The rise of Retail Investing
Retail Trading has gone ballistic. In the US equities market, Retail Trading accounts for almost as much volume as Mutual Funds and Hedge Fund Trading volumes, combined. The ease (and gamification) of stock investing has opened up a new asset class to many ordinary people and has democratized the process of buying and selling stocks.
Retail Investing as a Secular Growth Trend
The post-Covid Retail Investor is a new breed of investor that is here to stay. She/He is younger (Median Age 35 years versus 48 for Typical Investor), more optimistic (72% are bullish) and has increasing disposable income to put to work (43% plan to invest more in the stock market). Whilst speculative euphoria may have burnt some new investors, more of these new investors (+70%) are now looking at buy and hold strategies (versus only 56% a year ago). Companies like Robinhood have pioneered this change and with ‘Zero Comission’Trading, the barriers to entry are as low as they have ever been.
Chinese Retail Investing Market
This has got me thinking about where else this sort of rapid disruption in investing could take place. Boasting the second largest aggregate household wealth in the world (after the US), I was surprised to find that Chinese Retail investing pales in comparison to the US. Only 13% of China’s Households invest in equities, compared to over 55% in US.
Burgeoning Middle Class
From 2015-2030, the share of the Chinese Population with ‘High Incomes’ (>$35k/pa) is expected to grow by 5x (from 3% to 15%). Those with incomes greater than ($11k/pa), the ‘Upper-Middle Class’, are expected to grow to 35% of China’s population compared to only 10% in 2015 (all numbers normalized for 2021 Prices).
This rapid rise in income per capita as people move into the middle class, is expected to open up Total Addressable (Retail) Wealth of ~$30tn by 2030, with over 500m Chinese Clients falling into this ‘Upper Middle Class’ Income bracket with money to invest.
One further catalyst is that Chinese households have a disproportionate amount of wealth tied up in Physical Property. As per capita wealth increases, this should start to favor Financial Investments as households diversify their holdings (to be more in line with other developed countries).
China’s Demographic Problem
Unfortunately, alongside greater wealth has come a greater willingness to buy unproductive assets (e.g. Louis Vuitton handbags, Tech gadgets and International Travel). Ten years ago, the average Chinese worker saved 39c on every dollar of income. Today, it is 33c and many young Chinese save nothing at all.
This depletion in savings is coming at the same time that China is heading towards a demographic nightmare. By 2050, China will have one of the highest ratio of elderly citizens (as a proportion of it’s working population) in the world and a massive pensions deficit to accompany that. Reports estimate that the Chinese Government Run ‘Basic Pensions System’ will deplete all of it’s assets by 2035. The more Chinese wealth that gets squandered away in unproductive assets, the more of a (social and economic) problem this is going to become.
Chinese Retail Investing: Ripe for disruption
In this regard, Chinese Investing Platforms are not just in the business of democratizing finance like their US counterparts, but they are solving an underlying macroeconomic problem; they are creating the right incentives for households to invest.
To put things into perspective, the Shenzen and Shanghai Composite indices contain just 10% of the world’s equity by value (even though China contributes about 16% of Global GDP). Meanwhile in the US, the Nasdaq & NYSE have about 50% of the worlds equity value. Unlike in the US, Retail Holdings (as a % of market cap) inside of China have steadily been decreasing, speaking to a lack of incentives to invest in domestic markets. As a result, it is common for top tier Chinese companies to completely neglect domestic IPO’s in favor of Hong Kong or US listings.
Given the scale of the problem, I think the market is not just prone to disruption but if executed well, Chinese investment platforms can ride the tailwinds of (1) have the backing of the Chinese Government to solve a deepening macroeconomic crisis (2) exposure to a rapidly expanding middle class and (3) ride the broader growth trend in Retail Investing taking place in other countries.
China’s Robinhood’s: Futu & Tigr
The top two brokerage firms in China are ‘Tiger Brokers’ (Ticker: Tigr) and ‘Futu Holdings’ (Ticker: Futu). They surpass their competition by a wide margin due to their online only presence, reduced fees and established technology platforms. Both of these companies boast retention rates of approx. 98% and can be seen as the ‘Robinhood’s of China’.
Their three key revenue drivers are:
(1) Brokerage Commissions
(2) Interest Incomes from Margin Lending/Cash Sweeps
(3) IPO’s and Share plan services
Both companies generate over 60% of their revenues through (1) but this has been steadily decreasing this share through diversification into (2) and (3).
Futu
- Futu has two main investment apps; Futubull and MooMoo.
- Revenues from Brokerage Fees: Approx. 64%
- 1.4m Registered Clients, 516k Paying clients
- Paying Clients Growth: 60%, 84%, 137%, 160%
- Total Trading Volume: $150bn
- User median age is 34, mostly affluent Chinese (40% work in technology)
- To attract clients, Futu has a social networking element, ‘NiuNiu’ community. This allows investors to find new investment ideas (think Wallstreetbets but without the hype). The average user spends 38minutes per day on this in 2020 (versus 25mins in 2019)
- Founded by an ex Tencent employee. Tencent owns a 30% stake in the company
Tigr
- Revenues from Brokerage Fees: Approx. 60%
- 975k Registered Clients, 215k Paying Clients
- Paying Clients Growth: 29%, 53%, 76%, 110%
- Total Trading Volume: $63bn
- Initial focus is on US equities with international presence
- 72% of Tigr’s users are under 35 years old.
- Acquired US baked broker in 2020 to build out in-house clearing functions
- Interactive Brokers has 8% stake in the business (with Xiamo having 12% stake in the business)
Valuations
Both Tigr and Futu deserve to be considered explosive high growth stocks, growing revenues at an average of 130-150% over the last few years (alongside paying clients – see above). Importantly, they are both also profitable and have sizeable Free Cash Flows.
On paper, Futu does look like the better business given that it has grown faster and has shown that it can monetize this growth better; with 76% Gross Profit Margins and Net Income Margins at 38% (in 2020). Tigr has Gross Profit margins in the 40% and Net Margins around 12%.
Using analyst expectations for 2021 Revenues, both businesses should grow revenues by over 120% y/y. Assuming a conservative growth rate assumption (Futu 40-55%) and (Tigr 25-40%) over the next five years, adjusting for a 15-20x P/E multiple in 2025 and assuming they can hold Profit Margins in line with where they are now (also conservative given that as businesses see more user growth, they should experience higher margins due to scale), I think both of these stocks are trading at very attractive entry points for new investors with over 100% upside in five years in the most optimistic scenario.
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