Futu Holdings Limited (NASDAQ:FUTU) Q4 2022 Earnings Call Transcript

Futu Holdings Limited (NASDAQ:FUTU) Q4 2022 Earnings Call Transcript March 28, 2023

Operator: Hello, ladies and gentlemen. Welcome to Futu Holdings Fourth Quarter and Full Year 2022 Earnings Conference Call. 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.

Daniel Yuan: Thanks, operator and thank you for joining us today to discuss our fourth quarter and full year 2022 earnings results. Joining me on the call today are Mr. Leaf Li, Chairman and Chief Executive Officer; Arthur Chen, Chief Financial Officer; and Robin Xu, Senior Vice President. As a reminder, today’s call may include forward-looking statements, which represent the company’s belief regarding future events, which by their nature are not certain and are outside of the company’s control. Forward-looking statements involve inherent 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 registration statement.

So with that, I will now turn the call over to Leaf. Leaf will make his comments in Chinese and I will translate.

Leaf Li: Thank you all for joining our earnings call today. In the fourth quarter, we added over 42,000 paying clients, down 27% sequentially. Stock market plummet in the first half of the quarter and uncertainties around the sustainability of market rebound in the second half affected user sentiment, which led to the deceleration of client acquisition. Our total paying clients reached around 1.5 million, representing 20% growth year-over-year. In 2022, we managed to add over 240,000 paying claims exceeding our full year guidance by 20%. Despite a challenging market backdrop, our average quarterly client retention rate in 2022 remained above 98%, which speaks to the stickiness of our product. In Hong Kong, we continue to promote our product among the population age over 35 through offline workshops and campaigns as well as targeted online apps.

In the past quarter, people over 35 contributed over 50% of our new paying clients in Hong Kong. We will further rollout offline events and refine product offerings to reach and serve this population. In the U.S. market, we saw an improvement in client quality at the first month average net asset inflow of new paying clients increased by approximately 40% sequentially. Client acquisition in Singapore remained resilient in the fourth quarter, mainly attributable to continued client interest in money market and fixed income fund products. Total client assets increased by 2% year-over-year and 13% quarter-over-quarter to HKD417 billion. The sequential increase was largely due to market appreciation of our clients’ Hong Kong stock holding and robust net asset inflow across all regions.

As of quarter end, margin financing and securities lending balance declined by 10% sequentially. While we saw an uptick in securities lending balance amid market volatility, margin financing balance declined as clients unwound some of their positions during hard call market rebound. Solar trading volume was flattish quarter-over-quarter at HKD1.1 trillion, of which Hong Kong stock trading constituted 36%. In the fourth quarter, Hong Kong stock trading volume increased by 31% sequentially to HKD397 billion. The increase can be attributed to higher trading volume of China new economy companies and leveraged and inversed ETF, which clients used as tactical tool to make short-term bets on market trends. Our market shares in Hong Kong futures and options trading further climbed to historic highs of 8% and 15% respectively.

U.S. stock trading volume was HKD675 billion, down 10% sequentially amid market sell-off as mainly to U.S. technology name. Total client assets in wealth management grew 68% year-over-year and 22% quarter-over-quarter to HKD32 billion, mainly driven by sustained interest in money market funds amid interest rate hikes. We onboarded commodity funds and alternative funds in Singapore. In Hong Kong, we expanded equity and index-linked structured product offerings for high net worth clients to meet their different risk/return objectives during market turmoil. In the fourth quarter, we also became the first retail platform in Hong Kong to distribute the BGF China Innovation Fund as BlackRock, thereby enhancing the brand awareness of Futu Money Plus.

Our enterprise business had 333 IPO distribution and IR clients as well as 638 ESOP clients, up 41% and 60% year-over-year respectively. We acted as joint book runners for several high-profile Hong Kong IPOs, including those of 360 DigiTech and Weilong Delicious. We underwrote 41 Hong Kong IPOs in 2022 and ranked first among all brokers according to Wind. Of all 28 companies listed in 2022 with market cap over HKD10 billion by the end of the year, 23 companies have used to one or more of our enterprise product offerings. In the fourth quarter, we also launched Momo ESOP in Singapore to provide corporate clients with ESOP solution services. Next, I’d like to invite our CFO, Arthur, to discuss our financial performance.

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Arthur Chen: Thank you, Leaf and Daniel. Before going through our financial performance, I’d like to give you an update on our latest share repurchase program announced on March 11, 2022. At the end of last year, we have repurchased an aggregate of 8 million ADS with approximately $250 million total repurchase amount in the open market transactions. This constitutes about 50% of the maximum purchase amount of $500 million approved under our share repurchase program. 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 HKD2.3 billion, up 42% from HKD1.6 billion in the fourth quarter of 2021. Despite market volatility, we ended 2022 with full year revenue growing 7% to HKD7.6 billion.

Brokerage commission and handling charge income was HKD1 billion, an increase of 22% year-over-year and 10% Q-over-Q. The increase was mainly driven by a higher blended commission rate of 9.6 basis points. The commission per share pricing model for U.S. stock trading led to a further hike in blended commission rate as stock price dropped and the number of the shares trade increased. Interest income was HKD1.1 billion, an increase of 84% year-over-year and 29% Q-over-Q. The increase was mainly driven by higher interest income from cash deposits due to higher benchmark interest rates, which more than offset by the lower margin finance income due to lower daily average margin financing balance. Other income was HKD94 million, down 26.5% , an increase of 58% from HKD217 million in the fourth quarter of 2021.

Brokerage commission and handling charge expenses was HKD64 million, down 27% year-over-year and 23% Q-over-Q. Expenses didn’t move in line with our brokerage commission and handling charge income mainly due to cost savings from our U.S. self-clearing business. Interest income was HKD182 million, up 227% year-over-year and 307% Q-over-Q. The year-over-year and Q-over-Q increase was mainly driven by higher interest expenses associated with our security lending business. Processing and servicing costs were HKD96 million, up 31% year-over-year and 6% Q-over-Q. The year-over-year increase was due to higher data transmission fee and system upgrade fees. As a result, our total gross profit was HKD1.9 billion, an increase of 40% from HKD1.4 billion in the fourth quarter of 2021.

Gross margin was 85% as compared to 86% in the fourth quarter of 2021. Operating expenses were down 1% year-over-year and up 7% Q-over-Q to HKD818 million. To break it down, R&D expenses were HKD334 million, up 24% year-over-year and 7% Q-over-Q. The increase €“ the year-over-year increase was mainly due to increase in R&D headcount. We continue to support new product offerings investing in the U.S. self-clearing capabilities and the customized products for international markets. Looking into 2023, we intend to further grow our headcount by middle to high-teens on top of our 2,800 employees at the end of last year to support expansion into new international markets. Selling and marketing expenses was HKD153 million, down 55% year-over-year and 35% Q-over-Q.

Expenses declined due to slower client acquisition amid weak market sentiment and the lower client acquisition costs. G&A expenses were HKD330 million, up 52% year-over-year and 56% Q-over-Q. The rise was primarily due to increase in headcount for general and administrative personnel and to a lesser extent, an increase in professional fees relating to our proposed Hong Kong IPO listing. As a result, our net income increased by 92% year-over-year and 27% Q-over-Q to HKD959 million. Net income margin expanded to 42% in the fourth quarter as compared to 31% in the same quarter last year, mainly due to lower marketing spending. Our effective tax rate for the quarter was 14.7% in due to higher tax rate from our U.S. operations. That concludes our prepared remarks.

We now like to open the call to questions. Operator, please go ahead.

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Q&A Session

Operator: Thank you. Our first question comes from the line of Han Pu from CICC. Please ask you question, Han.

Han Pu: This is Han from CICC. Thanks very much for taking the question. And congrats on another strong quarter. I have two questions. Firstly, how about the latest progress in the new market, such as Australia and Japan, for example, the user profile and the products and service? Secondly, we see the continued rapid growth in the wealth business. Could you please share more color on the driver behind the product structure and our forward plan, besides how about the revenue contribution in the fourth quarter of the growth management business and also the user penetration to our brokerage business? Thanks.

Leaf Li: In Q4 we continued from various client acquisition channels in the Australian market, reduced the budget for inefficient client acquisition channels, and constantly optimize the account opening funnel. And by deepening connection with clients via online and offline exchanges, we also improved clients’ product experience. So as a result, the client acquisition cost in Q4 in Australia fell substantially on a Q-o-Q basis. And in the future, we will continue to improve our product capability and the ability to efficiently acquire clients as well as upgrade our marketing strategy. Thank you. Wealth Management business maintained strong growth momentum in the fourth quarter, mainly because low-risk fund products remain attractive to our clients during the rate hike cycle.

And meanwhile, we have been broadening in offerings to meet the investment and financial needs of customers with different risk appetites. And in Q4, wealth management business helped attract a lot of clients and assets, specifically the growth in wealth management AUM in Q4 is almost entirely driven by new asset inflows and the percentage of our new paying clients brought by fund products has also been growing. That’s especially true in the Singapore market. And looking ahead, we see a lot of room for growth in wealth management business, and we plan to continuously diversify structured products in Hong Kong with an aim to provide five types of notes, including fixed dividend structured products and fund linked notes in the first half of this year to better maybe asset allocation needs professional investors and high net worth clients.

And in Singapore, we have comprehensive mutual fund product offerings and we will focus on introducing more low-risk fund portfolios and dividend-paying fund portfolios, while gradually expanding other product categories, including bonds, private equity funds, structured notes, etcetera. Thank you.

Operator: Thank you. Our next question comes from the line of Chiyao Huang from Morgan Stanley. Please ask you question, Chiyao.

Chiyao Huang: Hi. My first question is on the driver for higher brokerage commission rate in the fourth quarter and roughly what’s the contribution from the derivative products? And how is the management’s outlook on the brokerage commission rating to 2023? And my second question is on the interest income, which we are seeing a rapid growth in the fourth quarter. And so basically, wondering how is our plan to utilize the client idle cash and what do we invest? And what’s the percentage and the scale of client idle cash that we plan to utilize in 2023? Thank you.

Arthur Chen: Thank you. I will take these two questions. Number one, in terms of the commission rate, I think the hike was mainly driven by our typical reasons because the market was quite volatile in fourth quarter. The U.S. stock markets make meaningful corrections, which implies our pricing model, effective pricing model become much higher. The other reason is, as you mentioned, these derivative tradings continue to increase in the fourth quarter given the market volatility, which also has a positive benefit on our blend commission rate. And in terms of the contribution in the fourth quarter derivatives, commissions roughly account for one-third of our total commission, maintaining a relatively high level in our history. But as I mentioned in last earnings call, we do not set any top €“ specific targets for our director products.

Instead, what we focus will be more on the investment education side, and also further enhance our product itself. For instance, this year, we will gradually roll out our U.S. option portfolio or the functions to attract more of these professional derivative traders. And we are not inclined to push or how sell these derivative products to these clients with low risk appetite. The second question regarding the interest income, it is very difficult to quantify how much idle cash we can utilize, but it depends on the market volatility, but I can give you some general range, say, in our history, the idle cash percentage-wise accounts for roughly 20% to 10% of our total client assets, different markets €“ different market conditions. For instance, in the fourth quarter, or even in the whole last year because the market was very €“ not very good.

Actually, our clients’ idle cash position, percentage-wise, it was relatively higher. I think looking forward this year, the interest income will continue to grow on a year-on-year basis, mainly benefiting from the high interest rate environment. And for the deployment usage, actually, we do not have a lot of choice. The reason is, according to the SFC regulations, we can only put clients idle cash into the bank deposits to the commercial banks with the duration of less than 6 months. Thank you.

Operator: Thank you. Our next question comes from the line of Cindy Wang from China Renaissance. Please ask you question, Cindy.