Futu Holdings Limited (FHL.US) · 3/15/2019 · Trading, Clearing & Settlement Brokerage Fee...

Futu Holdings Limited (FHL.US)

- Initial Analysis -

James Yeh

March 15, 2019

Investment Thesis & Risks for Minority Shareholders

@yuinausicaa | yuinausicaa.com

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Multi-Year Compounding Opportunity

Large, Expanding TAM

Scalable, Reinforcing Business Model

Tech-Driven, Product-Focused

Policy & Regulation

Execution & Competition

Macro Market & Idiosyncratic Liquidity

Structural / Tail Risks

Investment Thesis Risks

Business Model


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Fu

tuSecu

rities

Oth

er L

icen

sed

Bro

kers

Others

Users w/o

Assets

Clients w/

Assets

Product / Platform

Social NetworkClients w/o

Assets

Client Base

Trading

Information

Markets

Market Potential


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1,199 1,435 1,719 1,797 1,897 1,977 2,048 2,138

205 305

413 530

657 795

945 1,108

685

689

693 696

699 702

704 706

2,089

2,429

2,825 3,023

3,253 3,473

3,697 3,952

2016 2017 2018 2019E 2020E 2021E 2022E 2023E

Hong Kong-based investors China-based investors Others

No. of HK Online Securities Trading Retail Investors

(K)

13,290 14,149

16,454 17,341

18,038 18,652

20,479 21,127

2016 2017 2018 2019E 2020E 2021E 2022E 2023E

No. of US Online Securities Trading Retail Investors

(K)

9,700 14,300

20,000

26,600

33,100

41,600

51,200

66,300

2016 2017 2018 2019E 2020E 2021E 2022E 2023E

No. of CN-based Investors w/ Overseas Investment

(K)

Est Market Penetration in HK & China

9,700

14,300

20,000 1,199

1,435

1,719

2016 2017 2018Hong Kong Retail Investors China Retail Investors with Investable Overseas Assets

Paying Clients

Penetration

35 80 133

0.61%0.51%0.33%

(K)

Source: Company and author’s estimate

Competitive Landscape


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Online

Offline

Institutional Retail

China’s Overseas Online Retail Securities MarketHong Kong Online Retail Brokers

# Broker

1 Haitong

2 Futu

3 IB

4 BOC

5 HSBC

6 CMS

7 Huatai

8 CITIC

9 EBSHK

10 China Galaxy

Pure-play Online Broker

Hybrid Broker

Brokerage Business in Commercial Bank

# Broker

1 HSBC

2 Haitong

3 BOC

4 Futu

5 IB

6 Bright Smart

7 Huatai

8 CITIC

9 CMS

10 EBSHK

307 498

809 911 1,038 1,166 1,305 1,471 137

181 232

289 355

430

504

795

1,170 1,325

1,511 1,706

1,919

2,170

2016 2017 2018 2019E 2020E 2021E 2022E 2023E

Hong Kong-based investors China-based investors Others

Hong Kong Online Securities Trading Volume

(USD B) CAGR: 13.1%

185 298

452

700

892

1,109

1,422

1,784

2016 2017 2018 2019E 2020E 2021E 2022E 2023E

China Overseas Online Retail Securities Trading Volume

(USD B) CAGR: 31.6%

Source: Company

Services, Monetization & Potential


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Service Monetization Activity Concept

Trading, Clearing & Settlement Brokerage Fee Trading Race to Bottom

Margin Financing & Securities Lending Interest Trading Race to Bottom

Cash Management Interest Asset Gathering Scale

Corporate – ESPO & IPO Subscription Fee CA / BD1 Pipeline /

Penetration

Market Data & News Feeds Non as of now CA Scale

Social Network / Media Non as of nowInteraction

UGC / PGC2 Platform

Wealth / Asset Management Fee / Commission Asset Gathering Scale

UI as a Service for Other Brokers Subscription D2C3 / Aggregation

Data Science-related Various Reinforcement

Ex

isti

ng

Po

ten

tial

Note: 1. Customer Acquisition / Business Development; 2. User Generated Content / Professional Generated Content; 3. Direct to Customer

Customer Acquisition


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5.6M

0.5M

0.13M

Registered Clients

Paying Clients

App Users

x 9%

x 26%

(2.38% Conversion)

Acquisition Cost 2018

Advertising & Promotion (HKD K) $79,816

/ New Paying Clients 52,764

= CAC (HKD) per new paying client $1,513

Concept: Diminishing Return => Increasing CAC

Retention Cost 2018

Other Selling & Marketing Exp (HKD K) $18,246

/ Ending Paying Client Base 132,821

= Retention Cost (HKD) per paying client $ 137

Concept: Operating Leverage => Decreasing

Retention Cost

Retail

Investors

App Adoption


Customer Acquisition & Retention Costs


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681

1,513

1,650

1,800

1,950

2,100

2,250

2017 2018 2019F 2020F 2021F 2022F 2023F

333

138 137 137 137 137 137 137

2016 2017 2018 2019F 2020F 2021F 2022F 2023F

Customer Acquisition Cost (CAC) Customer Retention Cost (CRC)

• Acquisition channels will show diminishing return as

trading function on the platform lacks network effect1

• Control of CAC depends on the execution of product

diffusion, efficient conversion and retention via

thoughtful marketing initiatives and on-going user

experience improvement

• Nasdaq listing might help

(HKD) (HKD)

• Historical customer retention cost seems to stabilize at

HKD 137 per paying client

• As product and process improve, CRC tends to decline in

the long run (while here we model the pattern flat)

Step Flat

Note1: The social network on the platform might show network effect


Client Base & Behavior


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16

4451

73

94

113

128

144

2016 2017 2018 2019F 2020F 2021F 2022F 2023F

196

518

907

1,321

1,699

2,027

2,308

2,584

2016 2017 2018 2019F 2020F 2021F 2022F 2023F

0.13

2.943.18

4.40

5.38

6.086.54

6.89

2016 2017 2018 2019F 2020F 2021F 2022F 2023F

35,456

80,057

132,821

203,838

277,690

351,887

427,450

512,781

2016 2017 2018 2019F 2020F 2021F 2022F 2023F

Paying Clients

Client Assets

CAGR: 31%

CAGR: 23%(HKD B)

Margin Financing & Securities Lending Balance

(HKD B) CAGR: 17%

Trading Volume

CAGR: 23%(HKD B)


Contribution Profit

• Futu’s Contribution Profit =

• + Net Brokerage & Handling Income

• + Net Interest Income

• + Other Income

• - Processing and Servicing Costs

• Basically, it’s Futu’s Gross Profit

• Paying clients in later cohort tend to be

less active in trading and bring in less

asset on average compared to early

adopters

• It’s difficult to time the inflection point.


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1,183

2,530

4,229

3,898

3,590

3,317

3,054

2,817

2016 2017 2018 2019F 2020F 2021F 2022F 2023F

Contribution Profit per Paying Client


OR

Unit Economics


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Quarterly Dollar Churn 3% 6%

CLTV (Yr1-5) $7,904 $6,352

CAC $1,500 $2,600 $1,500 $2,100

CAC IRR 169% 90% 150% 99%

CLTV/CAC 5.3x 3.0x 4.2x 3.0x

Note:

1. Payback period has been less than six months since the beginning of

2017. Author assumes payback period is equivalent to CAC recovery.

2. Futu has retained over 97% of paying client base on a quarterly basis

since the beginning of 2017. Author assumes quarterly dollar churn equal

to paying client churn.

3. The company cannot avoid competition. Pricing for brokerage and

margin financing & securities lending is racing to bottom in the long run.

Metrics

Quarterly Contribution Profit1 $750

Quarterly Dollar Churn2 3%

Base Annual CRC / yoy $137 / 5%

Stabilized Yr / Discount Rate Year 5 / 15%

2.5x

3.0x

3.5x

4.0x

4.5x

5.0x

5.5x

1,5

00

1,6

00

1,7

00

1,8

00

1,9

00

2,0

00

2,1

00

2,2

00

2,3

00

2,4

00

2,5

00

2,6

00

3% Q $Churn 6% Q $ChurnCAC

CLT

V/C

AC

Client Retention & CAC Capacity

• Parameters in CLTV calculation are interdependent

• While platform for financial activities are stickier

(transaction/asset), make clients stay for superior

product/service rather than attractive pricing3


Financial Projection – Existing Business w/ Monetization


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HKD K 2016 2017 2018 2019E 2020E 2021E 2022E 2023E

Revenues

Brokerage commission and handling charge income 74,498 184,918 407,990 594,391 764,757 912,091 1,038,703 1,162,988

Interest income 5,795 105,872 360,585 502,657 623,750 718,152 789,386 852,372

Other income 6,722 20,873 42,768 49,367 48,598 48,907 45,702 50,384

Total revenues 87,015 311,663 811,343 1,146,415 1,437,105 1,679,151 1,873,791 2,065,744

Costs

Brokerage commission and handling charge expenses 18,730 36,777 80,127 115,906 148,363 176,034 199,431 222,131

Interest expenses 3,459 19,879 95,624 132,701 164,046 188,156 206,030 221,617

Processing and servicing costs 22,880 52,446 73,843 103,177 127,902 147,765 163,020 177,654

Total costs 45,069 109,102 249,594 351,785 440,311 511,955 568,480 621,401

Total Gross Profit 41,946 202,561 561,749 794,630 996,793 1,167,196 1,305,310 1,444,343

Operating expenses

Selling and marketing expenses 59,198 41,446 98,062 145,104 170,977 192,894 217,242 262,248

Research and development expenses 61,624 95,526 151,097 206,355 244,308 268,664 281,069 309,862

General and administrative expenses 31,786 57,293 103,831 137,570 158,081 167,915 168,641 175,588

Total operating expenses 152,608 194,265 352,990 489,028 573,366 629,473 666,952 747,697

Operating Income (110,662) 8,296 208,759 305,602 423,427 537,723 638,359 696,645

Operating Margin -127% 3% 26% 27% 29% 32% 34% 34%

Others, net (1,085) (4,918) (7,959) (8,000) (8,000) (8,000) (8,000) (8,000)

(Loss)/Income before income tax expenses (111,747) 3,378 200,800 297,602 415,427 529,723 630,359 688,645

Income tax benefit/(expenses) 13,276 (11,480) (62,288) (89,281) (124,628) (158,917) (189,108) (206,594)

Net (loss)/income (98,471) (8,102) 138,512 208,321 290,799 370,806 441,251 482,052

Net Profit Margin -113% -3% 17% 18.2% 20.2% 22.1% 23.5% 23.3%

Historical Projection

Note: Author’s estimate

Cap Table


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Share Count Shares % Note Assumption

Class A Ordinary Share

ADS – Public (Free Float) 63,666664 7.1%Incl. Over-allotment

Equivalent to 7,958,333 ADS

ADS – Tencent 5,333,336 0.6% No action

General Atlantic (Concurrent Private Placement) 50,909,090 5.6% Lock-up for 180 days Stay after lock-up

Matrix Partners China III HK Ltd 47,965,811 5.3% Lock-up for 180 days Potential secondary block

Entities affiliated w/ Sequoia 31,477,471 3.5% Lock-up for 180 days Potential secondary block

Entities affiliated w/ Tencent 157,685,761 17.5% Lock-up for 180 days No action after lock-up

Total Class A Ordinary Shares 357,038,133 39.6%

Class B Ordinary Share (20 votes/share)

Entities affiliated w/ Tencent 140,802,051 15.6% Lock-up for 180 days No action after lock-up

Entities affiliated w/ Leaf Hua Li 403,750,000 44.8% Lock-up for 180 days No action after lock-up

Total Class B Ordinary Shares 544,552,051 70.4%

Total Ordinary Shares 901,590,184 100%No additional equity capital raising for

cashflow shortfall or equity deficit issues


What are Minority Shareholders Paying for?


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• Invisible Asymptotes1

• ChasmSocial Network / Media

Brokerage-related Business

Corporate Service

Brokerage-related

Business

Corporate Service

Social Network / Media

Asset / Wealth

Management

Other Opportunities How much

for this?

Time

Horizon?

Boom-Bust in

Stock Price?

Note1: https://www.eugenewei.com/blog/2018/5/21/invisible-asymptotes

Futu Holdings Limited (FHL.US) · 3/15/2019 · Trading, Clearing & Settlement Brokerage Fee...

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Transcript of Futu Holdings Limited (FHL.US) · 3/15/2019 · Trading, Clearing & Settlement Brokerage Fee...