Prospectus Summary
PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements appearing elsewhere in this prospectus. In addition to this summary, we urge you to read the entire prospectus carefully, especially the risks of investing in the ADSs discussed under “Risk Factors,” before deciding whether to invest in the ADSs. This prospectus contains information from an industry report commissioned by us and prepared by Oliver Wyman Consulting (Shanghai) Limited, or Oliver Wyman, an independent research firm, to provide information regarding our industry and our market position in Hong Kong.Our Mission
We strive to redefine traditional investing with proprietary technologies and a relentless focus on user experience, providing a gateway to building the world’s leading digital financial institution.
Our Business
We are an advanced technology company transforming the investing experience by offering a fully digitized brokerage platform. Technology permeates every part of our business, allowing us to offer a redefined user experience built upon an agile, stable, scalable and secure platform. We primarily serve the emerging affluent Chinese population, pursuing a massive opportunity to facilitate a once-in-a-generation shift in the wealth management industry and build a digital gateway into broader financial services. As of September 30, 2018, we had an attractive and rapidly growing user base of 5.3 million, over 457,000 registered clients, defined as users who have opened trading accounts with us, and over 124,000 paying clients, defined as registered clients who have assets in their trading accounts. For the six months ended June 30, 2018, we brokered HK$478.2 billion (US$61.1 billion) in client trades, underlying a brokerage revenue base which ranked fourth among Hong Kong online retail brokers according to Oliver Wyman. We brokered HK$678.0 billion (US$86.6 billion) in client trades for the nine months ended September 30, 2018.
We launched our business on the premise that no one should be precluded from investing on the basis of prohibitive transaction costs or market inexperience. We thus designed a platform around an elegant user experience integrating clear and relevant market data, social collaboration and best-in-class trade execution, finding that by delivering our vision through a purpose-built technology infrastructure we could disrupt traditional investing conventions. Over the last eight years we have continuously enhanced our technology and built a comprehensive, user-oriented and cloud-based platform that is fully-licensed to conduct securities brokerage business in Hong Kong. This serves as a foundation from which we execute our growth strategies with an operating efficiency that allows us to offer commission rates that are approximately one-fifth of the average rate offered by the leading players in Hong Kong, according to Oliver Wyman, creating a massive barrier to entry. As of September 30, 2018, approximately 66% of our workforce was dedicated to research and development, reflecting the degree to which technological excellence is entrenched in every aspect of our business.
We provide investing services through our proprietary digital platform, Futu NiuNiu, a highly integrated application accessible through any mobile device, tablet or desktop. Our primary fee-generating services include trade execution and margin financing which allow our clients to trade securities, such as stocks, warrants, options and exchange-traded funds, or ETFs, across different markets. We surround our trading and margin financing services and enhance our user and client experience with market data and news, research, as well as powerful analytical tools, providing our clients with a data rich foundation to simplify the investing decision-making process.
We broaden our reach and promote the exchange of information through NiuNiu Community, our social network services. In contrast to traditional investing platforms and other online brokers, we have embedded social media tools to create a network centered around our users and provide connectivity to users, investors, companies, analysts, media and key opinion leaders. This fosters the free flow of information, reduces information asymmetry and supports the investing decision-making process. For instance, users can exchange market views, watch live broadcasts of corporate events and participate in investment education courses offered through the NiuNiu Classroom. Importantly, our social network serves as a powerful engagement tool where in September 2018, the average DAUs reached over 169,000. In addition, in September 2018, users who were active on a daily basis spent an average of 26 minutes per trading day through our Futu NiuNiu platform on our mobile application. These user activities provide invaluable user data which informs our product development and monetization efforts.
We have a young, active and rapidly expanding user and client base. Our clients are, on average, 34 years old and generally high earning. Approximately 44.7% of our clients work in internet, information technology or financial services industries. On average, a client who traded in the nine months ended September 30, 2018 executed over 162 trades with a total trading volume of HK$6.2 million (US$0.8 million). Our total client asset balance increased from HK$15.5 billion as of December 31, 2016 to HK$44.4 billion (US$5.7 billion) as of December 31, 2017, and further increased to HK$54.2 billion (US$6.9 billion) as of September 30, 2018. Furthermore, our client base is loyal. We retained over 95% of our paying client base on a quarterly basis in 2016, and have retained over 97% of our paying client base on a quarterly basis since the beginning of 2017. We grow our client base mainly through online and offline marketing and promotional activities, including those through external marketing channels that we cooperate with and directly pay for as well as promotions and marketing campaigns conducted by us on our platform, word-of-mouth referrals and our corporate services. For the nine months ended September 30, 2018, approximately 18.5% of our client acquisition was through our corporate services.
We work with our strategic investor, Tencent Holdings Limited (“Tencent”), across a number of cooperation areas in a mutually
beneficial relationship. Our collaboration is in part driven by our shared values of technological excellence and innovation. Collaborating with Tencent creates meaningful advantages to us. In December 2018, Shenzhen Futu, one of our operating
entities in China, entered into a strategic cooperation framework agreement with Shenzhen Tencent Computer System Co., Ltd. (
), a subsidiary of Tencent. Pursuant to the strategic cooperation framework agreement, subject to further definitive agreements to be entered into between the parties and to the extent in compliance with applicable laws
and regulations, Tencent agreed to cooperate with us in traffic, content and cloud areas through Tencent’s online platform. In addition, to the extent permitted by the applicable laws and regulations, we and Tencent agreed to further explore
and pursue additional cooperation opportunities for potential cooperation in the area of fintech-related products and services to expand both parties’ international operations. Tencent also agreed to cooperate with us in the areas of ESOP
services, administration, talent recruiting and training.
We have achieved significant growth in our user and client base, client assets, trading volumes and revenues. Our paying clients increased by 125.8% from 35,456 as of December 31, 2016 to 80,057 as of December 31, 2017, and increased by 98.4% from 62,899 as of September 30, 2017 to 124,809 as of September 30, 2018. Our growing paying client base allowed us to increase client assets and trading volumes by 186.0% and 164.4%, respectively, in 2017 as compared to 2016, and by 58.9% and 101.2%, respectively, for the nine months ended September 30, 2018 as compared to the same period of 2017. In comparison, the trading volume grew 14.5% from 2016 to 2017 on the global online securities markets, and grew 54.4% from 2016 to 2017 on the Hong Kong online securities market, according to Oliver Wyman. We believe the faster growth rate of our trading volume during the same years was mainly attributable to our unique competitive strengths such as the superior investing experience we provide through our fully digitalized brokerage platform, which have enabled us to rapidly and continually expand our client base and have fueled the strong momentum of our business. Our revenues reached HK$311.7 million (US$39.8 million) in 2017, representing a 258.2% increase from HK$87.0 million in 2016, and of HK$584.2 million (US$74.6 million) for the nine months ended September 30, 2018, representing a 227.5% increase from HK$178.4 million for the same period of 2017. We were able to decrease our net loss from HK$98.5 million in 2016 to HK$8.1 million (US$1.0 million) in 2017. We had net income of HK$100.3 million (US$12.8 million) for the nine months ended September 30, 2018 compared to net loss of HK$38.0 million for the same period of 2017. Our adjusted net income, which excludes share-based compensation expenses, reached HK$1.7 million (US$0.2 million) in 2017, compared to an adjusted net loss of HK$89.3 million in 2016. For the nine months ended September 30, 2018, our adjusted net income reached HK$107.6 million (US$13.7 million), compared to an adjusted net loss of HK$30.6 million for the same period of 2017. See “Summary Consolidated Financial and Operating Data—Non-GAAP Measures” for a reconciliation of adjusted net (loss)/income to net (loss)/income.
Our Industry
With popularization of mobile technology and growing acceptance of online trading, the global online securities market has grown faster than the overall securities market, expanding at a compound annual growth rate, or CAGR, of 23.1% over the past six years, reaching US$34.8 trillion in 2017. The online securities market is characterized by the following trends:
Among global markets, Hong Kong is the world’s fourth largest online securities market, with annual trading volume growing from US$404.5 billion in 2012 to US$1.6 trillion in 2017, representing a CAGR of 31.3%, which is expected to reach US$3.1 trillion in 2022; the United States is the world’s second largest online securities market with annual trading volume growing from US$5.5 trillion in 2012 to US$8.6 trillion in 2017, which is expected to reach US$11.6 trillion in 2022.
China-based investors have contributed to the aforementioned market growth by deploying a significant proportion of their increasing overseas investable assets in online securities trading, especially in Hong Kong and the United States. Financial assets accounted for the largest allocation of overseas investment in 2017, among which stock investment reached US$0.2 trillion, representing a CAGR of 33.8% from 2012 to 2017. Hong Kong market is particularly favored by China-based investors, because of its geographical and cultural proximity to China as well as the large number of listed Chinese companies.
As a result, China’s overseas online retail securities market represents a unique opportunity, combining the high growth of the global online securities market coupled with expanding overseas asset allocation by China-based investors. In 2017, the trading volume of China’s overseas online retail securities market reached US$297.5 billion, growing at a CAGR of 90.8% from 2012 to 2017. The market size is expected to reach nearly US$1.4 trillion in 2022, representing a CAGR of 35.4% from 2017 to 2022.
Our Strengths
We believe that the following competitive strengths contribute to our success and differentiate us from our competitors:
Our Strategies
We intend to pursue the following strategies to further expand our business:
Our Challenges
Our ability to realize our mission and execute our strategies is subject to risks and uncertainties, including those relating to our ability to:
Recent Developments
The following sets forth our selected unaudited financial data for the two months ended November 30, 2018 and certain operating data for the two months ended or as of November 30, 2018. We have provided the preliminary results described below for the purpose of providing investors with the most current information that our company is able to provide under the time constraints. The below summary of financial data is not a comprehensive statement of our financial results for the two months ended November 30, 2018 or 2017, and it is possible that normal annual adjustments will be made after our annual year-end financial statements are available.
As of November 30, 2018, we had an attractive and rapidly growing user base of 5.5 million, registered clients of over 490,000 and paying clients of over 130,000. The trading volume on our platform was HK$164.6 billion (US$24.0 billion) for the two months ended November 30, 2018, compared to HK$126.4 billion for the two months ended November 30, 2017. Our total client asset balance as of November 30, 2018 was HK$52.5 billion (US$6.7 billion), an increase from HK$41.7 billion as of November 30, 2017.
The above selected unaudited financial data for the two months ended November 30, 2018 and certain operating data for the two months ended or as of November 30, 2018 are generally consistent with the trends for the nine months ended September 30, 2018 as disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Our selected unaudited financial data for the two months ended November 30, 2018 and certain operating data for the two months ended or as of November 30, 2018 may not be indicative of our financial results for future interim periods or for the full year ended December 31, 2018. Please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus for information regarding trends and other factors that may affect our results of operations.
The table below sets forth a reconciliation of our adjusted net (loss)/income to net (loss)/income for the periods indicated. See “Summary Consolidated Financial and Operating Data—Non-GAAP Measures” for further explanation.
Corporate History and Structure
We commenced our operations in December 2007 through Shenzhen Futu Network Technology Co., Ltd., or Shenzhen Futu, a limited liability company established under the laws of the PRC, to provide internet technology and software development services.
Futu Securities International (Hong Kong) Limited, or Futu International Hong Kong, was incorporated under the laws of Hong Kong by Mr. Leaf Hua Li, our founder, chairman and chief executive officer in April 2012. In October 2012, Futu International Hong Kong became a securities dealer registered with the HK SFC by obtaining a Type 1 License for dealing in securities. Futu International Hong Kong obtained a Type 2 License for dealing in future contracts, a Type 4 License for advising on securities, a Type 9 License for asset management and a Type 5 License for advising on future contracts from the HK SFC subsequently in July 2013, June 2015, July 2015, and August 2018, respectively. In October 2014, Mr. Li transferred all of Futu International Hong Kong’s shares to Futu Holdings Limited, or Futu Holdings, our holding company. Futu International Hong Kong established two wholly-owned PRC subsidiaries, Shenzhen Shidai Futu Consulting Limited, or Shenzhen Shidai, and Shenzhen Qianhai Fuzhitu Investment Consulting Management Limited, or Shenzhen Qianhai, in May 2015 and August 2015, respectively. As of the date of this prospectus, we conduct most aspects of our operations through Futu International Hong Kong in Hong Kong.
In April 2014, Futu Holdings was incorporated under the laws of the Cayman Islands as our holding company. In May 2014, Futu Securities (Hong Kong) Limited, or Futu Hong Kong, was incorporated under the laws of in Hong Kong as a wholly-owned subsidiary of Futu Holdings. As of the date of this prospectus, Futu Hong Kong has not engaged in any operating activities. Futu Hong Kong established two wholly-owned PRC subsidiaries, Shensi Network Technology (Beijing) Co., Ltd., or Shensi Beijing, and Futu Network Technology (Shenzhen) Co., Ltd., or Futu Network, in September 2014 and October 2015, respectively, which, together with Shenzhen Shidai and Shenzhen Qianhai, are referred to as our wholly-foreign-owned entities, or PRC WFOEs, in this prospectus.
Due to restrictions imposed by PRC laws and regulations on foreign ownership of companies that engage in internet and other related business, Shensi Beijing later entered into a series of contractual arrangements with Shenzhen Futu, which we refer to as our variable interest entity, or VIE, in this prospectus, and its shareholders. For more details, see “Corporate History and Structure—Contractual Arrangements with Our VIE and Its Shareholders.” As a result of our direct ownership in our PRC WFOEs and the variable interest entity contractual arrangements, we are regarded as the primary beneficiary of our VIE. We treated our VIE and its subsidiary as our consolidated affiliated entities under generally accepted accounting principles in the United States, or U.S. GAAP, and have consolidated the financial results of these entities in our consolidated financial statements in accordance with U.S. GAAP.
We operate our business mainly through Futu International Hong Kong, which is a HK SFC-regulated entity that holds the relevant licenses related to our securities brokerage business. For the years ended December 31, 2016 and 2017 and the nine months ended September 30, 2018, we generated revenues of HK$83.2 million, HK$305.6 million and HK$576.7 million, accounting for 95.6%, 98.0% and 98.7% of our total revenues, respectively, from Futu International Hong Kong, whose assets amounted to HK$4,425.8 million, HK$10,748.7 million and HK$15,517.2 million, accounting for 98.0%, 98.4%, 97.8% of our total assets as of the end of the same periods, respectively, taking intercompany transaction offset into consideration. We also conduct research and development activities in China through Futu Network and our VIE. For the years ended December 31, 2016 and 2017 and the nine months ended September 30, 2018, we generated revenues of HK$2.5 million, HK$4.6 million and HK$1.7 million, accounting for 2.9%, 1.5% and 0.3% of our total revenues, respectively, from Futu Network and our VIE, whose assets amounted to HK$45.2 million, HK$73.8 million and HK$88.1 million, accounting for 1.0%, 0.7% and 0.6% of our total assets as of the end of the same periods, respectively, taking intercompany transaction offset into consideration. As of the date of this prospectus, we have not engaged in any operating activities through our other subsidiaries in China.
We strategically established Futu Financial Limited, Futu Lending Limited and Futu Network Technology Limited, each a wholly-owned subsidiary of our company in Hong Kong, in April 2017, April 2017 and August 2015, respectively, for the purpose of our potential business expansion in the future. As of the date of this prospectus, these subsidiaries have not engaged in any active operating activities. In the past, compared to our total revenues and total assets, the revenues and assets of these subsidiaries were nominal.
In addition, we established Futu Inc., Futu Clearing Inc. and Moomoo Inc., each a wholly-owned subsidiary of our company in the United States, in December 2015, August 2018 and March 2018, respectively, in order to improve our ability to offer investing services in overseas markets. As of the date of this prospectus, these subsidiaries are still at their initial stages of development and have not yet engaged in any business operations. We have not generated any revenue from these subsidiaries and their assets were nominal compared to the total assets of our company.
The following diagram illustrates our corporate structure, including our significant subsidiaries and our VIE, as of the date of this prospectus:
Note:
Implication of Being an Emerging Growth Company and a Foreign Private Issuer
As a company with less than US$1.07 billion in revenue for our last fiscal year, we qualify as an “emerging growth company” pursuant to the Jumpstart Our Business Startups Act of 2012, as amended, or the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other requirements compared to those that are otherwise applicable generally to public companies. These provisions include exemption from the auditor attestation requirement under Section 404 of the Sarbanes-Oxley Act of 2002 in the assessment of the emerging growth company’s internal control over financial reporting. The JOBS Act also provides that an emerging growth company does not need to comply with any new or revised financial accounting standards until such date that a private company is otherwise required to comply with such new or revised accounting standards.
We will remain an emerging growth company until the earliest of (a) the last day of the fiscal year during which we have total annual gross revenues of at least US$1.07 billion; (b) the last day of our fiscal year following the fifth anniversary of the completion of this offering; (c) the date on which we have, during the preceding three-year period, issued more than US$1.00 billion in non-convertible debt; or (d) the date on which we are deemed to be a “large accelerated filer” under the Securities Exchange Act of 1934, as amended, or the Exchange Act, which would occur if the market value of the ADSs that are held by non-affiliates exceeds US$700 million as of the last business day of our most recently completed second fiscal quarter. Once we cease to be an emerging growth company, we will not be entitled to the exemptions provided in the JOBS Act discussed above.
We are a foreign private issuer within the meaning of the rules under the Exchange Act, and as such we are exempt from certain provisions of the securities rules and regulations in the United States that are applicable to U.S. domestic issuers. Moreover, the information we are required to file with or furnish to the SEC will be less extensive and less timely compared to that required to be filed with the SEC by U.S. domestic issuers. In addition, as a company incorporated in the Cayman Islands, we are permitted to adopt certain home country practices in relation to corporate governance matters that differ significantly from the Nasdaq listing standards. See “Risk Factors—Risks Related to the ADSs and This Offering—As a company incorporated in the Cayman Islands, we are permitted to adopt certain home country practices in relation to corporate governance matters that differ significantly from the Nasdaq listing standards; these practices may afford less protection to shareholders than they would enjoy if we complied fully with the Nasdaq listing standards.”