Futu Holdings Ltd Q4 FY2022 Earnings Call

Hello, ladies and gentlemen. Welcome to Futu Holdings Fourth Quarter and Full Year 2022 Earnings Conference Call. Today's conference call is being recorded. If you have any objections, you may disconnect at this time. I’d now like to turn the conference over to your host for today’s conference call, Daniel Yuan, Chief of Staff to CEO and Head of IR at Futu. Please go ahead, sir.

Thanks, operator. Thank you for joining us today to discuss our fourth quarter and full year 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 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 will now turn the call over to Leaf. Leaf will make his comments in Chinese and I will translate.

Thank you all for joining our earnings call today. In the fourth quarter, we added over 42,000 paying clients, down 27% sequentially. The stock market plummet in the first half of the quarter and uncertainties around the sustainability of the market rebound in the second half affected user sentiment, which led to the deceleration of client acquisition. Our total paying clients reached around 1.5 million, representing 20% growth year-over-year. In 2022, we managed to add over 240,000 paying clients, exceeding our full-year guidance by 20%. Despite a challenging market backdrop, our average quarterly client retention rate in 2022 remained above 98%, which speaks to the stickiness of our product. In Hong Kong, we continue to promote our product among the population aged over 35 through offline workshops and campaigns, as well as targeted online applications. In the past quarter, people over 35 contributed over 50% of our new paying clients in Hong Kong. We will further roll out offline events and refine product offerings to reach and serve this population. In the U.S. market, we saw an improvement in client quality; the first-month average net asset inflow of new paying clients increased by approximately 40% sequentially. Client acquisition in Singapore remained resilient in the fourth quarter, mainly attributable to continued client interest in money market and fixed income fund products. Total client assets increased by 2% year-over-year and 13% quarter-over-quarter to HKD 417 billion. The sequential increase was largely due to market appreciation of our clients’ Hong Kong stock holdings and robust net asset inflow across all regions. As of quarter end, margin financing and securities lending balances declined by 10% sequentially. While we saw an uptick in securities lending balance amid market volatility, margin financing balance declined as clients unwound some of their positions during the hard call market rebound. Solar trading volume was flattish quarter-over-quarter at HKD 1.1 trillion, of which Hong Kong stock trading constituted 36%. In the fourth quarter, Hong Kong stock trading volume increased by 31% sequentially to HKD 397 billion. The increase can be attributed to higher trading volume of China new economy companies and leveraged and inverse ETFs, which clients used as tactical tools to make short-term bets on market trends. Our market shares in Hong Kong futures and options trading further climbed to historic highs of 8% and 15% respectively. U.S. stock trading volume was HKD 675 billion, down 10% sequentially amid the market sell-off primarily affecting U.S. technology names. Total client assets in wealth management grew 68% year-over-year and 22% quarter-over-quarter to HKD 32 billion, mainly driven by sustained interest in money market funds amid interest rate hikes. We onboarded commodity funds and alternative funds in Singapore. In Hong Kong, we expanded equity and index-linked structured product offerings for high net worth clients to meet their different risk/return objectives during market turmoil. In the fourth quarter, we also became the first retail platform in Hong Kong to distribute the BGF China Innovation Fund as BlackRock, thereby enhancing the brand awareness of Futu Money Plus. Our enterprise business had 333 IPO distribution and IR clients, as well as 638 ESOP clients, up 41% and 60% year-over-year respectively. We acted as joint book runners for several high-profile Hong Kong IPOs, including those of 360 DigiTech and Weilong Delicious. We underwrote 41 Hong Kong IPOs in 2022 and ranked first among all brokers according to Wind. Of all 28 companies listed in 2022 with a market cap over HKD 10 billion by the end of the year, 23 companies have utilized one or more of our enterprise product offerings. In the fourth quarter, we also launched Momo ESOP in Singapore to provide corporate clients with ESOP solution services. Next, I’d like to invite our CFO, Arthur, to discuss our financial performance.

Thank you, Leaf and Daniel. Before discussing our financial performance, I want to provide an update on our share repurchase program announced on March 11, 2022. By the end of last year, we had repurchased a total of 8 million ADS for around $250 million through open market transactions. This represents about 50% of the approved maximum purchase amount of $500 million for our share repurchase program. Now, let's move on to our financial performance in the fourth quarter. All figures are in Hong Kong dollars unless stated otherwise. Total revenue was HKD 2.3 billion, a 42% increase from HKD 1.6 billion in the fourth quarter of 2021. Despite market volatility, we concluded 2022 with a full year revenue growth of 7% to HKD 7.6 billion. Brokerage commission and handling charge income amounted to HKD 1 billion, marking a 22% year-over-year and 10% quarter-over-quarter increase, primarily due to a higher blended commission rate of 9.6 basis points. The commission per share pricing model for U.S. stock trading contributed to the rise in the blended commission rate as stock prices decreased and the volume of shares traded increased. Interest income reached HKD 1.1 billion, representing an 84% year-over-year and 29% quarter-over-quarter increase, largely driven by higher interest from cash deposits due to rising benchmark interest rates, which more than compensated for the decline in margin finance income owing to lower daily average margin financing balances. Other income was HKD 94 million, down 26.5%, but showed a 58% increase compared to HKD 217 million in the fourth quarter of 2021. Brokerage commission and handling charge expenses were HKD 64 million, down 27% year-over-year and 23% quarter-over-quarter, as expenses did not align directly with our brokerage commission and handling charge income, mainly due to cost savings from our U.S. self-clearing business. Interest expenses increased to HKD 182 million, up 227% year-over-year and 307% quarter-over-quarter, primarily due to higher costs related to our securities lending business. Processing and servicing costs reached HKD 96 million, an increase of 31% year-over-year and 6% quarter-over-quarter, attributed to higher data transmission and system upgrade fees. Consequently, our total gross profit stood at HKD 1.9 billion, an increase of 40% from HKD 1.4 billion in the fourth quarter of 2021, with a gross margin of 85% compared to 86% in the same quarter last year. Operating expenses were down 1% year-over-year but up 7% quarter-over-quarter to HKD 818 million. Breaking it down, R&D expenses were HKD 334 million, a 24% increase year-over-year and 7% quarter-over-quarter, driven by a rise in R&D headcount. We continue to invest in U.S. self-clearing capabilities and customized products for international markets to support new product offerings. Looking ahead to 2023, we aim to grow our headcount by the middle to high teens beyond our 2,800 employees at the end of last year to facilitate expansion into new international markets. Selling and marketing expenses were HKD 153 million, a 55% decrease year-over-year and 35% quarter-over-quarter, due to slower client acquisition amid weak market sentiment and reduced client acquisition costs. G&A expenses were HKD 330 million, up 52% year-over-year and 56% quarter-over-quarter, primarily driven by an increase in general and administrative personnel headcount, along with a rise in professional fees related to our proposed Hong Kong IPO listing. As a result, our net income grew by 92% year-over-year and 27% quarter-over-quarter to HKD 959 million. Our net income margin expanded to 42% in the fourth quarter compared to 31% in the same quarter last year, mainly due to decreased marketing spending. Our effective tax rate for the quarter was 14.7% due to a higher rate from our U.S. operations. This concludes our prepared remarks. We would now like to open the call to questions. Please proceed, Operator.

Thank you. Our first question comes from Han Pu from CICC. Please ask your question, Han.

This is Han from CICC. Thanks very much for taking the question. Congrats on another strong quarter. I have two questions. Firstly, how about the latest progress in the new market, such as Australia and Japan, for example, the user profile and the products and services? Secondly, we see the continued rapid growth in the wealth business. Could you please share more details on the drivers behind the product structure and our forward plan, besides how about the revenue contribution in the fourth quarter for the growth management business and also the user penetration to our brokerage business? Thanks.

In Q4, we continued exploring various client acquisition channels in the Australian market, reduced the budget for inefficient client acquisition channels, and constantly optimized the account opening funnel. By deepening connections with clients via online and offline exchanges, we also improved clients’ product experience. As a result, the client acquisition cost in Q4 in Australia fell substantially on a quarter-over-quarter basis. Looking ahead, we will continue to improve our product capability and the ability to efficiently acquire clients, as well as upgrade our marketing strategy. Thank you. The Wealth Management business maintained strong growth momentum in the fourth quarter, mainly because low-risk fund products remain attractive to our clients during the rate hike cycle. Meanwhile, we have been broadening our offerings to meet the investment and financial needs of customers with different risk appetites. In Q4, the wealth management business helped attract a lot of clients and assets; specifically, the growth in wealth management AUM in Q4 is almost entirely driven by new asset inflows, and the percentage of our new paying clients brought by fund products has also been growing, especially true in the Singapore market. Looking ahead, we see a lot of room for growth in the wealth management business, and we plan to continuously diversify structured products in Hong Kong, aiming to provide five types of notes, including fixed dividend structured products and fund-linked notes in the first half of this year to better address asset allocation needs of professional investors and high net worth clients. In Singapore, we have comprehensive mutual fund product offerings and will focus on introducing more low-risk fund portfolios and dividend-paying fund portfolios, while gradually expanding other product categories, including bonds, private equity funds, structured notes, etc.

Thank you. Our next question comes from the line of Chiyao Huang from Morgan Stanley. Please ask your question, Chiyao.

Hi. My first question is on the driver for the higher brokerage commission rate in the fourth quarter, and roughly what’s the contribution from the derivative products? How is the management’s outlook on the brokerage commission rate for 2023? My second question is on the interest income, which we are seeing rapid growth in the fourth quarter. Basically, I’m wondering how we plan to utilize the clients' idle cash, and what do we invest? What’s the percentage and the scale of client idle cash that we plan to utilize in 2023? Thank you.

Thank you. I will address these two questions. First, regarding the commission rate, the increase was primarily due to typical factors. The market experienced significant volatility in the fourth quarter, leading to noticeable corrections in the U.S. stock markets, which caused our effective pricing model to rise considerably. Additionally, as you pointed out, derivative trades grew during the fourth quarter due to the market volatility, positively impacting our blended commission rate. In the fourth quarter, commissions from derivatives constituted about one-third of our total commissions, which is a relatively high level historically. However, as mentioned in the previous earnings call, we do not establish specific targets for our derivative products. Our priority will be on investment education and further enhancing our offerings. For example, this year, we will gradually introduce features for our U.S. options portfolio to attract more professional derivative traders. We are not focused on aggressively marketing these derivative products to clients with a lower risk tolerance. The second question about interest income is more challenging to quantify concerning the use of idle cash, as it varies with market volatility. Generally speaking, idle cash has historically accounted for approximately 10% to 20% of our total client assets, depending on market conditions. For instance, in the fourth quarter and throughout the past year, the idle cash position was relatively higher due to unfavorable market conditions. Looking ahead, we expect interest income to continue growing year-over-year, primarily benefiting from the high interest rate environment. Regarding the utilization of this cash, options are limited due to SFC regulations; clients' idle cash can only be placed in bank deposits at commercial banks with durations of less than 6 months. Thank you.

Thank you. Our next question comes from the line of Cindy Wang from China Renaissance. Please ask your question, Cindy.

Thanks, management, for giving me this chance to ask questions. I have two questions. The first question is related to the U.S. market. In the fourth quarter, the average net asset inflow of new paying clients for their first month of onboarding increased by 40% quarter-over-quarter. What’s the U.S. client acquisition strategy in the fourth quarter that helped the new asset inflow increase? And do you have any expectations regarding net asset inflow and the number of new paying client contributions in the U.S. in 2023? The second question is on customer acquisition costs. The CAC in the fourth quarter was down 11% quarter-over-quarter. Can you elaborate on the recent declines and whether this trend will be sustained in the first quarter of 2023, and our outlook for the full year?

Thank you. I will take your second question first. I’ll leave the first question to Leaf to answer. For the CAC in the fourth quarter, we further optimized our channel distributions in Hong Kong and also in overseas markets. We adjusted certain incentives for our clients on a dynamic basis that not only focused on the speed of our clients but, more importantly, on the quality of our clients. Going forward, I think it is still very difficult to predict 2023 situations. My base case is that the CAC will largely remain the same as in 2022. Client acquisition in the U.S. in Q4 slowed down on a sequential basis. On one hand, market sentiment remained weak, which affected clients’ willingness to enter the market. On the other hand, we deliberately slowed down client acquisition to focus on improving client quality. As mentioned, the first month's average net asset inflows from our new paying clients in the U.S. increased by around 40%, mainly because we focused on attracting client assets and adjusted the reward threshold. In the first quarter this year, we already launched multi-leg options for U.S. stocks, and we plan to add and improve advanced derivative products and functions, such as index options this year. Moving forward, we will continue to enhance our product capabilities and gradually improve our product portfolio centered on U.S. stocks and U.S. derivatives to enhance our competitiveness in the local market while controlling client acquisition costs and focusing on improving client quality. Regarding guidance, we currently have no guidance for U.S. client or asset inflow growth in 2023. Thank you.

Thank you. Our next question comes from Frank Zheng from Credit Suisse. Please ask your question, Frank.

This is Frank Zheng from Credit Suisse. I have two questions. The first one is about new market entries. What is the latest progress in the timetable? Are services in Japan already online? The second question is related to interest rates; in the fourth quarter, interest expenses surged quarter-over-quarter. We would like to understand, in general, when interest rates are in an up cycle, how might the interest rate spread of margin financing be affected considering that the fee rate income is relatively fixed, but fee expenses could elevate?

Thank you very much, Frank. I will take both of your questions. Number one, in terms of new market expansion, you are right; we do have some new markets in our pipeline. In a base case, we are looking to expand into two new markets, both in Asia, this year. I think the total addressable market for these two potential markets will be very meaningful. However, in terms of the exact timeline, it is still very difficult to predict nowadays as we are still waiting for the regulators’ confirmations concerning our license approvals. Hopefully, we will provide you with updates and more details in the coming quarters. Regarding the interest expenses, I think relatively speaking, the spread will be narrowed a little bit, given that our pricing strategy for margin financing is fixed rate. However, the high-interest rate environment will impact the funding cost side. Thanks to our U.S. self-clearing capabilities and a very strong balance sheet, if you look at our total equity base, you will see that a lot of margin financing’s funding sources come from our own funds. Therefore, I think the pressure from the funding costs is still manageable in 2023. Thank you.

Thank you. Our next question comes from Leon Qi from Daiwa. Please ask your question, Leon.

Hi. This is Leon Qi from Daiwa. Thanks for taking my questions. Two questions today. Firstly, regarding Hong Kong business. We noticed that recently, Futu has been carrying out more and more offline services. I appreciate if management can give us any insight into how we should think about our offline business strategy in Hong Kong. Does that help us in terms of increasing the customer wallet share in AUM? The second question is regarding your latest plans for Hong Kong listing. Thank you very much.

Thank you very much, Leon. I will take your second question first and leave the first question to Leaf to answer. There are no confirmed timelines for our Hong Kong IPO listing at the moment. The top priority for the management this year is to fully cooperate and collaborate with the Mainland regulators to complete our inspection as soon as possible. This is our top priority, and we will further assess the feasibility of our Hong Kong IPO listing later, depending on market conditions and our intended use of proceeds. Thank you.

So, in Hong Kong, Futu has a higher penetration rate among the younger generations than among the middle-aged groups. We hope to better serve the middle-aged client base. Compared to the younger generations on our platform, we see that middle-aged clients are generally less tax-savvy and have longer conversion cycles. As such, we have implemented offline account opening services in Hong Kong, as face-to-face communication can shorten the conversion cycle for these clients. We also plan to reach potential clients through multiple touch points, including offline campaigns and cooperation with key opinion leaders, to improve both the quantity and quality of clients acquired. Thank you.

Our next question comes from Katherine Lei from JPMorgan. Please go ahead with your question, Katherine.

Sorry, this is Peter asking a question on behalf of Katherine. We understood that there is a CAC announcement on tightening of offshore brokers, and we wish to understand what’s the impact on Futu’s business operations, particularly, does Futu see any current AUM outflow following the CAC announcement last December? Thank you.

Thank you, Peter. Let me answer your question. First of all, I will provide some general insights about our clients’ movements following the end of last year’s inflow. We did witness some of our Hong Kong clients experience sentiment concerns resulting in some client outflows, particularly in the first half of January. However, I think the overall amount is quite manageable. Roughly, I estimate the net outflow at that time accounted for about 1% to 2% of our total client assets, which, compared to the situation we faced at the end of 2021, we think was manageable. The net outflow situation gradually reversed starting in February, and nowadays, we are recording daily asset growth. Secondly, regarding the CSRC’s news at the end of last year, we fully accept the regulator’s viewpoint, and we have made a commitment to cooperate with the regulators. On a net basis, we believe this will promote healthy long-term growth for the industry. If you have been following the news, there have been further clarifications from CSRC spokespersons in mid-February regarding how to deal with existing clients; they have asked for orderly management of existing clients, which will be an industry-wide situation. Thus, we will take constructive measures to cooperate with the regulators regarding this matter. Thank you very much.

Alright. I am showing no further questions. Thank you very much for all your questions. I will now turn the conference back to Daniel for closing remarks.

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