Futu Makes Bull Run Into Malaysia, As Profits Charge Ahead

Key Takeaways:

• Futu’s revenue grew 52% in the first quarter, and its profit more than doubled on big growth in its interest income amid its global expansion and new trading product offerings
• The online stock brokerage said it aims to build up its wealth management business over the next three to five years to 30% of total assets from a current 10%

By Doug Young

Next stop, Malaysia.

Online brokerage Futu Holdings Ltd. FUTU announced the Southeast Asian country will become its next new market, as it expands from its current base in Hong Kong. Internationalization has become the company’s main mantra these days, as it continues to expand its business presence in a growing mix of developed and developing markets.

The Malaysia expansion was the biggest headline grabber in Futu’s latest quarterly results that showed it continues to add more products and services for its customers in Hong Kong, the U.S., Singapore and Australia.

In addition to its continuous geographic expansion, the company also revealed big plans to boost its wealth management business targeting customers who are looking for diversified investment options. That segment of its business has been gaining traction among its customers. More on that shortly.

First, we’ll look at Futu’s latest results released late last month that largely continued recent trends. That included accelerating profit growth that saw the company’s net income more than double in the first quarter to HK$1.19 billion ($152 million), representing a 108% increase over a year earlier.

Much of that increase came from a huge jump in interest income, thanks to big hikes over the last year in global interest rates as the U.S. Federal Reserve and other central banks try to rein in inflation. Futu’s interest income grew 125% in the first quarter to HK$1.29 billion, becoming the company’s largest revenue source. Brokerage commissions that were previously the top revenue source grew by a far milder 11.6% to HK$1.08 billion.

Those two sources make up the bulk of Futu’s revenue, which grew 52.3% overall to HK$2.5 billion during the quarter, accelerating from a similarly strong 42% growth rate in last year’s fourth quarter. While those figures look strong, we can probably expect them to start coming down now that the Fed has largely ended its aggressive interest rate hikes.

Reflecting that, analysts polled by Yahoo Finance expect Futu’s revenue growth to slow to about 13% for all of 2023, while its profit growth is also seen slowing to about 18%. The analyst community is still quite bullish on the company, with 15 out of 21 polled by Yahoo Finance rating the company either a “strong buy” or “buy.” Their average target price of $56.90 is also about 50% higher than the stock’s current level, indicating they see relatively large upside potential.

Futu currently trades at a relatively modest price-to-earnings (P/E) ratio of 12, based on analyst forecasts for its 2023 profit. That’s about the same as the 13 for U.S. discount broker Interactive Brokers IBKR, but behind the 16 for Charles Schwab SCHW and 23 for UP Fintech TIGR.

Futu’s shares rose a modest 1.3% the day its latest report came out, indicating investors realize the company is making progress in its transition to becoming a more global online brokerage but still faces challenges. Futu’s current largest customer bases are in Hong Kong and Singapore though it doesn’t give out specific numbers, but says its app is used by 43% of adults in Hong Kong and more than 25% in Singapore. It also has an older client base in its original China market.

Malaysia Potential

Next, we’ll delve more deeply into some of the topics we mentioned earlier, starting with Futu’s move to Malaysia. The company previously said it planned to enter two new Asian markets this year, so Malaysia is one of those. It has yet to announce which country it will go to next, but it’s likely to be one in Southeast Asia.

Managers said on the company’s earnings call that Futu’s Malaysian subsidiary has received “approval-in-principle” for a Capital Markets Services License from the country’s securities regulator, and that it could launch in the market as soon as the second half of this year. They added Futu has a number of advantages over existing players, including a more robust app and lower fees for trading in international markets like the U.S. and Hong Kong that are one of its core strengths.

“We look forward to tapping into the immense market opportunity in Malaysia and further strengthening our presence in the Southeast Asian market,” founder and Chairman Li Hua, who also uses the English name Leaf, said on the company’s earnings call.

Geographic diversification has been high on the company’s agenda as it strives to expand its presence and business in other international markets in addition to its strong base in Hong Kong and Singapore. However, the company also cautioned about its growth in Hong Kong given the local Hong Kong capital market has yet to pick up its momentum. “The (Hong Kong stock market) is trading in a very narrow range and there are no meaningful IPO projects in the markets, CFO Arthur Chen said on the company’s earnings call.

Another key focus going forward will be the wealth management business, which is growing much faster than Futu’s overall business. The company’s wealth management assets rose 77% year-on-year to HK$37 billion in the first quarter, more than triple the growth rate for its overall assets.

The wealth management business now accounts for about 10% of Futu’s assets, Chen said on the earnings call. “Hopefully, I hope such proportion will continue to increase to 20% to 30% in the next three to five years. Definitely, there will be a very long journey to go.”

The expansions in multiple directions, both geographically as well as in services, are helping to offset the ongoing uncertainties in China. The company removed its app from Chinese app stores last month pending resolution of that matter. The company has been allowed to keep servicing its existing Chinese users, including providing them with app updates. The impact from those developments seems manageable, at least based on its latest results.

“We are very delighted that it seems that our existing China clients population are very calm about this headline news,” Chen said of the decision to remove the app from Chinese app stores. “We do not see any meaningful abnormal churn rates and also the client net asset outflow in the past week.”