Futu layoffs signal new phase of consolidation after rapid expansion

The company reportedly laid off about 200 people at its main base in Shenzhen, as it prepares to be ‘relatively disciplined’ in 2025

Key Takeaways:

• Futu has laid off about 200 people, or 6% of its workforce, mostly from its product and R&D departments, according to a media report
• After a period of rapid expansion into seven markets outside its original Mainland China base, the company said it has no plans to enter additional markets next year

By Doug Young

After more than two years of charging into international markets following a clash with the Chinese securities regulator, online brokerage Futu Holdings Ltd. (FUTU.US) appears to be entering a new phase of consolidating its position.

That’s our key conclusion based on a new report saying the company has abruptly laid off about 200 employees at its main base in Shenzhen. The company confirmed that recent “personnel movement” had affected about 5% of its workforce, according to the report in financial media Caixin. That would translate to about 160 workers, based on the company’s reported 3,213 employees in its latest annual report, though Caixin said the figure was higher at about 200, citing unnamed company sources.

Such year-end headcount reductions aren’t unheard of, and we’ve seen cases where companies require their managers to cut as much as 10% of their staff each year as part of an exercise to get rid of underperformers. But in this case the cuts seem somewhat unexpected, as Caixin reported they resulted in some protests.

The cuts would make sense in the context of Futu’s latest development path, as it enters a new, more stable phase after two years of rapid expansion beyond its home market in Mainland China. The company started out as an online broker that helped Chinese investors purchase U.S.- and Hong Kong-listed stocks.

But it became mired in controversy two years ago when the Chinese securities regulator informed Futu and another peer, UP Fintech (TIGR.US), operator of the similar Tiger Brokers service, that they were operating illegally due to lack of necessary securities trading licenses. The pair were allowed to continue serving their existing customers but were banned from signing up new ones. In May last year, Futu was also ordered to remove its app from Mainland China-based app stores.

The company has indicated before that it remains in talks with the China Securities Regulatory Commission (CSRC) on the issue, but doesn’t provide any detail. We initially interpreted the fact that it wasn’t ordered to shut its China-based business as a positive sign, signaling perhaps the CSRC wanted to reach a deal that would allow Futu and UP Fintech to resume signing up new China clients. But the more time that passes without any news, the more it seems like Futu is bracing itself to let go of its China-based business.

Such a move would certainly be consistent with China’s broader recent approach to privately owned financial services companies, which have found themselves under growing regulatory pressure. Many are looking to markets outside China to escape the heat at home, and Futu was one of the earliest to lead that charge overseas.

Even before the ban on signing up new Mainland Chinese customers in December 2023, Futu was already moving aggressively into other markets, starting with Hong Kong, Singapore and the U.S., and followed later by Australia and most recently Japan, Malaysia and Canada. While its new customers are based in all of those markets, Futu doesn’t disclose specific numbers on how much of its client base is now in Mainland China compared with its international markets. But observers believe that more than half of the company’s customers now come from its international operation.

Time to consolidate

Futu has never given a specific roadmap of how many markets it intends to enter. But it appears to be largely targeting markets with lots of Chinese speakers, as well as English through its Moomoo app, and most recently Japanese. That seems to be enough expansion for now, the company indicated in remarks on its latest earnings call last month.

“As we’ve passed the initial rapid expansion phase in a couple of new markets this year and as we have no imminent plans to launch in any new markets next year, so overall, from a headcount perspective, I think we’ll be relatively disciplined next year,” said Daniel Yuan, the company’s head of strategy and investor relations, on the earnings call.

The Caixin report noted that most of the recent layoffs came in Futu’s product and R&D divisions, which would make sense in the context of entering a new period of consolidation where such new product development is less important. The report also noted that the job cuts all came in the company’s original Shenzhen base, its largest operational center, even though it now officially lists its headquarters as Hong Kong.

Such a consolidation should reduce expenses, which is perhaps a factor behind analyst forecasts for the company’s profit growth to accelerate to 22% next year from 18% growth this year, according to Yahoo Finance. That acceleration would come even as the same analysts see Futu’s revenue growth slowing to 16% next year from 25% this year.

In fact, the analyst community is quite bullish on Futu as it enters its new consolidation phase, with 13 of 15 polled by Yahoo Finance rating the company either a “buy” or “strong buy.” The stock certainly seems to have some upside potential based on its current price-to-earnings ratio (P/E) ratio of 21, well behind UP Fintech’s 44 and also trailing U.S. discount brokers Robinhood Markets (HOOD.US) and Interactive Brokers (IBKR.US), which trade at 70 and 29, respectively.

Despite its expansion into seven markets outside Mainland China, Futu’s bread-and-butter is still offering trading services for U.S.- and Hong Kong-listed stocks, which accounted for about 80% and 18% of its overall trading volume of HK$1.9 trillion ($244 billion) in the third quarter. Notably, that trading volume was up 75% year-on-year, well ahead of the company’s 30% revenue growth to HK$3.44 billion for the quarter.

That would indicate that Futu’s growing international user base quite likes the service, even if they are finding ways to lower their actual spending, for example, by making bigger trades or using services with lower commission rates. Futu’s bottom line was still relatively strong for the quarter, with its profit rising 21% to HK$1.32 billion.

In a final point of interest, Futu noted it began offering cryptocurrency trading services in Hong Kong during the third quarter, showing it can quickly respond to market demand. Volume was relatively low during the quarter, at $10 million to $20 million per day, but it will undoubtedly grow if bitcoin and other cryptocurrencies continue to rally to new highs.

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