Futu Holdings Continues To Grow, But Lock In Some Profit

Summary:

• Futu Holdings Limited is an online brokerage firm based in Hong Kong with millions of customers and a range of services.
• The company has reported growth in registered and paying clients, as well as an increase in client assets.
• Despite this growth, total revenues only increased by 3.7% and there was a decline in net income, raising concerns about margins and profitability.
• Take some profit on this trade, and consider a house position, but watch those margins.

Back in November 2023, we outlined a public trade on Futu Holdings Limited (NASDAQ:FUTU). Before this, we traded at our service, last buying in at $39 when shares more than doubled. November’s public trade that we outlined called for buying in the 50s, and selling in the high 60s or 70s. After a nice run, we think it prudent to take some profit here. However, you can now consider backing out your initial investment, plus a large portion of the profit, and letting the rest run forever as a house position.

This is a key approach we teach at our Investing Group, and is a wonderful long-term strategy for wealth building? Why not just leave all the money in? Because we like to take those funds and move to the next opportunity for significant gains. So following this trade, we encourage profit taking and move to neutral following the just-reported earnings. Let us discuss.

If you are new to following our work, or are new to Futu Holdings Limited, we will tell you this is an online brokerage firm based in Hong Kong. The company’s trading platform can be accessed on any mobile device or online, and Futu has millions of customers, and it processes hundreds of millions of transactions. Executing trades and collecting commissions is the core business, but it also offers margin financing services, real-time market data and news, investment research, and analytical tools, like any other online brokerage firm. In recent quarters, Futu has built out its wealth management products to help boost revenue. Trading revenues often depend on market conditions, so there’s volatility in results quarter-to-quarter, but with China on the come up, activity as improved, but Futu has spread to other nations as well.

All the work being put in to spread and grow is bearing fruit. Futu is reporting more registered and paying clients on the platform, with more assets. Once again, trading volume is dependent on market conditions. Total paying clients increased 23.5% year-over-year to 1,887,270 at the end of March 2024, while registered clients increased 15.4% year-over-year to 3,812,326. Total users also increased 12.3% to 22.5 million. In aggregate as of the end of Q1, client assets increased 11.2% year-over-year to HK$517.9 billion (about $66.3 million USD) while daily average client assets were HK$480.0 billion, rising 6% from a year ago. This is strong, reliable growth.

The question is whether Futu can continue to drive more clients, which we believe it can, especially as it pushes out into more nations. Of course, revenues from clients depend heavily on trading volume revenue, which is why the company is trying to diversify out its revenue base. Total trading volume was up 9.5% year-over-year to HK$1.3 trillion.

Where we thought we would see more strength was in revenues based on higher trading volume and big increases in clients. In fact, brand-new paying clients jumped by 330.8% year-over-year to 177,000 the third-highest quarterly growth in history for Futu. Despite the increases aforementioned, Futu’s total revenues only increased 3.7% to 36.2% year-over-year to HK$2.6 billion (about $332.0 million in USD). Moreover, despite higher client counts and increased revenues, albeit single digits, we actually saw margin compression here. Total gross profit increased 3.9% year-over-year to HK$2.12 billion (about $271.7 million in USD). Factoring in expenses, net income fell 13.1% year-over-year to HK$1.03 billion (or about $132 million in USD). Making adjustments, we saw adjusted net income also fall 11.6% year-over-year to HK$1.12 billion (or about $143.5 million in USD).

While we argue that it is completely acceptable for expenses to rise with revenues and trading volumes, declines in margins and net income give us some pause. We would say performance was mixed, but management upped its guidance for brand-new paying members to 400,000 for the year after the growth in Q1. That is positive. However, expenses are ballooning to drive growth. Interest expenses were HK$312.8 million (about $40 million in USD), a massive increase of 139% from last year.

The increase was mainly driven by higher expenses associated with the securities borrowing and lending business, and is a direct result of global interest rates at much higher levels. Processing and servicing costs were HK$97.1 million about (about $12.4 million in USD), an increase of 10.7% from last year, while total costs were up 61.7% from a year ago. Operating expenses are also up, they rose 15.6% in total, with selling and marketing expenses driving this increase as they rose 107.1%. In short, it would seem they are ‘buying’ their clients through such heavy marketing. The long-term challenge will be retaining these clients.

Overall, we saw GAAP earnings of $0.96, which actually beat by $0.07. However, this was down from $1.09 a year ago. From a valuation perspective, the stock is pretty expensive here at $75 per share. However, you’re paying for the growth, which is A+ rated by Seeking Alpha’s quant ratings. However, if we see another quarter or two of EPS declines and meek revenue growth, then this quant rating will change quickly. Overall, we had a great trade, and we think you can run a house position, but take some gains.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of FUTU either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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