Hello, ladies and gentlemen. Welcome to Futu Holdings' Second Quarter 2023 Conference Call. At this time, all participants are in a listen-only mode. After management's prepared remarks, there will be a Q&A session. Today's conference call is being recorded. I would now like to turn the conference over to your host for today's call, Daniel Yuan, Chief of Staff to the CEO and Head of Investor Relations at Futu. Please go ahead, sir.

Thanks, operator, and thank you for joining us today to discuss our second quarter 2023 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 beliefs 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 annual report on Form 20-F. 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. I'm pleased to announce that we acquired over 57,000 paying clients in the second quarter, bringing the total number of our paying clients to nearly 1.6 million. Robust organic growth across all overseas markets drove a 41% sequential acceleration in client acquisition. In the second quarter, the Hong Kong market contributed approximately one third of new paying clients as effective offline marketing campaigns attracted older clients who prefer in-person instructions on how to open trading accounts and navigate our user interface. In the Singapore market, we also witnessed strong paying client growth on the back of U.S. equity market outperformance and the enticing yield of money market funds. In the U.S., we brought in more clients of higher quality as we iterated on marketing channels and client incentives. Despite fragile market sentiments, our group's quarterly paying client retention rate remained above 98%. In the second quarter, we continued to roll out new products and features across markets to help clients better execute their trading strategies. We launched bracket orders for U.S. and Hong Kong stock options and futures, and an algorithmic order for all clients in Hong Kong and Singapore. In Singapore and Australia, we now give clients access to certain U.S. stocks in EPS 24 hours a day, five days a week, thereby enhancing the accessibility of U.S. stock trading. Total client assets were HK$466 billion, up 8% year-over-year and relatively flat quarter-over-quarter. Negative mark-to-market impacts on client Hong Kong stock holdings dragged total client assets. The net asset inflow in overseas markets remained robust, which offset the market impact. The Singapore market delivered strong asset growth during the second quarter with a 21% and 12% quarter-over-quarter increase in total and average client assets, respectively. This was the fourth consecutive quarter where the Singapore market achieved double-digits sequential growth in total client assets. Margin financing and securities lending balance declined marginally by 1.4% sequentially as some clients unwound their security lending positions. Total trading volume declined 22% quarter-over-quarter to HK$1 trillion. Hong Kong stock trading volume was HK$259 billion, down 31% sequentially due to clients' waning interest in China technology names given disappointing stock price performance. U.S. stock trading volume was down by 18% quarter-over-quarter to HK$676 billion as the trading turnover of technology stocks and leveraged and inverse ETFs contracted. Total client assets under management were HK$43 billion, up 99% year-over-year and 17% quarter-over-quarter. Sustaining high yields and money market funds was a key driver behind this robust asset growth. In Hong Kong, we continue to expand structured product offerings by onboarding fund-linked notes and call/put spread notes to cater to the diversified risk-return expectations of high-net-worth clients. In Singapore, over 18% of clients held wealth management positions as of the quarter-end, up significantly from 2% in the year-ago quarter. In Singapore, average client assets in wealth management more than doubled year-over-year. In an effort to expand beyond retail wealth management, we launched entrusted accounts in Singapore that allow fund managers to manage assets on their clients' behalf. We have 374 IPO distribution and investor relations clients at the quarter-end, up 36% year-over-year. Of all 31 companies listed in Hong Kong in the first half of 2023, 20 of them have used one or more of our enterprise product offerings. In the quarter, we acted as joint book runners for several high-profile Hong Kong IPOs, including those of YSB and Edianyun. Lastly, I am pleased to announce that our wholly-owned Japan subsidiary, Moomoo Security Japan Corporation Limited, is officially approved by the Japanese regulators to conduct its brokerage and wealth management business via our online platform, Moomoo. The Japanese market is characterized by its large and growing number of affluent retail investors, high penetration of online trading, and increasing preference for U.S. stock trading, and we are excited to tap into this immense market opportunity. Next, I would like to invite our CFO, Arthur, to discuss our financial performance.

Thanks, Leaf and Daniel. Before going through our financial performance, I'd like to give you an update on our latest $500 million share repurchase program announced on March 11, 2022. At the end of the first half, we have repurchased an aggregate of 11 million ADS with approximately $360 million total repurchase amount in open market transactions. This constitutes about 70% of the maximum purchase amount approved under our share repurchase program. Now back to the financial performance in the second quarter. All numbers mentioned below are in Hong Kong dollars. Total revenues for the quarter were HK$2.5 billion, up 42% from HK$1.7 billion in the second quarter of 2022. Brokerage commission and handling charge income was HK$953 million, a decrease of 8% year-over-year and 12% quarter-over-quarter. The quarter-over-quarter decrease was mainly due to a decline in total trading volume, partially offset by the increase in the blended commission rate from 8.8 basis points to 9.9 basis points. Interest income was HK$1.4 billion, an increase of 127% year-over-year and 9% quarter-over-quarter. The increase was driven by higher interest income from cash deposits and a higher securities lending income. Other income was HK$127 million, up 37% year-over-year and remained mostly flat quarter-over-quarter. The year-over-year increase was driven by higher fund distribution income. Other income maintained largely stable quarter-over-quarter as high-open distribution and service income and the transfer fee were largely offset by lower currency exchange income, underwriting fee income, and market data income. Total costs were HK$375 million, an increase of 80% from HK$208 million in the second quarter of 2022. Brokerage commission and handling charge expenses were HK$55 million, down 37% year-over-year and 23% quarter-over-quarter. The decrease was attributable to lower trading volume and cost savings from our U.S. sales clearing business. Interest expenses were HK$220 million, up 729% year-over-year and 68% quarter-over-quarter. The increase was mainly driven by higher expenses associated with our securities borrowing and lending business. Higher funding costs from margin financing business also contributed to the quarter-over-quarter increase. Processing and servicing costs were HK$99 million, up 5% year-over-year and 13% quarter-over-quarter. The increase was primarily due to higher system usage fees, market information fees, and data transformation fees also increased on a sequential basis. As a result, total gross profit was HK$2.1 billion, an increase of 37% from HK$1.5 billion in the second quarter of 2022. Gross margin was 85% as compared to 88% in the second quarter of 2022. Operating expenses were up 18% year-over-year and 6% quarter-over-quarter to HK$852 million. R&D expenses were HK$363 million, up 25% year-over-year and 2% quarter-over-quarter. The increase was mainly due to increasing R&D headcount as we continue to upgrade our infrastructure, support new product offerings, and invest in product localization in international markets. Selling and marketing expenses were HK$175 million, down 20% year-over-year and up 24% quarter-over-quarter. The year-over-year decrease was mainly due to lower customer acquisition costs, and the quarter-over-quarter increase was driven by accelerated client acquisition. G&A expenses were HK$314 million, up 49% year-over-year and 2% quarter-over-quarter. The increase was mainly due to an increase in headcount for general and administrative personnel to support our international business expansion. As a result, our total net income increased by 74% year-over-year, and decreased by 6% quarter-over-quarter to HK$1.1 billion. Net income margin expanded to 45% from 37% in the same quarter last year, primarily due to strong top-line growth and lower selling and marketing expenses. That concludes our prepared remarks. We would now like to open the call to questions. Operator, please go ahead. Thank you.

We will now take the first question from Chiyao Huang from MS. Please proceed.

Let me briefly translate. So, I have two questions regarding the trading volume, and we're seeing the trading volume slip further than the overall market in both Hong Kong and the U.S. in the second quarter of Futu. So, just wondering what's the implication there? And also, we are seeing the brokerage commission bouncing quite sharply in the second quarter, roughly what's the driving factors behind? Thank you.

Thank you, Chiyao. I will address two of your questions. First, concerning trading volume, it aligns with overall market conditions, particularly in the second quarter, which has been quite challenging in both the U.S. and Hong Kong. We have noticed a decrease in trading velocity among our clients in both regions; however, this seems to be a temporary situation as we are seeing a rebound in trading velocity for the current quarter. Regarding trading commissions, the primary factor, as we've mentioned previously, is related to our clients' trading behavior in U.S. stocks. In the second quarter, we observed more clients trading low-value stocks in the U.S. market, which resulted in a higher blended commission rate compared to the second quarter.

We will now take the next question from the line of Pu Han from CICC. Please go ahead.

I'll translate. Thanks management for taking my questions. This is Pu Han from CICC. I have two questions here. The first one is regarding the AUM and the revenue breakdown by assets. How much does Hong Kong and the U.S. stocks and the wealth management products? And also the cash balance accounts for the total client asset balance? And how much does Hong Kong and U.S. stock market account for total revenue risk activity? The second question is regarding client net asset inflow. So, I wonder, what's the asset inflow of clients in Hong Kong, Singapore, and also Mainland China, respectively?

I'll answer your second question first and we'll leave the first question to Leaf. In terms of the net asset inflow in the second quarter, we see a very healthy rebound compared to the first quarter. Given that we got some negative headlines in the second quarter, which caused certain clients to feel uncomfortable in terms of their assets parked in our accounts. So, this impact has been fully removed in the second quarter and to breakdown among the different regions, Hong Kong actually contributed most of the asset inflows, followed by Singapore. I will leave the second question to Leaf.

In the past few quarters, the breakdown of Futu's client assets has remained relatively stable, with more client assets allocated to Hong Kong stocks than U.S. stocks, and the proportion of Wealth Management assets actually continues to rise in the past couple of quarters, now accounting for about 10% by the end of Q2, which has more than doubled year-over-year. Client's cash balance accounted for low teens of total client asset balance. And to answer your question regarding the revenue breakdown between Hong Kong and U.S. stocks, Hong Kong stocks usually contribute about 30% of the trading volume. U.S. stocks contributed 70% of the trading volume, and the blended commission rate for U.S. stocks is slightly higher. So, about 75% of our trading commission actually came from U.S. stock trading. Thank you.

Thank you. We will now take the next question from the line of Cindy Wang from China Renaissance. Please go ahead.

Thank you, management for taking my call. This is Cindy from China Renaissance. So, I have two questions. The first question is related to the customer acquisition cost. So, we see the second quarter new clients had good strong sequential growth. However, the CAC actually went down. So, is that going to be sustainable in the second half of 2023? And the second question is related to the Japan market. So, congrats on getting the license approval from the Japanese Government. Since we have launched the Beta version for the Moomoo app in Japan, can you talk a little bit more about what's the effect in the Beta version in terms of client feedback and MAU? And is that going to help you to grow your new client base in the second half of this year? Thank you.

Thank you, Cindy. I will take your first question, and I think Leaf will be very happy to share more insights about the Japan markets. In the second quarter, the blended client acquisition cost was around HK$3,000 per client. The CAC in Hong Kong was slightly higher than the average, while that in the U.S. and in Singapore was lower than the average. I think in the second quarter, we continued to optimize different channels, particularly some offline channel promotions to achieve very good results. Our efforts on the acquisition efficiency of target client groups have paid off, and in the future, we will further dynamically adjust our marketing strategy to improve efficiency and also the quality of customer acquisitions. Looking into the second half of this year, I personally think uncertainties still remain across different markets, but having said that, our view on average CAC will be slightly more optimistic than our view before. Therefore, we think the full-year CAC could have a high single-digit decrease compared to last year. Thank you. I hand over to Leaf.

We have been operating as a pure information market data platform in the Japanese market for less than a year, accumulating a lot of good feedback from Japanese users. We've also iterated many community networking features based on market trends and user interests. Our data shows that Moomoo's user community in Japan is highly active, with the DAU to user ratio averaging around 15% on trading days, indicating very high engagement and significant growth potential. Although the trading function is currently not available on Moomoo in Japan, we believe Moomoo has already brought unique value to Japanese users. In terms of product capabilities, Moomoo now offers various functionalities that were absent among local platforms, such as visual displays of fund flows covering U.S. and Japanese stocks, fundamental and technical analysis. Additionally, most securities brokers in Japan have a 15 to 20-minute delay in market data, and real-time quotes come at a cost. However, Moomoo provides free real-time quotes, not only for Japanese and U.S. stocks but also for foreign exchange options and futures within the global capital markets. Furthermore, Moomoo is currently the only online platform in Japan offering an online user community. We've introduced numerous KOLs and conducted live broadcasts for popular financial events in the social community, resulting in very high engagement. Lastly, we have strong trading capabilities in terms of product categories or types, trading duration, and various analytical tools, which can also be replicated in Japan in the near future. Regarding our future development plans, after receiving the approval from the Japanese regulators, we are actively preparing to launch the trading functions in the fourth quarter this year to provide Japanese investors with a comprehensive and smooth investment experience.

We will now take the next question coming from the line of Leon Qi from Daiwa. Please go ahead.

Let me record my questions in English. This is Leon Qi from Daiwa. Thanks for taking my questions. My first question is regarding the Japan market. Would management say that our competitive landscape in the online broker space in Japan is better than the U.S. based on our experience running the beta version? More specifically, do we have any expectations on CAC and payback period in Japan? My second question is on Hong Kong. We are very glad to see that FU has opened an offline experience center in Hong Kong. Many people are very excited about the product offerings. Just want to ask management what kind of user operating metrics or financial metrics are we expecting from the offline experience shops, and do we plan to open more offline shops?

Thank you. I think the first question can be answered by my colleague, Daniel, regarding our physical stores in Hong Kong. I believe Leaf is very happy to share more insights about these thoughts.

Right. So regarding the competitive landscape in Japan, we believe it is considerably more favorable than what we saw in the U.S. We understand that the online securities brokerage industry in Japan is now dominated by a few players. The top five internet brokers, including Rakuten and SBI, now account for the majority of the market share in terms of brokerage trading volume. They have each accumulated over 1 million clients, among which Rakuten and SBI are the top two players. Overall, we think that the landscape is a lot more fragmented than what we saw in the U.S., and we believe that our current product offers a significant competitive advantage over the existing online brokers. The Japanese market is huge and as we mentioned earlier, growing rapidly, and we are very confident in obtaining a meaningful market share in Japan. Overall, I think since we haven't really started acquiring clients yet, it's probably too early to talk about customer acquisition costs and payback period. But based on our initial analysis, Japanese retail investors are generally much more affluent than their U.S. counterparts, and there are actually a lot more ways to monetize trading in Japan. Let's take U.S. stock trading, for example. Industry standards now charge zero commissions for U.S. stock trading in the U.S., whereas most major online brokers in Japan still charge relatively high commissions for U.S. stock trading. So, generally, we think investors are wealthier and there are more monetization opportunities in Japan. Thank you.

Since the opening on July 31st, over a thousand people have visited our experience store, many of whom are middle-aged customers who are not familiar with the online account opening process. Previously, it was difficult for us to reach this client group through our online marketing channels, but these happened to be the target customer group that we want to further tap into. So, the experience store has helped us establish a connection with these clients and has become an important channel to enhance Futu's brand recognition among this group. In addition, the experience store in Hong Kong allows us to facilitate face-to-face communications with these users and gain a better understanding of Futu's product offerings. According to the data we have collected so far, the customer acquisition cost of experience stores is actually lower than our average Hong Kong market customer acquisition cost. So, from a CAC perspective, experience stores can actually help us reach previously underpenetrated client groups and further enhance brand image in Hong Kong at a lower cost. From the perspective of operating costs, we believe that experience stores really help us with long-term brand building, and we also plan to use these stores as venues for various offline investor educational events, which will further help save costs. If these experience stores continue to see very good progress in terms of client acquisition, we expect to establish more experience stores in Hong Kong. Thank you.

Thank you. I would now like to turn the conference back over to Daniel Yuan for closing remarks.

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

That does conclude our conference for today. Thank you for participating. You may now disconnect.