Online brokers UP Fintech and Futu stumble on weak stock markets

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China’s leading internet-based stock brokerage pair reports lower first-quarter revenue as UP Fintech posts second straight quarterly loss.

Key points to remember:

  • UP Fintech and Futu saw steep revenue declines in the first quarter on weak stocks the markets drove down trading commissions
  • Futu limited spending during the period, while UP Fintech’s spending increased on aggressive hiring for its global expansion

Tiger charging or bull crouching?

Investors seem to prefer the latter these days, at least based on the latest earnings from the two major Chinese online brokers, UP Fintech Holding Ltd. (TIGR) and Futu Holdings Ltd. (FUTU). The former is best known for its Tiger Brokers service, which started in Beijing but later migrated to Singapore. Futu, on the other hand, is known for his service Futu Niuniu which means “bull on the road to wealth”.

Futu shares rose 19% on the day his results were announced last Monday and ended up 20% for the week. UP Fintech moved in the opposite direction, falling 19% after announcing its first quarter results Friday.

That said, it should be noted that even after the big moves in opposite directions, UP Fintech remains significantly more valued than Futu with a price/earnings (P/E) ratio of 26 for the former and 14 for the latter. US discount brokers Charles Schwab (SCW) and Interactive brokers (IBKR) sit between the Chinese pair with P/E ratios of 23 and 20, respectively.

Truth be told, neither UP Fintech’s nor Futu’s latest results look that impressive, which isn’t all that surprising given the dismal performance of global equity markets in the first quarter. The benchmark S&P 500 fell 5.6% during the period as a long-awaited bear market set in after one of the longest bull markets on record.

Such slowdowns are generally bad not only for stock buyers, but also for the brokerage houses that help execute stock trades. This is because trading volume tends to drop in these markets, leading to steep declines in commissions which are the primary source of income for many stockbrokers.

In this case, UP Fintech’s revenue from commissions fell 42% year-over-year to $30.5 million, representing 58% of the company’s revenue for the quarter. Futu’s commission revenue also fell, but by 27%, to HK$967.5 million ($123 million), accounting for 59% of the company’s total.

UP Fintech’s overall revenue fell 35.2% to $52.6 million, with the company blaming the poor results on lower commissions. He also cited a decline in underwriting revenue from IPOs, as new listings also tend to decline when stock markets are weak. Futu’s total revenue fell 25.6% for the quarter to HK$1.6 billion.

Both companies were established in China as brokerages helping Chinese investors buy foreign stocks, first in the United States and then in Hong Kong. But each has tried to diversify into other markets, following remarks from Chinese regulators last year that the pair were most likely operating illegally by providing financial services without the necessary licenses.

The reality is that neither company is licensed as a financial services company in China, although both have units in the United States, Hong Kong and other markets that are licensed to provide financial services. financial services. China once welcomed private companies to offer such financial services to breathe new life into a sector previously dominated by less dynamic public entities. But he abruptly reversed course about five years ago and has recently cracked down on such companies, in part over concerns about their lack of experience in risk control.

Singapore Tiger and Hong Kong Lion

In their own separate but similar bids aimed at downplaying their Chinese roots and reducing their regulatory risk, UP Fintech and Futu have aggressively attempted to set up businesses outside of China. UP Fintech is focusing on Singapore, which it lists as its current headquarters, while Futu is focusing on the city of Hong Kong, just across the border, from its home base in the inner city. boom in Shenzhen, in southern China.

UP Fintech said in its latest report that it aims to add 100,000 funded accounts this year, which would represent a 15% increase from its total at the end of 2021. It added that it aims to create 60 % of these new accounts with clients in Singapore, which is already its largest market just two years after it began offering brokerage services there. Of the remaining new accounts it targets, only 15% are said to be from the Chinese mainland.

As part of its global diversification, UP Fintech launched its service in Australia in the first quarter and said some of the activity – which also targets adjacent New Zealand – will focus on new account openings for the rest of the year.

Futu, meanwhile, said more than 80% of its new paying customers in the first quarter came from Hong Kong and other overseas markets. He added that he was benefiting from consolidation in Hong Kong, where many small and medium-sized brokers are hurting as buyers turn to larger, more secure brokerages.

Both diversification efforts seem sensible for UP Fintech and Futu given the uncertain regulatory environment in China, which has affected businesses in a wide range of sectors, from online lending to e-commerce and education services.

One place where UP Fintech and Futu differ is in spending. Like many Chinese companies these days, Futu is implementing strict cost controls in anticipation of the tough times ahead. It reduced operating costs by 49% in the quarter. But UP Fintech was against the grain in this regard, with its operating costs actually rising 17.6% in the quarter. Most of this was due to an aggressive increase in headcount as part of the company’s international expansion, with employee compensation costs rising 67% year-over-year in the quarter.

This combination of rising costs and falling revenues pushed UP Fintech into the red for a second consecutive quarter, with a net loss of $5.9 million. The more cost-conscious Futu managed to remain profitable for the period, although its profit also fell 51% to HK$572 million year-on-year.

Ultimately, the market probably looked more favorably on UP Fintech before for the company’s more aggressive stance as the market boomed. But with a potentially long downturn now in the cards, sentiment appears to be swinging towards the more conservative Futu.

Disclosure: None

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Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.

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