By Joanne Chiu 

The international trading boom has sent a Chinese broker on a wild ride.

Worth just $1.2 billion a year ago, Nasdaq-listed Futu Holdings Ltd. has surged in value and at its peak in February was worth nearly $26 billion. Despite a pullback since then, the company, which is backed by Tencent Holdings Ltd., still had a market capitalization of more than $14 billion as of Wednesday's close.

Futu and other Chinese online brokers have benefited as younger investors have poured money into booming markets, both in the U.S., and in Hong Kong and mainland China. They have also thrived since investors often see the sector as a good way to bet on a broader rally.

Alongside Futu, the smaller UP Fintech Ltd., which is known in Asia as Tiger Brokers, has jumped in U.S. trading. And in Shenzhen, East Money Information Co., which focuses on onshore Chinese stocks, has nearly doubled in value over the past year. At nearly $36 billion as of Wednesday, it is now worth more than Interactive Brokers Group.

Alex Cheung, a 27-year-old in Hong Kong with a business degree, said he has been buying and selling stocks, mostly in the U.S., for about a year using the company's Futubull app. "You don't need to be a sophisticated investor to trade on Futubull," said Mr. Cheung, who posts online about investing under the name Shiba Daytrader.

Futu and others offer provide services that are a combination of the trading functions offered by apps such as Robinhood's flagship product, plus social networking similar to online forums such as Reddit's WallStreetBets.

"Futu is more an online social-media platform than just a trading platform," said Dennis Wu, a senior partner at the company. Its app lets users swap trading ideas and monitor news feeds, financial data and other content.

Heavily traded stocks on Futu include some that are also favored by U.S. day traders, plus some Chinese technology giants. Mr. Wu said hot stocks on the app included Tesla Inc., NIO Inc., Boeing Co., Apple Inc., and Alibaba Group Holding Ltd., as well as Hong Kong-listed tech stocks such as Tencent.

By dollar value, U.S. stocks made up 65% of all trading handled by Futu in the fourth quarter of 2020, with Hong Kong shares accounting for most of the rest and mainland Chinese shares making up about 1%.

Capital controls can limit overseas investments by people from mainland China. But there are no such restrictions in Hong Kong, where Futu is based, including for mainland customers who have assets in the city. Futu also caters to U.S. and Singapore-based clients, including Chinese expats.

Mr. Wu said millennial and Generation Z clients were comfortable trading stocks on mobile apps and that many worked in tech, giving them a good understanding of the sector. "They don't need intermediaries or analysts for trading advice," he said.

The emphasis is firmly on the positive: Advertisements for Futubull feature a young man with horns and a nose ring, sometimes riding a bull.

Brokerage stocks can be volatile and could sell off sharply in a broader market drawdown, as happened to East Money when Chinese markets crashed in 2015. Despite its phenomenal year-over-year gains, Futu has shed about 45% from its peak in mid-February, as shares in some high-growth companies have retreated.

In Futu's case, a limited public float might add to the volatility. According to the company, founder Leaf Li, who also goes by Hua Li, and his former employer Tencent together own around 60% of the stock.

For now, however, business is booming. Trading more than quintupled year over year in the fourth quarter, to the equivalent of $156 billion.

Jasmine Chin, an analyst at Bank of China International Holdings Ltd.'s research arm, said high-profile listings by Chinese companies in Hong Kong and the U.S. helped Futu add paying clients last year. Futu had 517,000 such customers as of December and aims to add 700,000 more in 2021, while Morgan Stanley analysts forecast it could add one million.

In addition to brokerage commissions and interest on margin loans, the company earns revenue from areas such as fund sales and underwriting initial public offerings. It also manages employee stock-ownership plans for 159 companies, including Tencent and its subsidiary Tencent Music Entertainment Group.

Alex Wong, a director at hedge fund Ample Capital, said competition could intensify as more online brokers emerge. Mr. Wong said he sold his holdings in Futu earlier this month, citing stretched valuations.

As of Wednesday, Futu's stock traded at a price of 32.6 times expected earnings for the next 12 months, according to FactSet. That compares with price-to-earnings ratios of roughly 27.6 for Interactive Brokers and 22.2 for Charles Schwab Corp.

Write to Joanne Chiu at joanne.chiu@wsj.com

 

(END) Dow Jones Newswires

March 25, 2021 05:44 ET (09:44 GMT)

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