Futu Holdings Limited

Hello ladies and gentlemen, welcome to FUTU Holdings first quarter 2024 earnings conference call. At this time, all participants are in a listen-only mode. After management's prepared remarks, there will be a question and answer session. Today's conference call is being recorded. If you have any objections, you may disconnect at this time. I'd now like to turn the conference over to your host for today's conference call, Daniel Yuan, Chief of Staff to CEO and Head of IR at FUTU. Please go ahead, sir.

Thanks, operator, and thank you for joining us today to discuss our first quarter 2024 earnings results. Joining me on the call today are Mr. Li Fuli, 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 future events, which by their nature are not certain and are outside the company's control. Four looking statements involving herein risks and uncertainties. We caution you that a number of important factors could cause actual results to differ materially from those containing any four 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 would now turn the call over to Li Fuli. Li Fuli will make his comments in Chinese, and I will translate. Thank you all for joining our earnings call today. Those who are by strong market performance and solid execution new markets, we wrapped up the quarter with approximately 1.9 million paying clients, representing a 24% growth year over year. In the first quarter, we added 177,000 paying clients, which more than quadrupled from the year ago quarter, marking third highest quarterly growth in history. Three months into the year, we have already achieved over 50% of our full year guidance of 350,000 net new paying clients. Given the year to date, we would like to raise this guidance to 400,000 for now. Despite the rapid expansion of our client base, our quarterly paying client retention rate remained above 98%. Client acquisition in Hong Kong and Singapore both accelerated to double digit sequential growth. Yet, their contribution to new paying clients dwindled to around one third amid the rapid expansion of our client base.

In Japan, we continued to refine our product experience, optimize the opening process, and conduct targeted market promotion activities. As a result, new clients with assets and mutual assets in return have achieved significant growth. In addition, MUMU's application program continued to gain user trust in Japan. By the end of May, the total download volume has reached 1 million.

In Japan, our continued focus on refining product experience and streamlining the account opening process, coupled with targeted marketing initiatives, led to robust growth in new paying clients and average client assets. In addition, our MUMU app continued to garner user interest in Japan, with cumulative downloads reaching 1 million in May.

In Malaysia, we achieved a growth of more than expected. Our client participation and activity have exceeded our expectations. We have attracted over 100,000 open client clients in the last six weeks of the new business. MUMU has also become the most downloaded financial app in the country. Despite the slow expansion of our client base since the second quarter, we believe that in this year, Malaysia can contribute to the growth of our business. In Malaysia,

our industry-leading trading experience, rich market information and data, interactive social community, and superior brand equity led to an above-expectation growth. Client engagement and trading velocity also surprised us on the upside. Within six weeks of our brokerage business launch in Malaysia, we attracted over 100,000 registered clients and became the most downloaded financial app. Though client acquisitions accelerated into the second quarter, we still expect meaningful contribution from Malaysia for the rest of the year and are committed to defending and extending our market leadership.

We

have a rich pipeline of new products and features in all markets. In late March, we launched Japan equities trading in Japan and subsequently in Hong Kong and Singapore in April. We also intend to launch fractional shares trading, NISA savings account, margin trading, and mutual funds in Japan in the coming quarters. We'll also start our crypto trading in Hong Kong and Singapore and we expect much higher take rates and equities trading. In Australia, we recently launched fractional shares, options and recurring investments for US stock trading. In Canada, we introduced self-directed registered retirement savings plan, tax-free savings account, US options trading, and will soon roll out Hong Kong stock trading.

The entry into all markets has maintained strong market share, which has been compared to the decline in some of the technology stocks, which has had a negative impact on client stock market value. In Singapore, as clients continue to enter the stock market and cash management products, the total assets of clients and the cash assets have increased by 25% and 15

% respectively. We continue to experience strong asset inflow across all markets, which more than offset the drag on clients' Hong Kong stock holdings from the market depreciation of several technology names. In Singapore, total client assets and average client assets recorded 25% and 15% sequential growth respectively, driven by robust net asset inflow into equities and cash management products.

The total trading volume has increased by 18% to 28 billion Hong Kong dollars. The client's passion for technology stocks, high-stake stocks, and ETFs has increased significantly. On the other hand, the trading activity surrounding artificial intelligence and encrypted currency has driven the trading volume of US stocks to increase by 48% to reach 10 billion Hong Kong dollars. This quarter, the double amount of the amount of the exchange rate has increased by 14% to 38 billion Hong Kong dollars, reaching a record high.

Margin financing and securities lending balance increased by 14% sequentially to a record high of 38 billion Hong Kong dollars. Total client assets and wealth management were 64 billion Hong Kong dollars, up 73% -over-year and 11% -over-quarter. In the first quarter, bond holdings increased by 21% sequentially, thanks to robust net asset inflow into equities and cash management products. In Singapore, wealth management asset balance grew by 356% -over-year and 37% -over-quarter, as money market funds continue to gain traction. To cater to investor demand for high dividend yield, we launched a fund portfolio with high dividend stable allocation strategy. As of quarter end, we have 430 IPO distribution in IR clients, up 22% -over-year. Over 1200 companies have set up enterprise accounts in our social community to interact with retail investors. Next, I'd like to invite our CFO author to discuss our financial performance.

The total revenue was 2.6 billion, up 4% from 2.5 billion in the first quarter of 2023. Brokage commission and handling charge income was 1.1 billion, up 20% -by-cube and largely flat -over-year. With client trading interest piling on AI and crypto scene stocks, with high stock price, the Blender commission rate decreased from 8.8 basis point to 8.1 basis point due to our Parcher pricing model in the US. As a result, brokerage income grew at a slower rate than trading volume, both -by-cube and -over-year. Interest income was 1.4 billion, a 5% -over-year and a 1% -by-cube. The -over-year increase was mainly driven by higher margin financing income due to an increase in daily average margin balance and higher interest income from bank deposits. The -by-cube increase was mostly driven by higher interest income from bank deposits due to the increase in daily average idle cash balance. Other income was 156 million, up 24% -over-year and a 14% -by-cube. The -over-year increase was primarily attributable to higher fund distribution income and the -by-cube increase was mainly driven by higher currency exchange income. Our total cost was 417 million, an increase of 62% from 291 million in the first quarter of 2023. Brokerage commission and handling charge expenses was 16 million, down 17% -over-year and up 2% -by-cube. Brokerage expenses didn't move in tandem with brokerage income -over-year mainly due to cost savings from our US self-clearing business. The expenses grow at a narrow margin than income sequentially due to non-recurring costs associated with self-clearing migration of Singapore stocks during the fourth quarter of 2023. Interest expenses were 313 million, up 139% -over-year and a 16% -by-cube. The -over-year increase was driven by higher interest expenses associated with our security policies and the lending business. The -by-cube increase was mostly due to a similar reason, partially offset by lower margin financing interest expenses. Processing and servicing costs were 97 million, 11% -over-year and a down 6% -by-cube. The -over-year increase was largely due to higher crowd service and the data transmission fees for new markets. The -by-cube decline was mainly driven by lower market information and the data fees as well as lower crowd service fees. As a result, total gross profit was 2.1 billion and decreased by 4% from 2.2 billion in the first quarter of 2023. Gross margin was .9% as compared to .4% in the year-ago quarter. Operating expenses was up 16% -over-year and a 2% -by-cube to 930 million. R&D expenses was 373 million. The -over-year and the -by-cube decrease was largely due to stricter cost control. Selling and marketing expenses were 293 million, up 107% -over-year and a 6% -by-cube. The increase was driven by our triple-digit -over-year and the -by-cube growth in net new paying clients, partially offset by lower client acquisition costs. G&A expenses were 301 million, down 7% -over-year and a 7% -by-cube to 930 million. The -over-year and the -by-cube decrease was mainly due to lower professional service fees and the -by-cube decrease was due to stricter cost control. As a result, income from operations declined 15% -over-year and increased by 17% -by-cube to 1.2 billion. Operating margin declined to 46% from .2% in the first quarter of 2023. Mostly due to higher marketing expenses. Our net income decreased by 13% -over-year and increased by 18% -by-cube to 1 billion. Net income margin declined to .9% in the first quarter as compared to .7% in the same quarter last year. Our effective tax rate for the quarter was 15.2%. That concludes our prepared remarks. We now like to open the call to questions. Operator, please go ahead.

Thank you. We will now begin the question and answer session. To ask a question, please press star 1-1 on your telephone. You will then hear an automated message revising your hand is raised. To withdraw your question, please press star 1-1 again. Please stand by while we compile the Q&A roster. Once again, it's star

1-1 for questions.

Our

first question

comes from the line of Zhiyou Huang from Morgan Stanley. Please ask your question,

Zhiyou. Thank you, Operator,

for giving me the first chance to ask a question. First of all, I would like to thank you for giving me the opportunity to answer your question. I would like to thank you for your excellent results. I would like to ask two more questions. First, regarding Japan, can you give us more data on the number of people and assets of the users? We are currently in the middle of a process. If we look at the conversion rate of users to paying clients, Japan and other overseas markets are currently at the same stage. What is the current trend? Is there any difference in the conversion rate? This is the first question. The second question is about the rebound of the entire market since March and April. We believe that the exchange rate of our clients in Hong Kong and the entry into the market will bring a significant improvement. After all, we think that these benefits will be more obvious under the profit-making effect. I would like to ask you to share with us your thoughts on the rebound of assets in China in the second quarter. What are the new benefits of the exchange rate and the entry into the market? I would like to ask you two questions. The first question is regarding the progress we are making in Japan in terms of the number of paying clients, the per client AUM, and also want to ask you about the impact of the rebound on the market. I would like to ask you two questions. The first question is about the impact of the rebound on the conversion rate of users to paying clients. Is there any difference we are seeing in Japan right now compared to other international markets at a similar stage? I want to give more coverage on that. The second question is regarding the rebound in Hong Kong and the entry into the market. I want to ask you two questions.

The first question is

about the impact of the rebound on the market. The second quarter, the data from May, is a good improvement compared to the first quarter. The overall rate of the increase in the number of paying clients is very good. The average rate of the average client's assets is still in the early stages of the rebound. But we can see that the different clients have continued to put new money into our accounts. Regarding the conversion rate, from users to the conversion rate of the client, Japan has made some improvements in the gold exchange rate. We can see that the conversion rate has increased significantly in the Q1Q. But compared to other international markets, we can still see a big gap in the data from the early stages of the market. We can still see a big gap in the data from the early stages of the market. We think that this is more related to the experience of the opening of the account. Another factor is the level of the product. As Lise mentioned, we have a very rich product line-up plan in the coming few seasons. Let me translate for myself. In Japan, we are seeing very meaningful growth in terms of new paying clients. We saw strong sequential growth in the first quarter. In the second quarter, we observed similar strong Q1Q momentum. In terms of client AUM, we are still in the early innings of attracting client assets. But we have seen cross-client cohorts continue to put assets onto our platform. In terms of conversion from users to paying clients, that conversion ratio has improved -over-quarter thanks to a better account opening process and with more financial products rolled out on our platform. But there is still a significant gap in comparison to other overseas markets, whether it is current percentages or when we first launched into that market. I think it is more of a reason because of the account opening friction and the lack of comprehensive financial products. As Lise mentioned in his opening remarks, we have a very rich product pipeline coming up in Japan in the coming quarters. Thank you.

As you can see, Lise mentioned that the exchange rate in the first quarter is over 75% in the US stock exchange rate. In terms of the second quarter, the exchange rate in the Hong Kong stock market has improved significantly due to the rebound in the Hong Kong stock market. I believe that the exchange rate in different markets will be even in the second quarter. In terms of the second quarter, we have actually achieved a very strong entry level in the data of the first quarter. The total entry level is over 350 billion Hong Kong dollars. This is better than the strong performance of the Hong Kong and Singapore markets and the new entry levels. From the current situation, the good performance has also been very strong. From the perspective of the entry level and the customer's total assets, we can still see a very good growth. From the perspective of the customer, in the first quarter, we have already acquired 17,000 clients with assets. Of course, some of the client growth is due to the very good performance of the new entry market in Malaysia. In terms of the overall situation in the second quarter, the exchange rate in the Hong Kong market has been very slow compared to the first quarter. The situation in the Malaysian market is more normal. However, the absolute number of customers remains very strong. In terms of trading volume, trading velocity, etc. As Lee mentioned in the opening remarks, in the first quarter, in terms of the trading volume breakdown, the US stock trading comes for roughly over 75% of our total trading volume. We do expect this ratio will become more healthy given more contributions in Hong Kong stock in the second quarter. Number two is in the first quarter, we record a very strong net asset inflow, which is roughly over 35 billion Hong Kong dollars thanks to a very strong inflow from our existing markets in Hong Kong and in Singapore, etc. Also, incremental contributions from new markets such as Malaysia and Japan, etc. We do believe such momentum remains in the second quarter today. This will significantly help in terms of the client assets and the trading volume, etc. And thirdly, despite we already achieved over 170 fund accounts in the first quarter, partially due to some special reasons in Malaysia due to our grand opening in the first quarter, we do think the overall momentum in absolute terms remains very strong. Despite we expect there can be some Q over Q decrease due to a very high base in the first quarter. Thank you. Thank you.

As a reminder to ask a question, please press star 1-1 on your

telephone keypad. Next question comes from

the line of Katherine Lay from JP Morgan. Please ask your question Katherine. Hi, can

you hear me clearly? I think the current situation is very active in this area. Do you think this is due to some events that are more active in the area or is it because of the current situation that the client area is more active? How long can this momentum last? Please tell us about some of the main concepts in this market. Thank you. Thank you. I will translate for myself. First is about the Malaysian market. I will appreciate if management can give us some color on the Malaysian market. I heard that clients are very active in trading. Is that one of or all of them? Is that one of the main concepts or is that a trend? The second question will be more on the commission rates. Do you think we will see some sequential improvement in the sequential rate? How should we form our expectation? Thank you.

Thank you Katherine. I will answer the second question first. I will answer the UNI Economics question. Then I will ask my colleague Robin to add some more information about the Malaysian client. Regarding the fee, we have already explained that the rate of the US stock in the first quarter is relatively high. So it will lead to a decrease in the fee rate. I expect that there will be a significant improvement in the second quarter. On the one hand, it is beneficial for the overall, as you just mentioned, for example, some high-priced shares, these will have a share split from June 1. This will ease the situation of our tax model. From the current situation in the second quarter, the overall interest rate in the second quarter is relatively stable. There is no further decline. Let me translate for myself for the second question first. I think the blended commission rate decrease was mainly due to our pricing model in the US stock market, as we mentioned before. And the quarter to date, we have seen the ratio has already become more stable. Partially due to there were some high-value stocks, such as Nevida, etc. in the US, were conducting a stock split. So this will alleviate the pricing pressure in the US. The first question is about the exchange rate of The exchange rate of the clients in Malaysia is relatively short. But the data we have seen from the clients, whether it is the entry rate, the exchange rate, or the exchange rate of the clients, the overall performance of the clients in Malaysia is much higher than the average market. So from the current situation, we don't feel that the characteristics are temporary. Of course, we need more time to do some observation. In terms of unit economics in Malaysia, so far on a call-call basis, we have witnessed a very healthy organic growth in terms of cash inflow than clients trading velocity and also the trading volume, etc. It seems that all these metrics in Malaysia is well above the average situation of our overseas markets. Of course, it is maybe still too early to say, given that we just entered into Malaysia a couple of months ago, we will still keep closely monitoring. But having said that, we think the user behavior demonstrated so far is not just because of some one-off events.

Thank you. Thank you. Let me answer the first question.

Thank you. Let me answer the first question. At the end of February this year, Malaysia officially launched our securities business. The customers were very active. One quarter of the group contributed almost one-third of the net profit to asset customers. We spent 49 days to make Malaysia the first place in the history of the world. Singapore has become the first major technology-oriented business with a very good reputation. Singapore's brand influence has played a major role in the market of Malaysia. We have also provided the best investment tools in the Malaysian market, such as the investment of shares and the trading of US stocks, as well as free real-time trade and information services. Whether it is in terms of product ability or product experience, they are all leading positions in the industry. Finally, there are a large number of early-stage users who have converted to asset customers in the first quarter. This has also contributed to our customers. In the early stages of the industry, the Malaysian market customers are strong and more than expected. From the second quarter, the contribution of the Malaysian market has not yet fully followed the pace of our early-stage customers. In order to ensure that our early-stage customers experience more smoothly and improve the efficiency of the team, we also appropriately grasp the pace of our customers, and monitor and monitor their data models to operate and develop the market more scientifically. Finally, the customer image of the Malaysian market is mainly male-oriented and with a high income. In terms of race, the current proportion of our customers is from Chinese. This explains why the Malaysian market has a relatively frequent number of customers and the performance of our customers is very good. Thank you.

We officially launched our brokerage business in Malaysia by

the end of February. We've experienced very rapid growth. In the first quarter, Malaysia contributed about one-third of our menu-paying clients. Within 49 days of official brokerage business launch, we achieved number one in total cumulative downloads in Malaysia. The reason why we can grow so quickly in Malaysia can be attributed to several factors. First of all, we were already the biggest online broker in Singapore when we entered in Malaysia, and that brought us a lot of brand recognition. Secondly, we simply offer the best product in Malaysia, a one-stop platform where you can invest in Malaysia equities, US equities, and we have free market data and information, which are all industry-leading. Last but not least, we have also accumulated a large number of users before our official brokerage business launch. We were able to convert a very meaningful chunk of those users. I think the first quarter growth was above our expectations, but going to the second quarter, we believe the contribution of Malaysia will come now sequentially. That's because there is still room for improvement in terms of the level of automation in client account opening, asset inflow, and outflow in operations to Sadara. In order to ensure that our clients have a very smooth experience and to increase our operational efficiency, I think we dynamically adjust our client acquisition pace so as to better inform our growth in Malaysia. In terms of our client profiles, most of our clients in Malaysia are male and have higher income. In terms of ethnicity, a lot of them are the Chinese population. I think that partly explains the high trading turnover and relatively higher average asset than we expected, which will probably lead to

a very good outcome. Thank you. Once again, to ask a question, please press star 1-1 on your telephone. I'm showing those are the

questions on the alternative side.

That concludes our call today. On behalf of the Food2Management team,

I would like to thank you for joining us today. If you have any further questions, please do not hesitate to contact me or any of our investor relations representatives. Thank you and goodbye.

Thank you. That concludes today's conference call. Thank you for participating. You may now disconnect.