Futu, Up Fintech brokerage sources apps from Chinese online stores

Shares of online brokerages Futu Holdings and Up Fintech Holdings were sharply lower on the Nasdaq on Tuesday after they said they would remove their apps from online stores in mainland China in response to “rectification demands” from the China Securities Commission.

Many in the investment world see the two firms as Chinese parallels to Robinhood Markets — popular trading platforms that people in China can use to trade markets outside the country’s borders, including the United States.

Tencent-backed Futu will remove its Futubull app from app stores in China by May 19, and Up Fintech said it will remove its app, Tiger International, by May 18.

Futu said it is removing the app to bring its operations into compliance with “regulatory principles regarding cross-border operations.” Up Fintech said the move was made “to complete the remedial work with satisfactory results.”

Both companies said existing mainland Chinese customers will still be able to shop with the apps. Up Fintech said existing mainland Chinese clients will receive links for instructions on how to update and download the app going forward, while Futu provided a phone number for customers to call.

The two Chinese firms stopped accepting mainland Chinese clients late last year after the CSRC launched inquiries into their cross-border operations, including providing cross-border securities services for domestic investors.

Hong Kong subsidiaries of several Chinese state-owned banks offer the same opportunities as Futu and Up Fintech. It is not clear whether the state-owned banks will also have to remove their apps.
If regulatory application is not consistent, it could raise further concerns among international investors that China will favor its own state sector over the private sector, despite assurances to the contrary from the country’s leadership.

In response to the inquiries that began in late December, shares of both companies fell dramatically, and analysts covering the shares began scaling back growth expectations.

Morgan Stanley rates Futu equal weight with a price target of $44.

“As the removal of contributions to onshore client growth is gradually priced in, we believe that future growth potential will increasingly depend on FUTU’s global expansion strategy, particularly in Asian markets,” Morgan Stanley wrote in an April 14 note.

Tuesday’s announcement hurts both stocks, but it’s not the worst-case scenario the companies faced – which would have required them to stop serving existing mainland customers.

Morgan Stanley warned in April that if Futu was forced to offload its mainland clients, the stock could fall to as low as $28. Futures’ 52-week high is $72.