Bank of America downgraded Futu ( NASDAQ: FUTU ) to Underperform from Buy and cut its earnings estimates after Chinese authorities said they will rectify its "illegal" business activities .
The China Securities Regulatory Commission has directed Futu ( FUTU ) to stop taking new onshore China clients.
"Although regulation overhang has existed for more than a year, this is the first time CSRC officially made a statement in this issue," said BofA analyst Emma Xu.
She noted that Futu's ( FUTU ) client base in China has been shrinking. Mainland China clients accounted for 35% of Futu's ( FUTU ) paying clients by H1 2022, down from 55%/38% in 2020/2021, and contributed 44% of total revenue in H1 2022, down from 60%/52% in 2020/21.
"We update our model to reflect our expectation of an orderly unwind. We assume that China clients decline 21K/10K per quarter in 2023/24E, trading velocity lowers to reflect negative sentiment from CSRC's actions, and compliance costs increase," said Xu.
BofA lowered Futu's ( FUTU ) earnings estimates by 25%/37% for 2023/24E and price target was cut to $27 from $59.60, implying ~34% potential downside to its last close.
BofA's bearish stance on Futu ( FUTU ) contrasts sharply with SA Quant's Strong Buy rating . Meanwhile, Wall Street analysts on average rate the stock Buy .
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Futu cut to Underperform at Bank of America on Chinese regulatory crackdown