Online Brokers UP Fintech, Futu Stumble on Weak Stock Markets

Key Takeaways:

• UP Fintech and Futu reported sharp first-quarter revenue declines as weak stock markets caused trading commissions to slide
• Futu reined in spending during the period, while UP Fintech’s spending rose on aggressive hiring for its global expansion  

By Doug Young

Charging tiger or crouching bull?

Investors seem to prefer the latter these days, at least based on the latest earnings from China’s two leading online brokers, UP Fintech Holding Ltd. TIGR and Futu Holdings Ltd. FUTU. The former is best known for its Tiger Brokers service, which started out in Beijing but later migrated to Singapore. Futu, meanwhile, is known for its Futu Niuniu service that means “bull on the road to riches.”

Futu’s stock charged ahead by 19% the day its results were announced last Monday, and ended up 20% for the week. UP Fintech moved in the opposite direction, retreating 19% after it announced its first-quarter results on Friday.

That said, we should note that even after the large moves in opposite directions, UP Fintech remains substantially higher valued than Futu with a trailing price-to-earnings (P/E) ratio of 26 for the former and 14 for the latter. U.S. discount brokers Charles Schwab SCHW and Interactive Brokers IBKR lie in between the Chinese pair with P/E ratios of 23 and 20, respectively.

Truth be told, neither UP Fintech’s nor Futu’s latest results look that impressive, which isn’t all that surprising considering the dismal performance by global stock markets during the first quarter. The benchmark S&P 500 fell 5.6% during the period as a long-awaited down market took hold after one of the longest bull markets on record.

Such downturns are typically bad not only for stock buyers, but also the brokerages that help to execute stock trades. That’s because trading volume tends to go down during such markets, leading to big drops in commissions that are the biggest revenue source for many stock brokers.

In this case UP Fintech’s revenue from commissions fell 42% year-on-year to $30.5 million, accounting for 58% of the company’s revenue for the quarter. Futu’s revenue from commissions also fell, but by a milder 27% to HK$967.5 million ($123 million), accounting for a similar 59% of the company’s total.

UP Fintech’s overall revenue fell 35.2% to $52.6 million, with the company blaming the poor results on declining commissions. It also cited a drop in underwriting revenue from IPOs, since new listings also tend to decrease when stock markets are weak. Futu’s total revenue fell 25.6% for the quarter to HK$1.6 billion.

Both companies were established in China as brokerages helping Chinese investors buy foreign stocks, initially in the U.S. and later in Hong Kong. But each has been trying to diversify its business to other markets following remarks by Chinese regulators last year saying the pair were quite possibly operating illegally by providing financial services without the necessary licenses.

The reality is that neither company is licensed as a financial services company in China, though both have units in the U.S., Hong Kong and other markets that are licensed to provide financial services. China once welcomed private companies to offer such financial services to inject new life into a sector previously dominated by less-dynamic state-owned entities. But it abruptly reversed course about five years ago, and has more recently been cracking down on such companies partly due to concerns about their lack of experience at risk control.

Singaporean tiger and Hong Kong lion

In their own separate but similar bids to de-emphasize their China roots and lower their regulatory risk, both UP Fintech and Futu have been aggressively trying to build up businesses outside China. UP Fintech is focusing on Singapore, which it lists as its current headquarters, while Futu is focusing on the city of Hong Kong just across the border from its original base in the southern Chinese boomtown of Shenzhen.

UP Fintech said in its latest report that it’s aiming to add 100,000 funded accounts this year, which would represent a 15% increase from its total at the end of 2021. It added it is targeting to make 60% of those new accounts from customers in Singapore, which is already its largest market just two years after it started offering brokerage services there. Of the remaining new accounts it’s targeting, just 15% would come from the Chinese mainland.

As part of its global diversification, UP Fintech launched service in Australia in the first quarter, and has said that part of the business – which also targets adjacent New Zealand – will be a focus for new account sign-ups for the rest of the year.

Futu, meantime, said that over 80% of its new paying clients in the first quarter came from Hong Kong and other overseas markets. It added that it is benefitting from consolidation in Hong Kong, where many small- and mid-sized brokers are suffering as buyers move to larger, safer brokerages.

Both diversification drives look shrewd for UP Fintech and Futu given the uncertain regulatory environment in China, which has affected companies in a wide range of sectors from online lending, to e-commerce and education services.

One place where UP Fintech and Futu differ is spending. Like many Chinese companies these days, Futu is implementing strict cost controls in anticipation of difficult times ahead. It slashed its operating costs by 49% during the quarter. But UP Fintech was a contrarian in that regard, with its operating costs actually rising 17.6% during the quarter. Most of that was due to an aggressive headcount increase as part of the company’s international expansion, with employee compensation costs up 67% year-on-year during the quarter.

That combination of rising costs and falling revenue pushed UP Fintech into the red for a second consecutive quarter, with a net loss of $5.9 million. The more cost-conscious Futu managed to stay profitable for the period, though its profit also slipped 51% to HK$572 million year-on-year.

At the end of the day, the market was probably looking more favorably on UP Fintech previously for the company’s more aggressive posture while the market was booming. But with a potentially long downturn now in the cards, sentiment seems to be swinging towards the more conservative Futu.