Futu Holdings Ltd

F:6FHA

Earnings Call Transcript 2024-Q3

[Operator]

Hello, ladies and gentlemen. Welcome to Futu Holdings Third Quarter 2024 Earnings Conference Call. [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, Head of Strategy and IR at Futu. Please go ahead, sir.

[Daniel Yuan, executive]

Thanks, operator, and thank you for joining us today to discuss our third 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 Xiu, 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 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. 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]

[Foreign Language]

[Daniel Yuan, executive]

[Interpreted] Thank you all for joining our earnings call today. We wrapped up the quarter with 154,000 net new paying clients up 138% year-over-year and flattish quarter-over-quarter. Our total paying clients reached approximately 2.2 million, up 33% year-over-year. Three quarters into 2024, we have acquired 487,000 paying clients, and we expect full year growth to comfortably exceed our guidance of 550,000 thanks to resilient growth in established markets and strong momentum in newer ones.

[Leaf Li, executive]

[Foreign Language]

[Daniel Yuan, executive]

[Interpreted] As we continue to iterate on various client acquisition strategies and launched effective campaigns and elevated market sentiment, client acquisition accelerated in Hong Kong and Singapore which collectively contributed to over 1/3 of new paying clients. Three quarters in a row, Malaysia remains the top contributor of new paying clients among our 7 markets.

We're committed to further elevating our brand image in Malaysia, and we've broadened product offerings to enhance our value proposition as a one-stop investment platform. In Japan, we made steady progress on client acquisition despite doing lay interest in Japan equities among retail investors amid market pullback in the third quarter.

[Leaf Li, executive]

[Foreign Language]

[Daniel Yuan, executive]

In terms of new product offerings, we rolled out U.S. stock dividend reinvestment plan in Hong Kong. We launched NISA savings account and mutual funds in Japan and recently supported U.S. margin trading and Japan options trading which started to gain decent traction among our clients. In Malaysia, we've rolled out Ring Aid and USD-denominated money market funds. We also became the first broker in Malaysia to offer U.S. options trading.

[Leaf Li, executive]

[Foreign Language]

[Daniel Yuan, executive]

[Interpreted] Total client assets grew 48% year-over-year and 20% quarter-over-quarter to HKD 693 billion. The sequential increase was due to strong net asset inflow across markets and to a greater extent, the appreciation of client stock holdings amid China equity search towards quarter end. In Singapore, total and average client assets grew by 18% and 10% quarter-over-quarter driven by robust net asset inflow and favorable market movements.

U.S., Canada and Australia all recorded double-digit sequential growth in average client assets for the third consecutive quarter. In the third quarter, our clients maintained their risk call mode as evidenced by a single-digit sequential growth in daily average margin balance. Sharp market movements in September prompted some clients take profit. As a result, margin financing and securities lending balance as of quarter end slipped by 7% to HKD 41 billion.

[Leaf Li, executive]

[Foreign Language]

[Daniel Yuan, executive]

[Interpreted] Total trading volume grew by 17% quarter-over-quarter to HKD 1.9 trillion, of which U.S. stock trading volume outpaced the overall growth by rising 23% sequentially to HKD 1.53 trillion. The growth in U.S. operating was fueled by elevated trading interest in technology stocks and leveraged ETFs amid heightened volatility in August. Despite sluggish sentiments and rather muted trading activities in July and August, our clients quickly picked up the momentum of China equities in September.

Overall, Hong Kong stock trading volumes slipped by 3% quarter-over-quarter to HKD 348 billion. Notably, during the week of September 23, Hong Kong stock trading volume surged by 267% week-over-week. And together with China ADRs contributed to over half of our trading volume for the week.

[Leaf Li, executive]

[Foreign Language]

[Daniel Yuan, executive]

[Interpreted] Wealth Management recorded another quarter of strong growth on the back of enticing yields of money market funds and fixed income funds. As of quarter end, total client assets grew 87% year-over-year and 22% quarter-over-quarter to HKD 97 billion. Around 27% of our paying clients held wealth management products up from 25% in the second quarter. To cater to client demand for asset allocation, we launched ETF-based robo-advisory service in Hong Kong and Singapore.

[Leaf Li, executive]

[Foreign Language]

[Daniel Yuan, executive]

[Interpreted] We have 461 IPO distribution in our clients, up 17.9% year-over-year. We underwrote the 3 largest Hong Kong IPOs in the first 3 quarters of 2024.

[Leaf Li, executive]

[Foreign Language]

[Daniel Yuan, executive]

[Interpreted] 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 third quarter. All the numbers are in Hong Kong dollar unless otherwise noted. Total revenue was HKD 3.4 billion, up 30% from HKD 2.7 billion in the third quarter of 2023. Brokerage commission and handling charge income was HKD 1.5 billion up 52% year-over-year and 11% Q-over-Q.

The increase was mainly driven by a 75% year-over-year and 17% Q-over-Q growth in total trading volume. Partially offset by the decline in blended commission rate as our clients gravitate towards higher-priced stocks. Our blended commission rate went down from 8.5 basis points to 8 basis points Q-over-Q.

Interest income was HKD 1.7 billion, up 13% year-over-year and 7% Q-over-Q, the year-over-year increase was mainly driven by higher margin financing income due to increase in daily average margin balance and higher interest income from security borrowing and the lending business. The Q-over-Q increase was mainly driven by the growth in bank deposit interest income and margin financing income.

Other income was HKD 209 million, up 52% year-over-year and 30% Q-over-Q. The year-over-year and Q-over-Q increase was both primarily attributable to higher fund distribution income and higher currency exchange income. Our total cost was HKD 625 million, an increase of 43% from HKD 437 million in the third quarter of 2023. Brokerage commission and handling charge expenses were HKD 82 million, up 30% year-over-year. Brokerage expenses grew by a narrow margin than brokerage income year-over-year, mainly due to cost savings from our U.S. sales clearing business.

Interest expenses was HKD 414 million, up 43% year-over-year and 10% Q-o-Q. The year-over-year and Q-over-Q increase was mainly driven by higher interest expenses associated with our security borrowing and the lending business. Processing and servicing costs were HKD 130 million, up 51% year-over-year and 19% Q-over-Q, the year-over-year was mainly driven by higher product service fee and the data transmission fees as a result of growing business scale.

As a result, total gross profit was HKD 2.8 billion, an increase of 27% from HKD 2.2 billion in the third quarter of 2023. Gross margin was 81.8% as compared to 83.5% in the year ago quarter. Operating expenses went up 21% year-over-year and a flattish Q-over-Q to HKD 1.1 billion. R&D expenses were HKD 385 million, up 7% year-over-year and 3% Q-o-Q. The year-over-year and Q-over-Q increase was mainly driven by increase in R&D headcount to support new products and new markets.

Selling and marketing expenses were HKD 314 million, up 49% year-over-year and down 7% Q-over-Q. The year-over-year increase was mainly driven by a triple-digit year-over-year growth in new paying clients, partially offset by lower client acquisition costs. The Q-over-Q decline was mainly due to improved efficiency in customer acquisition. G&A expenses were HKD 381 million, up 18% year-over-year and 5% Q-over-Q. The year-over-year and Q-over-Q increase was primarily due to an increase in headcount for general and administrative personnel.

As a result, income from operations increased by 31% year-over-year and 17% year-over-year Q-over-Q to HKD 1.7 billion. Operating margin increased to 50.4% from 49.8% in the third quarter of 2023. Our net income increased by 21% year-over-year and 9.1% Q-over-Q to HKD 1.3 billion. Net income margin declined to 38.4% in the third quarter as compared to 41.2% in the same quarter last year.

Lower net income margin was mainly due to the unrealized foreign exchange loss from the appreciation of RMB in the third quarter. Our effective tax rate for the quarter was 15.3%, in addition, we are pleased to announce that our Board of Directors approved a special cash dividend of USD 0.25 per ordinary share or USD 2 per ADS to holders of ordinary shares and holders of ADS of record as of the close of business on December 6, 2024.

That concludes our prepared remarks. We now like to open the call to questions. Operator, please go ahead.

[Operator]

[Operator Instructions] And the first question comes from the line of Cindy Wang from China Renaissance.

[Yun-Yin Wang, analyst]

Okay. [Foreign Language] I have 2 questions here. First, since the China assets rose in -- since the end of September. So based on current run rate in fourth quarter, can you give us some color on the Hong Kong up trading volume and ADR trading volume as a percentage of your total trading volume. And would that help your overall blended commission rate in the fourth quarter? And also the new customer acquisition in Hong Kong?

Second question is related to crypto. Can you give us some color on the crypto development in third quarter? And will the Bitcoin price really since October would help your overall transitional amount and the new paying clients? And also, could you give us update for the VATP license in Hong Kong?

[Arthur Chen, executive]

Thank you, Cindy. Let me answer your second question about crypto, and I will leave the first question to my colleague, Daniel. [Foreign Language]

In terms of the updates VATP license, we are still in the process of being reviewed by the regulators in terms of some on-site visits and for their inquiries. Hopefully, we can give the market some update in the near future.

And as Li mentioned in the opening remarks, we have already launched our crypto business in the third quarter in Hong Kong. Given the recent data, we think the penetration of the users and also the trading volumes pick up very, very meaningfully. Now I think the daily average trading volumes on the crypto assets in Hong Kong was in the range of USD 10 million to USD 20 million every day.

And I do think the penetration and the trading volume will continue to keep current momentum. And considering the recent rallies on the digital assets, it will definitely give us positive help in our new client acquisitions in Hong Kong recently.

[Daniel Yuan, executive]

[Foreign Language]

So in late September, early October, the trading volume and the percentage of trading volumes of Hong Kong stocks and China ADRs experienced a rapid search, and as Li mentioned in his opening remarks, the trading volume contribution of Hong Kong stocks and China ADRs altogether exceeded over 50% at some point. And later on, as a lot of China assets experienced pullback, both numbers experienced some sequential decrease. But overall, it is still much stronger than what we've seen in the third quarter.

So in the first -- in the fourth quarter so far, the U.S. equities have performed very well, especially around the U.S. election. Some of the technology names that our clients are particularly fond of experienced rapid surges. So overall, in the fourth quarter, we have seen a very meaningful sequential increase in our U.S. stock trading volume. And that's where the blended commission rate as you are aware, there are a number of factors that affect our blended commission rate.

In the fourth quarter so far, we have seen a mild pullback in the commission rate, mostly because the trading volume increase of our cash equities increased at a faster pace than derivatives, which brought a slight decline in blended commission rate. And in terms of client acquisition, quarter-to-date, we have seen an increase in our new paying clients.

And that increase is primarily attributable to our Hong Kong client acquisition. Mostly because the Hong Kong stocks and China ADRs performed very well in October -- in early October and have experienced continued volatility, which helped with client acquisition.

[Operator]

And the next question comes from the line of Chiyao Huang from MS.

[Chiyao Huang, analyst]

[Foreign Language]

So I got 2 questions. One is about the thinking around the special dividend, especially how to put that into context with the growth potential in the overseas market and also the related investment in these markets. And will we have a more recurring shareholder return plans in the next, say, 2 to 3 years?

Second question is on the sales and marketing expense. So just wondering what portion of sales and marketing expense should be more fixed in nature and what portion should be more variable and depending on the client acquisition number. So what should we expect for the fixed budget to grow in 2025, given our plans in the different overseas markets?

[Arthur Chen, executive]

Thank you, Chiyao Let me answer your first question about the special dividend. And I also will leave the second question to Daniel. [Foreign Language] As you may be aware, this year, in particular, the third quarter is a very special moment for Futu. A couple of weeks ago, we just celebrated our 12th anniversary of Futu. And this is also the fifth annual rate since the inception of our IPO in 2019. We very pay attention to the shareholder reward and the shareholder values.

Since 2021, we have set a series of share repurchase programs to demonstrate our commitment to the shareholder values. Considering this year is the fifth anniversary of our listing, we want to take this opportunity to express the gratitude to our long-term shareholders in the past. This is the major rationale for this special cash dividend payout and the total size for this cash dividend amounting to USD 280 million, which accounts to 7.8% of total net equities at the end of the third quarter.

Considering our balance sheet and also our cash on hand, we think this size is appropriate, and there will be no any negative implications to our client acquisitions, our current operations afterwards.

As to whether we will set up a more visible dividend payout policies, we will make the revisit in next years after taking into account the market conditions and our future business development. Thank you very much.

[Daniel Yuan, executive]

[Foreign Language] So among our sales and marketing expense, over 50% is salary related, which can be interpreted as more fixed in nature, and the rest is marketing related. And as we've passed the initial rapid expansion phase in a couple of new markets this year, and as we have no imminent plans to launch in any new markets next year, so overall, from a headcount perspective, I think we'll be relatively disciplined next year.

And the marketing expense will depend on a variety of external factors. So in our fourth quarter earnings call in March next year, we'll give out more guidance. Thank you.

[Operator]

And the next question comes from the line of You Fan from CICC.

[You Fan, analyst]

[Foreign Language] This is You Fan from CICC. And I have 2 questions here. The first one is regarding the AUM breakdown. How much is from the client net asset inflow and how much from the market-to-market appreciation? And what's the regional breakdown of the client assets.

The second question is about the breakdown of the current interest income. And also, would you please share more color on the impact of the interest rate cut on our net interest income.

[Arthur Chen, executive]

I will answer your second question about the interest income breakdown, and I will leave the first question to Daniel. [Foreign Language] In terms of the interest income breakdowns, the structure is almost similar to the patterns in the second quarters. The interest income from our idle cash roughly accounts for 40% to 45% of our total interest income. And the remaining part mainly goes to the margin financing and the store borrowing lending, et cetera. There's no update in terms of the sensitivity implications from the Fed rate cut.

In the third quarter, what we observed is that given a lot of clients locking their profit in the third quarter and the absolute amount coming from the idle cash become bigger, which partially offset the negative implications of the rate cut in the U.S.

[Daniel Yuan, executive]

[Foreign Language] So in terms of our client assets growth in the quarter, over half of that comes from market appreciation of our client assets, especially towards the quarter end when China equities performed exceptionally well. So in the third quarter, overall net asset inflow remained very robust. So the number trended down a bit sequentially given the high base in the second quarter, but still well exceeded the first quarter numbers.

And in terms of the breakdown between different geographies, Hong Kong market still contributed the majority of our net asset inflow which is followed by Singapore. And 3 quarters in a row, we have seen overseas markets contributed to over HKD 10 billion in net asset inflow and we are very optimistic about the sustainability of net asset inflow from overseas markets.

[Operator]

And the next question comes from the line of Charles Zhou from UBS.

[Cheng Zhou, analyst]

[Foreign Language] So first of all, congratulations to the management. I think it's a very solid set of results. I have a follow-up question regarding the special dividend. I think we know the shareholders, right? So you have the buyback and also the dividend. So what's the rationale behind of giving the dividend now? And how do you see -- so do you prefer a buyback or dividend going forward? And what factors do you consider when you determine the buyback or a dividend? And what do you feel the investor will prefer currently?

My second question is that compared with the Visible Alpha consensus, we are glad to see the top line is a 4% beat, but net profit is just largely in line. We also noticed there's one item of other costs and loss of HKD 131.4 million, which is not small. So for management, so would you please clarify so what is -- could you please clarify for this item? And would this also affect your net profit going forward?

[Arthur Chen, executive]

Thanks, Charles. I will take these 2 questions. [Foreign Language] Regarding the special dividend, actually, we will use a combination of share buyback and also cash dividends. When we touch base with our investors, we do notice they're specific group of the potential investors do care the cash dividend, which gives more visibilities of the cash inflows.

So going forward, actually, we will take into account the different demand from different shareholders in order to demonstrate our commitment to create the shareholder value to all of our shareholders.

Then regarding the breakdown of others, the nature behind that is mainly due to the unrealized foreign exchange loss arising from the RMB appreciation versus U.S. dollars and also the fluctuations of Singapore dollars versus the U.S. dollars, both of which are all noncash items.

So if we -- judging by the current FX rate, the majority part of the others in the third quarter will be reversed in the fourth quarter. So if we take this -- the noise from the operations part, just focusing our key operating profit and also the top line. I think the growth -- the trend between the top line and the operating profit is almost in line. Thank you very much.

[Operator]

And the next question comes from the line of Emma Xu from Bank of America Securities.

[Emma Xu, analyst]

[Foreign Language] So I have 2 questions. The first question is about the strategies in your major markets. So you mentioned that you don't have plans for new markets next year. So probably we'll focus on existing markets, Hong Kong, Singapore and Malaysia are doing well. And this quarter, you also emphasize that U.S., Canada and Australia's average client asset all recorded double-digit sequential growth for 3 consecutive quarters.

So what have you changed to the strategies in this major market so that you see the improvement in the client quality or is it major driven by the market appreciation, especially in the U.S. market?

And the second question is that there are a lot of macro events recently, including the Fed rate cut, the numerous policies from China and the U.S. election. So do you see some meaningful changes in investors trading behavior and asset allocation.

[Daniel Yuan, executive]

[Foreign Language]

[Interpreted] And to briefly translate my 2 answers, maybe I'll take your second question first, given that's a little similar to the answer we gave out earlier. So in terms of our trading volume mix, we saw a surge and the percent of trading volume contributed by Hong Kong stocks in China ADRs in late September and early October. And then the percentage pulled back a bit given the performance of China equities also pull back. But overall, the percentage increase quarter-over-quarter.

And in terms of U.S. stocks, the U.S. Stocks have been generally performing very well fourth quarter to date, especially around U.S. election, some of the technology stocks and virtual asset stocks performed exceptionally well and boosted the overall U.S. stock trading volume.

And to your first question, Hua Li touched on a number of markets, and it's hard to give a concise answer on our earnings call and happy to chat more offline.

But just to summarize, I think just over time, we have a better understanding of our business. We have a better understanding of our capabilities and also we've developed a better understanding of each and every one of these markets and the client demands. So we don't have a one size fits all approach towards all of our 7 markets, but instead, we focus on learning more about users we develop unique product pipelines. We have different marketing messages. We emphasize on different unique selling points, and we have different client operations strategies. So overall, I think we'll continue to iterate based on our understanding of each of these 7 markets. Thank you.

[Operator]

As there are no further questions, I would now like to hand back to Daniel Yuan for any closing remarks.

[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]

Ladies and gentleman, this conclude's today's conference call. Thank you for participating. You may now disconnect.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]