Q1 2023 Futu Holdings Limited Earnings Call

Speaker 2: Hello ladies and gentlemen, welcome to Future Holdings first quarter 2023 earnings 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.

Speaker 3: Joining me on the call today are Mr. Lise Lee, Chairman and Chief Executive Officer, Arthur Chen, Chief Financial Officer, and Robin Xu, Senior Vice President.

Speaker 3: As a reminder, today's call may include four 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.

Speaker 3: for looking statements involving hearing risks and uncertainties.

Speaker 3: We caution you that a number of important factors could cause vector results to differ materially from those containing any four looking statements.

Speaker 3: For more information about the potential risks and uncertainties, please refer to the company's feelings with the FCC, including its annual report on Form 20F.

Speaker 3: With that, I will now turn the call over to Lise. Lise will make his comments in Chinese and I will translate.

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Speaker 3: Thank you all for joining today. As of quarter end, our paying clients surpassed 1.5 million, representing 15% growth year over year. Based on paying client growth in the first five months of the year, we expect to add 150,000 paying clients in 2023.

Speaker 3: In the first quarter, Hong Kong market contributed over one third of paying client growth as client acquisition accelerated on the back of the rally of China technology names in January .

Speaker 3: We also witnessed resilient pain client growth in Singapore as we continue to strengthen our brand awareness through offline events and promoted demand for lower risk fund products through investor education.

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Speaker 4: and the government of China. We are very proud to be part of this effort. We are very proud to be part of this effort. We are very proud to be part of this effort. We are very proud to be part of this effort.

Speaker 3: We continued to broaden our trading product offerings and upgrade trading features in various markets. We became the only broker in Hong Kong that allows clients to trade certain US stocks and ETFs 24 hours a day, 5 days a week, thereby enhancing the flexibility and accessibility of US stock trading.

Speaker 3: We also launched Leverage Foreign Exchange Trading in Singapore, where clients can trade 36 major currency pairs on margin to take advantage of volatilities in the foreign exchange market.

Speaker 3: In the US, we rolled out multi-light options strategy orders for US stocks. This advanced trading function streamlines clients' trading experience and will attract more sophisticated options traders to our platform.

Speaker 3: Despite market weakness and headline regulatory news, our expanding product suite and premier user experience led to another quarter of over 98% pay-in-cline retention rate.

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Speaker 3: The total client assets increased by 21% year-over-year and 12% quarter-over-quarter to $466 billion Hong Kong dollars due to higher mark-to-market value of client stock holdings and net asset inflow.

Speaker 3: In Singapore, total client assets and average client assets increased by 28% and 22% sequentially, attributable to solid net asset inflow across client cohorts and favorable U.S. equity market performance.

Speaker 3: In the first quarter, we attracted high quality clients in Singapore that continued to deposit funds into their trading accounts.

Speaker 3: For clients we acquired in January , for example, their average asset balance almost tripled by barge.

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Speaker 3: Margin financing and securities lending balance was up by 30% sequentially to reach 35 billion Hong Kong dollars, driven by elevated activities around technology stocks.

Speaker 3: Total trading volume was 1.2 trillion HKD, a 12% quarter over quarter.

Speaker 3: US stock trading volume grew by 23% sequentially to $828 billion HKD, mainly due to higher trading turnover of US technology names, many of which handsomely outperformed the market during the quarter.

Speaker 3: Hong Kong's stock trading volume was 372 billion HKD, down 6% sequentially, as investor sentiments were dragged by the equity market correction in February and March.

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Speaker 3: Wealth management business recorded another quarter of strong growth, with total client assets climbing to 37 billion HKD, of 77% year over year and 17% quarter over quarter.

Speaker 3: In Singapore, elevated interest around money market funds led to a 69% sequential increase in total client assets.

Speaker 3: We also expanded our product offerings by introducing bond trading.

Speaker 3: As of quarter end, 15% of our paying clients in Singapore held wealth management products, up from 1% in the year ago quarter.

Speaker 3: In Hong Kong, we bolstered our structured product offering by launching fixed coupon notes and additional notes.

Speaker 3: These products gain traction among our high net worth clients and structure product asset balance as a result created by fivefold quarter over quarter.

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Speaker 3: We have 353 IPO distribution in IR clients as well as 662 ESOP clients as of QN, of 37% and 44% year over year respectively.

Speaker 3: We acted as joint lead managers for several high-profile Hong Kong IPOs, including those of Beauty Farm Medical and Health Industry and YH Entertainment Group.

Speaker 3: In the first quarter, we underwrote 9 Hong Kong IPOs and ranked first among all brokers, and went to win.

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Speaker 3: I am pleased to announce that our wholly owned Malaysia subsidiary has received the approval and principle for the capital market services license from the Securities Commission, Malaysia. We look forward to tapping into the immense market opportunity in Malaysia and further strengthening our presence in the Southeast Asian market.

Speaker 5: The total revenue was $2.5 million, up 52% from $1.6 billion in the first quarter of 2022.

Speaker 5: Brokerage commission and handling charge income was 1.1 billion, an increase of 12% EoE and 3% QvQ. The EoE increase was mainly driven by a higher pleasure commission rate of 8.8 basis points. A QvQ increase was primarily attributable to higher US stock trading volumes.

Speaker 5: Interest income was 1.3 billion increase of 125% year-over-year and 14% Q-Q. The increase was driven by higher interest income from cash deposits and higher security lending income. Other income was 126 million of 29% year-over-year and 34% Q-Q. The year-over-year and Q-Q increase were both driven by higher interest income from cash deposits and higher security lending income.

Speaker 5: higher funded distribution income.

Speaker 5: Our total cost was 291 million increase of 28% from 228 million in the first quarter of 2022.

Speaker 5: Brokerage commission and handling charge expenses were 72 million, down 25% year-over-year and up 13% Q per Q. The expenses didn't move in tandem with our brokerage commission and handling charge income mainly due to cost savings from our US sales clearing business.

Speaker 5: Interest expenses were 131 billion, up 234% year-over-year, and down 28% year-over-year. The year-over-year increase and the year-over-year decrease were both driven by interest expenses associated with our security lending business.

Speaker 5: Processing at the service end cost was 88 million, down 5% year-over-year and 9% year-over-year. The year-over-year decrease was mainly due to lower product service fee as a result of system optimization.

Speaker 5: The Q over Q decrease was mainly due to lower market information fee and the data transmission fee.

Speaker 5: As a result, total gross profits were $2.2 billion, increased of 55-56%.

Speaker 5: from 1.4 billion in the first quarter of 2022. Growth margin was 88% as compared to 86% in the first quarter of 2022.

Speaker 5: Operating expenses were up 7% year-over-year and are down 2% Q-per-Q to 804 minutes.

Speaker 5: I&D expenses were 355 million, 26% year-over-year and 6% year-over-year. The increase was mainly due to increasing I&D headcount as we continue to support new product offering and invest in product localization in new international markets. What's more, your standard marketing expenses was 1 examples...

Speaker 5: down 51% year-over-year and 80% year-over-year. Expenses declined due to decelerating client acquisition amidst weak market sentiment.

Speaker 5: GMA expenses were 308 million of 73% UVA and a down 7% QvQ. The rise was primarily due to the increase in telecom for general and under-three personnel to support our international business. The expenses declined QvQ as we recorded one-off professional service fee for our proposed personnel.

Speaker 5: mainly due to strong revenue growth and lower marketing spending.

Speaker 5: That concludes our prepared remarks. We now like to open the call to questions.

Speaker 5: Operator, please go ahead. Thank you.

Speaker 2: Thank you. To ask a question you'll need to press star 1 and 1 on your telephone and wait for your name to be announced. To withdraw your question you can press star 1 and 1 again. Please stand by while we compile the Q&A roster.

Speaker 3: We will now take our first question. Please stand by. While we compile the queue.

Speaker 2: Once again, if you do have questions, it's star one and one.

Speaker 2: Thank you, we now have the first question ready.

Speaker 2: And this is from the line of Qiyo Huang from Morgan Stanley . Please go ahead.

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Speaker 6: color on the US and Australia market developments and also regarding the new entrance in Malaysia market any plans and also localization in that market will be a greatly appreciated and second question is around the latest regulatory change with the removal of the food to the app from the actual app stores and just wondering how would that impact the existing onshore users

Speaker 5: I think the first question, Daniel and Robin can give you some colors about our first quarter achievements in Australia and in the US. Also, our ambition plans for entering into Malaysia potentially in the second half of this year. For your second question about CSRC maintenance…

Speaker 5: Hopefully it will be helpful to you.

Good morning. Good to meet you. I'm Robin disrupted. The audience, I'll try to speak neuron know that I have some questions. return. Let me be brief and share sides. The got all

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So for Malaysia, we just received the approval and principal for the capital markets license from the Securities Commission Malaysia. Next we'll start building local teams and work on product and research and development.

So far we haven't set a date for the official lounge in Malaysia and will update the market when we have more information.

And in terms of the US market, our growth in the US slowed down during the first quarter, primarily because we were mapping out and optimizing our localization strategy with a focus on improving client quality. And we started to offer the US multi-leg options trading function in the first quarter, and we plan to launch advanced functions and products such as bracket orders this year.

market, in the first quarter our client acquisition in Australia has increased. And after more than a year of brand building, our brand awareness in Australia continues to improve.

Based on our market research and...

owning on our target client profile and have adopted different methods to cultivate brand awareness and acquire clients of different backgrounds. We plan to continue to launch product functions and develop deeper customer insights in Australia.

on our target client profile and have adopted different methods to cultivate brand awareness and acquire clients of different backgrounds. We will plan to continue to launch product functions and develop deeper customer insights in Australia.

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Q. Is that more expected form a second quarter and then come back for another quarter to generate the soak? Oh, that's right. And then the third quarter will come, right. Then what? In general, very significantly. Very money will come. In trouble. In sure. OK. Okay. Thank you. We havewherepaper is September 25, I think?

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Based on CSRC's announcement on December 13th and the statements made on February 15th in response to a question from reporters, the existing clients' tradings will not be affected and the existing clients can continue to trade through their existing offline financial institutions. And so these existing clients deposited more funds, it is...

allowed as long as they satisfy the requirements from SAFE. Currently for our existing clients all of their trading activities and fund deposit activities are as usual. Besides, the regulators further clarified that existing clients are defined as clients that already have trading accounts with actual brokers.

So, for mainland Chinese clients that have open trading accounts with other Hong Kong brokers, we are allowed to open accounts for them. And the fund deposits and stock transfer from other brokers to us are also allowed by the regulators.

And in terms of our app upgrades, we have issued guidances on our website and our app to guide clients on how to timely upgrade the app to the latest version. And we think our current services to the existing clients are not jeopardized. And if they have questions during the upgrades, they can call our customer service.

since we published an announcement to remove our app from domestic Apple stores last Tuesday. We are very delighted that our existing China client population is very calm about this headline news.

We do not see any meaningful abnormal churn rate and also the client-net asset outlook in the powerful week.

Thank you. We'll now take our next question.

Please stand by. This is from the line of Cindy Wang from China Relaystones. Please go ahead.

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So, one quite a fine feature. So, thanks for taking my questions. So, I have two questions. First question is related to commission rate. So, the commission rate has slightly down sequentially. So, may I know what's the reason behind it? Is that because of the...

US stock rebalance impacted or the lower derivative trading in the first quarter. The second question is, we think we've seen the news about the food who is going to open the first shop in Hong Kong. Could management let us know what kind of services the shop will provide?

and could investors open trading accounts to the shop in the future? Thank you. Thank you, Cindy. I will take the first question and for the second question, I believe we are answered. In terms of commission rate, you are right. I think the fluctuation is due to the two reasons.

You both mentioned, number one, this primary is due to the US stock trading pattern as we elaborate to the market several times. It is more due to the US market rebound, especially for these tech names, big tech names in the first quarters. I think going forward...

We do not feel any strong competition in terms of pricing in Hong Kong and in other markets. Of course there will be some natural fluctuations from quarter to quarter perspective due to the US stock trading pattern. And also in the second quarter so far given...

I hand over to Lee for your second question.

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We actually have plans to open offline stores for a while and we have been preparing for it. I think recently we are going through renovations at the offline store so probably the logo attracted media attention. And the reason we opened this offline store was actually drawing inspiration from Apple's offline store. Let me get me the card.

I think the store will help our potential clients better experience our products and services. And also we can answer a lot of their questions face to face. As we continue to increase our client penetration in Hong Kong, I think the store will help us reach the clients that we are not able to reach through online channels.

and further expand our client acquisition channel. Thank you.

Thank you.

And we'll now take our next question.

Please stand by. This is from the line of Zoe Zung from Jefferies. Please go ahead.

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Thanks, Manjimin, for taking my questions. Congratulations on the solid results, and I have two questions. So first, could you please provide some color about our user acquisition strategy this year? We have noted that in Q1, our sales and marketing expenses and customer acquisition costs both declined sequentially.

Recently we have seen companies promote in Hong Kong. So just wondering what's our user acquisition target and the cost in Q2 for year and the longer term. And my second question is about our strategy for wealth management business. Will we launch our own fund products or do we just perform as a distributor? Thank you.

I will take both of your questions. I think number one in terms of the client acquisition, you can see in the first quarter they imply the CAC is roughly in line with what we achieved in the fourth quarter of last year. I think going forward, of course, the second quarter should be even more challenging.

I think overall our CAC target this year should be similar to compare with last year. Particularly in Hong Kong, we will continue to double down our efforts in terms of the market share gains, not only to the millennial generations which we used to take into account.

In terms of wealth management, I think you are right. In the foreseeable future, our role will still be the facilitator or distributor to our clients. We do not have any confirmed time schedule or plan to package our products by using our own money.

I think you are right. In the foreseeable future, our role will still be the facilitator or distributor to our clients. We do not have any confirmed time schedule or plan to package our products by using our own money. Thank you.

Thank you.

Thank you. Thank you.

We'll now take the next question. Please stand by.

This is from the line of Frank Shen from Credit Suisse. Please go ahead.

Thank you management. This is Frank from CodaSUS. I have two questions. The first one is on...

the breakdown of interest income in terms of return on deposit and return on their margin financing and security lending business. And similarly, what are the sizes of each component of interest expenses? And secondly, how should we think about the growth rate of operating expenses going forward? Will the company take some measures to optimize the expenses? Thank you.

Thank you, Brent. I will take both of your questions. In terms of the breakdown of the interest income, as you can imagine, we are key beneficiaries of the, you know, the US rate of cycle. So in the possible borders, you can see our interest income continue to increase sequentially.

largely due to the federal rate hike and also the liquidity situations in Hong Kong. So you can imagine the majority of our interest incomes come from the client's idle cash deposits nowadays. Having said that, you can see our margin balance also increased.

So the absolute contribution from margin business also is very healthy. In terms of your second question regarding the operating expenses, I think we have given some guidance to the market in last burning quarter.

in the last earning call, we're looking for roughly 15 to 20 percent headcount increase year over year, primarily to support our international market expansion. Most of these headcount increase will be on the R&D side. Of course, you know.

there will be new overseas office opening. So there will be associate rental expenses and also the security activity colleagues be placed in these local markets. I think going forward, definitely there will be more rigorous.

expenses control, especially on the GN expenses, which we can see. There's still some room to further enhance. But I think in terms of the R&D, which we think, it is not expenses to some extent, we think it is our investment.

So we will continue to make a huge effort on the R&D, which will be our core advantage compared with our peers.

So we will continue to make a huge effort on the IND, which will be our whole advantage, compared with our peers. Thank you.

Thank you. We'll now take the next question. Please stand by. This is from Leon Key from DIWARE. Please go ahead.

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I have two questions. The first one is still on the regulations from the mainland China side. We noticed that from CSRC's public announcements, one of the principles from the regulator is to effectively solve the existing users.

or just one drape management could share with us any color on what the latest steps from the regular data at the moment on the existing fine base. And the second question is on the wealth management business. We did appreciate the very strong AM growth on the wealth management business.

From a longer term, I'm just wondering how management sees the AUM of your wealth management business, which is a buy side business. How does your buy side AUM would compare with your sell side traditional brokerage AUM? Just appreciate management give us any.

long-term cut-off that seems a lot. Thank you, Leo. Maybe I take your second question first. I need the first question to leave to give you some more sharing about the regulations for the existing clients. You can understand we are actually a very dedicated apprentice of Charles Watt in the United States.

So I think a lot of lessons we learned from Shua is that eventually want to be an asset aggregator for our users and provide their lifetime financial service down the road.

So far we do not set any specific targets in terms of portions between the wealth management AUM versus our clients trading AUM. I think now the wealth management AUM roughly accounts to close to 10% of our total clients' assets. Hopefully, I hope such...

proportion will continue to increase to 20 to 30 percent in the next three to five years. Definitely there will be a very long journey to go. As you can imagine, wealth management is a business which time is your friend. But I think we are fully dedicated and fully committed on these directions.

to rowing the snowboard step by step. Now I will hand it over to Liv for your first question about the Mainland regulations.

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Based on the spirit of CSRC's announcement on December 30th in statements made on February 15th, resolving existing business is to let clients churn naturally while providing them with proper services, not turning them away.

Clients would stop trading due to investment losses or when they need their funds for other purposes, which will lead to a natural churn for clients and, without new clients, the number of exit, the number of existing lients who reduce as time goes by, thus serving existing clients well as the prerequisite for orderly resolving existing clients, Thank you. Thank at all. They, not you.

Stop trading due to investment losses where, when they need their funds for other purposes, which will lead to a natural churn for clients and without new clients, the number of the number of existing clients we reduce as time goes by, thus serving the existing clients well if the prerequisite for orderly resolving existing clients. Thank you, Thank So, all FA you, Thank you.

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Now we have signed the chat with you, and then I'll go into it. First thing I want, could you please share a more about why we choose my name as our new market? And do we have more information to share about the market room, the competitive landscape, the local investor behavior, and the product supply in this market?

And secondly, regarding the Singapore market, we see both the paying clients number and the average asset client asset keep growing quarter-over-quarter in the Singapore market. We see the cohort of the first batch.

In the first quarter of 2021, I left two years before, how was the average client assets and the layer of solo on Fung Inflow? Have they reached the peak even point and then they start to make the profit? Thank you. Okay, thank you. Maybe my colleagues Robin can answer the first question about the company.

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So the population of Malaysia is around 33 million with the Chinese population accounting for about 20%.

And as of 2022, there were about 2.1 million active retel trading accounts for Malaysian stocks, while the number of trading accounts for US stocks, Hong Kong and Singaporean stocks are in the hundreds of thousands and are constantly rising.

And we observed that the retail participants in Malaysia are young and are highly accustomed to digitized products.

and amount of new personal accounts open in 2022, 59% of them come from investors, age 23 to 45.

Currently in Malaysia, the traditional bank affiliated security firms are dominant while the online brokers started relatively late. However, due to the overall trend of younger retail investors and their high acceptance of internet products, we think there is huge potential for online brokers to further penetrate. In mainland, sorry, mainstream internet brokers such as OSL stocks are braced up to 365, so the bottom-right is sipping r hates, so am I saying.

are relatively small in scale and their product capabilities are pretty basic with almost no social community operations. And on the other hand, our product capabilities have strong advantages, including a wider variety of products, advanced market data and oreotypes, and rich fundamental and technical analysis tools. And in addition, the trading fees are farming stocks like US stocks are pretty high in Malaysia.

differentiated experience. Thank you. Thank you Daniel and Robin. For your second question, we entered into Singapore markets roughly two years ago. So the first batch of our clients' cohort access increased by two to three times in the past two years.

We are very encouraging to see the client's call and also the client's retention. So now for the first batch, two years, the clients which we acquired two years ago, they have already surpassed our client's acquisition cost, which means contribute operating profit nowadays. I think that we are extremely confident about our...

probability and earning powers in the Singapore market alone not only just Because of the you know our portal will continue to enhance our output and the client access but more importantly There will be a lot of initiative efforts

to cutting the cost down, not only the operating cost, but also the clearing cost, such as our US stock trading, which we still deal with our Singapore-based clients through our external partners. In the second half of this year, we do have a plan.

We do have a plan to congratulate my great our, you know, U.S. stock trading for Singapore clients from external partners to our internal U.S. clearinghouse. So this will also significantly decrease our our cost relating to the U.S. stock trading which will further enhance our profitability in Singapore. Thank you very much.

That's very helpful. Thank you very much. Thank you. And I will now hand the conference back to you and for some closing remarks. That concludes our call today. On behalf of the Food to Management team, I would like to thank you for joining us. If you have any further questions, please do not hesitate to contact me or any of our investors really.

And.