Q3 2019 Earnings Call

Ladies and gentlemen, todays conference is scheduled to begin shortly please go to standby, it's like food patients.

Ladies and gentlemen, today's conference is scheduled to begin shortly about 10 minutes Leaseco T to standby is 60 patients.

Earnings Conference call.

At this time, well, but do you suppose I didn't miss it.

After the speakers presentation they'll be question answer session.

I've two questions. Please press star one.

It wasn't like it was close to be recorded today I'd like to have the concerts with you'll see speaker for today did they give you one thank you Scott.

Thank you operator.

Thank you for joining us today to discuss our third quarter 2019 results joining me on the call today or at least Li Chairman and Chief Executive Officer altered Chen Chief Financial Officer.

<unk> Senior Vice President.

Oh. The reminder, today's call May include forward looking statements, which represent the company's belief regarding future events, which by their nature and uncertain in or outside of the company's control.

We're looking at Stephens involving here.

Uncertainties.

Caution you that number and important factors could cause actual results to differ materially from does contain any forward looking statement.

The more information about the potential risks and uncertainties. Please refer to the company's filings with the FCC, including its registration statement.

With that I'll now turn the call over to easily legal make his comments in Chinese and I will translate.

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Hello, everyone. Thank you for joining us today, despite the ongoing situation in Hong Kong and the week equities market. We were pleased with our performance during a challenging third quarter.

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Our total number of paying claims jumped 42% year over year until about a 177000.

Got it over 12000 net new paying claims in the past quarter, which was roughly between China and Hong Kong.

Even though we decided to scale back on marketing efforts given the difficult situation.

Relation we were able to almost double the number of paying claims in Hong Kong well maintained double digit growth in net new client additions on the year over year maintenance.

So to speak to the unique value proposition and our platform and the high potential says market.

The same time, we were able to maintain a 98.1% claim retention rate this quarter.

By yearend, we expect our total bank lines to reach 190 to 195000.

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Well I know, it's like rather it was another highlight of Q3.

Dogs, which cover about half of our plane training turn in the worst performance among the major stock markets around the world in the third quarter, our total client assets actually run into a better 72 million ongoing dollars an increase of 33 point, that's precisely over a year and 6% of quarter over quarter.

Following that doesn't inflow of $5.7 billion, which has a number we tracked closely as we transformed from a truly transaction based business model to a model that increasingly rely on fee income from assets under management.

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Our im just going outside growth and that's driven by money plus our mutual fund distribution platform.

September Thirtyth, which was only a month after the platform was officially launched total client assets and mutual funds had already surpassed three meal and hung on dollars.

Besides offerings, there all subscription fees and the more diverse array of products money plus provides investors with a mobile friendly platform to treat their mutual funds positions monitor performance understands fund these things such as duration top holdings angiographic in an industry concentration.

We work with fund managers and industry expertise to deliver a comprehensive selection of investor education materials across different formats, including articles graphics and videos and even life broadcast.

These materials have proven to be quite effective in facilitating investing decisions.

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The money market funds for popular from day, one because they offer a significantly higher interest rates than bank checking accounts and her seamlessly integrated with claim brokerage accounts. This means that our clients can instantaneously redeemed money market funds positions for stock purchases.

In addition, fixed income funds are also gaining increasing traction on our platform. Thanks to our effective investor education.

Well continue to enrich our mutual fund offering a part of our work to provide the best in 17 experience for users.

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Oh, you pretty old trucks, you Gulf Copel decisions, all that Shelby said to you on the whole could you don't see the bundle.

On August the talk we were granted and SFC type southern license that allows them to provide automated training services.

One and half month later, we also allows start pulling training for Hong Kong ideas, which as a service unique to the Hong Kong brokerage market and allows retail investors to train their IPO allocations Davis for an official lusting.

Where are the fourth brokerage company and the only online broker in Hong Kong to provide such a service.

Similar to our core trading infrastructure or a dark whole system also differentiates itself and the speed of trade execution of a number of concurrent trains process.

We believe dark pool training will help with client acquisition Aston service enhances capital efficiency, especially when a number of high quality IPO that take place around the same time.

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And finally, our enterprise service also had an excellent quarter, we added a record 17, new heats up plans, which bringing our total number of claims to 56000 at quarter end.

In addition, we are proud test insulet tend to provide us IPO subscription services to though even during the quarter.

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With that I'll now turn the call over to alter to discuss our financial performance. Secondly, we conclude the full quarter with total revenue of 250 for me it in Hong Kong absorption per cent young yet it was down 2% appealing to [noise], Oh, Hey client growth was offset by lower our pool, given the weak equity market, Let me walk you through.

Some key overall financial gain.

This order.

Brokerage Commission has living charge income was 123 of the Hong Kong increase over 12% off the same here was in 2018 and the flat on a sequential basis.

Although trading volume rose by a border way to 6%, our and our commission rate well you got stopped treating slightly increased due to fewer promotions discounts and the more you with options trading.

Brokerage commission, the having charge income contributed about 48 cents local geographies.

This past quarter.

Interesting coupled with one fitting in Hong Kong increased 11% young used in the Wilkinson County.

That's interesting comps increased due to high idle cash positions and the higher benchmark interest rate in Hong Kong compared with the state here with a few but sequentially. The benchmark interest rates has come down by about <unk>, 0.3%.

Multi publicity helped increased primarily due to higher Bobby policy in the short selling in the U.S. market.

Oh body policy and the security letting others increase the by 17% on a yearly basis and the system since Q on Q interest income contributed about 45% of our total revenue.

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16 bit in Hong Kong or the sold the life assess young April was mainly attribute to the new money tough business at a heightened the price of his charges incurred.

Sequentially sees fee income from Atlanta price business case off by a large margin due to fewer IPO activities in the fourth.

Oh, the coal side, who supports what sort of who've been in Hong Kong, a decrease of 4% of young yet an increase of 9%, killing two most of the coal cost role in line with our revenue.

Well, we according to the boss focused 180 buying into Hong Kong Walt profit increase so talking what percent of young yet but decreased to six or seven the Q on Q due to look well qualified world.

Gross margin was 72.6% to compare with success to the 0.8% indices here, we love to you in a 75.5% in Q2.

<unk> operating expenses total expenses was was 53, the Hong Kong increase of 45% of the out years.

This was mostly due to increasing how to call and the rental well additional office space.

Bringing up all operating expenses.

On the or send this war. So if you want me to on call up 77% for the Lafayette and 11% from last quarter. The wise was primary due to the continued increasing held accountable on R&D function.

<unk> and R&D personnel account for about 74% all while delivering point.

We continue as we invest in technology to enhance trading infrastructure and expand our father offerings such as money flows.

Trading how concentrated which was launched in early October .

Well it was future trading well to use and the U.S. clearly capabilities.

We view R&D expenses, so long term investment in our business. However, we expect our head of called <unk>.

We expect our headcount increasing R&D to be normalizing to solve the 20.

The bottom such as well so he's I'm going to call call.

So some puts and the only and that some people tend to feel too we decide to scale back blending and about <unk> expenses, given the conditions in Hong Kong.

She has extensive what's 40 feet in Hong Kong increases so that people since a yearly basis. The rice was primary due to increasing head of corporate general and administrative personnel.

Well this higher professional service fees post IPO.

That's a result navigate income decreased the by so to what extend the l. year too.

They want me to Hong Kong non-GAAP , adjusted net income decreased by 27% to talk about living in Hong Kong.

Overall, the week, Mako environment, and silicon, taking Hong Kong due to the difficult difficult social conditions post of some fairly big challengers. It's all business in the past quarter. However, we believe the fundamentals of our business remained intact, our carbon Q4 run rate indicates strong.

So growth in both paying clients and net asset inflows and the we remain confident about our ability to attract more client assets, especially I saw when you money plus service getting traction.

We also believed that our technology investments will pay off in the media today, we have a robust peptides on new product trading.

That concludes helped propel the robot with.

Now I'd like to open the call to question operator. Please go ahead.

Thank you, ladies and gentlemen, and I'll begin the question answer session answer. Your question. Please press star one and it's on the sound and lakes, meaning to them.

It's cancer the request it is dependent some ski.

Once again thesis Taiwan.

One key pets.

Once again for those who wish to ask questions.

Please press star one in the telephones.

Thank you first question comes from denied definitely Puno Citibank. Please go ahead.

Hi.

Hi, I'm management's definitely taking my questions. So a couple of question from my side. So first one is on the Oh paying customer pool. So Oh, you mentioned about to make so if you would accept if its peak from China, and Hong Kong, which means that they're supposed to wash slow without.

And then you'll paint.

Okay. So I would like to understand more like whether you see that.

More structural reasons or Disney is there more because these are my cat.

Hi Tech you ought to current market competition, and I guess, what is the <unk> Oh, you paint Kaiser.

Going forward.

And also related to back so I guess given the current situation Hong Kong can you one day you happened yet like backup hands on maybe <unk> expansion.

And then.

The next question just Oh, the Hum distribution business. So Oh, we like <unk> <unk>, what would be no contribution on Sunday Monday product platforms in the pro quota and since you are currently offering.

There was a switch from the I got that the promotion so would that be any timetable for you may be true increase 50 rate Oh backtrack cease all maybe say Wang yacht you ambitious southern scaled that you'll meet batch.

Increase the monetization I thought.

That's a and last me I'll just on the South and marketing expense. Since you mentioned you scale down on the marketing efforts, but it seems they expand has not come back that much fun to see so well be wondering whether that is a time lag and what we get out of Q4, one extra we expect a more oh I get the cash.

Oh the expense.

Question. Thank you.

Most in company. A this is also I will oh, so you'll see questions well number one a in terms of the new paint Clive acquired in sort of what's yours, that's really the slowdown which highlights the key this more due to the equity market will the to the taste.

So the calls her we do not see any structural.

Hold on a unit the mainland.

And Oh for the for the mutual fund distribution.

Distributions or the direct the revenues a into sort of what's I guess do relative small, which we included in the other income items.

But we think you know study you both a will remain robust in the fourth quarters, and though we actually now sheer silicon portion of the mutual funds management fees.

Which were caught our distribution income.

But we do not to a particular disclosure or the particular percentish. All the commission fees are located a two hour side and also for the marketing expenses you are right. There's still some time black ink in the filled the quarters.

I think there, though the current situation or you know all the thesis we wouldn't if you mean a in October naturally we have see some market recovery, partially due to a more nimble IPO activities in Q4, such if the reason or the boss IPO seen Hong Kong, which give.

A lot help go to Momentums in trumps on you paying clients applied and also new asset inflows. So.

So I do think through most of marketing expenses may should be an old keep stable.

In Q4 compared with Q3.

Also.

And also just to supplement.

For the overall for Oh, the <unk> market expansion I think a the currently we will still focus on our existing marketing Hong Kong or cost or you may recall that we have the license a young the U.S. Mckim well we are also.

Those Polish Oh products, you know flow U.S. markets, which I think we'll be up another growth drivers applaud you would pay clients are quite well into selling the tonight.

Oh, Okay. So looking it's looking at your mix yeah. That's it means that I guess the homes on market. We're still be your pardon me. So Oh, I guess like Hong Kong and I'm trying to tie ins were still beat it probably try first focus himself woke up my question.

Yes, you're right.

Okay got it thank you.

Thank you think kids.

Once again for those who wish to ask a question despair, Taiwan on your telephone keypad.

Next question is something I understand me she outlets Goldman Sachs. Please go ahead.

Oh, Hi, random team. Thank you for taking my questions I actually have three questions or the first one is still regarding to the marketing expense or we find the preparing calling to acquisition cost, which is calculated as marketing spends a divided by new paying clients actually decrease.

I agree increased quarter over quarter Oh, we're just wondering the reason for the you know they increased pay a increased paying coins acquisition cost does it has anything to do with the recent social events in Hong Kong and on top that are we to really appreciate it if management team could provide guidance on marketing spends.

And paying coins outlook for next year.

And my second question sung commission fee rate, we see that food, whose gross commission fee rate is still at pretty high level, it even increase but quarter over quarter, Oh, we think it'd be great. If management team can add some color on this.

And my my last question. Some other income we're just wondering if we could have more detailed explanation on.

The decrease other income quarter over quarter. Thanks, that's all from my questions. Thank you.

Well show a sick of Stephanie let me just a can also one by one oh well the marketing expenses actually you know silicon marketing advertisement Oh gosh have to be it'll schedule a head off a lot of events. So there's there are some fixed cost, which we have already to come.

Before we have to expectations of a reason to social events in Hong Kong.

And the second delay for the for the new paying clients or <unk> and also the marketing expenses guidance for the for the next year, that's where the we if we are now in the process, hoping tunnel budgeting wallets, we saw the tons. He outlook. So we will update you for these data are you in our fourth quarter.

Earning calls for the commission rate actually we do not feel any pressures in terms of a commission rates because you can see you, though on a sequential basis, our commission rate remains quite stable.

Seem to fill the quarters, especially the increase was due to more you as an option trading up by all paying clients.

For the other income a sequential that you'll see some you are those the backwater all Q on Q basis. This is due to a you know the IPO activities resumes or what point.

So quarter compared with a second quarter.

Oh. Thank you that's really helpful. Thanks.

Thank you.

Thank you. My next question is ones and I know, maybe a new of HSBC. Please go ahead.

Oh, Hi management, Oh, I have two questions. The first one is or do we have the breakdown of the trading volumes in terms of a region. For example is a is the number between <unk> and U.S. market is still 50, 50, and how do we react to that.

Zero come out of Commission campaign in the U.S. 'cause a we recently some quite from marketing events from our competitors a into Hong Kong.

A region, where the U.S. stock on so you seem to zero Commission to pay will happen in.

In Hong Kong and true.

Second question is about the R&D expense. So I see that he tells is hard disclosure a sad that comes as far as he is included and a expense and ill also he did late into the next few quarters. So do we have a capex.

I'm asking me for the Oh R&D expense indefinitely quarters. Thank you.

Secondly, the let me just the also your second question first and for the first question in particular or the the expectations of the zero commissions competitions or my Oh see you'll leave a will address this club trends for the R&D side I was thinking.

No.

That's year the situation will be more normalized in particular this year, we haven't they invest a lot of knew how to call. It seemed a into R&D sessions, which account.

As I mentioned the before in terms of total headcount headcount.

Yeah, and also the pulled a team already accounts for 74%, a while total employees and on the closest to sales revenues.

Ratios already achieved achieved a close to 25% or even a into slick waters I do think even though this ratio will come down I'll.

I had to be normalize the are you know looking to sell the Tonight and also for the trading volume.

During the past quarter actually the U.S. trading volumes, it's slightly bigger tend to Hong Kong trading volumes.

In terms of breakdown the U.S. treating roughly a comfortable 52%, although total trading volumes and a Hong Kong plus Asia, Hong Kong still connect a roughly I call, 48% of the total trading volumes in the fourth quarter no I hand over to leave a pool for your questions regarding.

Well Commission a competition.

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She said.

We have ever mentioned aware that on an online brokers such as Charles trial started offerings are all conditions and the third quarter, but this year old condition on France, mostly targeting the domestic users and as you know gustafson to paying claims come from mainland China and Hong Kong and these are and will be our main focus and the in the near term.

And secondly, as you probably know to the transaction fees for for Hong Kong or most of the charters actually come from the government charges, especially the stamp duty.

Trading volume is a 10000 hung on dollars for example, the stamp duty will be 100 hung on dollars. So to me now we are offering a commission rate of three that's a with a minimum in charge of $300. So you'll see that mathematically my offerings. There on commission. It does not a decrease the overall planning commission rate by dot much.

And a lot most of the U.S. online brokers, they haven't done much and branding and marketing in Hong Kong local market and we don't think they have very strong client acquisition capabilities and in the hung on local market and looking at the local brokers in Hong Kong and right now I think most oh local brokers.

After by a significant portion of their revenue from the conditions income on around 50%.

So we think in the short term, we don't expect any.

Any other brokers and in Hong Kong to start offerings. There on commission. So I think on the short term, we expect due to commission rate to be quite study and we also don't have any plans to a two to start offering zero Commission training.

That's out there a question.

Oh, thank you.

Thank you.

Once again.

Please press star laundering, it's on the phones and wait we need to Daniels.

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Yeah. The question something like that that's neat Citi. Please go ahead.

Hi, a sense when thinking about pressure again, so just a follow up on the from distribution business I'm. Just wondering can you give us and once idea like when do you expect a more meaningful revenue contribution from that business. Because you also mentioned that you're.

Shifting some trading Oh body and piece on business to a more assets <unk>. So yeah wondering what would be the target I read that they feel quite true.

Well on maybe the takes longer they took the Bakken well that we see it was meaningful contribution from their past. Thank you.

Sure definitely I think the though Oh in your tongue talk is for the fund distribution is the user engagement and ER accumulated their assets. That's why we are not.

Two hunger to charge subscription fees are seeing particular these upfront cost 12 uses I do expect Oh AIU and.

Talk toward the yen.

We will achieve well exceed a at least a five you then Hong Kong Oh in terms of total fund distribute and Ah I think you know in terms of the golf pocket contributions into selling the 20 I do look for it will close to high single digits.

Gross profit levels contribution on the fund distribution to sell into Tonight.

Okay. That's helpful. Thank you.

Thank you once again, what else we wish to ask questions. Please press star one I had telephone Lake Union.

My questions piece parts, Taiwan, and your telephone keypad.

So no question says as of this time, though that Congress Mexicans are being anyway, let's go ahead.

That concludes our call today on behalf of Convention management team I 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 representative Thank you and goodbye.

Susan.

Thank you, ladies and gentlemen that doesn't do they conference for today. Thank you for participating.

Well discuss.