Ladies and gentlemen, thank you for standing by, and welcome to the Futu Holdings Third Quarter of 2019 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speakers' presentation, there will be a question-and-answer session [Operator Instructions]. I must advise you this call is being recorded today. Now I'd like to hand the conference over to your first speaker for today, Mr. Daniel Yuan. Thank you. Please go ahead.

Thank you, operator, and thank you for joining us today to discuss our third quarter 2019 results. Joining me on the call today are 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 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 will now turn the call over to Leaf Li. Leaf will make his comments in Chinese and I will translate.

[Foreign Language] Hello, everyone. Thank you for joining us today. Despite the ongoing situation in Hong Kong and the weak equities market, we were very pleased with our performance during a challenging third quarter. [Foreign Language] Our total number of paying clients jumped 42% year-over-year to about 177,000. We added over 12,000 net new paying clients in the past quarter, which was roughly split between China and Hong Kong. Even though we decided to scale back our marketing efforts, given the difficult social situation, we were able to almost double the number of paying clients in Hong Kong, while maintaining double-digit growth in net new client additions on a year-over-year basis. This speaks to the unique value proposition of our platform and the high potential of this market. At the same time, we were able to maintain a 98.1% client retention rate this quarter. By year end, we expect our total paying clients to reach a 190,000 to 195,000. [Foreign Language] Client asset growth was another highlight of Q3. While Hong Kong stocks, which cover about half of our client trading turned in the worst performance among the major stock markets around the world in the third quarter, our total client assets actually rose to a record HKD72 billion, an increase of 33.3% year-over-year and 6% quarter-over-quarter. We saw a net asset inflow of HKD5.7 billion, which is a number we track closely as we transform from a purely transaction-based business model to a model that increasingly relies on fee income from assets under management. [Foreign Language] Part of the strong asset growth was driven by Money Plus, our mutual fund distribution platform. As of September 30, which was only a month after the platform was officially launched, total client assets in mutual funds had already surpassed HKD3 billion. Besides…

Thanks, Leaf. We concluded third quarter with total revenue of HKD254 million, up 13% year-on-year and down 2% year-over-year. Our paying client growth was offset by lower ARPU, given the weak equity market. Let me walk you through some key of our financial data for this quarter. Brokerage commission and handling charge income was HKD123 million, an increase of 12% following the same period in 2018 and flat on a sequential basis. Total trade volume rose by a moderate 6%, and our commission rate for U.S. stock trading slightly increased due to fewer promotion discounts and lower U.S. option trading. Brokerage commission and handling charge income contributed about 48% of our total revenues in this past quarter. Interest income was HKD115 million, an increase of 11% year-on-year and 1% Q-on-Q. Banking interest income increased due to higher idle cash positions and higher benchmark interest in Hong Kong compared with the same period last year. But sequentially, the benchmark interest rate has come down by about 0.3%. Margin financing income increased primarily due to higher-margin financing and the short selling in the U.S. market. Our margin financing and the security lending balance increased by 17% on a yearly basis and 13% Q-on-Q. Interest income contributed about 45% of our total revenue. Other income was HKD16 million. The 39% year-on-year growth was mainly attributed to the new Money Plus business and higher enterprise service charges income. Sequentially, this fee income from our enterprise business came down by a large margin due to fewer IPO activities in the quarter. On the cost side, total costs were HKD70 million, a decrease of 4% year-on-year, an increase of 9% Q-on-Q. Most of the costs were in line with our revenues. Overall, we recorded total gross profit of HKD185 million. Gross profit increase of 21% year-on-year,…

Thank you. [Operator Instructions] First question comes from the line of Daphne Poon of Citibank. Please go ahead.

Hi, management. Thanks for taking my questions. So a couple of questions from my side. So first one is on the paying customer growth. So you mentioned about the mix is still like 50-50 from China and Hong Kong, which means that there is also a slowdown in the new paying clients from China. So I would like to understand more like whether you see that as more of a structural reason. Or do you see it more because of this market or the current market condition? And I guess what is the outlook here in terms of the new paying clients from China going forward? And also related to that, it's -- I guess, it's in the current situation in Hong Kong. Can you -- wonder if you have any other like backup plans maybe in the other overseas market expansion? And then the next question is about the fund distribution business. So we'd like to understand what would be the revenue contribution from the Money Plus platform in the third quarter. And since you are currently offering zero subscription fee, I guess, as a promotion, so would there be any timetable for you maybe to increase the fee rate or start charging fees or maybe, say, when your AUM reach a certain scale that you may expect to increase the monetization effort on that? And lastly, just on the sales and marketing expense. Since you mentioned you scaled down on the marketing efforts, but it seems the expense has not come down that much in Q3. So will be wondering whether there is time lag and what will be the outlook in Q4, like should we expect a more -- a better decline of the expense in the fourth quarter? Thank you.

Thank you, Daphne. This is Arthur. I will answer your three questions. Well, number one, in terms of the new paying clients acquired in third quarter, actually, the slowdown in China, I think it is more due to the equity market volatilities in third quarter. We do not see any structural slowdown in the Mainland. And for the mutual funds distributions, the direct revenues in the third quarter is still relatively small, which we included in the other income items. But we think the AUM growth will remain robust in the fourth quarter. And we actually now share a certain portion of the mutual funds management fees, which we record as our distribution income. But we do note particular disclosure -- the particular percentage of the commission fees allocated to our site. And also, for the marketing expenses, you are right, there are certain time lags in the third quarter. I think the current situation or the data we witnessed in October, actually, we have seen some market recovery, partially due to more and more IPO activities in Q4 such as the recent Alibaba's IPOs in Hong Kong, which give us a lot of good momentum in terms of new paying clients acquired and also new asset inflows. So I do think the marketing expenses may -- should be -- keep stable in Q4 compared with Q3.

Arthur, so...

And also just to supplement for other markets expansion, I think that currently, we will still focus on our existing markets in Hong Kong. Of course, you may recall that we have the license in the U.S. market as well. We are also -- polish our products for our U.S. markets, which I think will be another growth driver for our new and paying clients acquired in 2020.

Okay. So looking into next year, does it mean that, I guess, the Hong Kong market will still be your primary focus, I guess, like Hong Kong and Mainland China clients will still be the primary drivers or your focus in terms of growth or customer acquisition.

Yes. You are right.

Okay. Got it. Thank you.

Thank you.

Thank you. [Operator Instructions] Our next question is from the line of Stanley Xia of Goldman Sachs. Please go ahead.

Hi, management team. Thank you for taking my questions. I actually have three questions. The first one is still regarding to the marketing expense. We find that per paying client acquisition cost, which is calculated as marketing spend divided by new paying clients, actually decreased -- actually increased quarter-over-quarter. We're just wondering the reason for the increased paying client acquisition costs. Does it have anything to do with the recent social events in Hong Kong? And on top of that, we'd really appreciate it if management team could provide guidance on marketing expense and paying clients outlook for next year. And my second question is on commission fee rate. We see that Futu's gross commission fee rate is still at a pretty high level. It even increased a bit quarter-over-quarter. We think it would be great if management team can add some color on this. And my last question's on the other income. We're just wondering if we could have more detailed explanation on the decreased other income quarter-over-quarter. Thanks. That's all for my questions. Thank you.

Sure. Thank you, Stanley. Let me just answer one by one. For the marketing expenses, actually, certain marketing advertisements have to be scheduled ahead of a lot of events. So there are some fixed costs, which we have already commenced before we have the expectations of recent social events in Hong Kong. And secondly, for the new paying clients guidance and also the marketing expenses guidance for the next year, actually, we are now in the process of internal budgeting for our 2020 outlook. So we will update you for these data in our fourth quarter earning calls. For the commission rate, actually, we do not feel any pressures in terms of commission rate fee cut. You can see on a sequential basis, our commission rate remains quite stable in the third quarter. The partially increase was due to more U.S. option tradings by our paying clients. For the other income, sequentially, you see some backward on a Q-on-Q basis. This is due to the IPO activities, relatively, was quiet in third quarter compared with the second quarter.

Thank you. That's really helpful. Thanks.

Thank you.

Thank you. Our next question is from the line of (inaudible) of HSBC. Please go ahead.

Hi, management. I have two questions. The first one is on -- do we have a breakdown of the trading volume in terms of region, for example? Is the number between Hong Kong and U.S. market still 50-50? And how do we react to the zero commission campaign in the U.S.? Because we recently see some quite strong marketing events from our competitors in the Hong Kong region for the U.S. stock. So do you think the zero commission campaign will happen in Hong Kong in the future? And second question is about the R&D expense. So I see the details of our disclosure said the headcount of R&D is included in the expense, and it will also be delayed into the next few quarters. So do we have a CapEx estimate for the R&D expense in the following quarters? Thank you.

Thank you, Lily. Let me just answer your second question first. And for the first question, in particular, the expectations of the zero commissions competitions my -- our CEO, Leaf, will address these questions. For the R&D side, I think, next year, the situation will be more normalized. In particular, this year, we heavily invest a lot of new headcounts in the R&D sections, which accounts, as I mentioned before, in terms of total headcounts, R&D and also the product team already account for 74% of our total employees. And R&D versus the sales revenue ratios already achieved close to 25% in the third quarter. I do think this ratio will come down and be normalized in 2020. And also, for the trading volumes, in the past quarter, actually, the U.S. trading volumes is slightly bigger than the Hong Kong trading volumes. In terms of breakdown, U.S. trading roughly accounts for 52% of the total trading volumes; and Hong Kong, plus Asia, Hong Kong stock net roughly accounts for 48% of the total trading volumes in the third quarter. Now I hand over to Leaf for your questions regarding the zero commission competition in the U.S. and also in Hong Kong.

[Foreign Language] We are very much aware that online brokers such as Charles Schwab started offering zero commissions in the third quarter. But this zero commission offering is mostly targeting the U.S. domestic users. And as you know, most of the paying clients come from Mainland China and Hong Kong, and these are and will be our main focus in the near term. And secondly, as you probably know, for the transaction fees for Hong Kong, most of the charges actually come from the government charges, especially the stamp duties. So if our trading volume is HKD10,000, for example, the stamp duty will be HKD100. So at Futu now, we are offering the commission rate of 3 bps with a minimum charge of HKD3. So you'll see that mathematically, by offering zero commission, it does not decrease the overall planning commission rate by that much. And most of the U.S. online brokers, they haven't done much of branding and marketing in the Hong Kong local market, and we don't think they have very strong client acquisition capabilities in the Hong Kong local market. And looking at the local brokers in Hong Kong. And right now, I think most of the Hong Kong local brokers don't derive a significant portion of their revenue from the commissions income, around 50%. So we think in the short term, we don't expect any other brokers in Hong Kong to start offering zero commission. So I think in the short term, we expect the commission rate to be quite steady, and we also don't have any plans to start offering zero commission trading. Does that answer your question?

Well, thank you.

Welcome.

Thank you. [Operator Instructions] We have a question from the line of Daphne Poon of Citi. Please go ahead.

Hi, thanks for taking my question again. So just a follow-up on the fund distribution business. Just wondering can you give us a rough idea like when do you expect a more meaningful revenue contribution from that business? Because you also mentioned that you're shifting from trading volume-driven business to a more asset-driven business. So yes, wondering what would be the timeline, whether it's, say, a few quarters down the road or maybe it takes longer, say, two to three years down the road that we see a more meaningful contribution from that part of the business. Thank you.

Sure, Daphne. I think our near-term targets for the fund distribution is the user engagement and accumulated assets. That's why we are not too hunger to charge subscription fees, in particular, these upfront costs to our users. I do expect our AUM toward the year end, we will achieve or exceed at least HKD5 billion in terms of total fund distribute. And I think in terms of the gross profit contributions in 2020, I do look forward -- it will close to high single-digit gross profit levels contribution on the fund distribution in 2020.

Okay. That's helpful. Thank you.

Thank you.

Thank you. [Operator Instructions] There are no more questions as of this time. I would like to hand the conference back to Mr. Daniel Yuan. Please go ahead.

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.

Susan?

Thank you. Ladies and gentlemen, that does conclude the conference for today. Thank you for participating. You may now all disconnect.