Futu Holdings Ltd Q1 FY2021 Earnings Call

Hello, ladies and gentlemen. Welcome to Futu Holdings First Quarter 2021 Conference Call. After management’s prepared remarks, there will be a question-and-answer session. I would now like to turn the conference 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.

Thanks, operator. And thank you for joining us today to discuss our First 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 the 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.

I would now turn the call over to Leaf, who will make his comments in Chinese, and I will translate.

Hello everyone, thank you for joining the earnings call today. We are excited to announce that we started off the year with robust growth across our operating and financial matrices.

Hello everyone, thank you for joining the earnings call today. We are excited to announce that we started off the year with robust growth across our operating and financial matrices.

Our net paying client addition was approximately 273,000, bringing the total number of paying clients to over 790,000, representing 231% year-over-year growth. Three months into the year, we already achieved 39% of our full-year growth target. For the first quarter, over 70% of net additions came from Hong Kong, Singapore, and other overseas markets. Organic growth continued to contribute over 50% of our net new paying clients. Despite rapid client base expansion, our quarterly paying client churn rate remains a low 2%.

The total number of paying clients reached over 790,000, showing a year-over-year growth of 231%. Within the first three months of the year, we have already met 39% of our full-year growth target. During the first quarter, more than 70% of our net additions originated from Hong Kong, Singapore, and other international markets. Organic growth accounted for over 50% of our new paying clients. Even with a fast-growing client base, our quarterly paying client churn rate remains low at 2%.

Our official debut in Singapore on March 8 has experienced significant growth in client acquisition. Our superior product experience and laser focus on client servicing, coupled with our online and offline advertising and strong word-of-mouth referrals, have helped us quickly capture the mindshare of Singaporeans, characterized by its large and affluent Chinese population and high penetration of financial services. Singapore presents a huge market opportunity, not to mention its strategic importance as an entry point into the broader Asian market. With strong growth momentum trending into the second quarter, we are confident of rapid growth in Singapore.

Our online and offline advertising, along with strong word-of-mouth referrals, have allowed us to quickly gain the attention of Singaporeans. This market, known for its large and affluent Chinese population and high usage of financial services, offers a significant opportunity for us. Moreover, Singapore is strategically important as a gateway into the larger Asian market. With strong growth momentum heading into the second quarter, we are optimistic about our rapid growth in Singapore.

In terms of client assets, our average asset balance per paying client climbed to HKD 585,000, a record high since 2016. As of quarter-end, total client assets reached HKD 462.2 billion, representing 368% growth on a year-over-year basis and 62% growth on a quarter-over-quarter basis.

We are seeing strong growth momentum as we move into the second quarter, which gives us confidence in rapid growth in Singapore. In terms of client assets, our average asset balance per paying client reached a record high of HKD 585,000 since 2016. As of the end of the quarter, total client assets stood at HKD 462.2 billion, reflecting 368% growth year-over-year and 62% growth quarter-over-quarter.

Total trading volume in the quarter was HKD 2.2 trillion, up 278% year-over-year. U.S. stock trading contributed about 63% of the total trading volume. In the past quarter, we launched OSE futures from the Japan Exchange Group and Singapore stock trading, as part of our continued efforts to diversify trading offerings.

Total trading volume in the quarter was HKD 2.2 trillion, up 278% year-over-year. U.S. stock trading contributed about 63% of the total trading volume. In the past quarter, we launched OSE futures from the Japan Exchange Group and Singapore stock trading, as part of our continued efforts to diversify trading offerings.

Our wealth management business, Money Plus, established new partnerships with four reputable asset managers in the quarter, including Wells Fargo, Income Partners, Aberdeen Standard, and BNY Mellon. As of quarter-end, over 59,000 clients held total assets of HKD 13.1 billion in wealth management, up 189% and 108% year-over-year, respectively. As Money Plus' distribution capabilities are increasingly recognized by asset managers, Wells Fargo entered into an exclusive agreement with us to distribute the Hong Kong dollar-denominated retail share class with its China small mid-cap growth line, one of its flagship products in the region. In the first quarter, we started to offer a flagship TMT hedge fund, managed by a globally renowned asset manager, to our qualified investors.

The management saw an increase of 189% and 108% year-over-year, respectively. As Money Plus' distribution capabilities gain recognition among asset managers, Wells Fargo has formed an exclusive agreement with us to distribute a Hong Kong dollar-denominated retail share class of its China small mid-cap growth line, which is one of its key products in the region. In the first quarter, we began offering a flagship TMT hedge fund, managed by a globally recognized asset manager, to our qualified investors.

As of quarter-end, our enterprise business, Futu I&E, had 152 IPO and IR clients, as well as 200 ESOP solution clients. In the first quarter, we participated in all Chinese ADRs' secondary listings in Hong Kong and were the only online broker in the selling groups for the Hong Kong IPOs of Kuaishou, Baidu, and Bilibili.

As of quarter-end, our enterprise business, Futu I&E, had 152 IPO and IR clients, as well as 200 ESOP solution clients. In the first quarter, we participated in all Chinese ADRs' secondary listings in Hong Kong and were the only online broker in the selling groups for the Hong Kong IPOs of Kuaishou, Baidu, and Bilibili.

The enterprise accounts function in our social community is increasingly adopted by listed companies to engage with over 14 million retail investors interested in Hong Kong and U.S. stock trading. By the end of the first quarter, over 500 listed companies have set up enterprise accounts with us to promote their products and services, provide business updates, and live stream earnings calls. As of today, nine enterprise accounts have over 1 billion followers. Listed companies are an indispensable stakeholder in our ecosystem, and their engagement has greatly diversified our content offerings, thereby increasing user stickiness and retention.

We are focused on Hong Kong and U.S. stock trading. By the end of the first quarter, more than 500 listed companies had established enterprise accounts with us to promote their products and services, share business updates, and live stream earnings calls. Currently, nine enterprise accounts have over 1 billion followers. Listed companies play a crucial role in our ecosystem, and their involvement has significantly broadened our content offerings, which has enhanced user engagement and retention.

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 first quarter. All the numbers are in Hong Kong dollars unless otherwise noted. Our total revenue was HKD 2.2 billion, an increase of 349% year-over-year and 86% quarter-on-quarter. Brokerage commission and handling charge income was HKD 1.3 billion, an increase of 343% year-over-year and 84% quarter-on-quarter. The growth was mainly driven by a 278% year-over-year increase in our total trading volume. Our blended commission rate and our clients' trading velocity remain resilient compared with last quarter. Interest income was HKD 659 million, an increase of 356% year-over-year and 96% quarter-on-quarter. The increase in margin financing interest income was mainly driven by the strong growth in daily average margin financing balance, higher IPO financing interest income, due to a very active Hong Kong IPO market in the first quarter, and an increase in our security borrowing and lending business. Other income was HKD 221 million, an increase of 370% year-over-year and 69% quarter-on-quarter; this strong growth was primarily driven by an increase in our IPO subscription service charge income and currency exchange service income. In terms of costs, our total costs were HKD 443 million, an increase of 276% year-over-year and 83% quarter-on-quarter. Brokerage commission and handling charge expenses were HKD 214 million, an increase of 327% from HKD 50 million in the first quarter of 2020. The increase was largely in line with the growth of our brokerage commission and handling charge income. Interest expenses were HKD 168 million, an increase of 406% from HKD 33 million in the first quarter of 2020. The growth was primarily due to higher margin financing interest expenses and an increase in our security borrowing and lending business. Processing and servicing costs were HKD 62 million, an increase of 78% from HKD 35 million in the first quarter of 2020. We continue to increase cloud service expenses and added another 300 throttling controllers connected to the trading systems of the Hong Kong Stock Exchange to execute a large number of concurrent Hong Kong stock trades. As a result, our total gross profit was HKD 1.8 billion, an increase of 373% year-over-year and 87% quarter-on-quarter. Gross profit margin increased from 76% in the first quarter of 2020 to near 80% in the first quarter of this year, thanks to higher operating leverage as a result of our larger business scale. Our total operating expenses were HKD 419 million, an increase of 149% from HKD 197 million in the first quarter of 2020. To break it down, R&D expenses were HKD 137 million, an increase of 63% from HKD 84 million in the first quarter of 2020. We further invested in R&D to support our new product offerings. Selling and marketing expenses were HKD 275 million, an increase of 321% year-over-year and 144% quarter-on-quarter. The increase was primarily due to higher branding and marketing spending, especially in the international markets to cultivate brand image and acquire new clients. If we compare client acquisition costs in the Hong Kong and China areas alone, our CAC number this quarter is largely in line with that number in the last quarter. G&A expenses were HKD 78 million, an increase of 65% year-over-year. The increase was primarily due to the increase in headcount for G&A personnel. As a result, our net income increased by 6.5 times to HKD 1.2 billion from HKD 155 million in the first quarter of 2020. In April, we also completed our follow-on offering with net proceeds of approximately $1.4 billion. The proceeds will be used to support a larger margin financing balance, our international market expansion, new licensing applications, potential investment and acquisition opportunities, and other general corporate purposes. That concludes our prepared remarks. We now like to open the call to questions. Operator, please go ahead.

Certainly, we will now begin the question-and-answer session. Our first question comes from Katherine Liu from Morgan Stanley. Please go ahead.

Thank you very much for the opportunity to ask questions. This is Katherine from Morgan Stanley. I have two questions. First, could management provide an introduction or briefing on the second quarter trends concerning trading velocity, client acquisitions, growth rates, and so on? Given the strong growth in the first quarter, will management offer guidance on full-year growth rates for paying clients? My second question is whether management can provide a breakdown of clients by geography. We noticed that Singapore might experience significant growth; could management share insights on the growth trend in the Singapore market? Thank you.

Sure, Katherine. Let me answer your second question first. I will show you our clients' breakdown in the first quarter. I will leave the second trend – the second-quarter trend and also your questions about the guidance to Robin and Leaf. Robin will also give you some insights in terms of our client acquisitions and also the client profile in Singapore in these particular markets. In the first quarter, on a flat basis, Singapore and the U.S. accounted for 25% of our new paying clients acquired in the first quarter. The remaining 75% was almost evenly split between Mainland China and Hong Kong, slightly leaning towards Hong Kong. I will leave Robin and Leaf to give you a comment about your first question.

Although we have achieved 39% of our full-year paying client growth target in the first quarter, we will not adjust our full-year target for now. We believe our product offers a unique value proposition in overseas markets. Since officially entering the Singapore market in March, we have experienced strong client growth that has continued into the second quarter. We recognize that the brokerage business is positively affected by market performance, sentiments, and the number of IPOs. We understand there are differing opinions about how market performance will develop for the rest of the year, so we will maintain our full-year growth target for the time being. We may provide an update during our second quarter earnings call if necessary.

Well, we have observed a market pullback since mid-February, which we believe has influenced our users' trading sentiment, and we consider that to be normal. The markets currently seem to be receiving less attention and are shifting from growth to value stocks. Still, there are several stocks that are performing exceptionally well. Looking at our client assets, from March 1st to May 16, we have noticed positive net asset inflows on almost every trading day, except for a few. This indicates that our clients are consistently engaging with our platform. Our key performance indicators are paying client numbers, client retention, and client assets, which we value more than short-term fluctuations in trading volume. Regarding the client profiles in Singapore, we've observed that the average age of Singapore clients is nearly the same as that of clients from Mainland China and Hong Kong. However, client assets in Singapore are still behind, showing a significant gap compared to our Mainland China clients, which we believe is a normal trend. Based on past experiences, entering a new market typically requires time for client assets and trading volume to rise. We plan to share more details about our client profile in the upcoming quarters. Thank you.

Thank you. We have our next question coming from the line of Jacky from China Renaissance. Please go ahead.

Congratulations on the excellent results. I have two questions. First, regarding our competition: we have noticed some competitors in the Hong Kong market ramping up their marketing activities. Additionally, we hear that some Asian brokers might enter the U.S. and Hong Kong stock trading sectors. In light of the potential increase in competition from Mainland China and Hong Kong, are we concerned about the impact on our customer acquisition costs and the pressure on trading commission pricing? Second, could you provide a rough breakdown of our interest income and other revenue? Thank you.

Sure, Jacky. Let me answer your second housekeeping financial numbers question first. I will leave the first question to my – again, colleagues, our CEO Leaf. In terms of the interest income breakdown, roughly a lot of interest income is derived from margin financing, accounting for 60% to 65% of total interest income. The remaining interest income is naturally derived from our clients' idle cash deposits. As for other income, there are two major parts: one is IPO subscription service charge, where we usually charge HKD 50 to HKD 100 per person for participation in the Hong Kong IPOs. The other significant part is the foreign exchange service charge. Many of our clients trade in both the Hong Kong and the U.S. markets, creating demand for foreign exchange. These two parts contribute roughly 70% to 75% of our total interest income. The remaining part comes from distribution income from our wealth management products and other service offerings. Thank you.

From our inception, we have operated in a very crowded market. We don’t think the market will become less competitive in the future. Indeed, we have seen some players offering zero commission. However, we don’t believe this shift in the competitive landscape will lower our commission rate because in Hong Kong, there is a stamp duty of 10 basis points. We offer 3 basis points for Hong Kong trading, and the additional benefits for our clients from reducing our commission rate beyond that are minimal. We welcome online brokers entering the Hong Kong markets. With more players in the market, we can collectively educate the market and enhance recognition for the online brokerage industry. There are two primary types of online brokers providing Hong Kong stock trading services. The first type includes Hong Kong brokers licensed by the Securities and Futures Commission (SFC), who are regulated by the SFC, and Futu is an example of this type. The second type consists of online brokers holding licenses in third-party domiciles, who are not regulated by the Hong Kong SFC, such as those licensed in New Zealand. The SFC has stricter regulatory requirements compared to other markets and is cautious about granting licenses. Therefore, for the second type of online brokers wishing to obtain a license in Hong Kong, they must address regulatory integrity issues upfront. The SFC will not permit online brokers to operate under a more lenient regulatory framework. Once they obtain licenses, they’ll need to transition existing clients and businesses into a new entity regulated by the SFC, which is challenging and makes it less likely that they will secure a license in Hong Kong. This is why another online brokerage has discussed obtaining a license for three years but has yet to succeed; the process typically doesn’t take this long for a new brokerage in Hong Kong. We don’t believe that the potential entry of other online brokerage firms will adversely affect our future market share in Hong Kong. Firstly, financial services involve significant considerations for clients when selecting a platform, and trust is crucial when they entrust their assets to a financial services provider. Futu has a robust shareholder base, with companies like Tencent enhancing trust in our brand. Additionally, we've spent the past eight years nurturing our brand image in Hong Kong, gaining user recognition among local users. For a new financial services provider, achieving that level of trust requires a significant investment of time. Secondly, newcomers can only attract clients if they present a strongly differentiated value proposition. Otherwise, it will be hard for them to replace existing platforms. Futu has established a comprehensive business with considerable barriers to entry. We’ve made extensive investments in account opening, trading infrastructure, market information, services, and our social community. Many of our offerings have set industry standards, which would require newcomers considerable time and effort to match, making it difficult for them to provide distinctive products and services. Additionally, we have consistently pursued innovation. Moreover, it's important to consider regulatory challenges. As previously discussed, some competitors have begun acquiring Hong Kong clients without holding a local license. After they obtain their licenses, migrating existing Hong Kong clients to these new entities regulated by the SFC, which includes strict Know Your Customer (KYC) and Anti-Money Laundering (AML) procedures, could be a lengthy process that may result in some client losses. New entities entering the Hong Kong market will also have to implement rigorous KYC procedures during the licensing phase, further complicating their adaptation to the regulatory environment. Furthermore, the margin financing business heavily depends on the company’s capital base. Building margin financing capital requires long-term partnerships with commercial banks in Hong Kong. The SFC dictates that the margin financing balance a broker can support is capped at five times its capital base. Therefore, newcomers will need to inject significant capital into their licensed entities in Hong Kong to enhance their net assets and obtain financing from conservative local banks, which usually necessitates extended collaboration before gaining credit approval. Consequently, it is impractical for these new entrants to accumulate substantial capital in a short period, which would limit their margin financing capabilities, particularly for IPO margin financing. Additionally, some peers are working to shift clients from interactive broker accounts to their own systems. If their systems are under SFC supervision, the capital limitations we mentioned earlier will be magnified. Finally, developing the execution and clearing systems in Hong Kong requires substantial capital and time. Futu has invested eight years to create a highly stable and scalable execution and clearing system, achieving a 99.96% service availability rate. This sophisticated system creates high entry barriers. When other brokers enter the Hong Kong market, they may initially depend on third-party vendors for execution, which can lead to instability during market volatility or IPO events. Therefore, short-term conditions may negatively impact their service quality in comparison to what Futu can offer. We remain committed to innovation and progress, maintaining the same mentality we had when we entered the Hong Kong market, and we believe that additional competition will motivate us to continuously improve.

Thank you.

Thank you. We have our next question coming from the line of Zeyu Yao from CICC. Please go ahead.

Thanks, management. This is Zeyu Yao from CICC. First of all, congratulations on the impressive results. I see our existing business is on track, and I was curious if there is any chance we will apply for new brokerage licenses to expand our services to more customers in different areas or introduce more trading products like Bitcoin or other digital currencies? Thank you.

Okay. Thank you, Zeyu. Let me answer your first question. I will leave the second question to my colleague, Robin Xu, for additional service and products in our pipeline. Regarding the new license, I think you're right; we are conducting some preliminary studies in other international markets, particularly in Asian countries. As Leaf mentioned in the opening remarks, we do see Singapore as a crucial gateway for entering the Asian market as a whole. But now it’s still in a very preliminary stage. We are also evaluating feasibility studies in other English-speaking countries.

We’re planning to launch crypto trading for our international clients in the second half of this year. Additionally, we plan to roll out more futures under CME futures. Thank you.

Thank you.

Thank you. We have the next question coming from the line of Zoey Zong from Jefferies. Please go ahead.

Hi, management. Thanks for taking my question. This is Zoey from Jefferies. Congratulations on the strong first-quarter results. I have a follow-up question on digital currency. We noted that the Association of China has announced that financial institutions and payment companies are banned from engaging in cryptocurrency transactions. I’m wondering about Futu’s plans regarding digital currency this year, and will China’s regulations affect consumers.

We are very much aware of the different regulatory frameworks in various jurisdictions. Actually, we’re in the process of applying for digital currency-related licenses in the U.S., Singapore, and Hong Kong. However, we know for certain that we will not offer digital currency trading services to mainland China users. Thank you.

Thank you.

The next one comes from the line of Emma Xu from BofA Securities. Please go ahead.

So congratulations on the very strong results. I have two questions. The first question is about the margin financing business. After the capital – following the follow-on offerings in the fourth quarter, Futu further strengthened its ESOP base. Will you try to increase the ratio of margin financing and security loan balance as a percentage of total client assets? The second question is about client acquisition. You mentioned that 50% of the new clients are from organic growth. What are the acquisition channels for the other half of the clients statistically, with a specific focus on ESOP clients? How do you classify them as new paying clients? Will you consider them as new paying clients when the stock is listed, or will you wait for their stocks to vest? Thank you.

Thank you very much. I will answer the first question and leave the second question to my colleagues, Robin and Daniel. First and foremost, we value our paying clients from a DCF – PCF value perspective, which means we care primarily about their lifetime values rather than the near-term P&L they contribute in terms of our top line or bottom line. Therefore, we will not aggressively encourage our clients to use margin, as margin financing carries high risks. For us, investment education – making our investors aware of the risks – is far more important than near-term monetization. Historically, our margin financing balance-to-total client assets ratio has been in the range of 5% to 7%. After completing our follow-on placement, we have sufficient capital to support our margin financing business, particularly with our IPO subscription service in Hong Kong. However, we won’t deliberately push our clients to increase margin usage unless they understand the associated risks. Thank you.

Hi, I’m Daniel. I’ll take your second question on client acquisition. Approximately 50% of our new paying clients come from organic growth, while about 15% are from ESOP and group account openings. The remaining 35% is roughly evenly split between online and offline advertising, as well as third-party channel partners. High-profile IPOs tend to encourage client acquisition, but it’s challenging to pinpoint specific client inflow to one or two single IPOs. However, we generally observe an uptick in client acquisition before these IPOs occur. Regarding ESOP clients, they are not currently counted as our paying clients at the moment. Thank you.

Fifteen percent comes from ESOP and group account openings. The other thirty-five percent is approximately evenly divided between online and offline advertising, along with third-party channel partners. Notable IPOs usually boost client acquisition, but it's difficult to attribute specific client inflows to one or two particular IPOs. Nonetheless, we typically see an increase in client acquisition before these IPOs happen. As for ESOP clients, they are not currently recognized as our paying clients at this time. Thank you.

Thank you. As we do not have any further questions, I would like to hand the conference back to our host, Mr. Daniel Yuan. Please take over.

Thank you, operator, and thank you all for joining the earnings call today. On behalf of the Futu management team, I would like to thank you for joining our earnings call, and if you have any additional questions, please do not hesitate to ask me or any of our Investor Relations representatives. Thank you and good night.

Thank you, ladies and gentlemen. That concludes the conference today. Thank you all for your participation. You may now disconnect.