Rising Regulatory Burdens Will Choke Trading Despite Minor Market Hopes

Key Takeaways

• Mounting regulatory and compliance pressures globally threaten user growth, profit margins, and may force costly operational adjustments.
  
• Shifts in demographics and rising fintech competition risk reducing trading volumes and eroding Futu's revenue streams over time.
  
• Accelerating international user growth, innovative product diversification, and rising operating efficiency position the company for enduring revenue expansion and resilient profitability despite global market shifts.

Catalysts

Provides digitalized securities brokerage and wealth management product distribution service in Hong Kong and internationally.

• Intensifying global regulatory scrutiny, particularly with regard to Chinese companies operating abroad and increasing uncertainty around cross-border capital movements, threatens to restrict Futu's addressable market and could materially limit user growth and trading volumes, putting sustained pressure on topline revenue and future earnings.
  
• As global concerns over data privacy and financial security mount, the likelihood of more burdensome compliance regimes rises, leading to higher operational costs and potentially creating barriers to user acquisition and international expansion, which would weigh heavily on future net margins.
  
• The erosion of retail investor enthusiasm for equity trading platforms, driven by demographic headwinds such as aging populations and lower savings rates in Futu's core Asian markets, may result in structurally lower trading activity over time, leading to declining commissions and undermining the base for revenue growth.
  
• Heightened regulatory risks in China and overseas continue to loom over the company, as evidenced by references to license suspensions and new tax scrutiny on Mainland clients' overseas investments; this exposes Futu to significant risk of forced operational restructuring, escalating compliance costs and long-term net margin compression.
  
• The rapid commoditization of online brokerage services alongside the emergence of decentralized finance and advanced fintech competitors threatens to accelerate fee compression and reduce Futu's differentiation, eroding transaction-based revenue streams and diminishing overall earnings power in the long run.

Futu Holdings Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Futu Holdings compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Futu Holdings's revenue will grow by 15.2% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 47.1% today to 40.0% in 3 years time.
• The bearish analysts expect earnings to reach HK$8.5 billion (and earnings per share of HK$61.84) by about July 2028, up from HK$6.6 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 21.1x on those 2028 earnings, down from 27.4x today. This future PE is lower than the current PE for the US Capital Markets industry at 29.1x.
• Analysts expect the number of shares outstanding to grow by 0.9% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.63%, as per the Simply Wall St company report.

Futu Holdings Future Earnings Per Share Growth

Risks

• Rapid growth in funded accounts across multiple geographies, with a 48 percent year-over-year and 22 percent sequential rise in new funded accounts, points to robust user growth that could lead to stronger long-term revenue and earnings expansion.
  
• Diversification of product lines-including the rollout and early success of proprietary AI investment tools and crypto trading capabilities-suggests Futu is positioned to capture new growth trends, enhancing client stickiness and potentially expanding net margins by differentiating its offering from commoditized peers.
  
• Record-high client asset inflows in multiple regions, together with double-digit, multi-quarter growth in markets like Singapore and sustained asset growth in Australia and Canada, underscore increasing brand trust and the potential for asset-under-management-driven long-term revenue growth.
  
• Expansion into wealth management, structured products, and international markets such as New Zealand and Japan, combined with manageable client acquisition costs and high client retention rates above 98 percent, indicate a strong base for recurring fee-based income and business model resilience, which could support stable earnings even as market conditions fluctuate.
  
• Operating leverage is improving, shown by a substantial increase in operating margin from 46 percent last year to 57.2 percent this year, and gross margin rising above 84 percent, hinting that strong top-line growth-joint with investments in technology and operational efficiency-could drive higher net income and sustainable long-term profitability.

Valuation

• The assumed bearish price target for Futu Holdings is $124.85, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Futu Holdings's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $188.88, and the most bearish reporting a price target of just $124.85.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be HK$21.3 billion, earnings will come to HK$8.5 billion, and it would be trading on a PE ratio of 21.1x, assuming you use a discount rate of 8.6%.
• Given the current share price of $164.25, the bearish analyst price target of $124.85 is 31.6% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.