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Companies

Tencent-backed brokerage surges in Nasdaq debut amid trade war

Futu capitalizes on Chinese millennials' hunger for overseas equities

Futu Holdings, a Hong Kong-based fintech company, went public March 8 on the Nasdaq Stock Market.   © Photo courtesy of Futu Holdings

NEW YORK -- China's Futu Holdings, an online stock brokerage backed by Tencent Holdings, wrapped up its first trading day on the Nasdaq on Friday at 27.67% above its initial offering price, reaching a roughly $1.7 billion market valuation in what is seen as the year's first major Chinese listing in the U.S.

Investors' fervor despite the ongoing Sino-American trade war was shared by Connecticut-based private-equity firm General Atlantic, which swooped in at the last minute for a $70 million deal with Futu ahead of the initial public offering.

The Hong Kong-based company lets mainlanders invest in Hong Kong and American shares. Futu rides a growing Chinese appetite for overseas equities -- an online retail market it sees expanding to over $1.4 trillion in 2022 from $451.6 billion in 2018, citing a report it commissioned from the Oliver Wyman consulting firm.

More and more onshore investors "realize the importance of the diversification" not only through different asset classes, but also from a geographical perspective, Chief Financial Officer Arthur Chen told the Nikkei Asian Review.

China was home to some of the world's worst-performing stock markets last year, with the benchmark CSI 300 Index tumbling roughly 25% as the S&P 500 fell less than 7%.

Futu Holdings Fhief Financial Officer Arthur Chen (Photo courtesy of Futu)

The 7-year-old startup brokered $115.8 billion in client trades in 2018 and logged revenue of $103.6 million, up 160.3% from 2017, according to its prospectus. The company also moved into the black on a net basis last year.

Higher returns are a major reason Chinese retail investors are looking overseas, said analyst Tian Jie of Beijing-based consulting firm Analysys.

"Since 2015, fintech companies specializing in overseas stock markets, such as Futu Securities and Tiger Brokers, have become a big draw for Chinese retail investors," Tian said.

Hong Kong and the U.S., to which Futu offers access, are among the most popular overseas targets for Chinese investors.

The Hong Kong market offers shares in many Chinese companies, including tech giant Tencent and real estate heavyweights like Country Garden Holdings, while also enjoying geographical and cultural proximity to the mainland.

New York's Nasdaq boasts e-commerce big names JD.com and Pinduoduo, while Alibaba Group Holding trades on the New York Stock Exchange.

Nasdaq has also attracted a large number of Chinese biotechnology companies in recent years.

Chinese households currently allocate about 5% of their investment to overseas markets, compared with more than 20% in countries like Japan and South Korea, according to Futu CFO Chen. "So you can see ... there's a huge gap," he said.

Futu clients have an average age of 34 to 35, Chen said.

This is a "very sweet spot in terms of wealth accumulation and also the capital markets knowledge accumulation," he said. "They are also very young and very loyal to our platform."

Tencent, which participated in all of Futu's venture rounds, owns roughly 40% of the company. The Chinese tech giant provides support to Futu in areas including content, traffic and cloud services.

The integration between Chinese internet and brokerage companies began as early as 2014, when Tencent teamed up with Sinolink Securities to introduce the nation's first online securities app, Yongjinbao. In 2018, Alibaba paid over $500 million for a 3.25% stake in Huatai Securities.

"Since large-scale technology companies have a user base of more than 900 million people, their collaboration could create a huge potential market for securities companies," Analysys said in a 2018 report.

But the likes of Futu and Xiaomi-backed rival Tiger Brokers, whose owner also filed for a Nasdaq listing last month, have focused on combining financial services and tech from the start.

And Chen touts technology -- such as a seamless transaction experience and user profiling -- as a key competitive edge for Futu. Players from the BAT camp of Baidu, Alibaba and Tencent may still take 12 to 24 months to catch up from a technological standpoint if they want to "replicate Futu's success story," he said.

"About two-thirds of our employees belong to the R&D and product development function, given that we highly emphasize the importance of the proprietary technologies," he said.

Nikkei staff writer Coco Liu in Hong Kong contributed to this report.

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