Futu Holdings Limited (FUTU) Earnings Call Transcript & Summary

Okay. Thank you, Daphne. I will answer your first question about IPO margin. And I will partially answer your second questions in terms of breakdown of new paying clients. I will leave the acquisition cost outlook to my colleague, Robin. We noticed this consultation paper issued by Hong Kong Stock Exchange earlier this week. You’re right. The IPO processing time line may be cut from the current T+5 days to T+1 day under this new arrangement. On such perspective, our IPO margin revenue will be negatively impact similar to all our retail broker peers. And I expect we may loss middle to single -- middle single digit revenues if we implement this new policy in the first 3 quarter of this year. On a forward-looking perspective, I think this loss may be significantly offset by the demand increase and also the industry consolidation within the retail brokerage business in Hong Kong. Despite our near-term financial loss, which I think is fully manageable, we strongly support this initiative advocated by Hong Kong Stock Exchange as we think this reform will improve the overall market efficiency and eliminate unnecessary transition costs for all market participants. This will make the overall market more accessible to the main Street. So we think every participant, including Futu, will be better eventually. And for your second question, in terms of the new paying clients we achieved in this quarter, 53% came from the Hong Kong local market and the remaining 47% came from the mainland. I will leave the client acquisition cost questions to Robin. Thank you.

Thank you. [Foreign Language]

[Foreign Language]

[Interpreted] Right. So this year, the percentage of our new paying clients from organic growth continue to climb meaningfully quarter-after-quarter. And you can see that our per paying client acquisition cost has, therefore, come down quite a bit this year. Therefore -- in terms of our overall market spending, I think, we attach more importance to the ROI, our client acquisition as opposed to the total marketing expenses.

We have the next question coming from the line of Yiran Zhong from Crédit Suisse.

Congratulations on a strong quarter. I have 3 questions. One is, in 3Q, you have further gained trading volume market shares, both in Hong Kong and U.S. How is the trend looking for 4Q thus far? And also, more specifically on U.S. volume, we noticed that the China ADRs trading volume has significantly pick up in November. And could you share any color on kind of the stock distribution of your U.S. volume? What are the top traded U.S. stocks on your platform? And how concentrated on the China ADRs traded through Futu? Secondly is, we calculated that the overall commission and handling fee rate was 5.5 bps in 3Q, lower than the 4 -- 6.4 bps in the last quarter. Could you share kind of the underlying drivers for the Q-on-Q change? Any color on how it's trending going forward? And thirdly, on customer acquisition, can you -- are you able to break out the contribution from, say, IPO-related promotional events? Just trying to understand how should we think about the customer acquisition growth related to IPOs? And also, how is that -- how should we think about the trend going for -- beyond 4Q, beyond this year into next year and beyond?

Okay. Thank you. I will answer the first 2 questions, and I will also leave the third question to Robin for your inquiries about client acquisitions. Number one, as we mentioned in our last earnings call, we see significant spike in terms of our market share gains in Hong Kong since July. And the situation in Q3, you can see the overall -- our Hong Kong trading volumes increased a lot. In terms of the market share, we continue ways to keep our market shares over 2%. And I think the situation in October is still well on track. So I do expect there can be some structural positive things going forward. And in terms of the U.S. trading volume, actually, I think we -- the breakdown for our U.S. trading is not very concentrate on these Chinese ADR names. If my memory is right, our Chinese ADR trading volume accounts for roughly 10% to 15% of our total U.S. trading volumes overall. So despite -- we will benefit from these Chinese ADR training volumes recently in the U.S., I think the overall impact is not very meaningful. And secondly, about your question on the commission rate. Actually, I addressed this in the opening remarks. On a like-for-like basis, actually, our commission rate keep -- very stable. You can see our blended commission rate dropped down this quarter compared with last quarter. This is mainly due to the increase in trading volume product for stocks for clients who use the flat rate pricing package options we offered. I will leave the third question to Robin.

Okay. I'll take the third question on our paying client breakdown. It's very difficult for us to break out what clients specifically come for the IPOs because it's really hard to trace other activities like they may invest in stocks first and then subscribe to IPO. So it's very hard to do that breakdown. But overall, we have seen that when these jumbo IPOs get listed in Hong Kong, we'll see a pickup in our client acquisition for 1 to 2 weeks beforehand. For Ant Group's IPO, for example, 2 weeks before the Ant Group's IPO, we have seen a meaningful pickup in our paying client numbers. And as we mentioned, these jumbo deals in Hong Kong will definitely be a positive contributor to our paying client growth. But again, it's very hard to break down the specific percentage. But we think the Hong Kong IPO, in general, just attract a lot more attention to the market. Well, it may bring some clients that are interesting IPO at first, but then they will be converted to other trading clients. So overall, we have not seen a meaningful change in our clients' asset balance or their trading behaviors.

[Operator Instructions] We have the next question from the line of Kelvin Chu from UBS.

It's Kelvin Chu from UBS. Two questions from me. First, you have delivered very strong brokerage business this year with decent market share gain. So at this point, what is your long-term strategic vision for your business model? How do you prioritize your traditional business versus wealth management fund product distribution over the long term? And secondly, can we have an update on the U.S. settlement system? Any disruption due to COVID-19? Just in terms of timing, when should we expect the migration of the trading account to take place? And when will the financial impact to come through in terms of potentially higher interest income from settlement cash?

Okay. Thank you, Kelvin. Let me answer your second question first. I will leave the first question to my colleagues Leaf and Robin. You are right. Our progress in the U.S. self-clearing was negatively impacted by this COVID-19 pandemic. Now we currently expect we will start the trial migration to our self-clearing house in the first half next year. It is still too early to expect the financial impact. I think overall speaking, next year's financial impact will still not too significant. But just to give you a rough idea, based on our current U.S. stock positions as we complete this full process of the self-clearings, I think, we will at least generate additional USD 50 million operating profit.

[Foreign Language]

[Interpreted] Our strategy is composed of 5 different elements to our businesses. And number one is our retail brokerage business; number two, our wealth management business that provides a lot more earnings visibility nature. And thirdly is our enterprise service, Futu I&E with our ESOP system and IPO distribution services. And number four is our international expansion, we want to expand our client size, and we think that overseas market will contribute to a meaningful share of our overall paying client base in the mid to long run. And number five is that we want to create Futu into ecosystem that is centered around users and provides connectivity to different stakeholders like the investors, KOLs, media, et cetera, and we want to construct a self-reinforcing ecosystem. And with regards to the relationship between our brokerage and wealth management business, I think our strategy is to become one stop financial services platform for our clients and catering to the various different asset allocation needs for our clients. And I think wealth management is a very important step towards the strategy.

We have our next question which is coming from the line of Hanyang Wang from 86Research.

So my first question is about our margin financing business. So our successful secondary offering last quarter helped us serve more margin financing demand and significantly improved the margin financing balance. So we have impressive growth, be sustainable, given we have the leverage restriction on the business in Hong Kong. How shall we project the future growth of our margin financing balance? And do we need to keep raising money from the capital markets to meet the leverage requirement? And my second question is on our user acquisition strategy. So in the third quarter, I think a number of Hong Kong paying users have surpassed the mainland users. So what will be our strategy in the future to acquire the mainland China users, which seems to be -- have a larger user base that we could explore into? My final question is about the Ant's IPO suspension. So will there be any impact on our IPO financing business in the fourth quarter?

Okay. Thank you. I think I have already answered your third question before through another analyst. I will answer your first question about margin financing, and I will leave the user acquisition strategies to my colleagues, Robin and Daniel. For the margin financing, you are right, after the equity placement we did in third quarter, our equity base has already almost doubled. This will be very supportive for our balance sheet business going forward. I think based on our current business expansions, we will have sufficient monies to support our margin financing in the next 12 to 18 months. And also, if you look at our third quarter number, our total equity base now already exceeds HKD 5 billion. Based on the regulations made by Hong Kong SFC, each retail broker's leverage ratio in Hong Kong cannot exceed 5x. So you can have just -- here, just to give you some rough ideas about how further upside for our margin businesses. I think it is very difficult to estimate the margin balance outlook going forward as that -- there was a lot of market conditions, market volatilities will impact the client's risk appetite. But I think long term speaking, as we have more and more clients, this balance will continue to grow down the road. Now I will leave the second question to Robin. Thank you.

[Foreign Language]

[Interpreted] We have been quite aggressive with our Hong Kong marketing strategy and that turned out to be quite effective because Hong Kong itself is a small place. And the existing client base, they are very prone to trading Hong Kong and U.S. securities already. So our marketing efforts have been quite effective so far. And with regards to our mainland client acquisition, I think we use different client acquisition strategies because of the number of constraints. For example, like ESOP continues to contribute a very steady stream high-quality clients and word-of-mouth referral is more meaningful in mainland than in Hong Kong in terms of our absolute paying client contribution. So we have different client acquisition strategies for mainland, and we think the growth prospects in mainland are very strong. Thank you.

We have our next question. This is coming from the line of Cecilia Qiu from DTC Investment.

Congrats on the strong quarter. I'm really excited about Futu launching Hong Kong option products and other derivative instruments to expand your product portfolio. But my concerns are on the risk control side. I don't know if you have anything to share at this moment about risk management regarding your burgeoning derivatives business segment.

Okay. Thank you. I will let my colleagues, Daniel, to answer this question.

With regards to our risk management procedures, we have always been quite prudent with our risk management approach. And actually, if you compare our LTV ratio -- I mean for individual stock margin financing, if you compare our LTV ratio to those offered by traditional banks, we are more conservative around that. And that also goes with our derivatives trading risk management as well. I think to prepare for the launch of this business, we have actually recruited a number of finance personnel from the traditional institutions that have very rich experience in risk management for derivatives products. So like overall, we have been prudent in our approach and we gradually rollout our derivatives trading products. Like we mentioned, like in the third quarter, we started offering the Hong Kong securities lending business. But so far, we've only opened up that service to 10% of our total paying client base, and we decided to open it to 100% of our client base by the end of this year. So like when we start the new derivatives product, like we are prudent, and we take a gradual approach towards our business development. So overall, I think, so far, we have not -- since we launched the margin financing business in 2017 and like we have added a lot of new derivatives products. But so far, we have not experienced any material loss on any of our margin financing or derivatives trading offering. Thank you.

Understood. And may I add one more question on your brokerage fee and commission expense ratio, is there a meaningful difference between the brokerage expense ratio of your U.S. trading volume and that of Hong Kong volume? And how should we expect the expense ratio to be in, say, 3 to 5 years when your proprietary U.S. stock clearing system is fully developed?

I think in terms of the commission -- blended commission rate in Hong Kong and in the U.S., U.S. rate is slightly higher than Hong Kong, but the difference is too -- not too significant. And secondly, for the U.S. self-clearing capabilities, Kelvin from UBS also raised this question before, I think it will take a very long time for us to gradually migrate our clients' U.S. stock positions to our self-clearing house. It has a lot of human technology know-hows, and we need to make sure all these corporate actions can be conduct in a right manner. So it definitely will take time. I'll just give you a rough idea. If we migrate all these existing positions to our self-clearing house today, the cost savings in terms of the execution fee and also the idle cash potentially we can monetize alongside with the stock positions, we can potentially monetize through stock borrowing and lending activities. We can generate additional USD 15 million operating profit without considering any direct people cost nowadays.

[Operator Instructions] We do not have any questions at this moment. I would like to hand the conference back to our host, Mr. Daniel, please take over for any closing remarks.

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 representative. Thank you, and goodbye.

Thank you, sir. Ladies and gentlemen, that concludes our conference for today. Thank you all for your participation. You may disconnect your lines now. Thank you to all.