CFO INTERVIEW: Futu's Focus on Users and Technology Puts it Ahead
Shares in Futu Holdings Ltd. (Nasdaq: FHL) closed up 28 percent on its debut day, at $15.32 apiece, as the Hong Kong-based online brokerage firm completed its $90 million initial public offering in New York.
The company priced its shares at the top end of the expected range of $10 to $12 and peaked as high as $17.38 per American depositary share as it lifted off before noon today. It thus became the first Asian company to become publicly traded in the United States this year.
Futu's float on Wall Street will be followed by a concurrent private placement of shares in the amount of $70 million to private equity firm General Atlantic Singapore FT.
Futu aims to provide online stock trading services with low fees and live feeds. Unlike other platforms, the company allows mainland Chinese investors to trade stocks in Hong Kong and the United States. It is reported that Futu was among the top five brokerage companies in Hong Kong with more than 80 percent of users from mainland China.
The fast-growing company said in a filing with the U.S. Securities and Exchange Commission last month that its revenue for the year through December reached $103.6 million, an increase of 159 percent from the preceding year. Net income was $17.7 million, or 1 cent per share, in contrast to a net loss of $1 million in 2017.
Tencent Holdings Ltd. (HKEX: 0700), one of China's Big Three tech giants, has been one of Futu's biggest backers through all its prior rounds of financing and have indicated interest to purchase ADSs of up to $30 million in its IPO.
Back home, the giant has helped the brokerage company to gain brand recognition, according to Arthur Yu Chen. Now, Futu is looking to enter the U.S. market, and that was one of the reasons it pursued a New York IPO, he said in an interview with CapitalWatch.
After the company's IPO today, Chen discussed at length the company's strong performance despite a weakening economy, its focus on user satisfaction, and its future plans.
CapitalWatch: Now that Futu has become a public company, how do you feel?
Arthur Yu Chen: Today is a very exciting day, but at the same time, we should be aware of the responsibilities ahead. Now that we have become a public company, we need to further strive to unceasingly fulfill the trust and the confidence that our shareholders, our users, and our clients, have placed in us. And we will continue to deliver what we promised to them and continue to deliver our values to our shareholders.
So it's time for us to party, but after that, we need to go back to work very quickly.
CW: Futu has turned profitable in 2018 and showed strong performance. This is impressive, considering China's economic slowdown and the trade tensions with the U.S. To what do you attribute this fast growth?
Chen: We have high-quality user profiles. Typically, they are in the age group of 34-35 years old. Actually, this has been nearly unchanged in the past three years, which means that every year many younger users join Futu. These guys are typically working for China's leading TMT sectors (technology, media, and telecommunications) and in financial industries. That means their financial position is much stronger. They are also very sticky to our platform, thanks to the premium user experience we provide due to our technology advancement.
So, if you look at our revenue breakdowns, the trading commission accounted for 51 percent of our total revenue in 2018, and our clients generated over HK$900 billion despite the year being pretty tough for stock markets. At the same time, the number of our new paying clients almost doubled in 2018.
Even though the market has been quite choppy, we are taking over a significant market share, not only from the other brokerages, but more importantly, we are attracting newcomers. Among our clients, 60 percent had their first brokerage account for trading in the U.S. with us, while the remaining 40 percent had other accounts before and came from our competitors. You can see how important it is for us to focus on bringing new customers into trading.
CW: What was the biggest challenge the company had to overcome to get to where you are today?
Chen: Entering a new market and continuing to increase our paying clients.
We have a very successful market share in Hong Kong, and we are now in the process of entering the U.S. market. In terms of trading volume, our client pool has a very big involvement in the U.S. So, the U.S. market exploration is a logical and natural step in terms of business strategy outlook. But of course, because we don't have any sophisticated experience in this market, we still have to catch up. We got our new broker dealer license in the U.S. last year.
This is also an area in which our new strategic shareholder, General Atlantic, can give us a lot of support and guidance, given that they invest in a lot of companies in the U.S. and some have a similar business model, such as the Etrade.
CW: One of Futu's main differences from other brokerage firms is that it allows investors to trade stocks both in Hong Kong and the United States. How else does Futu stand out from its competitors?
Chen: First of all, though this brokerage model is very mature in the U.S., it is still new to Asia. We are competing with a lot of traditional standalone retail brokers and we are competing with commercial banks, such as HSBC, BOC Hong Kong, etc., which provide trading execution services for banking customers.
In terms of our advantages, we have developed a very sophisticated close-group proprietary infrastructure technology which can support 100 percent online experience for investing. From account opening, to trade execution, to customer service. And all our services have been put into an application called Futu NiuNiu, which gets updated regularly, almost every two weeks on front-end and almost every month on back-end. So, from the perspective of agility and focus, we have an edge compared with the traditional players.
Secondly, we put an emphasis on user experience. We have a lot of staff in product development and R&D (research and development). We listen carefully and frequently to the advice or demand from our users. We are quite agile in reacting to the younger generation's voice. For these traditional financial service companies, it is very difficult to replicate.
Thirdly, it's our user profile, because we are focusing on the millennial generation, given that it is more inclined to make investment decisions and use our mobile platform.
CW: What led Futu to seek to go public in the U.S. at this time? Was it part of your strategy of expanding to the U.S. market?
Chen: The reason for us to consider an IPO now is for brand awareness. In Hong Kong, our brand is recognized as we benefit from our strategic shareholder, Tencent. We want to enhance our brand awareness worldwide.
In addition, in terms of IPO structure, the U.S. market is more flexible, while Hong Kong still has a lot of limitations.
CW: Tell us about your plans for the IPO funds?
Chen: The total fundraising from the IPO in connection with the concurrent private placement is $160 million.
Number one, we plan to use the proceeds for general corporate purposes. We will continue to invest heavily in our technology and R&D capabilities and in our talent pools. In particular, for the preparation of the U.S. market penetration.
Secondly, we want to enhance our capital base to support our finance services. Before the IPO, our total net equity was roughly HK$1.2 billion and, based on our estimation of our future increase of the paying clients, we need more money to support this area.
And thirdly, some money will be reserved for certain strategic considerations and new initiatives, including getting a license for the U.S. These projects may need certain capital for businesses development, though it is difficult to estimate a fixed timeline for the launch at the current stage.
Just based on our current estimations, we think our current funding can insure our capital requirement adequacies in the foreseeable future.
CW: What about your long-term plans? How do you see the company in the next 5 years? And please also take into account the changes we might anticipate in the financial sector.
Chen: In the medium to long term, we want to further expand our service offerings. For instance, option market, futures trading, etc. and even the foreign exchange trading, as we seek to further engage our clients and also to attract new people to our platform.
In terms of new market penetration, we want to attract people in the United States to another new product, which is called MooMoo. We have launched the beta-testing version of this app in December. Going forward, we want to prove our capabilities to attract U.S. users to trade on our platform as well.
Thirdly, we are considering entering retail banking. We think will make a good combination of brokerage and banking services.
CW: Would you say that Tencent has played a big part in Futu's success?
Chen: Tencent is our strategic shareholder, it participated in all rounds of financing prior to the IPO.
Tencent compares to Alibaba (Chinese tech giant Alibaba Group Holding Ltd. (NYSE: BABA), which has more presence in the financial services industry. Tencent's presence in FinTech is very light, though it has a business in commercial banking called WeBank. So, it's very important from strategic considerations.
Tencent will continue to be our largest outside institutional investor in the foreseeable future. And there can be a lot of synergies in terms of traffic sharing and content sharing, with which Tencent can help us grow much faster. Also, Tencent gives us support in terms of the brand installment, which is critical.
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