Daiwa says ‘stay calm,’ Futu regulation removes overhang

Daiwa analyst Leon Qi tells investors to "stay calm" after the China Securities Regulatory Commission said it will regulate Futu‘s cross-border brokerage activities by prohibiting incremental customer acquisition domestically, and ensuring proper handling of its existing business by allowing existing domestic clients to keep trading overseas securities via its platforms. While the regulations do not come as a surprise, a negative surprise is that the regulator officially defined the cross-border brokerage as "illegal," which may cause a "big negative sentiment in the market," Qi tells investors in a research note. However, the analyst thinks the different regulatory treatments for new and old customers is an important point. He views the official regulatory announcement "as a removal of an overhang" and revised down his 2023 and 2024 earnings estimates by up to 5% on factoring in the net impact of the regulatory announcement. Qi still likes Futu’s structural user and earnings growth. He keeps an Outperform rating on the shares with a $64 price target. The stock in afternoon trading is down 31% to $40.53.