Chinese online broker Futu Holdings Limited is well-positioned to enter the American market and compete against industry leaders like Robinhood in the face of global economic uncertainties.
"In terms of our brand awareness, we consider the U.S. market a more important area for us to improve, especially as a large portion of our clients’ trading volume in 2018 actually came from trading in the U.S. market," said Futu CFO Arthur Chen Yu in an interview with China Money Network on March 9. Futu is an online stock trading platform allowing Chinese investors to trade shares primarily listed in Hong Kong and the U.S.
The Hong Kong-based online broker saw its shares jumped as much as 46% on its first day of trading on March 9, after raising US$90 million in a New York initial public offering (IPO). Futu was the first Chinese online broker to go public overseas.
"The first thing we considered about for going public is branding, given that we have already achieved break-even last year," said Chen. He said Futu is in the process of applying for a license in the U.S. with a beta version app called "moomoo," which is oriented toward U.S. residents.
The U.S. has the largest stock market worldwide, reaching US$34 trillion in 2018 — 43% of the global market value, according to statistics from Nasdaq. American brokerage firms including TD Ameritrade, Charles Schwab and Robinhood have a strong hold. Robinhood, for instance, became popular among young investors for its commission-free stock trading app. The Menlo Park-based company raised US$539 million in funding to date and is valued at US$5.6 billion. In comparison, Futu has a market cap of around US$2 billion as of today.
Futu plans to tap into niche markets to better compete in the U.S. "Charles Schwab is more tailor-made for wealthy older generations who heavily rely on their advisers for portfolio management, while Robinhood is tailor-made for younger generations," said Chen. "We target the population whose demands are just in between, i.e. the younger generations who are at the early stage of wealth accumulation and inclined to trade by themselves through mobile devices."
Futu is backed by Tencent, Sequoia Capital China, and Matrix Partners China before its IPO. Tencent was Futu’s second-largest shareholder, with a 38.2% stake. Futu founder and CEO Leaf Li Hua, who held a 51.7% stake, has strong ties with Tencent since he was one of the earliest employees at the social media and gaming giant.
"The investors may concur with our view that it is still very early in a long uptrend of the younger generation in China starting to invest by themselves and, more importantly, starting to invest overseas," said Chen.
An Oliver Wyman report indicates households in developed countries, such as the U.K., Japan and South Korea, normally allocate 20% to 25% of their total assets to overseas markets, compared with 5% in China. The number of mainland investors who have overseas assets reached 20 million in 2018 — and is expected to double in the next five years.
Futu had a user base of 5.6 million by the end of 2018, most of which are investors from Hong Kong and mainland. They recorded HK$907 billion (US$115.8 billion) in trading.
Arthur Chen Yu serves as the CFO of Futu since September 2017. Prior to Futu, Chen worked as a director at Citigroup Global Markets Asia Limited from 2009 to 2016 in its equity business. Prior to that, he was a vice president at China International Capital Corporation from 2005 to 2009.
Below is an edited version of the interview.
Q: Why did Futu choose to list in New York instead of other markets like Hong Kong and mainland China?
A: The first thing we considered about for going public is branding, given that we have already surpassed the break-even point last year. We were financially well-positioned before the IPO so you can see the size of our new offering is not very big. We are actually in the process of applying for a license in the U.S.
Tencent is a very important strategic shareholder of Futu since the launch of our business. Benefiting from Tencent’s presences in Hong Kong and China — in terms of our brand awareness — we consider the U.S. market as a more important area for us to improve, especially as a large portion of our clients’ trading volume in 2018 came from the U.S. trading.
Recently we just launched a beta version app called "moomoo," which you can find in the Apple Store. It’s still in beta testing, so we are yet to do any market campaigns. This product will focus more on U.S. local residents.
Q: What is your major target for the business expansion plan in the American market in 2019?
A: We are still in the early stage of the U.S. business strategy in terms of products and team construction. Maybe it’s still too early to lay out a clear business model, but we think there can be a big opportunity even in this mature market.
As you may notice, a similar retail brokerage business company called "Robinhood" made a huge success in the U.S. in the past several years. For us, the No. 1 target is that there should be a difference between our model and those adopted by Robinhood and Charles Schwab. Charles Schwab is more tailor-made for wealthy older generations who heavily rely on their advisers for portfolio management, while Robinhood is tailor-made for younger generations — but in terms of wealth, they are relatively in a low level compared with the whole population, and they require less trading features and functionalities in apps.
We target the population whose demands are just in between, i.e. the younger generations who are at the early stage of wealth accumulation and incline to trade by themselves and make decisions through the mobile. Such population also require certain sophisticated features and trading functionalities in the app.
Q: What are the proportions of your clients based in mainland China, Hong Kong, and overseas markets?
A: The majority of our clients are mainland retail investors, and we also started to pick up Hong Kong retail clients. We currently focus on the Greater China region. I think we will keep focusing on this population in the near future due to the market potential and our market competitive landscape in the area. We are still in a very early stage to penetrate, and even to monetize other overseas markets. As time goes by, if our model can be successfully validated — as it has been in Hong Kong and we are trying to do so in the U.S. — we may replicate it to other countries.
Q: The Chinese government finalized the rules for the Nasdaq-like new high-tech board in Shanghai in early March. Does Futu have any expectations or involvements in the new board?
A: We have no plan to list on the high-tech board in Shanghai.
This is a new initiative advocated by the Chinese government that could be launched by the end of the second quarter of 2019. I think it’s a logical step to give an additional funding access, or to say capital market access, to new economy companies in areas like the internet, technology, and biotech. But I don’t think it will fully deter many new economy companies to list overseas. After all, in terms of the structure and flexibility of regulations, Hong Kong, in particular the U.S., still have a huge advantage.
We will keep monitoring this market, given that we are still in a very early stage, and the policy-wise [of the new board], like the details of execution in this new-born market, has not been fully confirmed. We will consider providing services for clients to trade on the new board, depending on the regulations, and requests and demands of clients.
On the business front, this new initiative may help give some investment education to many retail investors in mainland China. The similar situation happened when the Shanghai-Hong Kong Stock Connect was launched in November 2014. Many people wondered whether the Shanghai-Hong Kong Stock Connect would have certain negative impacts on our business as people can use their on-shore money to buy off-shore assets in Hong Kong, will they still invest in off-shore markets with off-shore money? But the reality is you can see such initiatives actually improved people’s awareness about the importance of assets diversification, not only from the asset-class level but also from the geographic-location level.
So I believe more people will open their perspectives and pay more attention to what’s going on in the overseas capital markets like Hong Kong and the U.S.
Meanwhile, the investors may concur with our view that it is still in a very early stage for a long uptrend for the younger generation in China to start to do investment by themselves and, more importantly, start to do investment overseas. In the past few years, Chinese people are very concentrated on the home market instead of asset allocations in terms of equity trading. Statistics from Oliver Wyman shows that households in developed countries, such as U.K., Japan and even South Korea, normally allocate 20% to 25% of their total assets to overseas markets, compared with the 5% in China. So there’s still a huge room for us to grow.
Q: Looking forward, what are the challenges and opportunities faced by Futu?
A: Firstly, the macroeconomic uncertainties, trade war, and market volatility may impact our growth speed in the acquisition of new clients, trading volumes, etc. This is a macro challenge that we cannot control. Secondly, another challenge is our attempt to penetrate in the U.S. market. It takes time for us to accumulate sufficient know-how in technology, infrastructures, regulations, and market campaign strategies, to develop a new market in the next two to three years.
The primary focus of Futu in 2019 is to continuously increase the number of our paying clients from mainland China and Hong Kong. We witnessed a lot of policy changes in Hong Kong. For example, the Hong Kong government started to advocate a fast payment system, which allows people to transfer money from commercial bank accounts to merchants, payees, and brokerage accounts in a faster manner with a very low cost. Previously, many services in the commercial banking area were not very user-friendly. Normally, it might take 24 hours to complete a transaction, and the bank would charge highly on the handling fee.
We used to have difficulties in attracting people who might be interested in using a stand-alone brokerage platform, because they preferred to stick to commercial banking platforms. But given the current improvement of financial technologies in Hong Kong, there could be more people, especially people who care about user experience and mobile features, to start using digital platforms like Futu rather than traditional commercial banking channels for their investment.
Q: China is seeking to further open up the brokerage business to foreign companies. How will it inpact the market?
A: I think most competition is currently from local players. Many local players have a strong advantage in distributions as they have a lot of branches across China. Given the resources [held by domestic players], foreign companies may not expand very quickly after they enter into the Chinese market. Meanwhile, they are relatively new to the market, so they need to understand what local users like and what products will be favorable for them.
For example, Hong Kong has over 600 brokerage firms, according to Hong Kong SFC (Hong Kong Securities and Futures Commission). The market is too fragmented, and the competition in Hong Kong is much fiercer than that in mainland China. But most of them are just using traditional offline commercial banking channels to do the business. So I do think there will be a consolidation period in Hong Kong, especially after the emergence of online brokers like Futu to serve younger generations. This could be a reference for foreign players entering into China’s onshore market.
I cannot give a precise number of market players in the future. But I think an easy reference maybe a look at some other more sophisticated economies like the U.S. The country has less than ten major brokerage companies covering a large portion of all the retail brokerage business. I think a similar trend may happen in Hong Kong and mainland China down the road.