Q3 2021 Futu Holdings Ltd Earnings Call
Going forward, our key growth strategies would be to defend and extend our leading position in Hong Kong further take market share in Singapore and drive self clearing in the U S to improve monetization and operational flexibility in the second quarter, Singapore contributed nearly half of our new paying clients.
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Singapore represents a blue ocean opportunity and we will leverage marketing and word of mouth referrals to further capture user mindshare.
In the U S. Our self clearing initiatives reported accelerating progress as we now have migrated about 350 docks to our proprietary clearing systems, we're targeting to self clear 50% of the U S stock by the end of this year.
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Our total client assets were 503 billion Hong Kong dollars at quarter end, representing 253% growth on a year over year basis, and 9% growth on a quarter over quarter basis, despite challenging mark to market impact average client assets came down sequentially to 503.
Hong Kong is paying client acquisition and new market picked up and track average balance.
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Total trading volume was up 104% year over year to one three trillion of which U S trading constituted approximately 54% trade.
Trading volume came down meaningfully from the first quarter due to a much lower turnover rates across different trading markets and client cohort.
We have seen our clients stay on the sidelines amid market uncertainty and we expect our trading volume growth in the coming quarters should be driven mostly by expansion in client accounts and assets rather than trading turnover should current market environment persists.
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Our wealth management business money plus have been relatively immune to the market downturn, although the Hong Kong Ipos at the ended the quarter. It took away some of the assets accumulated over the quarter and we expect steady at the balanced growth in coming quarters.
As of June 30 over 74000 clients wealth management position and total client assets in wealth management were $13 8 billion, Hong Kong dollars of 59% year over year, and 5% quarter over quarter money.
<unk> established new partnerships with southern reputable at the managers in the quarter, including Goldman Sachs UBS in principle.
We also became the exclusive distributor for China AMC for like Greater China Technology plan, the only China technology focused mutual fund in Hong Kong.
We continue to innovate on product features.
We added fund portfolio rebalancing function and upgraded the functionality of money market funds, where clients can now off to automatically subscribed and the team money market funds based on their idle cash and margin balanced position.
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Our enterprise business <unk> has 186, IPO and IRA clients as well as 263 ethos solutions clients as of quarter end, representing 191% and 153% year over year growth respectively.
We continue to enhance the value proposition of our <unk> business by providing an end to end one stop solution and various value added services to the management team and employees for their corporate clients.
Our experience in handling complicated aesop granting that scale across different geographies helps us continue to win over a large scale corporate clients.
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Despite low paying client attrition, we're encouraged to see robust user engagement data as average seem to remain above $1 million and daily average user time spent hovered around 30 minutes on each trading day in June.
In an effort to drive user engagement, we continue to enrich content in our social community by attracting different stakeholders and improved content recommendation alpha.
As of quarter end over 600 companies have set of enterprise accounts, and our social community to interact with retail investors, providing our users and valuable data to facilitate investment decision making.
Okay.
Jim So since that outlook, just all of them, but you told US I will go ahead.
Next I'd like to invite our CFO Arthur to discuss our financial performance.
That's the best area.
Allow me to walk you through our financial performance in the second quarter. All numbers are in Hong Kong dollar unless otherwise noted.
Total revenue was $1 78.
$101 78 billion, an increase of 109% from the second quarter of 2020, and a decrease of 28% sequentially.
Focused commission handling charge income was 798 million up 95% year over year and down 40% accounts is appealing to the client was mainly due to a sharp drop in trading turnover amidst dental market sentiment from about six times in the first quarter to three tons in the second quarter to be specific.
This was partially offset by higher client assets and a slightly sequential uptick in blended commission rate to six one basis points.
Interest income was $610 million, an increase of 194% year over year, and a decrease of 7% Q on Q.
The year over year increase interest income was mainly driven by higher margin financing balance highest liquidity borrowing in the lending servicing hub as well as higher ico financing income.
Somehow the quarterly decline can be mainly attributed to a reduction in security borrower income as the market value of USD borrowing in the borrowing rate both dropped sequentially.
Other income was $169 million up 141% year over year, that's 104% Q on Q.
Year over year growth and the <unk> 10, both be attributed to changes in our IPO subscription service charge income and currency exchange service income as market conditions fluctuate.
In terms of cost our total cost was 279 million an increase of eight 1% from the same quarter last year and a decrease of 37% from last quarter.
Focused commission and handling charge expenses was $145 million, an increase of 89% year over year. This increase was roughly in line with our tenure of our focused commission and handling charge income.
Interest income was 80 million up 98% year over year. The growth was primarily due to number one higher cost associated with our securities borrowing in the lending business and the number two higher margin financing interest expenses, driven by higher margin financing balance, partially offset by lower cost of funding.
Processing and servicing costs were 54 million up 4% to 8% year over year. The increase was primary due to the increasing crowd the service fee to process higher number of concurrent with weight.
As a result total gross profit was $1 3 billion, an increase of 143% from $534 million in the Thanksgiving 2020.
Gross profit margin increased from 77, 6% in the second quarter of 2020 to 82, 3%. This quarter. Thanks to high operating leverage as a result of our larger business scale.
Total operating expenses was up 145% year over year, and 32% Q on Q2 $647 million over 40% of which was related to our international initiatives in Singapore and the U S market.
R&D expenses was $173 million, an increase of 4% to 8% year over year, and a 26% Q on Q roughly in line with our R&D headcount increase we continue to invest in our U S. Clearly has the ability and the dedicated at around 40% of our R&D personnel took part.
Development in Singapore, and the U S to drive a smoother and the customized products variance for local users.
Selling and marketing expenses was $377 million up 292% year over year and 37%. The increase was primarily due to higher branding and marketing spending, especially in the international markets to cultivate brand image and acquire new clients in the second quarter of 2020.
Over half, our sales selling and marketing expenses with the bulk of the overseas markets.
G&A expenses were flat at 7 million increase of 91% year over year in the 24% Q. He was increasing head count for general and administrative personnel.
Our effective tax rate increased from 9% in the fourth quarter to 14, 5% in the second quarter since our cocoa tax credit arising from accumulated loss in the mainland business has been fully utilized so far and our net revenue derived from our use of trading declined in the second quarter.
We do expect our effective tax rate to be in the range of 12% to 14%.
As a result, our net income for the quarter increased by 146% year over year and decreased by 54% Q on Q2 $534 million.
That concludes our prepared remarks, we'd now like to open the call to questions.
Please go ahead.
Thank you ladies and gentlemen, we will now begin the question and answer session.
You wish to ask a question. Please press star one on your telephone keypad and wait for your name to be announced if you wish to cancel your request. Please press the pound or hash scheme.
Your first question comes from Catherine Liu of Morgan Stanley. Please ask your question.
Thank you Ron it sounds good what should actually when it seems like from a question Tony that their CFO.
I think once you see any other questions from the mine itself.
Thank you for your question Debbie here Chi.
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Our control Kenosha quick question lumber in Japan, Australia, Sean Sean I'll send it to China.
A quick question on potash initial downstairs.
For the quarter, Joshua James <unk> Jaguar right.
Jakob for avionics for trading shield Central Unkelos Youll note that comp how should the coupons.
I'll translate for myself so.
I have two questions first is.
The management, please give us some guidance in terms of the third quarter to date results, including client acquisition pace per.
For catheter turnover velocity client acquisition cost and maybe some operating expenses growth rates and second in light of the regulatory uncertainties regarding various structures companies on the APR or does the company have and its plans regarding Hong Kong listing. Thank you.
Thank you Catherine. This is also I will take these two questions first of all just quarter to date I just want to share some color definitely I think the market fluctuations quarter today have some negative impact on our average assets sulfides in the roughly our average.
Access will be down around in the range of 10% to 20%.
Attribute to the market to market loss.
We are very confident on precautionary even quarter to date almost everyday we still see meaningful net asset inflows in terms of the.
The wealth accumulation.
With two platforms.
Therefore, I do think <unk>.
Market back to normal our season marketing market loss okay.
Come to the to the to the average numbers and the.
In terms of the clients trading velocity, we do expect trading velocity has some of the bonds.
In July and.
August.
Given the market, especially high seasonal textbooks.
Meaningful setbacks, we do see some bottom patient from the retail investors and.
Unlike many unlike the situation in second quarter, many investors on the sidelines.
You see some.
Participations in the in the third quarter. So if based on the current run rate I would expect in terms of topline we may see some sequential Q on Q increase.
In the third quarter compared with the comparable with the second quarter.
In terms of the client acquisition cost I think on the absolute amount levels.
<unk> marketing campaign spending will be roughly in line with what we did in the second quarter, but definitely the client acquisition speed will slow down due to the market conditions.
This will effect.
But the normal the normal numbers and then we'll let our cash numbers.
The increase in the in the first quarter compared with the second quarter for your second question.
I think number one.
All of the ice structure is slightly different for many compared with many Chinese.
Adi off companies because most of them all of revenue analogy right from the offshore essentially we do not generate any revenue from all of the guidance structure.
He will.
There will be some new regulations on the VIP structure I do not expect that we will have some meaningful impact operational wise or financial wise to all business.
Definitely we have noticed some recent trends in the capital markets and we are actively conducting quality research and evaluation and gets was about we will make a very comprehensive assessment to ensure that sufficient to maximize our shareholders. That's the long term interest estimate thank you.
Okay.
Thank you very much.
Your next question comes from Ethan Wang from CLSA. Please ask your question.
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One trend to a primary listing.
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I'm not so sure where you were to generalize.
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You saw you with Doctor searching for onshore to ship broker Ctg's cornerstone conversion, where do you see either from CA na Youre, where youre ocean amongst these are harder than their pump.
Okay. So.
Interim management I have two questions surrounding the Chinese rail yard to different risks the first one.
Wondering whether management can share.
Some color on our current percentage of Chinese yards.
As a percentage of the total trading volume.
The U S on direct stocks onshore tool set.
Second one is if the risk of de listing for the China food yards really happens.
Then these companies, there's very likely to convert the Hong Kong listing influencer parameter ones that means they will be included in our connect IQ, which means the Chinese.
China is going back to your country those stocks to unlock a ton of brokers, that's not a very big risk from.
So how does manage management okay. Thank you.
Okay. Thank you I will take the first question and that will leaf.
Colleagues logging in and the leaf for the second question in terms of our currently use both tradings.
Essentially ADR just accounts for a very small pop if we do some back testing around the 15% of our U S book Tradings, but honestly as these Chinese ADR.
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Yeah.
Okay.
Yes, we think the return of China, Adr's back to Hong Kong could be a structural trend, although we don't really take a stance on how the.
<unk> will evolve in the Hong Kong Ipos generally have very high monetization potentials, and we generate a pretty sizeable percentage of our revenue from the IPO subscription and margin financing interest and also.
In Hong Kong, there's more friendly trading hours for our clients and also just to add on to you.
One other point about primarily about converting to primary less Tang.
Well, we don't think.
There is the <unk>.
Onshore brokers will necessarily pose a great spread to our business because a lot of the popular in China.
Chinese companies per ton out of Hong Kong right now already accessed accessible chairman Han Chinese investors through stock connect for example type thing.
Some of these large cap tech companies still account for a majority of our asset balance in Hong Kong stocks and in comparison to training through our stock connect.
Trading directly in the Hong Kong market offers more flexible and more favorable trading hours in training time. So like if you know mainland China has a public holiday does not affect our training hours in Hong Kong and also there's a lot more flexibility about margin financing and there was a wider selection of stock that you kind of best thing. So we don't believe that a number of China.
Chinese company converting from secondary left him two primary less tangible change our competitive edge in this market.
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Could you talk about what doses, that's another coaching useful because listening to Athena couldn't tissue.
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The returns have been deemed would it be on a difficult year in a way.
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Got it.
We also have a very differentiated client cohort as compared to some of the onshore brokers. So we don't think our competitive advantage will be diluted.
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Your next question comes from the line of Tony Zhong from Jefferies. Please ask your question.
Well talking about HOKA as they go forward.
That's helpful color.
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Alright.
Can you guys. Just why you would have read I'm sure you've got the pathway.
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Hello, Paul.
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Hi management, Thanks for taking my question.
I'm, Jeffrey and I have two questions.
That's helpful.
Regarding the tax rate I, probably have noticed that the respective parts wasteful Quechua Barcelona, 5% ours is much higher than our previous forecast I wonder what's the reason for the increase and how should we estimate this number going forward and my second question is we know that Hong Kong exchange culture adopt a key path to make that call.
Okay.
In the fourth quarter due to I'm wondering how should we think about the impact on our IPO.
No.
Thank you.
Thank you Zoe I will answer the first question will need a second Hudson to leaf actually I mentioned this in our opening remarks.
Right or effective tax rate increased from 9% in the first quarter to 445% in the second quarter.
Actually comes bumps twofold number one is our tax credit arising from historical accumulated loss and the China operation has been fully utilized. So this is a permanent effect and secondly is our net revenue derived from our U S stock trading.
Belonged to cease mainline individuals actually we can make offshore clients in Hong Kong.
They are U S trading volume in the second quarter decline. Therefore, we have some temporary impact in.
In the second quarter arising from the stick in the reasons going forward, we expect our tax rate will be in the range of 12% to 14%. Thank you.
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Financing income accounted for about 4% and power revenue in the first half of this year.
Contribution was less than 6% in 2020, so if we aren't just seeing that the settlement period goes from T plus five P. T plus two from aesthetic point of view. This will have only a 2% to 3% negative impact on our top line, which we think it's manageable.
So anyway element.
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I'll just ask two engines, England book.
Secondly, a lot of the IPO.
Theyre compirion kind of overlap with each other so we believe benefit needs for IPO subscription happened.
Under the current.
And kind of regulations, and we think that could change out turn the forum, so, especially when the markets are performing really well and there are a lot of IP is happening at the same time, having a T plus two settlement period.
Can increase the capital efficiency of our clients and therefore potentially help increase their engagement in this IPO subscription contracts and also we understand that the regulations are not only regarding shortening the settlement period, but also may touch on avoiding.
Our retail clients from subscribing to Ipos through multiple brokers and we believe that the IPO financing income makes up a very significant income for our lives the mid to small size brokers this policy to actually.
No.
Contributing to industry consolidation and direct a lot of these retail investors to platform like <unk> that have better user experience and more capital for them to you during the IPO.
Okay.
Jason.
Once again, if you wish to ask a question. Please press star one on your telephone keypad.
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Your next question comes from Han Young Man from 86 research. Please ask your question.
Thank you for your time here with Covid, you Wonder if you're planning on where sugar electrify the research of the hangar.
Consumer Interactive Entertainment company.
Or was it related to <unk>.
Through them kind of to the congressional chicken ground cumulative contributing machine into fixed income, which I'm sure that we get to the tier 200 from afar. So thank you.
But you started the year, we will touch on in detail as you take a LIFO.
Any kind of acquisition a woman can should equal quicker.
I will translate my questions.
Thanks management for taking my questions conversions are another great quarter.
I don't know sort of a question on the IPO business. So we are the uncertainties for terna ADR appeal throughout the recent slowdown.
Our IPO inherent in our business.
Whereas that also impact our acquisition in China, So what we thought thank.
Thank you.
Well.
Yes.
Thank you let me take this question.
Number one.
Slowdown.
Chinese companies overseas AVR IPO is just a temporary situation, we do understand that many Chinese companies are in.
The pet lines and that they are waiting for more clarity.
Understood.
The regulations from China, and also from the U S regulators down the road.
Therefore, I think the impact will be very short term.
And having said that we also see as leaf mentioned that before we see more and more.
The companies and also.
Pre IPO companies will consider Hong Kong sale primary listing space.
Rather than the U S in the <unk>.
In the past, we do have a very strong edge in Hong Kong market.
Our home base.
Therefore, we do think that all.
Client acquisition, so through that you saw through the IPO will continue just.
Just to give you to some of the some breakdown in terms of our current client acquisition channels.
Organic already accounts for over 50%.
If we just calculate piece of channel.
Buying with his group account opening and we're just account for around 10% of our total new paying clients enhanced every quarter. So I think the impact of SKU management.
Thank you very helpful.
Thank you.
We have another question from the line of Catherine Liu from Morgan Stanley. Please ask your question.
Hey, guys, everyone is home for HIFU, which had been hurt your opinion the windshield.
Now for the poker for Sean Sean Kim.
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And that concludes the dantzler no.
Okay.
Anytime you go through that and then it will be the case for CECO.
So as you've been that you go downhill.
I'll translate for myself.
Wondering I understand that.
Your line of our new markets, our initial monetization, maybe a sort of less importance versus client market share. But then just wondering has management considered increasing the monetization for the Singapore market.
Whether it will be some guidance from companies or some Kim from companies.
It will be a natural result, as clients assets increase on the platform. Thank you.
Sure Kathryn.
Let me give you some color in terms of our client profile in Singapore, I think in terms of age and they're trading velocity.
This population is very similar to what do we see.
In Hong Kong market. The average age is around 30 years old and that they do trade off particular quarter for the U S markets.
Now the average assets in Singapore is around 6000 CMO dollars.
Of course it is.
Relatively low compared with the assets.
In China and in Hong Kong.
Currently I think if we look at Copel basis.
New client we acquired in March and April.
Asset already almost doubled in the past before too.
Four to five months so back to your question I think number one definitely we see.
The nature of our business is just more like a rolling out global we are.
Very happy to go along with our clients in their investment journeys.
We believe as time goes by their average assets will become bigger in the books and the bigger.
Number two is definitely we will have a more service offering more product offerings in the pipeline portfolio and we will launch more business in the coming two quarters.
Since we will provide clinical.
Clinical clients to participate in the <unk>.
<unk> IPO retail tranche.
Not to mention we will also.
And our wealth management offerings.
A couple of pages offering to the mainland and Hong Kong people to casino for local rather than a step.
Therefore, I think.
We provide a more and more products and services, we will find a more monetization areas to enhance our hospital.
Yeah.
Hum.
Thank you very much.
And there are no further questions at this time I would now like to hand, the conference back to Daniel for closing remarks.
That concludes our call today on behalf of <unk> management 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 representative.
And goodbye.
Thank you that does.
This concludes our conference for today. Thank you for participating you may now disconnect.