Goldman Sachs Halves Futu's Target Price, Q1 Performance Expected to Decline Quarter-on-Quarter

Goldman Sachs downgraded Futu Holdings (FUTU) from "buy" to "neutral" on May 25th, significantly reducing its 12-month target price from $210.47 to $102.13, primarily due to the notable increase in regulatory uncertainty in Mainland China regarding cross-border brokerage firms. Concurrently, Futu is about to release its Q1 2026 financial report, with CICC expecting a slight sequential decline in performance but still maintaining a relatively fast year-over-year growth, with the net inflow of funds expected to approach the historical highest level.

Goldman has compressed its 2027 expected P/E multiple for Futu from 19x to 10x, and has reduced its net profit forecasts for 2026 to 2028 by 26%, 20%, and 20%, respectively, with adjusted EPS being approximately 27% and 24% lower than market consensus expectations. CICC, however, maintains its profit forecasts of around HKD 13 billion and 14 billion for 2026 and 2027, respectively, with a target price of $250 and an outperform industry rating.

Regulatory Strength Exceeds Previous Rounds, but Management Views as a One-Time Event

Goldman notes that this round of regulatory strength exceeds that of 2022, not only prohibiting the addition of new clients in violation of regulations but also requiring the proactive cleaning up of pre-existing non-compliant accounts from Mainland China. The bank estimates that the total cost related to the regulation may amount to about $393 million, including the announced RMB 1.85 billion fine and the asset reduction due to account cleaning.

Futu's CFO characterized the fine as a one-time financial event during the management conference on May 25th, asserting that it will not create legal contagion risks for the listed entity. The penalties are confined to four operational entities, with core R&D and back-office functions unaffected. The rectification transition period is two years, and the China Securities Regulatory Commission has not set any rigid quantitative targets.

The management emphasizes that this round of regulation aims to establish unified standards for all institutions serving clients from Mainland China, covering both commercial banks and brokers, thus having an equal impact on competition among peers. Goldman also believes that as the fines are implemented and account rectification progresses, uncertainties will gradually dissipate.

Limited Mainland Exposure, Overseas Expansion Momentum Unchanged

Data disclosed by the management shows that Mainland China clients account for 13% of paying clients, 17% of assets under management, and 20% of revenue, with net capital inflows in recent months constituting only 1.5% of the company's total. Goldman expects that regulatory changes will not affect Futu's non-Mainland customer base.

Regarding overseas expansion, the management maintains its guidance of adding 800,000 new paying clients for the year. Hong Kong and Singapore remain the main profit drivers of overseas business, with Singapore's trading activity comparable to Hong Kong's but with average client assets only one-third of Hong Kong's, leaving considerable room for growth. Malaysia is expected to break even within 6 to 12 months, and South Korea will operate through cooperation with local brokers.

Q1 Revenue May Slightly Decline Sequentially, but Net Capital Inflow May Hit a Record

CICC estimates Futu's Q1 total revenue to be around HKD 5.94 billion, a sequential decrease of 8% and a year-over-year increase of 27%; Non-GAAP net profit is estimated to be around HKD 3.13 billion, a sequential decrease of 10% and a year-over-year increase of 41%.

The revenue decline is mainly due to interest income being a drag. CICC expects a decrease in the proportion of idle customer funds combined with a decrease in borrowing interest rates, leading to a 17% sequential decrease in interest income to HKD 2.51 billion. Transaction commission income, however, is relatively stable, with a transaction volume increase of about 2% sequentially, reaching a new high, and commission revenue is expected to grow by 2% sequentially to HKD 2.82 billion.

The highlight is customer capital inflow. CICC expects that the market fluctuation-driven bottom-fishing sentiment will drive net capital inflow close to the historical highest quarterly level, largely offsetting the downward pressure on holding market value. At the end of Q1, customer assets are about HKD 1.245 trillion, remaining flat sequentially. Net new capital inflow accounts for about 216,000 users, a decrease of 8% sequentially but still at a high level. Overall, cost control is feasible, and