Futu Squeezes Growth From Product, Geographic Diversity

Key Takeaways:

• Futu’s fee-based revenue rose 5.3% in the third quarter, while its overall revenue jumped 36% on a big increase in its interest income
• Analysts were excited about the company’s recent move into Japan, though Futu cautioned the market could be tough as more local brokers offer zero-commission trading

By Doug Young

A diverse portfolio has always been important when investing. Now, it’s also becoming an important asset for online brokerage Futu Holdings Ltd. FUTU, helping it to record revenue and profit gains in the third quarter despite difficult market conditions, according to its latest financial report released in late November.

At the same time, the company also announced its official launch of service in Canada and Japan in September. The Japan entry marks an especially important move for Futu, with the potential to make stocks from another one of the world’s top 10 exchanges available to the company’s increasingly global client base.

With the addition of Japan and Canada, Futu now offers its stock-trading services for seven markets, including its older markets in Hong Kong, the U.S., Singapore and Australia. The company also offers trading services that let users in Mainland China buy offshore stocks, and the company itself is headquartered in Hong Kong as it pursues its global strategy.

We’ll return to the Japanese story shortly, as it has potential to become a future growth engine for the company. But first we’ll begin with Futu’s latest results, which show it managed to post growth for its core trading services in the third quarter despite one of the weaker environments for global stocks in recent memory.

In the face of such weakness, Futu maintained its trading volumes by offering a wide array of non-securities products, including money market funds, treasury notes and other fixed-income wealth management products that often become “safe havens” for investors in times of uncertainty.

The company said the brokerage commissions and handling charges that are its main operational revenue source totaled about HK$1 billion ($128.8 million) in the third quarter, up 5.3% year-on-year. But it earned an even larger HK$1.5 billion in interest income, up 71% from a year ago, thanks to the U.S. Federal Reserve’s interest rate hikes over the last year to tame inflation. While that income has helped to boost the company’s revenue this year, the Fed’s halt to rate hikes could help to boost market liquidity going forward and thus ultimately breathe new life into Futu’s brokerage commissions.

But for now, at least, the strong addition of interest income helped to boost Futu’s overall revenue by 36% year-on-year to HK$2.7 billion ($338.5 million) in the third quarter.

Company executives discussed the wide range of investment products now available to Futu clients, and noted that client bond holdings jumped by 86.8% from the second quarter to the third due to strong demand for U.S. treasury bills.

“We think these products will further diversify our clients’ asset allocations and help them to navigate different interest cycles down the line,” said CFO Arthur Chen on Futu’s earnings call to discuss the results.

Many of its non-stock products are grouped into Futu’s category called “wealth management,” which has also seen strong growth in such volatile times. The company’s wealth management client assets stood at HK$52 billion by the end of September, doubling from a year earlier. At that level, wealth management products now account for about 11% of Futu’s total client assets, up from 7% a year earlier.

Growing Customer Base

The company’s growing product base, combined with its widening geographic reach, helped Futu to boost its paying client base by 14% year-on-year to 1.65 million by the end of September, boosted by strong gains in Hong Kong and Singapore. The company added that its addition of 65,000 paying clients in the third quarter brought its total to 163,000 new paying clients for the nine months through September, exceeding its previous guidance for all of 2023.

Within its different major markets, Futu reported the strongest activity in trading for U.S. stocks. Its U.S. trading volume rose 19% quarter-on-quarter to HK$804 billion, while volume rose by a smaller 5% to HK$273 billion for Hong Kong, its second largest market. That dichotomy is reflected in the broader market indexes, with the S&P 500 down by a relatively mild 3.6% during the third quarter, while the Hang Seng Index fell by a larger 5.8%.

Futu’s modest gains from fee-based revenues, combined with the big interest income, helped to lift its net income by 45% for the quarter year-on-year to HK$1.1 billion. Analysts expect both the revenue and profit growth to slow next year as the interest income boost fades. Sixteen analysts polled by Yahoo Finance expect Futu’s revenue to grow 11% in 2024, while they see its profit growing 6%.

Investors were neither wowed nor overly worried about the report, with Futu stock falling by a modest 1.1% last Friday after it came out. Year-to-date the stock is still up by more than 40%, contrasting sharply with declines for most other major U.S.- and Hong Kong-listed China stocks. The company’s shares now trade at a price-to-earnings (P/E) ratio of 17, roughly in line with the 19 for U.S. online brokerage Charles Schwab SCHW, but trailing the 29 for Interactive Brokers IBKR and an even higher 30 for Futu’s former hometown rival UP Fintech TIGR.

We’ll end with a look at Futu’s move into Japan, which was the subject of questions from all four analysts who participated in the company’s earnings call, reflecting excitement about the addition of such a major new market. The company said it began signing up customers in Japan after entering the market in September, and already had 400,000 users on its Japanese platform. It noted that Japanese users so far can only trade in U.S. stocks, but it expects to add Japanese stocks soon and also to make trading in those stocks available to its clients in Hong Kong and Singapore in the “near future.”

The Tokyo Stock Exchange is currently the world’s fifth biggest stock market, behind only the New York Stock Exchange and Nasdaq in the U.S., Shanghai Stock Exchange and Euronext. But Futu executives noted the going could be tough in Japan, since many brokerages in the country are moving to zero commissions for trading in Japanese stocks.

But the company believes that its brokerage business could still become profitable in the Japanese market, for example by charging fees for Japanese customers who want to buy U.S. stocks. In addition, Futu is planning to launch Japan stock trading to clients outside of Japan, which will deepen client engagement in its other markets and create an additional revenue source.