(May 28): Futu Holdings Ltd disclosed that mainland Chinese accounted for US$26 billion ($33.2 billion) in client assets, laying bare the online brokerage’s vulnerability to Beijing’s intensifying crackdown on illicit cross-border trading.
Speaking on an earnings call Thursday, chief executive officer Leaf Li reiterated that the firm will cooperate with regulators and adhere to all compliance requirements. Despite the regulatory headwinds, Futu maintained its full-year forecast of adding 800,000 new paying clients.
The executive’s commentary followed a bleak earnings report, with first-quarter profit falling 61% from a year earlier, dragged down by Chinese regulatory penalties. The company revealed that funded accounts from mainland China held about HK$207 billion (US$26.4 billion or $33.73 billion) in assets, representing nearly a fifth of its total client pool. Mainland Chinese also accounted for 20% of its revenue.
Futu is the biggest of three brokerages censured by Chinese authorities last week for operating on the mainland without a licence. The clampdown marks Beijing’s most aggressive effort yet to plug loopholes that residents have long exploited to bypass capital controls and offshore investment bans.
The firm faces about US$271 million in fines and confiscated income, while Li faces a proposed personal penalty of 1.25 million yuan (US$184,000 or $240,000). The wealth of the billionaire founder and CEO has slumped to about US$5.5 billion, almost half the US$10.1 billion fortune he had at the end of October last year, according to the Bloomberg Billionaires Index.
Analysts at Citigroup Inc cut their earnings forecast for Futu over the next three years in part “to factor in potential asset outflow in Futu’s onshore Chinese accounts”, according to a note.
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“That being said, looking beyond the earnings hit, we believe the easing concern on Futu’s regulatory risk could drive Futu’s multiple expansion in the long run,” the Citi analysts said.
Jefferies Financial analysts also said in a note that the earnings report showed a smaller exposure to the mainland and “solid progress” globally.
Futu’s credit facilities remain intact despite the recent regulatory enforcement, chief financial officer Arthur Chen said on the call, adding that he’s confident the firm will secure a favourable outcome in upcoming credit ratings.
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Beijing’s latest crackdown represents a sharp escalation from late 2022, when China first ordered online brokers to rectify illegal business activities and halt the onboarding of new onshore investors, signalling Beijing’s growing impatience with unauthorised capital outflows.
The moves sent Futu tumbling almost 28% on Friday, while later bouncing back to recoup some losses thanks to share buybacks. They slid 4.8% in New York on Thursday.
The firm has repurchased US$418 million worth of its American depositary shares as of Thursday, following through on a November promise to buy back US$800 million shares before end-2027.
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