SOPA Images/LightRocket via Getty Images
Elevator Pitch
I rate Futu Holdings Limited (NASDAQ:FUTU) as a Hold. Earlier, I reviewed FUTU’s Q3 2023 financial performance with my previous write-up published on November 23, 2023.
For the current update, the spotlight is on Futu Holdings’ Q4 2023 results release in March and the company’s 2024 prospects. FUTU’s earnings growth is expected to slow for Q4 2023 taking into account the absence of rate hikes in that quarter and continued investments in overseas expansion initiatives. Looking beyond 2023, Futu Holdings’ 2024 performance could be negatively affected by potential rate cuts. But expectations of slower growth for Futu Holdings are largely priced in, considering its PEG (Price-to-Earnings) valuation multiple of close to 1. As such, I still have a Hold rating for FUTU.
The Analysts Anticipate Slower Growth For FUTU In Q4 2023
The expected date of FUTU’s financial results announcement for the final quarter of the prior year is March 27, 2024. The sell side sees Futu Holdings registering a more moderate pace of top line and earnings growth in Q4 2023, and my view is that such expectations are fair.
Specifically, the market’s consensus financial forecasts taken from S&P Capital IQ indicate that FUTU’s revenue growth in Hong Kong dollar terms is expected to decelerate from +36.2% YoY in Q3 2023 to +15.6% YoY for Q4 2023. The analysts also project that Futu Holdings’ YoY normalized net profit expansion will moderate from +43.7% for the third quarter of 2023 to +8.8% in the fourth quarter of last year.
I am of the opinion that there are a couple of factors that might have contributed to a slower pace of revenue and bottom line growth for FUTU in the final quarter of 2023.
One factor is that Q4 2022 is a high base for Futu Holdings in terms of interest income.
Q4 2022 marks the first quarter in the company’s history that its interest income exceeded HK$1 billion. In specific terms, interest income for FUTU grew by +84% YoY and +29% QoQ to HK$1,137.8 million in the fourth quarter of 2022. The company attributed the substantial growth in interest income for the final quarter of 2022 to “higher benchmark interest rates” at its Q4 2022 earnings briefing.
But the Fed hasn’t raised rates since July 2023, so it is reasonable to assume that FUTU’s interest income growth for Q4 2023 is likely to be more muted.
Another factor is that the negative trend for the commission rate might persist in Q4 2023.
FUTU’s commission rate declined from 9.9 basis points in Q2 2023 to 9.3 basis points for the third quarter of 2023. As a comparison, the company’s Q4 2022 commission rate was 9.6 basis points, which was higher than what Futu Holdings achieved in Q3 2023.
On the company’s Q3 2023 earnings call, FUTU explained that changes to “the client’s trading behavior” such as higher-than-expected trading volume for “big blue chips” will affect its “blended commission” rate. Futu Holdings also previously noted on its Q1 2023 results briefing that a “rebound” and “higher trading turnover” for “big tech names” led to a -0.8 basis points QoQ contraction in its commission rate for that quarter.
Therefore, it is realistic to think that a meaningful recovery in commission rate for FUTU is less probable, as investor interest remains with the largest listed companies like the “Magnificent 7” which seem to carry relatively lower commission rates as per its management commentary.
Finally, elevated operating costs could be a drag on FUTU’s profitability. The current consensus financial estimates suggest that Futu Holdings’ normalized net income margin is expected to contract from 44.5% for Q4 2022 and 43.7% for Q3 2023 to 41.9% in Q4 2023.
Operating costs for FUTU increased by +5% QoQ and +17% YoY to HK$893 million in Q3 2023. At its Q3 2023 results call, Futu Holdings acknowledged that “our CAC (Customer Acquisition Cost) for this quarter (Q3 2023) and next quarter (Q4 2023) in Japan will be higher than our group average.” In other words, the company’s continued investments to support its expansion in international markets such as Japan will likely weigh on Futu Holdings’ profit margins for the near term.
In the next section, I outline the two major factors influencing FUTU’s financial prospects for the current year.
Eyes On Rate Cuts And US Market Outlook For 2024
Interest rates and the US market are the most important items to watch when assessing Futu Holdings’ outlook. Interest income accounted for more than half or 56% of FUTU’s top line for Q3 2023, while the US market represented 73% of Futu Holdings’ aggregate trading volume for the third quarter of last year.
A February 8, 2024, Seeking Alpha News article cited Federated Hermes, Inc.’s (FHI) Chief Investment Officer’s comments regarding his expectations of “three rate cuts by the Fed” in 2024. Separately, Mainland Chinese stockbroker BOCOM International published a report (not publicly available) titled “How Will Fed’s Rate Cuts Impact Futu’s Revenue?” on January 15, 2024. In BOCOM International’s mid-January research report, it is estimated that FUTU’s 2024 interest income might potentially decrease by HK$334 million assuming that there are three rate cuts of 25 basis points each. As a reference, HK$334 million is equivalent to approximately 3.3% of Futu Holdings’ current consensus top line forecast for FY 2023.
FUTU’s management has a more optimistic view of the impact of potential rate cuts on its future financial performance. The company emphasized at its Q3 2023 earnings call that “we do think the trading revenues arising from this rate cut will largely offset the potential idle cash revenue (i.e., interest income) decrease.” This implies that FUTU is of the opinion that lower interest rates will boost the performance of the US stock market and translate into higher US market trading volume.
On the flip side, there could be other negative factors driving a weaker-than-expected performance and lower-than-expected trading volume for the US equity market, notwithstanding lower rates. For example, Lisa Shalett, Morgan Stanley’s (MS) Chief Investment Officer for its Wealth Management arm, cites “excessive valuations” and “vulnerable corporate earnings” as downside risks for US shares this year in her January 10, 2024 outlook report.
The issues relating to interest rates and the US stock market highlighted in this section help to explain why the market has modest expectations of Futu Holdings’ 2024 results. As per S&P Capital IQ’s consensus data, the analysts are now forecasting an +11.3% revenue expansion and a +10.4% normalized net income growth for FUTU in 2024. In comparison, Futu Holdings’ top line and normalized net profit (in HK$ terms) are projected to have increased by +33.8% and +49.8%, respectively last year.
Concluding Thoughts
I continue to assign a Hold rating to Futu Holdings. My Q4 2023 results preview and assessment of the company’s 2024 prospects imply that FUTU will likely experience slower growth going forward, which is already reflected in the stock’s PEG (Price-to-Earnings Growth) valuation metric. FUTU is now trading at 0.98 times PEG based on its consensus next twelve months’ normalized P/E multiple of 11.9 times and the company’s consensus FY 2024-2025 normalized earnings CAGR of +12.1% (source: S&P Capital IQ). FUTU is deemed to be fairly valued and worthy of a Hold rating, considering that its PEG ratio is close to 1x, that is indicative of fair valuation.
