This document provides an initial analysis of Futu Holdings Limited (FHL.US) by James Yeh on March 15, 2019. It discusses Futu's investment thesis, business model, competitive landscape, customer acquisition strategy, and financial projections. The key points are: 1) Futu has a multi-year compounding opportunity in China's large and expanding online securities trading market by providing a scalable and reinforcing brokerage platform. 2) Futu's business model focuses on acquiring new clients and increasing assets from existing clients through its technology-driven and product-focused approach. 3) Futu faces risks from competition, execution challenges, policy/regulation changes, and macroeconomic factors that could

1. Futu Holdings Limited (FHL.US)
- Initial Analysis -
James Yeh
March 15, 2019

2. Investment Thesis & Risks for Minority Shareholders
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Multi-Year Compounding Opportunity
Large, Expanding TAM
Scalable, Reinforcing Business Model
Tech-Driven, Product-Focused
Policy & Regulation
Execution & Competition
Macro Market & Idiosyncratic Liquidity
Structural / Tail Risks
Investment Thesis Risks

3. Business Model
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FutuSecurities
OtherLicensed
Brokers
Others
Users w/o
Assets
Clients w/
Assets
Product / Product
Social NetworkClients w/o
Assets
Client Base
Trading
Information
Markets

4. Market Potential
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1,199 1,435 1,719 1,797 1,897 1,977 2,048 2,138
205
305
413 530
657
795
945
1,108
685
689
693
696
699
702
704
706
2,089
2,429
2,825
3,023
3,253
3,473
3,697
3,952
2016 2017 2018 2019E 2020E 2021E 2022E 2023E
Hong Kong-based investors China-based investors Others
No. of HK Online Securities Trading Retail Investors
(K)
13,290
14,149
16,454
17,341
18,038
18,652
20,479
21,127
2016 2017 2018 2019E 2020E 2021E 2022E 2023E
No. of US Online Securities Trading Retail Investors
(K)
9,700
14,300
20,000
26,600
33,100
41,600
51,200
66,300
2016 2017 2018 2019E 2020E 2021E 2022E 2023E
No. of CN-based Investors w/ Overseas Investment
(K)
Est Market Penetration in HK & China
9,700
14,300
20,0001,199
1,435
1,719
2016 2017 2018
Hong Kong Retail Investors China Retail Investors with Investable Overseas Assets
Paying Clients
Penetration
35 80 133
0.61%0.51%0.33%
(K)
Source: Company and author’s estimate

5. Competitive Landscape
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Online
Offline
Institutional Retail
China’s Overseas Online Retail Securities MarketHong Kong Online Retail Brokers
# Broker
1 Haitong
2 Futu
3 IB
4 BOC
5 HSBC
6 CMS
7 Huatai
8 CITIC
9 EBSHK
10 China Galaxy
Pure-play Online Broker
Hybrid Broker
Brokerage Business in Commercial Bank
# Broker
1 HSBC
2 Haitong
3 BOC
4 Futu
5 IB
6 Bright Smart
7 Huatai
8 CITIC
9 CMS
10 EBSHK
307 498
809 911 1,038 1,166 1,305 1,471
137
181
232
289
355
430
504
795
1,170
1,325
1,511
1,706
1,919
2,170
2016 2017 2018 2019E 2020E 2021E 2022E 2023E
Hong Kong-based investors China-based investors Others
Hong Kong Online Securities Trading Volume
(USD B) CAGR: 13.1%
185
298
452
700
892
1,109
1,422
1,784
2016 2017 2018 2019E 2020E 2021E 2022E 2023E
China Overseas Online Retail Securities Trading Volume
(USD B)
CAGR: 31.6%
Source: Company

6. Services, Monetization & Potential
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Service Monetization Activity Concept
Trading, Clearing & Settlement Brokerage Fee Trading Race to Bottom
Margin Financing & Securities Lending Interest Trading Race to Bottom
Cash Management Interest Asset Gathering Scale
Corporate – ESPO & IPO Subscription Fee CA / BD1 Pipeline /
Penetration
Market Data & News Feeds Non as of now CA Scale
Social Network / Media Non as of now
Interaction
UGC / PGC2 Platform
Wealth / Asset Management Fee / Commission Asset Gathering Scale
UI as a Service for Other Brokers Subscription D2C3 / Aggregation
Data Science-related Various Reinforcement
ExistingPotential
Note: 1. Customer Acquisition / Business Development; 2. User Generated Content / Professional Generated Content; 3. Direct to Customer

7. Customer Acquisition
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5.6M
0.5M
0.13M
Registered Clients
Paying Clients
App Users
x 9%
x 26%
(2.38% Conversion)
Acquisition Cost 2018
Advertising & Promotion (HKD K) $79,816
/ New Paying Clients 52,764
= CAC (HKD) per new paying client $1,513
Concept: Diminishing Return => Increasing CAC
Retention Cost 2018
Other Selling & Marketing Exp (HKD K) $18,246
/ Ending Paying Client Base 132,821
= Retention Cost (HKD) per paying client $ 137
Concept: Operating Leverage => Decreasing
Retention Cost
Retail
Investors
App Adoption
Source: Company and author’s estimate

8. Customer Acquisition & Retention Costs
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681
1,513
1,650
1,800
1,950
2,100
2,250
2017 2018 2019F 2020F 2021F 2022F 2023F
333
138 137 137 137 137 137 137
2016 2017 2018 2019F 2020F 2021F 2022F 2023F
Customer Acquisition Cost (CAC) Customer Retention Cost (CRC)
• Acquisition channels will show diminishing return as
trading function on the platform lacks network effect1
• Control of CAC depends on the execution of product
diffusion, efficient conversion and retention via
thoughtful marketing initiatives and on-going user
experience improvement
• Nasdaq listing might help
(HKD) (HKD)
• Historical customer retention cost seems to stabilize at
HKD 137 per paying client
• As product and process improve, CRC tends to decline in
the long run (while here we model the pattern flat)
Step Flat
Note1: The social network on the platform might show network effect
Source: Company and author’s estimate

9. Client Base & Behavior
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16
44
51
73
94
113
128
144
2016 2017 2018 2019F 2020F 2021F 2022F 2023F
196
518
907
1,321
1,699
2,027
2,308
2,584
2016 2017 2018 2019F 2020F 2021F 2022F 2023F
0.13
2.94
3.18
4.40
5.38
6.08
6.54
6.89
2016 2017 2018 2019F 2020F 2021F 2022F 2023F
35,456
80,057
132,821
203,838
277,690
351,887
427,450
512,781
2016 2017 2018 2019F 2020F 2021F 2022F 2023F
Paying Clients
Client Assets
CAGR: 31%
CAGR: 23%(HKD B)
Margin Financing & Securities Lending Balance
(HKD B) CAGR: 17%
Trading Volume
CAGR: 23%(HKD B)
Source: Company and author’s estimate

10. Contribution Profit
• Futu’s Contribution Profit =
• + Net Brokerage & Handling Income
• + Net Interest Income
• + Other Income
• - Processing and Servicing Costs
• Basically, it’s Futu’s Gross Profit
• Paying clients in later cohort tend to be
less active in trading and bring in less
asset on average compared to early
adopters
• It’s difficult to time the inflection point.
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1,183
2,530
4,229
3,898
3,590
3,317
3,054
2,817
2016 2017 2018 2019F 2020F 2021F 2022F 2023F
Contribution Profit per Paying Client
Source: Company and author’s estimate
OR

11. Unit Economics
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Quarterly Dollar Churn 3% 6%
CLTV (Yr1-5) $7,904 $6,352
CAC $1,500 $2,600 $1,500 $2,100
CAC IRR 169% 90% 150% 99%
CLTV/CAC 5.3x 3.0x 4.2x 3.0x
Note:
1. Payback period has been less than six months since the beginning of
2017. Author assumes payback period is equivalent to CAC recovery.
2. Futu has retained over 97% of paying client base on a quarterly basis
since the beginning of 2017. Author assumes quarterly dollar churn equal
to paying client churn.
3. The company cannot avoid competition. Pricing for brokerage and
margin financing & securities lending is racing to bottom in the long run.
Metrics
Quarterly Contribution Profit1 $750
Quarterly Dollar Churn2 3%
Base Annual CRC / yoy $137 / 5%
Stabilized Yr / Discount Rate Year 5 / 15%
2.5x
3.0x
3.5x
4.0x
4.5x
5.0x
5.5x
1,500
1,600
1,700
1,800
1,900
2,000
2,100
2,200
2,300
2,400
2,500
2,600
3% Q $Churn 6% Q $Churn
CAC
CLTV/CAC
Client Retention & CAC Capacity
• Parameters in CLTV calculation are interdependent
• While platform for financial activities are stickier
(transaction/asset), make clients stay for superior
product/service rather than attractive pricing3
Source: Company and author’s estimate

12. Financial Projection – Existing Business w/ Monetization
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HKD K 2016 2017 2018 2019E 2020E 2021E 2022E 2023E
Revenues
Brokerage commission and handling charge income 74,498 184,918 407,990 594,391 764,757 912,091 1,038,703 1,162,988
Interest income 5,795 105,872 360,585 502,657 623,750 718,152 789,386 852,372
Other income 6,722 20,873 42,768 49,367 48,598 48,907 45,702 50,384
Total revenues 87,015 311,663 811,343 1,146,415 1,437,105 1,679,151 1,873,791 2,065,744
Costs
Brokerage commission and handling charge expenses 18,730 36,777 80,127 115,906 148,363 176,034 199,431 222,131
Interest expenses 3,459 19,879 95,624 132,701 164,046 188,156 206,030 221,617
Processing and servicing costs 22,880 52,446 73,843 103,177 127,902 147,765 163,020 177,654
Total costs 45,069 109,102 249,594 351,785 440,311 511,955 568,480 621,401
Total Gross Profit 41,946 202,561 561,749 794,630 996,793 1,167,196 1,305,310 1,444,343
Operating expenses
Selling and marketing expenses 59,198 41,446 98,062 145,104 170,977 192,894 217,242 262,248
Research and development expenses 61,624 95,526 151,097 206,355 244,308 268,664 281,069 309,862
General and administrative expenses 31,786 57,293 103,831 137,570 158,081 167,915 168,641 175,588
Total operating expenses 152,608 194,265 352,990 489,028 573,366 629,473 666,952 747,697
Operating Income (110,662) 8,296 208,759 305,602 423,427 537,723 638,359 696,645
Operating Margin -127% 3% 26% 27% 29% 32% 34% 34%
Others, net (1,085) (4,918) (7,959) (8,000) (8,000) (8,000) (8,000) (8,000)
(Loss)/Income before income tax expenses (111,747) 3,378 200,800 297,602 415,427 529,723 630,359 688,645
Income tax benefit/(expenses) 13,276 (11,480) (62,288) (89,281) (124,628) (158,917) (189,108) (206,594)
Net (loss)/income (98,471) (8,102) 138,512 208,321 290,799 370,806 441,251 482,052
Net Profit Margin -113% -3% 17% 18.2% 20.2% 22.1% 23.5% 23.3%
Historical Projection
Note: Author’s estimate

13. Cap Table
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Share Count Shares % Note Assumption
Class A Ordinary Share
ADS – Public (Free Float) 63,666664 7.1%
Incl. Over-allotment
Equivalent to 7,958,333 ADS
ADS – Tencent 5,333,336 0.6% No action
General Atlantic (Concurrent Private Placement) 50,909,090 5.6% Lock-up for 180 days Stay after lock-up
Matrix Partners China III HK Ltd 47,965,811 5.3% Lock-up for 180 days Potential secondary block
Entities affiliated w/ Sequoia 31,477,471 3.5% Lock-up for 180 days Potential secondary block
Entities affiliated w/ Tencent 157,685,761 17.5% Lock-up for 180 days No action after lock-up
Total Class A Ordinary Shares 357,038,133 39.6%
Class B Ordinary Share (20 votes/share)
Entities affiliated w/ Tencent 140,802,051 15.6% Lock-up for 180 days No action after lock-up
Entities affiliated w/ Leaf Hua Li 403,750,000 44.8% Lock-up for 180 days No action after lock-up
Total Class B Ordinary Shares 544,552,051 70.4%
Total Ordinary Shares 901,590,184 100%
No additional equity capital raising for
cashflow shortfall or equity deficit issues
Source: Company and author’s estimate

14. What are Minority Shareholders Paying for?
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• Invisible Asymptotes1
• ChasmSocial Network / Media
Brokerage-related Business
Corporate Service
Brokerage-related
Business
Corporate Service
Social Network / Media
Asset / Wealth
Management
Other OpportunitiesHow much
for this?
Time
Horizon?
Boom-Bust in
Stock Price?
Note1: https://www.eugenewei.com/blog/2018/5/21/invisible-asymptotes