China’s order for cross-border brokers to rectify their mainland business will likely erode customer base at Futu Holdings Ltd. and lead to negative market sentiment, analysts said.
(Bloomberg) — China’s order for cross-border brokers to rectify their mainland business will likely erode customer base at Futu Holdings Ltd. and lead to negative market sentiment, analysts said.
China slammed Futu and Up Fintech Holding Ltd. after market close on Friday, ordering both to rectify “illegal” business activities and stop taking new onshore investors or opening new accounts for them. Existing onshore clients can still trade via the brokerages but additional fund transfers via non-compliant channels to their accounts will be banned.
“A negative surprise in our view is that the regulator officially defined the cross-border brokerage as ‘illegal’,” Daiwa Capital Markets Hong Kong Ltd. analyst Leon Qi wrote in a report dated Dec. 30. The scrutiny came right after Futu abruptly postponed its Hong Kong listing less than a day before its scheduled debut on Friday.
While the crackdown was expected and removed a long-term overhang, Futu’s existing customer base on the mainland may decline by 20% every year from 2023 onward and its earnings will be cut by “high-single-digit” this year, the analyst said.
Shares of Futu slumped 31% in US trading on Friday while its closest rival Up Fintech, also known as Tiger Brokers, dropped 28.5%.
Still, mainland China customers only constituted around 10% of Futu’s new users in 2022, according to Daiwa, meaning any impact on its fundamentals will likely be limited. Daiwa reiterated a buy rating on Futu with the target price unchanged at $64, advising investors to “stay calm” and focus on the fundamentals.
Huatai Securities Co. said that Futu stocks have fully priced in pessimism over the tough regulation in a Monday note while Citic Securities Co. said it expects the broker to achieve better development within the regulatory framework. Both maintained a buy rating on the stock.
Futu and Tiger Brokers have been operating in a gray area, allowing millions of mainland investors to evade capital controls to trade shares in markets such as Hong Kong and New York. A senior central bank official has questioned the legitimacy of online trading firms, calling their services “illegal” at least twice since 2021.
The criticism had prompted the companies to shift their focus away from the domestic market even before Friday’s regulatory order. Tiger Brokers was resorting to job cuts and Futu was eying overseas markets to diversify its growth.
Both firms said they will cooperate with the China Securities Regulatory Commission to take necessary measures to review their cross-border operations in mainland China, in response to the order. The CSRC will dispatch a task force to supervise rectification work at both firms and take further appropriate measures.
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