Earnings Call: Q1 2021

May 19, 2021

Earnings release

Hello, ladies and gentlemen. Welcome to Futu Holdings First Quarter 2021 Conference Call. At this time, all participants are in a listen only mode. After management's prepared remarks, there will be a question and answer 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, Mr. Daniel Yuan, Chief of Staff and Head of IR at Futu. Please go ahead, sir. Thanks, operator, and thank you for joining us today to discuss our Q1 2021 earnings results. Joining me on the call today are Mr. Lee Fei, Chairman and Chief Executive Officer Arthur Chen, Chief Financial Officer and Robin Hsu, 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 involving hereinvest 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 registration statement. So with that, I will now turn the call over to Leaf. Leaf will make his comments in Chinese, and I will translate. Hello, everyone. Thank you for joining the earnings call today. We are excited to announce that we started off the year with robust growth across our operating and financial matrices. Our net paying client addition was approximately 273,000, bringing the total number of paying clients to over 790,000, representing 231% year over year growth. 3 months into the year, we already achieved 39% of our full year growth target. For the Q1, Over 70% of net additions came from Hong Kong, Singapore and other overseas markets. Organic growth continued to contribute over 50% our net new paying clients. Despite rapid client base expansion, our quarterly paying client churn rate remained below 2%. Since our official debut in Singapore on March 8, we have experienced significant growth in client acquisition. Our superior product experience and laser focus on client servicing, coupled with our online and offline advertising and strong word-of-mouth referral, has helped us quickly capture the mind share of Singaporeans, characterized by its large and affluent Chinese population, Deep and mature capital markets, high penetration of financial services and rising rate of digitalization, Singapore presents a huge market opportunity, let alone its strategic importance as an anchor point into the broader ASEAN market. With the strong growth momentum trending into the 2nd quarter, we are confident to unveil rapid growth in Singapore. In terms of client assets, our average asset balance per paying client climbed to HKD5 HKD385000, a record high since 2016. As of quarter end, total client assets reached HKD462.2 of HKD462.2 billion, representing 368% growth on a year over year basis and 62% growth on a quarter over quarter basis. Total trading volume in the quarter was HKD2.2 trillion, up 2 78% year over year. U. S. Stock trading contributed about 63% of the total trading volume. In the past quarter, we launched OSV Futures from the Japan Exchange Group and Singapore stock trading as part of our continued efforts to diversify trading offerings. Our wealth management business, MoneyPlus, established new partnerships with 4 reputable asset managers in the quarter, including Wells Fargo, Income Partners, Aberdeen Standard and BNY Mellon. As of quarter end, over 59,000 clients held total assets of HK13.1 HKD1 1,000,000,000 in Wealth Management, up 189% and 108% year over year, respectively. As MoneyPlus' distribution capabilities get increasingly recognized by asset managers, Forgo entered into an exclusive agreement with us to distribute the Hong Kong dollar denominated retail share class of its China Small Mid Cap Growth Fund, one of its flagship products in the region. In the Q1, we started to offer a flagship TMT hedge fund managed by a globally renowned asset manager to our qualified investors. At the quarter end, our enterprise business, Futu I and e, had 152 IPO and IR clients as well as 200 ESOP solution clients. In the Q1, We participated in all Chinese ADR secondary listings in Hong Kong, and we're the only online broker in the selling groups of the Hong Kong IPOs of Kuaishou, The enterprise account function in our social community gets increasingly adopted by listed companies to engage with over 14,000,000 retail investors interested in Hong Kong and U. S. Stock trading. By the end of the Q1, over 500 listed companies have set up enterprise accounts with us to promote their products and services, provide business updates and live stream earnings calls. As of today, 9 enterprise accounts have amassed over 1,000,000 followers. Listing companies are an indispensable stakeholder in our ecosystem, and their engagement has greatly diversified our content offerings, thereby increasing user stickiness and retention. Next, I'd like to invite our CFO author to discuss our financial performance. Thanks, Li and Daniel. Please allow me to walk you through our financial performance in the Q1. All the numbers are in Hong Kong dollar unless otherwise noted. Our total revenue was RMB2.2 billion, an increase of 3 49% year over year and 86% Q on Q. Brokerage commission and handling charge income was RMB1.3 billion, an increase of 3 43% year over year and 84% Q on Q. The growth was mainly driven by 278 percent year over year of our total trading volume increase. Our blended commission rate and our clients' trading velocity remained resilient compared with last quarter. Interest income was RMB659 1,000,000, an increase of 3 56% year over year and the 96% Q on Q. The increase in margin financing interest income was mainly driven by the strong growth in daily average margin financing balance, higher IPO financing interest income due to a very active Hong Kong IPO market in the Q1 and increase in our security, borrowing and lending business. Other income was CNY221,000,000, an increase of 3 70% year over year and a 6.9% Q on Q. The strong growth was primarily driven by increasing our IPO subscription service charge income and the currency exchange service income. In terms of costs, our total costs were RMB443 1,000,000, an increase of 2.70 26% year over year and 83% Q on Q. Brokerage commission and handling charges expenses were CNY240 1,000,000, an increase of 3 27 percent from CNY50 1,000,000 in the Q1 of 2020. The increase was largely in line with the both of our mortgage commission and handling charge income. Interest expenses was CNY168 1,000,000, an increase of 4 0 6 percent from CNY33 1,000,000 in the Q1 of 2020. The growth was primarily due to higher margin financing interest expenses an increase in our security borrowing and lending business. Processing and servicing costs were RMB62 1,000,000, an increase of 78% from RMB35 1,000,000 in the Q1 of 2020. We continue to increase cloud service expenses and add another 300 floating controller connect to the trading system of the Hong Kong Stock Exchange to execute a large number of concurrent Hong Kong Stock Trade. As a result, our total gross profit was RMB1.8 billion, an increase of 3 73% year over year and 87% Q on Q. Gross profit margin increased from 76% in the Q1 of 2020 to near to 80% in the Q1 of this year, thanks to higher operating leverage as a result of our larger business scale. Our total operating expenses was RMB419 1,000,000, an increase of 149 percent from RMB197 1,000,000 in the Q1 of 2020. To break it down, R and D expenses was RMB137 1,000,000, an increase of 63% from RMB84 1,000,000 in the Q1 of 2020. We further invested in the R and D to support our new product offerings. Selling and marketing expenses were RMB275 1,000,000, an increase of 3 21% year over year and 144 percent Q on Q. The increase was primarily due to higher branding and marketing spending, especially in the international markets to cultivate brand image and acquire new clients. If we compare client acquisition costs in the Hong Kong and the China areas alone, our CAC number this quarter is largely in line with that number in the last quarter. G and A expenses were CNY78 1,000,000, an increase of 65% year over year. The increase was primarily due to the increase in the headcount for G and A personnel. As a result, our net income increased by 6.5x to RMB1.2 billion from RMB155 1,000,000 in the Q1 of 2020. In April, we also complete our follow on offering with net proceeds of approximately US1.4 billion dollars The proceeds will be used to support a larger margin financing balance, our international market expansion, new licensing applications, potential investment and acquisition opportunities and other general corporate purpose. That concludes our prepared remarks. We'd now like to open the call to questions. Operator, please go ahead. Certainly, sir. Ladies and gentlemen, we will now begin the question and answer session. We have our first question coming from the line of Katherine Liu from Morgan Stanley. Please go ahead. Thank you very much for giving me this opportunity to ask questions. This is Catherine from Morgan Stanley. So I have two questions to raise. First is like, can management please give some introduction or some briefing in terms of the second quarter this year trend in terms of trading Velocity, client acquisition growth rate, etcetera. And also in light of the Q1 strong growth, Will management risk guidance in terms of the full year, for example, growth in paying clients, etcetera? And second question is, Could management please give some guidance or introduction in terms of the breakdown of clients by geography? And then we note that Singapore could potentially see very strong growth. And could management please give us some guidance in terms of the Growth trend in the Singapore market. Thank you. Sure, Katherine. Let me answer your second First, I will show you our clients' breakdown in the Q1. I will leave the second trend The Q2 trend and also the your questions about the guidance to Robin and the lead. Robin will also give you some colors in terms of our client acquisitions and also the client profile in Singapore, this particular market. In the 1st quarter, on a flat basis, Singapore and the U. S. Accounts for 25% of our new paying clients acquired in the Q1. The remaining 75% was almost evenly split within Mainland China and also Hong Kong, I think slightly higher in Hong Kong part. I will leave Robin, I'll leave to give your comments about your first question. Although we have achieved 39% of our full year paying client risk target in the Q1, for the time being, we will not adjust our full year target. Well, we definitely believe that our product has very differentiated value proposition towards these markets. And in fact, since we entered the Singapore market officially in March, We have some very strong client growth and that momentum has continued into the Q2. But we also reckon that the brokerage business is positively correlated with the market performance, with market sentiments, with the number of IPOs. And we understand that right now, the market has disagreements over how the market performance will evolve for the rest of the year. So we'll not adjust our full year kind of the inclined growth target for now. And we Well, we have seen that the market experienced some level of pullback since mid February, and we believe that our users' trading sentiment has been affected more or less, and we think that's perfectly normal. We feel like the market still gets a lot of attention right now And kind of under the rotation from growth to value stocks, there are still a number of stocks that are performing really, really well. And from the standpoint of our client assets, we have seen that from March 1 to last Friday, which is May 16, almost on every single trading day, we see a positive net asset inflow except for a couple of trading days. So it's a very positive sign that our clients are continuously putting assets into our platform. And for us, Paying client number, paying client retention and client asset are our 3 KPIs, and we attach much more importance to these three metrics than some short term volatilities in the client's trading volume. And let me just add a little bit to your question about in our Singapore clients profile. So, so far, Based on what we have seen, again, this is only based on about 2 and 2.5 months of data that we have seen so far. So Singapore clients, average and median age is almost identical to that of Mainland China and Hong Kong clients. And in terms of their client assets, it still lacks. And actually, there's a pretty big discrepancy between our between the average client assets of our Singapore clients and our mainland China clients. But we think that's normal. And based on our experience, When we enter a new market, it will take some time for our clients' assets and clients' trading volume to catch up. And We'll probably give more details around our client profile in the next couple of quarters. Thank you. Thank you. We have our next question. This is coming from the line of Jacky from China Renaissance. Please go ahead. So congrats on the great results. I have two questions. Number 1 is about our competition. We actually saw some competitors, for example, in Hong Kong market, increasing their marketing efforts. And we also hear Some Asia brokers may enter the U. S. And Hong Kong Stock Trading Business. So regarding the potential increasing competition for our markets and customers from mainland and Hong Kong. Do And number 2 is about a housekeeping question. Could you provide us rough breakdown of our interest income and also other revenue? Thank you. Sure, JP. Let me answer your second question in terms of housekeeping financial numbers first. I will leave the first question to my colleagues, Our CEO, Lee. In terms of the interest income breakdowns, roughly interest income arising from the margin financing account for 60% to 65% of total interest income. The remaining interest income actually derived from our clients' idle cash reported. And also in terms of other incomes, actually, these 2 major parts, one is The IPO subscription service charge, I. E, normally we charge HKD50 to HKD100 Per person, when each participant in the Hong Kong IPO. The other significant part is the foreign exchange You know the service charge. You know many of our clients trade in both in Hong Kong and So they do have the demand for their foreign exchange. These two parts, I think roughly will contribute 70% to 75% of our total asset income. The remaining part will belong to such as distribution income from our wealth management products and other for this conference. Thank you. So from our inception, we operated in a very crowded market, and we don't think the market is going to get less competitive going forward. And we indeed have seen some players offering 0 commissions, but we don't think the change in the competitive landscape will have downward pressure on our commission rate because in Hong Kong, there's the stamp duty, which is 10 bps. And for us, we offer 3 bps for Hong Kong trading and the marginal benefit for our clients for lowering our commission rate beyond that 3 bps is really loud. And for some of the Asia brokers, they already have Hong Kong licensed entities and besides we've also seen some other online brokers that want to enter the Hong Kong local market. So maybe I'll talk a little bit more about the online brokers due to the similarities in the business model. First of all, we definitely welcome online brokers to enter the Hong Kong market. With more of these players entering the Hong Kong market, we can educate the market together and help the online brokerage industry as a whole gain more industry recognition. Now there are 2 major types of online brokers that provide Hong Kong stock trading services. And the first type are the Hong Kong brokers They are licensed by SFC and hold SFC licenses and are regulated by the SFC and Futu is an example of this first type. And the second type are the online brokers that hold licenses of the 3rd dom file and is not regulated by the Hong Kong SSC. For example, a license from New Zealand, and this is the second type, using the 3rd party domicile license to provide trading in Hong Kong. And as we all know, the SSC has more stringent regulatory requirements than some other markets and are more prudent when given our licenses. So for the 2nd type of online brokers that we just mentioned, if they are to get a license in Hong Kong, They have solved the issue of regulatory incongruity in advance. And from the regulatory standpoint, SSP will not allow these online brokers to operate under a more relaxed regulatory framework. This means that once the online brokers hold licenses, They will need to migrate their existing clients and their existing businesses into the new entity that is regulated by the SFC. And if this issue cannot be solved very well, it is highly unlikely that they will get a license in Hong Kong. And I think that's probably why Another online brokerage peer of ours have been talking about getting the license in Hong Kong soon for the past 3 years, but still have not managed to get one. Because based on our understanding, under normal circumstances, there's no way that it would take so long to apply for a new Hong Kong brokerage license. And secondly, we don't think that the potential entry of Other online brokerage companies will have a negative impact on Futu's market share in Hong Kong. Well, the first reason is that Financial services, it really takes a big decision for our clients to choose the financial services platform. And there is the psychological barrier for clients to actually entrust their assets with a financial services platform. And for Futu, we have very outstanding shareholder base. We have shareholders like Tencent that really instilled trust into our brand. And on top of that, we have spent the past 8 years cultivating our brand image in Hong Kong, gaining user recognition and capturing the mind share of the Hong Kong local users. And for a financial services company that is new to Hong Kong, It will take a lot of time for them to get the same level of trust that we've been able to garner in the past 8 years. And secondly, for the newcomers, and they can only be competitive if they can offer very differentiated value proposition. Otherwise, it will be very difficult for them to replace the existing platforms. And Futu has built a very comprehensive business, that has huge entry barriers. And we've invested significantly into our account into our trading infrastructure, market information and services and social community, etcetera, and many of our product offerings really set industry standards. And the other online brokerage peers need to spend a lot of time to catch up to where we are today, let alone offering differentiated products and services. And on top of that, we have never stopped innovating. And the third point is the regulatory congruity issue that we just mentioned. And as we discussed earlier, and some of the online peers have already started And after they acquire the license, they probably will spend a lot of time Migrating their existing Hong Kong clients to this new entity that is heavily regulated by the SFC and has really stringent KYC and AML procedures. And this will be a very cumbersome process, definitely with some sort of attrition. And for the other party that has not operated in Hong Kong so far, after they get the license, they still need to kind of kick start a very stringent account opening KYC procedure under the supervision of SSC. And this will take time for them to adjust to and take time for them to get familiarized with. And fourthly, the margin financing business is highly contingent on the capital on the company's capital base, And the margin financing capital needs to be gradually accumulated through the long term collaboration with the commercial banks in Hong Kong. In Hong Kong, based on SSE's regulation, the margin financing balance that a broker can support is limited to 5x of its Capital based. So first of all, they need to inject a lot of capital into their licensed entity in Hong Kong to bolster their net assets. And on top of that, they need to secure additional financing from the commercial banks in Hong Kong. And from our experience, The Hong Kong commercial banks are generally very conservative, and they're only willing to offer additional credit lines after kind of a long So it's impractical for these newcomers to get to garner a lot of capital in a short period of time. And this will definitely put constraints on the margin financing business, especially the IPO margin financing business. And we realized that simply of our peers are trying to migrate their clients from the Interactive Broker accounts to their own account system. And if their own account system is under the supervision of SFC, the margin financing capital issue that we just mentioned will be further enhanced. The 5th point is that the Hong Kong Execution and clearing system need a lot of capital and time to invest, and the R and D takes a it's a very lengthy process. And Futu spent 8 years to construct a highly stable and scalable execution and clearing system with a 99.96% service availability rate. And this very advanced trading system has high entry barriers. And when the other brokers enter the Hong Kong market, in the short period of time, they probably need to rely on a third party vendor to provide this execution system, which means that the stability of this system will be outside of their control for a considerable amount of time. So this may lead to trade congestion issues, when there is extreme market volatility or when hot IPOs take place. So in the short term, it will be very difficult for them to match the client service and quality that Futu can provide. And the last point is I want to make is that we have never stopped innovating and progressing, And we still keep that Nathan mentality when we entered into the Hong Kong market. And we believe that additional competition in the Hong Kong market We'll push it to do better. Thank you. Thank you. Thank you. We have a question coming from the line of Ziyu Yao from CICC. Please go ahead. Thanks, management. This is Dewey from CICC. First of all, congrats to our exciting results. I see our existing business are well on track, and I was wondering if there is any possibility that we will apply for new Brokerage licenses to serve more customers in other areas or launch more trading products like Bitcoin for other digital currency? Thanks. Okay. Thank you, Zohu. Let me answer your first question. I will leave the second question to my colleagues, our Senior Vice President, Robin Xu, for More service and quarters in our pipelines. For the new license, actually, I think you're right. We are doing some preliminary studies in other international markets, in particular, in the ASEAN countries. Therefore, as Lee mentioned In the opening remarks, we do think Singapore is a very important gateway for which entering into the ASEAN market as a whole. But now it's doing a very preliminary stage. Also, we are doing some feasibility studies in other English language speaking country as well. So we are planning to launch crypto trading to our international clients in the second half of this year and also we'll plan to roll out more futures under the CME Futures. Thank you. Yes, thank you. Thank you. We have the next question. This is coming from the line of It's Zoe Song from Jefferies. Please go ahead. Hi, management. Thanks for taking my question. This is Zoe from Jefferies. Congratulations on the strong first quarter results. And I have a follow-up question on the digital currency. So regarding digital currency, like we've coined, we have noticed that the subsidiaries of China have announced that We are very much aware of the different regulatory frameworks under different jurisdictions. And actually, we're in the process is applying for digital currency related licenses in U. S, Singapore and Hong Kong. But what we know for sure is that We will not offer digital currency trading services to Mainland China users. Thank you. The next one comes from the line of Emma Xu from BOFA Securities. Please go ahead. So congratulations on the very strong results. I have two questions. The first question is about the margin financing business. After the capital after the Follow on offerings in Q1, Futu further in April, Futu further strengthened its KCL base. So will you try to increase the ratios of margin financing and security loan balance as a percentage of total client assets. And the second question is about client acquisition. You mentioned that 30% of the new client It's for organic growth. Then how about the other half? What's the acquisition channel for the other half of clients? Specifically, I'm paying more attention about the ESOP clients. How much does it contribute to the new clients? And how do you record it in those etop clients? Will you record them as You paying client when the stock is listed or you will wait and hear their stock are vested? Thank you. Thank you very much. I will answer the first question. I will leave the second question to my colleagues, Robin and Daniel. Number 1, I think we value our paying Thanks. From a DCF value perspective, I. E, we more care about their lifetime values rather than the near term P and L they can contribute in terms of our top lines or bottom lines. Therefore, I think We will not very aggressively encourage our clients to use the margin because margin financing involve very high risks. Therefore, I think in our mentality, investment education, how to let our investors know the risk is far more important our near term monetization. If you look at our margin balance financing balance versus our total client assets ratio, This ratio historically is in the range of 5% to 7%. I think definitely after we finish our Following placement, we do have more sufficient capitals to support our margin financing business and in particular, our IPO subscription service in Hong Kong. But we were not intentionally to push up our clients' margin usage unless they know the risks. Thank you. Hi, Emma. This is Daniel. I'll take your second question on client acquisition. So about 50% of our new paying clients are from organic growth, then about 15% are from ESOP and group account opening. And the rest 35% is roughly evenly split between online and offline advertising as well as the 3rd party channel partners. So definitely, we think that the high profile IPOs are conducive to our client acquisition, but it's very difficult for us to attribute certain client base to maybe 1 or 2 single IPOs, but we generally kind of observe an increase in uptick in our client acquisition before these IPOs take place, but it's very difficult to ascertain which clients come specifically for the IPOs. And for Kuaishou's case, like you mentioned, so for Kuaishou's employees that have stock options, Right now, they are not counted as our paying clients. Thank you. Thank you. As we do not have any further questions, I would like to hand the conference back to our host, Mr. Daniel Zhang. Please take over. Thank you, operator, and thank you all for joining the earnings call today. On behalf of the Futu management team,