Futu Holdings: A Fast-Growing Yet Undervalued Company

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About: Futu Holdings Limited (FHL)
by: Aiden Wang
Summary

Futu Holdings is the largest online overseas broker in China.

The oversea asset allocation has great potential given the Chinese domestic economy and currency turbulence.

Futu also shows impressive technology and R&D capabilities.

We find Futu holdings to be undervalued which presents a good entry point for investors.

Image result for futu

Investment Thesis

We find Futu Holdings Ltd. (NASDAQ: FHL) to be a valuable investment target with good market potential and strong growth momentum. The current price presents a good entry point for investors.

Futu Holdings: The Largest Online Overseas Securities Broker In China

Futu Holdings Ltd., a Hong Kong–based online brokerage that is backed by Chinese internet giant Tencent Holdings Ltd. (OTCPK:TCEHY), IPO's on Nasdaq in March.

FHL provides investing services through its proprietary digital platform, Futu NiuNiu, a highly integrated application accessible through any mobile device, tablet or desktop. Their primary revenue sources including service fees and interest income from margin financing. FHL enables Chinese clients to trade securities, such as stocks, warrants, options and exchange-traded funds, or ETFs, across different markets (especially overseas markets like U.S.).

According to FHL’s prospectus, it was the second largest securities company in China’s overseas online retail securities market, beating the global leading broker Interactive Brokers (IEX:IBKR):

LOGO

Overseas Asset Allocation: Big Topic For China

The recent turbulence of the Chinese Yuan and the concern of economic slowdown in China, have stimulated the demand in global asset allocation. Also, the fast-growing number of Chinese IPOs in overseas markets, especially from technology, Fintech, media and telecom industries, in Hong Kong and the United States boosts the demand of overseas investment products.

Source: Yahoo Finance

According to Oliver Wyman, in 2017, China’s overseas online retail securities market reached US$297.5 billion, with a CAGR of 90.8% from 2012 to 2017. The market is expected to reach nearly US$1.4 trillion in 2022, representing a CAGR of 35.4% from 2017 to 2022.

Source: FHL’s prospectus

As a result, China’s overseas online retail securities market represents a unique opportunity, combining the high growth of the global online securities market coupled with expanding overseas asset allocation by China-based investors.

We expect the revenue growth of FHL will stand at least the same as the overall market growth, which is above 35% according to market research shown above.

Futu: High Growth, Profitable, What Else Do You Need?

FHL has achieved rapid growth since its inception and maintained the growth in 2019. Total revenues increased 37.1% year over year to HKD236.4 million. As of March 31st, 2019 FHL had an attractive and rapidly growing user base of 5.7 million, about 548,000 registered clients and over 148,000 paying clients. Total client assets grew 20.7% year over year to HKD62.3 billion.

In addition to the fast growth, FHL’s profitability is also attractive given the net income at HK$45.5 million (US$5.8 million). At the same period, its main competitor (such as UP Fintech (TIGR)) is still suffering from losses.

FHL’s gross margin also improved to 74.1%, compared with 69.7% in the first quarter of 2018. The rise was primarily due to its operating leverage brought by larger business scale and improved operating efficiency.

On the valuation side, according to the management's guidance, Q2 will see at least the same amount of increase in new paying clients. We expect to see a similar growth rate for FHL's revenue as in Q1 (i.e. close to 40%). The stock is now trading at about 7x price to sales. Given this is still a high growth stock, we think the valuation is relatively low. The sell-side ratings give a price target at over $14, showing nearly 40% upside room based on current price.

Source: Seeking Alpha

Unique R&D Capabilities

Another interesting aspect that caught our attention is the R&D capability that FHL has established. Unlike TIGR, who got their clearing license through acquiring another U.S. brokerage, FHL got their clearing license by building up their own clearing subsidiary in the U.S., the Futu Clearing Inc., which was granted the clearing license by FINRA in May. With the clearing license, FHL will be allowed to capture the full cycle of the client trade and maintain custody of client's assets.

This is a rather remarkable achievement, given the fact that the most popular Fintech Brokerage Startup Robinhood in the United States took roughly two years to complete their own clearing capabilities, according to the outlook statements.

We believe the strong technology and R&D capabilities of FHL will help them to achieve long-term success in the market.

Potential Risk Factors

Typically, the brokerage business will be impacted by trading volume, which also depends on market volatility. We are not too concerned about this as we see the long-term growing demand as the main driving force for FHL.

Key Takeaways

As the leader in China's growing overseas securities brokerage market, FHL has huge growth potential. The fact that the company is investing heavily and shows strong achievement in technology and R&D makes us believe that FHL will maintain strong growth in the coming quarters.

The fact that FHL is growing fast while maintaining profitability makes it an attractive target. Although we see some risk factors regarding the industry and Chinese macroeconomy overall, they don't diminish our optimistic view of FHL.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in FHL over 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.