Futu Q4 2023 Earnings Call Transcript

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Provided by Quartr
March 14, 2024

There are 8 speakers on the call.

Operator

Hello, ladies and gentlemen. Welcome to Futu Holdings 4th Quarter and Full Year 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 all for joining us today to discuss our Q4 and full year 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. With that, I will now turn the call over to Leaf. Leaf will make his comments in Chinese and now will translate. Thank you all for joining our earnings call today.

Speaker 1

In the Q4, we added over 59,000 paying clients. Our total paying clients as of year end reached over 1,700,000 representing 15% growth year over year and exceeding our guidance. Client acquisition in Singapore sustained high growth into the 4th quarter. Money market funds continue to garner significant client interest amid high interest rate and market volatility. In December, we became the 1st and only distributor of Fullerton Fund Management Singapore Dollar Denominated Money Market Fund, the only T+0Singapore dollar money market fund for retail investors in Singapore.

Speaker 1

We continue to gain user mind share in Japan with our rich market information, comprehensive market data and interactive social community. In the Q4, the average daily downloads of Moomoo app in Japan ranked top 3 among all brokers and surpassed those of Nomura and Matsui Security according to Data AI. With Nikkei recording remarkable gains and hitting new high, client acquisition in Japan also showed a notable sequential increase in the Q1. We continue to streamline the account opening It will soon roll out Japan equities trading. Our clients in Hong Kong and Singapore will also have access to Japan stock trading in the second quarter.

Speaker 1

Client acquisition in Hong Kong slowed down due to sluggish market sentiments. We have rebounded in the Q1 along with the recovery of the Hong Kong stock market. In the U. S, we continue to prioritize client quality over quantity with the average asset balance of new paying clients in their Q1 of onboarding increasing by over 30% compared to the last quarter. In Australia, we focused on cultivating brand equity and adding new products, including cash management.

Speaker 1

On February 26, we launched brokerage business in Malaysia and gained significant traction. Over 30,000 clients locked our platform within 1 week of the official launch, representing the fastest growth in any of our international markets. We managed to generate high brand awareness in Malaysia from the outset, thanks to our rapid share gain in Singapore over the past 3 years. We observed robust paying client growth across all markets this year. In fact, we attracted more paying clients and net asset inflows in the 1st 2 months this year than the entire Q4.

Speaker 1

Given the strong momentum year to date, we are guiding for 350,000 net new paying clients in 2024. Total client assets increased by 16% year over year and 4% quarter over quarter to HKD 486 1,000,000,000. The sequential increase is largely due to robust net asset inflow across all regions and the market appreciation of our clients' U. S. Stock holdings.

Speaker 1

In Singapore, total client assets and average client assets posted sequential increase of 25% and 17%, respectively. Average client assets was over SGD17000 due to strong inflows across cohorts. As we continue to build brand equity, Moomoo gained traction among high net worth clients in Singapore. As of quarter end, margin financing and securities lending balance increased marginally by 2% quarter over quarter. While we saw an uptick in securities lending balance for U.

Speaker 1

S. Stocks, margin financing balance declined as clients unwound their position. Total trading volume was HKD 957,000,000,000 dollars down 12% year over year and quarter over quarter. In the 4th quarter, Hong Kong and U. S.

Speaker 1

Stock trading volume were down 13% 12% sequentially. Weak sentiments around Hong Kong equities and lower turnover in U. S. Tech stocks dragged total trading volume. Our share gains in the derivatives market in Hong Kong was the bright spot.

Speaker 1

Hong Kong futures and options trading had 8.5% and 14.7% market share in the 4th quarter, respectively. Total client assets in Wealth Management increased by 82% year over year and 11% quarter over quarter to HK58 $1,000,000,000 accounting for 12% of total client assets. Clients increased their allocation in money market funds and U. S. Treasury bills to harvest high yields.

Speaker 1

Total bond holdings as a result increased by over 60% quarter over quarter. We continue to enrich our structured products by onboarding to accumulator notes, a product that allows clients to sell their stock positions at a premium. Our enterprise business has 414 IPO distribution and IR clients, up 24% year over year. In the Q4, we acted as joint bookrunners for several high profile Hong Kong IPOs, including those of JMT Express and UBTAC. We underwrote 37 Hong Kong IPOs in 2023 and ranked 1st among all brokers, according to

Speaker 2

Wind. Next, I'd like to invite our CFO, Arthur, to discuss our financial performance. Thank you, Li Bin, Daniel. Before going through our financial performance, I'd like to give you an update on our latest share repurchase program announced on March 11, 2022. As of December 31, 2023, the expiration date of the program, we had a repurchase aggregate of CAD11 1,000,000,000 with approximately USD365 1,000,000 total repurchase amount in open market transactions.

Speaker 2

We have put in place a new share repurchase program, which approves and authorizes to repurchase up to US500 million dollars of ADS before December 31, 2025. Now please allow me to walk you through our financial performance. All numbers are in Hong Kong dollar unless otherwise noted. Total revenue was RMB2.4 billion, up 4% from RMB2.3 billion in the Q4 of 2022. We ended 2023 with full year revenue growing 31% to RMB10 1,000,000,000.

Speaker 2

Brokerage commission and handling charge income were RMB904 1,000,000, a decrease of 14% year over year and 10% Q over Q. The decrease was mainly driven by lower trading volume. Interest income was RMB1.3 billion, up 17% year over year and down 11% Q over Q. The year over year increase was mainly driven by higher interest income from clients' cash deposits due to higher benchmark interest rate and higher margin financing income due to an increase in daily average margin balance. The Q over Q decrease was mostly driven by the lower interest income from clients' cash deposits due to decrease in daily average client cash balance.

Speaker 2

Other income was RMB137 1,000,000, up 46% year over year and largely flat Q over Q. The year over year increase was primarily attributable to higher fund distribution income, partially offset by lower enterprise public relationship service income and underwriting fee income. Our total costs were RMB433 1,000,000, an increase of 27% from RMB342 1,000,000 in the Q4 of 2022. Brokerage commission and handling charge expenses were RMB59 1,000,000, down 8% year over year and 6% Q over Q. The decrease was roughly in line with our decrease of our brokerage commission and handling charge income, partially offset by the cost of migrating our SGX equities to our sales clearing system.

Speaker 2

Interest expenses were RMB271 1,000,000, a 49% year over year and are down 6% Q over Q. The year over year increase was driven by higher interest expenses associated with our security borrowing and the lending business and the higher margin financing interest expenses. The Q over Q decrease was mostly due to lower interest expenses associated with our security borrowing and the lending business, partially offset by higher margin financing interest expenses. Processing and servicing costs was RMB 104,000,000, up 7% year over year and 21% Q over Q. The increase was largely due to higher product service fee for new markets and higher system usage fees.

Speaker 2

As a result, our total gross profit was RMB1.9 billion, largely flat year over year. Gross margin was 81.7% as compared to 85% in the Q4 of 2022. Operating expenses was up 12% year over year and 3% Q over Q to RMB916 1,000,000. R and D expenses were RMB363 1,000,000, up 9% year over year and 1% Q over Q. The year over year increase was mainly due to increase in R and D headcount as we continue to support new product offerings in international markets.

Speaker 2

Selling and marketing expenses was RMB182 1,000,000, up 19% year over year and down 14% Q over Q. The year over year increase was due to a 41% year over year increase in net new paying clients, partially offset by lower customer acquisition costs. And the Q over Q decrease was due to fewer net new clients and the lower customer acquisition costs. G and A expenses were RMB370 1,000,000, up 12% year over year and 15% Q over Q. The increase was primarily due to an increase in headcount for general and administrative personnel, partially offset by lower professional service fees.

Speaker 2

As a result, income from operations decreased 9% year over year and 22% Q over Q to RMB1 1,000,000,000. Operating margin declined to 43.1 percent from 49.1% in the Q4 of 2022, mostly due to operating deleverage. Our net income decreased by 9% year over year and 20% Q over Q to RMB 876 1,000,000 net income margin shrank to 36.9% in the 4th quarter as compared to 42% in the same quarter last year. Among our international business, Singapore was the first to achieve breakeven on a quarterly basis, even with a portion from headquarter. As client asset continue to grow, we believe the unit economics in Singapore will maintain an upward tragedy.

Speaker 2

That concludes our prepared remarks. We now like to open the call to questions. Operator, please go ahead. Thank you.

Operator

Thank you. First question today is from the line of Cindy Wang from China Renaissance. Please go ahead.

Speaker 3

Thanks for taking my call. And I have 2 questions. First one is, what's your progress of improving account opening process in Japan? And could you provide more color on new paying client acquisition in 4th quarter last year versus Q1 this year so far in Japan? And when would you expect to launch Japan stock trading?

Speaker 3

And the second question is regarding to the new paying client. So we see the new paying client target of 350,000 in 2024 is very impressive. Could you break down by key markets, including like Hong Kong, Singapore, U. S, Japan, etcetera? Thank you.

Speaker 2

Thank you, Cindy. I will take your second question first and then we'll leave the first question to my colleague, Daniel. In terms of our new targets for 2024, the contributions from Singapore, Hong Kong and the Australia and the existing markets, our absolute terms should be similar to last year. So the incremental growth drivers mainly come from certain new markets we enter into this year and recently in Q4 last year, such as Japan, Canada and Malaysia. Thank you.

Speaker 1

Cindy, this is Daniel. And I'll take your question on Japan. So in the Q4, we continue to optimize our account opening process and to integrate the redundant processes and pages in that process and to iterate on the key friction points. And we have seen therefore a very meaningful But in comparison to other international markets, there is still a lot of room for improvement in that conversion number. And to continue to optimize that account opening golden process will be a key priority for us this year.

Speaker 1

And in terms of Japan equities trading, yes, we are planning to roll out Japan equities trading to our Japan clients by the end of March. And then in April or May, we're going to roll out Japan equities trading to our clients in Hong Kong and Singapore. Thank you.

Operator

Thank you. We'll now take our next question. And this is from the line of Chiao Huang from Morgan Stanley. Please go ahead.

Speaker 4

My question is on the Singapore. So what was roughly the client number and client asset contribution on the overall firm basis? And also I wonder what's the strategy in Singapore for 2024? And how is the competitive landscape changing Singapore? And also what's the risk appetite evolving for Singapore clients in 2024 given the U.

Speaker 4

S. Market is still performing quite well? Do you are trading more stocks? Thank you.

Speaker 2

Thank you, Qiu Yong. My colleagues Robin will answer this question for you. So in the

Speaker 1

Q4, the Singapore recorded very steady client growth and contributed about 30% of our total net new clients for the entire quarter. And thanks to the continued net asset inflow of our existing clients and the higher quality new clients, the total client assets and average client assets in Singapore recorded 25% 17% sequential growth, respectively. And the total client assets recorded sequential increase for every single quarter since we launched the business. And average client assets have been on an upward trajectory for 6 consecutive quarters. And as of the end of last year, average client assets in Singapore was over SGD17,000 And we believe that as we continue to enhance our brand awareness to diversify and enrich our product offerings and to improve our client services, Moomoo will continue to attract more high net worth individuals.

Speaker 1

And we've also seen the unit economics in Singapore to continue to improve in the past 2 years. And taking into account the costs from the headquarters to support Singapore, the Singapore subsidiary broke even for the first time during the Q4 and we have some very good growth year to date. And in terms of clients' risk appetite, so during the past rate hike cycle, we started to promote our cash plus product, which is the money market fund product. And we continue to cross sell different investment products based on our clients' risk appetite. And this year, we have seen very strong traction in U.

Speaker 1

S. Equities among our Singapore clients. Thank you.

Speaker 4

Thank you very much.

Operator

Thank you. We'll now take our next question. This is from the line of Yoo Fan from CICC. Please go ahead.

Speaker 5

My first question is regarding the blended commission rate. We see the commission rate increase this quarter. So what's the reason behind? And the second question is about the CAC. So we see the CAC decrease a lot this quarter.

Speaker 5

So what's the reason behind? And how do you view the future trend of the CAG?

Speaker 2

Thank you. I will take these two questions. For commission rate, the combined take rate is almost flat q on q basis on a q on q basis, slightly up because of the product mix shares and more contributions from our derivative products. Then for the CAC, we further optimize our different marketing campaigns channels to control and even decrease our CAC, which bear very strong results in the Q4. And looking forward and based on the year to date situations, we do expect this year the CAC number will decrease compared with last year hopefully by 10% to 20% year on year basis.

Speaker 2

Thank you.

Speaker 5

Thank

Operator

you. We'll now take our next question. Please stand by. Next question is from the line of Emma Xu from Bank of America Securities. Please go ahead.

Speaker 6

So I have two questions. The first one is about the client quality in other international markets. You mentioned earlier about the positive progress in the Singapore client quality. But how about other international markets? Do you also see improvement in the average client asset?

Speaker 6

And for your Hong Kong market, with you penetrating into the mass market, how will the client profile and average client assets change? And the second question is about your trading velocity and trading volume. It declined the trading with velocity declined to a record low in 4th quarter, and it is quite understandable that the Hong Kong trading velocity declined due to the weak market. However, U. S.

Speaker 6

Markets actually performed quite well in the Q4, but your U. S. Trading volume also declined. So how should we think about the connection between the market performance and your trading velocity? Do we see a notable rebound of your trading velocity in the Q1?

Speaker 2

Thank you. I will take your second question first and leave the first question to my colleague, Daniel. In terms of trading velocity, you are right. The trading velocity is down in Hong Kong and the U. S.

Speaker 2

In the Q4. Despite the U. S. Stock performed very well in the Q4, but it remains a very strong continuous uptrend for the whole quarters. So most of our clients actually use a buy and hold strategy to enjoy the rallies.

Speaker 2

And the implied volatility in the U. S. Markets in the Q4 actually went down compared with 3rd quarters. So the trading velocities decreased. Actually, based on our humble observations, is in line with a lot of other U.

Speaker 2

S. Discount brokers operating metrics as well. Then in the Q1 this year, so far, we have seen a very healthy pickup, not only in the U. S, but also in Hong Kong in terms of the trading volume and also the trading velocity. Thank you.

Speaker 1

Thank you, Emma. This is Daniel. And I will take your question on the client quality in international markets. Actually, we have seen an improvement in average AUM not only in Singapore, but also in our other international markets, including U. S, Australia and Japan, mostly because unlike some of our other peers, I think Futu really cares about quality growth.

Speaker 1

And net inflow of AUM is a key KPI, very important KPI for all of our marketing teams across different international regions. And in the Q4, we have seen very strong AUM inflows despite weak market sentiments. And in the 1st 2 months this year, as we've mentioned in his opening remarks, we have a higher net asset inflow in the 1st 2 months of this year than the entire Q4 combined. And actually over 1 third of that net asset inflow comes from international markets. So we'll expect continued upward trajectory in our client assets across international markets.

Speaker 1

And for Hong Kong, in the past couple of quarters, we continue to attract older clients, especially with our offline store. And we have seen that these clients typically have higher average assets, but because of the large face effect, these new clients didn't change the overall client profile much in Hong Kong. Thank you.

Speaker 6

Thank you. This is really encouraging.

Operator

Thank you. We'll now take our next question. This is from the line of Leon Keay from Daiwa. Please go ahead.

Speaker 4

Thanks for taking my questions. This is Liang Qi. I want to ask 2 questions today. Firstly, it's on our Hong Kong marketing and client acquisition strategy. Just now management shared a lot of details on Singapore, but I'm interested in Hong Kong now.

Speaker 4

Given we have an increasing number of client base, paying client base now, would management feel that going forward, it will be increasingly more difficult for us to acquire new customers? Are we considering gradually shifting our focus from the number of customers into average AUM or the quality of our customers. We do appreciate the new customer guidance that management talked about just now that Hong Kong new customers guidance in 2024 would be similar to 2023? Second question is on self clearing in U. S.

Speaker 4

Stocks. May I confirm that all of our trades in U. S. Has already been self cleared? In addition to the positive impact on our net interest income, do we see any improvements in terms of our trading execution efficiencies by using self clearing.

Speaker 4

Wondering if we can make any comparisons with our competitors in the U. S. Such as Interactive Brokers, etcetera. Thank you very much.

Speaker 2

Thank you, Liu. I let Lee to take the first question and I will answer the second one.

Speaker 1

The Hong Kong market is our home base. And in 2023, we continue to maintain very high penetration among the younger clients and we also steadily improve our penetration into clients from other age groups. As of the end of Q4, our paying client penetration among the adults aged 35 to 55 in Hong Kong was over 10%. And in Hong Kong, our goal is to achieve high quality growth. And we focus on acquiring high quality clients and also focus on attracting net asset inflow from existing clients.

Speaker 1

That's why during Q4 and also in the past where market sentiments were weak, we continue to see very robust net asset inflow from Hong Kong. And going forward, we'll leverage our comprehensive product offerings and have different operational strategies for clients with different asset amount and different investment needs and we'll very closely track the net asset inflow trend in Hong Kong. Thank you.

Speaker 2

For the second question, you're right. We have already largely complete the U. S. Self clearing so far. And I think actually the positive contributions from this migration will continue, thanks to the increased client assets, cohort and also the contribution from the new markets such as Japan and Malaysia.

Speaker 2

And in terms of the operating efficiency, definitely after the self clearing capabilities, our service downtime versus before has been meaningfully decreased. And also the trading execution in terms of the reporting, etcetera, will be more smooth. Thank you. Thank you very much.

Operator

Thank you. We will now take our next question. Your next question is from the line of Peter Zhang from JPMorgan. Please go ahead.

Speaker 7

My first question is about the interest income. We noticed that interest income have been decreased sequentially in Q1. We wish to understand what's the Q4 trend for clients, AdelCash and Foothills deposit rates. I also wish to understand what's the trend in Q1 for clients at the cash balance. My second question is about operating expense.

Speaker 7

I wish you understand what's Foothills' plan for the headcount increase in 2024? And what's management's guidance for Futu's operating expense increase or say cost of income ratio trend? Thank you.

Speaker 2

Thank you, Peter. I will take these two questions. For idle cash, roughly idle cash accounts for 10% to 15% of our total client assets in the past one of in the past quarter and also the similar situations happened in the Q1 so far. And the decrease of the interest revenue in the Q4, as I mentioned in the opening remarks, is mainly due to the decrease of the average balance decrease for the security borrowing and the lending despite if you see the balance sheet date, the margin and the security lending balance was higher than that in the Q3. Then for the for your second half questions, in terms of headcounts, we are looking for mid to high single digit headcount growth.

Speaker 2

Mainly, we'll be deployed for our international market expansion and further in house our R and D capabilities. Unfortunately, we do not have a cost income ratio guidance. Given the nature of our business, our revenue is very volatile. It's very difficult to predict due to the market volatility. So we were more focusing on the people side, given this is one of the largest cost components while overall cost structure.

Speaker 2

Thank you. Thank you.

Operator

Thank you. And this does conclude the question and answer session. So at this time, I would like to hand the conference back to Daniel Yuan for closing remarks. Thank you.

Speaker 1

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. Thank you, and goodbye.

Operator

Thank you. This does conclude today's conference call. Thank you for participating and you may now disconnect.

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