Futu Holdings Limited

Hello, ladies and gentlemen. Welcome to Futu Holdings' first quarter 2023 earnings 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. 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 to CEO and Head of IR at Futu. Please go ahead, sir.

Thanks, operator. And thank you for joining us today to discuss our first quarter 2023 earnings results. Joining me on the call today are Mr. Lief Lee, Chairman and Chief Executive Officer, Arthur Chen, Chief Financial Officer, and Robin Xu, 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 uncertainties. We caution you that a number of important factors could call back to results to differ materially from those containing 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 20F. With that, I will now turn the call over to Leif Lisa will make his comments in Chinese and I will translate.

Thank you all for joining today. As of quarter end, our paying clients surpassed 1.5 million, representing 15% growth year-over-year.

Based on paying client growth in the first five months of the year, we expect to add 150,000 paying clients in 2023. In the first quarter, Hong Kong market contributed over one-third of paying client growth as client acquisition accelerated on the back of the rally of China technology names in January. We also witnessed resilient paying client growth in Singapore as we continue to strengthen our brand awareness through offline events and promoted demand for lower-risk fund products through industrial education.

We expanded the trade product category in multiple markets and upgraded the product function. In Hong Kong, we began to provide customers with services for specific US stocks and ETFs. As the only one in Hong Kong to provide 5x24 hours of US stock trading function, we have improved the flexibility of the trading period and lowered the threshold for Hong Kong customers to participate in US stocks. We also launched the GANGAN market foreign exchange function in Singapore to provide customers 36 major currency-based insurance transactions, allowing customers to seize the opportunity to trade in the ever-changing foreign exchange market. In the U.S., we have launched the U.S. stock combination equity function. The introduction of this high-end trading function has optimized the customer's trading experience, and is expected to attract more high-end equity traders to our platform. Although the market is weak in the first quarter, there is also a negative impact, but we are constantly enriching the product category and optimizing the product experience.

We continued to broaden our trading product offerings and upgrade trading features in various markets. We became the only broker in Hong Kong that allows clients to trade certain U.S. stocks and ETFs 24 hours a day, five days a week, thereby enhancing the flexibility and accessibility of U.S. stock trading. We also launched leveraged foreign exchange trading in Singapore. where clients can trade 36 major currency pairs on margin to take advantage of volatilities in the foreign exchange market. In the U.S., we've rolled out multi-led option strategy orders for U.S. stocks. This advanced trading function streamlines clients' trading experience and will attract more sophisticated options traders to our platform. Despite market weakness and headline regulatory news, our expanding product suite and premier user experience led to another quarter of over 98% paying client retention rate.

With the growth of our customer base and the continued promotion of our entry-level funds, our total customer base has reached 4,660 billion Hong Kong dollars, which is 21% higher than before and 12% higher than before. In Singapore, thanks to the strong entry-level funds and the better performance of the U.S. stock market, our total customer base The total client assets increased by 21% year-over-year and 12% quarter-over-quarter to HK$466 billion.

due to higher mark-to-market value of client stock holdings and net asset inflow. In Singapore, total client assets and average client assets increased by 28% and 22% sequentially, attributable to solid net asset inflow across client cohorts and favorable U.S. equity market performance. In the first quarter, we attracted high-quality clients to Singapore that continued to deposit funds into their trading accounts. For clients we acquired in January, for example, Their average asset balance almost tripled my barge.

With the increase in the trading mood of the technology stocks, the share price has increased by 30% to 3.5 billion Hong Kong dollars. This quarter's total trading volume is 1.2 trillion Hong Kong dollars. The share price has increased by 12%. Many U.S. technology stocks have performed well this quarter, winning the market. The increase in the trading volume of iBank, Margin financing and securities lending balance was up by 30% sequentially to reach HK$35 billion, driven by elevated activities around technology stocks.

Total trading volume was 1.2 trillion Hong Kong dollars, up 12% quarter over quarter. U.S. stock trading volume grew by 23% sequentially to 828 billion Hong Kong dollars, mainly due to higher trading turnover of U.S. technology names, many of which handsomely outperformed the market during the quarter. Hong Kong stock trading volume was 372 billion Hong Kong dollars, down 6% sequentially, as investor sentiments were dragged by the equity market correction in February and March.

In this quarter, the financial management business has again seen a strong growth. The total asset holdings of customers reached 3.7 billion Hong Kong dollars, which is 77% of the total growth, which is 17% of the total growth. In Singapore, the currency fund continues to be favored by customers. During the period when the total asset holdings of customers increased by 69%, We also launched a blockchain transaction function to expand the product category. At the end of the first quarter, the penetration rate of wealth management products in Singapore's real estate customers increased from 1% in the same period last year to 15%. In Hong Kong, we enriched the type of structured ticket. Structured ticket assets have increased by more than five times.

Wealth management business recorded another quarter of strong growth, with total client assets climbing to HK$37 billion, up 77% year-over-year and 17% quarter-over-quarter. In Singapore, elevated interest around money market funds led to a 69% sequential increase in total client assets. We also expanded our product offerings by introducing bond trading. As of quarter-end, 15% of our paying clients in Singapore held wealth management products, up from 1% in the year-ago quarter. In Hong Kong, we bolstered our structured product offering by launching fixed coupon notes and digital notes. These products gained traction among our high-net-worth clients and structured product asset balance, as a result, grew by five-fold quarter-over-quarter.

At the end of the first quarter, we had 353 IPO distributors and investors and 662.1 SOAP customers, with 37% and 44% growth respectively. In this quarter, we, as the leading partner in the practice, participated in many large-scale Hong Kong IPOs, including Meili Park and Lehua Entertainment. According to WANDA's data statistics, in the first quarter, we participated in nine Hong Kong IPOs as sellers, and ranked first in all exchanges.

We have 353 IPO distribution and IR clients, as well as 662 ESOP clients as of quarter end, of 37% and 44% year-over-year, respectively. We acted as jointly managers for several high-profile Hong Kong IPOs, including those at Beauty Farm Medical and Health Industry and YH Entertainment Group. In the first quarter, we underwrote nine Hong Kong IPOs and ranked first among all brokers, according to WINS.

I am pleased to announce that our wholly owned Malaysia subsidiary has received the approval and principal for the Capital Market Services License

from the Securities Commission Malaysia. We look forward to tapping into the immense market opportunity in Malaysia and further strengthening our presence in the Southeast Asian market. Next, I'd like to invite our CFO Arthur to discuss our financial performance.

Thanks, Leeb and Daniel. Now, please allow me to walk you through our financial performance in the fourth quarter. All numbers are in Hong Kong dollars unless otherwise noted. Total revenue was 2.5 billion, up 52% from 1.6 billion in the first quarter of 2022. Brokerage commission and handling charge income was 1.1 billion, an increase of 12% year-over-year and 3% Q-over-Q. The year-over-year increase was mainly driven by a higher lender commission rate of 8.8 basis points. The Q-over-Q increase was primarily attributable to higher U.S. stock trading volumes. Interest income was $1.3 billion increase of 125% year-over-year and 14% Q-over-Q. The increase was driven by higher interest income from cash deposits and higher security lending income. Other income was $126 million of 29% year-over-year and 34% Q-over-Q. The year-over-year and Q-over-Q increase were both driven by higher funder distribution income. Our total cost was $291 million, increase of 28% from $228 million in the first quarter of 2022. Brokerage commission and handling charge expenses were $72 million, down 25% year-over-year and up 13% Q-by-Q. The expenses didn't move in tandem with our brokerage commission and handling charge income, mainly due to cost savings from our U.S. self-clearing business. Interest expenses was $131 million, up 234% year-over-year and down 28% Q2. The year-over-year increase and the Q2 decrease were both driven by interest expenses associated with our security lending business. Processing as a service cost was $88 million, down 5% year-over-year and 9% Q2. The year-over-year decrease was mainly due to lower product service fee as a result of system optimization. The Q over Q decrease was mainly due to lower market information fee and the data transmission fee. As a result, total gross profit was $2.2 billion, increased by 56% from $1.4 billion in the first quarter of 2022. Gross margin was 88% as compared to 86% in the first quarter of 2022. Operating expenses were up 7% year-over-year and down 2% cube-by-cube to $804 million. R&D expenses were $355 million, up 26% year-over-year and 6% cube-by-cube. The increase was mainly due to increasing R&D headcount as we continue to support new product offering and invest in product localization in new international markets. Selling and marketing expenses was $141 million, down 51% year-over-year and 80% Q2. Expenses declined due to decelerating client acquisition amid weak market sentiments. GMA expenses was $308 million, up 73% year-over-year and down 75% Q2. The rise was primarily due to the increase in headcount for general and administrative personnel to support our international business. The expenses declined Q over Q as we recorded one more professional service fee for our proposed Hong Kong listing last quarter. As a result, our net income increased by 108% year-over-year and 24% Q over Q to $1.2 billion. Net income margin expanded to 48% from 35% in the same quarter last year, mainly due to strong revenue growth and lower marketing spending. That concludes our prepared remarks. We now like to open the call to questions. Operator, please go ahead. Thank you.

Thank you. To ask a question, you'll need to press star 1 and 1 on your telephone and wait for your name to be announced. And to withdraw your question, you can press star 1 and 1 again. Please stand by while we compile the Q&A roster. We'll now take our first question.

Please stand by. Please stand by while we compile the queue. Once again, if you do have questions, it's star 1 and 1. Thank you. We now have the first question ready.

And this is from the line of from Morgan Stanley. Please go ahead.

I have two questions. The first question is about the expansion of overseas. Because we see that the growth in the first quarter in Singapore is still very good. And I would like to ask the manager to give more colors in the new markets in the United States and Australia. What new products do we have in the first quarter? And what new strategies will there be in the future? Then, as I mentioned earlier, the principle-based acquisition of the Malaysian license plate, we will take a step forward in some of the new projects in Malaysia and some of the local operations that will need to be done. What are some of the new views? Let's share with the manager. The second question is about the changes in the latest supervision. We see that the main consideration is that after the application is downloaded in China, I would like to ask the manager what will affect the continuous use of the mass customer, and in what aspects will we uh uh So my first question is around the overseas expansion. We have been seeing very encouraging progress in Singapore in the first quarter. So water management could give more color on the U.S. and Australia market developments. And also regarding the new entrance in Malaysia market, any plans and also localization in that market will be greatly appreciated. And second question is around the latest regulatory change with the removal of the app from the onshore app stores, and just wondering how would that impact the existing onshore users, their experience, and how is the company's plan to continue to provide high-quality service to those existing clients? And maybe longer term, how do you think about the existing TAM, the TAM of existing onshore clients would change going forward, and also how would the competition change going forward? Thank you.

Thank you, Chiyo. I think the first question, Daniel and Robin can give you some colors about our first quarter achievements in Australia and in the U.S. Also, you know, our ambition plans for entering into Malaysia potentially in the second half of this year. For your second question about, you know, CSRC, the mainland regulation implications, I think, you know, Leif will give you some you know, more colors in terms of the implications for our existing users. I can, you know, just supplement some, you know, initial data in the past week, which we observed. Hopefully it will be helpful to you.

Hello, thank you for the question.

Hi, I'm Robin. Let me answer the question about Malaysia first. Then I will answer the question about the US, Australia and the regulatory system. Thank you. As you know, we have also issued an announcement that we have just obtained the principle skin of the Malaysian regulatory system for our securities. Next, we will start investing in the entire Malaysian market Thank you.

Let me talk about Q2 and Q2 in the US.

In Q1, the customer speed in the US has slowed down. This is mainly due to our strategy of sorting and optimizing localization. We also want to put the focus on improving customer quality. In Q1, we started to support the features of the US stock combination market. We are also planning to make up for the high-end features such as cross-order orders this year. to strengthen the core product capabilities of U.S. stocks, stocks and eye products. In the future, we will also increase the product recognition level here through exclusive bidding content and in-house activities. We will continue to attract customers through product power and improve the quality of customers. In Australia, we have increased the number of customers in the first quarter. After the accumulation of more than a year of market time, the brand's popularity in Australia has also been continuously strengthened. Through market research and practice, we are now more clear about the target customer base in Australia, and have adopted different ways to train brand awareness and customers in people who are in different stages of trading. In Australia, we will continue to supplement the product capability here to improve the movement of customer demand.

Thank you.

So for Malaysia, we just received the approval in principle for the capital markets license from the Securities Commission Malaysia. And next, we'll start building local teams and work on product and research and development. So far, we haven't set a date for the official launch in Malaysia, and we'll update the market when we have more information. And in terms of the U.S. market, our growth in U.S. slowed down during the first quarter. primarily because we were mapping out and optimizing our localization strategy with a focus on improving client quality. And we started to offer the U.S. multi-leg options trading function in the first quarter, and we plan to launch advanced function and products such as bracket orders this year, while continuing to strengthen the core product capabilities around U.S. stocks and derivatives trading. And in the future, we'll also offer tailored investor education contents and activities to enhance brand awareness, attract clients through superior product offerings, and improve client quality. And for the Australian market, in the first quarter, our client acquisition in Australia has increased. And after more than a year of brand building, our brand awareness in Australia continues to improve. And based on our market research, owning on our target client profile, and have adopted different methods to cultivate brand awareness and acquire clients with different backgrounds. We plan to continue to launch product functions and develop deeper customer insights in Australia.

For our customers, according to the statement of China's press spokesman on February 15, China's press spokesman on February 15, China's press spokesman on February 15, the transaction of stock investors is actually not affected. So the amount of funds should meet the requirements related to the management of the national foreign exchange. Currently, all the transaction functions of our stock customers are normal. In addition, based on our communication with the supervision, we understand that mainlanders who already have securities accounts in Hong Kong and other exchanges are defined as such stock mainland customers. So this part of the population can actually be opened up by FUTU. Whether it's a deposit or a transfer, it can become a customer of FUTU. So currently, regarding the APP, we have actually made some proper arrangements. So whether it's upgrading or providing this spare channel, the service can also be secured. Currently, all of the stock customers So based on CSRC's announcement on December 13th and the statements made on February 15th in response to a question from reporters,

The existing clients' tradings will now be affected, and the existing clients can continue to trade through their existing offline financial institutions. And for these existing clients to deposit more funds, it is allowed as long as they satisfy the requirements from SAFE. And currently, for our existing clients, all of their trading activities and some deposit activities are as usual. And besides, the regulators further clarified that existing clients are defined as clients that already have trading accounts with actual brokers. So for mainland Chinese clients that have open trading accounts with other Hong Kong brokers, we are allowed to open accounts for them. And the fund deposits and stock transfer from other brokers to us are also allowed by the regulators. And in terms of our app upgrades, we have issued guidances on our website and our app to guide clients on how to timely upgrade the app to the latest version. And we think our current services to the existing clients are not jeopardized. And if they have questions during the upgrades, they can call our customer service line and ask questions through the app at any time, and we resolve client requests very timely. Thank you.

Yes, and also I want to supplement, if I may, some initial observations since we published an announcement to remove our app from domestic Apple stores last Tuesday. We are very delighted that it seems that our existing China clients population are very calm about this headline news. we do not see any meaningful, you know, abnormal churn rates and also the client net asset outflow in the past week.

Thank you.

We'll now take our next question. Please stand by. This is from the line of Cindy Wang from China Relations. Please go ahead.