On August 25th, J.P.Morgan remained Neutral on Futu and raised the target price from $43.00 to $51.00.

J.P.Morgan pointed out the following highlights on FUTU:

1. 2Q23 results beat on interest income and cost management: 1) robust interest income ; 2) strong client growth 3) better cost management; 4) negative side: trading volume declined 22% q/q, due to the poor equities market, but was partly offset by the increase in blended commission fee rate , due likely to higher derivatives and more US stock trading in 2Q.

2. From the briefing call: 1) management disclosed Futu saw net assets inflow in 2Q23, which helped to offset mark to market AUM loss in the HK market; 2) management expects Futu to launch brokerage service in Japan in 4Q23; 3) management guided to FY23 client acquisition cost to decline high single digit vs 2022; 4) trading velocity has rebounded lately from the trough in 2Q.

3. J.P.Morgan believes the current valuation is fair, considering the regulatory overhang on Futu’s mainland business. S&P500 and Hang Seng indices were down 2% and 4% QTD, respectively, while turnover was largely flat q/q, indicating operating environment could continue to be challenging. And the expansion into Japan and Malaysia market could lead to more upfront expense near-term.

J.P.Morgan actualized 2Q23 data and revised 2023-25 earnings estimates by 29%/21%/15% to reflect higher paying client growth and robust interest income.

Downside risks:

1. weakness in China tech stocks, leading to lackluster trading volume growth;

2. regulatory risk ;

3. lower-than-expected growth in the number of paying clients.

Upside risks :

1. higher-than-expected growth in the paying client number;

2. stronger-than-expected trading volume growth;

3. a better-than-expected operating efficiency improvement.