Futu Q2 2023 Earnings Call Transcript

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Provided by Quartr
August 24, 2023

There are 7 speakers on the call.

Operator

Ladies and gentlemen, welcome to Futur Holdings Second 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. If you have any objections, you may disconnect at this time.

Operator

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 Q2 2023 earnings results. Joining me on the call today are Mr. Leaf Li, 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 involving hereinvest 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 20 F. 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

I'm pleased to announce that we acquired over 57,000 paying clients in the 2nd quarter, bringing the total number of our paying clients to nearly 1,600,000. Robust organic growth across all overseas markets Drove a 41% sequential acceleration in client acquisition. In the Q2, Hong Kong market contributed approximately 1 third of new paying clients As effective offline marketing campaigns attracted older clients who prefer in person instructions on how to open trading accounts And navigate our user interface. In Singapore market, we also witnessed strong paying client growth on the back of U. S.

Speaker 1

Equity market outperformance And the enticing yields of money market funds. In the U. S, we brought in more clients of higher quality As we iterated on marketing channels and client incentives, despite fragile market sentiments, our group's quarterly paying client retention rate Remain above 98%. In the Q2, we continue to roll out new products and features across markets. To help clients better execute their trading strategy, We launched bracket orders for U.

Speaker 1

S. And Hong Kong Stock Options and Futures, an algorithmic order for all clients in Hong Kong and Singapore. In Singapore and Australia, we now give clients access to certain U. S. Stocks and ETFs 24 hours a day, 5 days a week, thereby enhancing the accessibility of U.

Speaker 1

S. Stock trading. Total client assets were HKD 466,000,000,000, Up 8% year over year and flattish quarter over quarter. Negative mark to market impact on clients' Hong Kong stock holdings dragged total client assets. The net asset inflow in overseas markets remained robust, which offset the market impact.

Speaker 1

Singapore market delivered strong asset growth during the Q2 with a 21% 12% quarter over quarter increase And total and average client assets respectively. This was the 4th consecutive quarter where the Singapore market achieved double digit Sequential growth in total client assets. Margin financing and securities lending balance declined marginally by 1.4% sequentially Total trading volume declined 22% quarter over quarter to HKD1 1,000,000,000,000 Hong Kong stock trading volume was HKD259 billion, down 31% sequentially due to clients' waning interest in China Technology names Given disappointing stock price performance, U. S. Stock trading volume was down by 18% quarter over quarter to HKD676 billion as trading turnover of technology stocks and leverage and inverse ETFs contracted.

Speaker 1

Total client assets and wealth management were HKD43 billion dollars, Up 99% year over year and 17% quarter over quarter, the sustained high yields and money market funds were the key driver behind this robust asset growth. In Hong Kong, we continue to expand structured product offerings by onboarding Phone Link nodes and Colpitts spread nodes to cater to the diversified risk return expectations of high net worth clients. In Singapore, over 18% of clients held wealth management positions as of quarter end, up significantly from 2% in the year ago quarter. In Singapore, average client assets in Wealth Management more than doubled year over year. In an effort to expand beyond retail Wealth Management, We launched entrusted accounts in Singapore that allow fund managers to manage assets on their clients' behalf.

Speaker 1

We have 374 IPO distribution and IR clients at the quarter end, up 36% year over year. Of all 31 companies listed in Hong Kong in the first Half of twenty twenty three, twenty of them have used 1 or more of our enterprise product offerings. In the quarter, we acted as joint bookrunners Several high profile Hong Kong IPOs, including those of YSP and eDiving. Last but not least, I am pleased to announce that our wholly owned Japan subsidiary, Moomoo Securities Japan Corporation Limited is officially approved by the Japanese regulators to conduct its brokerage and wealth management business They are our online platform, Moomoo. The Japan market is characterized by its large and growing number of affluent retail investors, High penetration of online trading and increasing pension for U.

Speaker 1

S. Stock trading, and we are excited to tap into this immense market opportunity. Next, I'd like to invite our CFO, Arthur, to discuss our financial performance.

Speaker 2

Thanks, Li and Daniel. Before going through our financial performance, I'd like to give you an update on our latest US500 $1,000,000 share repurchase program Announced on March 11, 2022. At the end of the first half, we have repurchased an aggregate of 11,000,000 ADS With approximately US360 $1,000,000 total repurchase amount in open market transaction, this constitutes about 70% of the maximum purchase amount are pulled under our share repurchase program. Now back to the financial performance in the second quarters. All the numbers mentioned below are in Hong Kong dollars.

Speaker 2

Total revenues for the quarter were CNY2.5 billion, up 42% from RMB1.7 billion in the Q2 of 2022. Brokerage commission and handling charge income was RMB9.50 RMB53 million, a decrease of 8% year over year and a 12% Q over Q. The Q over Q decrease was mainly due to the decline in the total trading volume, partially offset by the increase in the blended commission rate from 8.8 basis points to 9.9 basis points. Interest income was RMB1.4 billion increase of 127 percent year over year and 9% Q over Q. The increase was driven by higher interest income from cash deposits And higher security lending income.

Speaker 2

Other income was RMB127 1,000,000, up 37% year over year And have maintained most flat Q over Q. The year over year increase was driven by higher fund distribution income. Other income maintained largely stable Q over Q since higher fund distribution service income and the trust of fee We're largely offset by lower currency exchange income, underwriting fee income and the market information and the data income. Total cost was RMB375 1,000,000, an increase of 80% from RMB208 1,000,000 in the Q2 of 2022. Brokerage commission and handling charge expenses was RMB 55,000,000, down 37% year over year and 23% Q over Q.

Speaker 2

The decrease was attributable to lower trading volume and the cost savings from our U. S. Sales clearing business. Interest expenses were RMB220 1,000,000, up 729 percent year over year and 68% Q over Q. The increase was mainly driven by higher expenses associated with our security borrowing and lending business, higher funding costs from margin financing business also contribute to Q over Q increase.

Speaker 2

Processing and servicing costs were RMB99 1,000,000, up 5% year over year and 13% Q over Q. The increase was primarily due to higher system usage fee, market information fee and the data transformation fee also increased on a sequential basis. As a result, total gross profit was RMB2.1 billion, an increase of 37% From RMB1.5 billion in the Q2 of 2022, gross margin was 85% as compared to 88% Operating expenses were 18% year over year and 6% Q over Q to RMB 852 1,000,000. R and D expenses were RMB363 1,000,000, up 25% year over year and 2% Q over Q. The increase was mainly due to an increase in R and D headcount as we continue to upgrade our infrastructure, support new product offerings and invest in product localization in international markets.

Speaker 2

Selling and marketing expenses was $175,000,000 down 20% year over year and up 24% Q over Q. The year over year decrease was mainly due to lower customer acquisition costs and the Q over Q increase was driven by accelerated Client position. G and A expenses were RMB 314 1,000,000, up 49% year over year and 2% Q over Q. The increase was mainly due to increase in headcount for general and administrative personnel to support our international business expansion. As a result, our total net income increased by 74% year over year and decreased by 6% Q over Q to RMB1.1 billion.

Speaker 2

Net income margin expense to 45% from 37% in the same quarter last year, primarily due to strong top line growth And the lower selling and marketing expenses. That concludes our prepared remarks. We now like to open the call to questions. Operator, please go ahead.

Operator

From the line of Chiyao Huang from MS. Please go ahead.

Speaker 3

Let me briefly translate. So the two questions is regarding the trading volume. And we're seeing the trading volume Flip further than the overall market in both Hong Kong and the U. S. In the Q2 for Futu.

Speaker 3

So just wondering what's the implication there? And also, we are seeing the brokerage commission bouncing quite sharply in the second quarter and roughly what's the driving factors behind? Thank you.

Speaker 2

Thank you, Ji Yong. I will take 2 of your questions. Number 1, regarding the trading volume, it is generally just in line with overall market conditions. Particularly in the Q2, we see very the market actually is very challenging Across the Board, regardless in the U. S.

Speaker 2

Or in Hong Kong, what we observe is actually the trading velocity from our clients Both in the U. S. And also in Hong Kong has decreased. But the situation seem to be Temporarily as we see the trading velocity rebound quarter to date in the Q2. Then in terms of the trading commissions, The major reason, as we elaborate several times before, is more related to the clients' trading behavior in the U.

Speaker 2

S. Stock. In the Q2, we see more clients trading these low value stock in the U. S. Markets, which led our lender implied Blender commission rate become higher versus the 2nd quarter.

Operator

Thank you. Thank you. We will now take the next question from the line of Yu Fan from CICC. Please go ahead.

Speaker 4

Okay. I will translate. Thanks, management, This is Youyou Fan from CICC. I have two questions, Hill. The first one is regarding the AUM and revenue breakdown by assets.

Speaker 4

How much does Hong Kong and U. S. Stocks and wealth management products and also the cash balance accounts for the total client asset balance? And how much does Hong Kong and U. S.

Speaker 4

Stock market account for the total revenue, respectively? The second question is regarding the client net asset Inflow, so I wonder what's the asset inflow of clients in Hong Kong, Singapore and also Mainland China respectively?

Speaker 2

Thank you, Fang Liu. I will answer your second question first and I will leave the first question to Lee. In terms of the Now as I think in the second quarter, we see a very healthy rebound in the second quarter versus the Q1, Given that we got some negative headline use in the Q2, which caused certain clients uncomfortable In terms of their assets parking in our accounts. So this has been fully removed in the second quarters. And to break down Among the different regions, Hong Kong actually contributed most of the asset inflows, which followed by Singapore afterwards.

Speaker 2

I leave the second question to

Speaker 1

In the past few quarters, the breakdown of Futu's client assets has remained relatively stable with more client assets allocated to Hong Kong stocks than U. S. Stocks. And the proportion of wealth management assets actually continue to rise in the past couple of quarters and now accounting for about 10% By the end of 2Q, which more than doubled year over year and clients' cash balance accounted for low teens of total client asset balance. And to answer your question regarding the revenue breakdown between Hong Kong and U.

Speaker 1

S. Stocks, Hong Kong stocks usually contributed about 30% of the trading volume. So U. S. Docs contributed 70% of the trading volume.

Speaker 1

And the blended commission rate for U. S. Docs Slightly higher, so about 75% of our trading commission actually came from U. S. Stock trading.

Speaker 1

Thank you.

Speaker 4

Okay. Thank you very much.

Operator

Thank you. We will now take the next question from the line of Cindy Wang from China Renaissance, please go ahead.

Speaker 5

Thank you, management, for taking my call. This is Cindy from China Renaissance. So I have two questions. First question is related to the customer acquisition cost. So we see the second quarter New clients have a good strong sequentially.

Speaker 5

However, the CAC actually went down. So is that going to sustainable in the second half of twenty twenty three? And the second question is related to the Japan market. So congrats to get the license approval from Japan government. So since we have The beta version for the Momo app in Japan.

Speaker 5

So can you talk about a little bit more color on what's the effect in The beta version in terms of client feedback and MAU, is that going to

Speaker 2

Thank you, Cindy. I will take your first question, and I think Lee will be very happy to share more colors and his thoughts about the Japan markets. In the Q2, the blended commission blended client acquisition cost was around HK3000 dollars per client. The CAC in Hong Kong was slightly higher than the average, while the while that in the U. S.

Speaker 2

And in Singapore was lower than the average. I think in the Q2, we continue to optimize different channels, particularly some offline channel promotions to get a very good results. So our efforts on the acquisition efficiency of target client groups And in the future, we will further dynamically adjust our marketing strategy to improve the efficiency and also the quality of customer acquisitions. Looking into the second half of this year, I personally think the uncertainties still remain across the different markets. But having said that, our view on average CAC We'll be slightly more optimistic than our view before.

Speaker 2

Therefore, we think the full year CAC cost may have a high single digit decrease compared with that of last year. Thank you. I hand over to Lee.

Speaker 1

We have been operating as a pure information to market data platform in the Japanese market for less than a year, Accumulating a lot of good feedback from Japanese users. We've also iterated many community networking features based on market trends and user interests. And our data shows that Muumu's user community in Japan is highly, highly active, with the DAU to user ratio Averaging around 15% on trading days, indicating very high engagement and certainly significant growth potential. Although trading function is currently not available on Muumu in Japan, we believe Muumu has already brought unique value to Japanese users. And in terms of product capabilities, Moomoo now offers various functionalities that were absent among local platforms, such as visual displays of fund flows covering U.

Speaker 1

S. And Japanese stocks, fundamental and technical analysis. And secondly, Most securities brokers in Japan have a 15 to 20 minute delay in market data and real time quotes are provided with a cost. However, Muumu provides free real time quotes not only for Japanese and U. S.

Speaker 1

Stocks, but also for foreign exchange Options and future state of global capital markets. And furthermore, mumu is currently the only online platform in Japan offering an online user community. We've introduced numerous KOLs and conducted live broadcast for popular financial events in the social community, resulting in very high engagement. And last but not least, we have strong trading capabilities in terms of product categories, order types, trading duration and various analytical tools, which can also be replicated in Japan in the near future. And regarding our future development plans, after we The approval from the Japanese regulators, we are actively preparing and aim to launch the trading functions in the Q4 this year to provide Japanese investors with a comprehensive and smooth investment experience.

Speaker 1

Thank you.

Operator

We will now take the next question coming from the line of Leon Qi from Daiwa, please go ahead.

Speaker 6

Hi, thanks for taking my question. Let me recap my questions in English. This is Leon Chi from Daiwa. Thanks for taking my questions. My first question is still regarding Japan market.

Speaker 6

Would management say that our competitive landscape in the online broker space in Japan is better than the U. S. From the experience that we run our beta version, most specifically, do we have any expectations on CAC and payback period in And my second question is on Hong Kong. We are very glad to see that recently, Budu has opened an offline Experience Center in Hong Kong, many people are very excited about the product offerings. I just want to ask management that What kind of user operating matrix or financial matrix are we expecting from the offline experience Shops and do we plan to open more offline shops?

Speaker 6

Thank you.

Speaker 2

Okay. Thank you. Thank you, Leo. I think the first question can be answered by my colleague, Daniel. And regarding our physical So in Hong Kong, I think Lee Wei is very happy to share more colors and about these thoughts.

Speaker 1

Right. So regarding the competitive landscape in Japan, we believe It is a lot more benign than what we saw in the U. S. We understand that the online securities brokerage industry in Japan is now dominated by a few players. The top 5 Internet brokers, including Rakuten and SBI, now account for the majority of the market share in terms of brokerage trading volume.

Speaker 1

They have each accumulated over 1,000,000 clients, among which Rakuten and SBI are the top two players. But overall, we think that the landscape is A lot more fragmented than what we saw in the U. S. And we believe that our current product offers a competitive advantage, a very significant one Over the existing online brokers. And the Japanese market is huge and as we mentioned earlier, growing rapidly and we are very confident to Obtain a meaningful market share in Japan.

Speaker 1

Overall, I think since we haven't really started acquiring clients yet, it's Probably too early to talk about customer acquisition costs and payback period. But based on our initial analysis, The Japanese retail investors are generally a lot more affluent than the U. S. Investors. And actually, there are a lot more ways To monetize on trading in Japan, let's take U.

Speaker 1

S. Stock trading, for example. It is now industry standards To charge 0 commissions for U. S. Stock trading in the U.

Speaker 1

S, while everyone still charges At least all of the major online brokers and the Japan still charges pretty high commission for U. S. Stock trading. So we think Generally, the investors are wealthier and there are more monetization opportunities in Japan.

Speaker 2

Thank you.

Speaker 1

Since its opening on July 31, Over a 1000 people have visited our Experian store and many of whom are middle aged customers who are not familiar with the online account opening process. And previously, it was difficult for us to reach this client group through our online marketing channels, but these Happen to be the target customer group that we want to further tap into. So, the experience store has helped us establish connection with these clients and has become an important channel to enhance Bluetooth brand recognition among this group. In addition, the experience store in Hong Kong allows us To make face to face communications with these users and have a better understanding of Futa's product offerings. And according to the data we have collected so far, The customer acquisition cost of experience stores is actually lower than our average Hong Kong market customer acquisition cost.

Speaker 1

So from a cap perspective, experienced stores can actually help us reach previously underpenetrated client groups And further enhance brand image in Hong Kong at a lower cost. From the perspective of operating costs, we believe that Experience store really help us with long term brand building and we also plan to use these stores as a venue for various offline investor educational Activities, events and corporate offices, which will further help save costs. And if this experience store continues to record very good progress in terms of client acquisition. We expect to have more experienced

Operator

Thank you. I would now like to turn the conference back over To Daniel Yuan for closing remarks.

Speaker 1

That concludes our call today. On behalf of Futu management team, I would like to thank you for joining us tonight. 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

That does conclude our conference for today. Thank you for participating. You may now disconnect.

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