Futu Holdings Ltd Q2 FY2022 Earnings Call

Hello, ladies and gentlemen. Welcome to Futu Holdings Second Quarter 2022 Conference Call. 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.

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 tenth consecutive quarter for which organic growth contributed over 50% of new paying clients. 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 one-fifth 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 nearly 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 have realized that the local users are more conservative during market downturns and thus launched a series of investor education activities to help users understand how to better navigate market turmoil and continue to diversify our product offerings and wealth management. We are encouraged to see that our quarterly client retention rate remained above 98% despite sharp market corrections in April and May. Total client assets decreased 14% year-over-year and increased 12% quarter-over-quarter to HKD434 billion. The sequential increase was largely due to strong net asset inflow across different regions and, to a lesser extent, rebounded China technology names in June. In Singapore, we continue to acquire higher-quality clients. The average asset balance of our newly acquired paying clients in Singapore exceeded SGD10,000 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. Total trading volume was HKD1.3 trillion, up 2% quarter-over-quarter. U.S. stock trading volume was HKD897 billion, constituting 67% of the total volume and up 6% quarter-over-quarter. The sequential growth was mostly driven by higher turnover of leverage and inverse ETFs amid heightened market volatility. Hong Kong stock trading volume was HKD424 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 functionality 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. Total client assets in Wealth Management were HKD22 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 hikes. To help our clients navigate the right inflation environment, we also launched a 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. 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 other various clients. In the first two quarters, we acted as the underwriter for 12 Hong Kong IPOs, tying for first place in terms of the number of Hong Kong IPOs underwritten. 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. 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 HKD1.7 billion, up 11% from HKD1.6 billion in the second quarter of 2022. Brokerage commission and handling charge income was HKD1 billion, an increase of 30% year-over-year and 7% quarter-over-quarter. 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 contributions from derivative trading. The quarter-over-quarter 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 stocks outlined can result in a higher blended commission rate. Interest income was HKD620 million, an increase of 2% year-over-year and 8% quarter-over-quarter. 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 quarter-over-quarter increase was mostly due to higher interest income from cash deposits amidst a rising rate environment. Other income was HKD93 million, down 45% year-over-year and 6% quarter-over-quarter. The year-over-year decrease was driven by lower IPO financing service income and underwriting fee income. The quarter-over-quarter decrease was mainly due to lower currency exchange income and enterprise public relationship service charge income. Our total costs were HKD208 million, a decrease of 25% from HKD279 million in the second quarter of 2022. Brokerage commission and handling charge expenses were HKD88 million, down 14% year-over-year and 10% quarter-over-quarter. Despite the year-over-year increase in brokerage commission and handling charge income, the expenses declined due to cost savings from our U.S. securities sales clearing migration and upgraded service package with our U.S. clearinghouse, as well as lower IPO subsequent fees. The quarter-over-quarter decrease was mostly due to sales clearance. Interest expenses were HKD27 million, down 67% year-over-year and 32% quarter-over-quarter. 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 market book with cash generated from securities borrowing. Processing and service costs were HKD94 million, up 74% year-over-year and 1% quarter-over-quarter. The year-on-year increase was primarily driven by higher cloud service fees to support overseas market expansion and accommodate a large number of concurrent trades. As a result, total gross profit was HKD1.5 billion, an increase of 19% from HKD1.3 billion in the second quarter of 2021. Gross margin was 88% as compared to 82% in the second quarter of 2021. Operating expenses were HKD747 million, up 12% year-over-year and down 4% quarter-over-quarter. To break down, R&D expenses were HKD292 million, up 69% year-over-year and 3% quarter-over-quarter. The increase was mainly due to an increase in R&D headcount as we continue to support new product offerings and invest in U.S. sales clearing capabilities in addition to a customized product experience in different markets. Selling and marketing expenses were HKD219 million, a decrease of 42% year-over-year and 24% quarter-over-quarter. The year-over-year decrease was due to lower overall marketing and branding spending, especially in international markets. The expenses declined quarter-over-quarter as marketing spending decreased due to slower paying client growth. G&A expenses were HKD211 million, up 118% year-over-year and 19% quarter-over-quarter. The increase was primarily due to an increase in headcount for general and administrative personnel. As a result, our net income increased by 20% year-over-year and 12% quarter-over-quarter to HKD639 million. Net interest margin expanded to 37% in the second quarter as compared to 34% in the same quarter last year, partially attributed to a lower tax rate of 10%. This lower tax rate was due to the tax credit benefit from our U.S. sales clearinghouse. We maintain our long-term tax rate guidance of 12% to 14%, and expect a tax benefit for another two quarters as well. That concludes our prepared remarks. We would now like to open the call to questions. Operator, please go ahead.

Thank you. And now we will take questions. The first question comes from Cindy Wang from China Renaissance. Please go ahead with your question.

Okay. Thanks for taking my questions. So I have two 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 is 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, do you really have any schedule for when we will finish self-clearing for the Singapore stocks? Once we finish the self-clearing, can we have further help in terms of the Singapore customer acquisition? Thanks.

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 focus of our technology capabilities still lies on our U.S. sales clearing operations. This migration has conducted very smoothly, and so far, we have already migrated over 80% of the dollar value of our U.S. security positions from our business partners to our own clearing costs. We expect this exercise will be largely completed by the end of this year. Afterward, we believe that the self-clearing capability in the Singapore market is definitely on our schedules, but we will be following subsequent to the completion of our U.S. self-clearing migrations.

The migration of our sales clearing operations has gone very smoothly, and so far, we have successfully transferred over 80% of the dollar value of our U.S. security positions from our business partners to our own clearing costs. We anticipate that this process will be mostly completed by the end of this year. Following that, we expect to implement our self-clearing capability in the Singapore market, but this will occur after we finish our U.S. self-clearing migrations.

Okay, thank you. Very clear.

Your next question comes from the line of Zoey Zong from Jefferies. Please ask your question.

Thank you, management, for taking my question. Congratulations on the solid results, first. And I have two questions. So first, in Q2, we recorded a HKD95.5 million loss in Hong Kong dollars. So please provide more color about this item? And my second question is how should we expect the customer acquisition cost structure moving forward? Thank you.

Thank you. I’ll also take your second question first. I think you are right. The year-to-date volatility in the capital markets definitely has some impact on our client positions. Our blended capital number is around HKD3,500 in the second quarter, which is slightly higher than our previous guidance of HKD2,500 to HKD3,000. We do think the current market turmoil may continue in the near term or even throughout the second half of this year. Therefore, we do think our previous estimation may be a little bit too optimistic. We currently expect the cash numbers in the second half of this year may maintain at the current level for a while. Can I just ask you to repeat your first question regarding the P&L items?

HKD3,500 in the second quarter is slightly higher than our previous guidance of HKD2,500 to HKD3,000. We believe that the current market turmoil may persist in the near term or even through the second half of this year. As a result, we consider our previous estimations to be somewhat too optimistic. We now expect the cash figures in the second half of this year to stay around the current level for some time. Could you please repeat your initial question regarding the P&L items?

Sure. The other items mainly consist of the unrealized financial gain on the loss. The nature is that we provide certain margin financing to our clients, who trade Asia Connect. Previously, we were scoring offshore RMB to fund this margin balance. Given the current balance sheet situation, we exchanged certain positions from our Hong Kong dollar position to the RMB position of sales. Due to the very volatile RMB and Hong Kong dollar movements in May and June, we recorded an unrealized loss. But this is actually on the cash item. In the long run, we believe it can present a chance to reverse that.

Got it. Thank you.

Thank you. We will take our next question. And the question comes from Emma Xu from Bank of America Securities. Please ask your question.

So, my question is regarding the financial impact of U.S. sales clearing, as well as the U.S. rate hike impact on your financials.

Sure. Let me answer the two financial number questions. For the sales clearing, as I mentioned before, we have already migrated over 80% of our U.S. stock positions to our own clearinghouse. According to the current run rate, we do expect in the second half of this year, the self-clearing capability can enhance HKD200 to HKD250 million in incremental revenues to our own P&L. Secondly, regarding the interest rate plan, we do believe we are a beneficiary of the rate cycle, given that we will get more interest income from client’s idle cash. If we do some simple calculations considering the rate hike expectations nowadays, by the end of this year, the rate could increase to around 3 or 3.25 basis points. In the second half of this year, we can generate an additional HKD200 million to HKD250 million in interest income because of that.

We expect to see incremental revenues reflected in our profits and losses. Additionally, we believe we will benefit from the interest rate cycle as we anticipate earning more interest income from clients' idle cash. Based on current expectations for rate hikes, by the end of this year, the rate could rise to approximately 3 or 3.25 basis points. Therefore, in the latter half of this year, we anticipate generating an extra HKD200 million to HKD250 million in interest income as a result.

Just to clarify, that’s for the second half of this year.

Okay. Thank you. That’s very clear.

Thank you.

Thank you. We will take our next question. And the question comes from Leon Qi from Daiwa. Please ask your question.

Thank you for giving me the opportunity to ask this question, and congratulations on the very strong results. I have two questions today. Firstly is regarding your new customer acquisition guidance. I appreciate your very strong new customer acquisition in the second quarter, which reached 61,000. Given you had also a very strong customer acquisition in the first quarter, your first half new customer acquisition has reached well over 50% of your full-year guidance of 200,000. So, I’m wondering if the management wants to take any revisions to your full-year target of 200,000. The second question is regarding your capital management. We are very delighted to see that the free cash position of the company actually saw a sequential increase while the company is executing very decent buybacks. Could management provide any insight in terms of the comfortable level of the cash position you want to hold to give us clues on the amount of capital that you will make available to return to shareholders? Thank you very much.

Thank you, Leon. I will let our CEO, Leaf, respond to your first question, and I will take your second question afterwards.

So, the overall market has recorded poor performance year-to-date, and we expect this uncertainty to persist for a reasonable period into the future. We believe the current market is not attractive to new clients, and we think we will continue to focus more on the quality of our new clients, the net asset inflow of our existing clients, and the unit economics of the different regions, especially in such a sluggish market. Therefore, we plan to keep our previous guidance of adding 200,000 net new paying clients, and we may revisit the guidance later on this year. Thank you.

Yes. For the second question, I think we are still in the early stages of Futu’s long-term growth strategy. So, it is too early to define the ideal capital ratios we should focus on. Instead of giving a fixed number, I think what we will focus on will be our long-term growth potential, especially in new markets, and further deployment of our resources to key technology operations moving forward. We will definitely focus more on the client return on equity side in the long run. However, in the near future, I do not foresee any dividend payout plans.

Okay. Thank you very much.

Thank you.

Thank you. We will take our next question. And the question comes from the line of Frank Yang. Please ask your question.

Let me quickly translate my two questions. The first one is on blended fee rate. As we see the fee rate continue to increase in the second quarter on a sequential basis, can management provide more color on the drivers behind this? And also, will this trend continue into the second half? The second question is on the IPO market. As the Hong Kong IPO market slowly recovers, do we see a recovery in the IPO bridge loan interest income and subscription fee income? What proportion does IPO income contribute to total revenue?

Sure. I will take these two questions. As I mentioned in the opening remarks, you are right that, on a blended basis, our commission rate continues to rise year-over-year and quarter-over-quarter. This is primarily driven by contributions from derivative trading, which now roughly accounts for 30% of our total trading commission revenues. However, we do not encourage trading in these derivatives. The increase is also a result of market volatility, especially in the U.S. market. In the second quarter, U.S. markets ramped up significantly. A decrease in the average share price of the stocks our clients trade can actually lead to a higher blended commission rate. Regarding the second question, historically, the contribution from our IPO business accounts for high-single digit or low-teen numbers of our total revenues. We do not see a very meaningful pickup despite the number of IPOs in Hong Kong starting to rebound since June. It will still take time for the market, especially retail investors, to build further momentum to participate in these transactions.

Thank you.

I would now like to hand back to Daniel Yuan for closing remarks. Please go ahead.

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.

This concludes today’s conference call. Thank you for participating. You may now disconnect.