This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk07: Ladies and gentlemen, welcome to Futu Holdings' second quarter 2021 conference call. At this time, all participants are in a listen-only mode. After the management's prepared remarks, there will be a Q&A session. Today's conference call is being recorded. If you have any objections, you may disconnect at this time. 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.
spk02: Thanks, Operator, and thank you for joining us today to discuss our second quarter 2021 earnings results. Joining me on the call today are Mr. Leif Leif, Chairman and Chief Executive Officer, Arthur Chen, Chief Financial Officer, and Robin Shute, Senior Vice President. As a reminder, today's call may include four 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 involving hearing risks and uncertainty. We caution you that a number of important factors could cause actual results to differ materially from those containing any forward-looking statements. For more information about the potential risks and uncertainty, 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 Leif. Leif will make his comments in Chinese, and I will translate.
spk01: Hello, everyone. Thank you for attending FUTU's 2021 second quarter performance conference. This quarter, FUTU has achieved an important milestone. The number of real estate customers has exceeded 1 million. Compared with the same period of growth of 230%, the number of real estate customers has increased by 21.1 million in this quarter, creating our second best quarter. Hello, everyone. Thank you for joining the earnings call today.
spk02: We achieved the milestone of 1 million paying clients as of the end of second quarter, translating into a 230% year-over-year growth. Net addition with 211,000, our second best quarter in history. Our relentless pursuit of premier user experience and brand image rewarded us with yet another quarter of rapid client-based expansion, over 50% organically required paying clients, and a high paying client retention rate of 97.8%.
spk01: To look forward to the future, our development strategy in the foreign market mainly includes three points. First, to consolidate and expand our leading position in the Hong Kong market. Second, to continue to increase market share in the Singapore market. Third, to promote trading self-calibration in the U.S. market, in order to further improve our currency capability and the flexibility of customer operation. This quarter, the Singapore market has contributed more than 50% of its new asset customers. Singapore is a South China Sea market. We will continue to occupy the hearts of Singaporean users through market marketing and reputation recommendations. In the U.S. market, the self-calculation project has achieved rapid progress in this quarter. We have moved about 350 U.S. stocks into our self-calculation system. At the same time, we plan to transfer 50% of U.S. stocks to our self-calculation system at the end of the year.
spk02: Going forward, our key growth strategies would be to defend and extend our leading position in Hong Kong, further take market share in Singapore, and drive self-clearing in the U.S. to improve monetization and operational flexibility. In the second quarter, Singapore contributed nearly half of our new paying clients. Singapore represents a blue ocean opportunity, and we will leverage marketing and word-of-mouth referral to further capture user mind share. In the U.S., our self-clearing initiative reported accelerated progress as we now have migrated about 350 U.S. stocks to our proprietary clearing system. We are targeting to self-clear 50% of U.S. stocks by the end of this year.
spk01: The rise in the capital market has had an impact on customer asset value. Our customer asset value has still reached a new record high of 5,030 billion Hong Kong dollars. Our total client assets were HK$503 billion at quarter end, representing 253% growth on a year-over-year basis
spk02: and 9% growth on a quarter-over-quarter basis, despite challenging mark-to-market impact. Average client assets came down sequentially to HK$503,000 as paying client acquisition in new markets picked up and dragged average balance.
spk01: This quarter, our total trading volume is 1.3 trillion HKD, with a growth of 104%. The total trading volume of each stock is about 64%. The trading volume has significantly increased compared to last quarter. Total trading volume was above 104% year-over-year to 1.3 trillion Hong Kong dollars.
spk02: of which U.S. trading constituted approximately 64%. Trading volume came down meaningfully from the first quarter due to a much lower turnover rate across different trading markets and client cohorts. We have seen our clients stay on the sidelines amid market uncertainty, and we expect our trading volume growth in the coming quarters to be driven mostly by expansion in client counts and assets rather than trading turnover should current market environment persist.
spk01: Although in the end of the second quarter, the hot market of Hong Kong-China IPO divided some of the wealth management business assets, but the wealth of rich people still achieved a steady growth in this quarter. We also expect that in the next few quarters, the wealth management asset size will remain stable and improve. As of June 30, more than 7.4 million customers hold 13.8 billion Hong Kong dollars of wealth management assets. The asset volume has increased by 59% compared to the growth of 5%. In the second quarter, we established a cooperative relationship with seven well-known asset management institutions, including Kaohsiung, Ruiying and Xin'an. Fudu has also become the only distributor of the Huaxia Golden Crescent China Science and Technology Fund. This fund is currently the only one in Hong Kong that focuses on the Chinese technology industry. In addition, we are also continuing to optimize and treat our product capabilities. Our wealth management business, MoneyPlus, has been relatively immune to the market downturn.
spk02: Although the Hong Kong ICOs at the end of the quarter took away some of the assets accumulated over the quarter, and we expect steady asset balance growth in coming quarters. As of June 30th, over 74,000 clients held wealth management positions and total client assets in wealth management were 13.8 billion Hong Kong dollars, up 59% year-over-year and 5% quarter-over-quarter. MoneyPlus established new partnerships with seven reputable asset managers in the quarter, including Goldman Sachs, UBS, and Principal. We also became the exclusive distributor of China AMC's Select Greater China Technology Fund, the only China technology-focused mutual fund in Hong Kong. We continued to innovate on product features. We added fund portfolio rebalancing function and upgraded the functionality of money market funds, where clients can now opt to automatically subscribe in the deemed money market funds based on their idle cash and margin balance positions.
spk01: At the end of this year, our corporate service has 186 IPOs and IR customers, and 263 ESOP customers. Compared to last year, the growth was 191% and 153% respectively. We will further enhance the capability of a one-stop ESOP service, and provide more real-time配套 services to the corporate management and employees. We have a complex cross-region Our enterprise business, Suitu I&E, has 186 IPO and IR clients, as well as 263 ESOP solutions clients at the quarter end, representing 191% and 153% year-over-year growth, respectively.
spk02: We continue to enhance the value proposition of our ESOP business by providing an end-to-end one-stop solution and various value-added services to the management team and employees of our corporate clients. Our experience in handling complicated ESOP granting at scale across different geographies helps us continue to win over large-scale corporate clients.
spk01: At the same time, we are happy to continue to see strong user activity. In June, The average daily number of people still remains at more than 1 million. The daily activity time of users on the platform is about 30 minutes. In order to further improve the activity of users, we continue to attract different types of people and institutions to join the platform to enrich community content, and continue to optimize it to achieve more accurate content recommendations. As of the end of the second quarter, more than 600 companies have established enterprises on our community platform.
spk02: To slice low-paying clients' attrition, we're encouraged to see robust user engagement data as average TAV remained above 1 million and daily average user time spent hovered around 30 minutes on each trading day in June. In an effort to drive user engagement, We continue to enrich content in our social community by attracting different stakeholders and improve content recommendation. As of quarter end, over 600 companies have set up enterprise accounts in our social community to interact with retail investors, providing our users invaluable data to facilitate investment decision-making.
spk01: 接下来,请首席财务官阿泽介绍我们本季度的财务表现。 Next.
spk02: I'd like to invite our CFO, Arthur, to discuss our financial performance.
spk04: Thank you, Daniel. Please allow me to walk you through our financial performance in the second quarter. All numbers are in Hong Kong dollars unless otherwise noted. Total revenue was $1.78 billion, an increase of 129% from the second quarter of 2020, and a decrease of 28% sequentially. Brokerage commission and handling charge income was $798 million, up 95% year-over-year and down 40% P&Q. The P&Q decline was mainly due to a sharp drop in trading turnover amidst dampened market sentiment from about six times in the first quarter to three times in the second quarter, to be specific. This was partially offset by higher client assets and the slightly sequential uptick in landed commission rates to 6.1 basis points. Interest incomes were 610 million, an increase of 194% year-over-year and a decrease of 7% year-on-year. The year-over-year increase in interest income was mainly driven by higher margin financing balance, higher security borrowing and the lending service income, as well as higher IPO financing income. The milder quarterly decline can be mainly attributed to a reduction in security borrowing income, as the market value of U.S. stock borrowing and the borrowing rate both dropped sequentially. Total income was $169 million, up 141% year-over-year and down 24% Q&Q. The year-over-year growth and QMQ decline can both be attributed to changes in our IPO subscription service charge income and currency exchange service income as market conditions fluctuated. In terms of costs, our total cost was $279 million, an increase of 81% from the same quarter last year and a decrease of 37% from last quarter. Vocation commission and handling charge expenses was $145 million, an increase of 89% year-over-year. This increase was roughly in line with our changes of our vocation commission and handling charge income. Interest income was $18 million, up 98% year-over-year. The growth was primarily due to, number one, high costs associated with our security borrowing and the lending business, and then number two, higher margin financing interest expenses driven by higher margin financing balance, partially offset by lower cost of funding. Processing and servicing costs were $54 million, up 48% year-over-year. The increase was primarily due to an increase in crowd service fee to present higher number of concurrent trades. As a result, total gross profit was $1.3 billion, an increase of 143% from $534 million in the same period in 2020. Gross operating margin increased from 77.6% in the second quarter of 2020 to 82.3% this quarter, thanks to high operating leverage as a result of our larger business scale. Total operating expenses was up 145% year-over-year and 32% Q&Q to $647 million, over 40% of which was related to our international initiative in Singapore and the U.S. markets. R&D expenses was $173 million, an increase of 48% year-over-year and then 26% Q&Q, roughly in line with our R&D headcount increase. We continue to invest in our U.S. clearing capabilities and dedicate around 40% of our R&D personnel to product development in Singapore and in the U.S. to drive a smoother and customized product experience for local users. Selling and marketing expenses was $377 million, up 292% year-over-year and 37% Q&Q. The increase was primarily due to higher branding and marketing spending, especially in the international markets, to cultivate brand image and acquire new clients. In the second quarter of 2021, over half our selling and marketing expenses were devoted to the overseas markets. G&A expenses was $97 million, an increase of 91% year-over-year and a 24% Q&Q due to increase in headcount for general and administrative personnel. Our effective tax rate increased from 9% in the first quarter to 14.5% in the second quarter, since our total tax credit arising from accumulated loss in the mainland business has been fully utilized so far, and our net revenue derived from our US stock trading declined in the second quarter. Going forward, we do expect our effective tax rate to be in the range of 12% to 14%. As a result, Our net income for the quarter increased by 126% year-over-year and decreased by 54% QMQ to 534 million. That concludes our prepared remarks. We now would like to open the call to questions. Operator, please go ahead.
spk07: Thank you. Ladies and gentlemen, we will now begin the question and answer session. If you wish to ask a question, please press star 1 on your telephone keypad and wait for your name to be announced. If you wish to cancel your request, please press the pound or hash key. Your first question comes from Catherine Liu of Morgan Stanley. Please ask your question.
spk06: Thank you for giving me the opportunity to ask this question. I'm Morgan Stanley's Liu Xinhe. I have two questions here. The first one is that I would like to ask if the management level will give us some guidance from the third quarter to the present, such as the speed of goods and customer service, and the exchange rate or the amount of transactions, including the cost of goods and customer service. The second one is that I would like to ask if the supervision team I will translate for myself. So I have two questions. First is can the management please give us some guidance in terms of the third quarter to date results, including client acquisition pace, AUM per capita, turnover velocity, client acquisition cost, and maybe some operating expenses growth rate. In light of the regulatory uncertainties regarding value-structured companies and ADRs, does the company have any plans regarding Hong Kong listing? Thank you.
spk04: Thank you, Catherine. This is Arthur. I will take these two questions. First of all, just quoted today, I just want to share some color. Definitely, I think, you know, the market fluctuations quoted today have some negative impacts on our average client assets. So far, I think roughly our average class assets will be down around in the range of 10% to 20%, mainly attributed to the market-to-market loss. But we are very confident because even quarter to day, almost every day, we still see meaningful net asset inflows in terms of the wealth accumulations in FUTU platforms. Therefore, I do think as the market back to normal, these market loss or gain will come to the average numbers. In terms of the client's trading velocity, we do expect trading velocity have some rebound in July and August, given the market, especially high these tech stocks. have meaningful setbacks, we do see some bottom positions from the retail investors. And unlike the situation in second quarter, many investors sit on the sidelines. We do see some participations in the third quarter. So based on the current runway, I would expect in terms of top lines, we may see some sequential clearances increase. in the third quarter compared with the second quarters. In terms of the client acquisition cost, I think on the absolute amount levels, this marketing campaign spending will be roughly in line with what we did in the second quarters. But definitely the client acquisition speed will slow down due to the market conditions. So this will affect the denominator numbers and we will let our CAC numbers have certain increase in the first quarter compared with the second quarter. For your second question, I think number one, our VIE structure is slightly different compared with many Chinese ADR companies. Because most of our revenue now derives from the offshore. Essentially, we do not generate any revenue from our VIE structures. So even, you know, there will be some new regulations on the VIE structure. I do not expect that it will have some meaningful impact operational-wise or financial-wise to our business. And definitely we have noticed some recent trends in the capital markets, and we are actively conducting policy research and evaluation in this regard. We will make a very comprehensive assessment to ensure that decision to maximize our shareholders' best long-term interest is made.
spk06: Thank you. Thank you very much.
spk07: Your next question comes from Ethan Wang from CLSA. Please ask your question.
spk00: Thank you, Ms. Wang. First of all, congratulations on the second quarter. It is actually a strong performance. Of course, we know that the monitoring environment has changed in July. I have two questions. They are all about the risk of Chinese CDR withdrawal. First of all, I would like to ask if it is possible uh, just to tell you that we are now in the United States. How much of the amount of transactions is, uh, is this Chinese ADR, uh, and then the second question is, uh, because in July, including, uh, this little incident, the risk of retirement now, uh, is indeed getting more and more, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, Okay, so thank you, management. I have two questions surrounding the Chinese ADR delisting risk. The first one is wondering whether management can share some color on a current percentage of Chinese ADRs as a percentage of the total trading volume of the U.S. stocks on FUTU. And the second one is if the risk of delisting for the Chinese ADRs really happens, then these companies may very likely to convert their Hong Kong listings into primary ones. That means they will be included in a Kinect scheme, which means that Chinese investors can trade those stocks to online China brokers. Does that mean a very big risk for a firm? So how does management look at this? Thank you.
spk04: Okay, thank you. I will take the first question and then we'll leave. my colleagues Robin and Lee for the second questions. In terms of our current U.S. stock trading, essentially ADR just accounts for a very small part. If we do some back testing around 15% of our U.S. stock trading belongs to these Chinese ADRs. The second question is, for example, after the U.S.
spk01: stock market closed, many Chinese stock companies will choose to go to Hong Kong for stock market. So here, the Chinese stock market going back to Hong Kong for stock market should become a structural trend. In fact, for FUTU, for us who have been in Hong Kong for so many years, we can see it as a Thank you.
spk02: Yeah, we think the return of China ADRs back to Hong Kong could be a structural trend, although we don't really take a stance on how the regulations will evolve. And the Hong Kong IPOs generally have very high monetization potentials, and we generate a pretty sizable percentage of our revenue from the IPO subscription and margin financing interest. And also, in Hong Kong, there's more friendly trading hours for our clients. And also, just to add on to your other point about converting to primary listing, well, we don't think the onshore brokers will necessarily pose a great threat to our business because a lot of the popular Chinese companies listed on Hong Kong right now are already accessible to our mainland Chinese investors through Stock Connect, for example, Tencent. But some of these large-cap tech companies still account for a majority of our asset balance in Hong Kong stocks. And in comparison to trading through Stock Connect, trading directly in the Hong Kong market offers more flexible and more favorable trading hours and trading time. So if mainland China has a public holiday, it does not affect their trading hours in Hong Kong. And also, there's a lot more flexibility around margin financing, and there is a wider selection of stocks that you can invest in. So we don't believe that a number of Chinese companies converting from secondary listing to primary listing will change our competitive edge in this market.
spk01: Sure, got it. That's good.
spk00: Thank you.
spk01: About the competition, if we leave out the Chinese foreign exchange, we can see that in Hong Kong, the competition with Anshuo has always existed. So FUTU has a very strong Okay, thank you.
spk02: And we also have a very differentiated client cohort as compared to some of the onshore brokers. So we don't think our competitive advantage will be diluted should this circumstance actually realize it.
spk07: Your next question comes from the line of Zoe Zong from Jefferies. Please ask your question.
spk05: Hello, everyone. Thank you for accepting my question. I'm Jessica. I have two questions for you. The first one is about TAG. Because we know that the effective tax rate of QO2 is 14.5%, which is higher than the previous rate. What is the reason behind this? And if you look back, how should we look at it? The second question is about... Because the period of the Hong Kong IPO settlement will be from T plus 5 to T plus 2 in the future. Of course, it may be executed in the fourth quarter of 2022. Hi, management. Thanks for taking my question. This is Zoe from Jefferies, and I have two questions. My first question is regarding the tax rate. As we have noted that the effective tax rate for Q2 was 14.5%, which is much higher than the previous quarter. I wonder what's the reason for the increase, and how should we estimate this number going forward? And my second question is we know that Hong Kong Exchange plans to adopt a T plus 2 settlement circle instead of the current T plus 5 in the first quarter of 2022. I'm wondering how should we think about the impact on our IPO financing business? Thank you.
spk04: Thank you, Zoe. I will answer the first question and then we'll leave the second question to Leif. Actually, I mentioned this in our open remarks. You're right. Our effected tax rate increased from 9% in the first quarter to 14.5% in the second quarter. The reason actually comes from two thoughts. Number one is our tax credit arising from historical accumulated loss in the China operation has been fully utilized. So this is a permanent effect. And the second layer is our net revenue derived from our U.S. stock trading belongs to these mainland individuals. Actually, we can make offshore claims in Hong Kong, but their U.S. stock trading volume in the second quarter declined. Therefore, we have some temporary impact in the second quarter arising from these second regions. Going forward, we expect our effect tax rate will be in the range of 12% to 14%. Thank you.
spk01: Let me answer the second question, which is about the change in public recruitment in Hong Kong. First of all, the IPO financing interest in the first half of this year accounts for about 4% of our income. In 2020, our total income was less than 6%. So if we assume that from five working days to two working days in this period, from a static perspective, it will only generate about So the IPO financing income accounted for about 4% of our revenue in the first half of this year and the contribution was less than 6% in 2020.
spk02: So if we were to assume that the settlement period goes from T plus 5 to T plus 2, from a static point of view, this will have only a 2% to 3% negative impact on our top line, which we think is manageable.
spk01: In addition, we actually, through these years of such an operation, we will also see that some IPOs, especially some popular IPOs, their heart rate is overlapping. So in fact, customers can take out There is a limited amount of funds for the acquisition of new stocks. In this overlapping cycle, we can see that there is a part of the demand for new stocks is actually suppressed. After using a new stock system here, because the whole time of a stock is shortened, this part of a demand will be released again. When the market is good or there are many new stocks, the whole time of a stock freeze is shortened. On the contrary, it can improve the efficiency of the use of a stock. will increase the flexibility and penetration rate of a customer's call. In addition, we will also see that the entire reform here is not only to turn the time of an entire new stock into a new one, but we also see that it adds a function, which is to avoid a multiple call. In other words, under the existing system, a customer is actually likely to open a call through different chains, a multiple purchase of the same stock. So in the new system, it can only do such things in one chain. So I think it is actually beneficial for those who are already in the relatively early stages. Because we have a better experience and relatively sufficient funds to provide and help it to complete the new stock.
spk02: Secondly, a lot of the IPO subscription periods kind of overlap with each other. So we believe some of the needs for IPO subscription have been subdued under the current kind of regulations, and we think this could change after the reform. So especially when the markets are performing really well and there are a lot of IPOs happening at the same time, having a T plus 2 settlement period can increase the capital efficiency of our clients and therefore we potentially help increase their engagement in this IPO subscription process. And also, you know, we understand that the regulations are not only regarding, you know, shortening the settlement period, but also may touch on, you know, avoiding the retail clients from subscribing to IPOs through multiple brokers. And we believe that the IPO financing income makes up a very significant income for a lot of the mid- to small-sized brokers. So this policy could actually contribute to industry consolidation and direct a lot of these retail investors to platforms like Futu that have better user experience and more capital for them to use during the IPO.
spk05: Thank you.
spk01: Thank you.
spk07: Once again, if you wish to ask a question, please press star 1 on your telephone keypad. Once again, it is star 1 if you wish to ask a question. Your next question comes from Hanyang Wang from 86 Research. Please ask your question.
spk03: I will translate my questions. Thanks, management, for taking my questions. Congratulations on another great quarter. I have a follow-up question on the IPO business. So will the uncertainties for China ADR's IPO, as well as the recent slowdown of Hong Kong IPOs, impact our ESO business? And will that also impact our user acquisition in mainland China, so ESOP? Thank you.
spk04: Well, thank you. Let me take this question. I think number one, the slowdown of Chinese companies overseas ADR IPO is just a temporary situation. We do understand that many Chinese companies are in the pep lines, and that they are waiting for more clarity. in terms of the regulations from China and also from the US regulators down the road. Therefore, I think that Intel will be very short-term. And having said that, we also see, as Lee mentioned before, we see more and more US listed companies and also pre-IPO companies will consider Hong Kong as their primary listing rather than US in the past. We do have a very strong edge in Hong Kong market given Hong Kong is our home base. Therefore, we do think client acquisition through the ESOP, through the IAPO will continue. Just give you some breakdowns in terms of our current client acquisition channels. Organic already accounts for over 50%. If we just calculate ease of channel combined with this group account opening, we'll just account for around 10% of our total new paying clients in every quarter. So I think the impact is still manageable.
spk03: Thank you. Very helpful. Thank you.
spk07: We have another question from the line of Catherine Liu from Morgan Stanley. Please ask your question.
spk06: Thank you. I'll translate for myself. Just wondering, understand that you're in a new market. Initial monetization may be less important versus client market share. But then just wondering, has the management considered increasing the monetization for the Singapore market? whether it will be some guidance from companies or some hints from companies, or it will be a natural result as clients' assets increase on the platform. Thank you.
spk04: Sure, Catherine. Let me give you some colors in terms of our client profile in Singapore. I think in terms of age and their trading velocity, this population is very similar to what we see in Hong Kong markets. The average age is around 30 years old, and they do trade a lot, particularly for the US markets. Now the average client assets in Singapore is around the $6,000. Of course, it is relatively low compared with the average assets that we witnessed in China and in Hong Kong. But currently, I think if we look at the cohort basis, the new clients we acquired in March and April, their cohort assets already almost doubled in the past four to five months. So back to your question, I think number one, definitely we think the nature of our business is just more like a rolling snowball. We are very happy to go along with our clients in their investment journeys. We believe as time goes by, their average assets will become bigger and bigger. Number two, definitely we will have more service offerings, more product offerings in the pipeline Hopefully, we will launch more business in the coming two quarters. For instance, we will provide Singapore clients to participate in the Hong Kong IPO retail crunch. Not to mention, we will also expand our wealth management product offerings offering to the mainland and the Hong Kong people to the Singapore local residents as well. Therefore, I think if we provide more and more products and service, we will find more monetization areas to enhance our output.
spk06: Thank you very much. Thank you.
spk07: As there are no further questions at this time, I would now like to hand the conference back to Daniel for closing remarks.
spk02: 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.
spk07: Thank you. That does conclude our conference for today. Thank you for participating. You may now all disconnect.
Disclaimer