Futu Holdings Ltd

F:6FHA

Earnings Call Analysis

Earnings Call Transcript 2024-Q1

[Operator]

Hello, ladies and gentlemen. Welcome to Futu Holdings First Quarter 2024 Earnings Conference Call. [Operator Instructions] Today's conference call is being recorded. If you have any objections, you may disconnect at this time.I'd 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, executive]

Thanks, operator, and thank you for joining us today to discuss our first quarter 2024 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 involving inherent risks and uncertainties. We caution you that a number of important factors could cause 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. With that, I will now turn the call over to Leaf. Leaf will make his comments in Chinese, and I will translate.

[Leaf Li, executive]

[Interpreted] Thank you all for joining our earnings call today. Bolstered by strong market performance and solid execution in new markets, we wrapped up the quarter with approximately 1.9 million paying clients, representing a 24% growth year-over-year.In the first quarter, we added 177,000 paying clients, which more than quadrupled from the year ago quarter, marking third highest quarterly growth in history. 3 months into the year, we have already achieved over 50% of our full year guidance of 350,000 net new paying clients.Given the year-to-date momentum, we would like to raise this guidance to 400,000 for now. Despite the rapid expansion of our client base, our quarterly paying client retention rate remained above 98%.Client acquisition in Hong Kong and Singapore both accelerated to double-digit sequential growth, yet their contribution to new paying clients doing to around one-third amidst strong triple-digit new paying client growth in other markets.In Japan, our continued focus on refining product experience and streamlining the account opening process, coupled with targeted marketing initiatives, led to robust growth in new paying clients and average client assets. In addition, our Moomoo app continues to garner the user interest in Japan with cumulative downloads reaching 1 million in May.In Malaysia, our industry-leading trading experience, rich market information and data, interactive social community, and superior brand equity led to an above expectation growth.Client engagement and trading velocity also surprised us on the upside. Within 6 weeks of our brokerage business launch in Malaysia, we attracted over 100,000 registered clients and became the most downloaded financial app.Though client acquisition decelerated into the second quarter, we still expect meaningful contribution from Malaysia for the rest of the year and are committed to defending and extending our market leadership.We have a rich pipeline of new products and features in all markets. In late March, we launched Japan equities trading in Japan and subsequently in Hong Kong and Singapore in April. We also intend to launch fractional shares trading, meet the savings account, margin trading, and mutual funds in Japan in the coming quarters.We'll also start offering crypto trading in Hong Kong and Singapore, and we expect much higher take rates than equities trading. In Australia, we recently launched fractional shares, options, and recurring investments for U.S. stock trading. In Canada, we introduced self-directed registered retirement savings plan, tax-free savings account, U.S. options trading, and will soon roll out Hong Kong stock trading.Total client assets increased by 11% year-over-year and 7% quarter-over-quarter to HK$518 billion. We continued to experience strong asset inflow across all markets, which more than offset the drag on clients' Hong Kong stock holdings from the market depreciation of several technology names.In Singapore, total client assets and average client assets recorded 25% and 15% sequential growth, respectively, driven by robust net asset inflow into equities and cash management products.Total trading volume rebounded substantially by 40% quarter-over-quarter to HK$1.3 trillion. In Hong Kong, trading volume grew by 18% sequentially to HK$ 280 billion. Clients showed heightened interest in technology and high dividend names as well as leveraged and inverse ETFs.High turnover of crypto and AI theme stocks helped U.S. stock trading volume jumped by 48% sequentially to HK$1 trillion. Margin financing and securities lending balance increased by 14% sequentially to a record high of HK$38 billion.Total client assets in Wealth Management were HK$64 billion, up 73% year-over-year and 11% quarter-over-quarter. In the first quarter, bond holdings increased by 21% sequentially, thanks to robust inflow in U.S. treasury bills. In Singapore, Wealth Management asset balance grew by 356% year-over-year and 37% quarter-over-quarter as money market funds continue to gain traction.To cater to inverse to demand for high dividend yield, we launched a fund portfolio with high dividend stable allocation strategy. At the quarter end, we have 430 IPO distribution in IR clients, up 22% year-over-year. Over 1,200 companies have set up enterprise accounts in our social community to interact with retail investors. Next, I'd like to invite our CFO, Arthur, to discuss our financial performance.

[Arthur Chen, executive]

Thank you, Leaf and Daniel. Please allow me to walk you through our financial performance in the first quarter. All the numbers are in Hong Kong Dollars unless otherwise noted.Total revenue was HK$2.6 billion, up 4% from HK$2.5 billion in the first quarter of 2023. Brokerage commission and handling charge income was HK$1.1 billion, up 20% Q-over-Q and largely flat year-over-year. With client trading interest pricing on AI and crypto-themed stocks with high stock price, the blended commission rate decreased from 8.8 basis points to 8.1 basis points due to our per share pricing model in the U.S.As a result, brokerage income grew at a slower rate than trading volume both Q-over-Q and the year-over-year. Interest income was HK$1.4 billion, up 5% year-over-year and 1% Q-over-Q. The year-over-year increase was mainly driven by higher margin financing income due to an increase in daily average margin balance and higher interest income from bank deposits.The Q-over-Q increase was mostly driven by higher interest income from bank deposits due to the increase in daily average idle cash balance. Other income was HK$156 million, up 24% year-over-year and 14% Q-over-Q. The year-over-year increase was primarily attributable to higher fund distribution income and the Q-over-Q increase was mainly driven by higher currency exchange income.Our total costs were HK$470 million, an increase of 62% from HK$291 million in the first quarter of 2023. Brokerage commission and handling charge expenses were HK$60 million, down 17% year-over-year and up 2% Q-over-Q. Brokerage expenses didn't move in tandem with brokerage income year-over-year, mainly due to cost savings from our U.S. self-clearing business.Expenses grew at a narrow margin net income sequentially due to a nonrecurring cost associated with sales clearing migration of Singapore stocks during the fourth quarter of 2023. Interest expenses were HK$313 million, up 139% year-over-year and a 16% Q-over-Q. The year-over-year increase was driven by higher interest expenses associated with our securities borrowing and lending business.The Q-over-Q increase was mostly due to similar reasons, partially offset by lower margin financing interest expenses. Processing and servicing costs were HK$97 million, up 11% year-over-year and down 6% Q-o-Q. The year-over-year increase was largely due to higher product service and the data transmission fees for new markets.The Q-over-Q decline was mainly driven by lower market information and the data fees as well as lower cloud service fees. As a result, total gross profit was HK$2.1 billion, a decrease of 4% from HK$2.2 billion in the first quarter of 2023. Gross margin was 81.9% as compared to 88.4% in the year ago quarter.Operating expenses were up 16% year-over-year and a 2% Q-over-Q to $930 million. R&D expenses were HK$336 million, down 5% year-over-year and 7% Q-over-Q. The year-over-year and Q-over-Q decrease was largely due to stricter cost control.Selling and marketing expenses were HK$293 million, up 107% year-over-year and 6% Q-over-Q. The increase was driven by our triple-digit year-over-year and the Q-over-Q growth in net new paying clients, partially offset by lower client acquisition costs.G&A expenses were HK$301 million, down 2% year-over-year and the 19% Q-over-Q. The year-over-year decrease was mainly due to lower professional service fees and the Q-over-Q decrease was due to stricter cost control. As a result, income from operations declined 15% year-over-year and that increased by 17% Q-o-Q to $1.2 billion.Operating margin declined to 46% from 56.2% in the first quarter of 2023, mostly due to higher marketing expenses. Our net income decreased by 13% year-over-year and increased by 18% Q-over-Q to HK$1 billion. Net income margin declined to 39.9% in the fourth quarter as compared to 47.7% in the same quarter last year. Our effective tax rate for the quarter was 15.2%.That concludes our prepared remarks. We'd now like to open the call to questions. Operator, please go ahead.

[Operator]

[Operator Instructions] Our first question comes from the line of Chiyao Huang from Morgan Stanley.

[Chiyao Huang, analyst]

So, I got 2 questions. First question is regarding the progress we are making in Japan in terms of the number of paying clients the pre-client AUM and also want to have more view on the conversion rate from the app user to paying clients.Is there any difference we're seeing in Japan right now compared to other international markets at a similar stage? So, wondering if management could give more color on that. Second question is regarding the -- into 2Q, we're seeing a pretty strong rebound in the China-related assets in Hong Kong and in the U.S. as well.So, I wonder what's the help we are seeing right now in terms of client trading activity and some inflows in the second quarter so far we're seeing?

[Arthur Chen, executive]

Thank you, Chiyao. I'll let my colleague, Daniel, to answer your first question, and I will address your second question sequentially. Thank you.

[Daniel Yuan, executive]

So, in Japan, we're seeing very meaningful growth in terms of new paying clients. We saw strong sequential growth in the first quarter and second quarter, quarter-to-date, we observed similar strong Q-on-Q momentum. And, in terms of client AUM, I think we're still in the early innings of attracting client assets, but we have seen across line cohorts that they continue to put assets on to our platform.And, in terms of conversion from users to paying clients, that conversion ratio has improved quarter-over-quarter, thanks to a better account opening process and with more financial products rolled out on our platform.But there's still a significant gap in comparison to other overseas markets, whether it's current percentages or when we first launched into that market. I think this is more the reason because of the power opening friction and the lack of comprehensive financial products. And as Leaf mentioned in his opening remarks, we have a very rich product pipeline coming up in Japan in the coming quarters. Thank you.Number one, definitely, we see a very strong momentum recovery in Hong Kong markets, which significantly helped our clients' asset inflows in Hong Kong and overall, in terms of trading volume, trading velocity, et cetera. As Leaf mentioned in the opening remarks, in the first quarter, in terms of the trading volume breakdown, the U.S. stock trading accounts for roughly over 75% of our total trading volume.And we do expect this ratio will become more healthy given the more contributions in Hong Kong stock in the second quarter. And number two is, in the first quarter, we recorded a very strong net asset inflows, which roughly over HK$35 million, thanks to a very strong inflow from our existing markets in Hong Kong and in Singapore, et cetera, also incremental contributions from new markets, such in Malaysia and Japan, et cetera.And we do believe such momentum remains in the second quarter to date. This will significantly help in terms of the client assets and the trading volume, et cetera. And thirdly, despite we already achieved over 170 fund accounts in the fourth quarter, partially due to some special reasons in Malaysia due to our grand opening in the first quarter.But we do think the overall momentum on absolute terms remain very strong despite we expect there can be some Q-over-Q decrease due to a very high base in the first quarter. Thank you.

[Operator]

[Operator Instructions] Our next question comes from the line of Katherine Lei from JPMorgan.

[Katherine Lei, analyst]

The first is about the Malaysia market. I would appreciate if management can give us some color on the Malaysia market. Like I heard that clients are very active in trading. Like is that one-off or event-driven or is that a persisting trend?The second question will be more on the commission rates. Do you think that we will see some sequential improvement in the sequential rate? How should we form our expectation?

[Daniel Yuan, executive]

Thank you, Katherine. Let me translate for myself for the second question first. I think the blended commission rate decrease was mainly due to our pricing model in the U.S. stock market, as we mentioned before. And quarter-to-date, we have seen the ratio has already become more stable, partially due to there were some high-value stocks, such a Avida, et cetera, in the U.S. will conduct stock split. So, this will alleviate the pricing pressure in the U.S.In terms of unit economics in Malaysia, so far, on a cohort basis, we have witnessed a very healthy organic growth in terms of Kuaishou inflow then clients trading velocity and also the trading volume, et cetera. It seems that all these metrics in Malaysia is well above the average situations of our overall overseas markets.Of course, it is maybe still too early to say, given that we just entered into Malaysia a couple of months ago, we will still keep closely monitoring. But having said that, we think the user behavior demonstrated so far is not just because of some one-off events. Thank you.

[Leaf Li, executive]

[Interpreted] So, we officially launched our brokerage business in Malaysia by the end of February, and we've experienced very rapid growth. So, in the first quarter, Malaysia contributed about one-third of our new paying clients. And within 49 days of official brokerage business launch, we achieved #1 in total cumulative downloads in Malaysia.And, I think the reason why we can grow so quickly in Malaysia can be attributed to several factors. First of all, we were already the biggest online broker in Singapore when we entered in Malaysia, and that brought us a lot of brand recognition.And secondly, we simply just offer the best product in Malaysia, one-stop platform where you can invest in Malaysia equity, U.S. equity, and we have free market data and information, which are all industry leading.And last but not least, we have also accumulated a large number of users before our official brokerage business launch, and we were able to convert a very meaningful chunk of those users. I think the first quarter growth was above our expectations. But going to the second quarter, we believe the contribution of Malaysia will come down sequentially.I mean that is because there is still room for improvement in terms of the level of automation in client account opening, asset inflow and outflow in operations to [indiscernible]. So, in order to ensure that our clients have a very smooth experience and to increase our operational efficiency, I think we dynamically adjust our client acquisition pace and so as to better inform our growth in Malaysia.And, in terms of our client profile, most of our clients in Malaysia are male and have higher income. And in terms of ethnicity, a lot of them are the Chinese population. I think that partly explains the high trading turnover and relatively higher average asset than we expected, which will probably lead to favorable payback period in Malaysia. Thank you.

[Operator]

[Operator Instructions] I'm showing no further questions. I'll now turn the conference back to Mr. Daniel Yuan for closing comments.

[Daniel Yuan, executive]

That concludes our call today. On behalf of the Futu Management Team, I would like to thank you for joining us today. 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 concludes today's conference call. Thank you for participating. You may now disconnect.