Futu Holdings Limited (FUTU) Earnings Call Transcript & Summary

Hello, ladies and gentlemen. Welcome to Futu Holdings' First Quarter 2021 Conference Call. [Operator Instructions] 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.

Thanks, operator, and thank you for joining us today to discuss our first quarter 2021 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 beliefs 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. 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 SEC, including its registration statement. So with that, I will now turn the call over to Leaf. Leaf will make his comments in Chinese and I will translate.

[Foreign Language]

[Interpreted] Hello, everyone. Thank you for joining the earnings call today. We are excited to announce that we started off the year with robust growth across our operating and financial matrices.

[Foreign Language]

[Interpreted] Our net paying client addition was approximately 273,000, bringing the total number of paying clients to over 790,000, representing 231% year-over-year growth. 3 months into the year, we already achieved 39% of our full year growth target. For the first quarter, over 70% of net additions came from Hong Kong, Singapore and other overseas markets. Organic growth continued to contribute over 50% of our net new paying clients. Despite rapid client base expansion, our quarterly playing (sic) [ paying ] client churn rate remains below 2%.

[Foreign Language]

[Interpreted] Since our official debut in Singapore on March 8, we have experienced significant growth in client acquisition. Our superior product experience and laser focus on client servicing, coupled with our online and off-line advertising and strong word-of-mouth referral has helped us quickly capture the mindshare of Singaporeans, characterized by its large and affluent Chinese population, deep and mature capital markets, high penetration of financial services and rising rate of digitalization. Singapore presents a huge market opportunity, let alone its strategic importance as an entry point into the broader Asian market. With the strong growth momentum trending into the second quarter, we are confident to unveil rapid growth in Singapore.

[Foreign Language]

[Interpreted] In terms of client assets, our average asset balance per paying client climbed to HKD 585,000, the record high since 2016. As of quarter end, total client assets reached HKD 462.2 billion, representing 368% growth on a year-over-year basis and 62% growth on a quarter-over-quarter basis.

[Foreign Language]

[Interpreted] Total trading volume in the quarter was HKD 2.2 trillion, up 278% year-over-year. U.S. stock trading contributed about 63% of the total trading volume. In the past quarter, we launched OSE futures from the Japan Exchange Group and Singapore stock trading as part of our continued efforts to diversify trading offerings.

[Foreign Language]

[Interpreted] Our wealth management business Money Plus established new partnerships with 4 reputable asset managers in the quarter, including Wells Fargo, Income Partners, Aberdeen Standard and BNY Mellon. As of quarter end, over 59,000 clients held total assets of HKD 13.1 billion in wealth management, up 189% and 108% year-over-year, respectively. As Money Plus's distribution capabilities get increasingly recognized by asset managers, Fargo entered into an exclusive agreement with us to distribute the Hong Kong dollar-denominated retail share class with its China small mid-cap growth line, one of its flagship products in the region. In the first quarter, we started to offer a flagship TMT hedge fund managed by a globally renowned asset manager to our qualified investors.

[Foreign Language]

[Interpreted] At the quarter end, our enterprise business Futu I&E had 152 IPO and IR clients as well as 200 ESOP solution clients. In the first quarter, we participated in all Chinese ADR secondary listings in Hong Kong, and we were the only online broker in the selling groups of the Hong Kong IPOs of Kuaishou, Baidu, and Bilibili.

[Foreign Language]

[Interpreted] The enterprise account function in our social community gets increasingly adopted by listed companies to engage with over 14 million retail investors interested in Hong Kong and U.S. stock trading. By the end of the first quarter, over 500 listed companies have set up enterprise accounts with us to promote their products and services, provide business updates and livestream earnings calls. As of today, 9 enterprise accounts have amassed over 1 million followers. Listed companies are an indispensable stakeholder in our ecosystem, and their engagement has greatly diversified our content offerings, thereby increasing user stickiness and retention.

[Foreign Language]

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

Thanks, Leaf and Daniel. Please allow me to walk you through our financial performance in the first quarter. All the numbers are in Hong Kong dollars, unless otherwise noted. Our total revenue was HKD 2.2 billion, an increase of 349% year-over-year and 86% Q-on-Q. Brokerage commission and handling charge income was HKD 1.3 billion, an increase of 343% year-over-year and 84% Q-on-Q. The growth was mainly driven by 278% year-over-year of our total trading volume increase. Our blended commission rate and our clients' trading velocity remained resilient compared with last quarter. Interest income was HKD 659 million, an increase of 356% year-over-year and 96% Q-on-Q. The increase in margin financing interest income was mainly driven by a strong growth in daily average margin financing balance, higher IPO financing interest income due to a very active Hong Kong IPO market in the first quarter, and increase in our securities borrowing and lending business. Other income was HKD 221 million, an increase of 370% year-over-year and 69% Q-on-Q. The strong growth was primarily driven by an increase in our IPO subscription service charge income and the currency exchange service income. In terms of cost, our total cost was HKD 443 million, an increase of 276% year-over-year and 83% Q-on-Q. Brokerage Commission and handling charge expenses were HKD 214 million, an increase of 327% from HKD 50 million in the first quarter of 2020. The increase was largely in line with the growth of our brokerage commission and handling charge income. Interest expenses was HKD 168 million, an increase of 406% from HKD 33 million in the first quarter of 2020. The growth was primarily due to higher-margin financing interest expenses and increase in our security borrowing and the lending business. Processing and servicing costs were HKD 62 million, an increase of 78% from HKD 35 million in the first quarter of 2020. We continue to increase cloud service expenses and add another 300 throttling controllers connected to the trading system of the Hong Kong Stock Exchange to execute a large number of concurrent Hong Kong stock trade. As a result, our total gross profit was HKD 1.8 billion, an increase of 373% year-over-year and 87% Q-on-Q. Gross profit margin increased from 76% in the first quarter of 2020 to near to 80% in the first quarter of this year, thanks to higher operating leverage as a result of our larger business scale. Our total operating expenses was HKD 490 million, an increase of 149% from HKD 197 million in the first quarter of 2020. To break it down, R&D expenses was HKD 137 million, an increase of 63% from HKD 84 million in the first quarter of 2020. We further invest in the R&D to support our new product offerings. Selling and marketing expenses were HKD 275 million, an increase of 321% year-over-year and 144% Q-on-Q. The increase was primarily due to higher branding and marketing spending, especially in the international markets to cultivate brand image and acquire new clients. If we compare client acquisition costs in the Hong Kong and the China areas alone, our CAC number this quarter is largely in line with that number in the last quarter. G&A expenses were HKD 78 million, an increase of 65% year-over-year. The increase was primarily due to the increase in the headcount for G&A personnel. As a result, our net income increased by 6.5x to HKD 1.2 billion from HKD 155 million in the first quarter of 2020. In April, we also completed our follow-on offering with net proceeds of approximately USD 1.4 billion. The proceeds will be used to support a larger margin financing balance, our international market expansion, new licensing applications, potential investment and acquisition opportunities and other general corporate purpose. That concludes our prepared remarks. We'd now like to open the call to questions. Operator, please go ahead.

[Operator Instructions] We have our first question coming from the line of Katherine Liu from Morgan Stanley.

[Foreign Language] Thank you very much for giving me this opportunity to ask questions. This is Katherine from Morgan Stanley. So I have 2 questions to raise. First is can management please give some introduction or some briefing in terms of the second quarter this year trend in terms of trading velocity, client acquisition growth rate, et cetera? And also in light of the first quarter strong growth, will management release guidance in terms of the full year, for example, growth rate in paying clients, et cetera? And second question is could management please give some guidance or introduction in terms of the breakdown of clients by geography? And then we note that Singapore could potentially see very strong growth. And could management please give us some guidance in terms of the growth trend in the Singapore market?

Sure, Katherine. Let me answer your second question first, I will show you our client breakdown in the first quarter. I will leave the second trend -- the second quarter trend and also the -- your questions about the guidance to Robin and Leaf. Robin will also give you some color in terms of our client acquisitions and also the client profile in Singapore, this particular market. In the first quarter, on a flat rate basis, Singapore and the U.S. account for 25% of our new paying clients acquired in the first quarter. The remaining 75% was almost evenly split within Mainland China and also Hong Kong, I think slightly higher in Hong Kong part. I will leave Robin and Leaf to give you comments about your first question.

[Foreign Language]

[Interpreted] Although we have achieved 39% of our full year paying client growth target in the first quarter, for the time being we'll not adjust our full year target. Well, we definitely believe that our product has a very differentiated value proposition to overseas markets. And in fact, since we entered the Singapore market officially in March, we have some very strong client growth and that momentum has continued into the second quarter. So we also reckon that the brokerage business is positively correlated with the market performance, with market sentiments with the number of IPOs and we understand that right now, the market has disagreements over how the market performance will evolve for the rest of the year. So we'll not adjust our full year kind of paying client growth target for now, and we may give a updated guidance during our 2Q earnings call, if needed.

[Foreign Language]

[Interpreted] Well, we have seen the market experience some level of pullback since mid-February, and we believe that our users' trading sentiment has been affected more or less, and we think that's perfectly normal. We feel like the market still gets a lot of attention right now and kind of center the rotation from growth to value stocks, there are still a number of stocks that are performing really, really well. And from the standpoint of our client assets, we have seen that from March 1 to last Friday, which is May 16, almost on every single trading day, we see a positive net asset inflow, except for a couple of trading days. So it's a very positive sign that our clients are continuously putting assets into our platform. And for us, paying client number, paying client retention and client assets are 3 KPIs, and we attach much more importance to these 3 matrices than some short-term volatilities in the clients' trading volume. And let me just add a little bit to your question about our Singapore clients profile. So, so far, based on what we have seen, again, this is only based on about 2 and 2.5 months of data that we have seen so far. So our Singapore clients average and median ages is almost identical to that of Mainland China and Hong Kong clients. And in terms of their client assets, it still lags. And actually, there's a pretty big discrepancy between our -- between the average client assets of our Singapore clients and our mainland China clients. But we think that's normal. And based on our experience, when we enter a new market, it will take some time for our clients' assets and clients' trading volume to catch up. And we'll probably give more details around our client profile in the next couple of quarters.

We have our next question. This is coming from the line of Jacky from China Renaissance.

[Foreign Language] So congrats on the great results. I have 2 questions. Number one is about our competition. We actually saw some competitors, for example, in Hong Kong market increasing their marketing efforts. And we also hear some Asia brokers may enter the U.S. and the Hong Kong stock trading business. So regarding the potential increasing competition for our markets and customers from Mainland and Hong Kong, do we concern about our customer acquisition costs and the trading commission pricing pressure? And number two is about a housekeeping question. Could you provide us a rough breakdown of our interest income and also other revenue?

Sure, Jacky. Let me answer your second question in terms of housekeeping financial numbers, first. I will leave the first question to my colleague, our CEO, Leaf. in terms of the interest income breakdown, roughly interest income arising from the margin financing account for 60% to 65% of total interest income. The remaining interest income actually derive from our clients' idle cash deposit. And also for -- in terms of other income, actually, these 2 major parts. One is the IPO subscription service charge, i.e., normally, we charge HKD 50 to HKD 100 per person when each participate in the Hong Kong IPOs. The other significant part is the foreign exchange service charge. Many of our clients trade in both in Hong Kong and the U.S. markets, so they do have the demand for the foreign exchange. These 2 parts, I think, roughly will contribute 70% to 75% of our total other income. The remaining part will belong to such as the distribution income from our wealth management products and other service offerings.

[Foreign Language]

[Interpreted] So from our inception, we operated in a very crowded market. And we don't think the market is going to get less competitive going forward. And we indeed have seen some players offering 0 commissions. But we don't think the change in the competitive landscape will have a downward pressure on our commission rate. Because in Hong Kong, there's the stamp duty, which is 10 bps. And for us, we offer 3 bps on Hong Kong trading, and the marginal benefit for our clients for lowering our commission rate beyond that 3 bps is really low.

[Foreign Language]

[Interpreted] And for some of the A share brokers, they already have Hong Kong licensed entities. And besides, we've also seen some other online brokers that want to enter the Hong Kong local market.

[Foreign Language]

[Interpreted] So maybe I'll talk a little bit more about the online brokers due to the similarities in the business model.

[Foreign Language]

[Interpreted] First of all, we definitely welcome online brokers to enter the Hong Kong market. With more of these players entering the Hong Kong market, we can educate the market together and help the online brokerage industry as a whole gain more industry recognition.

[Foreign Language]

[Interpreted] Now there are 2 major types of online brokers that provide Hong Kong stock trading services. And the first type are the Hong Kong brokers that are licensed by SFC and hold SFC licenses and are regulated by the SFC, and Futu is an example of this first type. And the second type are the online brokers that hold licenses of a third domicile and it's not regulated by the Hong Kong SFC; for example, a license from New Zealand. And this is the second type, using the third-party domicile license to provide trading in Hong Kong.

[Foreign Language]

[Interpreted] And as we all know, the SFC has more stringent regulatory requirements than some other markets and are more prudent when giving out licenses. So for the second type of online brokers that we just mentioned, if they are to get a license in Hong Kong, they must solve the issue of regulatory incongruity in advance. And from the regulatory standpoint, SFC will not allow the online brokers to operate under a more relaxed regulatory framework. This means that once the online brokers hold licenses, they'll need to migrate their existing clients and their existing businesses into the new entity that is regulated by the SFC. And if this issue cannot be solved very well, it is highly unlikely that they will get a license in Hong Kong. And I think that's probably why another online brokerage peer of ours have been talking about getting the license in Hong Kong soon for the past 3 years, but still have not managed to get one. Because based on our understanding, under normal circumstances, there is no way that it would take so long to apply for a new Hong Kong brokerage license.

[Foreign Language]

[Interpreted] And secondly, we don't think that the potential entry of other online brokerage companies will have a negative impact on Futu's market share in Hong Kong. Well, the first reason is that financial services, it really takes a big position for our clients to choose a financial services platform. And there is the psychological barrier for clients to actually entrust their assets with their financial services platform. And for Futu, we have very outstanding shareholder base. We have shareholders like Tencent that really instill trust into our brand. And on top of that, we have spent the past 8 years cultivating our brand image in Hong Kong, gaining user recognition and capturing the mindshare of the Hong Kong local users. And for a financial services company that is new to Hong Kong, it will take a lot of time for them to get the same level of trust that we've been able to garner in the past 8 years.

[Foreign Language]

[Interpreted] And secondly, so they're newcomers, and they can only be competitive if they can offer very differentiated value proposition. Otherwise, it will be very difficult for them to replace the existing platforms. And Futu has built a very comprehensive business that has huge entry barriers. And we've invested significantly into our account opening, into our trading infrastructure, market information and services and social community, et cetera, and many of our product offerings really set industry standards. And the other online brokerage peers need to spend a lot of time to catch up to where we are today, let alone offering differentiated products and services. And on top of that, we have never stopped innovating.

[Foreign Language]

[Interpreted] And the third point is the regulatory congruity issue that we just mentioned. And as we discussed earlier, and some of the online peers have already started acquiring Hong Kong local clients without a Hong Kong license. And after they acquire the license, they probably will spend a lot of time migrating their existing Hong Kong clients to these new entity that is heavily regulated by the SFC and has really strengthened KYC and AML procedures. And this will be a very cumbersome process, definitely with some sort of attrition. And for the other party that has not operated in Hong Kong so far, after they get the license, they still need to kickstart the very stringent account opening, KYC procedure under the supervision of the SFC. And this will take time for them to adjust to, and take time for them to get familiarized with.

[Foreign Language]

[Interpreted] And fourthly, the margin financing business is highly contingent on the capital -- on the company's capital base. And the margin financing capital needs to be gradually accumulated through the long-term collaboration with the commercial banks in Hong Kong. In Hong Kong, based on the SFC's regulation, the margin financing balance that a broker can support is limited to 5x of its capital base. So first of all, they need to inject a lot of capital into their licensed entity in Hong Kong to bolster their net assets. And on top of that, they need to secure additional financing from the commercial banks in Hong Kong. And from our experience, the Hong Kong commercial banks are generally very conservative. And they're only willing to offer additional credit lines after a long-term communication and long-term collaboration. So it's impractical for these newcomers to garner a lot of capital in a short period of time. And this will definitely put constraints on the margin financing business, especially the IPO margin financing business. And we realize that some of the other peers are trying to migrate their clients from the interactive broker accounts to their own account system. And if their own account system is under the supervision of SFC, the margin financing capital issue that we just mentioned will be further enhanced.

[Foreign Language]

[Interpreted] The fifth point is that the Hong Kong execution and clearing system need a lot of capital and time to invest, and the R&D takes -- is a very lengthy process. And Futu spent 8 years to construct a highly stable and scalable execution and clearing system with a 99.96% service availability rate. And this very advanced trading system has high entry barriers. And when the other brokers enter the Hong Kong market, for the -- in the short period of time, they probably need to rely on a third-party vendor to provide this execution system, which means that the stability of the system will be outside of their control for a considerable amount of time. So this may lead to trade congestion issues when there is extreme market volatility or when hot IPOs take place. So in the short term, it will be very difficult for them to match the client servicing quality that Futu can provide.

[Foreign Language]

[Interpreted] And the last point is, I want to make aside, we have never stopped innovating and progressing, and we still keep that nascent mentality when we entered into the Hong Kong market. And we believe that additional competition in the Hong Kong market will push us to do better.

We have our next question coming from the line of Zeyu Yao from CICC.

[Foreign Language] This is Zeyu Yao from CICC. First of all, congrats to our exciting results. I see our existing business are well on track. And I was wondering if there is any possibility that we will apply for new brokerage licenses to serve more customers in other areas, or launch more trading products like Bitcoin or other digital currency?

Okay. Thank you, Zeyu. Let me answer your first question. I will leave the second question to my colleagues, our Senior Vice President, Robin Xu, for more service and products in our pipelines. For the new license, actually, I think you are right, we are doing some preliminary studies in other international markets, in particular in the Asian countries. Therefore, as Leaf mentioned in the opening remarks, we do think Singapore is a very important gateway for which entering into the Asian market as a whole. But now it's still in a very preliminary stage. Also, we are doing some feasibility studies in other English language-speaking country as well.

[Foreign Language]

[Interpreted] So we're planning to launch crypto trading to our international clients in the second half of this year. And also, we'll plan to roll out more futures under the CME futures.

We have the next question. This is coming from the line of Zoey Zong from Jefferies.

[Foreign Language] This is Zoey from Jefferies. Congratulations on the strong first quarter results, and I have a follow-up question on the digital currency. So regarding digital currency at this point, we have noted that the [ SFC and different associations ] of China have announced that to banks and financial institutions and payment companies some licenses related to cryptocurrency transactions. I'm wondering what about Futu's plan on digital currency this year and will China issue a license who currently have following customer if we launch it in the country [ in that ].

[Foreign Language]

[Interpreted] We are very much aware of the different regulatory frameworks under different jurisdictions. And actually, we're in the process of applying for digital currency-related licenses in U.S., Singapore and Hong Kong, but what we know for sure is that we will not offer digital currency trading services to mainland China users.

The next one comes from the line of Emma Xu with BofA Securities.

[Foreign Language] So congratulations on the very strong results. I have 2 questions. The first question is about the margin financing business. After capital -- after the follow-on offerings in fourth quarter, Futu further -- in April, Futu further strengthen its capital base. So will you try to increase the ratio of margin financing and security loan balance as a percentage of total client assets? And the second question is about client acquisition. You mentioned that 50% of the new client is for organic growth. Then how about the other half, what's the acquisition channel for the other half of client specifically? And pay more attention about ESOP clients, how much that they contribute to the new clients? And how do you recorded those ESOP clients? Will you recorded them as a new paying client when the stock is listed, or you will wait until their stock are vested?

Thank you very much. I will answer the first question. I will leave the second question to my colleagues, Robin and Daniel. Number one, I think we value our paying clients from a DCF value perspective, i.e., we more care about their lifetime value rather than the near-term P&L they can contribute in terms of our top lines or bottom lines. Therefore, I think we will not very aggressively encourage our clients to use the margin, because the margin financing involve very high risks. Therefore, I think in our mentality, investment education, how to let our investors know the risk is far more important our near-term monetization. If you look at our margin balance -- financing balance versus our total client assets ratio, this risk ratio historically is in the range of 5% to 7%. And I think definitely after we finish our follow-on placement, we do have more sufficient capitals to support our margin financing business. And in particular, our IPO subscription service in Hong Kong. But we will not intentionally to push up our clients' margin usage unless they know the risks.

Emma, this is Daniel. I'll take your second question on client acquisition. So about 50% of our new paying clients are from organic growth, then about 15% are from ESOP and group account opening. And the rest, 35% is roughly evenly split between online and off-line advertising as well as the third-party channel partners. So definitely, we think about the high-profile IPOs are conducive to our client acquisition, but it's very difficult for us to attribute certain client base to maybe 1 or 2 single IPOs. But we generally kind of observe an increase and uptick in our client acquisition before these IPOs take place. But it's very difficult to ascertain which clients come specifically from the IPOs. And for Kuaishou's case, like you mentioned. So for Kuaishou's employees that have stock options, right now, they're not counted as our paying clients.

As we do not have any further questions, I would like to hand the conference back to our host, Mr. Daniel Yuan. Please take over.

Thank you, operator, and thank you all for joining the earnings call today. On behalf of the Futu management team, I'd like to thank you for joining our earnings call. And if you have any additional questions, please do not hesitate to ask me or any of our Investor Relations representatives. Thank you, and good night.

Ladies and gentlemen, that concludes our conference for today. Thank you all for your participation. You may disconnect now. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]