Tencent-backed online brokerage Futu taps Hong Kong IPO frenzy to lure paying users

Futu is tapping investors’ hunger for IPOs to lure more paying customers, targeting Chinese millennials as more people trade stocks on smartphones
Hong Kong has hosted 125 IPOs raising US$39.1 billion so far this year, putting it on track to finish the year with the highest fund raised in 10 years

IPO

Georgina Lee

Published: 5:00pm, 30 Nov 2020

Why you can trust SCMP

Futu, the Tencent-backed online brokerage targeting Chinese millennials, said its total number of customers doubled in the third quarter from a year earlier, as more retail investors piled in to a frenzy of bidding for initial public offerings (IPOs) through its mobile app.

Thanks to a slew of hugely popular IPOs by Chinese issuers in the tech, biotech and property management sectors, Futu’s total number of paying clients jumped to 418,000 at the end of September, chief financial officer Arthur Chen said in an interview. The base increased by 38 per cent from 303,102 at the end of June.

Popular deals, including by Chinese bottled water producer Nongfu Spring, drew in HK$30 billion (US$3.9 billion) of subscriptions on Futu’s platform last quarter, or twice the average seen in IPOs distributed on its platform in the first half of the year.

Nongfu Spring made history in Hong Kong’s IPO market when it locked up HK$677 billion (US$87.3 billion) in subscription money from retail investors for the HK$8.35 billion it sought to raise in September.

Hong Kong has hosted 125 IPOs raising US$39.1 billion so far this year, on track to finish the year with the highest amount of funds raised in 10 years.

“We have seen rapid growth of our customer base this year, driven by our ability to provide retail investors with margin financing to bid for these popular deals,” said Chen, whose firm is about 28 per cent-owned by WeChat operator Tencent Holdings. “We have grown our capital in time to prepare for this wave of growing demand.”

In August, the online brokerage completed its first follow-on share sale since its US listing in March 2019, raising US$314 million selling new American depositary shares. Chen said most of the proceeds had been used to expand its capital base to offer higher leverage to retail investors to bid at IPOs and trade shares.

To be sure, Chinese online brokerages have not yet created the “Robinhood effect” seen among young traders in the US. This refers to the craze earlier this summer spurred by the US discount online brokerage Robinhood, whose 13 million users injected enough new liquidity to fuel a rally in tech stocks like Tesla and Facebook.

But platforms such as Futu, and Xiaomi-backed Tiger Brokers, are diversifying beyond just trading stocks, as they tap into Chinese investors’ hunger for IPOs because of the expected post-listing windfall.

They are also posing a bigger threat to some 600 or so retail brokerages in Hong Kong. For the first nine month of this year, as many as 31 local brokerages went out of business because of their paltry online trading capacity, which was particularly evident during the coronavirus pandemic as more people worked from home.

Futu saw its third-quarter net profit rise by 18 times to HK$401.7 million from HK$20.9 million in the same period a year ago. It was on track to reach its full-year target of bring in 280,000 new clients this year.

Futu’s ambition does not stop at IPOs or stock trading. Earlier this year, it won a licence from the regulator of Hong Kong’s Mandatory Provident Fund to sell and market such retirement schemes to its customers. This will expand its range of wealth management products, in addition to funds from other asset managers such as Invesco and Morgan Stanley.

“We are developing our platform into one capable of distributing multi-asset class products as ultimately we want to become the primary ‘wallet’ of our users, and increase our share of their wallet,” said Chen.

Post