UP Fintech, Futu under pressure to go global as regulatory bomb explodes in China – Futu Holdings (NASDAQ:FUTU), UP Fintech Holding (NASDAQ:TIGR)

Key takeaways:

• China’s securities regulator said UP Fintech and Futu operated illegally by failing to obtain brokerage licenses for cross-border stock trading services
• The two companies have faced high regulatory risk in China since a central bank official warned that unlicensed stockbrokers in China were operating illegally

By Warren Yang

Online stockbrokers UP Fintech Holding Ltd. TIGER and Futu Holdings Ltd. FUTU learn the hard way that taking chances with Chinese regulators isn’t the best idea when a time bomb ticking for more than a year finally explodes in their faces. As that lesson sinks in, the couple’s ongoing push to move more of their business outside of China becomes more critical than ever.

The duo have been well aware of the risks for some time now, and are both moving aggressively to get more business offshore, in Hong Kong for Futu and in Singapore for UP Fintech. But the move hasn’t been quick enough, and China’s securities regulator finally brought things to a head last week.

Last Friday, the China Securities Regulatory Commission (CSRC) said the two companies violated national laws by allowing their customers at home to make cross-border trades despite lacking a required brokerage license. The regulator ordered the pair to stop accepting new clients in China, although it stopped short of asking them to close the accounts of existing ones.

Both companies allow mainland-based clients to trade in shares listed in offshore markets such as the US, Hong Kong and Singapore. But they do not offer such services for the mainland’s main stock markets in Shanghai and Shenzhen.

In a move that suggests the CSRC gave UP Fintech and Futu a heads-up about the bombshell, Futu postponed plans to do another IPO in Hong Kong, to complement the older listing in the US, which was planned for last Friday. It announced the postponement just a day earlier, saying only that it was clarifying “certain matters” with the Asian city’s stock exchange.

With the CSRC notice, UP Fintech and Futu became the latest victims of regulatory backlash in China, which has targeted a wide range of sectors from online lending to after-school tutoring.

In response, UP Fintech said it will continue to provide “legitimate” services to existing customers in China and “actively” cooperate with Chinese authorities. Futu so that it “will cooperate fully with the CSRC and take all necessary measures to review its cross-border operations in mainland China and to comply with all applicable rules and regulations.”

Their statements did not stop the companies’ shares from tanking. UP Fintech shares fell 28.5% on Friday after the CSRC announcement, and Futu plunged even more, down 38%. The sell-off continued on Tuesday as trading resumed after the New Year holiday, with Futu and UP Fintech shares losing a further 6.9% and 6.2%, respectively.

As dramatic as the market reaction was, the companies probably saw the blowback coming. In 2021, an official from China’s central bank warned that unlicensed stockbrokers in China were operating illegally, in an apparent reference to UP Fintech and Futu.

Prolonged clashes

In fact, UP Fintech’s run-ins with Chinese regulators began long before that. In 2016, the CSRC ordered one of the company’s units in China to stop cooperating with unauthorized foreign companies providing securities services in the country. UP Fintech complied — sort of. It did not cut ties with those partners, but it did remove links to account opening features on the website and app developed by the Chinese entity in question.

UP Fintech has also removed the Chinese words for securities and shares from the name of the partner app, positioning itself as an online provider of information for investors in China, rather than a provider of financial services such as securities trading. The company, known as Tiger Brokers in China, does not offer direct securities trading services on its platform in China, but instead provides such services through third-party partners.

But such solutions can only work for so long, and the companies have probably realized that. So both UP Fintech and Futu have tried to reduce their dependence on the Chinese market. UP Fintech has stepped up its efforts to expand outside of China, obtaining brokerage licenses and qualifications in a growing number of overseas markets and offering trading services for locally based investors.

Among other things, Singapore has been a key foreign market for UP Fintech, which was previously based in Beijing, but is now incorporated into the city-state. The total number of UP Fintech’s registered accounts in Singapore accounted for 19% of the city-state’s population of people aged 20 to 70. It does not mean that all these accounts are generating income because some are not active. But it’s still an impressive figure.

UP Fintech is trying to find similar success elsewhere, including Australia, where it introduced a service in the first quarter of last year. It also acquired US broker-dealer TradeUP Securities in 2019, allowing it to register US clients.

Futu is more focused on Hong Kong, looking to capitalize on growing local investor preferences for large, safer brokerages over small ones. It has also expanded to Singapore and the United States

UP Fintech says that more than 90% of their new customers now come from abroad. Futu does not give a geographical breakdown of its customer base, but says in its latest annual report that most of its customers are in China and Hong Kong. That could mean Futu, which was founded in 2007 and is seven years older than UP Fintech, is more dependent on the Chinese market than its younger rival.

It is naturally easier to grow in China and the closely connected Hong Kong for all Chinese companies, which is probably why Futu’s revenue has grown faster than UP Fintech’s. Even after the recent selloff, Futu shares are trading at a price-to-sales (P/S) ratio of 7.7, much higher than UP Fintech’s 2.4. Furthermore, Futu shares have more than tripled since their market debut in 2019, while UP Fintech has more than halved since its IPO around the same time.

But a greater China focus means a harder blow for Futu from the CSRC crackdown. In addition, Futu warns that it has not “strictly” followed the rules for registering clients in Hong Kong and has received inquiries from regulators in the city, which could lead to a separate headache. That may explain why Futu’s shares fell more than UP Fintech’s after the CSRC announcement.

While both companies will be under pressure until the CSRC clash is resolved, the fact that the pair were only ordered to stop accepting new clients in China – and were not shut down – may suggest the regulator is open to licensing them and allowing them continue to offer services in the longer term.

But for now, it is important for both brokers to branch out from China. Of course, successful overseas expansion is easier said than done. Financial services are heavily regulated everywhere, and there is competition with existing leaders in every market. But to grow, UP Fintech and Futu seem to have no choice but to tackle such challenges.