Under pressure at home, Chinese online brokers expand offshore

Under growing regulatory pressure at home, Chinese online brokers that focus on offshore stocks are concentrating their energies on signing up new clients overseas.

The effort seems to be paying off. Among new clients registered by Futu Holdings and UP Fintech Holding last quarter, 90% came from outside mainland China, with Singapore proving a particularly fruitful market.

For UP, which operates as Tiger Brokers and is backed by Xiaomi, this boost meant that paying overseas users overtook mainland account holders, by a count of 341,000 to 332,000.

Both Nasdaq-listed brokers are now targeting Australia, with Malaysia next on the horizon.

“In 2022, we are confident that we can achieve similar success in other global markets, as we did in Singapore,” said UP Chief Executive Wu Tianhua in a call this month with analysts, noting that the average account size for clients from the city-state rose 26% in the October-December quarter from the quarter before.

Yet the conquests have come at a steep cost.

Selling and marketing expenses for Futu, which operates in greater China as Futubull and as Moomoo overseas, tripled last quarter to 336.97 million Hong Kong dollars ($43.07 million) from a year before due to higher spending in Singapore and the U.S.

By the calculations of Jefferies analysts, it cost the company HK$4,375 to capture each new customer in the fourth quarter, 80.6% more than in the July-September period.

UP similarly saw payroll and branding costs climb around 80% in the fourth quarter from a year before to keep up with its “continuous efforts to expand globally in accordance with our internationalization strategy.”

Moreover, even with the heavy investment in signing up new clients, the pace of growth has slowed dramatically.

After enrolling 728,000 customers last year to reach 1.24 million overall, Tencent Holdings-backed Futu told analysts to expect only around 200,000 net additions this year, with two-thirds expected to come from Singapore, the U.S. and Australia.

Both companies saw average client account assets decline last quarter from a year before due to heavy drops in share prices for New York and Hong Kong-listed Chinese companies.

UP Fintech CEO Wu Tianhua believes his app’s social media features will help draw Australian users.

“Our client addition kind of slowed down a little bit this year due to the negative equities market performance and a less active IPO market,” said Leaf Li, chairman and chief executive of Futu, in the company’s annual results call.

Many investment bank analysts who track the two brokers are still positive on both, but slashed their profit and price-gain expectations after this month’s updates.

Citigroup’s Judy Zhang cut her annual earnings forecasts for Futu for the next three years by 22% to 32% “on our assumptions of slower growth in paying customers and client assets” while trimming her 12-month share target price to $46.50 from $79.

On Friday, Futu closed at $37.26 while UP ended at $5.65.

The shares of each have fallen more than 75% since last June amid Beijing’s widening pressure on offshore listings and other sectors such as private tutoring.

Since October, the two brokers themselves have been in the crosshairs of Sun Tianqi, head of the central bank’s Financial Stability Bureau.

He has repeatedly said that the two are “conducting illegal financial activities.” A person briefed on the plans of the China Securities Regulatory Commission said it too will turn its attention to cross-border stockbroking later this year.

The activities of Tiger and Futubull are sensitive, due to China’s tight capital controls, which in principle restrict individual mainland residents from offshore stock buying except through a closed-loop channel with Hong Kong.

Since Sun began his attacks, the two brokers have stopped helping investors located in the mainland with opening offshore accounts or converting yuan, though staff acknowledge that many of those who are setting up overseas accounts may in fact be Chinese nationals.

Futu’s Li told analysts that he expects mainlanders to account for just 10% of the brokerage’s clients within three years. They now make up about one-third of its clientele.

Li said Hong Kong should account for a third of Futu’s clientele and assets by 2025. By Daiwa’s estimate, the company’s market share in the city climbed from 1.9% in 2018 to 8.6% last year.

Both brokers are bullish on their prospects of grabbing business away from existing players in Australia. UP’s Wu highlighted his app’s social media and data offerings and broad range of trading options. Li said, “We think that we have advantages in terms of our product offerings, and in terms of our tech capabilities.”


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