More than Chinese Robinhood

why $FUTU is a 10x bagger after a 500% return in 2020

Introduction

  • $FUTU is a social trading platform founded by ex Tencent employees, backed by Tencent.

  • Their strong growth is an outcome of sharp observation of humanity + excellence execution of community building.

  • Social investing, and financial investing (vs. real estate) is here to stay, and will remain a primary way for younger Chinese generations to manage their wealth.

  • $FUTU has the potential to become a next-gen fintech giant, reaching many more people, and building out much more vertically. 


Social investing is humanity (for Chinese)

  • Chinese stock market is known for its retail domination. It has close to 170 million retail investors in its local share market. Adding people investing in managed funds, the number can be > 700 million.

  • China has a long and broad culture of loving money + loving gambling. We also start to see a formation of a strong trend in venture investing in recent years.

  • More and more young people want to escape from 996,  and work towards FIRE (financial independent, retire early). Trading/investing is seen as a mainstream way to achieve that.

  • For demographic reasons, China will see a long term transition from real-estate centric investment to financial-assets centri investment.

  • Talking about and investing in stocks, especially relatable names/companies is becoming inevitably popular in younger generations.


Social networks on financial topics are unique

  • Influencers and communities on financial topics have their own charm - if someone successfully leads you to a better financial outcome (small or big), it will create a sense of intimacy & gratitude, and the feeling of necessity to follow to learn new stuff. 

  • That’s why FintTwit and Fin-Youtube always lead to viral spread and stickiness of fan base.  Being “close to the money” also leads Fin-Youtube videos has highest CPM among other types. 

Showing off financial success has always been the tier 1 demand of social platforms. It is an ultimate show off of status + knowledge/skill + wealth.

  • $TUTU, with its founders’ social network nature, has successfully built an unique community with many grassroots and verified financial celebrities, allowing users to easily share their investment returns, combined with an easy UI to trade various products globally.


But $TUTU can and will become much larger than Chinese Robinhood

  • Chinese companies have a tendency to build out much more broadly and much deeper vertically, in contrast many US companies choose to focus in their niche area.

  • I believe $TUTU’s potential is enormous, as capable of reaching below different segments (each of them has a huge TAM), not just a trading app:

  • Financial segment:

    • $TUTU currently has ~10 million users. It has a lot of room to reach out the 170mm retail investors, by broadening its offer to trade more products.

    • China has 600 million managed fund retail investors. $TUTU has the potential to become a huge fund distribution platform for new generations.(it’s already part of the offer but quite small = room to grow)

    • Chinese domestic private banking industry has a total market between 15 ~20 trillion yuan. The increasing recognition of using private banking has been steady, especially with older generations passing their wealth to younger ones, I believe $TUTU is a very good position to tap that huge market, to become a new generation digital private wealth firm.

    • China’s aging population + single child policy impact = many young families, when their parents pass away, would end up owning multiple properties but much less demands. This demographic structure will cause a long term transition from real-estate centric investment to financial-assets centri investment, which is a huge tail wind for $TUTU.

    • $TUTU, in its financial planning offer, could also offer insurance, taxation (even lending) cross selling.

    The non-trading sectors are where I think $FUTU will be generating more of future revenue, a retail fund distributor and wealth manager directly connected to WeChat Pay, with tons of value-added service available. This is the future financial planning for digital natives.

  • Social Segment:

    • $TUTU, around its financial influencers, can partner with streaming platforms such as $BILI or Bytedance, reach out to a much broader audience, earning from streaming advertising.

    • $TUTU, with a more complete product offer, could be directly connected with Wechat Pay. Tencent could use this finance-centric strategy to challenge Ali-Pay’s payment-centric strategy, for bigger market share of e-wallets.

    • $TUTU’s own online community could generate advertising and/or membership revenues as well, similar to Snowball or Zhihu.


  • Information Segment & other Geos:

    • $TUTU could become a major investment research distribution platform.

    • $TUTU could become an online course platform on financial related topics.

    • $TUTU could leverage its user data for more toB business.

    • I believe $TUTU has a great chance to expand most of these services to South East Asia ($SE has 100 million users), and broadly oversea Chinese population. (est. ~50mm people), given similar culture and deep connection with Tencent.


Valuation:

I use a simple revenue size comparison to guess-estimate the future valuation of each segment (at published data, $FUTU is trading ~$65)

Electronic trading - compare to itself

  • $TUTU currently has 10 million users, with ~325 million USD revenue, each user generates $32 per year. 

  • Assuming it could reach out to 50 million out of the total 170 million retail investors, with the same $32 rate. 

  • Assuming the current 26x P/S (rather cheap for a high growth, also 57x PE already in 2020, close to 40% net margin) will apply.

  • It translate to a future valuation of USD 41.8 billion vs. current USD 8.7 billion

Wealth management - compare to East Money, a tier 1 wealth management firm in China

  • Given we believe the entire market size will grow rapidly, it’s sensible/conservative to assume $TUTU can grow into a company that’s about 50% of East Money’s size in the future.

  • Assuming East Money’s revenue growth = its current USD 1billion x 30% YoY growth (rather conservative given 35% and 84% for 2019 & 2020). 

    • East Money future revenue will stabilize at USD 2.4 billion per year

    • Adjust East Money P/S ratio from current 41x to 35x and apply that to $TUTU

  • It will add a future valuation of USD 31.9 billion to $TUTU’s wealth management arm.

Above model suggests a 9.2x return of $TUTU’s current ~ USD 8.5 billion market cap.

I think some of the assumptions are actually quite conservative. I believe the deep connection with Tencent could really accelerate $TUTU’s path to be a giant fintech platform where younger generations socialize and manage their wealth.

We simply suggest buy $FUTU and give it a 10% position to your portfolio.

For cautious/exotic readers, you can sell the current very expensive put options of $FUTU to collect some decent premium waiting for pullbacks.


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