Futu Holdings Limited (FUTU) Earnings Call Transcript & Summary

Hello, ladies and gentlemen. Welcome to Futu Holdings Third Quarter 2021 Conference Call. [Operator Instructions] After management's prepared remarks, there will be a question-and-answer session. Today's conference call is being recorded. If you have any objection, 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 and Head of IR at Futu. Please go ahead, sir.

Thanks, operator, and thank you for joining us today to discuss our third 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 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 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] Thank you all for joining us today. In the third quarter, we added 166,000 net new paying clients, bringing our total paying clients to about 1.2 million. This was the seventh consecutive quarter where over 50% of new paying clients were acquired organically. Our quarterly paying client retention rate slightly slipped to 97% due to dent in market sentiment.

[Foreign Language]

[Interpreted] We continue to execute on our overseas strategy. In Singapore, we iterated on client incentives and budget allocation between brand and performance marketing to optimize client acquisition efficiency. In the third quarter, we observed higher retention rate and consistent asset inflow across client cohorts. We continue to expand product offerings in Singapore by launching U.S. IPO subscriptions, structured warrants and fund products.

[Foreign Language]

[Interpreted] In Hong Kong, we remain the top-of-mind retail broker as the number of our Hong Kong users already constituted 1/3 of the adult population in Hong Kong. We intend to further penetrate into the young and tech-savvy population and expand into the demographics that are currently not well represented in our client base. Despite the new players entering into the Hong Kong market, which has always been a very crowded space, we are confident to extend our leadership position because we believe the key success factors of a broker include a trustworthy brand, superior user experience, an end-to-end proprietary trading infrastructure, a strong capital base and close relationships with commercial banks, which all take time to cultivate and are where our competitive strengths lie.

[Foreign Language]

As of quarter end, total client assets were HKD 424 billion, representing 111% year-over-year increase and 16% quarter-over-quarter decrease. The sequential decrease was largely due to the sharp pullback of some Chinese new economy stock, though this mark-to-market impact was alleviated by robust net asset inflow. Average client asset balance dropped to HKD 363,000, which was tracked by lower account balance in new markets. However, in spite of the challenging market backdrop, both total and average client assets in Singapore increased sequentially, up 52% and 11%, respectively. For clients that we acquired 2 quarters prior, their average net asset inflow and account balance both tripled.

[Foreign Language]

[Interpreted] Trading volume was HKD 1.4 trillion, up 33% year-over-year and 3% quarter-over-quarter. HKD 680 billion or 50% of total trading volume came from U.S. stock trading, down 19% quarter-over-quarter due to lower trading turnover of U.S. tech stocks. Meanwhile, we continue to gain market share in Hong Kong futures and options trading.

[Foreign Language].

[Interpreted] Moneys Plus established new partnerships with prominent asset managers, including Schroders and Carlyle, bringing our total asset management partners to 56. By the end of the third quarter, Client Assets and Wealth Management reached HKD 17.7 billion, up 132% year-over-year. About 10% of our paying clients held wealth management positions. We further leaned into products and services for high-net-worth clients while onboarding more alternative funds and working with renowned asset managers to offer curated online workshops.

[Foreign Language]

[Interpreted] As of quarter end, we have 215 IPO and IR clients as well as 325 ESOP solutions clients, up 165% and 158% year-over-year. Companies include [indiscernible] adopted our ESOP service in the third quarter. Over 700 companies have opened enterprise accounts with us, including over 150 listed companies with market capitalization north of HKD 10 billion. In the third quarter, BYD Auto, JD Health, Pop Mart and Anta started to use our enterprise account to communicate with retail investors and post business updates.

[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 third quarter. All the numbers are in Hong Kong dollars unless otherwise noted. Our total revenue was $1.7 billion, up 83% year-over-year and 10% Q-over-Q. Brokerage commission and handling charge income was $933 million, an increase of 66% year-over-year and 17% Q-on-Q. The increase was driven by the 33% year-over-year growth in total trading volume and a higher blended commission rate of 6.9 basis points. Since most of our clients adopt the commission per share pricing model for U.S. stock trading, a decrease in the average share price of the stock they trade, resulting in a higher blended commission rate. Higher contribution from derivatives trading also support our commission rate expansion. Interest incomes was $632 million, an increase of 129% year-over-year and 4% Q-on-Q. The year-over-year and Q-over-Q increase was both driven by higher margin financing and the security lending income, partially offset by lower IPO financing interest income. Other income was $166 million, up 56% year-over-year and down 2% Q-on-Q. The year-over-year increase was primarily due to increase in enterprises public relationship service charge income and the currency exchange service income. The Q-over-Q decrease was mainly due to the decrease in IPO subscription fees and underwriting fee income under inactive IPO market. Our total costs were $267 million, an increase of 47% from $182 million in the third quarter of 2020. Brokerage commission and handling charge expenses was $125 million, an increase of 24% year-over-year and a decrease of 14% Q-on-Q. The expenses didn't grow in line with the brokerage commission and handling charge income due to our upgraded service package with our U.S. clearing house and the lower IPO subsequent fees. Interest expenses were $74 million, up 57% year-over-year and down 7% Q-over-Q. The year-over-year increase was due to higher margin financing interest expenses and higher expenses associated with our securities borrowing and the lending business. Though partially offset by lower IPO financing interest, interest expenses did increase in line with interest income as we increasingly shift our funding mix towards lower cost funding sources. Processing and servicing costs were $67 million, up 100% year-over-year and 25% Q-on-Q. The increase was primarily due to increase in system usage fees and the cloud service fees to possess a higher number of concurrent trades. As a result, our total gross profit was $1.64 billion, an increase of 92% from $764 million in the third quarter of 2020. Gross margin was 85% as compared to 81% in the third quarter of 2020. Our total operating expenses were $764 million, up 177% year-over-year and 18% Q-over-Q. We continue to invest in international markets, and we estimate over 30% of our operating costs were devoted to overseas markets. R&D expenses was $224 million, up 50% year-over-year and 29% Q-on-Q. We continue to add headcount to support the new product offering, U.S. clearing capabilities and the product customization for international markets. Approximately 40% of our R&D personnel were dedicated to our moomoo product nowadays. Selling and marketing expenses were $403 million, up 263% year-over-year and 7% Q-on-Q. The rising spending was driven by higher branding and marketing expenses in Singapore and in the U.S., in particular. In the third quarter, approximately 40% of our selling and marketing expenses were spent on overseas client acquisition. G&A expenses were $137 million, an increase of 122% year-over-year and 42% Q-on-Q. The increase was primarily due to increase in headcount for G&A personnel. As a result, our non-GAAP adjusted net income increased by 58% year-over-year and 17% Q-on-Q to $646 million. And non-GAAP net margin for the quarter was 37%. That concludes our prepared remarks. We now like to open the call to questions. Operator, please go ahead. Thank you.

[Operator Instructions] Our first question is from the line of Della Zeng of TH Capital.

I have two. The two many about the regulation impact actually. The first one is, you know the new jet from cyberspace administration of China requires cybersecurity assessment for listing in Hong Kong, well, especially for tech companies with data over 1 million users. So my question is, do you actually see any negative impact on your IPO pipeline because of the new regulation from CAC and you will expect the IPO pace in fourth quarter and next year will be slowed down a lot? The second one is in terms of your customer acquisition. There are some concerns about legality of offshore trading by online brokers. Just wondering if management can shed some light on the impact on the government regulation. Well, especially for customer acquisition in Mainland China, people may feel hesitate to open new accounts due to the regulatory concerns. Well, additionally, will that affect your customer acquisition strategy? Let me translate myself. [Foreign Language]

Thank you. I will take the second question first. I will leave the first question to my colleague, Leaf. In terms of the China regulations, I think we are not in the best position to prejudge what the regulator will do. I think so far, the impact to our client acquisitions in the Great China areas is manageable. I can share a little bit more color, which I think may be helpful for analysts and also the investors to gauge how the negative impact on the recent headline use because of that, what's the implication to our client acquisitions across board. Definitely, we see certain asset outflows among clients in the Great China areas, amid the concerns over media report. Overall speaking, we think the impact is still very short term and manageable from mid -- from the mid-October to mid-November, the net asset outflows accounts for less than 2% of our total client assets. And the situation started back normal from last week. In my personal thought, I think the worst is already behind us. Of course, the market volatility alongside with seasonality effect in Q4, together with this headline news, definitely enhanced attrition rate for existing paying clients and also create some challenges for new client acquisition across the board in the near term. But we think the overall speaking, the situation is still within our control.

[Foreign Language]

[Interpreted] Yes. We are business as usual here at Futu, and our business model is nothing new. So before our inception, this business has been there for years, and our business size is small relative to the whole industry. So our business model and how we serve our clients are identical to a lot of the other international Hong Kong and China brokers and banks in Hong Kong that help Chinese base access overseas trading, and we are operating under the same set of laws and regulations. You have to ask through the differences than in comparison to our peers, we invest more heavily into technology and innovation, and we attach more importance to user experience. And we have always been embracing the regulations and have a very high set of standards for operational compliance, and we are actively and transparently communicating with the regulators, and we anticipate and welcome more guidance from the regulators to both us and the industry as a whole. And if there are new regulatory guidance is coming out, I think we'll abide by these regulations as soon as possible. And as a listed company, we'll timely update any new information available to us. Yes. And also to your question about whether the IPO pipeline could be influenced? We feel like the IPO pipeline is more dependent on the overall market environment.than on the cybersecurity kind of investigations. So I think how the IPO pipeline will turn out in Hong Kong in the next couple of quarters will be largely dependent on the overall direction of the market. And also, I just want to point out that historically, we achieved like high single digit of our revenue through IP-related businesses, including IPO subscription fees and the IPO margin financing income. So we don't think it's a material impact on our business. and we have a lot more levers to go to further our growth. And as we mentioned in our opening remarks, we think there is still a huge underpenetrated population in Hong Kong that we could tap into and a lot of the international markets that we have entered, including the Singapore and the U.S. offers significant run rate for growth.

Our next question is from the line of Katherine Lei of Morgan Stanley.

[Foreign Language] I will translate for myself. So just 2 questions from me. First, just wondering the management help us to analyze how to view the overseas market growth opportunity or the room for growth for Futu? And then the second question is, can the company give us some guidance in terms of the fourth quarter-to-date operational data trend, such as the velocity, client assets, et cetera?

Okay. Sure. Katherine, let me just supplement the answer I mentioned before for your second question. Still, I will leave the first question to Leaf. I think in terms of the client activities, we see investor sentiment is warming up in the fourth quarter. Of course, in fourth quarter, we faced some long holidays such as National Holiday and also Christmas. If we do take out the holiday effect in Q4, we expect the overall trading volume may be similar to Q3 based on the current run rate. In terms of client assets, as I mentioned before, we definitely got some negative asset outflows because of the headline news recently. But the situation start to back to normal since last week. And in particular, we see very encouraging signals in our overseas markets such as Singapore. In our opening remarks, Leaf mentioned that our average client assets in Singapore already jumped 11% Q-on-Q basis. I do think on top of that, we will continue to see on a cohort and also on an absolute basis in Singapore market, we will still see another at least 15% increase Q-on-Q on top of the growth that we achieved in Q3. And also in terms of our wealth management products, so far, our asset and wealth management segment has demonstrated our strong resilience, and we do expect more product offering to be launched in Q4, which may further drive our AUM continue to go up.

[Foreign Language]

I think in Q3, we had about 2.2 million users in Hong Kong, accounting for about 32% of the population over age 18 in this region, meaning that about 1 out of every 3 Hong Kong adults is our user now. And our penetration rate among Hong Kong population between the age of 20 and 29 is about 20%. And meaning that 1 out of every 5 in this group uses our product. So in the Hong Kong market, we maintained a high penetration rate among young tech-savvy population, while focusing on acquiring the underpenetrated groups such as the middle-aged people and the female groups, et cetera. And in Singapore, the adult population is about 4.9 million. And assuming that about 30% of them have a brokerage account, there are approximately 1.5 million retail investors representing great potential for further penetration. And also as part of our future international strategy, we will take Singapore as our Southeast Asian headquarter spend into other countries in this region. And similar to Singapore, other Southeast Asian countries lag in terms of their brokerage service capabilities and user experience. And we see that there are approximately 33 million Chinese population in SEA and 22 million of whom are Internet users. And based on the IP address, Futu' existing users, we think that Futu has built a high brand recognition in many Southeast Asian countries already. And last but not least, I think we see potential for further growth in the U.S. market as well. We believe that moomoo [indiscernible] can balance between user-friendly mobile design and advanced product features and invest very well, filled the market gap between the incumbents in the market and a lot of these online brokers. And our net new clients in the U.S. increased meaningfully in Q3 on a sequential basis, benefiting strong our initiatives and broadening client acquisition channels. And going forward, we'll adjust our client acquisition strategy based on the market dynamics to reach our targeted client groups.

Our next question is from the line of Zoey Zong of Jefferies.

[Foreign Language] I have 2 questions. First, we noticed that company newly added 166,000 paying clients in Q3. Could you please provide some color about the user mix like how much came from Hong Kong, Singapore, Mainland and the U.S? And could you please also share the mix for the 1.2 million total paying clients? And my second question is regarding customer acquisition cost. So the impact customer acquisition cost was around HKD 2,400 in Q3. So how should we expect this next year?

Sure. I will take both questions. I think number one, the breakdown for the new clients acquired in Q3, in general, Great China areas account for roughly 60% of the new paying clients acquired for the quarter. The remaining 40% Singapore roughly accounts for 28%, and the remaining 11% belongs to the U.S. And also for your second question in terms of the marketing spending, I think what we focus internally is more the ARPU versus cap ratio. Definitely, you see the cap numbers in the third quarter increased from a Q-on-Q basis. Mainly, I think it's due to the -- because the market conditions, which led our attrition rate temporary go higher Therefore, on an average basis, you can see the cap number slightly go up from a Q-on-Q basis. It is very difficult for us to give you positive guidance for the cap number, which we heavily been impact by the market conditions, as you can imagine. But I think in our conviction, user engagement is always the most important things we care because the transition cost for the paying users to other competitors or to other channels take very high time threshold. Therefore, we still will more focus on the growth, definitely, we will on a close basis monitor our unit economics to make it more justifiable. For instance, if we look at our Singapore numbers, if -- I think back to second quarter this year, if we use the CAT number and also ARPU number at that time, our payback period for our Singapore paying clients is around 2.5 years. But now you can see after one quarter, our average client asset cohort already increased by 11%, and we do expect there will be another 15% jump in the fourth quarter. So on a more forward-looking perspective, the unit economics will become more and more makes sense after we further gain the trust and the confidence from the existing users who will inject more fundings into their accounts. And also at the same time, we will provide more product offerings to enhance our cap rate.

The next question is from the line of Charles Zhou of Credit Suisse.

[Foreign Language] I'll translate by myself. The first question, I just want to clarify, the 2% you just mentioned about outflows. So what do you mean by that? You just mentioned Greater China? Or which period, can you maybe just give us a little bit more color on that? Second question, you also mentioned that the onboarding process, the due diligence and also the risk management is same as banks. So do you mean that same as commercial bank or private bank for a security brokerage account? I also have 2 more questions here. The first one is we understand Futu has not adopted a 0 commission policy like many competitors do. So we have seen some promotion that offer 0 commission trading either by using a promotion code account opening or redeeming coupons and afterwards. So how do we think about the risk going forward in Hong Kong, Singapore as well as the monetization of the client AUM? The last one is also about the share buyback. So can you maybe give us a bit more color about your share back so far and say, at what price? And also like how many shares have you already buybacks?

Sure. Charles, you asked 4 questions. Let me just take number one, the number fourth first. Still, I will leave the second question and also the third question to Leaf. I think number -- in terms of the client asset outflows, as I mentioned before, I just want to share some latest colors in terms of the implications from the recent headline news. It is very difficult to attribute our client asset outflows because of -- whether because of the recent headline use or because of other reasons, but just to give you some very simple statistics, if we look back in the past 1 month, we do have some net asset outflow. I think the amount is roughly in the range of 1% to 2% of our total client asset balance at the end of the third quarter. So just to give you some sense in terms of the number. And also for the share buyback, I think definitely, we will -- this is a 13 months share buyback programs and also according to the SEC regulations, actually, we cannot conduct any share buyback during the result, the black power period. Therefore, so far, we have not conducted any share buyback yet.

[Foreign Language]

Sure. Yes. We -- as we mentioned earlier, we're advised by the same set of regulations and laws in terms of our account opening procedures, KYC and AML, et cetera. So we believe that what we do is in line with what other brokers and banks in Hong Kong, they currently do. We don't think there are differences.

[Foreign Language]

We don't think the competitive environment has changed much in the Hong Kong market. And in fact, this price wall between our competitors has been happening for a number of years. And as I mentioned in our opening remarks, we believe that the key success factors of a broker include a trustworthy brand, superior user experience, this end-to-end proprietary trading infrastructure, a very strong capital base and close relationships with commercial banks, and these really all take time to develop, and Futu has developed strong competitive strength in these areas. And also, we understand that the majority of the trading costs for Hong Kong stocks is coming from stamp duty, which is currently 3 bps. We currently charge a 3 bps commission, which is relatively low in comparison to the stamp duty cost. So we don't feel like the price well has affected margin and we don't have plans to change our pricing. And if pricing is the only lever our competitors can pull when they enter into the market, if they don't see financial operational results in the short term, they may feel a lot of pressure.

We have now reached the end of our question-and-answer session. And I would like to hand the conference back to Mr. Yuan for closing remarks. Please continue.

That concludes our call today. And I'll just have the Futu management team, I would like to thank you for joining us today. If you've any further questions, please do not hesitate to contact me or any of our Investor Relations representative. Thank you, and goodbye.

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