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Futu Holdings Limited (FUTU) Q4 2020 Earnings Call Transcript

By Motley Fool Transcribers - Mar 16, 2021 at 1:30PM

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FUTU earnings call for the period ending December 31, 2020.

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Futu Holdings Limited (FUTU 3.65%)
Q4 2020 Earnings Call
Mar 16, 2021, 7:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Hello, ladies and gentlemen, welcome to Futu Holdings' Fourth Quarter and Full Year 2020 Conference Call. [Operator Instructions] After management's prepared remarks, there will be question-and-answer session. [Operator Instructions]

I would now like to turn the conference over to your host for today's conference call, Mr. Daniel Yuan, Chief of Staff and Head of IR at Futu. Please go ahead, sir.

Daniel Yuan -- Chief of Staff and Head of Investor Relations

Thanks, operator and thank you for joining us today to discuss our fourth quarter and full year 2020 earnings results. Joining me on the call today are Mr. Leaf Li, Chairman and Chief Executive Officer; Arthur Chen, the 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 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 registration statement.

With that, I would now turn the call over to Leaf. Leaf will make his comments in Chinese and I will translate.

Leaf Li -- Founder, Chairman, Chief Executive Officer and Chairman of the Technology Committee

[Foreign Speech]

Hello, everyone. Thank you for joining the earnings call today. We are excited to announce that the robust growth momentum as our operating and financial matrices continued into the fourth quarter of 2020 and we ended the year on a high note.

[Foreign Speech]

We added over 98,000 paying clients on a net basis, over half of whom were from Hong Kong and overseas. We are pleased to see that our relentless commitment to user experience continue to pay off, as we again brought in over 50% of our new paying clients in the quarter through organic growth. As of year end, paying clients reached over 516,000 representing a 160.5% year-over-year growth. We exceeded our full year paying client guidance by adding approximately 320,000 paying clients in 2020. At the same time, we continued to deliver a high paying client quarterly retention rate of 97.9% in the quarter. Looking into 2021, we are guiding for 700,000 net new paying clients, translating to 135% year-over-year growth in total paying clients.

[Foreign Speech]

At the end of fourth quarter, average client asset balance was 552,000, a record high since our IPO, bringing our total client assets to HKD285.2 billion, representing 227.3% growth on a year-over-year basis and 41.9% growth on a quarter-over-quarter basis.

[Foreign Speech]

Total trading volume was HKD1.2 trillion in the quarter, a 438.1% year-over-year and 19.2% quarter-over-quarter. US stock trading with HKD783.6 billion or 65% of our total trading volume, underpinned by the robust US equities market performance. In Hong Kong, we continue to aggressively take market share in terms of both paying clients and trading volume. The market share of our Hong Kong trading volume was over 2.6% in the quarter, which more than doubled from the year ago quarter. In the fourth quarter, we further expanded our trading product offerings by launching CME futures and A50 futures.

[Foreign Speech]

By year end, total client assets in Money Plus surpassed the HKD10 billion milestone, up 68.5% year-over-year. We have established partnerships with 39 asset managers around the world, which altogether hosted 39 live-streaming on our platform in 2020 to conduct fund publicity and investor education. In the fourth quarter, we saw a growing number of clients capture the market boom by investing in equity funds. Among which, funds with a focus on the technology sector and the Greater China region, gained the most traction. Over 42,000 clients or 8.1% of our total paying client base, held wealth management positions as of year end, offering significant room for further penetration.

[Foreign Speech]

Futu I&E continues to be the go-to enterprise service partner. We had a 105 IPO and IR clients as of year-end. In the fourth quarter, 10 IPOs recorded over HKD10 billion in subscription, respectively, on our platform, including the US IPOs of Miniso and Lufax, and the Hong Kong IPOs of Pop Mart and JD Health. We also added 33 ESOP clients in the quarter, bringing our total ESOP client number to 159.

[Foreign Speech]

We continue to invest in our technology infrastructure. Despite heightened market volatility's in 2020, we still achieved a full year service availability rate of 99.96%. In January 2021, we further expanded our throttle rate for Hong Kong Stock trading from 200 to 500, thereby allowing us to execute 1,000 concurrent Hong Kong Stock orders per second. Technological excellence is deeply entrenched in every aspect of our business and we will continue to invest in technology to widen our competitiveness.

[Foreign Speech]

For Futu, 2021 is the year of internationalization. We officially launched our MooMoo app in Singapore, on March the 8, and has since then seen strong growth momentum and received encouraging feedback. We believe that our product and service deliver differentiated value proposition in many more markets, outside of Mainland China and Hong Kong. And we wanted to take advantage of the elevated retail stock market participation around the world.

[Foreign Speech]

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

Arthur Chen -- Chief Financial Officer

Thanks, Leaf and Daniel. Let me walk you through our financial performance. All the numbers are in Hong Kong dollar, unless otherwise noted. In the fourth quarter, our total revenue was HKD1.2 billion, an increase of 282% from HKD311 million in the fourth quarter of 2019. To break it down, brokerage commission and handling charge income was HKD718 million, an increase of 374% from the HKD152 million in the fourth quarter of 2019. The rise was mainly due to the 438% year-over-year growth of our total trading volume.

Interest income was HKD337 million, an increase of 163% year-over-year. We generate higher margin financing interest income due to the sharp increase in daily average margin financing balance and a higher IPO financing interest income due to a very active Hong Kong IPO market. Other income was HKD131 million, an increase of 317.8% from HKD31 million in the fourth quarter of 2019. The jump was primarily due to an increase in our IPO subscription service charge income and the currency exchange service income.

On the cost side, total costs were HKD242 million, an increase of 179% from HKD87 million in the fourth quarter of 2019. Brokerage commission and handling charge expenses were HKD133 million, an increase of 323% year-over-year. This growth was largely in line with our brokerage commission and handling charge income growth. Interest expenses were HKD64 million, an increase of 106% year-over-year. The increase was primarily due to higher IPO financing interest expenses.

Processing and servicing costs were HKD45 million, an increase of 79% year-over-year. The growth was primarily due to increase in cloud service fees. As a result, total gross profit was HKD944 million, an increase of 321% from HKD224 million in the fourth quarter of 2019. GP margin increased from 72% in the fourth quarter of 2019, to close to 80% in the fourth quarter of 2020, due to higher operating leverage as a result of our larger business scale.

Total operating expenses was HKD364 million, an increase of 100% year-over-year. To break it down, the R&D expenses was HKD162 million, an increase of 118% from HKD74 million in the fourth quarter of 2019. The increase was primarily due to an increase in R&D headcount to further expand our product offerings.

Selling and marketing expenses was HKD113 million, an increase of 119%, from HKD51 million in the fourth quarter of 2019. The increase was primarily due to higher branding and marketing spending. G&A expenses was HKD89 million, an increase of 60% from HKD60 million -- from HKD56 million in the fourth quarter of 2019. The increase was primarily due to the increase in headcount for G&A personnel.

As a result, our net income increased by 11 times to HKD533 million year-over-year. The increase was primarily due to robust revenue growth and the significant operating leverage. And the same quarter, we completed our $216 million pipe offering with a leading global investment firm. The offering was in the form of prepaid warrants, as has been reflect in our equity items in our balance sheet.

Also, we further enhanced our capital base. We are able to support a larger margin financing balance, ramp up our marketing efforts in international markets and to further invest into our technology infrastructure. That concludes our prepared remarks.

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

Questions and Answers:

Operator

Certainly. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Thank you. We have the first question from the line of Katrina Liu [Phonetic] from Morgan Stanley. Please go ahead.

Katrina Liu -- Morgan Stanley -- Analyst

[Foreign Speech]

I will translate for myself. First, the question is for Chairman Leaf. Just wondering in the future, three to five years, how do you see Futu different from now? And second question is about just another guidance given on the paying clients. Just now, the guidance for paying clients is around the 700,000 addition for new -- for 2021, I just wondering does the 700,000 include the clines also to MooMoo or it's just for Money Plus. Thank you very much.

Leaf Li -- Founder, Chairman, Chief Executive Officer and Chairman of the Technology Committee

[Foreign Speech]

In three to five years, a little long in comparison to how we plan our business. And I think our about -- our business will evolve in three effect and for one, you will see Futu as a more international platform and as we mentioned just now, internationalization is a key priority for us this year and in the years to come. And number two, I think we'll further go down our path of constructing a self reinforcing ecosystem in our platform. That provides connectivity to users, investors, KOLs, medias, etc. And number three, I think our Futu Money Plus, which is our wealth management business, will contribute a larger asset balance and also revenue to our total business.

[Foreign Speech]

And to your second question, the 700,000 net new paying client addition this year includes our MooMoo paying clients. So, we expect size and on these 700,000 new paying clients, about 80% of them will come from Mainland China and Hong Kong and the rest will come from Singapore and the US. Thank you.

Katrina Liu -- Morgan Stanley -- Analyst

[Foreign Speech]

Operator

Can we move to the next question?

Daniel Yuan -- Chief of Staff and Head of Investor Relations

Yes, please.

Operator

Yeah. The next question comes from the line of Xue Yuan from CICC. Please go ahead.

Xue Yuan -- CICC -- Analyst

[Foreign Speech]

Hi, management. Thanks for taking my question. I'm Xue Yuan from CICC and congratulation on the exciting results. I have two questions here. The first one is about the revenue breakdown. We see the other income has experienced a strong growth. And I want to -- would you please give us more information on the breakdown? And the second question is about the client assets. I noticed that the average client asset balance has increased significantly on a continuity basis. I remember, that's the average asset balance of our overseas clients is much lower than that of our Mainland customers. So, would you please give me more information about the difference between different regions? Thank you.

Arthur Chen -- Chief Financial Officer

Thank you, Xue. I will answer your two questions. I think number one in terms of breakdown income, the most part of our other income still come from the our IPO subscription service charge and also the currency exchange service charge. The things you mentioned such as the ESOP business revenue and also the wealth management revenue is still not very, very meaningful. We will give you the detailed breakdowns in our forthcoming Annual Report, which may be due in the later days of this month.

And the secondly for the average client assets. You're right, if we compare our Mainland client assets, and also the Hong Kong assets, roughly on average, our average client assets for Hong Kong market will be around the 20% to 25% lower than the average numbers of the Mainland numbers. We have not conduct our client acquisition in Singapore in the last Q4. So actually, we do not have such data on hand. Yes. And also we have not include our US clients numbers in fourth quarter as well. We will give you more information in the forthcoming Q1 earning call. Thank you.

Xue Yuan -- CICC -- Analyst

Thank you, Arthur.

Operator

Thank you. The next question comes from the line of Jackie Xou [Phonetic] from Channel and Sons. Please go ahead.

Jackie Xou -- Channel and Sons -- Analyst

[Foreign Speech]

Thanks management for taking my questions. I have two questions. Number one is about our guidance. So I think the 700,000 new paying clients guidance exceeded most market expectations. So, just want to check what is the current run rates of our paying -- new paying clients as in the first quarter and what do -- what is our expectation for the speed of customer acquisition in different regions over the year. And second question is about our US self-clearing progress. So, what will be the launch time for the US self-clearing and according to our last earnings call, you mentioned this probably a $50 million pre-tax benefit from self-clearing, so when will we see the impact on the financial results. Thank you.

Arthur Chen -- Chief Financial Officer

Okay. Thank you, Jackie. I will lead Leaf to answer your first question in terms of, give you some qualitative update about year-to-date situations. Frankly speaking, we cannot share any quantitative numbers about year-to-day run rate, which I think will give you more color during our first quarter earnings call.

For your second question, I will answer it first. In terms of self-clearing, actually we just start our initial migrations recently, just you know to overcome the first stop. But we do think this migration will take time, you will see meaningful progress in terms of operation numbers i.e. the client's assets and the bump -- the number of the clients from our counterparty in the US to our self-owned clearing house this year. But I think the -- in terms of the financial savings, it will not be too meaningful in terms of 2020 contributions. But definitely, you will see the benefits from the second half of next year.

Leaf Li -- Founder, Chairman, Chief Executive Officer and Chairman of the Technology Committee

[Foreign Speech]

Arthur Chen -- Chief Financial Officer

So first of all, I think Leaf supplemented on your second question on self-clearing. He mentioned that two weeks ago, he used his own personal accounts of trade by to execute five trades, which are processed through our own clearing system and the trades were processed very successfully, and has also mentioned, we'll start with the migration process starting in the second quarter and I will take your first question on our guidance and our run rate.

So, year-to-date the numbers have been really strong, the paying client growth have been strong and it gave us ample confidence to give out this guidance of 300,000 net new paying client addition this year. I think we are well on track. And as we mentioned earlier, and on this 700,000 new paying clients, about 80% of [Indecipherable] will come from Mainland China and Hong Kong and 20% will come from the US and Singapore. I think it's a little too early to give out a more detailed breakdown further down away I just mentioned.

But I think in terms of run rate, maybe I can talk a little bit about our business updates on year-to-date. As we mentioned, in Singapore, we soft launched in February and we officially launched our business on March the 8 and if you look out through the rankings on the IRF afterwards in Singapore, you will see that we have really strong downloads and our business has been growing really strong and kind of exceeding our expectations. So we are very confident about our growth prospects in Singapore.

And also, I know the strong momentum is also observed in the US market as well and in Mainland China and Hong Kong, I think the growth moment is strong as always. And we see that there is a very strong IPO pipeline to secure and if I remember correctly, in the first two months of this year, the total proceeds raised through Hong Kong IPOs totaled a little over HKD70 billion.

And in the first quarter of last year in total, the IPO proceeds was a little over HKD10 billion. So the IPO market is very active. The market sentiment is very positive and we are continuously expanding our Hong Kong Stock trading market share and in February this year, I think our DAU surpassed 1 million for the first time and that's also one of our major accomplishments in establishing our social community and just creating this ecosystem. Thank you.

Jackie Xou -- Channel and Sons -- Analyst

That's clear. Thank you.

Operator

Thank you. We have our next question from the line of Zoey Zong from Jefferies. Please go ahead.

Zoey Zong -- Jefferies -- Analyst

Hi, management. Thanks for taking my question. This is Zoey from Jefferies. I have two questions. First, could you please provide some color about the brokerage commission and handling charge income from US Stocks, Hong Kong Stock and China Stock respectively. And how should we think about the trend in the commission fee rate in different markets? My second question is, how should we think about the commission handling income contribution from the Singapore market and our strategy in other overseas countries? Thank you.

Arthur Chen -- Chief Financial Officer

Okay. Thank you, Zoey. Let me answer your two questions. I think the number one in terms of the trading volume. Just to give you some breakdown in terms of our fourth quarter trading volume, US markets roughly accounts for 65% of our total trading volume. The remaining 34% came from the Hong Kong local market and we have very tiny portion from the Hong Kong, China stock market.

If you look at our blended commission rate, Q-on-Q-wise, it keep very, very stable. If we take out some fluctuation due to the IPO and also the US trading, because our US stock commission actually some of our US trading commissions based on the number of this years, rather than a blended in those percentage calculations. So, on a like-for-like basis, our commission rate keep there was stable, and I do think such stability will continue toward this year.

And also in terms of the commission contribution, from the Singapore market this year, I think the proportion wise, will not be where we're aiming for, because there are still a growth learning curve in the -- in the Singapore market and also in order to penetrate the market more quickly and more aggressively, actually we adopt a lot of commission free strategies, because we think in the current stage, market share is far more important than the modernizations from the trading commission.

Zoey Zong -- Jefferies -- Analyst

That was helpful. Thank you.

Arthur Chen -- Chief Financial Officer

Thank you.

Operator

Thank you. We have our next question from the line of Yiran Zhong from Credit Suisse. Please go ahead.

Yiran Zhong -- Credit Suisse -- Analyst

[Foreign Speech]

The first is, following up on your paying client guidance of 700,000 net new paying clients for 2021, off those 80% are from Hong Kong and Mainland. What's the expected contribution from Mainland China versus Hong Kong local? On Singapore specifically, what's the marketing strategy for that market and how should we think about the customer acquisition costs going forward? Thank you.

Leaf Li -- Founder, Chairman, Chief Executive Officer and Chairman of the Technology Committee

[Foreign Speech]

To your first question on breakdown. As we mentioned, 80% of our new clients will be from Mainland China and Hong Kong, and then on those 80%, we think about 50% will be from Hong Kong and the rest from Mainland China.

And to your second question on the Singapore market, based on our own observations, competitive landscape in Singapore is very similar to that in Hong Kong. There is a relatively large retail investor base, that is relatively wealthy and the market is also dominated by incumbent players that have lackluster trading technology capabilities and have less than optimal user experience.

And for Q2, I think our client acquisition channels will be very similar to the channels in Hong Kong, including online and offline marketing, working with third-party channel partners, working with KOLs and also organic growth.

[Foreign Speech]

We expect our per paying client acquisition costs in Singapore to be around HKD2,000. So, that's our estimates based on one-month of experience, actually launching in the Singapore market and we believe that, as our user growth picks up, this per paying client acquisition costs has ample room to go down. Thank you.

Yiran Zhong -- Credit Suisse -- Analyst

That's very clear. Thank you.

Operator

Thank you. [Operator Instructions] And there are no further questions. I would like to hand the call back to Daniel. Over to you, sir.

Daniel Yuan -- Chief of Staff and Head of Investor Relations

Thank you. 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

[Operator Closing Remarks]

Duration: 38 minutes

Call participants:

Daniel Yuan -- Chief of Staff and Head of Investor Relations

Leaf Li -- Founder, Chairman, Chief Executive Officer and Chairman of the Technology Committee

Arthur Chen -- Chief Financial Officer

Katrina Liu -- Morgan Stanley -- Analyst

Xue Yuan -- CICC -- Analyst

Jackie Xou -- Channel and Sons -- Analyst

Zoey Zong -- Jefferies -- Analyst

Yiran Zhong -- Credit Suisse -- Analyst

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