On June 26th, Soochow Securities released the first coverage depth report of $Futu Holdings Limited(FUTU.US)$, giving it a "Buy" rating with a target price of $200.8.

At present, the source of income of Futu Holdings is commission fee, interest income and other business (corporate services + wealth management), among which commission fee income and interest income are the main business of the company. The data show that the net profit of Futu Holdings is growing at a high speed.

Three reasons optimistic about the development of Futu

1. With the willingness of mainland residents to invest in Hong Kong and US stocks to strengthen the continued and effective customer acquisition capacity of the superimposed company, the company's brokerage business is expected to maintain a sustained high growth trend.

Based on the calculation method of brokerage commission fee = (turnover rate * assets per customer * number of paying customers) * comprehensive commission rate, with the willingness of mainland residents to invest in Hong Kong and US stocks to strengthen the continuous and effective customer acquisition capacity of the overlay company, it is expected that the conversion rate of paying customers will gradually increase, reaching 40% from 2021 to 2023, leading to 1.285, 1.785 and 2.356 million paying customers.

As per capita assets are affected by multiple factors (foreign exchange policy, market trend, etc.), it is expected to maintain a slight growth, with year-on-year growth of 5%, 7% and 10% from 2021 to 2023 to 580, 620 and 680 thousand HKD.

Assuming that the comprehensive commission rate of 2021-2023 is 0.056%, which is slightly lower than that of 2019 (0.059%) and 2020 (0.057%), the brokerage commission and fee income of 2021-2023 will grow by 143%, 45% and 41% YoY to 4.84, 7.0 and 9.9 billion HKD respectively.

2. With the continuous improvement of paying customers and the continuous influx of excellent targets into the Hong Kong US stock market, interest income is expected to increase significantly.

The interest income of Futu Holdings mainly comes from the interest income of margin trading and bank deposits:

In 2020, the company's average daily margin balance reached HK $9.335 billion, a year-on-year increase of 122%. With the company's two additional issues completed in 2020 and early 2021, the margin capital was further strengthened, in addition to the continued growth of paying customers. It is expected that the average daily margin balance of the company will continue to maintain a high growth (y/y increases of 90%, 60% and 50%) to 17.74, 28.38 and 42.57 billion HKD from 2021 to 2023. Suppose the margin interest rate has dropped slightly to 6.10% compared with 2020,  margin interest income from 2021 to 2023 will reach 1.08, 1.73 and 2.6 billion HKD (y/y increases of 89%, 60% and 50%).

Futu Bank deposit interest income mainly comes from customers' cash balance interest income. In 2020, the company held bank deposits on behalf of customers reached 42.49 billion Hong Kong dollars (y/y increases of 192%). However, affected by the epidemic and the decline in market interest rates, the deposit interest rate (interest income on bank deposits/holding deposits on behalf of customers) has dropped sharply to 0.49% compared with 2019. With the clearance of the epidemic and the stabilization of interest rates, deposit interest rates are expected to return to 1.15% in 2021-2023, with deposit interest income of 950, 1,430 and 2,000 million HKD, y/y increases of 357%, 50% and 40% respectively.

3. With the continuous deepening of the company's wealth management, it will become a new growth point of other business income in the future.

The company's current wealth management business is still in its early stages of development, and with the continuous enrichment of the range of products, the penetration of the company's wealth management customers is expected to increase to 15%, 18% and 20% (accounting for paying customers) from 2021 to 2023.

At the same time, the company brings together a professional selection team to select excellent fund products and adhere to the boutique development model. The company's per capita assets are expected to grow by 20%, 22% and 22% to 0.29, 0.36 and 0.43 million HKD.

Assuming that the management rate in 2021-2023 is basically the same as that in 2020 (0.42%), the fund underwriting of the company from 2021 to 2023 will reach 240, 480 and 850 million (y/y increases of 451%, 103% and 79%).

As the new economy enterprises continue to pour into the Hong Kong and US markets, the brand effect of FUTUIE continues to upgrade. It is expected that the company's IPO subscription service fees will continue to grow steadily to 240, 350 and 500 million HKD (y/y increases of 48%, 50% and 40%). Led by the two major businesses, the company's other business revenue is expected to 760, 1,210 and 1,870 million HKD (y/y increases of 115%, 58% and 55%).

Soochow Securities believes that Futu Holdings is in the early stage of development, relying on scientific and technological strength and platform stickiness of the company's stable ability to get customers, leading to a substantial increase in revenue. Based on the above assumptions, Soochow Securities expects the company's operating income from 2021 to 2023 to reach 7.951, 11.872, 17.149 billion HKD, up 140%, 49% and 44% year-on-year, and net profit of 3.232, 4.849 and 7.03 billion HKD, up 144%, 50% and 45% respectively.

Initiated coverage on FUTU, target price of $200.8

Soochow Securities selects two comparable companies according to the attributes of the online brokerage and HK/US trading service. 

1. U.S. online brokerage: Interactive Brokers and Charles Schwab. During the high growth period(Charles Schwab 1995-2000; Interactive Brokers 2007-2015), their PE were 40-50 times.

2. Chinese online brokerage: East Money and Tiger Brokers.  Compared with domestic Internet securities firms, the current average valuation of optional companies is 56 times PE. Futu has a more complete Hong Kong and US stock license and has a better first-mover advantage than Tiger in business development. East Money is in a period of rapid growth in performance from 2018 to 2019, when the corresponding average PE reached 81.4 times.

Taking into account the significant increase in the allocation of investable assets for mainland residents in the future, the development of Futu Holdings' operation model based on "multi-license plus scientific and technological strength" is becoming more and more mature, with a strong ability to obtain customers in overseas markets, and various businesses are in a period of rapid growth. Soochow Securities values the company at 70 times PE in 2021, corresponding to the target price of $200.8 per share.