Futu - Earnings Call - Q1 2020

Transcript

Operator (participant)

Hello, ladies and gentlemen. Welcome to Futu Holdings' first quarter 2020 conference call. At this time, all participants are in a listen-only mode. After the management's prepared remarks, there will be a Q&A session. Today's conference call is being recorded. 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, Mr. Daniel Yuan, Chief of Staff and Head of IR at Futu. Please go ahead, sir.

Daniel Yuan (Head of Investor Relations)

Thank you, Operator. Thank you for joining us today to discuss our first quarter 2020 results. Joining me on the call today are Mr. Leaf Li, our 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 risks 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 statement. For more information about the potential risks and uncertainties, please refer to the company's filings with the U.S. Securities and Exchange Commission, including its registration statement. I will now turn the call over to Leaf Li.

Leaf will make his comments in Chinese, and I will translate.

Leaf Hua Li (Chairman and CEO)

大家好，感谢大家抽空参加富途控股2020年第一季度业绩电话会。今年一季度，富途的各项经营指标均取得了显著性的增长。

Daniel Yuan (Head of Investor Relations)

Hello everyone, thank you for joining us today. We're pleased to announce that we generated remarkable growth across our operating metrics in the first quarter of 2020.

Leaf Hua Li (Chairman and CEO)

我们的竞争有资产客户数达40,154人，是2019年全年竞争有资产客户数的60%。截至一季度末，富途有资产客户数达23.9万，同比增长60%，创下富途自2019年一季度以来的最高同比增速。其中富途的香港业务依然维持了高增速，一季度香港有资产客户数再次实现同比近翻倍的增长。自富途登陆香港市场以来，香港有资产客户数一直实现同比超90%的增长。我们相信香港市场拥有广阔的市场空间与巨大的增长潜力。我们有信心通过丰富的产品、极致的用户体验来进一步驱动香港本地业务的发展。

Daniel Yuan (Head of Investor Relations)

We added 40,154 paying clients on a net basis in the first quarter, which accounts for over 60% of our total net paying client addition in 2019. This brought our total number of paying clients to 239,000, up 60% year on year, which marks our highest paying client growth rate since the first quarter of 2019. Notably, our Hong Kong business again maintained a significant growth rate. Total number of Hong Kong paying clients almost doubled from the last March quarter, adding to a streak of over 90% year on year growth rate since we launched our Hong Kong business. We believe that the Hong Kong market offers tremendous opportunities, and we are confident to drive further business growth there with our diversified products and excellent user experience.

Leaf Hua Li (Chairman and CEO)

除了有资产客户数，我们的另外两项核心指标，客户留存率和总客户资产，同样表现突出。一季度，我们的客户留存率继续高达98.1%。尽管3月份股市大幅下挫，但一季度末，客户资产规模依然攀升至988亿港元，同比增长高达59%。

Daniel Yuan (Head of Investor Relations)

Besides total paying clients, our two other KPIs, namely client retention and total client assets, also performed well. In the first quarter, we maintained a high paying client quarterly retention rate of 98.1%. Despite the equities market plunge in March, we were still able to increase our total client assets by 59% year on year to HKD 99 billion as of the end of first quarter.

Leaf Hua Li (Chairman and CEO)

受客户规模迅速扩大及市场行情的推动，一季度总交易额达5,951亿港元，同比增长166%。3月份我们正式上线了香港股指期货，之后的几个季度我们还将继续扩充我们的交易产品品类。

Daniel Yuan (Head of Investor Relations)

As our paying client base rapidly expanded and as the huge market swing piqued trading interest, total trading volume reached HKD 595 billion in the first quarter, representing a 166% year on year increase. In March, we officially launched Hong Kong index futures trading. We will continue to expand our trading product offerings in the quarters to come.

Leaf Hua Li (Chairman and CEO)

财富管理业务方面，我们在一季度成功接入了贝莱德、Pinnacle、百瑞、霸凌、联博等多家全球顶级基金管理公司的产品，大幅丰富了平台的股票基金和债券基金的品类。4月初，贝莱德在富途平台上开展了一场视频直播，为用户分享了医疗健康行业的投资机会。这是贝莱德首次在香港线上基金分销渠道做直播路演，也进一步反映出富途财富管理业务的影响力日益增强。未来我们将继续深入与世界顶尖基金公司的合作，为用户提供优质丰富的投教内容。

Daniel Yuan (Head of Investor Relations)

As for our wealth management business, we onboarded mutual funds from a number of leading fund houses in the first quarter, including BlackRock, Pinnacle, PineBridge, Barings, AllianceBernstein, etc., which greatly enriched our equity and fixed income fund offerings. In early April, BlackRock conducted a live streaming event on our platform, discussing the investment opportunity in the healthcare sector. BlackRock mentioned that this is their first time doing a live broadcast session with an online distributor, which demonstrates the increasing influence of our wealth management business in the region. We will continue to explore ways to deepen our collaboration with leading fund houses to bring high-caliber investor education content to our users.

Leaf Hua Li (Chairman and CEO)

近季度，富途公募基金日均资产规模达69亿港元，环比增长70%。期末客户资产总额达63亿港元，环比基本持平。日均与季末数据的差异主要是由于在3月份股市大幅波动的情况下，大量客户赎回基金来抄底股市。财富管理业务的资产规模在二季度已经有了快速反弹，我们对该业务的增长前景充满信心。

Daniel Yuan (Head of Investor Relations)

Daily average client assets in mutual funds were HKD 6.9 billion in the first quarter of 2020, up 70% sequentially. Total client assets in mutual funds were HKD 6.3 billion as of quarter end, which was flat on a sequential basis. The discrepancy between daily average and quarter end numbers was mainly due to a surge in mutual fund redemption for stock trading during the March stock market plunge. We have witnessed a quick rebound in this segment in the second quarter so far, and we are confident about the growth prospects of our mutual fund distribution business.

Leaf Hua Li (Chairman and CEO)

一季度新冠疫情的爆发，使依赖于面对面沟通的企业服务受到一定程度的负面影响。我们一季度新增了12家ESOP客户，累计ESOP客户总数达到91家。此外，我们在第一季度还为4家企业提供了美股IPO分销服务。

Daniel Yuan (Head of Investor Relations)

With respect to our enterprise service, as it relies on face-to-face meetings, it was negatively impacted in the first quarter by the social distancing measures due to the COVID-19 pandemic. Nevertheless, we entered into 12 new ESOP service contracts, which brought our total number of ESOP clients to 91. In addition, we provided subscription services to four U.S. IPOs during the first quarter.

Leaf Hua Li (Chairman and CEO)

根据香港证监会统计，在香港648家券商中，按市场交易量计算排名在第65位及以下的小型券商，在2020年第一季度的市场份额合计约为7%。这一数字在2000年第一季度超过35%。以此可见，证券经纪业务经营杠杆明显。随着行业整合的不断深入，市场头部券商的市场份额也在逐步扩大。作为领先的线上经济和财富管理平台，富途将紧紧抓住这一行业整合趋势所带来的机遇，并在不断普及的线上交易浪潮中脱颖而出。

Daniel Yuan (Head of Investor Relations)

Moving on to the industry. According to SFC statistics, the smaller brokerages, whose market shares in terms of stock turnover ranked number 65 or lower among the total 648 brokerages, have a combined market share of about 7% in the first quarter of 2020, compared with over 35% in the first quarter of 2000. Since the brokerage business typically demonstrates economies of scale, we are not surprised that the larger players gained market share over the years amid industry consolidation. As a leading online brokerage and wealth management platform, Futu will seize the opportunities brought about by this increasing industry consolidation, especially given the structural trend of users migrating from offline trading platforms to online financial service providers.

Leaf Hua Li (Chairman and CEO)

接下来邀请我们的首席财务官 Arthur 来介绍我们的财务表现。

Daniel Yuan (Head of Investor Relations)

Next, I'd like to invite our CFO Arthur to discuss our financial performance.

Arthur Yu Chen (CFO)

Thanks, Leaf. In the first quarter, we delivered outstanding financial results on top of the remarkable operating metrics. We recorded a total revenue of HKD 491 million, up 108% year over year and 58% Q on Q. Non-GAAP adjusted net income was HKD 161 million, up 226% year over year and Q on Q. Let me walk you through some of our key financial details for the first quarter. Brokerage commission and handling charge income was HKD 299 million, an increase of 161% from the same period in 2019 and up 97% from the last quarter. The growth was primarily due to 166% year over year growth in our total trading volume. Our blended commission rate this quarter was 5 basis points, flat year over year, but down from 6.7 basis points in the last quarter.

This sequential decrease was primarily due to the increase in trading volume per DART for clients that use the flat rate pricing package option we offer for the U.S. stock trading. On an apples-to-apples basis, our commission rate remained quite stable. Brokerage commission and handling charge income account for 61% of our revenue in the quarter. Interest income was HKD 145 million, an increase of 34% year over year and 13% Q on Q. Margin financing interest income increased on the back of higher daily average margin financing balance. IPO financing interest income surged thanks to the active Hong Kong IPO market. However, interest income from the bank deposit decreased by 10% since the Federal Reserve cut the benchmark interest rate to nearly zero. Interest income contributed about 29% of our total revenue. Other income was HKD 47 million.

The 238% year over year growth was primarily due to higher IPO financing service charge income and higher fund distribution service income. Other income contributed about 10% of our total revenue. On the cost side, total cost was HKD 118 million, an increase of 92% year over year and 36% Q on Q. Brokerage commission and handling charge expenses grew 140% to HKD 50 million, which was mostly in line with our trading volume growth. Interest expenses increased by 62% to HKD 33 million, primarily due to higher margin financing interest expenses and also IPO financing interest expenses. Processing and service costs increased by 74% to HKD 35 million. The rise was primarily due to an increase in the market information and the data fee, as well as an increase in the number of flow controllers.

As trading volume skyrocketed in the quarter, we added another 100 flow controllers so that we can execute a large amount of Hong Kong stock trade simultaneously. Total gross profit increased to 113% year over year to HKD 373 million. Gross margin was 76% versus 74% in the same period last year. Total operating expenses were HKD 196 million, an increase of 74% year over year and 8% Q on Q. R&D expenses were HKD 84 million, an increase of 57% from the last year and 13% from last quarter. The year over year rise was primarily due to the increase in the R&D headcounts in 2019, as we continue to enrich product offerings. Selling and marketing expenses were HKD 65 million, up 105% year over year and 27% Q on Q.

Our higher branding and marketing spending in the quarter resulted in a higher quarterly paying client addition of over 40,000. G&A expenses were HKD 47 million, an increase of 71% on a yearly basis and a decrease of 15% on a sequential basis. The year over year rise was primarily due to the increase in the headcount for the G&A personnel, and the Q on Q decrease was mostly due to lower professional service fee. Net income increased by 240% year over year to HKD 155 million. The rise was primarily due to exponential top-line growth and a significant operating leverage benefit. The market volatility in the first quarter and increasing industry consolidation present a unique opportunity for us to scale our operation. We will continue to be mindful of the opportunities to grow our business and, at the same time, remain vigilant on our expenses.

Regarding the pandemic, so far, the key effects on our financials include higher trading revenue from increased trading activities, higher net interest margins from the margin financing business, and lower interest income from bank deposits resulting from lower benchmark interest rates. To date, we have not identified any material contingency or impairments as a result of this pandemic. Having said that, while the pandemic in mainland China and Hong Kong has shown signs of stabilization, the ongoing impact on the global economy and our future business is harder to predict at this moment. We will continue to closely monitor our business operation. That concludes our prepared remarks, and we would now like to open the call to questions. Operator, please go ahead.

Operator (participant)

Ladies and gentlemen, we will now begin the question and answer session. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the pound or hash key. Once again, if you wish to ask a question, you may press star one on your telephone keypad. Your first question comes from the line of Wei Cheng Tang. Please ask your question.

Hi, hi, Leaf, Arthur, and Daniel. Yeah, first, congratulations on the very robust first quarter results. I got two questions. One is about a turnover. As you have mentioned, I think that the market share of Futu has grown tremendously in the first quarter, as we see. It's basically 100 percentage points growth Q on Q, outpacing the Hong Kong exchange over turnover. Can you share more on how you dissect the growth of market share? On one hand, we see the paying client growth is quite strong at 40,000. Also, the client turnover has also peaked. It actually, I think it's the highest over the past nine quarters, as we have seen. Is there any particular drivers? We know the market volatility is quite high that drives the turnover, but is there any other particulars that will drive the overall volume increase?

Also, regarding the paying client growth, how much of that is coming from Hong Kong local investors versus the mainland China? How do you think, in the second quarter or rest of year, how the trend of paying client growth and their turnover will be like? The second question is regarding the cost. We see in the first quarter, the operating leverage is quite significant, leading to a much higher bottom line growth. Regarding both the R&D and the marketing expense, is there any budgeting for 2020, particularly for marketing? We see the per client acquisition cost has come down quite a lot.

I'm not sure it's because of the seasonality or it's just the peaking of single quarter paying client growth that led to a decline of per client acquisition cost and how you see the per client acquisition cost will be like for the rest of the year. Thank you.

Arthur Yu Chen (CFO)

Okay. Thank you, Wei Cheng. This is Arthur. I will answer your first questions regarding the market shares and also partial of your second questions regarding the cost. I leave the trend of the paying clients in the first quarter and also the remaining years to my colleagues Robin later on. In terms of market shares, you are right. We have gained a market share in Hong Kong, particularly in the first quarter. Compared with last year, last Q4, our estimation is, on average, our market share has increased by 20% in Hong Kong. At the end of last year, our market share in Hong Kong was around 1.03%. And this year, on average, in the first quarters, our market share, the highest, is close to 1.4%.

I think the spike of the trading volumes is heavily related to the overall market volatilities, particularly in February and also in March. On the cost side, we have some guidance to the market in the fourth quarter earnings call last time. We expect the number of our headcounts this year will be roughly in the range of 20%, something around. In terms of the marketing expenses, we target for the acquisition cost per each new client will be 10% lower than the average numbers of last year's. I think so far, in the first quarters, our progress was very smooth. We will not give a fixed absolute amount on the marketing expenses. We'll be more depending on our client acquisition strategies.

Given that our this year's unit economics still make valid sense, I think for us, we will be more aggressive on the marketing spending in order to further enhance our market share and also the number of our paying clients. I will leave more comments to Robin for the number of paying clients trend he observed in the second quarter and also our estimations in the second half of this year. Thank you.

Robin Li Xu (SVP)

有一个关于付费客户增长的一个问题留给 Robin。那在今年的一季度，付途的总的付费客户达到了很快的一个增长。那一季度的竞争付费客户中有多少来自于香港本地，有多少来自于中国大陆呢？那在二季度以及全年来看，付费客户的走势会怎样？

你好，Wei Cheng。我们今年整个的一个增长主要是来自于香港这边的一个强劲的一个增长。那我们刚才看到 Leaf 也有介绍到香港这边的一个竞争同比有增长超过 97% 的这样的一个数量。那当然之前我们并没有对外公布过我们香港和大陆客户这样的一个绝对数。那所以这里我们就先同步一个相对值，就是香港那边的一个 97% 的一个增长。

Okay. 那全年呢？全年我们现在有。

Daniel Yuan (Head of Investor Relations)

be a big problem to surpass the 80,000 forecast we previously gave to investors.

A large part of our paying client growth can be attributable to the strong growth momentum of our Hong Kong local business. In the first quarter, as Leaf mentioned in his opening remarks, our number of Hong Kong paying clients grew 97% year over year, and that growth rate has consistently topped 90%. For the rest of the year, in our fourth quarter 2019 earnings results, we gave a guidance of 90,000 net paying client addition in 2020. So far, observing from the run rate, we're pretty confident about succeeding this previous guidance that we gave out, partly because I think we're ramping up our marketing in Hong Kong local market. Also, we have seen very strong growth momentum from word-of-mouth paying client referrals.

Yeah. Thank you, Robin and Arthur. Actually, I just have a very small follow-up question regarding the tax rate. We see the tax rate in the first quarter is around 10%, the effective tax rate. Is that a normalized or what we can expect for the rest of the year or first quarter is just like there are still some seasonalities on recognizing the tax?

Arthur Yu Chen (CFO)

Sure, Wei Cheng. We expect that this year's full year effective tax rate will be in the range of 10%-12%, mainly due to our offshore tax claim benefit in Hong Kong and also our tax treatment, preferential treatment in the mainland. I think this effective tax rate will be valid in the next one or two years as well. Thank you.

Yeah. Great. Thanks, Arthur.

Operator (participant)

Once again, if you wish to ask a question, please press star and the number one on your telephone keypad. There are no further questions at this time. I'd now like to hand the conference back to Mr. Daniel Yuan for the closing remarks.

Daniel Yuan (Head of Investor Relations)

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 (participant)

Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may now all disconnect.