Futu Q3 2023 Earnings Call Transcript

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Provided by Quartr
November 23, 2023

There are 7 speakers on the call.

Operator

Hello, ladies and gentlemen. Welcome to Futu Holdings Third Quarter 2023 Conference Call. At this time, all participants are in a listen only mode. After management's prepared remarks, there will be a Q and A session. Today's conference call is being recorded.

Operator

If you have any objections, you may disconnect at this time. I would now like to turn the conference over to your host for today's conference call, Daniel Yuan, Chief of Staff to CEO and Head of IR at Futu. Please go ahead.

Speaker 1

Thanks, operator, and thank you for joining us today to discuss our Q3 2023 earnings results. Joining me on the call today are Mr. Lee Fei, Chairman and Chief Executive Officer Arthur Chen, Chief Financial Officer and Robin Xu, Senior Vice President. As a reminder, today's call may include forward looking statements, which represent the company's belief regarding future events, which by their nature are not certain and are outside of the company's control. Forward looking statements involve inherent risks and uncertainties.

Speaker 1

We caution you that a number of important factors could cause actual results to differ materially from those contained in any forward looking statements. For more information about the potential risks and uncertainties, please refer to the company's filings with the SEC, including its Annual Report on Form 20F. So with that, I will now turn the call over to Lee. Lee will make his comments in Chinese, and I will translate. Thank you all for joining today.

Speaker 1

In the Q3, we acquired around 65,000 paying clients, a 12% sequential increase. Our total paying clients reached 1,650,000, a 14% year over year. 3 quarters into 2023, we have exceeded our full year guidance by acquiring over 163,000 paying clients. In the Q3, Hong Kong market contributed over 40% of new paying clients. This acceleration in client acquisition was driven by the relief rally in the first half of the quarter and successful marketing around the government's green bond and silver bond we have a strong balance sheet.

Speaker 1

These two bond offerings attracted allocation driven clients to our platform. In late July, we opened the 1st offline store in Hong Kong to raise brand awareness, assist clients with account opening, demonstrate advanced product features and address inquiries regarding our products and services. Through this offline store, we managed to attract middle aged and senior clients it has a lower customer acquisition cost. In fact, clients aged 55 and above contributed over 50% of paying clients acquired through the offline during Q3 in Singapore, we launched successful marketing campaigns to promote our cash management product CashPlus, thereby growing our paying clients we continue to observe improvement in client quality in the U. S.

Speaker 1

As net asset inflow of new paying clients trended higher. In September, we officially launched our brokerage business in Japan and Canada, now offering clients access to U. S. Stock trading in Japan and U. S.

Speaker 1

And Canadian stock trading in Canada. During the early innings of market launch, we will remain focused on refining our account opening go in process, expanding trading products and honing our brand positioning and marketing messages. Despite various sentiments across global equity markets, we recorded another quarter of over 98% paying client retention rate. We continue to enrich trading product offerings across markets. In Singapore, we launched fractional shares for U.

Speaker 1

S. Stocks and ETFs to enhance accessibility for novice investors. We optimized our product for active options traders by introducing multi leg options rollover strategy in Hong Kong and the U. S. This trading function gives options traders flexibility to roll contracts near aspiration to a later date at different strike prices.

Speaker 1

Total client assets increased by 27% year over year to HKD468 1,000,000,000. While the market pullback dragged the valuation of our client Total client assets remained stable quarter over quarter due to robust net asset inflow. Notably, total client assets in Singapore achieved double digit sequential growth for the 5th consecutive quarter, which was partially driven by higher new asset quality. The average asset balance of new paying clients in Singapore was 20% higher than the prior quarter. Trading volume in the 3rd quarter rebounded as clients traded more actively in this heightened volatility.

Speaker 1

Total trading volume increased by 14% sequentially to HKD1.1 trillion dollars of which U. S. Stock trading constituted around 75%. Higher trading turnover of the magnificent Southern stocks led U. S.

Speaker 1

Stock trading volume to grow by 19% quarter over quarter. Hong Kong stock trading volume increased by 5% sequentially, mainly driven by rising trading interest and leverage and inverse EPS. Margin financing and securities lending balance slipped 4% quarter over quarter as some clients unwound their bets against popular U. S. Technology names.

Speaker 1

Total client assets and wealth management grew to HKD52 1,000,000,000 as of quarter end, up 100% year over year and 19% quarter over quarter. In the Q3, client assets and bonds increased by 87% sequentially as U. S. Treasury Bills maintain high yield. In Hong Kong, structured notes were met with high demands from high net worth clients after risk appetite abated amid macro uncertainties.

Speaker 1

As a result, private fund balance grew by 52% quarter over quarter. In Singapore, total client assets in Wealth Management increased by 5 fold year over year, driven by tripling of Wealth Management clients and higher average asset balance. In the Q3, we further expanded our product portfolio in Singapore by introducing structure notes and SGS bonds. We have 3 91 IPO distribution and IR clients at the quarter end, up 30% year over year. In the Q3, we acted as joint bookrunners of several high profile Hong Kong IPOs, including those of TuhuCar, 4 Paradigm and Keep.

Speaker 1

We also participated in the Hong Kong IPOs of all companies with market capitalization over HKD10 1,000,000,000 by the end of quarter. In the 1st three quarters, we underwrote 26 Hong Kong IPOs and ranked 1st among all Hong Kong brokers according to Lind. Next, I'd like to invite our CFO, Arthur, to discuss our financial performance. Thank you,

Speaker 2

Difei and Daniel. Now please allow me to walk you through our financial performance in the Q3. All the numbers are in Hong Kong order unless otherwise noted. Total revenue was RMB2.7 billion, up 36 percent from RMB1.9 billion in the Q3 of 2022. Brokerage commission and handling charge income was RMB1 1,000,000,000 an increase of 5% year over year and 6% Q over Q.

Speaker 2

Higher contributions from direct trading lift the blended commission rate from 8.8 basis points in the Q3 last year to 9.3 basis points this quarter. Interest income was RMB1.5 billion, an increase of 71% year over year and 7% Q over Q. The sequential increase was mainly driven by higher interest rate on client's cash deposits, partially offset by lower cash balance. Other income was RMB137 1,000,000, up 28% year over year and 8% Q over Q. The increase was largely due to our total costs were RMB437 1,000,000, an increase of 101% from RMB218 1,000,000 in the Q3 of 2022.

Speaker 2

Mortgage commission and handling charge expenses RMB63 million, down 24 percent year over year and up 14% Q over Q. The expenses didn't move in tender with brokerage commission and handling charge income, mainly due to cost savings from our U. S. Self clearing business. Interest expenses were RMB289 1,000,000, up 5 46% year over year and 31% Q over Q.

Speaker 2

The year over year and the Q over Q increase were both driven by higher interest expenses associated with our security lending business. Processing and servicing costs we're RMB86 1,000,000, down 6% year over year and 13% Q over Q. The year over year decrease was mainly due to savings from cloud service fee as a result of system optimization and the Q over Q decrease was mainly due to lower system usage fee. As a result, total gross profit was RMB2.2 billion, an increase of 28% from RMB1.7 billion in the Q3 of 2022. Gross margin was 84% as compared with 89% in the Q3 of 2022.

Speaker 2

Operating expenses was up 17% year over year and 5% Q over Q to RMB893 1,000,000. R and D expenses were RMB360 1,000,000, 15% year over year and are down marginally by 1% Q over Q. The year over year increase was mainly due to higher R and D headcount as we continue to upgrade our infrastructure, roll out new products and features and customized products for international markets. Selling and marketing expenses were RMB212 1,000,000, down 10% year over year, up 21% Q over Q. Expenses declined year over year due to lower customer acquisition costs and a Q over Q increase was primarily driven by accelerated paying client growth.

Speaker 2

General and administrative expenses were RMB322 1,000,000, up 52% year over year and 3% Q over Q. The rise was primarily due to an increase in telecom for general and administrative personnel to support our international market. As a result, our net income increased by 45% year over year and declined by 3% Q over Q to RMB1.1 billion. Net income margin expanded to 41% from 39% in the same quarter last year, mainly due to strong revenue growth and the lower selling and marketing expenses. That concludes our prepared remarks.

Speaker 2

We'd now like to open the call to questions. Operator, please go ahead.

Speaker 3

Thank

Operator

to ask your question. The first question comes from the line of Leon Qi with Daiwa. Please go ahead.

Speaker 3

Thanks management for taking my questions. This is Leon from Daiwa. My first question is regarding our new markets, especially in Japan. We understand we just launched Japan in late September, I'm interested in the user behavior in terms of our Japan new clients. Does management see any early indicators in terms of the trading velocities, margin lending penetration and the specific trading products that our Japanese clients are being engaged in, is there any significant differences in terms of these metrics for customers in Japan versus other markets?

Speaker 3

And also I'm interested to know the customer acquisition cost for us in Japan. So appreciate any color on the unit economics in Japan. My second question is on Wealth Management. We do appreciate the very rapid growth of our AUM in Wealth Management and per management introduction just now, money market bond is a major reason behind that. So I'm sure this is partly because of the higher U.

Speaker 3

S. Interest rates. But if we look at it from a cross interest rate cycle perspective, how much proportion does management expect the non money market fund products to contribute in our overall wealth management AUM? And also what is our take rate on money market for now? Thank you very much.

Speaker 1

Thank you, Leo. Let my colleague, Daniel, answer the first question first and I will answer the second question. Thank you. Sure. So unfortunately, we now only offer U.

Speaker 1

S. Cash equities trading to our Japanese clients. So we don't have margin, we don't have Japanese stock trading. So we only have data for client behavior on U. S.

Speaker 1

Stock trading. And so far, the turnover of the U. S. Stock trading is not so different from what we've seen in other markets. That being said, we have a very aggressive and ambitious product roadmap for next year and some of the products that I mentioned that we don't support now will be rolled out in the next couple of quarters.

Speaker 1

And in terms of client acquisition cost, because we are coming from a small base of clients, whereas we have a lot of fixed this quarter and next quarter in Japan will be higher than our group average. But over time as we increase the number of clients in Japan, the CAC will gradually come down. And so far, we have no reason to believe that the CAC in Japan will be higher than what we've seen in other markets. And just to give you some other colors and updates on our Japan business, we now have slightly over 400,000 users on our platform and overall users have been very active and we observed that on average during the trading days, our DAU to user ratio it's close to 20%, which is the highest among all the markets we are currently in. And user growth along with paying client growth will be our key priority for next year.

Speaker 1

Thank you. Okay. For second question regarding the wealth management, I think the key

Speaker 2

for us to do this kind of business is to engage a client and focus on the long term values of the clients. Therefore, we do not put too emphasis on the near term monetizations. But having said that, the take rate for these money market funds is essentially just similar to our other products such as equity products or fixed income products. I think we have already established a very comprehensive matrix in terms of the product offerings in our Daxiang Taipu. For instance, besides the money market plan, we also have the equity products, fixed income products.

Speaker 2

In particular, as Li mentioned in the opening remarks, we have launched free floating rate note FCN products in the past 2 quarters have record a very strong growth. We think these products will further diversify our clients' asset allocations and help them to navigate different interest cycles down the line.

Speaker 4

Thank you very much for

Speaker 3

your color, Arthur and Daniel.

Operator

Thank you. Next question comes from the line of Chiao Huang with MS. Please go ahead.

Speaker 4

So just wondering what's the reason for that and if we are seeing some of the existing clients are shifting their cash to mutual funds or other products. And also a related question is for the new inflow of client AUM, what's roughly the proportion between stocks and other investment products such as And second question is, can management talk about the strategy in Japan as we are seeing some local brokers are offering 0 commission already? What's our competitive strategy there and what's the thinking about the future monetization? Would we be considering building more comprehensive financial offerings and capabilities in Japan in order to improve the monetization over time. Thank you.

Speaker 2

In terms of your first The idle cash decrease was primarily due to our clients shift their cash positions to more equity stocks, especially on the U. S. Stock assets at the quarter end. And also the partial reason is because some clients allocated more on the wealth management products during the quarter end as well. In terms of the new clients' inflows, the allocations among cash, stock and also the wealth management, loss rate on stock positions account for 70% and the wealth management products account for 10% and the remaining belongs to the idle cash.

Speaker 2

Thank you.

Speaker 1

And Shao, I will take your second question on our monetization strategy in Japan. And yes, as you mentioned, we have seen a couple of leading brokers in Japan gone to 0 commission for Japanese stock trade and we have reasons to believe that other brokers in Japan will probably follow suit. So well, no one's going to make money from Japanese equities trading, the U. S. Stock trading is still quite profitable.

Speaker 1

SVN and Rakuten, for example, charge $0.45 for U. S. Stock trading. We tend to price more aggressively than these incumbents, but we still expect to make very decent margin on U. S.

Speaker 1

Stock trade. And as of the end of last year, we have seen that there are 2,300,000 U. S. Stock investors in Japan. That's relatively low compared to Japanese stock investors, but that has been growing pretty fast.

Speaker 1

As of the end of 2019, there were about 1,000,000 U. S. Stock investors. So over the past 4 years, it has more than doubled. And besides U.

Speaker 1

S. And stock trading commission, we also intend to monetize over margin financing and foreign exchange fees. We have observed that Japanese investors really like to trade on margin. We have seen that For the industry, average number like around 50% of their trades are placed with margin. So that's going to be a key revenue driver.

Speaker 1

And then for FX charges, we understand that in order to compensate for 0 commission for Japanese stock trading, all of the brokers in Japan charge pretty hefty fees for FX, so as the trading volume of U. S. Stock trading on our platform grows, we also expect FX revenue to make a meaningful contribution. Thank you.

Speaker 4

Thank you very much.

Operator

Thank you. Next question comes from the line of Cindy Wang with China Renaissance. Please go ahead.

Speaker 5

So I have two questions. This one is related to Japan market. Can you share the color of Japan's meeting plans progress? What's the conversion rate from registered users to 10 times? And have you if the Futai subsidiary is applying for digital assets trading platform in Hong Kong, what is the progress look like?

Speaker 5

And what is your preparation work for digital assets trading platform? Would you be able to launch trading functions in the Q3 once your license is approved? Thank you.

Speaker 2

Thank you, Cindy. I will answer your second question first and my colleague Daniel will answer your question regarding to Japan. We echo the Web3 policies advocated by the Hong Kong government. We want to build up Hong Kong as a Web3 Global Centers. In the past several quarters, we carefully studied the policies and the regulations issued by Hong Kong SFC, Tencentrade, a wholly subsidiary within Fusu Group, submitted VSAT license application to Hong Kong SFC last month, and we expect the whole application process may take at least 6 to 9 months when if we have the luck to get approval in principles.

Speaker 2

And we have not formed a very concrete business plans afterwards and we will continue to modify this content in the next couple of quarters. Hopefully, we can give some new updates in that for Q2 or Q3. Thank you.

Speaker 1

And I'm going to translate for myself. So right now in Japan, the user to client conversion rate as well as the client to paying client conversion rate are both lower than what we have observed in other international markets. And we think there are two main reasons behind it. Number 1 is that our account opening go to process still has a number of friction points. So far, the mid to back office in the Japan brokerage industry are still characterized by a lot of outsourced teams that have really unsatisfactory user experience.

Speaker 1

And in order to start account opening soon, we leveraged some of these outsourced systems, which really have a negative impact our users' experience and thus impacted the conversion rate from account opening to asset deposits. And in next couple of quarters, we plan to invest into our account opening process and gradually replace these outsourced systems with our proprietary system. And the second reason behind this low conversion rate so far is the lack of key trading products. And as mentioned earlier, we now only offer U. S.

Speaker 1

Cash equities trading to Japan users. And in the Q1 of next year, we plan to launch Japanese stock trading as well as NISA account. Although we are really confident that Futu's U. S. Stock trading capabilities lead our Japanese peers by a very wide margin.

Speaker 1

In Japan, the Japanese stock investing is still very, very popular. And we understand based on our user survey that lack of Japanese equity trading it is a key reason that prevents them from opening accounts with us. Thank you.

Operator

Mr. Wang, are you Ms. Wang, are you done with your question? A reminder to all the participants that you may press star and one to ask a question. Next question comes from the line of Peter Zhang with JPMorgan.

Operator

Please go ahead.

Speaker 6

Let me do the translation. My first question is a follow-up question regarding the Japan porta line. I wish to understand going forward, will the are clients in Fusun's clients in Hong Kong or Singapore market being allowed to trade Japan stock? Is this for the pipeline, my second question is regarding the blended commission fee rate. We noticed that the blended fee commission fee rate declined sequentially in Q3.

Speaker 6

We wish to understand what's the reason behind and what will be the trend going forward? Thank you.

Speaker 2

Regarding two questions. Number 1 is for the Japan stock trading offering to the markets outside of Japan, our answer is definitely it would be a yes and has already been in our product pipelines. Hopefully, we can launch the Japan stock trading to our clients in Hong Kong and Singapore in the near future. We do think this kind of product offering will further helpful to our client engagement in these markets and also increase the client participations in our platform and also our top line will also be benefit arising from that. Regarding the blended commission rate fluctuation as we elaborate to the market several quarters, it is mainly due to the client's trading behaviors, because our U.

Speaker 2

S. Stock trading commissions we have different menu price menus and one menu is actually not based on the percentage of the trading volume, but on the number of the shares, so when people trade these big blue chips all of these OTT stocks, the combination will have implications on the blood commission base as well. In the Q3, the fluctuations mainly because of that. And going forward, we think the blended commission rate, if we take out this trading pattern reasons can maintain stable in the near future. Thank you.

Operator

Thank you. Next question comes from the line of Lee Wan with Pockom International. Please go ahead.

Speaker 5

Can you give us a breakdown of interest income and what will be the impact from Fed's credit card next year. Thank you.

Speaker 2

In terms of the interest income, yesterday, the interest revenues contributed from the client idle cash is much bigger than the interest income derived from the margin lending and the security lending business. And going forward, we do not think the FADES rate we will be very fast. And in circumstances when the rates cut normally it would be helpful to the trading volumes for the whole capital markets for our clients as well. Therefore, we do think the trading revenues arising from this wake up will largely offset the potential idle cash revenue decrease. Thank you.

Operator

Ms. Phan, are you done with the question?

Speaker 5

Yes, I'm through.

Operator

Thank you. Next question comes from the line of Eema Xu with Bofa Securities. Please go ahead. Please go ahead. Ms.

Operator

Xu? Nishu, if you have muted from your end, please unmute yourself and you can go ahead with your question. Ms. Xu, can you go ahead with your question? Ms.

Operator

Emma Xu, can you go ahead with your question?

Speaker 1

Well, it seems that Emma is not here tonight. So if operator, do you have any further questions on the line?

Operator

There are no more questions. So I will now hand the call back over to Mr. Yuan for closing comments. Thank you.

Speaker 1

Sure. Yes. So that concludes our call today. On behalf of the Futu management team, I would like to thank you for joining us today. If you have any further questions, please do not hesitate to contact me or any of our Investor Relations representatives.

Speaker 1

Thank you and goodbye.

Operator

Thank you. This concludes our conference for today. Thank you for participating. You may now disconnect.

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