CFO INTERVIEW: Futu Plans Hong Kong Growth, U.S. Launch in 2019
The quiet period for Futu Holdings Ltd. (Nasdaq: FHL) ended this week after the Tencent-backed online brokerage firm raised a total of $170 million in its initial public offering on Wall Street and concurrent private placements of shares.
The Hong Kong company's stock lifted off at $12 per American depositary share and closed up 28 percent on debut day, March 8. More than 25 days after the float, its shares have stayed above IPO level, having closed at $17.62 apiece Tuesday.
A highly tech-oriented company, Futu operates an online and mobile app called NiuNiu for online stock trading with low fees and live feeds and aims to provide quality user experience. Unlike other broker platforms, the company allows mainland Chinese investors to trade in Hong Kong and the United States. The company is also looking to expand to the U.S. market with its new product, MooMoo.
Looking back at the IPO, Futu's chief financial officer, Arthur Chen, said the company was received with a "strong interest" from institutional investors early on, while the subscription in its offering was "well-covered."
The company has been backed by China's tech giant, Tencent Holdings Ltd. (HKEX: 0700), as well as by Sequoia Capital and Matrix Partners China. These and other factors, which Chen has described to CapitalWatch in detail below, have spiked investors' interest in Futu, as seen in its stock performance.
CapitalWatch: Your stock price has done well since the IPO. Any reaction to where it stands now?
Arthur Chen: During the IPO roadshow, we met a lot of high-quality institutional investors in Asia and in the U.S. who showed a strong interest in Futu.
I think that's because this brokerage model has been proven in the U.S. for several decades. Many U.S. brokers, such as Charles Schwab, generate decent returns for long-term shareholders.
I also think investors valued our growth in the past. In China, we are still in the early stage for this millennial generation to start investing. For many, it is going to be a long-term trend. And certainly, we are relatively large. In addition, many of our management and colleagues have a very strong R&D expertise and think technology can change things and can bring shareholder value.
We do feel a lot of interest from institutional investors and from the IPO. The subscription was well covered, which may be another reason why the stock performance was relatively okay.
For us, after the IPO, our focus has been on our work, on the daily business. We will strive unceasingly to fulfill the trust and the confidence that our shareholders have placed in us and in the things in which we believe. We will continue to deliver, as we promised to our investors.
CW: Since the IPO, you have a new publicly traded competitor: Up Fintech Holding Ltd. (Nasdaq: TIGR). What are the factors that differentiate you from competing brokerages, other than providing the ability to trade in both the Hong Kong and the U.S. stocks?
Chen: We have some similarities in terms of the target customers, which is the millennial generation in the mainland.
The key factors which differentiate us from Tiger [Tiger Securities is what Up Fintech is known as in China] are: Number One – license and regulations. We primarily serve individuals in the mainland and in Hong Kong to trade in Hong Kong and in the U.S. and we are regulated by the relevant regulators, i.e. the SEC [U.S. Securities and Exchange Commission] and the SFC [Hong Kong Securities and Futures Commission]. So, in terms of regulations, we respect the AML and KYC [Anti-Money Laundering and Know Your Customer are rules against securities fraud and market manipulation]. These are necessary steps very critical to a FinTech company's organic growth in the long run in a sustainable manner.
Number Two is we can legitimately own clients' assets. That means we can generate interest income from them. Our competitors, or peers, are mainly just introducing clients to their underlying business partners, who, in turn, own the assets and do the KYC, AML process. In this kind of model, it is difficult for companies to generate decent interest income from clients' assets.
Number Three – the employees' or the companies' profiles. Roughly 66 percent of our colleagues are working in R&D and product development. Many of our R&D colleagues came from Tencent and have a very rich experience in leading TMT [Technology, Media, Telecom] companies in China. We adopt 100 percent in-house infrastructure R&D process because we think R&D should be controlled by us, and we want to cover the whole process so that we can provide premier user experience.
If we look at profitability and the trading volume, you can see that the trading volume between us and Up Fintech is roughly the same. But if you look at revenue, ours is far beyond our competitors'. Last year, Futu generated roughly 17 percent of net profit margins. Our peers, though they may have a similar trading volume, they have not yet achieved a breaking point.
CW: Tencent's support of Futu has been one of the major drivers of growth for the company. Do you think that leads your users to trust Futu more?
Chen: During our six-year journey, Tencent gave us a lot of support. Given that we are conducting financial service offerings to individuals, brand endorsement is critical. Especially when we were a small private company, it was very difficult to engage clients and build trust. But now that we have become public, everything will be more transparent in terms of the financial numbers and governance. This is another reason why we decided to do the IPO now.
We signed a strategic agreement with Tencent in December to incorporate a range of business partnerships, including traffic migration and content sharing. We also started to provide an ESOP [employee stock ownership plan] service and we will be the preferred service provider for Tencent's portfolio companies.
Tencent will also continue to give us support in terms of technology infrastructure, given that it is based on its cloud business. So, we will continue to have a lot of cooperation.
Currently, Tencent owns roughly 34 percent of Futu.
CW: We've seen companies in other industries that rely on Alibaba Group Holding Ltd. (NYSE: BABA) or Tencent suffer if they reduce their involvement. Does that concern you?
Chen: We provide a certain value to Tencent in return. We spent a lot of time in the FinTech channels; in particular, we spent a lot of time on R&D. If Tencent decides to build its own [trading and financial] system now, they will need a lot of time to get to the same level. Of course, compared with Alibaba, Tencent has less presence in the financial service channels.
I believe Tencent will be a long-term strategic shareholder because of our shared values.
CW: In our IPO talk , you mentioned Futu was working on launching a U.S. brokerage app. Tell us more about this project. Is the company planning to grab a share of the U.S. market soon?
Chen: We have launched a beta testing version of our U.S. product called MooMoo. You can find it in the Apple Store. Our strategy for 2019 is to continue to optimize and test this product.
We want to make sure it is super user-friendly before we launch it in the mass market. We may start by attracting a small population in the U.S. – in particular, the Chinese people. We will also leverage some collaboration with Tencent on this project, such as using the international version of its social network WeChat, given that it has two million users in the U.S. This population may be a very good entry point for us to start to penetrate the U.S. market.
Of course, the U.S. market is very populated – it is the largest online trading market worldwide. It has a lot of strong existing players, such as Charles Schwab, E-Trade, Ameritrade, not to mention new players such as Robinhood, which has had super success.
Since it is not our home market, we will take a very cautious and step-by-step approach. We already got the broker-dealer license in the U.S. last year. We are now applying for a clearing license as well. If everything goes smoothly, we will get it this year.
We will start to do a lot of R&D infrastructure development to support our future U.S. business as well. Before the formal launch, we want to be fully prepared on the R&D and the product, as well as on understanding the U.S. market, like what kind of marketing campaigns we will use in the U.S. Now, it is still in the early stage, it is premature for us to finalize our strategies on the U.S. expansion.
CW: Has Futu felt the impact of China's economic slowdown and the trade tensions last year?
Chen: Of course, this situation has affected everyone, including Futu.
If you look at the stock markets in the last four quarters, they were quite volatile. That has definitely had some negative impact in our operations. Our growth momentum in terms of the new paying clients, those numbers started to soften a little bit toward the year-end, compared with the first three quarters of 2018.
But I think the beauty of our brokerage is that despite the markets' volatility, our clients were still very loyal. In terms of trading volume, we didn't suffer, we didn't feel a huge impact. We also generated more interest income, given there was more idle cash. This business model, to some extent, alleviates the market volatility in the short-term.
Things have become a little bit better since the beginning of this year. Hopefully, we can have some more good news from the government as the negotiations between China and the U.S. are ongoing.
CW: Looking ahead, what tactics do you plan to use to expand your customer base globally?
Chen: Going forward, in 2019, we will be focusing more on our existing markets, the Hong Kong and, potentially, the U.S.
Previously, the majority of our paying clients came from the mainland. But, starting this year, we hope Hong Kong locals can contribute more since we got a lot of regulation support.
Chief executive Carrie Lam advocates industry development in Hong Kong very aggressively. You see a lot of new initiatives from the government, such as a fast payment system and a commercial banking system. The SFC started using a more friendly attitude about the online accounts, which has facilitated the clients' account opening process. It has also become easier for us to build business partnerships, including with our commercial banks to get better commercial terms. These will be incremental benefits from the Hong Kong market which will lead to gain more trust and confidence from the Hong Kong locals.
In terms of product and user experience, we are a much better fit than any of our local competitors.
CW: What are your plans for investment in technology?
Chen: We perceive technology as a core element that would ensure our long-term growth, so we will continue to invest heavily in it. We will continue to expand our R&D teams, not only in Shenzhen, but also in Hong Kong, and we will also spend more on new product initiatives.
Now, all our products will concentrate on equity-related services, such as cash equity, warrants, ETFs [exchange-traded funds], and others. We have already served the U.S. option trading, but this year we plan to launch many new products, such as option trading and index futures trading in Hong Kong.
CW: What should we look for in terms of strategic moves this year from the company?
Chen: There will be a lot of new product offerings on our Futu NiuNiu app.
We also want to use certain small internet-style marketing campaigns in Hong Kong, such as client referral, word of mouth, etc., so that we can grow much faster in the Hong Kong market. Although last year we achieved more than 100 percent increase in paying clients in Hong Kong, this year, we can achieve much faster growth.
We will also continue to build our infrastructure for the U.S. market, such as getting a clearing license. We anticipate that will be a more difficult process compared with Hong Kong.
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