Earnings Call Transcript - FUTU Q2 2024

Daniel Yuan, Chief of Staff to CEO and Head of IR

Thanks, operator. And thank you for joining us today to discuss our second quarter 2024 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 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. With that, I'll now turn the call over to Leaf. Leaf will make his comments in Chinese and I will translate.

Leaf Li, Chairman and CEO

Thank you all for joining our earnings call today. In the second quarter, we acquired 155,000 paying clients, representing a year-over-year growth of 168%. By the end of the quarter, we reached over 2 million paying clients, showing a 29% growth from the previous year and 8% from the prior quarter. Six months into 2024, we have achieved more than 80% of our full-year target for new paying clients. Due to our strong performance so far this year, we are raising our guidance to 550,000 new paying clients for 2024. Both Hong Kong and Singapore saw double-digit growth in new paying clients, with a recovery in the mid-market contributing to over one-third of the growth in the second quarter. In Japan, new paying clients also increased significantly quarter-over-quarter as we enhance our product offerings, refine our marketing strategies, and boost our brand visibility. Meanwhile, Malaysia has shown strong growth, leading in the number of new paying clients for two consecutive quarters despite some slowdown. A significant update is our recent launch of cryptocurrency trading in Hong Kong and Singapore. We believe there is substantial opportunity for growth in crypto in these regions, thanks to a supportive regulatory environment, increased awareness of virtual assets, and the rise of user-friendly trading platforms. The adoption of crypto will vary and depend on market sentiments, but our development focus remains on offering a diverse portfolio that helps our clients navigate market cycles rather than solely on short-term profits. In our product roadmap for other international markets, we plan to launch NISA savings accounts, mutual funds, and U.S. margin trading in Japan soon. In Malaysia, we've recently introduced ringgit and USD-denominated money market funds and have launched Malaysian stock IPO subscription services to help our clients take advantage of the active local IPO market. In Canada, we just rolled out a cash plus product that allows clients to earn interest on their idle cash. Our total client assets rose by 24% year-over-year and 12% quarter-over-quarter to a record HKD579 billion, driven by strong net asset inflows and appreciation of stock holdings. Even with these inflows, we have surpassed our full-year 2023 numbers merely six months into the year. In the second quarter, our clients increased their leveraged positions, reflecting improved market sentiment. As a result, margin financing and securities lending rose to an all-time high of HKD44 billion. Thanks to strong inflows into equities and money market funds, total client assets in Singapore jumped 19% quarter-over-quarter, marking the eighth straight quarter of double-digit growth. Average client assets in Malaysia grew by 45% sequentially, with total client assets more than doubling. In Australia, average client assets have seen growth for three consecutive quarters. Optimism for Hong Kong stocks and major U.S. indexes continued into the second quarter, with total trading volume reaching HKD1.62 trillion, a 69% increase year-over-year and 21% quarter-over-quarter. Client interest in Hong Kong stock trading remained strong for technology and high-dividend stocks, with trading volume increasing by 28% sequentially to HKD358 billion. In the U.S. market, driven by trends in AI and the resurgence of meme stocks, stock trading volume grew by 19% quarter-over-quarter to HKD1.24 trillion. Our advanced options trading tools, user-friendly interface, and extensive educational resources have attracted more options traders in the U.S., with a year-over-year increase of about 60% in the number of traders and more than doubling of options contracts traded compared to the same quarter last year. Wealth management also experienced significant growth this quarter, as clients sought diversification and invested more in safer assets like money market funds and U.S. Treasury bills. Total client assets grew by 84% year-over-year and 25% quarter-over-quarter to around HKD80 billion. By the end of the quarter, wealth management assets made up 14% of our total client assets, with over 25% of paying clients involved in wealth management. In the first half of 2024, we underwrote seven of the ten largest Hong Kong IPOs. Next, I would like to invite our CFO, Arthur, to discuss our financial performance.

Arthur Chen, CFO

Thank you, Leaf and Daniel. 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. Total revenue was HKD3.1 billion, up 26% from HKD2.5 billion in the second quarter of 2023. Brokerage commission and handling charge income was HKD1.4 billion, up 45% year-over-year and 27% quarter-over-quarter. The increase was mainly driven by a 69% year-over-year and a 21% quarter-over-quarter growth in total trading volume. Given our per share pricing model for U.S. stock trading, the blended commission rate increased from 8.1 basis points to 8.5 basis points. As a result, brokerage income grew at a faster rate than trading volume quarter-over-quarter. Interest income was HKD1.6 billion, an increase of 13% year-over-year and 18% quarter-over-quarter. This year-over-year and quarter-over-quarter increase was mainly driven by higher margin financing income due to an increase in daily average margin balance, as well as higher interest income from securities borrowing and lending business. Other income was HKD161 million, reflecting a 27% year-over-year and a 3% quarter-over-quarter increase, primarily attributable to higher funded distribution income, while the quarter-over-quarter increase was partially offset by a decline in underwriting fee income. Total costs were HKD574 million, an increase of 53% from HKD375 million in the second quarter of 2023. Brokerage commission and handling charge expenses were HKD87 million, up 58% year-over-year and 45% quarter-over-quarter. The expenses grew by a wider margin than income sequentially, mainly due to the cap fee scheme for U.S. stock trading. Under the per share pricing model, we charge a maximum of 58 basis points of trading volume per order for U.S. stock trading. Therefore, when clients trade a more low-priced stock, as was the case in the second quarter, there will be a mismatch between the gross revenue rate and the expenses. Interest expenses were HKD378 million, reflecting a 71% year-over-year increase and a 21% quarter-over-quarter increase. The year-over-year and quarter-over-quarter increases were mainly driven by higher interest expenses associated with our securities borrowing and lending business. Processing and servicing costs were HKD109 million, up 11% year-over-year and 13% quarter-over-quarter. The year-over-year increase was largely due to higher crowd service fees and the quarter-over-quarter increase was mainly driven by higher market information and data fees. As a result, our total gross profit was HKD2.6 billion, reflecting a 21% increase from HKD2.1 billion in the second quarter of 2023. Gross margin was 81.6% compared to 84.9% in the year-ago quarter. Operating expenses were up 26% year-over-year and 16% quarter-over-quarter to HKD1.1 billion. R&D expenses were HKD374 million, up 3% year-over-year and 12% quarter-over-quarter. The year-over-year and quarter-over-quarter increases were mainly driven by an increase in R&D headcount to support our new markets. Selling and marketing expenses were HKD338 million, up 93% year-over-year and 16% quarter-over-quarter. The year-over-year increase was driven by the triple-digit year-over-year growth in new paying clients, partially offset by lower client acquisition costs. The quarter-over-quarter increase was mainly due to the sequential increase in client acquisition costs. G&A expenses were HKD362 million, up 16% year-over-year and 20% quarter-over-quarter. The year-over-year and quarter-over-quarter increases were primarily due to an increase in headcount for G&A customer support. As a result, income from operations increased by 18% year-over-year and 24% quarter-over-quarter to HKD1.5 billion. Operating margin declined to 47.3% from 50.6% in the second quarter of 2023, mostly due to higher marketing expenses. Our net income increased by 8% year-over-year and 17% quarter-over-quarter to HKD1.2 billion. The net income margin declined to 38.6% in the second quarter compared to 41.1% in the same quarter last year. Our effective tax rate for the quarter was 15.2%. That concludes our prepared remarks. We would now like to open the call to questions. Operator, please go ahead.

Operator, Operator

First question comes from Cindy Wang from China Renaissance. Thanks for taking my call. I have two questions. One is about your crypto services. You recently launched crypto services in Hong Kong and Singapore. Can you share some feedback from clients regarding crypto trading and your client acquisition strategy? My second question is about the third quarter. Can you provide some recent trends for the third quarter, including trading volume, trading velocity, assets under management, and the balances for margin financing and securities lending?

Arthur Chen, CFO

For the second quarter, we experienced strong client asset inflows, although there were some negative effects from market-to-market losses related to challenges in the Hong Kong markets. Our clients' trading turnover velocity and trading volume have remained robust, showing a sequential quarter-on-quarter increase. In terms of commission rates, we benefited in the second quarter from more clients trading low-value mid-cap stocks, resulting in a positive uptick in the take rate. However, we expect these benefits to normalize in the third quarter. Thank you very much.

Daniel Yuan, Chief of Staff to CEO and Head of IR

We launched cryptocurrency trading in Hong Kong and Singapore on August 1 and August 12, respectively, and we now offer a limited number of mainstream trading pairs. So far, several clients have activated their cryptocurrency trading accounts since we introduced the product recently. The cryptocurrency market has faced significant pullbacks and fluctuations. The trading volume of cryptocurrency and client assets are both relatively small compared to the overall scale of our business. Currently, our focus is on enhancing our product capabilities and providing investor education and operations to strengthen our value proposition as a comprehensive asset allocation platform. Thank you.

Chiyao Huang, Analyst

I have two questions. First, could management provide more details on the quarter-on-quarter increase in client assets? Specifically, how much is attributable to inflows and how much to market movements? Additionally, where are the inflows coming from in terms of geographic distribution in the second quarter? The second question concerns the acquisition of Japanese clients. Are we seeing any acceleration in trends in the second quarter compared to the first quarter? How is the trend looking in the third quarter so far? Also, what are the current client assets in Japan, and where are clients directing their investments?

Arthur Chen, CFO

I will address your first question, and my colleagues will handle the second one. In the second quarter, our total client assets rose by 12% compared to the previous quarter. To provide details, most of this increase came from client asset inflows, such as account cash or stock transfers, which contributed around high single digits, while an additional 2% to 3% came from positive market effects. Hong Kong and Singapore are our primary markets for net asset inflows, together accounting for approximately 80% of the total.

Daniel Yuan, Chief of Staff to CEO and Head of IR

In the second quarter, we experienced strong growth in new paying clients in Japan, achieving solid quarter-over-quarter increases. By the end of the quarter, we approached 800,000 users, which we consider very healthy growth. Previously, we indicated a target of 1 million to 1.5 million users in Japan by the end of the year, and we remain confident in that projection. The growth in new paying clients is driven by our ongoing rollout of new products. Although we still need to introduce a few key financial products compared to some mainstream competitors in Japan, as Leaf mentioned in his opening remarks, we plan to launch those products in the coming months. Building our brand is also crucial, as we have come to understand that Japanese users often take longer to trust a brand, particularly one from abroad. Therefore, we will continue to invest in our brand, which is why we held a power lounge event and brought on a brand ambassador in the second quarter. All these initiatives contribute to our brand equity. Currently, the average client assets are a few thousand U.S. dollars, with most clients investing in U.S. stocks, although the proportion of assets and trading volume from Japanese stocks has been growing. We believe that as we improve our Japan stock product offerings, the percentage contributions will continue to increase toward market levels. Thank you.

You Fan, Analyst

I have two questions. The first is about our plan for new product offerings and any developments in our product pipeline, particularly in new markets like Japan and Malaysia. The second question concerns the progress of the share repurchase program.

Daniel Yuan, Chief of Staff to CEO and Head of IR

In terms of the product pipeline for Japan, as Leaf mentioned earlier, we have several important financial products and planned rollouts in the coming months, including NISA savings accounts, mutual funds, and U.S. margin financing. For Malaysia, we have maintained a steady pace of new product introductions. In the third quarter, we launched Malaysian stock IPO subscription services and a cash plus product, which is a money market offering. Our experience indicates that during a strong IPO market, IPO subscription services can greatly contribute to new client growth. In a high-interest environment, money market products can increase client assets. Looking ahead in Malaysia, we plan to introduce stock transfers for Malaysian stocks this quarter to attract existing clients from other brokers.

Arthur Chen, CFO

Our existing share repurchase program actually covers 2024 and 2025. So far, we have not exercised this program yet. We will keep you and other analysts and investors informed should we decide to proceed with any exercises.

Zoey Zong, Analyst

I have two questions. First, can you explain the business model of your crypto services? Second, we noticed that interest expenses rose by 21% sequentially in Q2. Could you clarify the reasons for this increase and how we should view the trend going forward?

Arthur Chen, CFO

The increase in interest expenses in the second quarter is primarily linked to our clients' margin financing and stock borrowing activities. Specifically, with stock borrowing, the pricing—reflected by the implied interest rate—depends heavily on market-driven demand and supply, which is challenging to estimate or predict accurately. If we maintain the current situation and our retail client participation in the stock borrowing market continues, I anticipate that both the expenses related to these activities and the revenue will increase further.

Daniel Yuan, Chief of Staff to CEO and Head of IR

For cryptocurrency trading, since we now only offer trading services, the business model is straightforward as we charge a commission. When we designed our pricing scheme, we sought to balance our market competitiveness with monetization potential. Currently in Hong Kong and Singapore, we work with an upstream provider to offer cryptocurrency trading. Taking into account the upstream cost, we still enjoy a good gross profit margin. The net take rate of cryptocurrency trading is higher than that for Hong Kong and U.S. stock trading. Thank you.

Emma Xu, Analyst

I have two questions. The first question is about client acquisition. You recently increased your full-year target for new paying clients to 550,000, meaning you need to acquire around 108,000 new paying clients each quarter. Historically, client acquisition tends to be lower in the fourth quarter, suggesting that your first quarter might show strong results. Can you share which markets are driving your client growth in the third quarter? The second question concerns the rising expectations regarding rate cuts and the recent volatility in AI stocks. Are you observing any changes in how clients allocate their assets among stocks, bonds, and options? Additionally, within stocks, is there a trend moving from AI growth stocks to value stocks? How might these shifts in behavior influence your take rate, and how could the anticipated rate cuts impact your interest income? Although the effect on interest income this year may be minimal, what are your thoughts on how a 25 basis point reduction might affect your interest income next year?

Arthur Chen, CFO

In terms of our guidance for acquiring new clients, we have adjusted our target to 550,000 new paying clients for the entire year. In the second quarter, we saw significant contributions from Hong Kong and Singapore, which made up over one-third of our new clients. Together, Japan and Malaysia accounted for about 40% of the total. Based on the current situation this quarter, we remain optimistic about meeting our guidance, despite potential uncertainties due to the U.S. elections in the fourth quarter. We anticipate that the contribution breakdown from these markets will be similar to what we experienced in the first half of the year. Regarding your second question, we have noticed some negative effects from expected rate cuts. Our initial estimates indicate that a 25 basis point reduction in rates could affect our pre-tax profit and operating profit by HKD5 million to HKD8 million, not accounting for any positive effects from increased market trading volume due to the rate cut and benefits from new client acquisitions. So far, we haven't seen significant changes in client asset allocation. However, within wealth management, we are noticing a shift towards fixed-income products, including Treasuries and short-duration fixed incomes.

Charles Zhou, Analyst

First of all, congratulations to the management team. I think it's a very strong set of results and also above consensus. My question is regarding client acquisition costs. Is there any update for the 2024 full-year guidance? If there are no new updates, we believe there's still ample upside from here. Could you please share your marketing and client acquisition strategy for several key markets in the second half? My second question is related to interest income. Our understanding is that there are three major components: idle cash interest income, margin financing, and stock lending interest income, along with IPO financing income. Could you break down the interest income from these three components for the second quarter?

Arthur Chen, CFO

To address your two questions: the first one regarding CAC guidance. In the second quarter, our CAC was around HKD2,200, representing a 30% quarter-over-quarter increase compared to Q1, which had a relatively low base due to the significant contribution of new clients from Malaysia. We believe the situation will normalize in the second quarter. For the third quarter to date, we still consider our CAC to be at a relatively low level, below our guidance range of HKD2,500 to HKD3,000 for the full year. Relatively speaking, I feel more confident regarding the CAC guidance. Based on the current run rate, I think it will likely be at the low end of our range or even lower for the entire year. Regarding the breakdown of interest income due to market changes in Hong Kong and the U.S., the interest income from IPO financing in both locations is not material, and clients' idle cash and margin financing contribute almost equally to the interest income breakdown, although I believe the interest income from idle cash was slightly higher than in the second half.

Peter Zhang, Analyst

Thank you for the opportunity to ask my questions. I have two inquiries. My first question is about the progress of the business in Malaysia. Can management provide more details, such as client asset inflow, average client profiles, and current trading turnover? What is the outlook for the Malaysian business? My second question relates to Airstar Bank. I understand that Futu invested in 40% of Airstar Bank shares in June. Can you explain the rationale behind this investment and Futu’s strategy for cooperating with this virtual bank in Hong Kong moving forward?

Arthur Chen, CFO

The key motivations for considering this investment are twofold: we continue to receive substantial requests and suggestions from our users and clients regarding the need for enhanced fund transfer capabilities to brokerage accounts. Secondly, we anticipate significant synergies between our brokerage, wealth management, and the retail banking sectors, especially in terms of high net worth wealth management services typically provided by banks. Thus far, the deal was completed in the second quarter. We are working closely with the local management of Airstar Bank alongside Xiaomi and other shareholders to align our long-term strategy. In the near term, our focus will primarily remain on Futu itself, especially how to leverage our R&D and technology capabilities to optimize and enhance Airstar Bank's product infrastructure.

Daniel Yuan, Chief of Staff to CEO and Head of IR

In terms of our client profile, as a one-stop trading platform for Malaysian and U.S. stocks, we have attracted clients with some investment experience. Most of these clients are young Asian males with above-average income. We've noticed that the trading turnover of our Malaysian clients is significantly higher than the average for the group. Based on the ARPU and CAC figures from the second quarter, we believe the payback period for Malaysia is better than we initially expected when we launched in Singapore. By the end of the second quarter, net asset inflows and average client assets in Malaysia were consistently increasing month-over-month, with average client assets rising by 45% quarter-over-quarter. As our average client assets keep increasing, we expect to see better unit economics. For client acquisition in the second quarter, trends to date show that new paying clients were slightly down compared to the first quarter, which had a high base after converting many existing users into paying clients. Still, the growth in the second quarter remained stable quarter-over-quarter, which we attribute to brand equity gained in Singapore, our strong product capabilities as a one-stop platform for Malaysian U.S. stocks, and positive market sentiment during that period. We also launched Malaysian stock IPO subscriptions and automated investment schemes for U.S. stocks and fractional shares, as well as money market funds and stock transfers from Malaysian stocks in the third quarter. We expect steady growth in new paying clients in Malaysia.

Hu Shen, Analyst

What proportion of trading and media makes up the total U.S. trading volume? How did this factor affect the commission rate in the second quarter? How significant was the impact from mid-cap stock trading? What is a reliable indicator for tracking changes in U.S. stock trading commission rates? Additionally, what is the fee rate involved in fund distribution? When would be the right time to consider issuing dividends?

Arthur Chen, CFO

In terms of your first question, mid-cap stocks account for approximately 20% to 30% of our clients' U.S. stock trading volumes in the second quarter. Regarding the impact on the commission rate, we do not have any concrete dividend policy at this time. The main reason is we believe there are significant growth areas where we can invest our capital. We are confident that these investments will yield returns that exceed our cost of capital. Regarding the economics of fund distribution or treasury trading, while I cannot divulge specific confidential commercial arrangements, I can tell you that the arrangement is very typical and aligns with industry distribution models. Thank you.

Daniel Yuan, Chief of Staff to CEO and Head of IR

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.

Operator, Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.