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Tencent-Backed Broker Chases Growth Overseas After China Rebuke

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(Bloomberg) -- Tencent Holdings Ltd.-backed Futu Holdings Ltd. plans to push deeper overseas to diversify its growth and is considering alternatives in case its New York listing is revoked, as China’s crackdown on private enterprise catches up with internet trading firms.

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The online broker - which operates like Robinhood Markets Inc. in the US - is seeking to expand its presence in Hong Kong, California, Singapore and Australia while tapping into new markets, chief financial officer Arthur Chen said in an interview.

“Going abroad, or internationalization, will be a very important strategy for Futu in the next two to three years,” Chen said in Hong Kong. “The total addressable market offshore is much bigger than China or Hong Kong, and we see great potential there.”

The global push underscores the dilemma facing the nation’s largest overseas-listed online broker as it awaits clarity from China’s regulators amid Beijing’s tightening controls over broad swathes of its economy. A senior central bank official has questioned the legitimacy of such trading firms, calling their services “illegal” at least twice since October.

Futu and its main rival Up Fintech Holding Ltd. have been operating in a gray area for their mainland China businesses, allowing millions of local investors to evade capital controls to trade shares in markets such as Hong Kong and New York. Tencent is Futu’s second biggest shareholder after billionaire founder Leaf Li, himself a former senior executive at the internet platform company.

Up Fintech, known as Tiger Brokers, is cutting about a fifth of its workforce after warnings that allowing Chinese to invest abroad may run afoul of the nation’s strict capital controls and data privacy rules, people familiar with the matter said in April.

Meanwhile, Futu is taking a different approach. The online broker is boosting its research and development team to offset weaker growth as slumping global stocks burned retail investors. First-quarter revenue dropped 26% year-on-year, partly thanks to lower stocks trading volume.

Most of the headcount will be added in the southern technology hub of Shenzhen, according to Chen. The company is on track to meet its goal of adding 20% more staff this year, he said.

Awaiting Clarity

Futu has been actively communicating with Chinese authorities since October to keep regulators informed of how they service the nation’s clients, Chen said.

“We’re waiting for more policy clarity on this front, and in the meantime trying to maintain a strategy that ensures relatively stable growth for us by shifting the focus to overseas markets,” he said.

Chen expects Futu to gain a bigger share of Hong Kong’s segmented brokerage sector as smaller rivals exit amid the market downturn, and tap into Southeast Asia’s vast overseas Chinese population using Singapore as a stepping stone. Mainland China, Hong Kong and markets outside Greater China will each contribute about one third of the firm’s paying clients in the long run, he added.

The company has made some initial success in its effort to diversify, with over 80% of newly added paying clients in the first quarter coming from Hong Kong, US, Singapore and Australia.

‘Plan B’

In addition to regulatory headwinds at home, Futu is already seeking to mitigate risks abroad. Almost 200 New York-traded Chinese firms are at risk of being delisted as soon as 2023 because of the decades-long standoff over allowing US officials to inspect their audits.

While Chen is upbeat Beijing and Washington can reach an agreement before the deadline, he said the company won’t rule out the possibility of seeking a listing in capital markets outside the US, without giving further details or a timetable.

“We’ll try our best to comply and follow the directions as long as we have some more clarity, but from the company’s perspective we need to consider a Plan B,” said Chen. “We’ll keep other options open to mitigate the risk of a potential delisting.”

Listed in New York in 2019, Futu surged more than 400% in the two months after Christmas the following year in a short squeeze after Bill Hwang’s Archegos Capital Management had placed a massive bet against the online broker. It has since given back almost all the gains.

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