Futu - Earnings Call - Q4 2020
March 16, 2021
Transcript
Operator (participant)
Hello, ladies and gentlemen. Welcome to Futu Holdings Fourth Quarter and Full Year 2020 Conference Call. At this time, all participants are on listen-only mode. After management's prepared remarks, there will be question and answer sessions. 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 host for today's conference call, Mr. Daniel Yuan, Chief of Staff and Head of IR at Futu. Please go ahead, sir.
Daniel Yuan (Chief of Staff to CEO and Head of Strategy and Investor Relations)
Thanks, Operator. Thank you for joining us today to discuss our fourth quarter and full year 2020 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 inherent 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 statements. For more information about the potential risks and uncertainties, please refer to the company's filings with the SEC, including its registration statement. With that, I will now turn the call over to Leaf.
Li will make his comments in Chinese, and I will translate.
Leaf Li (Founder, Chairman, CEO & Chairman of the Technology Committee)
[Foreign language]
Daniel Yuan (Chief of Staff to CEO and Head of Strategy and Investor Relations)
Hello everyone, thank you for joining the earnings call today. We are excited to announce that the robust growth momentum of our operating and financial metrics continued into the fourth quarter of 2020, and we ended the year on a high note.
Leaf Li (Founder, Chairman, CEO & Chairman of the Technology Committee)
[Foreign language]
Daniel Yuan (Chief of Staff to CEO and Head of Strategy and Investor Relations)
We added over 98,000 paying clients on a net basis. Over half a million were from Hong Kong and overseas. We are pleased to see that our relentless commitment to user experience continued to pay off, as we again brought in over 50% of our new paying clients in the quarter through organic growth. As of year-end, paying clients reached over 516,000, representing 160.5% year-over-year growth. We exceeded our full year paying client guidance by adding approximately 320,000 paying clients in 2020. At the same time, we continue to deliver a high paying client quarterly retention rate of 97.9% in the quarter. Looking into 2021, we are guiding for 700,000 net new paying clients, translating to 135% year-over-year growth in total paying clients.
Leaf Li (Founder, Chairman, CEO & Chairman of the Technology Committee)
[Foreign language]
Daniel Yuan (Chief of Staff to CEO and Head of Strategy and Investor Relations)
By the end of fourth quarter, average client asset balance was 552,000, a record high since our IPO, bringing our total client assets to HKD 285.2 billion, representing 227.3% growth on a year-over-year basis and 41.9% growth on a quarter-over-quarter basis.
Leaf Li (Founder, Chairman, CEO & Chairman of the Technology Committee)
[Foreign language]
Daniel Yuan (Chief of Staff to CEO and Head of Strategy and Investor Relations)
Total trading volume was HKD 1.2 trillion in the quarter, up 438.1% year-over-year and 19.2% quarter-over-quarter. U.S. stock trading was HKD 783.6 billion, or 65% of our total trading volume, underpinned by the robust U.S. equities market performance. In Hong Kong, we continue to aggressively take market share in terms of both paying clients and trading volume. The market share of our Hong Kong trading volume was over 2.6% in the quarter, which more than doubled from the year-ago quarter. In the fourth quarter, we further expanded our trading product offerings by launching CME futures and A50 futures.
Leaf Li (Founder, Chairman, CEO & Chairman of the Technology Committee)
[Foreign language]。
Daniel Yuan (Chief of Staff to CEO and Head of Strategy and Investor Relations)
By year-end, total client assets in MoneyPlus surpassed the HKD 10 billion milestone, up 68.5% year-over-year. We have established partnerships with 39 asset managers around the world, which altogether hosted 39 live streaming on our platform in 2020 to conduct fund publicity and investor education. In the fourth quarter, we saw a growing number of clients capture the market boom by investing in equity funds, among which funds with a focus on the technology sector and the Greater China region gained the most traction. Over 42,000 clients, or 8.1% of our total paying client base, held net wealth management positions as of year-end, offering significant room for further penetration.
Leaf Li (Founder, Chairman, CEO & Chairman of the Technology Committee)
[Foreign language]
Daniel Yuan (Chief of Staff to CEO and Head of Strategy and Investor Relations)
Futu I&E continues to be the go-to enterprise service partner. We had 105 IPO and IR plans as of year-end. In the fourth quarter, 10 IPOs recorded over HKD 10 billion in subscription respectively on our platform, including the U.S. IPOs of Mingchuang Youpin and Lufax, and the Hong Kong IPOs of Pop Mart and JD Health. We also added 33 ESOP clients in the quarter, bringing our total ESOP client number to 159.
Leaf Li (Founder, Chairman, CEO & Chairman of the Technology Committee)
[Foreign language]
Daniel Yuan (Chief of Staff to CEO and Head of Strategy and Investor Relations)
We continue to invest in our technology infrastructure. Despite heightened market volatilities in 2020, we still achieved a full year service availability rate of 99.96%. In January 2021, we further expanded our throttle rate for Hong Kong stock trading from 200-500, thereby allowing us to execute 1,000 concurrent Hong Kong stock orders per second. Technological excellence is deeply entrenched in every aspect of our business, and we will continue to invest in technology to widen our competitive moat.
Leaf Li (Founder, Chairman, CEO & Chairman of the Technology Committee)
[Foreign language]
Daniel Yuan (Chief of Staff to CEO and Head of Strategy and Investor Relations)
For Futu, 2021 is the year of internationalization. We officially launched our Moomoo app in Singapore on March 8th and have since then seen strong growth momentum and received encouraging feedback. We believe that our product and service deliver differentiated value propositions in many more markets outside of mainland China and Hong Kong, and we want to take advantage of the elevated retail stock market participation around the world.
Leaf Li (Founder, Chairman, CEO & Chairman of the Technology Committee)
[Foreign language]
Daniel Yuan (Chief of Staff to CEO and Head of Strategy and Investor Relations)
Next, I'd like to invite our CFO Arthur to discuss our financial performance.
Arthur Chen (CFO)
Thanks, Li and Daniel. Let me walk you through our financial performance. All the numbers are in HKD unless otherwise noted. In the fourth quarter, our total revenue was HKD 1.2 billion, an increase of 282% from HKD 311 million in the fourth quarter of 2019. To break it down, brokerage commission and handling charge income was HKD 718 million, an increase of 374% from HKD 152 million in the fourth quarter of 2019. The rise was mainly due to the 438% year-over-year growth of our total trading volume. Interest income was HKD 337 million, an increase of 163% year-over-year. We generate higher margin financing interest income due to the sharp increase in daily average margin financing balance and higher IPO financing interest income due to a very active Hong Kong IPO market. Other income was HKD 131 million, an increase of 318% from HKD 31 million in the fourth quarter of 2019.
The jump was primarily due to an increase in our IPO subscription service charge income and the currency exchange service income. On the cost side, total costs were HKD 242 million, an increase of 179% from HKD 87 million in the fourth quarter of 2019. Brokerage commission and handling charge expenses were HKD 133 million, an increase of 323% year-over-year. This growth was largely in line with our brokerage commission and handling charge income growth. Interest expenses were HKD 64 million, an increase of 160% year-over-year. The increase was primarily due to higher IPO financing interest expenses. Processing and service costs were HKD 45 million, an increase of 79% year-over-year. The growth was primarily due to an increase in cloud service fees. As a result, total gross profit was HKD 944 million, an increase of 321% from HKD 224 million in the fourth quarter of 2019.
GP margin increased from 72% in the fourth quarter of 2019 to close to 80% in the fourth quarter of 2020 due to higher operating leverage as a result of our larger business scale. Total operating expenses were $364 million, an increase of 100% year-over-year. To break it down, R&D expenses were $162 million, an increase of 118% from $74 million in the fourth quarter of 2019. The increase was primarily due to an increase in R&D headcount to further expand our product offerings. Selling and marketing expenses were $113 million, an increase of 119% from $51 million in the fourth quarter of 2019. The increase was primarily due to higher branding and marketing spending. G&A expenses were $89 million, an increase of 60% from $56 million in the fourth quarter of 2019. The increase was primarily due to the increase in headcount for G&A personnel.
As a result, our net income increased by 11 times to $533 million year-over-year. The increase was primarily due to robust revenue growth and significant operating leverage. At the same quarter, we completed our $216 million U.S.D PIPE offering with our leading global investment firm. The offering was in the form of prepaid warrants as has been reflected in our equity items in our balance sheet. After we further enhanced our capital base, we are able to support a larger margin financing balance, ramp up our marketing efforts in international markets, and further invest into our technology infrastructure. That concludes our prepared remarks. We now like to open the call to questions. Operator, please go ahead.
Operator (participant)
Thank you, Li. 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 keypad and wait for your name to be announced. If you wish to cancel a request, please press pound or hash key. With star followed by one to ask your question. Thank you. We have the first question from the line of Catherine Liu from Morgan Stanley. Please go ahead.
Catherine Liu (VP)
[Foreign language] I will translate for myself first. The question is for Chairman Li. Just wondering in the future three to five years, how do you see Futu different from now? And second question is about just now the guidance given on the paying clients. Just now the guidance for paying clients is around 700,000 addition for 2021. Just wondering, does 700,000 include the clients on Futu Moomoo or it's just on Futu NiuNiu? Thank you very much.
Leaf Li (Founder, Chairman, CEO & Chairman of the Technology Committee)
[Foreign language]
Daniel Yuan (Chief of Staff to CEO and Head of Strategy and Investor Relations)
In three to five years, a little long in comparison to how we plan our business. I think our business will evolve in three aspects. Number one, you'll see Futu as a more international platform. As we mentioned just now, internationalization is a key priority for us this year and in the years to come. Number two, I think we'll further go down our path of constructing a self-reinforcing ecosystem in our platform that provides connectivity to users, investors, KOLs, media, etc. Number three, I think our Futu Money Plus, which is our wealth management business, will contribute a larger asset balance and also revenue to our total business.
Leaf Li (Founder, Chairman, CEO & Chairman of the Technology Committee)
[Foreign language]
Robin Xu (SVP)
[Foreign language]
Daniel Yuan (Chief of Staff to CEO and Head of Strategy and Investor Relations)
To your second question, the 700,000 net new paying client addition this year includes our Moomoo paying clients. We expect that amounting 700,000 new paying clients, about 80% of them will come from mainland China and Hong Kong, and the rest will come from Singapore and the U.S.. Thank you.
Catherine Liu (VP)
[Foreign language]
Operator (participant)
Can we move to the next question?
Daniel Yuan (Chief of Staff to CEO and Head of Strategy and Investor Relations)
Yes, please.
Operator (participant)
Yeah. The next question comes from the line of Yu Zhou from CICC. Please go ahead.
Yu Zhou (Investment Banking Analyst)
[Foreign language] Hi management, thanks for taking my question. I'm Zhou Yu from CICC. Congratulations on the exciting results. I have two questions here. The first one is about the revenue breakdown. We see the other income has experienced strong growth. I wonder, would you please give us more information on the breakdown? The second question is about the client assets. I noticed that the average client asset balance has increased significantly on a quarterly basis. I remember that the average asset balance of our overseas clients is much lower than that of our mainland customers. Would you please give me more information about the difference between different regions? Thank you.
Arthur Chen (CFO)
Thank you, Zhou. I will answer your two questions. I think number one, in terms of breakdown income, the most part of our other income still comes from our IPO subscription service charge and also the currency exchange service charge. The things you mentioned, such as the ESOP business revenue and also the wealth management revenue, is still not very, very meaningful. We will give you the detailed breakdowns in our forthcoming annual report, which may be due in the later days of this month. Secondly, for the average client's assets, you are right. If we compare our mainland client assets and also the Hong Kong client assets, roughly on average, our average client assets for Hong Kong markets will be around 20-25% lower than the average numbers of the mainland numbers.
We have not conducted our client acquisition in Singapore in the last Q4, so actually we do not have such data on hand yet. Also, we have not included our U.S. clients' numbers in fourth quarter as well. We will give you more information in the forthcoming Q1 earning call. Thank you.
Yu Zhou (Investment Banking Analyst)
Thank you, Arthur.
Operator (participant)
Thank you. The next question comes from the line of Jacky Zhao from China Renaissance. Please go ahead.
Jacky Zhou (Analyst)
[Foreign language] Thanks management for taking my questions. Two questions. Number one is about our guidance. So I think the 700,000 new paying clients' guidance exceeded most market expectations. So just want to check what is the current run rate of our new paying clients' ads in the first quarter, and what is our expectation for the speed of customer acquisition in different regions over the year? Second question is about our U.S. self-clearing progress. What will be the launch time for the U.S. self-clearing? According to our last earnings call, we mentioned there is probably a $50 million pre-tax benefit from U.S. self-clearing. When will we see the impact on the financial results? Thank you.
Arthur Chen (CFO)
Okay, thank you, Jacky. I will leave to answer your first questions in terms of giving you some qualitative updates about year-to-date situations. Frankly speaking, we cannot share any quantitative numbers about year-to-date run rate, which I think will give you more colors during our first quarter earnings call. For your second question, I will answer it first. In terms of self-clearing, actually we just started our initial migrations recently, just to overcome the first stop. We do think this migration will take time. You will see meaningful progress in terms of operation numbers, i.e., the client's assets and the number of the clients from our counterparty in the U.S. to our self-owned clearinghouse this year. I think in terms of financial savings, it will not be too meaningful in terms of 2020 contributions. Definitely, you will see the benefit from the second half of next year.
Leaf Li (Founder, Chairman, CEO & Chairman of the Technology Committee)
[Foreign language]
Daniel Yuan (Chief of Staff to CEO and Head of Strategy and Investor Relations)
First of all, I think Leaf supplemented on your second question on self-clearing. He mentioned that two weeks ago, he used his own personal account to execute five trades, which are processed through our own clearing system. The trades were processed very successfully. As Arthur mentioned, we'll start this migration process starting the second quarter. I will take your first question on our guidance and our run rate. Year-to-date, the numbers have been really strong. The paying client growth has been strong. It gave us ample confidence to give out this guidance of 300,000 net new paying client addition this year. I think we are well on track. As we mentioned earlier, around the 700,000 new paying clients, about 80% of that number will come from mainland China and Hong Kong, and 20% will come from the U.S. and Singapore.
I think it's a little too early to give out a more detailed breakdown further down what I just mentioned. I think in terms of run rate, maybe I can talk a little bit about our business updates year-to-date. As we mentioned in Singapore, we soft launched in February, and we officially launched our business on March the 8th. If you look at some of the rankings on the iOS App Stores in Singapore, you'll see that we have really strong downloads, and our business has been growing really strong and kind of exceeding our expectations. We are very confident about our growth prospects in Singapore. Also, the strong growth momentum is also observed in the U.S. market as well. In mainland China and Hong Kong, I think the growth momentum is strong as always.
We see that there is a very strong IPO pipeline this year. If I remember correctly, in the first two months of this year, the total proceeds raised through Hong Kong IPOs totaled a little over HKD 70 billion. In the first quarter of last year in total, the IPO proceeds were a little over HKD 10 billion. The IPO market is very active. The market sentiment is very positive, and we are continuously expanding our Hong Kong stock trading market share. In February this year, I think our DAU surpassed 1 million for the first time. That is also one of our major accomplishments in establishing our social community and just creating this ecosystem. Thank you.
Jacky Zhou (Analyst)
That's clear. Thank you.
Operator (participant)
Thank you. We have our next question from the line of Ziyu Zhang from Jefferies. Please go ahead.
Ziyi Zhang (Finance Analyst)
[Foreign language] Hi management, thanks for taking my question. This is Zoe from Jefferies. I have two questions. First, could you please provide some color about the brokerage commission and handling shared income from U.S. stocks, Hong Kong stocks, and Stock Connect respectively, and how should we think about the trend in the commission fee rate in different markets? My second question is, how should we think about the commission and handle income contribution from the Singapore market and our strategy in other overseas countries? Thank you.
Arthur Chen (CFO)
Okay, thank you, Zoe. Let me answer your two questions. I think number one, in terms of the trading volume, just to give you some breakdowns in terms of our fourth quarter trading volume, U.S. markets roughly account for 65% of our total trading volume. The remaining 34% came from the Hong Kong local market, and we have a very tiny portion from the Hong Kong China Stock Connect as well. If you look at our blended commission rate, QMQ-wise, it keeps very, very stable. If we take out some fluctuation due to the IPO and also the U.S. trading, because our U.S. stock commissions actually, some of our U.S. trading commissions based on the number of the shares rather than a blended percentage calculations. On a like-for-like basis, our commission rate keeps very stable. I do think such stability will continue towards this year.
In terms of the commission contribution from the single-mode markets this year, I think the proportion-wise will not be very meaningful because there is still a growth learning curve in the Singapore market. Also, in order to penetrate the market more quickly and more aggressively, actually we adopt a lot of commission-free strategies because we think in the current stage, market share is far more important than the monetizations from the trading commission.
Ziyi Zhang (Finance Analyst)
That's very helpful. Thank you.
Arthur Chen (CFO)
Thank you.
Operator (participant)
Thank you. We have our next question from the line of Yun Zhang from Credit Suisse. Please go ahead.
Yun Zhang (Client Due Diligence Analyst)
[Foreign language] The first is following up on your paying client guidance of 700,000 net new paying clients for 2021. Of the 80% from Hong Kong and mainland, what's the expected contribution from mainland China versus Hong Kong local? Singapore specifically, what's the marketing strategy for that market, and how should we think about the customer acquisition cost going forward? Thank you.
Arthur Chen (CFO)
[Foreign language]
Daniel Yuan (Chief of Staff to CEO and Head of Strategy and Investor Relations)
Thank you, Mr. Chen.
To your first question on breakdown, as we mentioned, 80% of our new clients will be from mainland China and Hong Kong. Among those 80%, we think that about 60% will be from Hong Kong and the rest from mainland China. To your second question on the Singapore market, based on our own observations, the competitive landscape in Singapore is very similar to that in Hong Kong. There is a relatively large retail investor base that is relatively wealthy, and the market is also dominated by the incumbent players that have lackluster trading technology capabilities and have less than optimal user experience. For Futu, I think our client acquisition channels will be very similar to the channels in Hong Kong, including online and offline marketing, working with third-party channel partners, working with KOLs, and also organic growth.
Arthur Chen (CFO)
[Foreign language]
Daniel Yuan (Chief of Staff to CEO and Head of Strategy and Investor Relations)
We expect our per paying client acquisition cost in Singapore to be around HKD 2,000. That is our estimate based on one month of experience of actually launching in the Singapore market. We believe that as our user growth picks up, this per paying client acquisition cost has ample room to go down. Thank you.
Yun Zhang (Client Due Diligence Analyst)
That's very clear. Thank you.
Operator (participant)
Thank you. Once again, if you wish to ask a question, please press star one on the telephone keypad and wait for your name to be announced. If you wish to cancel a request, please press five on the hotkeys. It's star followed by one to ask a question. Thank you. If there are no further questions, I would like to hand the call back to Daniel for what he said.
Daniel Yuan (Chief of Staff to CEO and Head of Strategy and Investor Relations)
Thank you. 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)
Thank you. Ladies and gentlemen, that concludes the conference for today. Thank you for participating. You may all disconnect now. Thank you.