FUTU - Futu Holdings: Mixed Results

2023-11-23 22:29:38 ET

Summary

• Q3 2023 was a mixed quarter for FUTU; Futu Holdings' top line beat expectations, but its normalized earnings came in lower than the consensus estimate.
• FUTU has done well in terms of its international markets expansion, but this came at a price of a substantial increase in General & Administrative costs.
• The company executed on a relatively small amount of share buybacks in Q3 2023, which might indicate that its stock has reached fair valuation.
• I leave my existing Hold rating for FUTU unchanged, after reviewing the company's most recent quarterly financial performance.

Elevator Pitch

My rating for Futu Holdings Limited ( FUTU ) shares is a Hold.

I previously touched on the regulatory developments associated with FUTU's business operations in my prior March 9, 2023 update . In this latest article, my focus is on the review of Futu Holdings' financial results for the third quarter of this year.

FUTU's Q3 2023 performance was mixed as the company delivered a revenue beat and an earnings miss. Futu Holdings' efforts to grow outside of Mainland China have paid off with an increase in the number of paying clients, but FUTU paid the price in the form of higher General & Administrative costs. Also, FUTU seems to be fairly valued, taking into account the fact that the company didn't spend much on share repurchases in Q3. Therefore, I retain my Hold rating for Futu Holdings.

The Market's Expectations Of FUTU's Q3 Performance

Before Futu Holdings revealed its actual Q3 2023 financial performance on Thursday, November 23 morning, the analysts were anticipating that the company will continue to deliver positive revenue and earnings growth for the third quarter, albeit at a more moderate pace.

In terms of the top line, the sell side projected that FUTU's revenue will increase from HK$1,945.6 million for the third quarter of 2022 to HK$2,308.1 million (source: S&P Capital IQ ) in the most recent quarter. While the market's expectations of a +19% YoY top line expansion for Q3 2023 is pretty good, this will be inferior to Futu Holdings' Q1 2023 and Q2 2023 revenue growth rates of +52% YoY and +42% YoY, respectively. Also, the consensus Q3 revenue forecast of HK$2,308.1 million implies a -7% QoQ contraction for the latest quarter.

With regards to the bottom line, the consensus numbers pointed to an expected +50% YoY jump in Futu Holdings' normalized net profit to $1,212.0 million for the third quarter of the current year. But this also suggests that FUTU will witness bottom line growth deceleration on YoY terms for the latest quarter. As a comparison, the company achieved better YoY revenue expansion rates of +104% for Q1 2023 and +73% for Q2 2023. The HK$1,212.0 million third quarter net profit estimate also translates into a modest +2% QoQ bottom line increase.

In the next section, I evaluate how FUTU performed relative to expectations.

Mixed Third Quarter Results With Revenue Beat And Earnings Miss

FUTU's actual Q3 2023 financial results were mixed. The company recorded an impressive +15% top line beat, but its non-GAAP adjusted earnings fell short of the sell-side analysts' expectations by -5%.

Futu Holdings' revenue rose by +36% YoY to HK$2,650.4 million in Q3 2023, which was much better than the consensus top line expansion forecast of +19% YoY. But FUTU's most recent quarterly revenue growth was still weaker than its top line expansion for Q1 2023 (+104%) and Q2 2023 (+73%).

The rising rate environment was the most important driver of FUTU's above-expectations top line in the latest quarter. The company's interest income surged by +71% YoY to HK$1,504.5 million for the third quarter of 2023, which it attributed to "higher interest income from bank deposits and securities borrowing and lending business" in its quarterly results press release . In contrast, Futu Holdings' brokerage commission and handling charge income increased by just +5% YoY to HK$1,008.9 million for the latest quarter.

But Futu Holdings' Q3 2023 bottom line wasn't as good as what the analysts predicted. Normalized net income for FUTU grew by +44% YoY to HK$1,158.0 million in the third quarter of this year. As a comparison, the market was anticipating a stronger +50% earnings growth in the most recent quarter.

FUTU's Q3 earnings miss was the result of lower-than-expected gross profit margin and higher-than-expected General & Administrative or G&A costs.

The company's gross profit margin contracted by -5.3 percentage points from 88.8% for Q3 2022 to 83.5% in Q3 2023, and this was lower than the consensus gross margin estimate of 86.2% (source: S&P Capital IQ ). Rising interest rates boosted Futu Holdings' revenue, but higher rates hurt its gross margin. FUTU's interest expenses went up by +546% YoY to HK$288.7 million for Q3 2023, and this explains why Futu Holdings registered below-expectation gross margin. Note that interest expense is recognized as a cost of revenue item for FUTU.

Separately, G&A costs for Futu Holdings rose by +52% YoY to HK$321.7 million in the third quarter of the current year. In its Q3 2023 results press release, the company revealed that it saw "an increase in general and administrative personnel to support overseas expansion." For the most recent quarter, the +52% YoY growth in G&A costs was much higher than FUTU's +36% YoY revenue expansion.

International Expansion Efforts Came At A Price

In the latest quarter, FUTU has put in lots of effort to expand the company's presence in markets outside Mainland China as disclosed in its third quarter earnings press release.

Futu Holdings set up the company's maiden physical shop in Hong Kong in July. For the Singapore market, FUTU came up with new wealth management products for the third quarter of the year. In September 2023, Futu Holdings started signing up new customers in Canada and Japan.

In particular, the Japanese market might turn out to be a meaningful growth driver for FUTU in the future. Stock brokerage firm China Renaissance Securities published a research report (not publicly available) titled "Strong Active User Trend In Japan" on October 10, 2023. In this report, China Renaissance Securities estimated that FUTU has the potential to "acquire at least 15,000 new paying clients in Japan in 4Q23."

For Q3 2023, Futu Holdings added a decent 65,000 new paying customers to its client base, which indicates that its foreign markets expansion plans are working well. However, the increase in new paying clients comes at a price. As I mentioned in the previous quarter, FUTU's G&A expenses jumped by +52% YoY and this played a big part in the company's earnings miss for the recent quarter.

Limited Share Repurchases For Q3 Might Suggest That Stock Is Fairly Valued

Earlier in March 2022, FUTU had disclosed a $500 million new share buyback plan that will expire at the end of 2023.

Futu Holdings spent a total of $365 million on share repurchases between March 2022 and end-Q3 2023, which implies that it has only executed on roughly 73% of the maximum buybacks that it could have done with the current share repurchase program. This also means that FUTU is less likely to complete the existing $0.5 billion share buyback plan, as the year is coming to a close soon.

In the third quarter of 2023, FUTU had allocated a mere $5 million to share buybacks. This was calculated by comparing Futu Holdings' cumulative share buybacks of $360 million and $365 million at the end of Q2 2023 and Q3 2023, respectively.

Futu Holdings' share price went up by +45% from $39.74 as of June 30, 2023 to $57.81 at the end of the September 30, 2023 trading day. During this time period, FUTU's consensus forward next twelve months' normalized P/E expanded from 10.1 times to 13.8 times as per S&P Capital IQ data. The significant stock price rise and the meaningful valuation multiple re-rating for FUTU could explain why Futu Holdings didn't allocate much capital to share buybacks for the latest quarter,

Based on Futu Holdings' last traded share price of $59.38 as of November 22, 2023, the market values Futu Holdings at a consensus forward next twelve months' P/E ratio of 13.9 times as per S&P Capital IQ data. In my view, FUTU isn't undervalued based on a comparison of its mid-teens P/E metric with the company's consensus FY 2024-2025 normalized EPS (in Hong Kong dollars) CAGR at the high-single digit percentage level, or 8.6% (source: S&P Capital IQ ) to be exact.

Final Thoughts

FUTU's mixed set of results for Q3 doesn't offer many reasons to upgrade the stock's rating, so I choose to maintain a Hold for Futu Holdings. The company is still in expansion mode, so investments relating to international expansion are expected to be a drag on its bottom line. In addition, FUTU appears to be trading at a fair valuation judging by the limited share buybacks done in Q3.

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