Q2 2023 Futu Holdings Ltd Earnings Call

Participants

Daniel Yuan; Chief of Staff & Head of IR; Futu Holdings Limited

Hua Li; Founder, Chairman & CEO; Futu Holdings Limited

Yu Chen; CFO; Futu Holdings Limited

Chiyao Huang; Research Associate; Morgan Stanley, Research Division

Leon Qi; Analyst; Daiwa Securities Co. Ltd., Research Division

You Fan; Analyst; China International Capital Corporation Limited, Research Division

Yun-Yin Wang; Research Analyst; China Renaissance Securities (US) Inc., Research Division

Presentation

Operator

Hello, ladies and gentlemen. Welcome to Futu Holdings Second 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, sir.

Daniel Yuan

Thanks, operator, and thank you for joining us today to discuss our second 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 of the company's control. Forward-looking statements involve inherent risks and uncertainties. We caution you that a number of important factors could cause the actual results to differ materially from those containing 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.
With that, I will now turn the call over to Leaf. Leaf will make his comments in Chinese, and I will translate.

Hua Li

(foreign language)

Daniel Yuan

[Interpreted] Thank you all for joining today. I'm pleased to announce that we acquired over 57,000 paying clients in the second quarter, bringing the total number of our paying clients to nearly 1.6 million. Robust organic growth across all overseas markets drove a 41% sequential acceleration in client acquisition. In the second quarter, Hong Kong market contributed approximately 1/3 of new paying clients as effective offline marketing campaigns attracted older clients who prefer in-person instructions on how to open trading accounts and navigate our user interface. In Singapore market, we also witnessed strong paying client growth on the back of U.S. equity market outperformance and the enticing yields of money market funds. In the U.S., we brought in more clients of higher quality as we iterated on marketing channels and client incentives. Despite gradual market sentiments, our Group's quarterly paying client retention rate remained above 98%.

Hua Li

(foreign language)

Daniel Yuan

[Interpreted] In the second quarter, we continued to roll our new products and features across markets. To help clients better execute their trading strategy, we launched bracket orders for U.S. and Hong Kong stock options and futures, an algorithmic order for all clients in Hong Kong and Singapore. In Singapore and Australia, we now give clients access to certain U.S. stocks and ETFs 24 hours a day, 5 days a week, thereby enhancing the accessibility of U.S. stock trading.

Hua Li

(foreign language)

Daniel Yuan

[Interpreted] Total client assets were $466 billion, up 8% year-over-year and flattish quarter-over-quarter. Negative mark-to-market impact on clients' Hong Kong stock holdings drag total client assets. The net asset inflow in overseas markets remained robust, which offset the market impact. Singapore market delivered strong asset growth during the second quarter, with a 21% and 12% quarter-over-quarter increase in total and average client assets, respectively. This was the fourth consecutive quarter where the Singapore market achieved double-digit sequential growth in total client assets. Margin financing and securities lending balance declined marginally by 1.4% sequentially as some clients unwound their securities lending position.

Hua Li

(foreign language)

Daniel Yuan

[Interpreted] Total trading volume declined 22% quarter-over-quarter to $1 trillion. Hong Kong stock trading volume was $259 billion, down 31% sequentially due to clients' waning interest in China technology names given disappointing stock price performance. U.S. stock trading volume was down by 18% quarter-over-quarter to $676 billion as trading turnover of technology stocks and leverage and inverse ETFs contracted. Interpreted Total client assets in Wealth Management were $43 billion, up 99% year-over-year and 17% quarter-over-quarter. The sustained high yields on money market funds were the key driver behind this robust asset growth. In Hong Kong, we continue to expand structured product offerings by onboarding fund-linked notes and call/put spread notes to cater to the diversified risk return expectations of high net worth clients. In Singapore, over 18% of clients held wealth management positions as of quarter end, up significantly from 2% in the year ago quarter. In Singapore, average client assets in Wealth Management more than doubled year-over-year. In an effort to expand beyond retail wealth management, we launched entrusted accounts in Singapore that allow fund managers to manage assets on their clients' behalf.

Hua Li

(foreign language)

Daniel Yuan

[Interpreted] We have 374 IPO distribution and IR clients out at quarter end, up 36% year-over-year. Of all 31 companies listed in Hong Kong in the first half of 2023, 20 of them have used one or more of our enterprise product offerings. In the quarter, we acted as joint bookrunners of several high-profile Hong Kong IPOs, including those of YSB and Edianyun.

Hua Li

(foreign language)

Daniel Yuan

[Interpreted] Last but not least, I am pleased to announce that our wholly owned Japan subsidiary, Moomoo Securities Japan Corporation Limited is officially approved by the Japanese regulators to conduct its brokerage and wealth management business via our online platform, Moomoo. The Japan market is characterized by its large and growing number of affluent retail investors, high penetration of online trading and increasing pension for U.S. stock trading, and we are excited to tap into this immense market opportunity.

Hua Li

(foreign language)

Daniel Yuan

[Interpreted] Next, I'd like to invite our CFO Arthur to discuss our financial performance.

Yu Chen

Thanks, Leaf and Daniel. Before going through our financial performance, I'd like to give you an update on our latest USD 500 million share repurchase program announced on March 11, 2022. At the end of the first half, we have repurchased an aggregate of 11 million ADSs with approximately USD 360 million total repurchase amount in open market transactions. This constitutes about 70% of the maximum purchase amount approved under our share repurchase program.
Now back to the financial performance in the second quarter. All the numbers mentioned below are in Hong Kong dollars. Total revenues for the quarter were $2.5 billion, up 42% from $1.7 billion in the second quarter of 2022. Brokerage commission and handling charge income was $553 million, a decrease of 8% year-over-year and 12% Q-over-Q. The Q-over-Q decrease was mainly due to the decline in the total trading volume, partially offset by the increase in the blended commission rate from 8.8 basis points to 9.9 basis points. Interest income was $1.4 billion, an increase of 127% year-over-year and 9% Q-o-Q. The increase was driven by higher interest income from cash deposits and higher security lending income.
Other income was $127 million, up 37% year-over-year and have maintained most flat Q-over-Q. The year-over-year increase was driven by higher fund distribution income. Other income maintained largely stable Q-over-Q since higher fund distribution service income and the [chartered] fee were largely offset by lower currency exchange income, underwriting fee income and the market information and data income.
Total cost was $375 million, an increase of 80% from $208 million in the second quarter of 2022. Brokerage commission and handling charge expenses was $55 million, down 37% year-over-year and 23% Q-o-Q. The decrease was attributable to lower trading volume and the cost savings from our U.S. sale clearing business. Interest expenses were $220 million, up 729% year-over-year and [68%] Q-over-Q. The increase was mainly driven by higher expenses associated with our securities borrowing and lending business, higher funding costs from margin financing business also contributed to Q-over-Q increase.
Processing and servicing costs were $99 million, up 5% year-over-year and 13% Q-over-Q. The increase was primarily due to higher system usage fees, market information fee and the data transportation fee also increased on a sequential basis. As a result, total gross profit was $2.1 billion, an increase of 37% from $1.5 billion in the second quarter of 2022. Gross margin was 85% as compared to 88% in the second quarter of 2022.
Operating expenses were 18% year-over-year and 6% Q-over-Q to $852 million. R&D expenses were $363 million, up 25% year-over-year and 2% Q-over-Q. The increase was mainly due to an increase in R&D headcount as we continue to upgrade our infrastructure, support new product offerings and invest in product localization in international markets.
Selling and marketing expenses was $175 million, down 20% year-over-year and up 24% Q-over-Q. The year-over-year decrease was mainly due to lower customer acquisition costs and the Q-over-Q increase was driven by accelerated client position. G&A expenses were $314 million, up 49% year-over-year and 2% Q-o-Q. The increase was mainly due to increase in headcount for general and administrative personnel to support our international business expansion. As a result, our total net income increased by 74% year-over-year and decreased by 6% Q-over-Q to $1.1 billion. Net income margin expanded to 45% from 37% in the same quarter last year, primarily due to strong top line 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. Thank you.

Question and Answer Session

Operator

(Operator Instructions) We will now take the first question from the line of Chiyao Huang from MS.

Chiyao Huang

(foreign language) Let me briefly translate. So the 2 question is regarding the trading volume. And we are seeing the trading volume slip further than the overall market in both Hong Kong and the U.S. in the second quarter for Futu. So just wondering what's the implication there? And also, we are seeing the brokerage commission bouncing quite sharply in the second quarter and roughly what's the driving factors behind?

Yu Chen

I will take 2 of your questions. Number one, regarding the trading volume. It is generated in line with the overall market conditions, particularly in the second quarter, we see the market actually is very challenging across the board regardless in the U.S. or in Hong Kong. What we observed is actually the trading velocity from our clients both in the U.S. and also in Hong Kong has decreased. But the situation seems to be temporary as we see the trading velocity rebound quarter-to-date in the second quarter.
Then in terms of the trading commissions, the major reason, as we elaborated several times before, is more related to the clients' trading behavior in the U.S. stock. As in the second quarter, we see more clients trading these low-value stocks in the U.S. markets, which led our implied blend commission rate become higher versus the second quarter.

Operator

We will now take the next question from the line of You Fan from CICC.

You Fan

(foreign language) Okay, I will translate. Thanks management for taking my questions. Ms. You Fan from CICC. I have 2 questions here. The first one is regarding the AUM and revenue breakdown by assets, how much does Hong Kong and U.S. stocks and wealth management products and also the cash balance accounts for the total client asset balance? And how much that Hong Kong and U.S. stock markets account for the total revenue activity?
The second question is regarding the client net asset inflow. So I wonder what's the asset inflow of clients in Hong Kong, Singapore and also Mainland China, respectively?

Yu Chen

I will answer your second question first, and will leave the first question to Leaf. In terms of the net asset inflows in the second quarter, we see a very healthy rebound in the second quarter versus the first quarter, given that we got some negative headlines in the second quarter, which caused certain clients uncomfortable in terms of their top assets stocking in our accounts. So this impact has been fully removed in the second quarter. And to break down among the different regions, Hong Kong actually contributed most of the asset inflows, which followed by Singapore afterwards. I'll leave the second question to Leaf.

Hua Li

(foreign language)

Daniel Yuan

[Interpreted] In the past few quarters, the breakdown of Futu's client assets has remained relatively stable with more client assets allocated to Hong Kong stocks than U.S. stocks. And the proportion of wealth management assets actually continues to rise in the past couple of quarters and now accounting for about 10% by the end of 2Q, which more than doubled year-over-year, and clients' cash balance accounted for low teens of total client asset balance. And to answer your question regarding the revenue breakdown between Hong Kong and U.S. stocks, Hong Kong stocks usually contributed about 30% of the trading volumes. So U.S. stocks contributed 70% of the trading volume and the blended commission rate for U.S. stock is slightly higher. So about 75% of our trading commission actually came from U.S. stock trading. Thank you.

Operator

We will now take the next question from the line of Cindy Wang from China Renaissance.

Yun-Yin Wang

(foreign language) Thank you management for taking my call. This is Cindy from China Renaissance. So I have 2 questions. First question is related to the customer acquisition cost. So we see the second quarter, new clients are strong sequentially. However, the CAC actually went down. So is that going to sustainable in the second half of 2023? And the second question is related to the Japan market. So congrats to get the license approval from Japan government. So since we have done the beta version for the Moomoo app in Japan. So can you talk about a little bit more color on what's the effect in the beta version in terms of client feedback and MAU? And is that going to help you to grow your new client members in the second half of this year?

Yu Chen

Thank you, Cindy. I will take your first question. And I think Leaf will be very happy to share more colors and his thoughts about the Japan market.
In the second quarter, the net client acquisition cost was around $3,000 per client. The CAC in Hong Kong was slightly higher than the average, while in the U.S. and in Singapore was lower than the average. I think in the second quarter, we continue to optimize different channels, particularly some offline channel promotions to get very good results. So our efforts on the acquisition efficiency of target client groups have got reward. And in the future, we will further dynamically adjust our marketing strategy to improve the efficiency and also the quality of customer acquisitions. Looking into the second half of this year, I personally think the uncertainties still remain across the different markets. But having said that, our view on average CAC will be slightly more optimistic than our view before. Therefore, we think the full year CAC costs may have a high single-digit decrease compared with that of last year. Thank you. I hand over to Leaf.

Hua Li

(foreign language)

Daniel Yuan

[Interpreted] We have been operating as a pure information and market data platform in the Japanese market for less than a year, accumulating a lot of good feedback from Japanese users. We've also iterated many community networking features based on market trends and user interest. And our data shows that Moomoo's user community in Japan is highly, highly active with the DAU to user ratio averaging around 15% on trading days, indicating very high engagement and certainly significant growth potential. Although trading function is currently not available on Moomoo in Japan, we believe Moomoo has already brought unique value to Japanese users. And in terms of product capabilities, Moomoo now offers various functionalities that were absent among local platforms, such as visual displays of fund flows covering U.S. and Japanese stocks, fundamental and technical analysis. And secondly, most securities brokers in Japan have a 15- to 20-minute delay in market data and real-time quotes are provided with a cost. However, Moomoo provides free real-time quotes, not only for Japanese and U.S. stocks, but also for foreign exchange options and futures data of global capital markets. And furthermore, Moomoo is currently the only online platform in Japan, offering an online user community. We've introduced numerous KOLs and conducted live [rock-outs] for popular financial events in the social community, resulting in very high engagement. And last but not least, we have strong trading capabilities in terms of product categories or types, trading duration and various analytical tools, which can also be replicated in Japan in the near future. And regarding our future development plans after we received the approval from the Japanese regulators, we are actively preparing and aim to launch the trading functions in the fourth quarter this year to provide Japanese investors with a comprehensive and smooth investment experience. Thank you.

Operator

We will now take the next question coming from the line of Leon Qi from Daiwa.

Leon Qi

(foreign language) Let me return my questions in English. This is Leon Qi from Daiwa. My first question is still regarding Japan market, would make one say that our competitive landscape in the online broker space in Japan is better than the U.S. from this experience that we run our beta provisions. More specifically, do we have any expectations on CAC and payback period in Japan?
And my second question is on Hong Kong. We are very glad to see that recently Futu has opened an offline experience center in Hong Kong. And many people are very excited about the product offerings. Just want to ask (inaudible) that what kind of user operating metrics or financial metrics are we expecting from the offline experience shops? And do we plan to open more offline shops?

Yu Chen

I think the first question can be answered by my colleague, Daniel. And regarding our physical store in Hong Kong, I think Leaf is very happy to share more colors about these shops.

Daniel Yuan

Right. So regarding the competitive landscape in Japan, we believe it is a lot more benign than what we saw in the U.S. And we understand that the only securities brokerage industry in Japan is now dominated by a few players. The top 5 Internet brokers, including Rakuten and SBI now account for the majority of the market share in terms of brokerage trading volume. They have each accumulated over 1 million clients, among which Rakuten and SBI are the top 2 players. But overall, we think that the landscape is a lot more fragmented than what we saw in the U.S., and we believe that our current product offers a competitive advantage, a very significant one over the existing online brokers. And the Japanese market is huge. And as we mentioned earlier, growing rapidly, and we are very confident to obtain a meaningful market share in Japan. Overall, I think since we haven't really started acquiring clients yet, it's probably too early to talk about customer acquisition cost and payback period. But based on our initial analysis, the Japanese retail investors are generally a lot more affluent than the U.S. investors. And actually, there are a lot more ways to monetize on trading in Japan, let's take U.S. stock trading, for example. It is now industry standards to charge 0 commissions for U.S. stock trading in the U.S., while everyone still charges at least all of the major online brokers and the Japan still charges a pretty high commission for U.S. stock trading. So we think, generally, the investors are wealthier and there are more monetization opportunities in Japan.

Hua Li

(foreign language)

Daniel Yuan

[Interpreted] Since its opening July 31, over 1,000 people have visited our experience stores and many of whom are middle age customers who are not familiar with the online account opening process. And previously, it was difficult for us to reach the client group through our online marketing channels, but these happen to be the target customer group that we want to further tap into. So the experience store has helped us establish connection with these clients and has become an important channel to enhance Futu's brand recognition among this group. In addition, the experience store in Hong Kong allows us to make face-to-face communications with these users and to have a better understanding of Futu's product offerings. And according to the data we have collected so far, the customer acquisition cost of experience stores is actually lower than our average Hong Kong market customer acquisition cost. So from a cap perspective, experience stores can actually help us reach previously underpenetrated client groups and further enhance brand image in Hong Kong at a lower cost. From the perspective of operating costs, we believe that experience store really helps us with long-term brand building. And we also plan to use these stores as a venue for various offline investor educational activities, events and corporate offices, which will further help save costs. And if this experience store continues to record very good progress in terms of client acquisition, we expect to have more experience stores in Hong Kong. Thank you.

Operator

Thank you. I would now like to turn the conference back over to Daniel Yuan for closing remarks.

Daniel Yuan

That concludes our call today. On behalf of the Futu management team, I would like to thank you for joining us tonight. If you have any further questions, please do not hesitate to contact me or any of our Investor Relations representatives. Thank you, and goodbye.

Operator

That does conclude our conference for today. Thank you for participating. You may now disconnect.