Futu - Q2 2023

Transcript

Operator (participant)

Hello, ladies and gentlemen. Welcome to Futu 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&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, Daniel Yuan, Chief of Staff to CEO and Head of IR at Futu. Please go ahead, sir.

Daniel Yuan (Chief of Staff to CEO and Head of Investor Relations)

Thanks, operator, and thank you for joining us today to discuss our second quarter 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 risk and uncertainties. We caution you that a number of important factors could cause actual results to differ materially from those containing 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.

Leaf Li (Chairman and CEO)

Thank you, everyone, for joining today's conference call. In Q2, we added more than 57,000 paying clients, bringing the total number of paying clients to nearly 1,600,000. Each market saw strong organic customer growth, driving a 41% quarter-on-quarter increase in paying clients. In Q2, the Hong Kong market contributed about one-third of the new paying clients, as effective offline marketing campaigns attracted older clients who preferred in-person instructions on how to open trading accounts and navigate our user interface. In Singapore, we also saw strong paying client growth, fueled by the outperformance of the US equity market and the attractiveness of money market funds. In the US, we acquired higher-quality clients by refining our marketing channels and client incentives. Despite overall market softness, our group's quarterly paying client retention rate remained above 98%.

Daniel Yuan (Chief of Staff to CEO and Head of Investor Relations)

Thank you all for joining today. I'm pleased to announce that we acquired over 57,000 paying clients in the second quarter, bringing the total number of our paying clients to nearly 1.6 million. Robust organic growth across all overseas markets drove a 41% sequential acceleration in client acquisition. In the second quarter, Hong Kong market contributed approximately one-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 the Singapore market, we also witnessed strong paying client growth on the back of US equity market outperformance and the enticing yield of money market funds. In the US, 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 remained above 98%.

Leaf Li (Chairman and CEO)

In Q2, we expanded our product offerings and enhanced features across markets. To help clients better execute their trading strategies, we introduced bracket orders for U.S. and Hong Kong stock options and futures, as well as algorithmic orders for all clients in Hong Kong and Singapore. In Singapore and Australia, we began offering after-hours trading for select U.S. stocks and ETFs, making stock trading more flexible and convenient.

Daniel Yuan (Chief of Staff to CEO and Head of Investor Relations)

In the second quarter, we continued to roll out new products and features across markets. To help clients better execute their trading strategy, we launched bracket orders for U.S. and Hong Kong stock options and futures, and 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.S. stock trading.

[Foreign language]an 8% year-over-year increase and flat 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. Singapore market delivered strong asset growth during the second quarter, with a 21% and 12% quarter-over-quarter increase in total and average client assets, respectively. This was the fourth consecutive quarter where the Singapore market achieved double digits sequential growth in total client assets.

Margin financing and securities lending balance declined marginally by 1.4% sequentially, as some clients unwound their securities lending position. Total trading volume declined 22% quarter-over-quarter to HKD 1 trillion. Hong Kong stock trading volume was HKD 259 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 HKD 676 billion, as trading turnover of technology stocks and leverage and inverse ETFs contracted.

Leaf Li (Chairman and CEO)

Wealth management total customer assets were HKD 43 billion, up 99% year-over-year, up 17% quarter-over-quarter. The yield on money market funds remained at a relatively high level this quarter, driving strong growth in customer assets. In Hong Kong, we continued to enrich the types of structured products, launching fund-linked notes and call spread notes to meet the different risk-return targets of high-net-worth customers. As of the end of the quarter, more than 18% of Singapore customers held wealth management products, a significant increase from 2% in the same period last year. Singapore customers' average wealth management product holdings doubled from the same period last year. In addition to the retail wealth management business, we also launched discretionary accounts in Singapore to help fund managers directly manage customer assets.

Daniel Yuan (Chief of Staff to CEO and Head of Investor Relations)

Total client assets in wealth management were HKD 43 billion, up 99% year-over-year, and 17% quarter-over-quarter. The sustained high yields of money market funds were the key driver behind this robust asset growth. In Hong Kong, we continue to expand structured product offerings by onboarding fund-linked notes and call spread notes 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 and 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.

Leaf Li (Chairman and CEO)

We have 374 IPO distribution and IR clients as of quarter end, up 36% year-over-year. Of all 31 companies listed in Hong Kong in the first half of 2023, 20 of them have used one or more of our enterprise product offerings. In the quarter, we acted as joint book runners of several high-profile Hong Kong IPOs, including those of YSB and EBM.

[Foreign language]Last but not least, I am pleased to announce that our wholly owned Japan subsidiary, Moomoo Securities Japan Co., Ltd., is officially approved by the Japanese regulators to conduct its brokerage and wealth management business via 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 penchant for U.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.

Arthur Chen (CFO)

Thanks, Lee and Daniel. Before going through our financial performance, I'd like to give you an update on our latest $500 billion share repurchase program, announced on March 11, 2022. At the end of the first half, we have repurchased an aggregate of 11 million ADS, with approximately $360 million total repurchase amount in open market transaction. It constitutes about 70% of the maximum purchase amount approved 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. Total revenues for the quarter were HKD 2.5 billion, up 42% from HKD 1.7 billion in the second quarter of 2022.

Brokerage commission and handling charge income was HKD 953 million, a decrease of 80% year-over-year, and 12% quarter-over-quarter. The quarter-over-quarter decrease was mainly due to the decline in the total trading volume, partially offset by the increase in the blended commission rate from 8.8-9.9 basis points. Interest income was HKD 1.4 billion, an increase of 127% year-over-year, and 9% quarter-over-quarter. The increase was driven by higher interest income from cash deposits and a higher security lending income. Other income was HKD 127 million, up 37% year-over-year, and it maintained mostly flat quarter-over-quarter. 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 fee were largely offset by lower currency exchange income, underwriting fee income, and the market information and the data income. Total costs were HKD 375 million, an increase of 80% from HKD 208 million in the second quarter of 2022. Brokerage commission and handling charge expenses was HKD 55 million, down 37% year-over-year, and 23% Q-over-Q. The decrease was attributable to lower trading volume and the cost saving from our U.S. self-clearing business. Interest expenses were HKD 220 million, up 729% year-over-year, and 680% Q-over-Q. The increase was mainly driven by higher expenses associated with our securities borrowing and the lending business.

Higher funding costs from margin financing business also contribute to Q-over-Q increase. Processing and servicing costs were HKD 99 million, 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 HKD 2.1 billion, an increase of 37% from HKD 1.5 billion in the second quarter of 2022. Gross margin was 85%, as compared to 88% in the second quarter of 2022. Operating expenses were 18% year-over-year, and 6% Q-over-Q, to HKD 852 million. R&D expenses were HKD 363 million, up 25% year-over-year, and 2% Q-over-Q.

The increase was mainly due to an increase in R&D head count, as we continue to upgrade our infrastructure, support new product offerings, and invest in product localization in international markets. Selling and marketing expenses was HKD 175 million, 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 acquisition. G&A expenses was HKD 314 million, up 49% year-over-year, and 2% Q-over-Q. The increase was mainly due to increase in head count 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 it decreased by 6% Q-over-Q to HKD 1.1 billion.

Net income margin expanded 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'd now like to open the call to questions. Operator, please go ahead. Thank you.

Operator (participant)

Thank you. To ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one and one again. That's star one and one, if you wish to ask a question. Please stand by while we compile the Q&A roster. We will now take the first question. One moment, please. From the line of Chiyao Huang from MS. Please go ahead.

Chiyao Huang (Analyst)

Let me briefly translate. So the two questions is regarding the trading volume, and we're seeing the trading volume slip further than the overall market in both Hong Kong and the US in the second quarter for Futu. 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. Thank you, Chiyao. I will take two of your questions. Number one, regarding the trading volume, it is generally just in line with the overall market conditions. Particularly, you know, in the second quarter, we see the market actually is very challenging across the board, regardless in the US or in Hong Kong.

Arthur Chen (CFO)

What we observed 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 temporary, as we see the trading velocity rebound quarter to date in the second quarter. Then in terms of the trading commissions the major reason, as we elaborate several times before, is more related to the client's trading behavior in the U.S. stock. As in the second quarter, we see more clients trading these low value stocks in the U.S. markets which led to our blended commission rate become higher versus the second quarter.

Thank you.

Operator (participant)

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

Yao Fan (Analyst)

[Foreign language]

Arthur Chen (CFO)

Thank you, Fan Yu. I will answer your second question first, and will leave the first question to Lee. In terms of the net asset inflows in the second quarter, we see a very healthy rebound in the second quarter versus the first quarter, given that we got some negative headline news in the second quarter, which caused certain clients uncomfortable in terms of their you know assets parking in our accounts. So this impact has been fully removed in the second quarters. And to break down among the different regions, Hong Kong actually contributed the most of the asset inflows, which followed by by Singapore afterwards. I leave the second question to Lee.

Daniel Yuan (Chief of Staff to CEO and Head of Investor Relations)

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. The proportion of wealth management assets actually continued 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. Clients' cash balance accounted for low teens of total client asset balance. To answer your question regarding the revenue breakdown between Hong Kong and U.S. stocks, Hong Kong stocks usually contributed about 30% of the trading volume. U.S. stocks contributed 70% of the trading volume. The blended commission rate for U.S. stocks is slightly higher, so about 75% of our trading commission actually came from U.S. stock trading. Thank you.

Yao Fan (Analyst)

Okay, thank you very much.

Operator (participant)

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

Cindy Wang (Director, Equity Research)

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 strong sequentially. However, the CAC actually went down. So is that going to be sustainable in the second half of 2023? And the second question is related to the Japan market. So congrats to get the license approval from Japan government. So since we have down the beta version for the moomoo app in Japan, 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 help you to grow your new client members in the second half of this year? Thank you.

Arthur Chen (CFO)

Thank you, Cindy. I will take your first question, and I think Libo will be very happy to share, share more colors and his thoughts about the Japan markets. In the second quarter, the landed commission landed client acquisition cost was around 3,000 HKD per client. You know, the CAC in Hong Kong was slightly higher than the average, while the, while that in the US and in Singapore was lower than the average. I think in the second quarter, we continue to optimize different channels, particularly, you know, some offline channel promotions to get a very good result. So our efforts on the acquisition efficiency of target client groups has got been rewa- a reward.

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, you know, uncertainties still remain across the different markets. But, having said that, our view on average CAC will be slightly more optimistic than our view before. 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 Libo.

Daniel Yuan (Chief of Staff to CEO and Head of Investor Relations)

We have been operating as a pure information and 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. Our data shows that moomoo's user community in Japan is highly, highly active, with a 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 moomoo in Japan, we believe moomoo has already brought unique value to Japanese users. 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.S. and Japanese stocks, fundamental and technical analysis.

And secondly, most securities brokers in Japan have a 15-20-minute delay in market data, and real-time quotes are provided with a cost. However, Moomoo provides free real-time quotes, not only for Japanese and U.S. stocks, but also for foreign exchange, options, and future state of global capital markets. And furthermore, Moomoo is currently the only online platform in Japan offering an online user community. We've introduced numerous KOLs and conducted live broadcasts 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 or types, trading duration, and various analytical tools, which can also be replicated in Japan in the near future.

Regarding our future development plans, after we receive the approval from the Japanese regulators, we are actively preparing and aim to launch the trading functions in the fourth quarter of this year to provide Japanese investors with a comprehensive and smooth investment experience. Thank you.

Operator (participant)

Thank you. One moment, please. We will now take the next question. Coming from the line of Leon Qi from Daiwa. Please go ahead.

Leon Qi (Analyst)

Oh, hi. Thanks for taking my question.

This is Leon Qi from Daiwa. Thanks for taking my questions. My first question is to, regarding Japan market. Would management state 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? More specifically, do we have any expectations on CAC and payback period, in Japan? And, my second question is on Hong Kong. We are very glad to see that, recently, Futu has opened an offline, experience center in Hong Kong, and many, many people are very excited about the product offerings. Just want to ask management that, what kind of, user operating metrics or financial metrics are we expecting from the offline experience shops?

Do we plan to open more offline shops? Thank you.

Arthur Chen (CFO)

Okay, thank you. Thank you, Leon. I think the first question can be answered by my colleague, Daniel. And, regarding our physical store in Hong Kong, I think, you know, Leaf is very happy to share, you know, more colors and about his thoughts.

Daniel Yuan (Chief of Staff to CEO and Head of Investor Relations)

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 five internet brokers, including Rakuten and SBI, now account for the majority of the market share in terms of brokerage trading volume. They have each accumulated over 1 million 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.

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. 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.S. stock trading for example. It is now industry standards to charge zero commissions for U.S. stock trading in the U.S., while everyone still charges, at least all of the major online brokers in 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. Thank you.

Leaf Li (Chairman and CEO)

[Foreign language]

Daniel Yuan (Chief of Staff to CEO and Head of Investor Relations)

Since its opening on July 31st, over 1,000 people have visited our experience store, and many of whom are middle-aged customers who are not familiar with the online account opening process. 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. The experience store has helped us establish connection with these clients and has become an important channel to enhance Futu's 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 Futu's product offerings. 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.

So from a CAC perspective, experience stores can actually help us reach previously under-penetrated 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. If this experience store continues to record very good progress in terms of client acquisition, we expect to have more experience stores in Hong Kong. Thank you.

Operator (participant)

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

Daniel Yuan (Chief of Staff to CEO and Head of Investor Relations)

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 (participant)

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