Futu Holdings Limited (FUTU) Earnings Call Transcript & Summary

Hello, ladies and gentlemen. Welcome to Futu Holdings Second Quarter 2022 Conference Call. [Operator Instructions] 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 second quarter 2022 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 uncertainty. 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]

[Interpreted] Thank you all for joining us today. As of quarter end, we had approximately 1.4 million paying clients, up 39% year-over-year. Net addition was over 60,000, bringing our first half paying clients growth to 143,000. This is also the 10th consecutive quarter for which organic growth contributed over 50% of new paying clients.

[Foreign Language]

[Interpreted] In the second quarter, client acquisition was resilient in Hong Kong, where we launched targeted marketing campaigns around the green bond issuance in May and attracted allocation-driven clients to subscribe to the green bond on our platform. We contributed over 1/3 of the overall green bond subscribers, which speaks to our leading brand recognition and superior product experience. In Hong Kong, we will continue to focus on clients over 30 years old as our current penetration rate among 30-plus Hong Kong residents is at a near 7.5%. To achieve that, we have rolled out new marketing initiatives and launched new features, including the light trading mode, which offers a more simplified and sleek trading interface and the regular savings plan for Hong Kong stocks, which caters to clients less interested in market timing. In Singapore, we've realized that the local users are more conservative during market downturn and thus launched a series of investor education activity to help users understand how to better navigate market turmoil and continue to diversify our product offerings in wealth management. We are encouraged to see that our quarterly client retention rate remained above 98% despite sharp market correction in April and May.

[Foreign Language]

[Interpreted] Total client assets decreased 14% year-over-year and increased 12% quarter-over-quarter to HKD 434 billion. The sequential increase was largely due to strong net asset inflow across different regions, and to a lesser extent, rebound of China technology names in June. In Singapore, we continued to acquire higher-quality clients. The average asset balance of our newly acquired paying clients in Singapore exceeded SGD 10,000 within 3 months. This compares to about 9 months for clients we acquired last year. Margin financing and securities lending balance increased 13% quarter-over-quarter as sentiments around technology stocks improved sequentially.

[Foreign Language]

[Interpreted] Total trading volume was HKD 1.3 trillion, up 2% quarter-over-quarter. U.S. stock trading volume was HKD 897 billion, constituting 67% of the total volume and up 6% quarter-over-quarter. The sequential growth was mostly driven by higher turnover of leveraged and inverse ETFs amid heightened market volatility. Hong Kong stock trading volume was HKD 424 billion, down 5% sequentially due to muted market sentiment around China tech names in Hong Kong. In the meantime, our market share in Hong Kong futures and options trading climbed to 6.7% and 13.5%, respectively. We launched multi-leg options function for Hong Kong stocks by the end of June, which enables our clients to formulate advanced options trading strategies to better manage risk and achieve investment targets. We believe this function will attract more sophisticated options traders to our platform.

[Foreign Language]

[Interpreted] Total client assets In wealth Management were HKD 22 billion, up 59% year-over-year and 5% quarter-over-quarter. As of quarter end, over 200,000 clients, 15% of our total paying client base, held wealth management products. The money market funds became increasingly attractive to our clients amid interest rate hike. And to help our clients navigate a ripe inflation environment, we also launched the model portfolio of global real return strategy in collaboration with Aberdeen. In Singapore, wealth management asset balance increased 377% quarter-over-quarter as we further expanded mutual fund offerings and launched new product features.

[Foreign Language]

[Interpreted] As of quarter end, we have 276 IPO and IR clients as well as 519 ESOP clients, up 48% and 97% year-over-year. Over 1,000 companies are now using their enterprise accounts in our social community to communicate with retail investors. Among the new additions in the second quarter are BYD Electronics and Tianqi Lithium. In the first 2 quarters, we acted as the underwriter for 12 Hong Kong IPOs, tied for first place in terms of the number of Hong Kong IPOs underwritten.

[Foreign Language]

[Interpreted] We believe that our superior user experience remains our biggest competitive advantage. In the first half of this year, we continued our relentless pursuit of product experience by releasing 99 versions of our mobile app and desktop clients and adding 3,989 new features, up 21% and 52% year-over-year. Going forward, we intend to launch more customized features for clients of different regions.

[Foreign Language]

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

Thanks, Leaf and Daniel. Now please allow me to walk you through our financial performance in the second quarter. All the numbers are in Hong Kong dollars, unless otherwise noted. Our total revenue was HKD 1.7 billion, up 11% from HKD 1.6 billion in the second quarter of 2022. Brokerage commission and handling charge income was HKD 1 billion, an increase of 30% year-over-year and 7% Q-over-Q. The year-over-year increase was mostly driven by a higher blended commission rate of 7.7 basis points, up from 6.1 basis points in the year ago quarter, underpinned by greater contribution from derivative trading. The Q-over-Q increase can be attributed to our commission-per-share pricing model for U.S. stock trading as a decrease in the average share price of the stock our clients trade can result in a higher blended commission rate. Interest income was HKD 620 million, an increase of 2% year-over-year and 8% Q-over-Q. The slight increase year-over-year was due to higher income from cash deposits and securities lending, which was largely offset by lower margin financing income and IPO financing interest income. The Q-over-Q increase was mostly due to higher interest income from cash deposits amidst a rising rate environment. Other income were HKD 93 million, down 45% year-over-year and 6% Q-over-Q. The year-over-year decrease was driven by a lower IPO financing service income and underwriting fee income. The Q-over-Q decrease was mainly due to lower currency exchange income and enterprise public relationship service charge income. Our total costs were HKD 208 million, a decrease of 25% from HKD 279 million in the second quarter of 2022. Brokerage commission and handling charge expenses were HKD 88 million, down 40% year-over-year and 10% Q-over-Q. Despite the year-over-year increase in brokerage commission and handling charge income, the expenses declined due to the cost savings from our U.S. sales -- U.S. securities self-clearing migration and upgraded service package with our U.S. clearinghouse and the lower IPO subscription fees. The Q-over-Q decrease was mostly due to self-clearance. Interest expenses were HKD 27 million, down 67% year-over-year and 32% Q-over-Q. The year-over-year decrease was mostly due to lower expenses for margin financing and IPO financing. The sequential decline was driven by lower blended funding costs as we finance an increasing percentage of our [ margin ] book with cash collateral generated from security borrowing. Processing and service costs were HKD 94 million, up 74% year-over-year and 1% Q-over-Q. The year-on-year increase was primarily driven by higher cloud service fees to support overseas market expansion and process a large number of concurrent trades. As a result, total gross profit was HKD 1.5 billion, an increase of 19% from HKD 1.3 billion in the second quarter of 2021. Gross margin was 88% as compared to 82% in the second quarter of 2021. Operating expenses were HKD 747 million (sic) [ HKD 722 million ], up 12% year-over-year and down 4% Q-over-Q. To break down, R&D expenses were HKD 292 million, up 69% year-over-year and 3% Q-over-Q. The increase was mainly due to an increase in R&D head count as we continued to support a new product offering, invested in the U.S. self-clearing capabilities and customized product experience in different markets. Selling and marketing expenses was HKD 219 million, a decrease of 42% year-over-year and 24% Q-over-Q. The year-over-year decrease was due to lower overall marketing and branding spending, especially in international markets. The expenses declined Q-over-Q as marketing spending came down due to slower paying client growth. G&A expenses were HKD 211 million, up 118% year-over-year and 19% Q-over-Q. The increase was primarily due to increase in head count for general and administrative personnel. As a result, our net income increased by 20% year-over-year and 12% Q-over-Q to HKD 639 million (sic) [ HKD 642 million ]. Net interest margin (sic) [ net income margin ] expanded to 37% in the second quarter as compared to 34% in the same quarter last year, partially attributed to lower tax rate of 10%. This lower tax rate was due to the tax credit benefit from our U.S. self-clearinghouse. We maintain our long-term tax rate guidance of 12% to 14% for tax benefit [ for later ] another 2 quarters also. That concludes our prepared remarks. We'd now like to open the call to questions. Operator, please go ahead.

[Operator Instructions] And the question comes from Cindy Wang from China Renaissance.

[Foreign Language] Okay. So I have 2 questions. So first question is, can management give us some breakdown for the customer acquisition by different regions? Since July and August, the stock market turnover are coming down. So what's the new customer acquisition trend in July and August? Please give us some color on that. And the second question is related to Singapore. Since Futu has got the self-clearing license in Singapore, so do we have any schedule when we will finish the self-clearing for the Singapore stocks? And the ones we finished the self-clearing, can we have further helping out in terms of the Singapore new customer acquisition?

Thank you, Cindy. Let me just answer your second question first. I will leave the first question in terms of the new paying clients breakdown to my colleague, Robin. I think now the most -- the focus of our technology capabilities still lies on our U.S. self-clearing operations. This migration has conducted very smoothly. And so far, we have already migrated over 80% dollar value of our U.S. security positions from our business partners to our own clearing house. And we do expect this exercise will be largely complete by the end of this year. Afterwards, we do think -- you're right, the self-clearing capability in the Singapore market definitely is on our schedules, but we will be following subsequent to the completion of our U.S. self-clearing migrations.

[Foreign Language]