‘China’s Robinhood’ sets its sights on international traders after explosive growth

Futu Holdings—often referred to as the ‘Robinhood’ of China—recorded triple-digit growth in the first-quarter of 2021 and has plans to double down on international expansion.

Total revenue for the app-based digital brokerage increased 349% to $283.6 million in the period, while net income grew 6.5 times to $149.5 million year-over-year. Futu’s total number of users shot up by 70% to 14.2 million worldwide, while paying clients increased 231% to almost 790,000, bolstered by the pandemic-fueled retail trading boom.

Fourteen-year-old Futu—which means ‘path to riches’ in Chinese—first became popular among users in mainland China, letting them buy and sell stocks that are listed in the U.S. and Hong Kong. It derives the majority of its revenue, around 60% in 2020, from users’ fees and commissions paid for trading securities on its platforms. While called ‘China’s Robinhood,’ Futu’s business model more closely resembles Charles Schwab’s by offering not only trading services, but integrated wealth management and data products, too.

Shenzhen- and Hong Kong-headquartered Futu is now at a pivotal moment in its growth. It wants to capitalize on domestic traders and thriving IPO markets in Hong Kong and the mainland while also diversifying overseas and expanding its wealth management services. The online brokerage is eyeing Singapore and the U.S. specifically—given the former’s access to Southeast Asia and the latter’s mature user base.

Futu founder and CEO Leaf Hua Li is bullish on the potential for international expansion. In the company’s May 19 earnings release, he said that 70% of new users in Q1 came from Hong Kong, Singapore and other overseas markets. “We are convinced that Singapore and Southeast Asia [offer a] huge runway for growth,” he said.

Blockbuster growth

Futu’s fortunes in 2020 “vastly exceeded” market expectations, says Jingyi Zhang, analyst at BOCOM International, due in part to the explosion of new retail traders in the last 12 months. During the pandemic, app-based, social media-linked trading surged in China, the U.S. and beyond. Robinhood in the U.S., for instance, recorded an average of 200,000 new users per month in 2020. Charles Schwab has dubbed the phenomenon of new, digital traders as ‘Generation Investor.’

Futu began running ads in Hong Kong’s Central MTR station mid-last year, with one video ad featuring a young man dodging bears, while riding a bull to space.

Futu received its first license in 2012 from the Hong Kong Securities and Futures Commission and listed on the Nasdaq in March 2019. But it wasn’t until the trading frenzy of 2020 that Futu began to snag market share in the digital trading sphere, charting a rapid ascent starting in second half of last year.

As of May 19, Futu’s share price had skyrocketed to $125, from a record low of $8.67 in late March 2020. The company has a market capitalization of around $18.3 billion, according to Bloomberg data.

Futu’s 2020 performance catapulted 44-year-old Li onto the Bloomberg’s Billionaires Index with a personal fortune that now stands at $6.3 billion. Li controls a 40% stake in the company, while Tencent is the second-largest shareholder, holding 30%.

And Li’s net worth could continue to balloon given Futu’s potential. As Tao Value, an independent portfolio manager, wrote in a Q1 investor letter: “There is a huge addressable market of Chinese domestic middle-to-upper classes’ wealth being deployed to overseas asset allocation in the next decade.” The incumbents being disrupted are “extremely weak” in their digital transformation.

Global expansion

While Futu had a bull run this year, investors will be watching whether the Chinese brokerage can break through in markets beyond Greater China.

In April, the company completed a follow-on offering of $1.4 billion, proceeds of which will be used for international expansion and potential investment and acquisition opportunities. Last month, Futu Holdings gave its U.S. subsidiary Futu Clearing a $400 million capital injection to scale up operations in-country.

Similar to other Chinese tech firms moving into Southeast Asia, such as Alibaba and ByteDance, Futu has eyed Singapore as a critical growth market and launchpad into the region. The company introduced its app in Singapore in March, and is considering expansion into Malaysia and Thailand.

Futu may have a leg up in the city-state given Singapore’s lag in digital trading. “Its expansion into Singapore will be smooth, because online brokerage penetration rate is not yet high. Large brokers like Phillip offer online and offline services, but it’s still not very convenient for client trading,” says Zhang.  

But securing a foothold in the U.S. is expected to prove more of a challenge. Futu gained a following in mainland China by offering access to foreign equities, and more convenient services compared to traditional Chinese brokers. The American digital trading landscape, meanwhile, has already-established competitors with their own advantages. Robinhood is popular among younger traders—Futu’s key demographic—while Charles Schwab offers a comprehensive portfolio of wealth management products, another key pillar for Futu, Zhang says.

The company’s current dependence on brokerage commissions means it may face short-term volatility aligned with the ups-and-downs of the U.S. market. But in the long run, analysts say Futu is in a strong position, given the continued popularity of online trading. It could “compound its revenue at a very high rate, with very high certainty,” Tao Value wrote.

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