Hello, ladies and gentlemen. Welcome to Futu Holdings' Second Quarter 2020 Conference Call. At this time, all participants are in listen-only mode. After managements' prepared remarks, there will be question-and-answer session. 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 call 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. Thank you.

Thanks operator and thank you for joining us today to discuss our results for the second quarter of 2020. 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 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. So, with that, I would now turn the call over to Leaf. Leaf will make his comments in Chinese and I will translate.

[Foreign Language] Hello, everyone. Thank you for joining us today, we're pleased to announce that we continue to achieve exponential growth across our operating and financial matrices in the second quarter of 2020 following a very successful first quarter. [Foreign Language] We achieved the highest paying client growth rates since our IPO in the first quarter of 2019. We added 64,566 paying clients on a net basis and the second quarter, bringing our total number of paying clients to 303,102, up 84% year-on-year. Both our China Mainland and Hong Kong paying clients recorded stellar growth. Our China Mainland paying clients hit a record high growth rate since the fourth quarter of 2018, while the number of Hong Kong paying clients jumped 125% year-on-year. Notably, organic growth continued to contribute over half our new paying clients. [Foreign Language] During our fourth quarter 2019 earnings call, we guided for 90,000 paying clients addition in 2020. Six months into 2020, we have already exceeded our full year growth target. We're now lifting our guidance to 280,000 net new paying clients this year, which translates to 141% year-on-year growth in our total number of paying clients. [Foreign Language] Besides total paying clients, we also witnessed robust growth momentum in total client assets and stable client retention with growth in both paying clients and average assets per clients, our total client assets reached HKD142.4 billion, representing 108% growth on a year-on-year basis and 44% growth on a quarter-over-quarter basis. The past quarter was our sixth consecutive quarter with a churn rate of below or equal to 2%. [Foreign Language] As for trading volume, our total trading volume reached a historic high of HKD643.9 billion, up 202% year-on-year. U.S. stock trading volume was HKD429.3 billion, which accounted for 66.7% of our total trading volume. In July,…

Thanks, Leaf and Daniel. In the second quarter, we continue to deliver outstanding financial results. We recorded the total revenue of HKD688 million, up 165% year-over-year and 40% Q-on-Q. Our net income was HKD236 million, up 329% year-over-year and 52% Q-on-Q. Our total revenue structure and the key revenue lines have been largely consistent with private quarters. Let me walk you through some of our financial details for the second quarter. Brokerage commission and the handling charge income was HKD410 million, an increase of 236% from the same period in 2019 and up 37% from Q1. The growth was primarily due to 202% year-over-year growth in our total trading volume. Our blended commission rate went up to 6.4 basis points on the back of increasing penetration of trading in the U.S. market. Also, more client trade low value stocks during the quarter in the U.S. market, which led implied take rate higher. Brokerage income contributes 60% of our total revenue in the quarter. Interest income was HKD208 million, an increase of 82% year-over-year and 44% Q-on-Q. Margin financing interest income increased on the back of 49% year-over-year growth in daily average margin financing balance. IPO financing interest income increased significantly, thanks to an our active Hong Kong IPO market and our clients increasing appetite to subscribe high quality IPOs on margin. Banned interest income increased due to clients' high idle cash balance, interest income as a total contributes about 30% of our total revenue. Other income was HKD17 million, a 192% year-over-year growth was primarily due to an increase in IPO financing service charge income and a fund distribution service income from our wealth management business. Other income contribute about 10% of our total revenue. On the cost side, total cost was HKD154 million, an increase of 141% year-over-year and…

Certainly. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] We have the first question from line of Weicheng Tang. Please go ahead.

Hi, Leaf, Author. Yes, thanks for the introduction and firstly, congratulate on the variable earnings in the second quarter. So, I have two questions. One is about the paying clients, we see a salary decline acquisition in second quarter even better than the historical high in the first quarter like 40,000, now we have like 65,000 new paying clients. So, can you elaborate more on the drivers of the paying client growth? And how do you see the momentum will continue in the second half of this year? The second question is more like a broader questions. So, basically, we see the retail activity, particularly online retail trading activity has picked up quite a lot across the region like Hong Kong, China and U.S. And it's a very good like operating environment for Futu, but also we see a competition is also rising with [Indiscernible] introducing the zero commission package in Hong Kong a few months ago, and maybe there are more competitors entering the market. So, I would like to ask like -- if you're looking at one to two years horizon, what is your -- what do you think is the biggest opportunity as well as the biggest challenge for Futu? Thank you.

Okay, thank you, Weicheng. I think I suggest my colleague Robin answer your first question and Leaf will answer your second question.

[Foreign Language] So, there are -- I think there are three major reasons behind our robust paying client growth. The first one being the COVID-19 pandemic has expedited the change of the behavioral patterns of the retail clients, aka migrating from offline financial institutions to online trading platforms. And besides the increased volatility in the market has attracted a lot of new investors and new capital. And the second reason being that Futu has long been devoted to optimizing our user experience and has created a very strong network effect and very established raising brand awareness. And in the first two quarters of this year, you can see that organic growth continue to contribute over 50% of our new paying client growth. And the third reason is that our operating efficiency also continue to improve. The conversion rate from our leads to paying clients also continues to improve. And those are the three main reasons behind our paying client growth. And I think going forward, we think we have a very optimistic view towards our paying client growth. We see very strong paying client contribution from various channels. As of the end of 2019, I think 70% of our paying clients are from Mainland and 30% from Hong Kong. And by the end of this year, we expect Hong Kong paying clients to contribute to over 40% of our total paying client base. And also we just got the in principle approval for license application in Singapore. So, we think that the U.S. local market and the Singapore market could be our next step for our paying client growth.

[Foreign Language] Right. So, there have been a lot of brokers in Hong Kong that offer zero commission, Huatai is not the first one, and it will certainly not be the last one. And to be honest, we haven't felt much pressure from these players. And you can see that our paying client growth has demonstrated stronger growth momentum than ever. So, if you look at the Hong Kong market, there's a 10 bps stamp duty, so Futu is now charging three bps for Hong Kong Stock trading and we think a further decrease in our trading commission actually brings little incremental value to the reduction of overall trading costs. And for the long time Futu has not been the broker that offers the lowest commission rate in the market, we believe that we are the one that has the strongest overall user experience. So, besides charging a commission rate that's significantly lower than industry average, we have the most in depth market data. We have a very stable trading system that allows for high quality trade execution. And we have very high quality market use and a very active social community platform. And these are all very important reasons to attract new customers and then these all require a long time to establish. [Foreign Language] In terms of our market opportunities, we believe that our target markets still offers tremendous opportunities for growth and in terms of the trade markets. I believe that the Hong Kong and the U.S. stock markets are still the two most attractive equity markets in the world. And Hong Kong - the Hong Kong Stock Market ranked number one in 2018 and 2019 in terms of the equity amount raised through IPOs. And we believe that as more high quality new economy companies come…

Can we move to the next questions?

Yes. Please.

The next question comes from the line of Daphne Poon from Citi. Please go ahead.

First congratulate on the very strong quarter. So I have a couple of questions here. First is regarding your client base for the new paying clients. So first would like to ask on the next -- between Hong Kong and Mainland China clients in terms of the new paying clients in the second quarter? And also like looking at your full year guidance on the new paying clients, we see is 280,000 which is a very strong number. So just wondering, if you can share some color on the -- on the recent two months like July and August can grow so far, like which is like how you can support confidence for the full year or second half continuous strength? And also one more on the client size that we see that the conversion rate has been improving. I think you also mentioned earlier, like conversion rate from the register clients who paying -- paying clients. I'm just wondering, whether this is also because of the higher conversion rate you have with the Hong Kong clients versus Mainland China, I guess there's still some tactical control which may have lower conversion rates. So yes, just wonder if you can break down the conversion rate for the -- for the two markets? And then next, I would also like to ask about your trading volume that you reported this, -- your -- market trading volume, this quantity which -- we have seen very strong growth and much stronger than Hong Kong market. So wonder if you can share that, what you see as the reason behind driving this strong growth and also whether this is like more skewed towards the U.S. companies or the Chinese ADRs and whether your biggest strength is, I guess sustainable going forward. And, and lastly, sorry, quite a lot of pressures. Lastly, just want to check on your thoughts about the international expansion, we understand you've got -- you mentioned you're expanding into the U.S. and Southeast Asia market, but also want to get your thoughts on the Asia market license. I understand it's not fully opened up yet, right, in terms of the license approval, but I guess thinking longer term, maybe two, three years or even longer down the road, what's your thoughts about the chance of getting a Asia license as well? Thank you.

Okay, thank you, Daphne. Let me just answer your first, second and also the fourth question. I will leave the third question to Robin, and the final question regarding the Asia market access to my Leaf. In terms of the breakdown of new client acquisition for this quarter, China roughly accounts for 53% of the total and the remaining 47% came from the China. And also in terms of the trading volumes, as you mentioned before, the U.S. trading volume roughly accounts for two-thirds of our total trading volumes achieved in this quarters in terms of the stock trading by all clients actually I think will be more skew to these purely U.S. stocks, such as Tesla, Facebook, and even GE et cetera. The overall Chinese areas trading volume -- our U.S. trading volume size is roughly about 15%. And in terms of the trading volume sustainability, I think it is more because of the high volatility in the U.S. markets, particularly in the first half of this year. Going forward, I think the proportion of the Hong Kong trading volumes will continue to go up, because we continue to gain market share in the Hong Kong market, compared with the first quarter, which we achieved a 1.4% cash and warrants stole market shares in Hong Kong. Our market share actually continues to increase to 1.6% in the second quarter, and the such momentum actually will continue -- has continued into July and August. Roughly speaking in July, our market shares in Hong Kong already achieved the 2.5%, which I think is -- which will underpin our growth strategies in the Hong Kong market trading volumes. So I will let Robin answer your second question about the conversion rate going forward and also our Asia market access by Leaf. Thank you

[Foreign Language] So, there are three main reasons between -- behind the higher conversion rate from total clients to total paying clients. And the first reason is, as it just says Daphne, there is a higher percentage and contribution from our Hong Kong paying clients. And Hong Kong paying clients are typically demonstrate higher conversion rates. And the second reason as Robin just mentioned, answering Weicheng question so we see an increasing conversion rate between our leads to our paying clients. So we have increased our operating efficiency, we have optimized the account opening and the cash deposit processes, so which made it easier for our clients to become our paying clients. And the third reason is because the general market volatility and the increase of high quality China ADR coming back to Hong Kong, so a lot of our clients want to take advantage of this opportunity to make money and that also resulted in the higher conversion rate. So you go to Leaf.

[Foreign Language] So we have continued to look out for opportunities in the Asia market, and five years ago, we became the level two market data provider in cooperation with Shanghai, China Stock Exchange, and we continue to optimize our market data, our news -- our trading offerings for Asia stocks to through Stock Connect. And we've also noticed the relative policy updates with regards to the Greater Bay Area And at the right time, I think we will consider getting the issuer license. But it's not on our immediate agenda right now. And there are still a lot of other things that we could do and we should focus on right now. Thank you.

Thanks. It's very helpful. Just want to follow-up on the conversation rate, wonder, if you can share, what is the conversion rate for Hong Kong clients versus that of the Mainland Chinese clients? And actually, just one more quick question, if I may its Regarding your any potential capital raising list as you have been undergoing this very fast business expansion and tagging into new markets, you actually wonder if you can comment on that? Thank you.

Daphne can you repeat your second question? I think let me just answer your first question first. In terms of conversion rate for the Hong Kong people, because now SFC ask local people to open account through the online model, actually they need to remit at least HKD10,000 to activate their account. So, essentially the conversion rate of Hong Kong paying clients is almost close to 100%. Then the remaining part in the Mainland people's the conversion rate between regular clients and paying clients is our longest close to 30%.

Okay. Got it. Yes. The second question is just about any potential capital raising as you continue to expand your business, including the margin financing business?

I think at the end of the second quarter, if you look at our margin balance, which was around HKD7.5 billion, this amount actually include around 20% of -- 20% of this amount actually belonged to the stock lending, which has no limitations on equity base. If we take this part out, our margin balance is around the HKD6 billion versus our total equities, close to HKD3 billion. So I think, you know, the leverage ratio is still well, manageable.

Okay. Got it. It's very helpful. Thank you.

Thank you.

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

Hi. Thank you for taking my questions. Congratulations on the very strong quarter. Just a follow-up question on the cost side, on the strong paying clients guidance. Would you provide any outlook on the customer acquisition costs in terms of transport -- transfer the second half of this year and the implication for sales and marketing expenses? And also a related question, which I think Leaf touched upon earlier, with the strong growth and better market conditions. Are you looking to revise your plan to add new staff? If not, if I'm not mistaken, you've previously got in for 20% year-on-year growth in new staff in total number of staff this year. Are there any new thoughts on this plan? Thank you.

Okay. Thank you. Let me answer your second question first. In terms of headcount, you're right. We plan to increase more headcount in the second half of the year, in light of very strong operating growth in the first half year. As you mentioned before, we guided around the 20%. Year-over-year headcount growth in the first half in line of the recent development of our business, we now consider the full year headcount increase compared with last year may in the range of 35% to 40%. And in terms of the acquisition costs per each client in the second half year, in the first half a year, our blended acquisition costs for each new paying client along the -- in the range of 1,500 to 1,600. We hope such range will remain largely insane in the second half of our new client acquisition.

Understood. Thank you very much.

Thank you.

Can we move to the next question? Yes. The next question comes from the line of Lily Liu from HSBC. Please go ahead.

Two questions. The first one is that Hong Kong IPO. So do we have the statistics that how much of our brokerage income and interest income in the second quarter is generated from the Hong Kong IPO? And could you share about the key mechanics of the IPO? For example, the 15 billion subscriptions from JD and NetEase, how much do you charge them and what is the interest charging duration and also the rate difference between normal transactions? And my second question is about the new function as a PI, professional investor services is usually the battle suit of resources and sales are personnel, whom providing their high net worth client with face-to-face or offsite services or customized services. So, what is our strategy to develop the PI business and how is our business different from the traditional private banks in Hong Kong in terms of the target customer group, and fee ratio, and also the product offerings? Thank you.

Okay. Thank you. Let me answer the first question and I leave the second question to my colleagues Daniel. Just some quick numbers in terms of the Hong Kong IPO, in the second half for the brokerage income, roughly 3% of them is coming from the Hong Kong IPO subscription and the trading. And within the interest income, roughly 20% contribute from the Hong Kong IPOs. We charge several different dollars from the Hong Kong IPOs, including the handling fees, which is normally HKD50 to HKD100 per person per subscriptions. And also, many investors will pay -- will reduced the leverage to make the subscription. The relatively interest income will be included in our interest income items under the first handling charges, which I mentioned before will be included in our other income. Then there will be some rebate, roughly 1% rebate if their subscription was successful and got shift from the company's allocation. This rebate will be included in our trading commission item as well.

Hi Lily to your second question on our private equity fund offering, you are definitely right, most of the private banks in Hong Kong, they very much rely on face-to-face interactions with a professional investors when selling the alternative investment fund. Also Futu will be still relying 100% on our online platform, will not have client service representatives to reach out to these professional investors and market our products. And the whole tenets of Futu is to equip our investors with information and tools to make well informed investment decisions. And that philosophy continues to our private equity fund offerings. We'll offer in our platform rich and adequate information about the different private equity funds and hopefully, that's enough information for them to make up their investment decision. And so far it's only been a little over a month since we started offering private equity funds and we have seen a pretty nice ramp-up in this area. So, in terms of our fee and product strategy, so I think our fee will still be lower than most of the -- than what most of the private banks charge. So, on average, we plan to charge about 1% subscription fee through our private equity funds. And for our product selections, since most of our clients are still stock trading clients, so we'll focus more on the fixed income fund offerings and for the equity offerings, we'll focus more on the tech-related hedge fund. Thank you.

Thank you. It's very clear.

Thank you. We have our next question from the line of Vincent Cao from Point72. Please go ahead.

Thanks for taking my question. I have several questions. The first is a follow-on question on your new paying customer target. You just revise up your full year target to 180,000. So that means you expect to grow new paying customer by another 170,000 in the second half. Can I get some colors about the run rate in July and August, namely, how many new paying customers you're really achieving in these two months? And where -- what's the strategy to attract that big number of new customers? Means what type of customers mainly from Mainland China or from Hong Kong local retailer, investors? And will this big number of increasing new customers dilutes the average asset per client? This is the first question. And the second question I want to ask is about the ADR, the currents like U.S. and China tensions, and U.S. also trying to like ask ADR companies to obey their rules to submit audit filings, which can cause some disruption on listing and operations. So, were you thinking about also conduct secondary listing in Hong Kong in the near future? Yes, that's my two questions. Thank you.

Okay. Thank you for your question. Let me answer your first question first. In terms of the full year guidance, you're right, our full year guidance implies around 180,000 paying clients in the second half of this year, which means on average, each month, we should achieve 30,000 new paying clients. We do not disclose monthly paying clients numbers, but I do think based on the current situations we observe in July and early August, the run rate is well on track. And the second question regarding the second listing in Hong Kong for the ADR platform, because we will list in the U.S. in the first quarter of last year. So, theoretically speaking, we cannot apply a second listing in Hong Kong until the early days of 2022. So, it is still too early for us to make our final assessment. We are still closely monitoring the length -- the politic landscape and also the new policies advocated by the Hong Kong Stock Exchange. So, currently we have no confirmed timetable and no confirmed ideas about secondary listing. Thank you.

Okay, thanks. Can I just quickly follow-up on the new paying customers? Where do you think you can -- what will be the mix of these new paying customers? How much percentage will come from Hong Kong and how much comes from Mainland China? And what do you think expected impact on the asset pricing -- average client asset per new client, will this cause, like dilution -- yes, dilution of your second quarter?

Understood. I think roughly speaking, we still target 50% from Hong Kong, the remaining 50% from the Mainland. And your concerns about dilution I think will mainly depend on the market as well. If the volatility continues, it will further increase the intentions for people to jump in more money into outperform. That's why we strive to provide a more service offering and also product offering to accelerate more money from clients' banking account. On a static basis, that the balance of the Hong Kong-based account will be slightly lower, roughly 20% to 25% lower compared with the balance -- average account balance for the main account.

Okay. Thank you. Thank you very much.

Thank you.

Thank you. I would now like to hand the call back to Daniel Yuan for any closing remarks. 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 for any of our Investor Relations representatives. Thank you and good bye.

Thank you. Ladies and gentlemen, that concludes our conference for today. Thank you for participating. You may all disconnect now. Thank you.