Futu Holdings Limited (NASDAQ:FUTU) Q3 2023 Earnings Call Transcript

Futu Holdings Limited (NASDAQ:FUTU) Q3 2023 Earnings Call Transcript November 23, 2023

Futu Holdings Limited beats earnings expectations. Reported EPS is $8.33, expectations were $7.83.

Operator: Hello, ladies and gentlemen. Welcome to Futu Holdings Third Quarter 2023 Conference Call. At this time, all participants are in a listen-only mode. After management’s prepared remarks, there will be a Q&A session. Today’s conference call is being recorded. 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.

Daniel Yuan: Thanks, operator, and thank you for joining us today to discuss our third quarter 2023 earnings results. Joining me on the call today are Mr. Leaf Li, Chairman and Chief Executive Officer; Arthur Chen, Chief Financial Officer; and Robin Xu, Senior Vice President. As a reminder, today’s call may include forward-looking statements, which represent the company’s belief regarding future events, which by their nature are not certain and are outside the company’s control. Forward-looking statements involve inherent risks and uncertainties. We caution you that a number of important factors could cause actual results to differ materially from those contained in any forward-looking statements. For more information about the potential risks and uncertainties, please refer to the company’s filings with the SEC, including its Annual Report on Form 20-F. So, with that, I will now turn the call over to Leaf. Leaf will make his comments in Chinese, and I will translate.

Leaf Hua Li: [Foreign Language] Thank you all for joining today. In the third quarter, we acquired around 65,000 paying clients, a 12% sequential increase. Our total paying clients reached 1.65 million, up 14% year-over-year. Three quarters into 2023, we have exceeded our full-year guidance by acquiring over 163,000 paying clients. In the third quarter, Hong Kong market contributed over 40% of new paying clients. This acceleration in client acquisition was driven by the relief rally in the first half of the quarter and successful marketing around the government’s Green Bond and Silver Bond issuances in the second half. These two bond offerings attracted allocation driven clients to our platform. In late July, we opened the first offline store in Hong Kong to raise brand awareness, assist clients with account opening, demonstrate advanced product features and address inquiries regarding our products and services.

Through this offline store, we managed to attract middle-aged and senior clients at a lower customer acquisition cost. In fact, clients aged 55 and above contributed over 50% of paying clients acquired through the offline store in the third quarter. In Singapore, we launched successful marketing campaigns to promote our cash management product, Cash Plus, thereby growing our paying clients by 35% year-over-year. We continue to observe improvement in client quality in the U.S. as net asset inflow of new paying clients trended higher. In September, we officially launched our brokerage business in Japan and Canada, now offering clients access to U.S. stock trading in Japan and U.S. and Canadian stock trading in Canada. During the early innings of market launch, we will remain focused on refining our account opening golden process, expanding trading products, and honing our brand positioning and marketing messages.

Despite various sentiments across global equity markets, we recorded another quarter of over 98% paying client retention rate. We continue to enrich trading product offerings across markets. In Singapore, we launched fractional shares for U.S. stocks and ETFs to enhance the accessibility for novice investors. We optimize our product for active options traders by introducing multileg options rollover strategy in Hong Kong and the U.S. This trading function gives options traders flexibility to roll contracts near expiration to a later date at different strike prices. Total client assets increased by 27% year-over-year to HKD468 billion. While the market pullback dragged the valuation of our clients’ stock holdings, total client assets remained stable quarter-over-quarter due to robust net asset inflow.

Notably, total client assets in Singapore achieved double-digit sequential growth for the fifth consecutive quarter, which is partially driven by higher new asset quality. The average asset balance of new paying clients in Singapore was 20% higher than the prior quarter. Trading volume in the third quarter rebounded as clients traded more actively amidst heightened volatility. Total trading volume increased by 14% sequentially to HKD1.1 trillion, of which U.S. stock trading constituted around 75%. Higher trading turnover of the Magnificent Seven stocks led U.S. stock trading volume to grow by 19% quarter-over-quarter. Hong Kong stock trading volume increased by 5% sequentially, mainly driven by raising trading interest and leveraged and inverse ETFs. Margin financing and securities lending balance slipped 4% quarter-over-quarter as some clients unwound their bets against popular U.S. technology names.

Total client assets in wealth management grew to HKD52 billion as of quarter end, up a 100% year-over-year and 19% quarter-over-quarter. In the third quarter, client assets and bonds increased by 87% sequentially as U.S. treasury bills maintain high yields. In Hong Kong, structured notes were met with high demands from high-net worth clients as their risk appetite abated amid macro uncertainties. As a result, private fund balance grew by 52% quarter-over-quarter. In Singapore, total client assets in wealth management increase by fivefold year-over-year, driven by tripling of wealth management clients and higher average asset balance. In the third quarter, we further expanded our product portfolio in Singapore by introducing structured notes and SGS bonds.

We have 391 IPO distribution and IR clients as of quarter end, up 30% year-over-year. In third quarter, we acted as joint bookrunners of several high-profile Hong Kong IPOs, including those of TUHU Car, 4Paradigm, and KEEP. We also participated in the Hong Kong IPOs of all companies with market capitalization over HKD10 billion by the end of quarter. In the first three quarters, we underwrote 26 Hong Kong IPOs and ranked first among all Hong Kong brokers, according to Wind. Next, I’d like to invite our CFO, Arthur, to discuss our financial performance.

Arthur Chen: Thank you, Leaf and Daniel. Now, please allow me to walk you through our financial performance in the third quarter. All the numbers are in Hong Kong dollar, unless otherwise noted. Total revenue was HKD2.7 billion, up 36% from HKD1.9 billion in the third quarter of 2022. Brokerage commission and handling charge incomes was HKD1 billion, an increase of 5% year-over-year and 6% Q-over-Q. Higher contributions from derivative trading lift the blended commission rate from 8.8 basis point in the third quarter last year to 9.3 basis point this quarter. Interest income was HKD1.5 billion, an increase of 71% year-over-year and 7% Q-over-Q. The sequential increase was mainly driven by higher interest rate on clients’ cash deposits, partially offset by lower cash balance.

Other income was HKD137 million, up 28% year-over-year and 8% Q-over-Q. The increase was largely due to higher fund distribution income. Our total costs were HKD437 million, an increase of 101% from HKD218 million in the third quarter of 2022. Brokerage commission and handling charge expenses were HKD63 million, down 24% year-over-year and 14% Q-over-Q. The expenses didn’t move in tandem with brokerage commission and handling charge income, mainly due to cost saving from our U.S. self-clearing business. Interest expenses were HKD289 million, up 546% year-over-year and 31% Q-over-Q. The year-over-year and the Q-over-Q increase were both driven by higher interest expenses associated with our security lending business. Processing and the servicing costs were HKD86 million, down 6% year-over-year and 13% Q-over-Q.

The year-over-year decrease was mainly due to saving from cloud service fee as a result of system optimization and the Q-over-Q decrease was mainly due to lower system usage fee. As a result, total gross profit was HKD2.2 billion, an increase of 28% from HKD1.7 billion in the third quarter of 2022. Gross margin was 84% as compared with 89% in the third quarter of 2022. Operating expenses was up 17% year-over-year and a 5% Q-over-Q to HKD893 million. R&D expenses was HKD360 million, up 15% year-over-year and a down marginally by 1% Q-over-Q. The year-over-year increase was mainly due to higher R&D headcount as we continue to upgrade our infrastructure, roll out new products and features, and customize products for international markets. Selling and marketing expenses was HKD212 million, down 10% year-over-year and up 21% Q-over-Q.

The expenses declined year-over-year due to lower customer acquisition costs and a Q-over-Q increase was primarily driven by accelerated paying client growth. General and administrative expenses were HKD322 million, up 52% year-over-year and 3% Q-over-Q. The rise was primarily due to an increase in headcount for general and administrative personnel to support our international markets. As a result, our net income increased by 45% year-over-year, and it declined by 3% Q-over-Q to HKD1.1 billion. Net income margin expanded to 41% from 39% in the same quarter last year, mainly due to strong revenue growth and the lower selling and marketing expenses. That concludes our prepared remarks. We now like to open the call to questions. Operator, please go ahead.

Operator: [Operator Instructions] The first question comes from the line of Leon Qi with Daiwa. Please go ahead.

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Q&A Session

Leon Qi: Hi. Thanks for taking my question. [Foreign Language] Thank management for taking my questions. This is Leon from Daiwa. My first question is regarding our new markets, especially in Japan. We understand we just launched Japan in late September. I’m interested in the user behavior in terms of our Japan new clients. Does management see any early indicators in terms of the trading velocities, margin landing penetration and the specific trading products that our Japanese clients are being engaged in? Is there any significant differences in terms of these matrix for customers in Japan versus other markets? And, also, I’m interested to know the customer acquisition cost for us in Japan, so appreciate any color on the unit economics in Japan?

And my second question is on wealth management. We do appreciate the very rapid growth of our AUM in wealth management and per management introduction just now, money market fund is a major reason behind that. So, I’m sure this is partly because of the high U.S. interest rates. But if we look at it from a cross interest rate cycle perspective, how much proportion does management expect the non-money market fund products to contribute in our overall wealth management AUM and also what is our take rate on money market fund now? Thank you very much.

Arthur Chen: Thank you, Leon. Let my colleague Daniel answer the first question first and I will answer the second question. Thank you.

Daniel Yuan: Sure. So, unfortunately, we now only offer U.S. cash equities trading to our Japanese clients. So, we don’t have margin, we don’t have Japanese stock trading, so we only have data for client behavior on the U.S. stock trading. And, so far, the turnover of the U.S. stock trading is not so different from what we’ve seen in other markets. That being said, we have a very aggressive and ambitious product roadmap for next year and some of the products that I mentioned that we don’t support now will be rolled out in the next couple of quarters. And in terms of client acquisition cost, because we are coming from a small base of clients, whereas we have a lot of fixed costs for, like, setting up markets, setting up, like, offices in Japan, and hiring marketing personnel.

So, obviously, our CAC for this quarter and next quarter in Japan will be higher than our group average. But, over time, as we increase the number of clients in Japan, the CAC will gradually come down. And, so far, we have no reason to believe that the CAC in Japan will be higher than what we’ve seen in other markets. And just to give you some other colors and updates on our Japan business, we now have slightly over 400,000 users on our platform, and overall users have been very active. And we observe that, on average, during the trading days, our DAU to user ratio is close to 20%, which is the highest among all of the markets we are currently in. And user growth, along with paying client growth, will be our key priorities for next year. Thank you.

Arthur Chen: Okay. For the second question regarding the wealth management, I think the key for us to do this kind of business is to engage a client and focus on the long-term values of the clients. Therefore, we do not put too emphasis on the near term monetizations. But, having said that, the take rate for these in the money market funds is essentially just similar to our other products, such as equity products or fixed income products. I think, you know, we have already established a very comprehensive matrix in terms of the product offerings in our Dasheng Taipu. For instance, besides the money market fund, we also have the equity products, fixed income products. In particular, as Leaf mentioned in the opening remarks, we have launched free floating interest — floating rate note, FCN products in the past two quarters and record a very strong growth.

We think these products will further diversify our clients’ asset allocations and help them to navigate different interest cycles down the line.

Leon Qi: Thank you very much for the color, Arthur and Daniel.

Operator: Thank you. Next question comes from the line of Chiyao Huang with MS. Please go ahead.

Chiyao Huang: [Foreign Language] The first question is on idle cash, and we saw some sequential decline in idle cash. So, just wondering, what’s the reason for that? And if we are seeing some of the existing clients are shifting their cash to mutual funds or other products? And, also, a related question is, for the new inflow of client AUM, what’s roughly the proportion between stocks and other investment products such as mutual funds? And second question is, can management talk about the strategy in Japan as we are seeing some local brokers are offering zero commission already. So, what’s our competitive strategy there and what’s the thinking about the future monetization? Would we be considering, you know, building more comprehensive financial offerings and capabilities in Japan in order to improve the monetization over time? Thank you.

Arthur Chen: [Foreign Language] In terms of your first question, the idle cash decrease was primarily due to our clients shift their cash positions to more equity stocks, especially on the U.S. stock assets at the quarter end. And, also, the partial reason is because some clients allocated more on the wealth management process during the quarter end as well. In terms of the new clients’ inflows, the allocations among cash, stock and also the wealth management, roughly, you know, stock positions accounts for 70% and the wealth management products accounts for 10% and the remaining belongs to the idle cash. Thank you.