Futu Q1 2024 Earnings Call Transcript

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Provided by Quartr
May 28, 2024

There are 5 speakers on the call.

Operator

Hello, ladies and gentlemen. Welcome to Futu Holdings First Quarter 20 24 Earnings Conference Call. 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 VuTou.

Operator

Please go ahead, sir.

Speaker 1

Thanks, operator, and thank you for joining us today to discuss our Q1 2024 earnings results. Joining me on the call today are Mr. Lee 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 herein risks and uncertainties.

Speaker 1

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. Thank you all for joining our earnings call today.

Speaker 1

Bostered by strong market performance and solid execution in new markets, we wrapped up the quarter with approximately 1,900,000 paying clients, representing a 24% growth year over year. In the Q1, we added 177,000 paying clients, which more than quadrupled from the year ago quarter, marking 3rd 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%.

Speaker 1

Client acquisition in Hong Kong and Singapore both accelerated to double digit sequential growth. Yet their contribution to new paying clients dwindled to around 1 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 mumu app continued to garner user interest in Japan, with cumulative downloads reaching 1,000,000 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.

Speaker 1

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 acquisitions decelerated into the 2nd 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.

Speaker 1

We also intend to launch fractional shares trading, NYSEF 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 rate than equities trading. In Australia, we recently launched fractional shares, options and recurring investments for U. S. Stock trading.

Speaker 1

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 HKD518 1,000,000,000 We continue 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 percent and 15% sequential growth, respectively, driven by robust net asset inflow into equities and cash management products.

Speaker 1

Total trading volume rebounded substantially by 40% quarter over quarter to HKD1.3 trillion. In Hong Kong, trading volume grew by 18 percent sequentially to HKD280 1,000,000,000. Clients showed heightened interest in technology and high dividend names as well as leveraged and inverse ETFs. High turnover of crypto and AI themed stocks helped U. S.

Speaker 1

Stock trading volume jump by 48% sequentially to HKD1 1,000,000,000,000. Margin financing and securities lending balance increased by 14% sequentially to a record high of HKD38 1,000,000,000. Total client assets and wealth management were HKD64 1,000,000,000, up 73% year over year and 11% quarter over quarter. In the Q1, bond holdings increased by 21% sequentially, thanks to robust inflow in U. S.

Speaker 1

Treasury bills. In Singapore, Wealth Management asset balance grew by 3 56% year over year and 37% quarter over quarter as money market funds continue to gain traction. To cater to investor demand for high dividend yield, we launched a fund portfolio with high dividend stable allocation strategy. As of quarter end, we have 430 IPO distribution and IR clients, up 22% year over year. Over 1200 companies have set up enterprise accounts in our social community to interact with retail investors.

Speaker 1

Next, I'd like to invite our CFO, Arthur, to discuss our financial performance.

Speaker 2

Thank you, Li and Daniel. Please allow me to walk you through our financial performance in the Q1. All the numbers are in Hong Kong dollar unless otherwise noted. Total revenue was RMB2.6 billion, up 4% from RMB2.5 billion in the Q1 of 2023. Brokerage commission and handling charge income was RMB1.1 billion, up 20% Q over Q and largely flat year over year.

Speaker 2

With client trading interest piling on AI and the crypto theme 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 grow at a slower rate than trading volume both Q over Q and the year over year. Interest income was RMB1.4 billion, a 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.

Speaker 2

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 RMB156 1,000,000, 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 RMB470 1,000,000, an increase of 62% from RMB291 1,000,000 in the Q1 of 2023. Brokerage commission and handling charge expenses were US16 1,000,000 down 17% year over year and up 2% Q over Q.

Speaker 2

Brokerage expenses didn't move in tandem with brokerage income year over year, mainly due to cost saving from our U. S. Self clearing business. Expenses grew at a narrow margin, the income sequentially due to a nonrecurring cost associated with self clearing migration of Singapore stocks during the Q4 of 2023. Interest expenses were RMB313,000,000, up 139% year over year and 16% Q over Q.

Speaker 2

The year over year increase was driven by higher interest expenses associated with our security borrowing and the lending business. The Q over Q increase was mostly due to a similar reason, partially offset by lower margin financing interest expenses. Processing and servicing costs were $97,000,000 up 11% year over year and down 6% Q over 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 marketing information and the data fees as well as lower product service fees.

Speaker 2

As a result, total gross profit was RMB2.1 billion and decreased 4% from RMB2.2 billion in the Q1 of 2023. Gross margin was 81.9 percent as compared to 88.4% in the year ago quarter. Operating expenses was up 16% year over year and 2% Q over Q to RMB930 1,000,000. R and D expenses was RMB336 1,000,000, down 5% year over year and 7% Q over Q. The year over year and the Q over Q decrease was largely due to stricter cost control.

Speaker 2

Selling and marketing expenses were $293,000,000 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 and A expenses were RMB301 1,000,000, 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 increased by 17% Q over Q to RMB1.2 billion.

Speaker 2

Operating margin declined to 46% from 56 0.2% in the Q1 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 RMB1 1,000,000,000. Net income margin declined to 39.9% in the 4th quarter as compared to 47.7% in the same quarter last year. Our effective tax rate for the quarter was 15 0.2%. That concludes our prepared remarks.

Speaker 2

We now like to open the call to questions. Operator, please go ahead. Thank

Operator

Our first question comes from the line of Zhiyao Huang from Morgan Stanley. Please ask your question, Zhiyao.

Speaker 3

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 per client AUM and also want to have more view on the conversion rate from the app user to paying clients. Is there any difference you are seeing in Japan right now compared to other international markets at a similar stage? So I wonder if management could give more color on that. And second question is regarding the into 2Q, we're seeing pretty strong rebound in the China related assets in Hong Kong and in Hong Kong in the U.

Speaker 3

S. As well. So wonder what's the help we are seeing right now in terms of client trading activity and found inflows in the Q2 so far we are seeing? Thank you.

Speaker 2

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

Speaker 1

And let me translate for myself. So for in Japan, we're seeing very meaningful growth in terms of new paying clients. We saw strong sequential growth in the Q1 and Q2 quarter to date, we observed similar strong Q on Q momentum. And in terms of client AUM, I think we are still in the early innings of attracting client assets, but we have seen across client cohorts that they continue to put assets onto 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.

Speaker 1

But there is still a significant gap in comparison to other overseas markets, whether it's current percentages or when they were first when we first launched into that market. I think it's more the reason because of the account opening friction and the product and the lack of comprehensive financial products. And as Lee mentioned in his opening remarks, we have a very rich product pipeline coming up in Japan in the coming quarters. Thank you.

Speaker 2

Let me translate for myself. Number 1 is we definitely see a very strong momentum recovery in Hong Kong markets, which significantly help our clients' asset inflows in Hong Kong and the overall in terms of trading volume, trading velocity, etcetera. As Steve mentioned in the opening remarks, in the Q1, in terms of the trading volume breakdowns, the U. S. Stock trading comes for roughly over 75% of our total trading volume.

Speaker 2

And we do expect this ratio will become more healthy given the more contributions in Hong Kong stock in the 2nd quarters. And number 2 is, in the Q1, we record a very strong net asset inflows, which roughly over HKD35 billion, thanks to a very strong inflow from our existing markets in Hong Kong and in Singapore, etcetera. Also incremental contributions from new markets such as Malaysia and Japan, etcetera. And we do believe such momentum remains in the Q2 to date. This will significantly help in terms of the client assets and the trading volume, etcetera.

Speaker 2

And thirdly, despite we already achieved over 170 fund accounts in the Q1, partially due to some special reasons in Malaysia due to our grand opening in the Q1. 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 Q1. Thank you.

Operator

Thank you. Our next question comes from the line of Katherine Lei from JPMorgan. Please ask your question, Katherine.

Speaker 4

Hi. Can you hear me clearly? That will translate for myself. The first is about the Malaysia market. I will appreciate if management can give us some color on the Malaysia market.

Speaker 4

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 rate. Do you think that we will see some sequential improvement in the sequential rate? How should we form our expectation?

Speaker 4

Thank you.

Speaker 1

Thank you, Catherine.

Speaker 2

Let me translate for myself for the second question first. I think the blended commercial rate decrease was mainly due to our pricing model in the U. S. Stock markets 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 stock such as EBITDA, etcetera in the U.

Speaker 2

S. Will conduct a stock split. So this will alleviate the pricing pressure in the U. S. In terms of unit economics in Malaysia, so far on a corporate basis, we have witnessed a very healthy organic growth in terms of cash inflow than clients' trading velocity and also the trading volume, etcetera.

Speaker 2

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 demonstrates so far is not just one off because of some one off events. Thank you.

Speaker 1

So we officially launched our brokerage business in Malaysia by the end of February, and we've experienced very rapid growth. So in the Q1, Malaysia contributed about 1 third of our net new paying clients. And within 49 days of official brokerage business launch, we achieved number 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.

Speaker 1

And secondly, we simply offer the best product in Malaysia, one style platform where you can invest in Malaysia equities, U. S. Equities 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. We were able to convert a very meaningful chunk

Speaker 2

of those

Speaker 1

users. I think the Q1 growth was above our expectations. But going to the Q2, we believe the contribution of Malaysia will come down sequentially. 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, etcetera. 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 to better inform our growth in Malaysia.

Speaker 1

And in terms of our client profiles, 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 assets than we expected, which will probably lead to favorable payback period in Malaysia. Thank you.

Operator

Right. Thank you. I'm showing no further questions. I'll now turn the conference back to Mr. Daniel Yuan for closing comments.

Speaker 1

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. That concludes today's conference call. Thank you for participating. You may now disconnect.

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