Futu Holdings Limited (FUTU) Earnings Call Transcript & Summary

Hello, ladies and gentlemen. Welcome to Futu Holdings Second Quarter 2021 Conference Call. [Operator Instructions] Today's conference call is being recorded. [Operator Instructions] I would now like to turn the conference over to your host for today's conference call, Daniel Yuan, Chief Staff and Head of IR at Futu. Please go ahead, sir.

Thanks, operator, and thank you for joining us today to discuss our second 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 belief 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 statements. 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]

Hello, everyone. Thank you for joining the earnings call today. We achieved a milestone of 1 million paying clients as of the end of second quarter, translating into a 230% year-over-year growth. Net addition was 211,000, our second best quarter in history. Our relentless pursuit of premier user experience and brand image rewarded us with yet another quarter of rapid client-based expansion over 50% organically required paying clients, and a high-paying client retention rate of 97.8%.

[Foreign Language]

Going forward, our key growth strategies would be to defend and expand our leading position in Hong Kong, further take market share in Singapore and drive self-clearing in the U.S. to improve monetization and operational flexibility. In the second quarter, Singapore contributed nearly half of our new paying clients. Singapore represents a blue ocean opportunity, and we will leverage marketing and word of mouth referral to further capture user mind share. In the U.S., our self-clearing initiative reported accelerating progress as we now have migrated about 350 U.S. stocks to our proprietary clearance system. We are targeting to self-clear 50% of U.S. stocks by the end of this year.

[Foreign Language]

Our total client assets were HKD 503 billion at quarter end, representing 253% growth on a year-over-year basis and 9% growth on a quarter-over-quarter basis, despite challenging mark-to-market impact. Average client assets came down sequentially to HKD 503,000 as paying client acquisitions in new markets picked up and drags average balance.

[Foreign Language]

Total trading volume was up 104% year-over-year to HKD 1.3 trillion, of which U.S. trading constituted approximately 64%. Trading volume came down meaningfully from the first quarter due to a much lower turnover rate across different trading markets and client cohorts. We have seen our clients stay on the sideline to mid-market uncertainty, and we expect our trading volume growth in the coming quarters should be driven mostly by expansion in client counts and assets rather than trading turnover should current market environment persist.

[Foreign Language]

Our wealth management business, Money Plus, has been relatively immune to the monthly downturn, although the Hong Kong IPOs at the end of the quarter took away some of the assets accumulated over the quarter, and we expect steady asset balance growth in coming quarters. As of June 30, over 74,000 clients helped wealth management position and total client assets in Wealth Management were HKD 13.8 billion, up 59% year-over-year and 5% quarter-over-quarter. Money Plus established new partnerships with 7 reputable asset managers in the quarter, including Goldman Sachs, UBS and Principal. We also became the exclusive distributor for China AMC's Select Greater China Technology Fund, the only China technology-focused mutual fund in Hong Kong. We continue to innovate on product features. We added fund portfolio rebalancing function and upgraded the functionality of money market funds, where clients can now opt to automatically subscribing the deep money market funds based on their idle cash and margin balance position.

[Foreign Language]

Our enterprise business, Futu I&E, has 186 IPO and IR clients as well as 263 ESOP solutions clients as of quarter end, representing 191% and 153% year-over-year growth, respectively. We continue to enhance the value proposition of our ESOP business by providing an end-to-end one stop solution and various value-added services to the management team and employees of our corporate clients. Our experience in handling complicated ESOP clients in a scale across different geographies helps us continue to win over large-scale corporate clients.

[Foreign Language]

Despite low paying client attrition, we're encouraged to see robust user engagement data as average DAU remained above 1 million and daily average user time spend hovered around 30 minutes on each trading day in June. In an effort to drive user engagement, we continue to enrich content in our social community by attracting different stakeholders and improve content recommendation. As of quarter end, over 600 companies have set up enterprise accounts in our social community to interact with retail investors, providing our users invaluable data to facilitate the investment decision making.

[Foreign Language]

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

Thanks Leaf and Daniel. Please allow me to walk you through our financial performance in the second quarter. All numbers are in Hong Kong dollars unless otherwise noted. Total revenue was HKD 1.78 billion, an increase of 129% from the second quarter of 2020 and a decrease of 28% sequentially. Brokerage commission and handling charge income was HKD 798 million, up 95% year-over-year and down 40% Q-on-Q. The Q-on-Q decline was mainly due to a sharp drop in trading turnover amidst dampened market sentiment from about 6x in the first quarter to 3x in the second quarter, to be specific. This was partially offset by higher client assets and a slightly sequential uptick in blended commission rate to 6.1 basis points. Interest income was HKD 610 million, an increase of 194% year-over-year and a decrease of 7% Q-on-Q. The year-over-year increase in interest income was mainly driven by higher margin financing balance, higher securities borrowing and a lending service income as well as higher IPO financing income. The mild quarterly decline can be mainly attributed to a reduction in securities borrowing income as the market value of U.S. stock borrowing and borrowing rate on store sequentially. Other income was HKD 169 million, up 141% year-over-year and down 24% Q-on-Q. The year-over-year growth and the Q-on-Q decline can both be attributed to changes in our IPO subscription service charge income and currency exchange service income as market conditions fluctuated. In terms of cost, our total costs was HKD 279 million, an increase of 81% from the same quarter last year and a decrease of 37% from last quarter. Brokerage commission and handling charge expenses was HKD 145 million, an increase of 89% year-over-year. This increase was roughly in line with our changes of our brokerage commission and handling charge income. Interest income was HKD 80 million, up 98% year-over-year. The growth was primarily due to: number one, high costs associated with our securities borrowing and the lending business; and then number two, higher margin financing interest expenses driven by higher margin financing balance partially offset by lower cost of funding. Processing and servicing costs were HKD 54 million, up 48% year-over-year. The increase was primarily due to the increase in cloud service fees to process higher number of concurrent trades. As a result, total gross profit was HKD 1.3 billion, an increase of 143% from HKD 534 million in the same period in 2020. Gross profit margin increased from 77.6% in the second quarter of 2020 to 82.3% this quarter, thanks to high operating leverage as a result of our larger business scale. Total operating expenses was up 145% year-over-year and 32% Q-on-Q to HKD 647 million, over 40% of which was related to our international initiatives in Singapore and the U.S. market. R&D expenses was HKD 173 million, an increase of 48% year-over-year and a 26% Q-on-Q, roughly in line with our R&D headcount increase. We continue to invest in our U.S. clearing capabilities and have dedicated around 40% of our R&D personnel to product development in Singapore and in the U.S. to drive a smoother and customized product experience for local users. Selling and marketing expenses were HKD 377 million, up 292% year-over-year and 37% 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. In the second quarter of 2021, over half our sales -- selling and marketing expenses were devoted to the overseas market. G&A expenses were HKD 97 million, an increase of 91% year-over-year and 24% Q-on-Q due to increase in headcount for general and administrative personnel. Our effective tax rate increased from 9% in the first quarter to 14.5% in the second quarter since our total tax credit arising from accumulated loss in the Mainland business has been fully utilized so far, and our net revenue derived from our U.S. stock trading decline in the second quarter. Going forward, we expect our effective tax rate to be in the range of 12% to 14%. As a result, our net income for the quarter increased by 126% year-over-year and decreased by 54% Q-on-Q to HKD 534 million. That concludes our prepared remarks. We now like to open the call to questions. Operator, please go ahead.

[Operator Instructions] Your first question is from Katherine Liu of Morgan Stanley.

[Foreign Language] I will translate for myself. So I have 2 questions. First is, can the management please give us some guidance in terms of the third quarter-to-date results, including client acquisition pace, AUM per capita, turnover velocity, client acquisition costs and maybe some operating expenses growth rate? And second, in light of the regulatory uncertainties regarding restructured companies and ADRs, does the company have any plans regarding Hong Kong listing?

Thank you, Katherine. This is Arthur. I will take these questions. First of all, just quarter-to-date, I just want to share some color. Definitely, I think the market fluctuations quarter-to-date have some negative impact on our average client assets. So far, I think roughly our average client assets will be down around in the range of 10% to 20%, mainly attributed to the market's -- market loss. But we are very confident because even quarter-to-date, almost every day, we still see meaningful net asset inflows in terms of the wealth accumulation into 2 platforms. Therefore, I do think once the market is back to normal, these market loss or gain will become to the average number. And in terms of the client trading velocity, we do expect trading velocity has some rebound in July and August, given the market, especially high tech stocks have meaningful setbacks, we do see some cushions from the retail investors. And unlike the situation in second quarter, many investors just on the sideline, we do see some participations in the third quarter. So if based on the current run rate, I would expect in terms of top line, we may see some sequential Q-on-Q increase in the third quarter compared with the second quarter. In terms of the client acquisition costs, I think on the absolute amount levels, this marketing campaign spending will be roughly in line with what we did in the second quarter, but definitely supply acquisition speed will slow down due to the market conditions. So this will all affect the denominator numbers, and we will left out -- our actual number have certain increase in the first quarter compared with the second quarter. For your second question, I think, number one, our VIE structure is slightly different for many -- compared with many Chinese ADR companies, because most of us our revenue is now derived from the offshore, essentially we do not generate any revenues from our VIE structures. So even there will be some new regulations on the VIE structure, I do not expect that it will have some meaningful impact operational wise or financial wise to our business. And definitely, we have noted some regional trends in the capital markets, and we are actively conducting quality research and evaluation in this regard. We will make a very comprehensive assessment to ensure that decisions should maximize our shareholders as the long-term interest is made. Thank you.

Your next question comes from Ethan Wang from CLSA.