Futu Securities Could Be the Best Investment Tencent Ever Made

    2017-06-23 12:55:01  PT

After successfully raising $145.5 million in funding round C, Futu Securities quoted Mr. Huateng Ma, the founder of Tencent, in its press release: 'Futu Securities has remarkable capacity in internet technologies and products, and attaches great importance to improving user experience. It also demonstrates impressive learning ability in finance. The team is pragmatic and focused. It has been really focusing on improving the best products and creating its own advantages to win the competition.'

Everyone who knows Futu Securities and its founder Mr. Hua Li would agree that the above comments on Futu are true. Mr. Huateng Ma's remarks almost include all the characteristics demonstrated by Futu since its establishment five years ago. When talking about Futu's 'internet plus securities' model, Mr. Hua Li always puts internet before finance. Even though the securities industry has always been conservative with common rules, Mr. Hua Li has made Futu more like an IT company due to his previous working experience at Tencent.

What Mr. Hua Li does every morning is collect information on Futu's user experience from every WeChat group. By doing so, he is able to fully exchange his ideas with the product team even before he arrives at the company. He has also been able to maintain his business sensitivity to products. When testing the trading system, he is always the first test person, saying that 'we should never let our customers be the laboratory rats.' Therefore, he personally places orders and tests the system. Sometimes, bugs can only be found by trading a volume large enough. Fortunately, Mr. Hua Li has been earning a lot by taking the role as a 'laboratory rat' and has made 10 times revenue of the investment in the secondary market over the past four years.

The three rounds of investments from Sequoia Capital, Matrix Partners, and Tencent have made Futu a unicorn among all the internet brokers. However, Futu still has a long way to go before it becomes a 'good internet broker,' according to Mr. Hua Li, who took part in founding Tencent, traded Hong Kong stocks in a volume of billions of yuan, and even passed the Hong Kong Securities License Exam. With his IT and investment background, where will Mr. Hua Li lead the young Futu?

Below is his interview.

Zhi Tong Finance: How would you allocate the money raised in this round?

Hua Li: We are growing really fast with increasing customer assets and trading volume. Therefore, a large part of the raised money will be used for consolidating the capital pool. Meanwhile, we will also allocate some money to product research and development, information communication, and AI.

ZTF: Why do Tencent, Matrix and Sequoia continue to invest in Futu? In addition to the three investors, has Futu contacted other investors during the fundraising?

Hua Li: There are actually many internet security brokers in this industry, however, Futu is unique. It is one of the few internet brokers with its own license in Hong Kong. This means that Futu has its own clients and assets. Other internet brokers, as claimed by themselves, actually have no clients. This is their biggest problem. They do not actually have the clients' capital. It means that all they can do is serve as an agent instead of provide more valuable services, such as managing wealth.

Another fatal problem for other companies is that agent does not have the pricing power. Revenue has a lot to do with the upstream costs. What most companies are doing now is trying to gain as many clients as possible and earn revenue from the upstream. However, if you want to pursue your own development path, you will face great uncertainty. For instance, for many agents similar to interactive brokers (IB) in the United States, if they want to apply for licenses one day, all the clients in IB will need to open a new account again. However, it would be a great challenge to transfer the clients from IB to your company, because IB can set limits on the downstream. Due to such a challenge, Futu has adopted the strategy of applying for the license in the first place. It starts from the difficult part and this strategy has been highly credited by investors. This is where the long-term value of Futu lies.

Second, we insist on independent research and development of the entire chain. I believe that our team's ability is equally strong with, or even stronger than, any team with the same number of members in any BAT company. This is the core value of Futu Securities. In fact, we contacted a lot of external investors in each round of capital-raising. Actually, we have contacted almost all the top 10 of China's VCs and the old investors have the prioritized right to invest in our company.

ZTF: How do you think of other internet brokers buying licenses?

Hua Li: Indeed, it is not difficult to buy a license. What is difficult is to decide whether to create your own trading and clearing system after you obtain the license. Securities companies are not like IT companies. The concept of 'internet plus finance' means a better management of timing. For example, the time for license approval may be longer than the application process. Also, you need a better timing management for receiving the license and you need to make adjustments to align with regulations. It is not like an IT company, which can innovate as it wants. You have to innovate reasonably and effectively within the regulation framework.

ZTF: Does this mean that Futu Securities is unique one among all the internet brokers?

Hua Li: This is the comment that we receive from our investors. Futu is operating with a real internet plus securities model and such a model is more valuable than a simple agent model.

ZTF: What do you think of the regulations on the Hong Kong financial market? Do the regulations affect model innovation?

Hua Li: The regulations on the Hong Kong financial market do not affect innovation. You just need some time to understand them. The regulatory authorities did not understand our goal at the very beginning. Therefore, they were a little worried and asked a lot of questions. During this process, Futu proactively communicated with the regulatory authorities and tried to give them a good understanding of what Futu was doing. By doing this, we were able to create mutual trust. Internet brokerage is not a new industry. It is part of the securities industry. I believe that the earlier you embrace regulations, the better it is for your company's long-term development. It helps us to build a healthier corporate governance structure. It is a completely different style with IT startups.

To align with the regulations, we certainly have additional costs. However, I believe such costs are worthwhile. You cannot just be an athlete and a referee at the same time. Such an ambiguous role will lead the companies to make wrong choices when it comes to conflicts of interest.

Before Futu officially applied for the license, I passed Hong Kong Licensing Examination for Securities and Futures Intermediaries. At that time, I only had an IT background and was worried that I may make wrong decisions due to the lack of knowledge in finance. Therefore, I took and passed all the licensing exams for securities and futures.

Meanwhile, we also encourage other colleagues to take the exams even though they do not need licenses for their work. We pay for their exams and raise their monthly salary by 1000 yuan as long as they take the exams. By doing so, we encourage our employees to have a good understanding of relevant regulations.

ZTF: Have you ever promised profits to investors or planned to go public?

Hua Li: We are very grateful to our investors. During all the past three rounds of investments, they never mentioned making profits or asking Futu to go public. What they really care about is how Futu can enhance its competitive advantages in a faster and more effective way.

ZTF: What are the areas of focus for Futu's research on AI? Do they involve quantitative trading?

Hua Li: I believe that there two special characteristics about the securities brokerage industry. One is the long-term process. The other is that only a small number of participants can make big money. In regards to AI research, we focus on solving issues which require a large amount of repetitive work and try to improve the decision-making efficiency. However, we do not expect AI technology to replace human labor. We apply AI technology to making decisions instead of trading. If AI could make money, the clients would not need us. This could not happen.

ZTF: Futu may need to compete with Hong Kong securities brokers. What do you think of the competition?

Hua Li: I personally think that Futu is not necessarily competing with the local securities brokers in Hong Kong. The Hong Kong stock market has been pretty much solidified. Particularly, the landscape of the financial industry would not change much. I mean, once investors make a decision about which broker to use, they will be quite tolerant and continue to use this broker unless the broker's service is too bad to bear. Based on the data, I don't see fierce competition between Futu and its counterparts in Hong Kong. We have far more clients from the mainland than existing clients in Hong Kong. Some HK counterparts are getting worried because they have never seen such a strategy as ours.

ZTF: Does the trading of Hong Kong and U.S. stocks have a glass ceiling in China? How large can the cake be?

Hua Li: I am going to give you some numbers. One, Hong Kong individual investors account for near 60% of all the adults, while the number in the United States and Australia is only approximately 30%. If we look at the number in all of China, stock investors account for less than 20% of the adult population. If you consider the significantly large population base of China, you would draw two conclusions. One, there are a great number of potential clients. Two, there are significant growth prospects.

Also, the number of Chinese tourists travelling abroad has been growing since 2000. This actually creates the demand for investment and more currency will inevitably be brought overseas.

Finally, I firmly believe that China has been developing fast during the past years and will rise as a global power. Then the yuan will likely become a global currency and yuan-denominated investment will spread to the entire globe. If you just look at the growth potential on the mainland, probably the glass ceiling will be reached soon. However, if you look at it from the global perspective, it is not the case. Therefore, I never worry about the glass ceiling issue. I believe that we just need to get ready before the opportunities come. Meanwhile, our investors completely understand about this and they care more about the trend. It is important for investors to have such a vision.

ZTF: Since Futu has obtained the license, will it be involved in the traditional business, such as investment banking and wealth management?

Hua Li: Futu is very pragmatic and focused. I believe we still have a lot of research and development to do in the brokerage business. Our team is not fully ready for investment banking and wealth management. Our strategy is learning first instead of doing everything without a good understanding.

ZTF: Is there any similarity between Futu Securities and IB?

Hua Li: If you have to find a benchmark for Futu, I would say it is Charles Schwab & Co. Before I created Futu, I had read a book called 'How One Company Beat Wall Street and Reinvented the Brokerage Industry.' Charles Schwab enlightened me a lot. You would see 80% of what we are doing in that book. However, I do believe that there is something we should learn from IB. They have been doing really well in the brokerage business.