CAPI AL WA CH FUTU HOLDINGS LIMITED PREPARED BY HONGLAN CHENG, CFA | PETER FRANK | MINGYI XU FUTU HOLDINGS LIMITED Futu Holdings Ltd. Contents Forward .............................................. 3 Sector: Financial Services Industry: Investment I. Industry Overview ................................... 3 Sub-Industry: Online Brokerage A. General Introduction ............................... 3 B. Global Investment Channels Increasing ................ 4 C. The U.S. Remains a Dominant Market .................. 4 D. China’s Rise in Investable Assets ..................... 6 E. Chinese Investors Going Global ...................... 8 II. Futu Holdings Ltd ................................... 9 A. Futu’s Business Model ............................. 9 B. Extraordinary Growth and Profitability .................. 10 C. Key Milestones ................................... 12 D. Tencent As a Major Partner .......................... 12 E. Futu’s Competitive Strengths ........................ 14 F. Shift of Revenue .................................. 18 G. Faith in “Good Products” ........................... 20 H. Considerable Public Attention ........................ 21 I. Diverse Profile of Futu’s Users........................ 23 J. Incredible Trust between Futu and Users ............... 24 K. Risks........................................... 26 L. Industry Insiders’ Opinions .......................... 27 CapitalWatch Research and/ or one of its affiliates does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. 2 CapitalWatch Research - Futu Holdings Ltd. Forward This report is the outcome of a months-long investigation, research, and analysis of Futu Holdings Ltd. and China’s online brokerage industry by 27 professional journalists and analysts from JPM Media Group across its Beijing, Silicon Valley and New York offices. It differentiates from investment banks’ reports by focusing on media reports and providing analysis from the perspective of the media. It collected and isolated relevant information from an extensive range of reports on Futu Holdings and China’s online brokerage industry, conducted in-depth analysis through investigations, verified the information authenticity from multiple channels, and analyzed data from unique media perspectives. We hope this report will provide you with sufficient and reliable information to understand Futu Holdings and serve as a useful factor in making decisions about your investments. I. Industry Overview A) General Introduction The global securities market, estimated currently to exceed $100 trillion per year, is expanding rapidly as new technology and new economic opportunities continue to develop around the world. The market, which includes trading in stocks, bonds, equity and bond funds, derivative securities, and other investments, has seen a 20 percent increase in just six years through 2018. New technology, including rapidly growing digital channels, is leading much of the increase with new investment vehicles being made available for populations in all parts of the world. Indeed, online trading alone – as a percent of overall trading volume – is estimated to have grown from less than 16 percent of the entire market in 2012 to more than double that penetration, to 35 percent in 2018. During that time, the online securities market, also aided by a change in consumer preferences, has seen a compound annual growth rate of more than 20 percent during those years. While much of this growth has been brought by an expansion of organic growth in global capital markets and concomitant trading volumes overall, an increasing component of the larger securities trading activity stems from a greater receptivity and appetite for online services. By bringing traditional trading capabilities into the hands of digitally-aware consumers, the industry has seen an aggressive expansion of new entrants in every continent. Underpinning this customer receptivity are the developments of new technologies, including heightened and sophisticated internet security, which frees consumers to utilize these services with more confidence; the development of artificial intelligence, which assists in guiding and securing transactional information and preferences among consumers; and, new cloud capabilities, which integrates an infrastructure that permits the storage of big data with a global accessibility. As a result, operating and transactional completion costs continue to decrease, lowering consumer costs and the hurdles that traditionally limited micro- or small-investment thresholds. Efficiencies in all areas have opened these securities markets not only to new companies and facilitators, but to new customers and trading platforms. CapitalWatch Research - Futu Holdings Ltd. 3 FUTU HOLDINGS LIMITED B) Global Investment Channels Increasing We see several trends emerging worldwide within the securities industry. Among the most impactful is the shift from the traditional bricks-and-mortar business model to online services. While this trend has accompanied the growth of the internet overall for the past 20 years, the speed of growth and the increasing acceptance of online and mobile trading platforms has accelerated in recent years. As such, various new industry players are entering the online brokerage market, primarily large internet operators that are able to fund the significant investments necessary to enter the industry. Although the cost of entry is relatively small, the security needed to build out infrastructure, as well as operate within the various and strict international regulatory requirements, remain a serious barrier to many smaller firms. In addition, the increasingly complex level of asset classes, capital requirements, customer identity security measures, and flow-of-funds restrictions require significant management expertise and experience. Notwithstanding those substantial requirements, as consumers become more accustomed and familiarized with various alternative investment channels, the user experience becomes increasingly paramount in the development of the industry. Each of these components require changing and newly developed strategic revenue-driven business models that augment the user experience and combine to ensure a platform that can deliver long-term value. This rapid development and maturation of the industry is not likely to slow any time soon. With each new capability and furtherance of technological developments, increased competition will continue. In addition, customers will become increasingly expectant of new alternatives, which in turn, will continue pressure among competitors to develop and offer additional ancillary services that serve to differentiate products and value-added services. C) The U.S. Remains a Dominant Market With securities markets expanding around the world, the United States remains among the top destinations for capital. Technological advances, primarily driven by development within, and pioneered by, corporate research inside the U.S., has translated into vigorous growth within that market. Today, the U.S. is among the leaders in the rapidly growing online securities markets. According to iResearch Report, the market size of online brokerage services was expected to reach nearly $7 trillion last year, representing roughly 15 percent of overall volume on the market. And the market is expected to continue expanding, increasing by nearly one-third in the next five years. 4 CapitalWatch Research - Futu Holdings Ltd. With immense liquidity and transaction capabilities, securities markets in the U.S. continue to dominate for corporations and investors seeking capital placement. Much of that trading today has shifted, and continues to migrate, to the various online platforms. ONLINE SECURITIES TRADING VOLUME IN U.S. 10 9 8 7 6 rillions 5 In $T 4 3 2 1 0 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Retail 3.8 3.9 4.1 5.2 5.1 5.8 7.5 7.8 8.1 8.3 9.1 9.4 Institutional 1.7 2.1 2.6 2.9 2.9 2.8 4.2 4.4 4.6 4.8 5.3 5.5 Source: Company Data, CapitalWatch Research In particular, the retail market for trading accounts in the U.S. is robust and growing, nearly two-thirds of online trading volume is initiated by retail accounts, which represent more than one-fifth of overall trading volume. That volume, and its size relative to the overall market, is expected to increase as new technologies and newly integrated products and services give rise to increasingly lower trading costs and market entries. The New York Stock Exchange and the Nasdaq Stock Market are today among the top destinations for securities trading. The ease of capital inflow and interborder financial transactions has brought an increasing volume of capital from overseas markets to the United States exchanges. CapitalWatch Research - Futu Holdings Ltd. 5 FUTU HOLDINGS LIMITED D) China’s Rise in Investable Assets Among the top originating countries for investors’ funds has increasingly been China, which has seen an explosive growth in recent decades among a burgeoning mass affluent class in the population. China, as the world’s second-largest economy, is expected to see its gross domestic product jump from 61 trillion yuan in 2013 to an anticipated 108 trillion yuan by 2022. At the same time, the country’s population has shifted dramatically to urban centers,