Futu Holdings Limited (NASDAQ:FUTU) Q2 2023 Earnings Call Transcript

Futu Holdings Limited (NASDAQ:FUTU) Q2 2023 Earnings Call Transcript August 24, 2023

Futu Holdings Limited beats earnings expectations. Reported EPS is $8.51, expectations were $6.89.

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. [Operator Instructions] 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 actual results to differ materially from those contained in any forward-looking statements. For more information about the potential risks and uncertainties, please refer to the Company’s filings with the SEC, including its 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.

Leaf Hua Li: 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 one third 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 witness strong paying client growth on the back of U.S., equity market outperformance and the enticing yield 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 fragile market sentiments, our group’s quarterly paying client retention rate remained above 98%. In the second quarter, we continue to roll out 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 in EPS 24 hours a day, five days a week, thereby enhancing the accessibility of U.S. stock trading. Total client assets were HK$466 billion up 8% year-over-year and flattish quarter-over-quarter.

Negative mark-to-market impact on client Hong Kong stock holdings dragged 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 digits sequential growth in total client assets. Margin financing and securities lending balance declined marginally by 1.4% sequentially, as some clients unwound their security lending position. Total trading volume declined 22% quarter over quarter to HK$1 trillion. Hong Kong stock trading volume was HK$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 HK$676 billion as trading turnover of technology stocks and leverage and inverse EPS contracted. Total client assets involve management were HK$43 billion of 99% year over year and 17% quarter over quarter. To sustain high yields and money market funds with a key driver behind this robust asset growth. In Hong Kong, we continue to expand structured product offerings by on-boarding 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 double the year over year.

In an effort to expand beyond retail wealth management, we launched and trusted accounts in Singapore that allow fund managers to manage assets on their client’s behalf. We have 374 IPO distribution and IR clients out the quarter end of 36% year over year, of all 31 companies listed in Hong Kong and 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 book runners of several high profile Hong Kong IPOs, including those of YSB and Edianyun. Last but not least, I am pleased to announce that our wholly-owned Japan subsidiary, Moomoo Security 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. Next, I would like to invite our CFO, Arthur, to discuss our financial performance.

Arthur Chen: Thanks, Leaf and Daniel. Before going through our financial performance, I’d like to give you an update on our latest $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 ADS with approximately $360 million total repurchase amount in open market transaction. This constitutes about 70% of the maximum purchase amount approved on 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 HK$2.5 billion, up 42% from HK$1.7 billion in the second quarter of 2022. Brokerage commission and handling charge income was HK$953 million, a decrease of 8% year-over-year and a 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 HK$1.4 billion, an increase of 127% year-over-year and 9% Q-over-Q. The increase was driven by higher interest income from cash deposits and a higher security lending income. Other income was HK$127 million, up 37% year-over-year and then 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 high open distribution and service income and the transfer fee were largely offset by lower currency exchange income underwriting fee income and the market information and the data income.

Total cost was HK$375 million, an increase of 80% from HK$208 million in the second quarter of 2022. Brokerage commission and handling charge expenses was HK$55 million, down 37% year-over-year and the 23% in Q-on-Q. The decrease was attributable to lower trading volume and cost savings from our U.S. sales clearing business. Interest expenses were HK$220 million, up 729% year-over-year, and the 68% Q-over-Q. The increase was mainly driven by higher expenses associated with our security borrowing and the lending business. Higher funding costs from margin financing business also contribute to Q-over-Q increase. Processing and the servicing costs were HK$99 million, up 5% year-over-year and 13% Q-over-Q. The increase was primarily due to higher system usage fee, market information fee and the data transformation fee also increased on a sequential basis.

As a result, total gross profit was 2.1 billion, 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 the 6% Q-over-Q to 852 million. R&D expenses was 363 million up 25% year-over-year and the 2% Q-over-Q, the increase was mainly due to increasing 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 accelerate client acquisition.

G&A expenses was 314 million of 49% year-over-year, and the 2% Q-over-Q, the increase was mainly due to increase in head account 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 the decreased by 6% Q-over-Q to 1.1 billion. Net income margin expense to 45% from 37% in the same quarter last year, primary due to strong top line growth and the lower selling and the marketing expenses. That concludes our prepared remarks. We now like to open the call to questions. Operator, please go ahead. Thank you.

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Q&A Session

Operator: [Operator Instructions] We will now take the first question, one moment please, from the line of Chiyao Huang from MS. Please go ahead.

Chiyao Huang: Let me briefly translate. So the two questions regarding the trading volume, and we’re seeing the trading volume slip further than the overall market in both Hong Kong and the U.S. in the second quarter of 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? Thank you.

Arthur Chen: Thank you, Chiyao. I will take two of your questions. Number one, regarding the trading volume, it is generally just in line with the overall market conditions, particularly in the second quarter we see very — the market actually is very challenging across the board, regardless in the U.S. or in Hong Kong. What we observe is actually the trading velocity from our clients both in the U.S. and also in Hong Kong has decreased, but the situation seem to be temporary as we see the trading velocity rebound quarter today in the second quarter. Then in terms of the trading commissions, the major reason as we elaborate several times before is more related to the client’s trading behavior in the U.S. stock. As in the second quarter, we see more clients trading this low value stock in the U.S. market, which let our lender implied blended commission rate become higher versus the second quarter.

Operator: We will now take the next question from the line of Pu Han from CICC. Please go ahead.

Pu Han: I’ll translate. Thanks management for taking my questions. This is Pu Han from CICC. I have two questions here. The first one is regarding the AUM and the revenue breakdown by assets. How much does Hong Kong and the U.S. stocks and the wealth management products? And also the cash balance accounts for the total client asset balance? And how much does Hong Kong and U.S. stock market account for the total revenue risk 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?

Arthur Chen: I’ll answer your second question first and we’ll leave the first question to leave. In terms of the net asset inflow in the second quarter, we see very healthy rebound in the second quarter versus the first quarter. Given that we got some negative headline use in the second quarter, which caused certain clients uncomfortable in terms of their park assets parking in our accounts. So, this impact has been fully removed in the second quarters and to breakdown among the different regions. Hong Kong actually contributed most of the asset inflows, which followed by Singapore afterwards. I leave the second question to Leaf.

Leaf Hua Li: 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 continue 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 client’s 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 contribute at about 30% of the trading volume. U.S. stocks contributed 70% of the trading volume. And the blended commission rate for U.S. stocks is slightly higher. So, about 75% of our trading commission actually came from U.S. stock trading. Thank you.

Operator: Thank you. We will now take the next question from the line of Cindy Wang from China Renaissance. Please go ahead.