Futu Holdings Limited: FY2020 Form 20-F Summary
Business context and reporting period
This annual report covers the fiscal year ended December 31, 2020, rather than a standalone 2020 fourth-quarter filing. Futu is a Cayman Islands holding company operating primarily through Hong Kong subsidiaries, PRC subsidiaries and a variable interest entity. It provides online brokerage, margin financing and securities lending, wealth management, market data, investor community and corporate services through the Futubull and moomoo platforms. The consolidated financial statements are prepared under U.S. GAAP.
At year-end, Futu reported 11.9 million users, 1,419,734 registered clients, 516,721 paying clients, total client assets of HK$285.2 billion and 1,315 employees. Approximately 98.1% of consolidated revenue was generated through Futu Securities International (Hong Kong) Limited.
Key financial metrics
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Total revenue | HK$3,310.8 million (US$427.0 million) | HK$1,061.6 million | +211.9% |
| Brokerage commission and handling charge income | HK$1,990.1 million | HK$511.4 million | +289.1% |
| Interest income | HK$965.6 million | HK$464.9 million | +107.7% |
| Other income | HK$355.1 million | HK$85.3 million | +316.3% |
| Gross profit | HK$2,614.9 million | HK$779.9 million | +235.3% |
| Gross margin | 79.0% | 73.4% | +5.6 percentage points |
| Income before tax | HK$1,450.6 million | HK$178.5 million | +712.7% |
| Net income | HK$1,325.5 million (US$171.0 million) | HK$165.7 million | +699.7% |
| Net margin | 40.0% | 15.6% | +24.4 percentage points |
| Net cash from operating activities | HK$20,456.7 million | HK$1,969.4 million | +938.5% |
| Capital expenditures | HK$44.6 million | HK$118.3 million | Down |
Revenue mix shifted toward brokerage: brokerage commission and handling charge income represented 60.1% of revenue, interest income 29.2% and other income 10.7%. Net income per ordinary share was HK$1.28 basic and HK$1.26 diluted; diluted net income per ADS was US$1.30.
Year-end cash and cash equivalents were HK$1,034.7 million. Cash held on behalf of clients was HK$42,487.1 million and is not equivalent to unrestricted corporate cash. Total assets were HK$71,337.8 million and shareholders’ equity was HK$8,307.7 million.
Borrowings increased to HK$5,482.8 million from HK$1,467.6 million, while securities sold under repurchase agreements increased to HK$5,453.0 million from HK$1.6 million. The borrowings primarily supported margin financing and carried a weighted-average interest rate of 1.82% at year-end. The company reported unused bank facilities of HK$3,285.9 million, although these facilities were uncommitted.
Regulated subsidiaries remained above stated capital requirements. Futu Securities International (Hong Kong) Limited had net capital of HK$2,453.7 million against a HK$1,286.3 million requirement, an excess of HK$1,167.4 million.
Material changes versus the prior comparable period
- Total trading volume increased 296.9% to HK$3,463.6 billion, driven by higher client activity and paying-client growth.
- Paying clients increased 160.5% to 516,721, while registered clients increased to 1,419,734.
- Daily average margin financing and securities lending balances increased 121.8% to HK$9.34 billion; year-end margin financing and securities lending balance reached HK$19.5 billion.
- Client assets increased 227.4% to HK$285.2 billion from HK$87.1 billion.
- Operating expenses increased 93.8% to HK$1,147.0 million, including research and development expenses of HK$513.3 million and selling and marketing expenses of HK$385.3 million.
- Interest income from margin financing and securities lending increased to HK$571.8 million; IPO financing interest income increased to HK$184.2 million from HK$12.7 million.
- The company completed a US$301.8 million net follow-on offering and raised approximately US$262.5 million through pre-funded warrants in December 2020. The warrants covered 53.6 million Class A ordinary shares and were unexercised at year-end.
- Class A shares outstanding increased to 590.1 million, while Class B shares declined to 494.6 million after a 50 million-share conversion to Class A shares.
- Futu adopted the current expected credit loss model in 2020, recognizing HK$9.1 million of expected credit loss expense. A prior material weakness in U.S. GAAP financial reporting controls was reported as remediated as of December 31, 2020.
Guidance, outlook, commentary and unusual items
Management did not provide quantitative revenue or earnings guidance. It identified 2021 as a year of internationalization, with Singapore and the United States as strategic markets. Futu launched moomoo in Singapore on March 8, 2021 and expects to use Singapore as a platform for broader Southeast Asian expansion.
Management said COVID-19 did not materially disrupt 2020 operations and that market volatility, online trading adoption, increased account sign-ups, trading velocity and asset inflows benefited results. However, it cautioned that these conditions may not continue as clients regain access to offline facilities and that the pandemic’s future economic and operating impact remains uncertain.
Unusual or important items include the substantial increase in margin lending and repurchase financing, the HK$9.1 million expected credit loss provision, a HK$5.9 million impairment of an equity-method investment, customer-loyalty revenue deferrals and offsets totaling HK$276.2 million, and ongoing regulatory inquiries regarding client onboarding processes. The company recorded no provision for potential regulatory fines.
Principal risks and contingencies
- Ongoing HK SFC inquiries into client onboarding could result in remediation, reprimands, fines, restrictions or suspension or revocation of licenses; the outcome is not predictable.
- The company does not hold a PRC license for securities brokerage and relies on a VIE structure for a limited portion of its PRC operations. Changes in PRC interpretation or enforcement could restrict operations or prevent consolidation of the VIE.
- Some PRC-related activities may require additional licenses, including securities investment consulting, internet audio-video, internet news and fund-related permissions.
- Revenue and profitability depend heavily on trading volumes, market volatility, commission rates, interest rates, client cash balances and the availability and cost of margin-financing funding.
- Margin financing, securities lending, IPO financing and repurchase transactions expose the company to collateral, counterparty, liquidity and forced-liquidation risks. Margin loans outstanding were HK$18.4 billion at year-end.
- Competition may reduce commissions, financing spreads, client retention and market share.
- Technology failures, cyberattacks, data breaches, third-party system outages and capacity constraints could disrupt trading and create regulatory, litigation and reputational exposure.
- Most of the company’s auditors’ work is performed in China, where PCAOB inspection access was unavailable at the filing date, creating potential future reporting, trading and delisting risk under U.S. legislation.
- The dual-class structure gives Class B shareholders 20 votes per share. Founder Leaf Hua Li held approximately 68.0% of aggregate voting power as of February 28, 2021.
- The company does not expect to pay cash dividends in the foreseeable future and intends to retain earnings for growth.
- The company had operating lease commitments of HK$240.7 million through 2025. It also disclosed ordinary-course lawsuits and regulatory matters that management considered immaterial individually and collectively, subject to ongoing uncertainty.
Most important facts for investors to verify
- Whether the exceptional 2020 growth in trading volume, paying clients, client assets and profitability persisted after the pandemic-driven market volatility.
- The status and potential financial or licensing consequences of the HK SFC client-onboarding inquiries.
- Collateral quality, liquidation practices, funding concentration and loss sensitivity within the HK$19.5 billion margin financing and securities lending exposure.
- The sustainability of the 79.0% gross margin and 40.0% net margin as marketing, technology, regulatory and international expansion costs increase.
- The effect of borrowings, repurchase agreements and uncommitted credit facilities on liquidity and regulatory capital.
- Compliance and enforceability of the PRC VIE arrangements, required PRC licenses and cross-border foreign-exchange practices.
- Future dilution from the 53.6 million pre-funded warrant shares, employee awards and other equity incentives.
- PCAOB inspection developments and any resulting SEC disclosure, trading or Nasdaq listing consequences.