Futu Holdings Limited (FUTU) Earnings Call Transcript & Summary

Yes. And also I want to supplement, if I may, some initial observations since we published an announcement to remove our app from the metric Apple stores last Tuesday. We're very delighted that it seems that our existing China client population are very prompt about this headline news. We do not see any meaningful abnormal churn rates and also the client net asset outflows in the past week.

Thank you. We'll now take our next question. This is from the line of Cindy Wang from China Renaissance.

[Foreign Language] So I have question -- two questions. First question is related to commission rate. So the commission rate has slightly down sequentially. So may I know what the reason behind it? Is that because of the U.S. stock refund impacted or the lower derivative trading in the first quarter? The second question is since we've seen the news about that Futu is going to open the first shop in Hong Kong, could management let us know what kind of services the shop will provide? And could investors open trading accounts through the shop in the future?

Thank you, Cindy. I will take the first question. And for the second question, Leaf will answer. In terms of commission rate, you are right. I think the fluctuation is due to the 2 reasons you both mentioned. Number one is primarily due to the U.S. stock trading pattern as we elaborate to the market several times. It is more due to the U.S. market rebound, especially for these tech names -- big tech names in the first quarter. I think going forward, they are -- we do not feel any strong competition in terms of pricing in Hong Kong and in other markets. Of course, there will be some natural fluctuations from a quarter-to-quarter perspective due to the U.S. stock trading pattern. And also in the second quarter, so far, given the market is trading in a very narrow range bond, so what we see, the clients' activities on the derivative side, especially on the option and the future, start to be decreased on a Q-on-Q level. So this will have some implications in the second quarter blended commissions. I hand over to Leaf for your second question.

[Foreign Language]

[Interpreted] We actually have plans to open off-line stores for a while, and we have been preparing for it. I think recently, we're going through renovations of the off-line stores. So probably logo attracted media attention. And the reason we opened this off-line store was actually drawing inspirations from Apple's off-line store. I think the store will help our potential clients better experience our products and services. And also, we can answer a lot of your questions face-to-face. As we continue to increase our client penetration in Hong Kong, I think the store will help us reach the clients that we're not able to reach through online channels and further expand our client acquisition channel. Thank you.

Thank you. And we'll now take our next question. This is from the line of Zoey Zong from Jefferies.

[Foreign Language] Congratulations on the solid results, and I have 2 questions. So first, could you please provide some color about our user acquisition strategy this year? We have noted that in Q1 our sales and marketing expenses and customer acquisition costs both declined sequentially. Recently, we have seen company's promotion in Hong Kong. So just wondering what's our user acquisition target and the cost in Q2 full year and the longer term? And my second question is about our strategy for wealth management business. Will we launch our own fund products? Or do we just perform a distributor?

Thank you, Zoey. I will take both of your questions. I think number one, in terms of the client acquisition, you can see in the first quarter implied CAC is roughly in line with what we achieved in the fourth quarter of last year. I think going forward, despite -- of course, second quarter, it should be even more challenging given the market conditions, especially in Hong Kong. The index is trading in a very narrow range, and we have no any meaningful IPO project to the market. So it will have some negative implication to our client acquisition. But having said that, I think overall, our CAC target this year should be similar to compared with last year. Particularly, in Hong Kong, we will continue to double down our efforts in terms of the market share gains, not only just to the millennial generations, which we used to take into, but with -- as Leaf and Robin mentioned before, we were also focusing on these some new population such as the female population and also the client over the age of 40s. Number two, in terms of wealth management, I think you are right, in the foreseeable future, our role will still be the facilitator or distributor to our clients. We do not have any confirmed time schedule or plan to package our products by using our own money. Thank you.

Thank you. We'll now take the next question, this is from the line of Frank Zheng from Credit Suisse.

[Foreign Language] This is Frank from Credit Suisse. I have 2 questions. The first one is on the breakdown of interest income in terms of return on deposit and return on the margin financing security lending business. And similarly, what are the sizes of each component of interest expenses? And secondly, how should we think about the growth rate of operating expenses going forward? Will the company take some measures to optimize the expenses?

Thank you, Frank. I will take both of your questions. In terms of the breakdown of the interest income, as you can imagine, we're key beneficiaries of the U.S. rate up cycle. So in the past several quarters, you can see our interest income continued to increase sequentially, largely due to the fed rate hike and also the liquidity situations in Hong Kong. So you can imagine the majority of our interest income come from the clients idle cash deposits nowadays. Having said that, you can see our margin balance also increased Q-over-Q in the first quarter. So the absolute contribution from margin business also is very healthy. In terms of your second question regarding the operating expenses, I think we have given some guidance to the market in last earning call -- in the last earning -- earning call. We're looking for roughly 15% to 20% headcount increase year-over-year primarily to support our international market expansion. Most of this headcount increase will be on the R&D side. Of course, there will be new overseas office opening, so there will be associated rental expenses and also the security activity colleagues be placed in these local markets. I think going forward, definitely, there will be more -- some rigorous expenses control, especially on the G&A expenses, which we can see there is still some room to further enhance. But I think in terms of R&D, which we think it is not expensive, to some extent, we think it is our investment. So we will continue to make a huge effort on the R&D which will be our core advantage compared with our peers. Thank you.

Thank you. We'll now take the next question. This is from Leon Qi from Daiwa.

[Foreign Language] Congratulations on the very strong results. I have 2 questions. The first one is still on the regulations from the Mainland China side. We noticed that from CSRC's public announcements, one of the principles from the regulator is to effectively dissolve the existing users. Just wondering if management could share with us any color on what's the latest stance from the regulatory at the moment on the existing client base. And the second question is on the wealth management business. We did appreciate the very strong AUM growth on the wealth management business. From a longer term, just wondering how management sees the AUM of your wealth management business which is the buy-side business? How does your buy-side AUM would compare with your sell-side traditional brokerage AUM? Just appreciate if management give us any long-term color on that.

Thank you, Leon. Maybe I'll take your second question first and leave the first question to Leaf to give you some more sharing about the regulations for the existing clients. You can understand we're actually a very dedicated apprentice of Charles Schwab in the United States. So I think a lot of lessons we learned from Schwab is that eventually we want to be asset aggregators for our users and provide life -- provide lifetime service -- financial service down the road. So, so far, we do not set any specific targets in terms of portions between the wealth management AUM versus our clients' trading AUM. I think now the wealth management AUM roughly accounts to close to 10% of our total clients assets. Hopefully, I hope such proportion will continue to increase up to 20% to 30% in the next 3 to 5 years. Definitely, there will be a very long journey to go. As you can imagine, wealth management is a business which time is your friend. But I think we're fully dedicated and fully commitment on these directions to rolling the snowball step by step. Now I'll hand it over to Leaf for your first question about the Mainland regulations.

[Foreign Language]

[Interpreted] Based on the spirit of CSRC's announcement on December 30 and statements made on February 15, resolving listing business is to let clients churn naturally while providing them with proper services, not turning them away. So clients who stopped trading due to investment losses or when they need their funds for other purposes, which will lead to a natural churn for clients. And with our new clients, the number of existing clients will reduce as time goes by. Thus serving the existing clients themselves is the prerequisite for orderly resolving existing clients. Thank you.

We'll now take our next question, and this is from Han Pu from CICC.

[Foreign Language] Firstly, I want -- could you please share us more about why we choose Malaysia as our new market? And do we have more information to share about the market room, the competitive landscape, the local investor behavior and the product supply in this market? And secondly, regarding the Singapore market, we see both the paying client number and the average asset -- client assets keep growing quarter-over-quarter in the Singapore market. If we see the cohort of the first launch in the first quarter of 2021, like 2 years before, how was the average client assets and the year follow net asset inflow? Have we reached the breakeven point and that we start to make the profit?

Okay. Thank you. Maybe my colleagues, Robin can answer the first question about the competitive landscape and also our competitive advantage in Malaysia. And I'll take your second question. Robin, please.

[Foreign Language]

[Interpreted] So the population of Malaysia is around 33 million with the Chinese population accounting for about 20%. And as of 2022, there were about 2.1 million active retail trading accounts for Malaysian stocks, while the number of trading accounts for U.S. stocks, Hong Kong and Singaporean stocks are in the hundreds of thousands and are constantly rising. And we observed that the retail participants in Malaysia are gone and are highly accustomed to digitized products. And now the new personal accounts opened in 2022, 59% of them come from investors age 23 to 45. Currently, in Malaysia, the traditional bank affiliated securities firms are dominant, while the online brokers started relatively late. However, due to the overall trend of younger retail investors and their high acceptance of Internet products, we think there is huge potential for online brokers to further penetrate. In Mainland -- sorry, mainstream Internet brokers such as Rakuten, iSPEED and MPlus are relatively small in scale and their product capabilities are pretty basic with almost no social community operations. And on the other hand, our product capabilities have strong advantages, including a wider variety of products, advanced market data and order types and rich fundamental and technical analysis tools. And in addition, the trading fees for foreign stocks like U.S. stocks are pretty high in Malaysia, with each trade costing as much as USD 10 to USD 25 and Futu can greatly reduce the trading costs of these offshore stocks. And finally, we have an active social community, which investor education materials and very strong Internet operational capabilities, all of which we think can provide Malaysian investors with a very differentiated experience. Thank you.

Thank you, Daniel and Robin. For your second question, I -- we entered into Singapore markets roughly 2 years ago. So the first batch of our core client cohort assets increased by 2 to 3x in the past 2 years. We're very encouraged to see the clients cohort and also the clients retention. So now for the first batch, 2 years -- the clients which we acquired 2 years ago, they have already surpassed our client acquisition costs, which means contribute to operating profit nowadays. I think we're extremely confident about our profitability and earning powers in the Singapore markets alone not only just because of the -- our cohort will continue to enhance our ARPU and the client assets, but more importantly there will be a lot of initiative efforts to cutting the costs down, not only the operating cost, but also the clearing costs such as our U.S. stock trading, which we still deal with our Singapore-based clients through our external partners. In the second half of this year, we do have a plan to gradually migrate our U.S. stock trading for Singapore clients from external partners to our internal U.S. clearinghouse. So this will also meaningfully decrease our costs relating to the U.S. stock trading which will further enhance our profitability in Singapore. Thank you very much.

Thank you. And I will now hand the conference back to Yuan for some closing remarks.

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

Thank you. This does conclude the conference for today. Thank you for participating, and you may now disconnect. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]