Futu Holdings Ltd Q2 FY2020 Earnings Call

Hello, ladies and gentlemen. Welcome to Futu Holdings' Second Quarter 2020 Conference Call. At this time, all participants are in listen-only mode. After management's prepared remarks, there will be a question-and-answer session. 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 call 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. Thank you.

Thanks operator and thank you for joining us today to discuss our results for the second quarter of 2020. 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 would 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 us today, we're pleased to announce that we continue to achieve exponential growth across our operating and financial matrices in the second quarter of 2020 following a very successful first quarter. [Foreign Language] We achieved the highest paying client growth rates since our IPO in the first quarter of 2019. We added 64,566 paying clients on a net basis in the second quarter, bringing our total number of paying clients to 303,102, up 84% year-on-year. Both our China Mainland and Hong Kong paying clients recorded stellar growth. Our China Mainland paying clients hit a record high growth rate since the fourth quarter of 2018, while the number of Hong Kong paying clients jumped 125% year-on-year. Notably, organic growth continued to contribute over half of our new paying clients. [Foreign Language] During our fourth quarter 2019 earnings call, we guided for 90,000 paying clients addition in 2020. Six months into 2020, we have already exceeded our full year growth target. We're now lifting our guidance to 280,000 net new paying clients this year, which translates to 141% year-on-year growth in our total number of paying clients. [Foreign Language] Besides total paying clients, we also witnessed robust growth momentum in total client assets and stable client retention with growth in both paying clients and average assets per clients, our total client assets reached HKD142.4 billion, representing 108% growth on a year-on-year basis and 44% growth on a quarter-over-quarter basis. The past quarter was our sixth consecutive quarter with a churn rate of below or equal to 2%. [Foreign Language] As for trading volume, our total trading volume reached a historic high of HKD643.9 billion, up 202% year-on-year. U.S. stock trading volume was HKD429.3 billion, which accounted for 66.7% of our total trading volume. In July, we launched Hong Kong Stock futures and MSCI Index futures trading. Going forward, we will continue to enrich our derivatives trading offering. [Foreign Language] The increase in U.S.-listed Chinese companies seeking secondary listing in Hong Kong and the surge of high profile Hong Kong IPOs act as major tailwinds for us to further grow and engage our paying clients. Our clients' total subscription for JD.com and NetEase’s Hong Kong IPOs both exceeded HKD15 billion. We have also seen our plans develop a growing appetite for biotech IPOs with a total subscription for [Indiscernible] on medical and [Indiscernible] IPOs, exceeding HKD19 billion and HKD14 billion respectively. [Foreign Language] Money Plus maintained strong growth in the second quarter and remains our strategic focus. We established new partnerships with eight reputable mutual fund managers, including T. Rowe Price, Franklin Templeton, and Amundi. We also started offering our professional investors private equity funds in June, including these real estate funds from Oaktree. Besides expanding fund offerings, we continue to add on new features, including an automatic investment scheme that allows for automatic investments into the same funds at predefined time intervals. As of June 20th, total client assets and wealth management reached HKD8.6 billion, representing 37% sequential growth. Over 25,000 clients or over 8% of our total paying clients held mutual fund positions at the quarter end, and we see significant room for further penetration into our client base. [Foreign Language] Our enterprise service continues to scale. We had 114 stock plans and 64 IPO and IR clients as of the end of 2Q. Our ESOP service is gaining significant traction among industry leaders in TMT, automobile, and biotech sectors. Companies like Baker, [Indiscernible] Motors, Endocare Pharma and [Indiscernible] Medical have all retained us as their ESOP provider. [Foreign Language] As a leading online brokerage and growth management platform, we offer superior technology infrastructure that allows for stable trade execution. Despite a highly volatile stock market due to COVID-19, our service availability rate in the first half of 2020 reached 99.98%. In April, we doubled our throttle rate in Hong Kong from 100 to 200 to process a higher number of concurrent trades. [Foreign Language] I am pleased to share that on August 12th, Futu Singapore Ltd. was granted in-principle approval from the Monetary Authority of Singapore for the Capital Market Services license application. This marks a milestone in our internationalization and we will continue to look for new markets to extend the footprint of our business. [Foreign Language] Next, I'd like to invite our CFO, Arthur, to discuss our financial performance.

Thanks, Leaf and Daniel. In the second quarter, we continued to deliver outstanding financial results. We recorded total revenue of HKD688 million, up 165% year-over-year and 40% quarter-over-quarter. Our net income was HKD236 million, up 329% year-over-year and 52% quarter-over-quarter. Our total revenue structure and the key revenue lines have been largely consistent with past quarters. Let me walk you through some of our financial details for the second quarter. Brokerage commission and handling charge income was HKD410 million, an increase of 236% from the same period in 2019 and up 37% from Q1. The growth was primarily due to 202% year-over-year growth in our total trading volume. Our blended commission rate went up to 6.4 basis points on the back of increasing penetration of trading in the U.S. market. Additionally, more clients traded low-value stocks during the quarter in the U.S. market, which led to a higher implied take rate. Brokerage income contributed 60% of our total revenue in the quarter. Interest income was HKD208 million, an increase of 82% year-over-year and 44% quarter-over-quarter. Margin financing interest income increased due to a 49% year-over-year growth in daily average margin financing balances. IPO financing interest income increased significantly, thanks to our active Hong Kong IPO market and our clients' increasing appetite to subscribe to high-quality IPOs on margin. Interest income, in total, contributes about 30% of our total revenue. Other income was HKD17 million, a 192% year-over-year growth, which was primarily due to an increase in IPO financing service charge income and a fund distribution service income from our wealth management business. Other income contributed about 10% of our total revenue. On the cost side, total costs were HKD154 million, an increase of 141% year-over-year and 31% quarter-over-quarter. Brokerage commission and handling charge expenses grew 221% year-over-year to HKD77 million, which was mostly in line with our trading volume growth. Interest expenses increased by 111% year-over-year to HKD40 million, primarily related to our margin financing business and IPO activities in Hong Kong. Processing and service costs increased by 76% year-over-year to HKD37 million. The rise was primarily due to increased market information and data fees as well as a rise in the total [ph] rate. As a result, gross profit increased by 172% year-over-year to HKD534 million. Gross margin was 78% compared to 75% in the same period last year. Total operating expenses were HKD264 million, an increase of 82% year-over-year and 35% quarter-over-quarter. Among them, R&D expenses were HKD117 million, an increase of 83% from the same period last year and 39% from last quarter. The increase was primarily due to the continuous increase in R&D headcount as we persist in investing in our technology platform to sustain long-term growth. Selling and marketing expenses were HKD96 million, up 129% year-over-year and 48% quarter-over-quarter as we continue to roll out our marketing and branding activities to attract new paying clients. Our acquisition costs per each new paying client were around HKD1,500, down 8% quarter-over-quarter. G&A expenses were HKD51 million, an increase of 31% year-over-year and 9% quarter-over-quarter, which is largely in line with our overall business growth. As a result, our non-GAAP adjusted net income increased by 312% to HKD243 million. The strong bottom-line growth was primarily due to significant topline improvement and proven operating leverage. That concludes our prepared remarks, and we would now like to open the call to questions. Operator, please go ahead.

Certainly. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] We have the first question from the line of Weicheng Tang. Please go ahead.

Hi, Leaf, Arthur. Yes, thanks for the introduction and firstly, congratulations on the strong earnings in the second quarter. So, I have two questions. One is about the paying clients; we see a significant decline in acquisition in the second quarter even better than the historical high in the first quarter like 40,000, now we have about 65,000 new paying clients. So, can you elaborate more on the drivers of the paying client growth? And how do you see the momentum continuing in the second half of this year? The second question is more of a broader question. So, basically, we see retail activity, particularly online retail trading, has picked up quite a lot across the region like Hong Kong, China, and the U.S. It's a very good operating environment for Futu, but we also see competition is rising with [Indiscernible] introducing the zero commission package in Hong Kong a few months ago, and maybe there are more competitors entering the market. So, I would like to ask: if you're looking at a one to two years horizon, what do you think is the biggest opportunity as well as the biggest challenge for Futu? Thank you.

Okay, thank you, Weicheng. I think I suggest my colleague Robin answer your first question and Leaf will answer your second question.

[Foreign Language] So, I think there are three major reasons behind our robust paying client growth. The first one being the COVID-19 pandemic has expedited the change in the behavioral patterns of retail clients, specifically migrating from offline financial institutions to online trading platforms. Additionally, increased market volatility has attracted a lot of new investors and new capital. The second reason is that Futu has long been devoted to optimizing our user experience and has created a very strong network effect and established brand awareness. In the first two quarters of this year, organic growth continued to contribute over 50% of our new paying client growth. The third reason is that our operating efficiency also continues to improve. The conversion rate from our leads to paying clients continues to rise. Those are the three main reasons behind our paying client growth. Going forward, we are optimistic about our paying client growth. We see very strong paying client contributions from various channels. As of the end of 2019, 70% of our paying clients were from Mainland China and 30% from Hong Kong. By the end of this year, we expect Hong Kong paying clients to contribute over 40% of our total paying client base. We just received the in-principle approval for our license application in Singapore. Therefore, we believe that both the U.S. local market and the Singapore market could be the next steps for our paying client growth.

[Foreign Language] Right. Many brokers in Hong Kong offer zero commission, Huatai is not the first one, and it certainly will not be the last one. To be honest, we haven't felt much pressure from these players. Our paying client growth has demonstrated stronger growth momentum than ever. In the Hong Kong market, there's a 10 bps stamp duty, so Futu is currently charging three bps for Hong Kong stock trading. We think further decreases in our trading commission bring little incremental value to the overall reduction of trading costs. For a long time, Futu has not been the broker that offers the lowest commission rate in the market; we believe we have the strongest overall user experience. Beyond the significantly lower commission rate compared to the industry average, we provide in-depth market data, a stable trading system that allows high-quality trade execution, high-quality market use, and a very active social community platform. These factors are all crucial for attracting new customers and take time to establish. [Foreign Language] In terms of our market opportunities, our target markets still offer tremendous growth potential, particularly in trading markets. I believe that the Hong Kong and U.S. stock markets are among the most attractive equity markets worldwide. Hong Kong's stock market ranked number one in 2018 and 2019 in terms of equity raised through IPOs. As more high-quality new economy companies list in Hong Kong and more Chinese ADRs seek secondary listings in Hong Kong, it will further contribute to the prosperity of the Hong Kong Stock Market. Simultaneously, the U.S. stock market has some of the most attractive investment opportunities in the world, and we believe these markets will continue to attract new capital, enabling Futu to increase our market share. In terms of our client base, we believe the online brokerage business has a strong network effect. We are confident in sustaining rapid growth in our total number of clients. There are over 20 million Chinese nationals with overseas assets, and there are about two million retail stock traders in Hong Kong. Considering Futu has about 300,000 paying clients, we believe there is still significant room for growth. The policies in the Greater Bay Area will also further benefit us. Aside from our two main target markets, China Mainland and Hong Kong, we will continue to expand globally. Our Moomoo app, aimed primarily at the domestic U.S. market, has begun to attract a large fan base, and we will continue to optimize our products and enhance our influence. Yesterday, our Singapore entity also received in-principle approval for our license application from the Monetary Authority of Singapore, and we will pursue opportunities in Southeast Asia as well. Our wealth management business is also a key strategic focus; we launched this business under a year ago and have already amassed total client assets of over HKD8.6 billion. Current data suggests that wealth management continues to attract additional assets, and we aim to develop Futu into a one-stop wealth management platform to encourage clients to entrust more assets for us to manage. Lastly, challenges arise with increasing clients, soaring trading volumes, and heightened market volatility, which puts pressure on our trading system and risk management capabilities. We will ramp up our R&D investment to ensure the stability of our trading system and enhance our risk management abilities. As our business grows, we will continue to hire more personnel and work on optimizing our talent structure, focusing on attracting finance professionals with international backgrounds and retaining and incentivizing our existing talent pool. Weicheng, I hope that answers your question.

Can we move to the next question?

Yes, please.

First, congratulations on the very strong quarter. So I have a couple of questions here. The first is about your client base for the new paying clients. I would like to ask about the breakdown between Hong Kong and Mainland China clients in terms of the new paying clients in the second quarter? Also, regarding your full-year guidance on new paying clients, we see it's 280,000, a very strong number. Just wondering if you can share some color on the recent two months, like July and August, and how you can support confidence for the full year or second half's continued strength? Additionally, I'd like to ask about the client size; we note that the conversion rate has been improving. I believe you also mentioned the conversion rate from registered clients to paying clients. I wonder if there's a higher conversion rate with Hong Kong clients versus Mainland China clients, considering the controls which may lead to lower conversion rates. So, I would like to know if you can break down the conversion rates for those two markets. Lastly, I want to ask about your trading volume that you reported this quarter; we have seen very strong growth, much stronger than the Hong Kong market. So, wonder if you can share the reasons behind this strong growth and whether this is skewed more towards U.S. companies or Chinese ADRs and whether your biggest strength is sustainable going forward. Lastly, I want to understand your thoughts on international expansion; we understand you're expanding into the U.S. and Southeast Asia market, but also want to know your thoughts on the Asia market license, which I understand isn't fully opened yet in terms of license approval, but thinking longer term, maybe two to three years or even longer down the road, what's your thoughts on the chances of getting an Asia license? Thank you.

Okay, thank you, Daphne. Let me just answer your first, second, and fourth questions. I will leave the third question to Robin, and the final question regarding the Asia market access to Leaf. In terms of the breakdown of new client acquisition for this quarter, China roughly accounts for 53% of the total and the remaining 47% came from Hong Kong. In terms of the trading volumes, as mentioned before, the U.S. trading volume roughly accounts for two-thirds of our total trading volumes achieved in this quarter regarding stock trading by all clients; I think it leans more towards those purely U.S. stocks, such as Tesla, Facebook, and GE, etc. The overall U.S. ADR trading volume is about 15%. Regarding sustainability in trading volume, I believe it's due to the high volatility in the U.S. markets, particularly in the first half of this year. Going forward, I think the proportion of Hong Kong trading volumes will continue to rise as we gain market share in the Hong Kong market; from the first quarter, our market share in Hong Kong was 1.4%, and it has increased to 1.6% in the second quarter. This momentum has continued into July and August, where our market share in Hong Kong reached 2.5%. I believe this will underpin our growth strategies in the Hong Kong market trading volumes. Now I will let Robin address your second question about the conversion rate going forward and also our Asia market access by Leaf. Thank you.

[Foreign Language] So, there are three main reasons behind the higher conversion rate from total clients to total paying clients. The first reason is, as you mentioned Daphne, there is a higher percentage contribution from our Hong Kong paying clients, who typically demonstrate higher conversion rates. The second reason, as I just mentioned when addressing Weicheng’s question, is we see an increasing conversion rate between our leads and our paying clients. We've optimized the account opening and cash deposit processes, making it easier for our clients to become paying clients. The third reason is due to general market volatility and the influx of high-quality China ADRs returning to Hong Kong, which has motivated many clients to take advantage of this opportunity to make money, resulting in a higher conversion rate. So, now I will hand it over to Leaf.

[Foreign Language] We have continued to seek opportunities in the Asia market. Five years ago, we became the level two market data provider in cooperation with the Shanghai China Stock Exchange, and we continue to optimize our market data, our news, and our trading offerings for Asian stocks through Stock Connect. We have also noticed the relative policy updates with regards to the Greater Bay Area. At the appropriate time, I believe we will consider obtaining the issuer license, but that is not on our immediate agenda. There are still many other things we could do and should focus on right now. Thank you.

Thanks. It's very helpful. Just want to follow up on the conversation rate; I wonder if you can share what the conversion rate is for Hong Kong clients versus that of Mainland Chinese clients? Also, regarding any potential capital raising plans, as you have been undergoing this very fast business expansion and targeting new markets, I wonder if you can comment on that? Thank you.

Daphne, can you repeat your second question? I think let me just answer your first question first. In terms of the conversion rate for Hong Kong clients, due to the SFC requiring local individuals to open accounts through the online model, and they must remit at least HKD10,000 to activate their accounts, the conversion rate is almost close to 100%. For Mainland clients, the conversion rate from regular clients to paying clients is approximately 30%.

Okay, got it. Yes. The second question is just about any potential capital raising, as you continue to expand your business, including the margin financing business?

At the end of the second quarter, our margin balance was around HKD7.5 billion, which includes about 20% belonging to stock lending, which has no limitations on equity base. If we exclude this portion, our margin balance is around HKD6 billion compared to our total equities of nearly HKD3 billion, meaning the leverage ratio is still manageable.

Hi. Thank you for taking my questions. Congratulations on the very strong quarter. Just a follow-up question on the cost side regarding the strong paying clients guidance. Would you provide any outlook on customer acquisition costs in the second half of this year and the implications for sales and marketing expenses? Also, relatedly, I think Leaf touched upon earlier; with the strong growth and better market conditions, are you looking to revise your plan to add new staff? If not, you've previously guided around 20% year-on-year growth in new staff this year. Any new thoughts on this plan? Thank you.

Thank you. Let me answer your second question first. Regarding headcount, you're right. We plan to increase our headcount in the second half of the year, considering the strong operating growth in the first half. As mentioned before, we guided for a year-over-year increase of around 20%. Based on the recent developments in our business, we now consider that the full-year headcount growth may be in the range of 35% to 40%. Concerning acquisition costs per client in the second half of this year, during the first half, our blended acquisition costs for each new paying client were in the range of HKD1,500 to HKD1,600. We hope that such costs will remain largely stable in the second half.

Can we move to the next question?

Two questions. The first is about Hong Kong IPOs. Do we have the statistics on how much of our brokerage income and interest income in the second quarter was generated from the Hong Kong IPO? Could you share about the key mechanics of the IPO? For example, the 15 billion subscriptions from JD and NetEase, how much do you charge them and what is the interest charging duration, as well as the rate difference compared to normal transactions? My second question is about the new function targeting professional investors, which usually requires many resources and sales personnel providing high net worth clients with face-to-face or offsite customized services. What is our strategy to develop this professional investor business, and how does our business differ from traditional private banks in terms of target customer group, fee ratio, and product offerings? Thank you.

Thank you. Let me answer the first question, and I will leave the second question to my colleague Daniel. Regarding Hong Kong IPOs, approximately 3% of our brokerage income coming from Hong Kong IPO subscriptions and trading in the second quarter. For our interest income, about 20% was generated from Hong Kong IPOs. We charge different fees during Hong Kong IPOs, including handling fees, which typically range from HKD50 to HKD100 per person per subscription. Many investors also pay reduced leverage for subscriptions, which is included in our interest income items. We also provide some rebate, roughly 1% rebate if their subscription was successful and got shift from the company's allocation. This rebate is included in our trading commission item as well.

Hi Lily, regarding your second question on our private equity fund offerings, you're right, most private banks in Hong Kong heavily rely on face-to-face interactions with professional investors when selling alternative investment funds. Futu will rely entirely on our online platform; we will not have client service representatives reaching out to these professional investors to market our products. Our core philosophy at Futu is to equip our investors with the necessary information and tools to make informed investment decisions, and that philosophy extends to our private equity fund offerings. We will provide comprehensive and adequate information about different private equity funds through our platform to help clients make educated investment choices. Although we've only been offering private equity funds for a little over a month, we've already seen significant ramp-up in this area. In terms of fee and product strategy, our fee structures will remain lower than those most traditional private banks charge. Generally, we plan to charge around 1% subscription fee for our private equity funds. For product selection, since most of our clients are still stock trading clients, we will focus on fixed-income fund offerings and tech-related hedge funds.

Thanks for taking my question. I have several inquiries. First, regarding your new paying customer target, you just revised your full-year target to 180,000, meaning you expect to grow new paying customers by another 170,000 in the second half. Can I get some insights about the run rate in July and August, namely how many new paying customers you've achieved in these two months? What's your strategy for attracting this significant number of new customers? Are these largely from Mainland China or local retail investors in Hong Kong? Will this increase in new customers dilute the average asset per client? For my second question about the ADRs amidst the U.S. and China tensions, as the U.S. requests ADR companies to comply with strict audit regulations, which may lead to disruptions, are you considering conducting a secondary listing in Hong Kong in the near future? Thank you.

Thank you for your question. Regarding the full-year guidance, you're right; our full-year guidance implies around 180,000 paying clients in the second half of this year, which means on average, each month, we should achieve 30,000 new paying clients. We do not disclose monthly paying client numbers, but I believe based on current trends we've observed in July and early August, the run rate is well on track. Regarding the second question about secondary listing in Hong Kong for the ADR platform, since we listed in the U.S. in the first quarter of last year, theoretically, we cannot apply for a second listing in Hong Kong until at least early 2022. As such, it's still too early for us to finalize our plans. We are closely monitoring the political landscape and new policies advocated by the Hong Kong Stock Exchange; as of now, we have no confirmed timetable for a secondary listing.

Okay, thanks. Can I just quickly follow up on the new paying customers? Where do you think the mix of these new paying customers will be? What percentage will come from Hong Kong and how much from Mainland China? Do you expect a significant impact on the average client assets per new client, resulting in dilution?

Understood. Roughly speaking, we still target for 50% of new paying clients from Hong Kong and the remaining 50% from Mainland China. As for your concerns about dilution, it will mainly depend on the market conditions. If volatility remains high, it will encourage people to invest more assets. Hence, we strive to enhance our service offerings and product lines to drive more funds from clients' accounts. On a static basis, the average balance of accounts for Hong Kong clients may be slightly lower, roughly 20% to 25% less than the average account balance for Mainland clients.

Thank you. I would now like to hand the call back to Daniel Yuan for any closing remarks. Thank you.

That concludes our call today. On behalf of the Futu management team, I would like to thank you for joining us today. 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. Ladies and gentlemen, that concludes our conference for today. Thank you for participating. You may all disconnect now. Thank you.