TIGR - UP Fintech Futu Under Pressure To Go Global As Regulatory Bomb Blows Up In China

Summary

• China’s securities regulator said UP Fintech and Futu were operating illegally by failing to get brokerage licenses for cross-border stock trading services.
• Overseas expansion is becoming critical for the pair of online brokers after China’s securities regulator said their cross-border trading services for mainland investors were illegal.
• The two companies have faced high regulatory risk in China since a central bank official warned that unlicensed stock brokerages in China were operating illegally.

Online stockbrokers UP Fintech Holding Ltd. ( TIGR ) and Futu Holdings Ltd. ( FUTU ) are learning the hard way that taking chances with Chinese regulators isn’t the best idea, as a time bomb that was ticking for more than a year finally blew up in their face. As that lesson sinks in, the pair’s ongoing drive to move more of their business outside China is becoming more critical than ever.

The duo has been well aware of the risk for a while now and are both moving aggressively to get more business offshore, in Hong Kong for Futu and in Singapore for UP Fintech. But the movement hasn’t been fast enough, and China’s securities regulator finally brought things to a head last week.

Last Friday, the China Securities Regulatory Commission (CSRC) said the two companies violated domestic laws by allowing their customers at home to make cross-border trades despite lacking a required brokerage license. The regulator ordered the pair to stop accepting new clients in China, although it stopped short of asking them to shut down accounts of existing ones.

Both companies allow mainland-based customers to trade in stocks listed in offshore markets like the U.S., Hong Kong, and Singapore. But they don’t offer such services for the mainland’s main stock markets in Shanghai and Shenzhen.

In a move that suggests that the CSRC gave UP Fintech and Futu a heads-up about the bombshell, Futu postponed plans to make a second listing in Hong Kong, to complement its older U.S. listing, that had been scheduled for last Friday. It announced the postponement just a day earlier, only saying that it was clarifying “certain matters” with the Asian city’s stock exchange.

With the CSRC notice, UP Fintech and Futu became the latest victims of regulatory crackdowns in China, which have targeted a wide range of sectors from online lending to after-school tutoring.

In response, UP Fintech said that it will continue to offer “legitimate” services to existing customers in China and “actively” cooperate with Chinese authorities. Futu said that it “will fully cooperate with the CSRC and take all necessary measures to review its cross-border operations in mainland China and to comply with all applicable rules and regulations.”

Their statements didn’t stop the companies’ stocks from tanking. UP Fintech stock dropped 28.5% on Friday following the CSRC announcement, and Futu plunged even more, by 38%. The sell-off continued on Tuesday when trading resumed after the New Year holiday, with Futu and UP Fintech shares shedding another 6.9% and 6.2%, respectively.

As dramatic as the market reaction was, the companies probably saw the clampdown coming. In 2021, an official from China’s central bank warned that unlicensed stock brokerages in China were operating illegally, in an apparent reference to UP Fintech and Futu.

Long-running clashes

In fact, UP Fintech’s run-ins with Chinese regulators began long before that. In 2016, the CSRC ordered one of the company’s entities in China to stop working with unauthorized foreign companies that provide securities services in the country. UP Fintech complied — sort of. It didn’t cut its ties with those partners, but it removed its links to account-opening functions on the website and app developed by that particular Chinese unit.

UP Fintech has also removed the Chinese words for securities and stocks from the name of the partner app, positioning itself as an online provider of information for investors in China, rather than a provider of financial services like securities trading. The company, known as Tiger Brokers in China, doesn’t directly provide any securities-trading services on its platform in China, but instead offers such services via third-party partners.

But any such workarounds can only work for so long, and the companies likely realized that. So both UP Fintech and Futu have been trying to reduce their reliance on the China market. UP Fintech has been stepping up efforts to expand outside China, obtaining brokerage licenses and qualifications in a growing number of overseas markets and offering trading services for locally based investors.

Among other places, Singapore has been a key overseas market for UP Fintech, which was formerly based in Beijing but is now incorporated in the city state. The total number of UP Fintech’s registered accounts in Singapore amounted to 19% of the city state’s population of people aged 20 to 70 years old. That doesn’t mean that all of those accounts generate revenue because some aren’t active. But it’s still an impressive number.

UP Fintech is trying to find similar success elsewhere, including Australia, where it introduced a service in the first quarter of last year. It also acquired U.S. broker-dealer TradeUP Securities in 2019, allowing it to sign up U.S. customers.

Futu is more focused on Hong Kong, looking to capitalize on growing local investor preferences for large, safer brokerages over small ones. It also has expanded into Singapore and the U.S.

UP Fintech says more than 90% of its new customers are now coming from overseas. Futu doesn’t provide a geographic breakdown of its customer base, but says in its latest annual report that most of its customers are in China and Hong Kong. That could mean that Futu, which was founded in 2007 and is seven years older than UP Fintech, is more reliant on the Chinese market than its younger rival.

It’s naturally easier to grow in China and closely connected Hong Kong for any Chinese companies, which probably is why Futu’s revenue has grown more quickly than UP Fintech’s. Even after the recent selloffs, Futu shares trade at a price-to-sales (P/S) ratio of 7.7, much higher than 2.4 for UP Fintech. Moreover, Futu stock has more than tripled since its market debut in 2019, while UP Fintech has more than halved since its IPO around the same time.

But a greater China focus means a heavier blow for Futu from the CSRC crackdown. Plus, Futu warns that it has not “strictly” followed rules for signing up clients in Hong Kong and has received inquiries from regulators in the city, which could lead to a separate headache. That may explain why Futu’s stock tumbled more than UP Fintech’s following the CSRC announcement.

While both companies will be under pressure until the CSRC clash is resolved, the fact that the pair were only ordered to stop accepting new customers in China – and weren’t shut down – could suggest that the regulator is open to licensing them and letting them continue offering services over the longer term.

But for now, branching out of China is vital for both brokers. Of course, successful overseas expansion is easier said than done. Financial services are heavily regulated everywhere, and there’s competition with existing leaders in each market. But to grow, UP Fintech and Futu seem to have no other choice but to tackle such challenges.

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