FUTU Holdings Limited

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 4/5

FUTU Holdings Limited is a leading online brokerage and wealth management platform focused on providing financial services through technology. It facilitates trading and investment across diverse markets for a global user base, primarily in China, Hong Kong, the US, and Singapore.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Futu’s core offering involves access to various markets and trading services through its proprietary app, providing investors with an efficient and user-friendly platform to manage their finances.

Business Overview

  • Revenue Distribution: Futu primarily generates revenue from four key sources:
    • Brokerage commissions and handling charges: Commissions charged for executing securities trades and other related services. This is its largest revenue segment, accounting for 59.4% of total revenues in 2023.
    • Interest income: Primarily earned from margin financing and securities lending, as well as cash deposits and bank accounts. These are the sources of 21.9% of the revenues in 2023.
    • Other income: Encompasses a range of services including corporate services, money information and data services, and IPO service income. This contributed 18.6% of revenues in 2023.
      • Of the three other revenue sources, wealth management is also a significant contributor to growth, and is included in “Other income”.

  • Financing and securities lending income

  • Industry Trends:
    • The online brokerage industry is growing rapidly, driven by increasing retail investor participation.
    • Mobile-first platforms are becoming the norm, catering to the younger generation of investors.
    • There is a growing trend toward consolidation within the brokerage sector, due to the need to achieve scale.

  • Margins: * While gross profit margins are relatively high at 87.6% for 2023, operating margins are much lower, at 21.4%. This indicates that a significant portion of revenues is used to pay for operating costs. * Operating expenses include both selling/marketing and research/development, which are areas of growth opportunity in the long term.

  • Competitive Landscape: Futu operates in a highly competitive landscape with both global players and more localized brokers, particularly in its main markets (Hong Kong, China, Singapore, US)
    • Key competitors include traditional brokerages, other online brokers, and wealth management firms.
    • Competition from global brokers who offer similar capabilities may put pressure on profit margins.
    • Competition from localized brokers could take away the company’s market share.
  • What makes the company different:
    • Futu’s main strength seems to lie in its focus on serving active traders in global markets. It has invested heavily in a proprietary, full-stack platform, enabling strong mobile trading capabilities, as well as offering data, news, and community tools.
    • The company’s heavy focus on technology enables it to respond quickly to market dynamics, but can also leave it vulnerable to sudden technological changes.

Financials

  • Revenue: Total revenues grew by 23.7% year-over-year in 2023, to HK$8,115.2 million. The growth is primarily attributable to an increase in brokerage commission and handling charges, as well as interest income.
  • Revenues grew from 2,211,840 thousand in 2019 to 7,115,320 thousand in 2022, showing good growth.
  • Net Income: Net income also followed suit, increasing to HK$2,422.1 million in 2023, demonstrating its profitability.
    • Net income has seen an almost consistent increase through the years, growing from 826,890 thousand in 2019 to 2,815,216 thousand in 2022.
  • Expenses: Although there is increase in expenses over the last few years, they remain relatively low when compared to revenues, and have not outpaced revenue growth.
    • The majority of expenses goes into costs related to services and processing, and selling/marketing expenses.
  • Balance Sheet:
    • Total assets at December 31, 2023 amounted to HK$98,801 million, while total liabilities amounted to HK$73,832 million, implying that company’s debt-to-equity ratio may be manageable.
    • Cash and cash equivalents at the same period were HK$45,792 million, providing a strong buffer for operational needs and expansion.
  • Share Repurchase: During the year, FUTU repurchased shares of its own stock worth US$332 million.

Moat Rating: 3 / 5

Futu possesses a narrow economic moat due to a combination of switching costs and the network effect, but the competitive landscape makes its durability uncertain.

Here’s why:

  • Switching Costs: A degree of switching costs exists because of the integrated nature of Futu’s services, particularly its trading platform, but they are limited compared to other industries. Clients build data, and get used to the platform, and to switch to a competitor may cause disruption and costs. However, clients will switch easily between trading platforms, if others offer similar services at a better price or better user interface. The fact that other trading platforms exist may affect the moat.
  • Network Effect: The network effect is somewhat present because as more users trade on the platform, the more data and insights it will be able to collect and give better prices, leading to more users using it. However, it’s not as strong as in other network effect-based businesses, since securities are available to trade at several different platforms. Also it doesn’t offer the advantage of information sharing among users.
  • Scale Economics: Although Futu is building scale, its profitability is primarily due to its technology focus, so far its scale advantage over competitors is not overwhelming.
  • Intangible assets: FUTU’s name and reputation has a role in helping the company to attract and retain customers. This helps the company with pricing power and reduce churn. However, brand name is not something that is exclusive to the company and can be easily copied by other companies. The company also owns a few patents, but they don’t make as much of a difference in its moat.
  • Absence of Strong Barriers: Futu’s business does not have large barriers to entry, that could limit potential competition and cause its profitability to fall down over the long term, which limits its moat significantly.

Risks and Business Resilience

  • Regulatory Changes: The company is subject to constant changes in laws and regulations, particularly in China and Hong Kong. While they mention they have a strong team to manage the changes and comply with new regulations, these changes can significantly increase operational costs and negatively affect results. Also, if new regulations are introduced that require additional funding, capital expenditure for them will also have negative effects on its financials. The ever changing and unknown regulation may put a limit on the growth of the company.
  • Cybersecurity Risk: The company is also subject to various types of cybersecurity risks. Although they have established strong risk management and cybersecurity protocols, there is a chance that such threats may significantly damage the platform, and hurt customers trust, or may expose private data, causing a negative impact on reputation and future growth.
  • Market Volatility: Trading volumes and revenues are often tied to the movement of the stock market. In times of bad economic performance and stock market downturns, there can be a decline in trading volumes and earnings that may affect company’s financials and value.
    • There can be periods where the market is in the bear zone, where retail investors often lose interest in trading.
  • Dependency on Partnerships: A significant portion of the company’s services and revenue is tied to the services it provides to other companies. Any changes to these relationships could negatively affect the company’s business and its revenue stream.

Understandability: 3 / 5

  • Futu’s business model is largely based around the trading of securities online using its proprietary software. This is simple to understand at its core, however, a bit complex to fully understand the dynamics and complexities involved in the operations of the business.
    • The company also has many types of revenue sources, which makes the business a bit more complex.
  • The company’s business is subject to various financial factors that affect its profitability, and this may require knowledge to understand some of the risks.
  • The company’s operations and its financial statements are a bit hard to understand and analyse, so investors must take their time to study them.

Balance Sheet Health: 4 / 5

  • The company has a strong cash position, low debt and is profitable, making its balance sheet relatively healthy.
    • The low debt also means it is less exposed to interest rate risks.
  • The company has sufficient liquidity to continue to fund operations, and is profitable which is a sign of financial stability.

Recent Concerns / Controversies and Management Perspective

  • The main concern of FUTU was that its revenues may decline if China makes any changes to policies in relation to Chinese citizens investing in foreign companies. Management is aware of this risk, and has been exploring other markets outside of China to diversify its revenue streams.
    • The management is confident in its position as a global business, which gives access to multiple clients from various jurisdictions. They state their commitment to developing their proprietary platforms and increasing their market share in different jurisdictions.
  • There is also the fear of US regulations in relation to the company’s US operations. The company’s response to that is that they are cooperating with regulators to ensure compliance, and have created appropriate policies to meet all regulatory requirements. Management also reiterated its commitment to continue its global expansion and diversify revenue streams.
  • The company is also in the process of getting the appropriate licenses required in all countries that it operates.
  • Although they faced some challenges in client acquisition in Hong Kong, the company managed to grow well and expand its market share, showing resilience and agility in its business operations.
  • For example, the company has shown growth in user base in Singapore by 76% year over year.
  • Management also stated that despite volatile conditions, its business continues to grow and generate great results. They also stated their focus on long-term growth and value. They are looking at all opportunities in all markets.
  • Overall, despite acknowledging certain risks, management continues to exude a sense of confidence about the company’s future performance and its ability to manage and mitigate risks, and focus on the positives by improving their technology, market position, and customer experience.
    • Also note that the share repurchase program shows management’s confidence in the long-term performance of the company.