Earnings Call: Q2 2021

Aug 31, 2021

Earnings release

Hello, ladies and gentlemen. Welcome to Futu Holdings Second Quarter 2021 Conference Call. At this time, all participants are in a listen only mode. After the management's prepared remarks, there will be a Q and 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 and Head of IR at Futu. Please go ahead, sir. Thanks, operator, and thank you for joining us today to discuss our Q2 21 Earnings Results. Joining me on the call today are Mr. Lei Fei, 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 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 achieved the milestone of 1,000,000 pain plans as of the end of second quarter, translating into a 2 30% year over year growth. Net addition was 211,000, our 2nd best quarter in history. Our relentless pursuit of premier user experience and brand image rewarded us with yet another quarter of rapid client base expansion, Over 50% organically acquired paying clients and a high paying client retention rate of 97.8%. Going forward, our key growth strategies would be to defend and extend our leading position in Hong Kong, Further take market share in Singapore and drive self clearing in the U. S. To improve monetization and operational flexibility. In the Q2, Singapore contributed nearly half of our new paying clients. Singapore represents a blue ocean opportunity We will leverage marketing and word-of-mouth referral to further capture user mind share. In the U. S, our self clearing initiatives reported accelerated progress As we now have migrated about 350 U. S. Docs to our proprietary clearing systems, we are targeting to self clear 50% of U. S. Docs by the end of this year. Our total client assets were HKD503 1,000,000,000 at quarter end, representing 250 Average client assets came down sequentially to HKD503,000 as paying client acquisition in new markets picked up and dragged average balance. Total trading volume was up 100 and percent year over year to HKD1.3 trillion dollars of which U. S. Trading constituted approximately 64%. Trading volume came down meaningfully from the Q1 due to a much lower turnover rate across different trading markets and client cohorts. We have seen our clients stay on the sidelines amid market uncertainties, and we expect our trading volume growth in the coming quarters to be driven mostly by expansion in client counts in Our wealth management business, MoneyPlus, has been relatively to the market downturn. Although the Hong Kong IPO at the end of the quarter took away some of the assets accumulated over the quarter, And we expect steady asset balance growth in coming quarters. As of June 30, over 74,000 clients held wealth management positions And total client assets in Wealth Management were HKD13.8 billion, up 59% year over year and 5% quarter over quarter. MoneyPlus established new partnerships with 7 reputable asset managers in the quarter, including Goldman Sachs, UBS and Principal. We also became the exclusive distributor of China AMC's Select Greater China Technology Fund, the only China technology focused mutual fund in Hong Kong. We continue to innovate on product features. We added fund portfolio rebalancing function and upgraded the functionality of money market funds, where clients can now opt to automatically subscribe in the De Money Market Fund based on their illogash and margin balance position. Our enterprise business, Futu IME, has 186 IPO and IR plans as well as 263 ESOP Solutions clients as of quarter end, representing 191% and 100 and to 3% year over year growth, respectively. We continue to enhance the value proposition of our ePaw business by providing an end to end one stop solution and various value added services for the management team and employees for their corporate clients. Our experience in handling complicated ESOP granting at scale of different geographies helps us continue to win over large scale corporate clients. Despite low paying client attrition, We're encouraged to see robust user engagement data as average DAZ remained above 1,000,000 and daily average user time spent hovered around 30 minutes on each trading In an effort to drive user engagement, we continue to enrich content in our social community by attracting different stakeholders and improved content recommendation. As of quarter end, over 600 companies have set up enterprise accounts in our social community to interact with retail investors, providing our users invaluable data to facilitate investment decision making. Next, I'd like to invite our CFO, Arthur, to discuss our financial performance. Next, Li, Ben Daniel, Please allow me to walk you through our financial performance in the Q2. All numbers are in Hong Kong dollar unless otherwise noted. Total revenue was RMB1.78 billion, an increase of 129% from the Q2 of 2020 a decrease of 28% sequentially. Brokerage commission and handling charge income was RMB798,000,000, Up 95% year over year and down 40% in Q on Q. The Q on Q decline was mainly due to a sharp drop in trading turnover amidst dampened market sentiment from about 6x in the 1st quarter to 3x in the 2nd quarter to be specific. This was partially offset Higher client assets and a slightly sequential uptick in blended commission rate to 6.1 basis points. Interest income was RMB610 1,000,000, an increase of 194% year over year and a decrease of 7% Q on Q. The year over year increase in interest income was mainly driven by higher margin financing balance, higher security borrowing and the lending service income as well as higher IPO financing income. The modest quarterly decline can be mainly attributed to a reduction in security borrowing income As the market value of U. S. Stock borrowing and the borrowing rate both dropped sequentially. Other income was RMB169 1,000,000, of 141% year over year and down 24% Q on Q. The year over year growth and the Q on Q decline can both be attributed to changes in In terms of costs, our total cost was RMB279 1,000,000, an increase of 81% from the same quarter last year and a decrease of 37 from last quarter. Mortgage commission and handling charge expenses was RMB145 1,000,000, an increase of 89% year over year. This increase was roughly in line with our changes of our brokerage commission and handling charge income. Interest income was RMB 80,000,000, up 90 8% year over year. The growth was primarily due to number 1, higher costs associated with our security And the lending business and the number 2, higher margin financing interest expenses driven by higher margin financing balance, partially offset by lower cost of funding. Processing and servicing costs were RMB54 1,000,000, up 48% year over year. The increase was primarily due to an increase in crowded service fee to process higher number of concurrent trades. As a result, total gross profit was RMB1.3 billion, an increase of 143 percent from RMB534 1,000,000 in the same period in 2020. Gross profit margin increased from 77.6% in the Q2 of 2020 to 82.3% this quarter, thanks to higher operating leverage as a result of our larger business scale. Total operating expenses was up 145 percent year over year and 32% Q on Q to RMB647 1,000,000, over 40% of which was related to our international initiatives in Singapore and the U. S. Markets. R and D expenses was RMB173 1,000,000, an increase of 48% year over year and then 26% Q on Q, Roughly in line with our R and D headcount increase, we continue to invest in our U. S. Clearing capabilities and dedicate around 40% of our R and D personnel to further development in Singapore and in the U. S. To drive a smoother and customized Order experience for local users. Selling and marketing expenses was RMB377,000,000, up 2.92% year over year and 37% 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. In the Q2 of 2021, over half our selling and marketing expenses devote to the overseas markets. G and A expenses were RMB97 1,000,000, an increase of 91% year over year and a 24 to 14.5% in the 2nd quarter since our total tax credit arising from accumulated loss in the Mainland business has been fully utilized so far and our net revenue derived from our U. S. Stock trading decline in the Q2. Going forward, we do expect our effective tax rate to be in the range of 12% to 14%. As a result, our net income for the quarter increased by 126% year over year and decreased by 54% Q on Q to RMB 534,000,000. That concludes our prepared remarks. We now like to open the call to questions. Operator, please go ahead. Thank Your first question comes from Katherine Liu of Morgan Stanley. Please ask your question. I'll translate for myself. So I have two questions. First is, can the management please give us some guidance in terms of the 3rd quarter to date results, including client acquisition pace, AUM per capita turnover velocity, client acquisition cost and maybe some operating expenses growth rate? And second, in light of the regulatory uncertainties regarding value structured companies and ADRs, Does the company have any plans regarding Hong Kong listing? Thank you. Thank you, Katherine. This is Arthur. I will take these two questions. First of all, just quarter to date, I just want to share some color. Definitely, I think the market fluctuations Today, we have some negative impacts on our average client assets. So far, roughly, our Average car assets will be down around in the range of 10% to 20%, mainly attributed to the market to market loss. But we are very confident because even quarter to date, almost every day, we still see Meaningful net asset inflows in terms of the wealth accumulations in Futu platforms. Therefore, I do think as the market back to normal, these market loss or gain will be come To the average numbers. And in terms of the client trading velocity, we do expect trading velocity Have some rebound in July August, given the market, Especially, as these tech stocks have meaningful setbacks, we do see some more competition from the retail investors. And unlike the situation in 2nd quarter, meaning that set on the sidelines, We do see some participations in the Q3. So based on The current run rate, I would expect in terms of top lines, we may see some sequential Q on Q increase in the Q3 compared with the 2nd quarter. In terms of the client acquisition cost, I think on the absolute amount levels, this marketing campaign spending will be roughly in line with what we did In the second quarter, but definitely, the client acquisition speed will slow down due to the market conditions. So this will affect The denominator numbers and we will let our CAC numbers have certain increase in the Q1 compared with the Q2. For your second question, I think number 1, Our BIA structure is slightly different for many compared with many Chinese ADR companies Because most of our revenue now derived from the offshore. Essentially, we do not generate any revenues from our BIE structures. So even there will be some new regulations on the BIA structure, I do not expect that it will have some And definitely, we have noticed some recent trends in the capital markets, and we are actively conducting quality research and evaluation in this regard. We will make a very comprehensive assessment to ensure that decision to maximize our shareholders' best long term interest is made. Thank you. Your next question comes from Ethan Wang from CLSA. Please ask your question. Okay. So thank you, management. I have two questions surrounding the Chinese ADR division risk. The first one is wondering whether management can share some color on the current percentage of Chinese ADRs As a percentage of the total trading volume of the U. S. Stocks on Futu? And the second one is, if the risk of delisting for the Chinese ADRs really happens, then these companies may Very likely to convert the Hong Kong listings into primary ones. That means they will be included in a connect scheme, Which means that Chinese investor can trade those stocks through online China brokers. Does that mean a very big risk for a firm? So how does management look at this? Thank you. Okay. Thank you. I will take the first question and then we'll leave My colleagues, Robin and Elise for the second questions. In terms of our current U. S. Store trading, Essentially, ADR just accounts for a very small part. If we do some backtesting, around 15% Yes. We think the return of China ADR's back to Hong Kong could be a structural trend, although we don't really take a stance on how the regulations will evolve. And the Hong Kong IPOs Generally, we have very high monetization potentials and we generate a pretty sizable percentage of our revenue from the IPO subscription And margin financing interest and also in Hong Kong, there's more friendly trading hours for our clients. And also just to add on To your other point about converting to primary listing, well, we don't think there's the onshore brokers will necessarily It poses a great threat to our business because a lot of the popular Chinese companies, first on Hong Kong right now, Already accessible to our Mainland Chinese investors through Stock Connect, for example, Tencent. But some of these large tech companies They'll account for a majority of our asset balance in Hong Kong stocks. And in comparison to trading through a Stock Connect, Trading directly in the Hong Kong market offers more flexible and more favorable trading hours and trading time. So like if Mainland China has a public holiday, it does not affect your trading hours in Hong Kong. And also there is a lot more flexibility around margin financing and there is a wider selection of stocks that you can invest in. So we don't believe that a number of Chinese companies converting from secondary listing to primary listing will change our competitive edge in market. Sure. Got it. That's it. Thank you. We also have a very differentiated client cohort As compared to some of the onshore brokers, so we don't think our competitive advantage will be diluted, should this circumstance actually Your next question comes from the line of Zoe Zhang from Jefferies. Please ask your question. Hi, management. Thanks for taking my question. This is Zoe from Jefferies, and I have two questions. My first question is regarding the tax rate. As we have noted that the effective tax rate for Q2 was 14.5%, which is much higher than the previous quarters. Wondering what's the reason for the increase and how should we estimate this number going forward? And my second question is, we know that Hong Kong Exchange plans to adopt a T plus To our settlement circle, instead of the current T Class V in the Q1 2022, I'm wondering how should we think about Thank you, Zoe. I will answer the first question and then we'll leave the second question to Lee. Actually, I mentioned this in our open remarks. You're right, our effective tax rate increased from 9% the Q1 to 14.5% in the 2nd quarter. The reason actually comes from 2 quotes. Number 1 is our tax credit Arranging from historical accumulated loss in the China operation has been fully utilized. So this is a permanent effect. And secondly is our net revenue derived from our U. S. Stock trading belongs to these mainland individuals. Actually, we can make offshore claims But their U. S. Stock trading volume in the 2nd quarter declined. Therefore, we have some temporary impact In the Q2, arriving from the 2nd regions. Going forward, we expect our effective tax rate will be in the range of 12% to 14%. Thank you. Sure. So the IPO financing income accounted for about 4% of our revenue in the first half of this year and Contribution was less than 6% in 2020. So if we are to assume that the settlement period goes from T plus 5 to T plus 2, From a static point of view, this will have only a 2% to 3% negative impact on our top line, which we think is manageable. Secondly, a lot of the IPO subscription periods So we believe some of the needs for IPO subscription have been subdued under the current kind of Regulations and we think this could change after the reform. So especially when the markets are disciplined really well and there are a lot of IPOs happening at the same time, Having a T plus 2 settlement period can increase the capital efficiency of our clients and therefore, we potentially help increase Their engagement in this IPO subscription process. And also, we understand that the regulations are not only Shortening the settlement period, but also may touch on avoiding the retail clients from subscribing to IPOs through multiple brokers. And we believe that the IPO financing income makes up a very significant income for a lot of the mid to small sized brokers. So this policy could actually contribute to industry consolidation and direct a lot of these retail investors to platforms like Futu that has better user experience and more capital for them to use during the IPO. Your next question comes from Hanyang Wang from 86 Research. Please ask your question. I will translate my questions. Thanks, management, for taking my questions. Congratulations on another great quarter. I have a follow-up question on the IPO business. So will the uncertainties for China ADR IPO as well as the recent slowdown for Hong Kong Thank you. Let me take this question. I think, Number 1, the slowdown of Chinese companies overseas ADR IPO is just a temporary situation. We do understand many Chinese companies In the pipelines, they are waiting for more clarifications in terms of the regulations from China and Also from the U. S. Regulators down the road. Therefore, I think the impact will be very short term. And having said that, we also see, as Lee mentioned before, we see more and more U. S.-listed companies and also Pre IPO companies will consider Hong Kong as their primary listing stage rather than U. S. In the past. We do have a very strong edge in Hong Kong market, given Hong Kong is our own base. Therefore, We do think client acquisition through the ESOP, through the IPO will continue. Just give you some break In terms of our current client acquisition channels, organic already accounts for over 15%. If we just calculate ESOP channel combined with this group account opening, we will just account for around 10% about our total new paying clients in house every quarter. So I think the impact is still manageable. We have another question from the line of Katherine Liu from Morgan Stanley. Please ask your question. I'll translate for myself. Just wondering, I understand that you're only in a new market, initial monetization may be For less importance versus client market share, but then just wondering has the management So there is increase in the monetization for the Singapore market. Whether it will be some guidance from companies or some hints from companies or it will be a natural result as clients' assets increase on the platform? Thank you. Sure, Katherine. Let me give you some In terms of our client profile in Singapore, I think in terms of age and their trading velocity, this population is Very similar to what we see in Hong Kong markets. The average age is around the 30 years old And they do trade a lot, particularly for the U. S. Markets. Now the average asset in Singapore is around the SGD6,000 Of course, it is relatively low compared with the equity assets what we witnessed in China and in Hong Kong. But currently, I think if we look at the 4 fold basis, the new clients we acquired In March April, their core assets already almost doubled in the past 4 to 5 months. So back to your question. I think number 1, definitely we think the nature of our business is just more like a loaner snowball. We are very happy to go along with our clients in their investment journeys. We believe as times goes by, Their average assets will become bigger and bigger. Number 2, definitely, we will have a more service offering, More product offerings in the pipeline. Hopefully, we will launch more business in the coming two quarters. For instance, we will provide Singapore clients to participate in the Hong Kong IPO retail tranche. And not to mention, we will also Expense, our wealth management product offerings, currently just offering to the mainland and Hong Kong people to the Singapore local residents as well. Therefore, I think as we provide more and more products and service, we will find more monetization areas to enhance our ARPU. As there are no further questions at this time, I would now like to hand the conference back to Daniel for closing remarks. That concludes our call today. On behalf of the Futu management team, I would like to thank you for joining us today. Thank you. That does conclude our conference for today. Thank you for participating. You may now all disconnect.