FUTU - Futu Charges Ahead In Singapore In Stepped-Up Global Expansion

2023-09-04 05:00:00 ET

Summary

• Futu’s total client assets in Singapore increased about 21% at the end of June from three months earlier, marking a fourth consecutive quarter of growth exceeding 10%.
• The company’s revenue grew 42% during the quarter, as an 8% drop in fee income due to weak market sentiment was more than offset by big interest income gains.
• While Futu’s global expansion can help to continue boosting its revenue, it certainly won’t be smooth sailing in the current choppy markets, where local competition is also fierce.

It's all sunny in Singapore these days for Futu Holdings Ltd. ( FUTU ).

The online stock broker's latest quarterly results show it's making good progress in its efforts to establish a presence in the Lion City. For investors, this should be a promising sign that some of Futu's global expansion plans are bearing fruit as the company continues to enter new markets to accelerate growth and diversify its customer base.

Futu's revenue grew 42% year-on-year to HK$2.5 billion ($317 million) in the second quarter, with its net profit jumping 75% to HK$1.12 billion, according to its latest quarterly results released Aug. 24. The impressive headline numbers are largely a repeat of the company's first-quarter performance, with a massive 127% gain in interest income driving the growth thanks to high global interest rates to tame inflation. A reduction in selling and marketing expenses also helped to fatten the company's bottom line.

Diving deeper into Futu's second-quarter results, its income from brokerage commissions and handling charges, its bread-and-butter as the operator of stock trading platforms, decreased about 8% year-on-year as the total volume of trading on its apps shrank nearly 29%, despite an increase in its blended commission rate to 9.9 basis points from 7.7 basis points due to more active trading of undervalued U.S. stocks. Futu also attributed this to a cooling of investor interest in Chinese technology stocks.

Despite a drop in trading volume in the Hong Kong market during the quarter, Futu pointed out that it has quickly become a leading underwriter for IPOs in the city which is a key gateway for global investors looking to buy into China. It said it helped to underwrite eight of the city's top 10 IPOs in the first half of the year and provided corporate services to 20 of the 31 companies listed during that time.

Futu's shares rose slightly the day the results came out, but then rallied more strongly over the next two trading days, gaining a combined 12.7% over the three-day period. That seems to indicate investors were generally pleased with the report.

The headline numbers aside, one of the brightest spots in Futu's report came in its upbeat progress in Singapore. Its total client assets in the city-state rose 20.5% at the end of June from three months earlier, marking a fourth consecutive quarter of sequential double-digit growth.

In another positive signal from its Singapore business, more than 18% of the company's local customers had signed up for wealth management products by the end of the quarter, up from just 2% a year earlier. As a result, average client assets under management for such services more than doubled, Futu CEO Li Hua, who also uses the name Leaf, said on the company's earnings call.

Futu is trying to boost its distribution of third-party wealth management products as part of efforts to diversify its revenue and reduce its reliance on fees from trading, which can fluctuate widely depending on market conditions. Futu rolled out its first wealth management products in 2019 and currently offers a range, including money market funds, mutual funds, private investment products, bonds, structured products, and cash sweep solutions.

That business has developed rapidly since then, and Futu said its overall wealth management client assets stood at HK$43.5 billion by the end of June, roughly double their level from a year earlier and up 17.5% sequentially.

Geographic expansion

Geographic expansion is as important - if not more important - than business diversification for Futu. The company initially focused on Hong Kong, where it is now based. It embarked on its global diversification back in 2018 when the company launched its moomoo brand and proprietary app in the U.S. market and has taken steps to plant its flag in other markets as well, including Singapore, Australia, Malaysia, Canada, and Japan. On the earnings call, the company announced that its Japan subsidiary has been officially approved by Japanese regulators to conduct brokerage and wealth management businesses via its moomoo platform.

The company removed its app from app stores in mainland China early this year after being requested to do so by China's securities regulator over regulatory issues. However, it was allowed to keep serving existing clients but stopped accepting new ones in mainland China. According to its latest report, Futu managed to retain almost all of its client base against this regulatory headwind.

Moomoo's success in Singapore bodes well for its plan to set foot in neighboring Malaysia, which, like other Southeast Asian countries, holds a lot of potential from younger generations used to trading and accessing information over their smartphones. Many Malaysians who frequently travel to adjacent Singapore may already even be familiar with the moomoo brand.

On the back of an impressive run of both revenue and profit growth since its U.S. IPO in 2019, Futu's stock has more than quadrupled from its listing price to command a respectable price-to-earnings (P/E) ratio of 14 and a price-to-sales ratio (P/S) of 7.

While Futu's global expansion can help to continue boosting its revenue, it certainly won't be smooth sailing in the current choppy markets, where local competition is also fierce. Understanding different markets' characteristics is critical in identifying target customers and developing the right products for them, which requires groundwork. Competition with local brokerages, as well as international platforms, can also be tough.

Regardless, Futu's progress in Singapore suggests that the company is making solid progress with its global expansion efforts. If it stays on that path, investors' appreciation for the company is likely to keep growing.

Disclosure: None

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Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

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