Clear Regulation Positively Impacts Futu; Valuation Recovery Depends on Non-Mainland Growth

Overview

Goldman Sachs issued an earnings review for Futu Holdings Ltd, analyzing the latest SFC regulatory announcement. The report states that clarified regulation is a net positive for Futu, reducing future enforcement risks, leading to a slight upward revision of earnings forecasts. However, analysts maintain a Neutral rating, emphasizing that the key to sustained valuation recovery lies in the continued growth of non-mainland accounts. Current valuations already reflect concerns about restrictions on mainland operations.

Core views

Quantifying Regulatory Impact: The SFC allows licensed firms in Hong Kong to continue servicing existing mainland clients but prohibits onshore services. Futu can retain mainlands accounts' AUM and generate offshore income, though trading speeds are expected to decline, with income mainly coming from interest rather than commissions. Calculations show mainland account revenue contributes approximately 8% of total revenue. Earnings Forecast Adjustments: Based on regulatory clarity, Goldman Sachs raised average revenue and net profit forecasts for 2026-28 by 2%/3%. Excluding the impact of mainland accounts, average revenue/profit forecasts for 2027-28 are HK$26bn/13bn, representing growth rates of 13%/20%. Valuation Logic: The current stock price corresponds to a 2027E PE of 8x, lower than the 14x seen during the 2023-24 regulatory tightening cycle, reflecting concerns over non-mainland growth. The target price of $118.19 is based on a 2027E 11x PE, implying a 29.4% upside. Recovery Conditions: Sustained valuation recovery requires meeting two conditions: 1) Maintain strong profitability, as EPS growth is the primary driver of stock price; 2) Profit growth must be driven by non-mainland sources, requiring verification of AUM growth in the non-mainland segment starting from 2Q26.

Analysis framework

Goldman Sachs employed scenario analysis to assess regulatory impacts, decomposing mainland account revenue into interest income and trading commissions, then recalculating revenue structures assuming reduced trading speeds. For valuation, a PE multiple method was used, comparing historical regulatory period valuations (PE 14x in 2023-24) with current levels (8x), combined with non-mainland business growth expectations to set a target multiple (11x). Back-testing was also conducted to analyze stock price drivers, revealing that EPS growth, rather than valuation expansion, is the primary driver.

Methodology notes

• Valuation methodsPE/PEG valuation

  PE Valuation Multiple Method

  Target price is calculated by multiplying the target PE multiple by forecast EPS. This report uses a 2027E 11x PE as the valuation anchor.

• Corporate Fundamentals and Financial FrameworkProfitability Quality Analysis

  Revenue Structure Decomposition Analysis

  Decomposes revenue by source (mainland/non-mainland) and type (interest/commissions) to evaluate the contribution and sustainability of different business lines to total revenue.

• Event-Based Gaming and Behavioral FinanceExpectation Gap/Expectation Management

  Regulatory Expectation Gap Analysis

  Analyzes the difference between regulatory announcements and actual market expectations to assess their marginal impact on stock prices. This report concludes that regulatory clarity reduces uncertainty premiums.

Asset mapping & comparison

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

• FUTU.US

  Direct Beneficiary

  Strengths

  Clear regulation reduces enforcement risk; retains mainland AUM interest income

  Weaknesses

  Trading speeds for mainland accounts expected to decline; commission income restricted

  Comparison

  Lower valuation compared to 2023-24 regulatory cycle (8x vs 14x)

  Risks

  Non-mainland growth below expectations; further regulatory tightening

Key data

• Target PriceUS$118.19Based on 2027E 11x PE
• Current Stock PriceUS$91.31Implies 29.4% upside
• Earnings Forecast AdjustmentRevenue/Net Profit 2026-28 +2%/+3%Adjusted upward due to regulatory clarity
• Mainland Account Revenue ContributionApproximately 8%Percentage of total revenue
• Current Valuation2027E PE 8xReflects concerns over non-mainland growth
• Non-Mainland Business ForecastRevenue/Profit 2027-28 HK$26/13bnGrowth rate 13%/20%

Impact & implications

For Futu, regulatory clarity reduces compliance uncertainty, benefiting the stabilization of interest income generated from existing mainland client AUM. However, long-term valuation repair depends on the expansion capability in non-mainland markets (e.g., Southeast Asia), and investors should monitor non-mainland AUM growth data starting from 2Q26. For the industry, it clarifies the boundaries for Hong Kong-licensed institutions serving mainland clients; other similar brokerages can reference this regulatory framework to assess their own business impacts.

Risks

• Regulatory impact lower or higher than expected
• Capital market performance stronger or weaker than expected
• Cost structure optimization in new markets below expectations
• Challenges in expanding into new markets

What to watch

• AUM growth in the non-mainland segment starting from 2Q26
• Verification of non-mainland business growth excluding market fluctuations
• Changes in trading speeds for mainland accounts