On May 19, Morgan Stanley issued an updated research report on Futu Holdings after its first-quarter earnings announcement.
Morgan Stanley reiterated FUTU an "Overweight" rating with a target price of US$239, 92% above the closed price on May 18, 2021(US$ 124.39).
Here comes the highlights of the research report:
Based on Futu's 1Q21 briefing, we expect 1) potentially greater significance of offshore markets in client/revenue contribution; 2) still engaged retail investors in 2Q21; 3) limited competitive pressure; and 4) further business/market expansion. Reiterate OW and our conviction in the firm.
1Q21 new paying clients mix by region; offshore markets likely more significant in future: Singapore and the US contributed ~25% of new paying clients. HK and the mainland split the rest roughly 50-50 (HK slightly higher). We think the US contributed more new clients than Singapore in 1Q21, given the latter's late start on March 8, but we expect Singapore's client contribution to pick up notably from 2Q21. We note continuous expansion in offshore markets. Thus, we expect offshore markets gradually to play a more important role in client acquisition in future.
Futu's management didn't adjust its 2021 new paying client target of 700k but said it may consider an update with the 2Q briefing.
Guidance on client activity trend into 2Q21 – still engaged: Futu guided for some moderation in client activity from the peak in mid-February, but the impact is limited – sector rotation kept trading flow good. We expect quarter-to-date client trading velocity and client acquisition pace to be similar to the levels in early January given similar DAU level despite recent market volatilities.
Limited competition and pressure on brokerage fee rate: HK's high stamp duty dwarfs its commission rate. Further reducing fee rates won't help client acquisition much. Derivatives, on which fee rate is ~6-10xhigher vs. stocks, contributes ~20% of brokerage fees in 1Q21. US stocks made up 64% of trading volume in 1Q21 and likely ~70% of brokerage fees. 1) Still large market,2) brand recognition and trust accumulated,3) advanced proprietary technology, 4) strong capital base and close ties with local banks supporting margin finance, and 5) investors accumulated should help it withstand and outperform competition.
New businesses/markets:Futu is studying other ASEAN and English-speaking countries. Futu will also provide other products covered by CME.
Risks to Downside:
Major correction in US and/or HK markets
Earlier-than-expected direct entry to the HK brokerage market by Internet giants
Faster-than-expected expansion of virtual banks in HK brokerage business, etc.
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