Futu: Turning Bullish On Strong Customer Growth (Rating Upgrade)
Contributor since 2012 / 12330 Followers
Summary:
- Futu Holdings’ most recent quarterly financial performance surpassed expectations as the company’s Q1 2024 revenue and earnings in HK$ terms beat consensus by +1.2% and +8.0%, respectively.
- Looking ahead, FUTU anticipates that the company can add 400,000 new paying customers this year, which is way better than the 220,000 new paid client additions it achieved last year.
- My rating for Futu Holdings is revised to a Buy, as I am impressed with the company’s above-expectations results and upward client growth guidance revision.
Torsten Asmus/iStock via Getty Images
Elevator Pitch
Futu Holdings Limited (NASDAQ:FUTU) is assigned a Buy investment rating.
I previewed Futu Holdings’ financial results for the final quarter of the prior year in my February 22, 2024 article. This latest write-up analyzes FUTU’s most recent financial disclosures.
FUTU recorded above-expectations revenue and EPS for Q1 2024. The company’s future looks bright, given that its new client net additions guidance for the current year was revised upwards by +14.3%. My decision is to upgrade the rating for Futu Holdings from a Hold to a Buy.
The Sell-Side’s Consensus Financial Forecasts
The market expected FUTU to report a slower pace of YoY top-line expansion and lower bottom line on a YoY basis in Q1 2024, prior to the company’s actual results release on May 28.
According to consensus data taken from S&P Capital IQ, Futu Holdings’ revenue was projected to increase by +2.4% YoY and +7.9% QoQ to HK$2,561 million (source: S&P Capital IQ) for the first quarter of 2024. In contrast, FUTU’s top line rose by a relatively faster +4.1% YoY in Q4 2023.
Separately, the analysts forecasted that FUTU’s diluted GAAP earnings per ADS (American Depositary Share) will decrease by -18.1% YoY to HK$6.91 for Q1 2024 as per S&P Capital IQ data. As a comparison, Futu Holdings’ bottom line contracted by a relatively milder -7.2% YoY in the final quarter of last year. The company’s consensus Q1 2024 diluted net profit per ADS of HK$6.91 is also equivalent to a +9.5% expansion on QoQ terms.
I evaluate Futu Holdings’ actual first quarter financial performance in the subsequent section.
Actual Q1 Results Came In Above Expectations
Futu Holdings announced the company’s first quarter results with a press release issued on May 28 before the market opened. FUTU’s Q1 2024 revenue and earnings were better than what analysts had anticipated.
Revenue for FUTU rose by +3.7% YoY from HK$2,499.9 million for Q1 2023 to HK$2,592.5 million in the most recent quarter. This also translated into a +9.2% QoQ growth in Futu Holdings’ revenue. The company’s latest quarterly top line turned out to be +1.2% higher than the market’s consensus revenue estimate.
The company’s revenue beat expectations, as certain markets and investment themes found favor with investors on top of new client growth, which is detailed in the next section. In its Q1 2024 results press release, FUTU Holdings highlighted that some of its “clients chased the Hong Kong market rally” and mentioned that there was a “frenzy around crypto and AI-themed stocks” for the US market. In specific terms, FUTU’s trading volume for Hong Kong and the US expanded by +18.0% QoQ and +48.1% QoQ, respectively for the recent quarter.
The robust trading volume growth was partially negated by a lower “blended commission rate” as mentioned in its first quarter earnings release. This explains why the QoQ increase in top line is less significant than the jump in trading volume.
FUTU’s diluted GAAP net profit per ADS declined by -11.6% YoY from HK$8.44 in Q1 2023 to HK$7.46 for the first quarter of the current year. On a quarter-on-quarter basis, the company’s diluted earnings per ADS had expanded by +18.2%. Notably, Futu Holdings had managed to register a +8.0% bottom line beat in Q1 2024.
Futu Holdings’ earnings for the latest quarter were boosted by lower brokerage and R&D (Research & Development) costs. FUTU’s R&D expenses and brokerage expenses decreased by -5.5% YoY and -16.5% YoY to HK$335.5 million and HK$60.3 million, respectively in the first quarter of this year.
The company credited the reduction in R&D costs to “stricter cost control” in its results release. On the other hand, Futu Holdings had already drawn attention to the improved “operating efficiency” pertaining to the transition to “self-clearing” for its US operations at the earlier FY 2023 results briefing. This led to a decrease in brokerage costs for FUTU in the first quarter of the year.
Upward Revision In FY 2024 New Customer Growth Guidance
FUTU lifted its guidance for the net additions to the company’s paying client base this year by +14.3% from 350,000 previously to 400,000 now. As a reference, Futu Holdings brought in a much lower 220,000 net new paid customers last year.
The company has made substantial headway in growing its presence in key international markets. In late April, Futu Holdings shared that it has secured 100,000 paying users for the Malaysian market in just one and half months since it began operating in the country.
In the early part of the current month, FUTU revealed that the cumulative downloads for the company’s app in Japan hit the one million mark. At its Q1 2024 analyst briefing, Futu Holdings indicated that “we continue to optimize our account opening process” for the Japanese market and stressed that “there is still a lot of room for improvement in that conversion” from “registered clients to paying clients” in Japan.
In the first quarter of 2024, the company reported that its net new paying clients surged by +330.8% YoY to approximately 177,000. This meant that Futu Holdings had already achieved 50.6% of its initial full-year guidance by Q1. As such, it is reasonable for FUTU to set a more ambitious new customer growth target.
Risk Factors
There are two key risk factors that investors should watch.
One risk is that Futu Holdings’ expansion in international markets slows because of tougher competition or regulatory issues.
Another risk is that the company’s future trading volume declines going forward, assuming that certain investment themes go out of favor or interest in specific markets dwindles.
Closing Thoughts
The market is currently valuing FUTU at 16 times consensus next twelve months’ P/E, which is still substantially lower than the stock’s five-year average forward P/E ratio of 26 times. These valuation metrics were obtained from S&P Capital IQ. My view is that Futu Holdings can trade at a superior P/E multiple nearer to its historical mean, as the company continues to expand its paying customer base rapidly.
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. 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.
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