Futu Holdings: Short-Term Regulatory Uncertainty, Long-Term Upside Potential

Overview

This research report primarily assesses the investment value of Futu Holdings amid regulatory tightening targeting Mainland China Clients (MCC). UBS acknowledges short-term regulatory uncertainty putting pressure on the company's valuation but believes the current ~10x forward P/E has overly discounted these negative factors. The report indicates that actual asset outflows are manageable and the company is actively expanding overseas markets, demonstrating long-term growth potential. Based on reassessment of regulatory impact, UBS has lowered near-term earnings forecasts and target price but maintains 'Buy' rating, emphasizing significant valuation recovery potential once regulatory clarity emerges.

Core views

UBS's core thesis is 'short-term uncertainty, long-term upside'. Despite short-term pressure from new regulations targeting mainland clients, actual asset outflow has been far better than market concerns. The report shows post-regulatory crackdown, client asset outflows accounted for less than 1% of total AUM, primarily driven by Hong Kong client news-driven selling with minimal mainland client contribution. Futu remains committed to balancing long-term growth with shareholder returns and plans to disclose segment performance for mainland and non-mainland clients in Q2 earnings report to enhance transparency. Regarding core profitability, UBS conducted detailed analysis of mainland client business impact. In Q1, mainland clients accounted for approximately 13%/17%/20% of funded accounts, client AUM and revenue respectively, but contributed ~30% of net profit due to extremely low operating costs. UBS estimates that under a full mainland client business cleanup scenario, the valuation of non-mainland client business alone would be approximately USD 67 per share. This valuation is based on ~HKD 9.8 billion net profit (excluding mainland clients) for the next 12 months at 7x P/E (reflecting short-term regulatory risk), plus ~HKD 5.4 billion working capital release (mainly from margin financing). On whether overseas expansion can compensate for mainland business losses, UBS gives an affirmative answer. The report notes that non-mainland client funded accounts and AUM grew ~50% and ~100% YoY in FY2025, reaching 85% and 80% of totals (previously 79% and 66%). Hong Kong and Singapore remain primary drivers of asset inflows, with Malaysia expected to become a key growth engine in the next 2-3 years and Japan providing steady client additions. Additionally, the company is driving growth through entry into new Asian markets (targeting one market entry in Q3 2026, another pending regulatory approval) and product line expansion (such as cryptocurrency brokerage and event contracts). Regarding near-term catalysts, UBS believes the newly launched prediction market brokerage business will have limited near-term earnings impact. Approved by US NFA, potential catalysts include the upcoming World Cup in June and US midterm elections in November. This initiative helps the company build capabilities in product design, operations, and risk management to support broader expansion. The company is also engaging with regulators in various jurisdictions to explore similar products. Finally, UBS emphasizes that investors are constructive on Futu's overseas growth, believing valuation could re-rate to at least mid-teens P/E once regulatory uncertainty dissipates.

Analysis framework

UBS's analytical logic follows a 'scenario decomposition—quantify impact—assess hedge—revalue' approach. First, the institution clearly distinguishes between 'mainland client business' and 'non-mainland client business', quantifying mainland clients' specific contributions to account numbers, asset scale, revenue and profit through detailed financial data decomposition to precisely assess regulatory policy impact on core profits. Second, to evaluate the company's value under worst-case scenarios, UBS constructed a 'full mainland client business cleanup' scenario analysis. In this scenario, the institution excluded mainland client contributions to net profit and valued the company based solely on non-mainland business profitability, while considering working capital release (e.g., reduced margin financing) from business contraction as value accretion. This 'segment valuation + scenario analysis' method helps investors understand the company's floor value under extreme risks. Third, the institution demonstrated overseas markets' capacity to fill mainland business gaps by comparing overseas business growth data (e.g., high growth in non-mainland client AUM) against mainland business stagnation. This 'trade-off' comparative analysis is key to supporting its long-term optimistic outlook. Finally, in valuation, UBS employed a Three-Stage Residual Income Model to derive the target price. The revised target price of 140 USD implies ~13x forward P/E, positioned at the lower end of the company's historical valuation range (10-20x) and far below US peers' ~30x. This comparison highlights current valuation's relative attractiveness. The institution believes current low valuation already reflects market pessimism, and valuation has room to revert to mean once regulatory framework clarifies.

Methodology notes

• Valuation MethodRIM Residual Income Model

  Three-Stage Residual Income Model

  A valuation method that decomposes company value into book value of existing net assets and present value of future residual income. UBS used this model to derive Futu's target price, which effectively handles profit fluctuations across different growth stages (short-term pressure, long-term recovery), suitable for evaluating internet brokers with both growth and volatility.

• Valuation MethodPE/PEG valuation

  Forward P/E and Peer Comparison

  The report frequently references '12-month forward P/E' as a valuation anchor. UBS compares Futu's current ~10x forward P/E against its historical range (10-20x) and US peers (~30x) to assess whether valuation is low. This is a common intuitive metric for investors to judge stock cheapness or expensiveness.

• Industry/Industrial Analysis Framework

  Full MCC Business Cleanup Scenario Analysis

  UBS constructed an extreme 'full cleanup of Mainland China Clients (MCC) business' scenario to calculate the value of non-mainland business under this assumption. This bottom-up scenario analysis aims to help investors clarify the company's 'floor value' under worst-case regulatory policies, thereby assessing downside risk.

• Company Fundamentals & Financial Framework

  Non-MCC Business Segment Valuation

  In scenario analysis, UBS split company business into 'mainland client business' and 'non-mainland client business', valuing only non-mainland business profitability (at 7x P/E). This isolates the regulatory-impacted portion from the steadily growing segment, more clearly revealing the value of core assets.

• Company Fundamentals & Financial FrameworkWorking capital cycle

  Working Capital Release

  The report mentions ~HKD 5.4 billion working capital release during MCC business cleanup, mainly from margin financing. This refers to reduced capital occupation when client assets (especially margin financing) flow out, freeing cash for other uses (e.g., dividends, buybacks, or reinvestment). In valuation, this released cash is treated as value accretion.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Futu Holdings (FUTU.US)

  Directly covered subject; UBS maintains 'Buy' rating believing its long-term value is undervalued.

  Strengths

  Strong overseas business growth (Japan, Malaysia etc.) with non-mainland client AUM share rising to 80%; product innovation capabilities (e.g., prediction markets, cryptocurrency brokerage); brand and user experience moat; current valuation at historical lows.

  Weaknesses

  Regulatory risks targeting mainland client business contributing ~30% of net profit; short-term market sentiment pressure and potential asset outflows from regulatory uncertainty; increased marketing spending to strengthen brand.

  Comparison

  Valuation-wise, Futu's current ~10x forward P/E is far below US peers' ~30x, at the lower end of its own three-year valuation range (10-20x).

  Risks

  International expansion (especially Japan and Malaysia) below expectations; deteriorating market environment (e.g., stock market performance); further tightening of regulations on mainland China business.

Key data

• 12-Month Target Price140.00 USDDowngraded from previous 231 USD target, implying ~36.1% upside potential.
• Current Price102.85 USDAs of June 1, 2026.
• Current Valuation Level~10xP/E based on next 12 months' earnings, at the lower end of historical valuation range.
• FY26/27/28E EPS9.0/12.7/17.1 (HKD)UBS's revised EPS forecasts, downgraded by 29%/22%/22% respectively.
• Client Asset Outflows< 1%Asset outflows post-regulatory crackdown account for less than 1% of total AUM, mainly driven by Hong Kong client selling.
• Mainland Client (MCC) Profit Contribution~30%Estimated Q1 net profit contribution, despite only 20% revenue share due to extremely low operating costs.
• Non-Mainland Client AUM Growth (FY25)~100% YoYApproximately doubled YoY growth, indicating robust overseas business expansion.
• Non-Mainland Client AUM Share80%Non-mainland client AUM accounted for 80% of total client AUM as of FY25, up from 66% previously.
• FY26 New Paid Client Guidance800,000Company maintains unchanged annual guidance for 800,000 new paid clients.
• Customer Acquisition Cost (CAC) Guidance2,500-3,000 HKDMaintains guidance within this range.

Impact & implications

UBS believes current market pricing of Futu overemphasizes short-term regulatory risks while underestimating its long-term growth potential. The institution points out that regulatory clarity would present an attractive 'buy-the-dip' opportunity at current valuation levels. The report highlights that market uncertainty centers on whether regulators intend to completely eliminate mainland clients or merely restrict onshore trading and financing. This ambiguity is the key factor suppressing market sentiment. From a company perspective, asset outflow risks from regulatory uncertainty (e.g., estimated HKD 80-100 billion in HK stock assets) and potential news-driven redemptions from some Hong Kong and Singapore clients could indeed pressure liquidity and stock price in the near term. However, UBS views this as temporary pressure. In the medium-to-long term (>1 year), as regulatory details materialize and sentiment stabilizes, some outflowing client assets may return to Futu's platform. Meanwhile, net asset inflows from Hong Kong and Singapore are expected to gradually recover to pre-crackdown levels and continue improving. More importantly, as regulatory uncertainty dissipates, valuation headwinds will ease while strong overseas growth could drive valuation re-rating. Therefore, UBS believes the company's medium-to-long term upside potential may exceed what their scenario analysis suggests. For investors, the key is to await regulatory clarity as a signal confirming the inflection point.

Risks

• International expansion slower than expected, particularly in Japan and Malaysia markets
• Deteriorating market environment with reduced trading activity
• Further tightening or stricter enforcement of regulations on mainland China business

What to watch

• Further clarification of regulatory framework, especially specific implementation details regarding mainland clients' onshore trading and financing
• Disclosure of segment performance for mainland and non-mainland clients in Q2 earnings report
• Customer growth and asset inflow trends in overseas markets (e.g., Malaysia, Japan)
• Progress of US prediction market business and its actual revenue contribution
• Whether potential asset outflow scale expands or shows signs of reversal