Futu Holdings Ltd

NASDAQ:FUTU

Earnings Call Analysis

Strong Client and Asset Growth Despite Trading Volume Dip

Futu Holdings capped off the year with a 15% increase in paying clients, reaching over 1.7 million and surpassing guidance, driven by high growth in Singapore and fresh traction in Japan and Malaysia. They anticipate adding 350,000 new paying clients in 2024. Revenue rose modestly in Q4 to HKD 2.4 billion, culminating in a robust 31% gain for the year. Total client assets grew by 16% to HKD 486 billion, while wealth management assets soared by 82%. Despite this growth, trading volumes dipped by 12% due to weak sentiment in Hong Kong and U.S. markets.

Client Acquisition & Market Expansion

In the fourth quarter, the company showed impressive client acquisition, adding over 59,000 paying clients, reaching a total of 1.7 million paying clients by year-end—a 15% growth year-over-year and surpassing their previous guidance. Notably, Singapore sustained significant growth in client acquisition with the company becoming the first and only distributor of a T+0 Singapore dollar money market fund. Japan also displayed strong progress, with the moomoo app reaching top 3 in average daily downloads among all brokers. The U.S. market, in contrast, has seen a strategic emphasis on client quality, with a substantial increase in asset balance among new paying clients. Furthermore, the launch in Malaysia marked an explosive start with over 30,000 clients joining in the first week—indicating the fastest growth in any of the company's international markets. And finally, the company has set an ambitious target of gaining 350,000 net new paying clients in 2024.

Asset Growth and Trading Activity

Total client assets saw a 16% increase year-over-year reaching HKD 486 billion, and there was a notable shift in average client assets with improved inflows across client cohorts. Trading volume experienced a dip—down 12% year-over-year, partly due to a decline in Hong Kong and U.S. stock trading volume. However, wealth management client assets grew by 82% year-over-year. The company’s enterprise business flourished with a 24% increase in IPO distribution and IR clients, strengthening its position in the market.

Financial Performance and Projections

Income from operations and net income both saw a decrease, alongside a contraction in net income margin. There's optimism for the Singapore market, which achieved breakeven in the fourth quarter and saw growth in client assets, with high traction in U.S. equities among Singapore clients. The cost of acquiring clients (CAC) decreased significantly in the fourth quarter, and expectations are set for a continued downward trend in CAC for the current year, potentially dropping 10-20% year-on-year.

Innovation and Optimization

The company is enhancing its services by streamlining the account opening process, with a significant increase in conversion rate seen. Plans to roll out Japan equities trading to clients in Japan and subsequent expansion to Hong Kong and Singapore are underway. Self-clearing capabilities have improved service downtimes and trading execution, indicating a more efficient operation.

Capital Management

To align with the company’s growth and maintain flexibility, a new share repurchase program was established, which authorizes the repurchase of up to USD 500 million of ADS before December 31, 2025.

Revenue & Expenses

Brokerage commission and handling charge income decreased both year-over-year and quarter-over-quarter. Interest income also saw a mix of trends—rising year-over-year due to higher interest rates and margin financing but decreasing quarter-over-quarter due to a lower average client cash balance. The total costs increased year-over-year and quarter-over-quarter, impacted by expenses across brokerage commissions, interest, and processing and servicing costs.

Closing Remarks & Future Outlook

Management remains focused on client asset growth, operational efficiency, and international market expansion. They expect continued growth from existing markets such as Singapore, Hong Kong, and Australia, with an additional contribution from new markets. Mid- to high single-digit headcount growth is projected for 2024, aimed to support expansion and enhance R&D capabilities. Despite market volatility, there’s optimism regarding client asset inflow trends and service improvement after the successful implementation of self-clearing capabilities in the U.S. market.

Earnings Call Transcript 2023-Q4

[Operator]

Hello, ladies and gentlemen. Welcome to Futu Holdings Fourth Quarter and Full Year 2023 Earnings Conference Call. [Operator Instructions] 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 to CEO and Head of IR at Futu. Please go ahead, sir.

[Daniel Yuan, executive]

Thanks, operator, and thank you all for joining us today to discuss our fourth quarter and full year 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 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. In the fourth quarter, we added over 59,000 paying clients. Our total paying clients as of year-end reached over 1.7 million, representing 15% growth year-over-year and exceeding our guidance.Client acquisition in Singapore sustained high growth into the fourth quarter. Money market funds continue to garner significant client interest amid high interest rate and market volatility. In December, we became the first and only distributor of Fullerton Fund Management, Singapore dollar-denominated money market fund. The only T+0 Singapore dollar money market fund for retail investors in Singapore.We continue to gain user mind share in Japan with our rich market information, comprehensive market data and interactive social community. In the fourth quarter, the average daily downloads of moomoo app in Japan ranked top 3 among all brokers and surpassed those of Nomura and Matsui Securities according to Data.ai. With Nikkei recording remarkable gains and hitting new highs, client acquisition in Japan also showed a notable sequential increase in the first quarter.We continue to streamline the account opening process to reduce leakage in the conversion funnel and focused on R&D for key investment products. We launched [indiscernible] growth account in December and will soon roll out Japan equities trading. Our clients in Hong Kong and Singapore will also have access to Japan stock trading in the second quarter.Client acquisition in Hong Kong slowed down due to sluggish market sentiment. We have rebounded in the first quarter, along with the recovery of the Hong Kong stock market. In the U.S., we continue to prioritize client quality over quantity with the average asset balance of new paying clients in their first quarter of onboarding, increasing by over 30% compared to the last quarter. In Australia, we focused on cultivating brand equity and adding new products, including cash management.On February 26th, we launched brokerage business in Malaysia and gained significant traction. Over 30,000 clients flocked to our platform within 1 week the official launch, representing the fastest growth in any of our international markets. We managed to generate high brand awareness in Malaysia from the outset, thanks to our rapid share gain in Singapore over the past 3 years.We observed robust paying client growth across all markets this year. In fact, we attracted more paying clients and net asset inflows in the first 2 months this year than the entire fourth quarter. Given the strong momentum year-to-date, we are guiding for 350,000 net new paying clients in 2024.Total client assets increased by 16% year-over-year and 4% quarter-over-quarter to HKD 486 billion. The sequential increase was largely due to robust net asset inflow across all regions and the market appreciation of our clients' U.S. stockholding. In Singapore, total client assets and average client assets posted sequential increase of 25% and 17%, respectively. Average client assets was over SGD 17,000 due to strong inflows across cohorts. As we continue to build brand equity, moomoo gained traction among high net worth clients in Singapore.As of quarter end, margin financing and securities lending balance increased marginally by 2% quarter-over-quarter. While we saw an uptick in securities lending balance for U.S. stocks, margin financing balance declined as clients unwound their position.Total trading volume was HKD 957 billion, down 12% year-over-year and quarter-over-quarter. In the fourth quarter, Hong Kong and U.S. stock trading volume were down 13% and 12%, sequentially. Weak sentiments around Hong Kong equities and lower turnover in U.S. tech stocks dragged total trading volume. Our share gains in the derivatives market in Hong Kong was a bright spot. Hong Kong futures and options trading at 8.5% and 14.7% market share in the fourth quarter, respectively.Total client assets in wealth management increased by 82% year-over-year and 11% quarter-over-quarter to HKD 58 billion, accounting for 12% of total client assets. Clients increased their allocation in money market funds and U.S. treasury bills to harvest high yield. Total bond holdings, as a result, increased by over 60% quarter-over-quarter. We continue to enrich our structured products by onboarding accumulator note, a product that allows clients to sell their stock positions at a premium.Our enterprise business had 414 IPO distribution and IR clients, up 24% year-over-year. In the fourth quarter, we acted as joint bookrunners for several high-profile Hong Kong IPOs, including those of J&T Express and UBTech. We underwrote 37 Hong Kong IPOs in 2023 and ranked first among all brokers, according to Wind.Next, I'd like to invite our CFO, Arthur, to discuss our financial performance.

[Arthur Chen, executive]

Thank you, Leaf and Daniel. Before going through our financial performance, I'd like to give you an update on our latest share repurchase program announced on March 11, 2022. As of December 31, 2023, the expiration date of the program, we had repurchased an aggregate of 11 million ADS with approximately USD 365 million total repurchase amount in open market transactions. We have put in place a new share repurchase program, which approved and authorized us to repurchase up to USD 500 million of ADS before December 31, 2025.Now please allow me to walk you through our financial performance. All numbers are in Hong Kong dollar unless otherwise noted. Total revenue was HKD 2.4 billion, up 4% from HKD 2.3 billion in the fourth quarter of 2022. We ended 2023 with full year revenue growing 31% to HKD 10 billion. Brokerage commission and handling charge income were HKD 904 million, a decrease from 14% year-over-year and 10% Q-o-Q. The decrease was mainly driven by lower trading volumes.Interest income was HKD 1.3 billion, up 17% year-over-year and down 11% Q-o-Q. The year-over-year increase was mainly driven by higher interest income from clients' cash deposits due to higher benchmark interest rate and higher margin financing income due to an increase in daily average margin balance. The Q-over-Q decrease was mostly driven by the lower interest income from clients' cash deposits due to decrease in daily average client cash balance.Other income was HKD 137 million, up 46% year-over-year and largely flat Q-over-Q. The year-on-year increase was primarily attributable to higher fund distribution income, partially offset by lower enterprise public relationship service income and underwriting fee income.Our total costs were HKD 433 million, an increase of 27% from HKD 342 million in the fourth quarter of 2022.Brokerage commission and handling charge expenses were HKD 59 million, down 8% year-over-year and 6% Q-over-Q. The decrease was roughly in line with our decrease of our brokerage commission and handling charge income partially offset by the course of migrating our SGX equities to our self clearing system.Interest expenses were HKD 271 million, up 49% year-over-year and down 6% Q-o-Q. The year-over-year increase was driven by higher interest expenses associated with our securities borrowing and lending business and the higher margin financing interest expenses. The Q-over-Q decrease was mostly due to lower interest expenses associated with our security borrowing and the lending business, partially offset by high margin financing interest expenses.Processing and servicing costs was HKD 104 million, up 7% year-over-year and 21% Q-o-Q. The increase was largely due to higher product service fee for new markets and higher system usage fees. As a result, our total gross profit was HKD 1.9 billion, largely flat year-over-year. Gross margin was 81.7% as compared to 85% in the fourth quarter of 2022.Operating expenses was up 12% year-over-year and 3% Q-over-Q to HKD 916 million. R&D expenses were HKD 363 million, up 9% year-over-year and 1% Q-over-Q. The year-over-year increase was mainly due to increase in R&D headcount as we continue to support new product offerings in international markets.Selling and marketing expenses was HKD 182 million, up 19% year-over-year and down 14% Q-over-Q. The year-over-year increase was due to a 41% year-over-year increase in net new paying clients, partially offset by lower customer acquisition costs and the Q-over-Q decrease was due to few net new clients and the lower customer acquisition costs.G&A expenses were HKD 370 million, up 12% year-over-year and 15% Q-over-Q. The increase was primarily due to the increase in headcount for general and administrative personnel, partially offset by lower professional service fees.As a result, income from operations decreased 9% year-over-year and 22% Q-over-Q to HKD 1 billion. Operating margin declined to 43.1% from 49.1% in the fourth quarter of 2022, mostly due to operating deleverage.Our net income decreased by 9% year-over-year and 20% Q-over-Q to HKD 876 million. Net income margin shrank to 36.9% in the fourth quarter as compared to 42% in the same quarter last year.Among our international business, Singapore was the first to achieve breakeven on a quarterly basis, even with apportioned costs from headquarter. As client assets continue to grow, we believe the unit economics in Singapore will maintain an upward trajectory.That concludes our prepared remarks. We'd now like to open the call to questions. Operator, please go ahead. Thank you.

[Operator]

[Operator Instructions] We'll now take the first question. First question today is from the line of Cindy Wang from China Renaissance.

[Yun-Yin Wang, analyst]

[Interpreted] I have 2 questions -- and I have 2 questions. First one is what's your progress of improving account opening process in Japan? And could you provide more color on new paying client acquisition in fourth quarter last year versus first quarter this year so far in Japan? And when would you expect to launch Japan stock trading?And the second question is regarding to the new paying clients. So we see the new paying client target of 350,000 in 2024 is very impressive. Could you break down by key markets, including like Hong Kong, Singapore, U.S., Japan, et cetera?

[Arthur Chen, executive]

Thank you, Cindy. I will take your second question first, and we'll leave the first question to my colleague, Daniel. In terms of our new targets for 2024, the contributions from Singapore, Hong Kong and the Australia, these existing markets on absolute terms should be similar to last year. So the incremental growth drivers mainly come from certain new markets we enter into this year and recently in the fourth quarter last year, such as Japan, Canada and Malaysia. Thank you.

[Daniel Yuan, executive]

Cindy, this is Daniel, and I'll take your question on Japan. So in the fourth quarter, we continue to optimize our account opening process and to integrate the redundant processes and pages in that process and to iterate on the key friction points. And we have seen, therefore, a very meaningful increase in the conversion rate from users to registered clients to paying clients. But in comparison to other international markets, there is still a lot of room for improvement in that conversion number. And to continue to optimize that account-opening golden process will be a key priority for us this year.And in terms of Japan equities trading, yes, we are planning to roll out the Japan equities trading to our Japan clients by the end of March. And then in April or May, we're going to roll out Japan equities trading to our clients in Hong Kong and Singapore. Thank you.

[Operator]

We'll now take our next question. And this is from the line of Chiyao Huang from Morgan Stanley.

[Chiyao Huang, analyst]

[Interpreted] My question is on Singapore. So what was roughly the client number and the client asset contribution on the overall firm basis? And also I wonder what's the strategy in Singapore for 2024? And how is the competitive landscape changing in Singapore? And also, what's the risk appetite evolving for Singapore clients in '24 given the U.S. market is still performing quite well. Do you trading more stocks?

[Arthur Chen, executive]

Thank you, Chiyao Huang. My colleague, Robin will answer this question for you.

[Robin Xu, executive]

[Interpreted] So in the fourth quarter, the Singapore recorded very steady client growth and contributed about 30% of our total net new clients for the entire quarter. And thanks to the continued net asset inflows of our existing clients and the higher quality new clients. The total client assets and average client assets in Singapore have recorded 25% and 17% sequential growth, respectively. And the total client assets recorded sequential increase for every single quarter since we launched the business. And average client assets have been on an upward trajectory for 6 consecutive quarters. And as of the end of last year, average client assets in Singapore was over SGD 17,000. And we believe that as we continue to enhance our brand awareness, to diversify and enrich our product offerings and to improve our client services, moomoo will continue to attract more high net worth individuals.And we've also seen the unit economics in Singapore to continue to improve in the past 2 years. And taking into account the cost from the headquarters to support Singapore, the Singapore subsidiary broke even for the first time during the fourth quarter, and we have some very good growth year-to-date. And in terms of clients' risk appetite, so during the past rate hike cycle, we started to promote our Cash Plus product, which is the money market fund product. And we continue to cross-sell different investment products based on our clients' risk appetite. And this year, we have seen very strong traction in U.S. equities among our Singapore clients. Thank you.

[Operator]

We'll now take our next question. This is from the line of You Fan from CICC.

[You Fan, analyst]

[Interpreted] My first question is regarding the blended commission rate, we see the commission rate increased this quarter, so what's the reason behind? And the second question is about the CAC. So we see the CAC decreased a lot this quarter. So what's the reason behind? And how do you view the future trend of the CAC?

[Arthur Chen, executive]

Thank you. I will take these 2 questions. For commission rate, the combined take rate is almost flat Q-on-Q basis -- on a Q-on-Q basis, slightly up because of the product mixtures and more contribution from our derivative products. Then for the CAC, we further optimize different marketing campaigns, channels to control and even decrease our CAC, which bear very strong results in the fourth quarter. And looking forward and based on the year-to-date situation, we do expect this year, the CAC number will decrease compared with last year, hopefully, by 10% to 20% year-on-year basis. Thank you.

[Operator]

We'll now take our next question. Next question is from the line of Emma Xu from Bank of America Securities.

[Emma Xu, analyst]

[Interpreted] So, I have 2 questions. The first one is about the client quality in other international markets. You mentioned earlier about the positive progress in the Singapore client quality, but how about other international markets? Do you also see improvement in the average client assets? And for your Hong Kong market, with you penetrating into the mass market, how will the client profile and average client asset change?And the second question is about your trading velocity and trading volume. It declined -- the trading velocity declined to a record low in fourth quarter. And it is quite understandable that the Hong Kong trading velocity declined due to the weak market. However, U.S. market actually performed quite well in the fourth quarter, but your U.S. trading volume also declined. So how should we think about the connection between the market performance and your trading velocity? Do we see a notable rebound of your trading velocity in the first quarter?

[Arthur Chen, executive]

Thank you. I will take your second question first and leave the first question to my colleague, Daniel. In terms of trading velocity, you are right. The trading velocity [indiscernible] Hong Kong and the U.S. in the fourth quarter. Despite the U.S. stock performed very well in the fourth quarter, but it remains a very strong -- continuous uptrend for the whole quarter. So most of our clients actually use a buy and hold strategy to enjoy the rallies and implied volatility in the U.S. market in the fourth quarter actually went down compared with third quarter. So the trading velocities decreased, actually, based on our humble observations, is in line with a lot of other U.S. discounted brokers operating metrics as well. Then in the first quarter this year, so far, we have seen a very healthy pickup not only in the U.S. but also in Hong Kong in terms of the trading volume and also the trading velocity. Thank you.

[Daniel Yuan, executive]

Thank you, Emma. This is Daniel. And I will take your question on the client quality in international markets. And actually, we have seen an improvement in average AUM, not only in Singapore, but also in our other international markets, including the U.S., Australia and Japan, mostly because unlike some of our other peers, I think Futu really cares about quality growth. And net inflow of AUM is a key KPI, very important KPI for all of our marketing teams across different international regions. And in the fourth quarter, we have seen very strong AUM inflows despite weak market sentiment.And in the first 2 months this year, as Leaf mentioned in his opening remarks, we have a higher net asset inflow in the first 2 months of this year than the entire fourth quarter combined. And actually over 1/3 of that net asset inflow comes from international markets. So we'll expect a continued upward trajectory in our client assets across international markets. And for Hong Kong, in the past couple of quarters, we continue to attract older clients, especially with our offline store. And we have seen that these clients typically have higher average assets. But because of the large base effect, these new clients didn't change the overall client profile much in Hong Kong. Thank you.

[Operator]

We'll now take our next question. This is from the line of Leon Qi from Daiwa.

[Leon Qi, analyst]

[Interpreted] This is Leon Qi. I want to ask 2 questions today. Firstly, is on our Hong Kong marketing and client acquisition strategy. Just now, management shared a lot of details on Singapore, but I'm interested in Hong Kong now, given we have an increasing number of client base, paying client base now, would management feel that going forward, it will be increasingly more difficult for us to acquire new customers? Are we considering gradually shifting our focus from the number of customers into average AUM or the quality of our customers? We do appreciate the new customer guidance that management talked about just now that Hong Kong new customers' guidance in 2024 would be similar to 2023.Second question is on self-clearing in U.S. stocks. May I confirm that all of our trades in U.S. has already been self-cleared. In addition to the positive impact on our net interest income, do we see any improvement in terms of our trading execution efficiencies by using self-clearing? Wondering if we can make any comparisons with our competitors in the U.S. such as interactive brokers, et cetera.

[Arthur Chen, executive]

Thank you, Leon. I'll let Leaf to take the first question, and I will answer the second one.

[Leaf Li, executive]

[Interpreted] The Hong Kong market is our home base. And in 2023, we continue to maintain very high penetration among the younger clients, and we also steadily improved our penetration into clients from other age group. As of the end of Q4, our paying client penetration among the adults aged 35 to 55 in Hong Kong was over 10%. And in Hong Kong, our goal is to achieve high-quality growth and we focus on acquiring high-quality clients and also focused on attracting net asset inflow from existing clients. That's why during Q4 and also in the past where market sentiments were weak, we continue to see very robust net asset inflow from Hong Kong. And going forward, we'll leverage our comprehensive product offerings and have different operational strategies for clients with different asset amount and different investment needs, and we'll very closely track the net asset inflow trend in Hong Kong.

[Arthur Chen, executive]

For the second question, you're right, we have already largely completed the U.S. self-clearing so far. And I think actually the positive contributions from this migration will continue, thanks to the increased client assets cohort and also the contribution from the new markets such as Japan and Malaysia. And in terms of the operating efficiency, definitely after the self-clearing capabilities, our service downtimes versus before has been meaningfully decreased. And also the trading execution in terms of the reporting, et cetera, will be more smooth. Thank you.

[Operator]

[Operator Instructions] We will now take our next question. The next question is from the line of Peter Zhang from JPMorgan.

[Peter Zhang, analyst]

[Interpreted] My first question is about the interest income. We noticed that interest income have been decreased sequentially in first quarter. We wish to understand what's the fourth quarter trend for clients, idle cash and Futu's deposit rates. And I also wish to understand what's the trend in first quarter for clients idle cash balance?My second question is about operating expense. I wish to understand what Futu's plan for the headcount increase in 2024? And what's management's guidance for Futu's operating expense increase or say, cost of income ratio trend?

[Arthur Chen, executive]

Thank you, Peter. I will take these 2 questions. For idle cash, roughly the idle cash accounts for 10% to 15% of our total client assets in the past or in the past quarter and also the similar situation happened in the first quarter so far. And the decrease of the interest revenue in the fourth quarter, as I mentioned in the opening remarks, is mainly due to the decrease of the average balance decrease for the security borrowing and the lending. Despite, if you see the balance sheet date, the margin and the security lending balance was higher than that in the third quarter.Then for the -- for your second half question, in terms of headcounts, we are looking for mid- to high single-digit headcount growth mainly will be deployed for our international market expansion and further enhance our R&D capabilities. Unfortunately, we do not have a cost/income ratio guidance given the nature of our business, our revenue is very volatile. It's very difficult to predict due to the market volatility. So we will more focusing on the people side, given this is one of the largest cost component for our overall cost structure. Thank you.

[Operator]

Thank you. And this does conclude the question-and-answer session. So at this time, I would like to hand the conference back to Daniel Yuan for closing remarks. Thank you.

[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]

Thank you. This does conclude today's conference call. Thank you for participating, and you may now disconnect.