Futu Q1 2023 Earnings Call Transcript

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Provided by Quartr
May 24, 2023

There are 9 speakers on the call.

Operator

Hello, ladies and gentlemen. Welcome to Futu Holdings First Quarter 2023 Earnings 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, sir.

Speaker 1

Thanks, operator, and thank you for joining us today to discuss our Q1 2023 earnings results. Joining me on the call today are Mr. Lee Fei, Chairman and Chief Executive Officer Doctor. Chen, Chief Financial Officer And Robin Hsu, 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.

Speaker 1

Forward looking statements involving hereinvest and uncertainties. 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 20 F. With that, I will now turn the call over to Leaf. Leaf will make his comments in Chinese, and I will translate.

Speaker 1

Thank you all for joining today. As of quarter end, our paying clients surpassed 1,500,000, representing 15% growth year over year. Based on paying client growth in the 1st 5 months of the year, we expect to add 150,000 paying clients in In the Q1, Hong Kong market contributed over 1 third of paying client growth as client Position accelerated on the back of the rally of China Technology Inc. In January. We also witnessed resilient paying client growth in Singapore as we continue to strengthen our brand awareness through offline events and promoted demand for lower risk fund products through industrial education.

Speaker 1

We continue to broaden our trading product offerings And upgrade trading features in various markets. We became the only broker in Hong Kong that allows clients to trade certain U. S. Stocks and ETFs 24 hours a day, 5 days a week, thereby enhancing the flexibility and accessibility of U. S.

Speaker 1

Stock trading. We also launched leverage foreign exchange trading in Singapore, where clients can trade 36 major currency pairs on margin To take advantage of volatilities in the foreign exchange market. In the U. S, we've rolled out multi light option strategy orders for U. S.

Speaker 1

Stocks. This advanced trading function streamlines clients' trading experience and will attract more sophisticated options traders to our platform. Despite market weakness and headline regulatory news, our expanding product suite and premier user experience led to another quarter of over 98% Total client assets increased by 21% year over year and 12% quarter over quarter to HKD466 billion due to higher mark to market value of client stock holdings and net asset inflow. In Singapore, total client assets Leveraged client assets increased by 28% and 22% sequentially, attributable to solid non asset inflow across client cohorts And favorable U. S.

Speaker 1

Equity market performance. In the Q1, we attracted high quality clients in Singapore that continue to deposit funds into their trading accounts. For clients we acquired in January, for example, their average asset balance almost tripled by barge. Margin financing and securities lending balance was up by 30% sequentially to reach HK35 $1,000,000,000 driven by elevated activities around technology stock. Total trading volume was HK1.2 trillion dollars, Up 12% quarter over quarter.

Speaker 1

U. S. Stock trading volume grew by 23% sequentially to HKD828 billion, mainly due to higher trading turnover of U. S. Technology name, many of which handsomely outperformed the market during the quarter.

Speaker 1

Hong Kong stock trading volume was HKD372 billion, down 6% sequentially as investor sentiments are dragged by the equity market correction in February March. Wealth Management Business recorded another quarter of strong growth with total client assets climbing to HKD37 1,000,000,000, up 77% year over year and 17% quarter over quarter. In Singapore, elevated interest around money market funds led to a 59% sequential increase in total client assets. We also expanded our product offerings by introducing bond trading. As of quarter end, 15% of our paying clients in Singapore held wealth management products, up from 1% in the year ago quarter.

Speaker 1

In Hong Kong, we bolstered our structured product offering by launching fixed coupon notes and digital notes. These products gained traction among our high net worth clients and structured product asset balance as a result grew by 5 fold quarter over quarter. We have 353 IPO distribution and IR clients as well as 662 ESOP clients as of quarter end, Up 37% and 44% year over year, respectively, we acted as joint lead managers for several high profile Hong Kong IPOs, including those of Beauty Pharm Medical and Health Industry and YH Entertainment Group. In the Q1, we underwrote 9 Hong Kong IPOs and ranked 1st among all brokers according

Speaker 2

to when.

Speaker 1

I am pleased to announce that our wholly owned Malaysia subsidiary has received the approval in principle for the Capital Markets Services license Next, I'd like to invite our CFO, Arthur, to discuss our financial performance.

Speaker 2

Thanks, Lee and Daniel. Now please allow me to walk you through our financial performance in the 4th quarter. All numbers are in Hong Kong dollars unless otherwise noted. Total revenue was RMB2.5 million, up 52 percent from RMB1.6 billion in the Q1 of 2022. Brokerage commission and handling charge income was RMB1.1 billion, an increase of 12% year over year and 3% Q over Q.

Speaker 2

The year over year increase was mainly driven by a higher blended commission rate of 8.8 basis points. The Q over Q increase was primarily attributable To higher U. S. Stock trading volume, interest income was RMB1.3 billion, an increase of 125% year over year and 14% Q over Q. The increase was driven by higher interest income from cash deposits and higher security lending income.

Speaker 2

Other income was RMB126 1,000,000, up 29% year over year and 34% Q over Q. The year over year and the Q over Q increase Well, both driven by higher funded distribution income. Our total cost was RMB291 1,000,000, increase of 28% From RMB228 1,000,000 in the Q1 of 2022. Brokerage commission handling charge expenses were RMB72 1,000,000, Down 25% year over year, up 13% Q over Q. The expenses didn't move in tandem with our brokerage commission and handling charge income, mainly due to cost savings from our U.

Speaker 2

S. Self clearing business. Interest expenses was RMB 131 1,000,000, Up 234% year over year and are down 28% Q over Q. The year over year increase and the Q over Q decrease were both driven by interest expenses associated with our securities lending business. Processing and the servicing costs It was RMB88 1,000,000, down 5% year over year and the 9% Q over Q.

Speaker 2

The year over year decrease was mainly due to lower product service fee As a result of system optimization, the Q over Q decrease was mainly due to lower market information fee and the data transmission fee. As a result, total gross profit were RMB2.2 billion, increase of 55 56 percent From $1,400,000,000 in the Q1 of 2022, gross margin was 88% as compared to 86% in the Q1 of 20 22. Operating expenses were up 7% year over year and were down 2% Q over Q to 804,000,000. R and D expenses were RMB 355,000,000, up 26% year over year and 6% Q over Q. The increase was mainly due to increase in R and D headcounts.

Speaker 2

We continue to support new product offering and invest in product localization in new international markets. Selling and marketing expenses was RMB141 1,000,000, down 51% year over year and 80% year over year. Expenses declined due to decelerating client acquisition amid weak market sentiments. G and A expenses were RMB308 1,000,000, 70 3 percent year over year and down 7% Q over Q. The rise was primarily due to the increase in headcount for general and administrative personnel To support our international business, the expenses declined Q over Q as we recorded 1 off professional service fee for our proposed Hong Kong listing last quarter.

Speaker 2

As a result, our net income increased by 108% year over year and 24% Q over Q to RMB1.2 billion. Net income margin expanded to 48% from 35% in the same quarter last year, mainly due to strong revenue growth and the lower marketing spending. That concludes our prepared remarks. We now like to open the call to questions. Operator, please go ahead.

Speaker 2

Thank you.

Operator

Thank And this is from the line of Qiu Huang from Morgan Stanley. Please go ahead.

Speaker 3

So my first question is around the overseas expansion. We have been seeing very encouraging Progress in Singapore in the first quarter. So, if one of the management could give more color on the U. S. And Australia market developments?

Speaker 3

And also regarding the new entrance in Malaysia market, Any plans and also localization in that market will be greatly appreciated. And second question is around the latest regulatory change With the removal of the Futus app from the onshore app stores and just wondering how would that impact the existing onshore users, their experience and how Is the company's plan to continue to provide high quality service to those existing clients? And maybe longer term, how do management think about the existing TAM, At the time of existing onshore clients, would change going forward? And also how would the competition change going forward? Thank you.

Speaker 2

Thank you, Chiyo. I think the first question Daniel and Robin can give you some colors about our first All the achievements in Australia and in the U. S, also our ambition plans for entering to Malaysia Potentially in the second half of this year. For your second question about CSRC, the mainland regulation implications, I think, Lee will give you some more colors in terms of the implications for our existing users. I can just supplement some initial data in the past week, which we observe.

Speaker 2

Hopefully, it will be helpful to you.

Speaker 1

So for Malaysia, we just received the approval in principle for the Capital Markets license from Securities Cognition Malaysia. And next, we'll start building local team and work on product and research and development. So far, we haven't set a date for the official launch in Malaysia and we'll update the market when we have more information. And in terms of the U. S.

Speaker 1

Market, our growth in U. S. Slowed down during the Q1, primarily because we were mapping out And optimizing our localization strategy with a focus on improving client quality. And we started to offer the U. S.

Speaker 1

Multi leg options trading function in the Q1, and we plan to launch advanced function and products such as bracket orders this year, while continuing to strengthen the core product capabilities around U. S. Stocks and derivatives trading. And in the future, we'll also offer tailored industrial education, contents and activities to enhance brand awareness, attract clients through superior product offerings and improved client quality. And for the Australian market, In the Q1, our client acquisition in Australia has increased.

Speaker 1

And after more than a year of brand building, our brand awareness in Australia continued to improve. And based on our market research and owning on our target client profile and have adopted different methods to cultivate brand awareness And acquire clients with different backgrounds. We plan to continue to launch product functions and develop deeper customer insights in Australia. So based on CSRC's announcement on December 13 and the statements made on February 15 in response to a question from reporters, the existing clients' tradings will now be affected and the existing clients can continue to trade Through their existing offline financial institutions and for these existing clients to deposit more funds, it is allowed as long as they satisfy the requirements from SAFE. And currently for our existing clients, All of their trading activities and fund deposit activities are as usual.

Speaker 1

And besides, the regulators further clarified that Existing clients are defined as clients that already have trading accounts with offshore brokers. So for Mainland Chinese clients that have opened trading accounts with other Hong Kong brokers, we are allowed to open accounts for them. And the fund deposits and stock transfer from other brokers to us are also allowed by the regulators. And in terms of our app upgrades, we have issued guidances on our website and our app to guide clients on how to timely Upgrade to the latest version and we think our current services to the existing clients are not jeopardized. And if they have questions during the upgrades, they can call our customer service line and ask questions through the app at any time, and we will resolve client requests very timely.

Speaker 1

Thank you.

Speaker 2

Yes. And also, I want to supplement, if I may, Some initial observations since we published announcement To remove our app from domestic Apple Stores last Tuesday, we are very delighted that it seems that our existing China Clients population are very calm about this headline news. We do not see any meaningful abnormal

Operator

This is from the line of Cindy Wang from China Relations. Please go ahead.

Speaker 4

So thanks for taking my questions. So I have question 2 questions. First question is related to commission rate. So The commission rate has slightly down sequentially. So may I know what's the reasoning behind it?

Speaker 4

Is that because of the U. S. Stock response impacted or the lower derivative trading in the Q1? The second question is, since we've Seeing the news about the Fudu is going to open the 1st shop in Hong Kong, could management let us know what kind of services this shop will provide? And could investors open trading accounts through the shop in the future?

Speaker 4

Thank you.

Speaker 2

Thank you, Cindy. I will take the first question. And for your second question, Steve will answer it. In terms of commission rate, you are right. I think the Punctuation is due to the two reasons you both mentioned.

Speaker 2

Number 1 is primary is due to the used stock trading pattern as we elaborate to the market several times. It is more due to the U. S. Markets rebound, especially for these tech names, Big tag names in the 1st quarters. I think going forward, there we do not feel any strong competition in terms of pricing in Hong Kong and in other markets.

Speaker 2

In Hong Kong and in other markets, of course, there will be some natural fluctuations from quarter to quarter perspective Due to the U. S. Stock trading pattern and also in the Q2 so far, Given the market is trading in a very narrow range point, so what we see the clients' activities on the derivative side, Especially on the option and the future start to be decrease on Q on Q level. So this will have some implications In the 2nd quarter, planned commissions, I hand over to Lee for your second question.

Speaker 1

We actually have plans to open offline stores for a while and we have been preparing for it. I think recently we are going through renovations at the offline stores, so Probably the logo attracted media attention. And the reason we opened this offline store was actually drawing inspirations from Apple's offline store. I think the store will help our potential clients better experience our products and services. And also we can answer a lot of your questions Face to face.

Speaker 1

As we continue to increase our client penetration in Hong Kong, I think the store will help us Reach the clients that we are not able to reach through online channels and further expand our client acquisition channels. Thank you.

Operator

Thank you. And we'll now take our next question. Please stand by. This is from the line of Zoe Zheng from Jefferies. Please go ahead.

Speaker 5

Thanks management for taking my questions. Congratulations on the solid results. And I have two questions. So first, could you please provide some color about our user acquisition strategy this year? We have noted that in Q1, Our sales and marketing expenses and customer acquisition costs both declined sequentially.

Speaker 5

Recently, we have seen companies more promotion in Hong Kong. So just wondering what's our user acquisition target and the cost in Q2 for year and the longer term? And my second

Speaker 2

Thank you, Zoe. I will take both of your questions. I think number 1, in terms of the client acquisition, you can see In the Q1, the implied CAC is roughly in line with what we achieved in the Q4 of last year. I think going forward, despite, of course, Q2 should be even more challenging given the market conditions, especially in Hong Kong. The index is trading in a very narrow range and there is no any meaningful IPO projects To the markets.

Speaker 2

So it will have some negative implication to our client acquisition. But having said that, I think overall, our CAC Our target this year should be similar to compared with last year. Particularly, In Hong Kong, we will continue to double down our efforts in terms of the market share gains, not only just to the millennial Generations which we used to take into but with Lee and Robin mentioned before, We will also focusing on these some new populations such as the female population and also the clients over the age of 40s. Number 2, in terms of wealth management, I think you're right. In the foreseeable future, our role will still be the facilitator or distributor To our clients, we do not have any confirmed the time schedule or plan

Operator

Thank you. We'll now take the next question. Please standby. This is from the line of Frank Shen from Credit Suisse. Please go ahead.

Speaker 6

Thank you, management. This is Frank from Credit Suisse. I have two questions. The first one is on the breakdown of interest income in terms of return on deposit and return on the margin financing and securities lending business. And similarly, what are the sizes of each component of interest expenses?

Speaker 6

And secondly, how should we think about the growth rate of Operating expenses going forward, will the company take some measures to optimize the expenses? Thank you.

Speaker 2

Thank you, Frank. I will take both

Speaker 1

of your questions. In terms of

Speaker 2

the breakdown of the interest income, as you can imagine, We are key beneficiaries of the U. S. Rate upcycle. So in the past several quarters, you can see our Interest income continued to increase sequentially, largely due to the federal rate hike And also the liquidity situations in Hong Kong. So you can imagine the majority of our interest incomes come from the clients' idle cash deposits Nowadays, having said that, you can see our margin balance also increased Q over Q In the Q1, so the absolute contribution from margin business also is very healthy.

Speaker 2

In terms of your second question regarding the operating expenses, I think we have given some guidance to the market In last earning call in the last earning call, we're looking for roughly 15% to 20% headcount Increase year over year, primarily to support our international market expansion. Most of these headcount increase will be on the R and D side. Of course, there will be new overseas office opening. So there will be associate Rental expenses and also the security activity colleagues be placed In these local markets. I think going forward, definitely there will be more some rigorous Expenses control, especially on the G and A expenses, which we can see, there are still some room to further enhance.

Speaker 2

But I think in terms of the R and D, which we think it is not expenses. To some extent, we think it is an investment. So we will continue to make a huge effort on the R and D, which will be our core advantage compared with our peers. Thank

Operator

you. Thank you. This is from Leon Ke from Daiwa. Please go ahead.

Speaker 7

Thank you for taking my question Congratulations on the very strong results. I have two questions. The first one is still on the regulations from the Mainland China side. We noticed that from CSRC's public announcements, one of the principles from the regulator is to Effectively, it's solved the existing users. Just wondering if management could share with us Any color on what's the latest stance from the regulator at the moment on the existing client base?

Speaker 7

And the second question is on the Wealth Management business. We did appreciate the very strong AUM growth On the Wealth Management business, from a longer term, just wondering how management sees The AUM of your wealth management business, which is a buy side business, how does your buy side AUM would compare With your sales side traditional brokerage AUM, just appreciate if management give us any Long term color on that.

Speaker 2

Thanks a lot. Thank you, Leo. Maybe I take your second question first. I'll leave the first question to To give you some more sharing about the regulations for the existing clients. You can understand we are actually a very dedicated apprentice of Charles Schwab in the United States.

Speaker 2

So I think a lot of lessons we learned from Schwab is that Eventually, we want to be asset aggregators for our users and provide All lifetime service financial service down the road. So, so far, we do not set any specific targets in terms of portions Between the wealth management AUM versus our clients trading AUM. I think now the wealth management AUM roughly accounts To close to 10% of our total clients' assets. Hopefully, I hope such proportion will continue to increase to 20% to 30% in the next 3 to 5 years. Definitely, there will be a very long journey to go.

Speaker 2

As you can imagine, wealth management It's a business which time is your friend. But I think we are fully dedicated and fully committed

Speaker 1

Based on the spirit of CSRC's announcement on December 30 and statements made on February 15, Resolve in existing business is to let clients churn naturally while providing them with proper services, not turning them away. And clients with stock trading due to investment losses or when they need their funds for other purposes, which will lead to a natural churn for clients. And without new clients, the number of existing clients will reduce as time goes by. Thus, serving the existing clients well It's a prerequisite for orderly resolving existing clients. Thank you.

Speaker 7

Thanks a lot.

Operator

Thank you. We'll now take our next question. Please stand by. And this is from Han Ku from CICC. Please go ahead.

Speaker 8

Firstly, I want could you please share us more about why we choose Manesia as our new market? And do we have more information to share About the market room, the competitive landscape, the local investor behavior and the product supply in this market? And secondly, regarding the Singapore market, we see both the paying clients number and the average As I said, client assets keep growing quarter over quarter in the Singapore market, if we see the cohort of the 1st March In the Q1 of 2021, like 2 years before, how was their average client assets and their solo unfund inflow?

Speaker 2

Maybe my colleagues, Robin can answer the first question about the competitive landscape and also our competitive advantage And I will take your second question. Robin, please.

Speaker 1

So the population of Malaysia is around 33,000,000 with the Chinese population accounting for About 20%. And as of 2022, there were about 2,100,000 active retail trading accounts for Malaysian stocks, While the number of trading accounts for U. S. Stocks, Hong Kong and Singaporean stocks are in the 100 of 1000 and are constantly rising. And we observed that the retail participants in Malaysia are young and are highly accustomed to digitized products.

Speaker 1

And amount of new personal accounts opened in 2022, 59% of them come from investors aged 23 to 45. Currently, Malaysia, the traditional bank affiliated securities firms are dominant, while the online brokers started relatively late. However, due to the overall trend of younger retail investors and their high acceptance of Internet products, we think there is huge potential for online brokers to further penetrate. And Mainland sorry, mainstream Internet Brokers such as Rakuten, High Speed and Mplus are relatively small in scale and their product capabilities are pretty basic with almost no social community operations. And on the other hand, our product capabilities have Strong advantages, including a wider variety of products, advanced market data and order types and rich fundamental and technical analysis tools.

Speaker 1

And in addition, the trading fees for farming stocks like U. S. Stocks are pretty high in Malaysia with each trade costing as much as USD 10 to USD 25 And Q2 can greatly reduce the trading costs of these offshore stocks. And finally, we have an active social community, Rich investor education materials and very strong Internet operational capabilities, all of which we think can provide Malaysian investors with a very differentiated experience. Thank you.

Speaker 2

Thank you, Daniel and Robin. For your second question, we entered Into Singapore markets roughly 2 years ago. So the 1st batch of our clients' cohort assets Increased by 2 to 3 times in the past 2 years. We are very encouraging to see the client's call and also the client's retention. So now for the 1st batch, 2 years the clients which we acquired 2 years ago, they have already surpassed our clients' acquisition cost, Which means contribute operating profit nowadays.

Speaker 2

I think we are extremely confident about our Profitability and earning powers in the Singapore market alone, not only just because of the Our cohort will continue to enhance our ARPU and the client assets. But more importantly, there will be a lot of initiative efforts To cutting the cost down, not only the operating cost, but also the clearing cost, such as our U. S. Stock trading, Which we still deal with our Singapore based clients through our external partners. In the second half of this year, we do have a plan to gradually migrate our U.

Speaker 2

S. Stock trading for Singapore clients From external partners to our internal U. S. Clearinghouse. So this will also meaningfully decrease Our calls relating to the U.

Speaker 2

S. Stock trading, which will further enhance our profitability in Singapore. Thank you very much.

Speaker 8

That's very helpful. Thank you very much.

Operator

Thank And I will now hand the conference back to Yuan for some closing remarks.

Speaker 1

That concludes our call today. On behalf of the Food Tube Management team, I would like to thank you for joining us. If you have any further questions, please do not hesitate to contact me or any of our Investor Relations representatives. Thank you and goodbye.

Operator

Thank you. This does conclude the conference for today. Thank you for participating and you may now disconnect.

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