Hello, ladies and gentlemen, welcome to Futu Holdings Second Quarter 2021 Conference Call. At this time, all participants are in a listen-only mode. After the management's prepared remarks, there will be a Q&A 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 conference over to your host for today's conference call, Daniel Yuan, Chief of Staff and Head of IR at Futu. Please go ahead, sir.

Thanks, operator, and thank you for joining us today to discuss our second quarter 2021 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 risk and uncertainty. 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 will 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 the earnings call today. We achieved the milestone of 1 million paying clients as of the end of second quarter, translating into a 230% year-over-year growth. Net addition was 211,000, our second best quarter in history. Our relentless pursuit of premier user experience and brand image rewarded us with yet another quarter of rapid client base expansion; over 50% organically acquired paying clients and a high paying client retention rate of 97.8%. Going forward, our key growth strategies would be to defend and extend our leading position in Hong Kong, further take market share in Singapore, and drive self-clearing in the U.S. to improve monetization and operational flexibility. In the second quarter, Singapore contributed nearly half of our new paying clients. Singapore represents a blue ocean opportunity and we will leverage marketing and word of mouth referral to further capture user mind share. In the U.S., our self-clearing initiatives recorded accelerated progress as we now have migrated about 350 U.S. stock to our proprietary clearing system. We are targeting to self-clear 50% of U.S. stocks by the end of this year. Our total client assets were HK$503 billion at quarter end, representing 253% growth on a year-over-year basis and 9% growth on a quarter-over-quarter basis, despite challenging mark-to-market impact. Average client assets came down sequentially to HK$503,000 as paying client acquisition in new markets picked up and dragged average balance. Total trading volume was up 104% year-over-year to HK$1.3 trillion, of which U.S. trading constituted approximately 64%. Trading volume came down meaningfully from the first quarter due to a much lower turnover rate across different trading markets and client cohorts. We have seen our clients stay on the sidelines amid market uncertainties and we expect our trading volume growth in the coming…

Thanks, Leaf and Daniel. Please allow me to walk you through our financial performance in the second quarter. All numbers are in Hong Kong dollar, unless otherwise noted. Total revenue was HK$1.78 billion, an increase of 129% from the second quarter of 2020 and decrease of 28% sequentially. Brokerage commission handling charge income was HK$798 million, up 95% year-over-year and down 40% Q-on-Q. The Q-on-Q decline was mainly due to a sharp drop in trading turnover amid general market sentiment from about six times in the first quarter to three times in the second quarter, respectively. This was partially offset by higher client assets and the slightly sequential uptick in blended commission rate to 6.1 basis point. Interest income was HK$610 million, an increase of 194% year-over-year and a decrease of 7% Q-on-Q. The year-over-year increase in interest income was mainly driven by higher margin financing balance, higher security borrowing and the lending service income, as well as higher IPO financing income. The moderate quarterly decline can be mainly attributed to a reduction in security borrowing income as the market value of U.S. stock borrowing and the borrowing rate both dropped sequentially. Other income was HK$169 million, up 141% year-over-year and down 24% Q-on-Q. The year-over-year growth and the Q-on-Q decline can both be attributed to changes in our IPO subscription service charge income and currency exchange service income as market conditions fluctuated. In terms of cost, our total cost was HK$279 million, an increase of 81% from the same quarter last year and the decrease of 37% from last quarter. Brokerage commission and handling charge expenses was HK$145 million, an increase of 89% year-over-year. This increase was roughly in line with our changes of our brokerage commission and handling charge income. Interest income was HK$80 million, up 98% year-over-year.…

[Operator Instructions] Your first question comes from Katherine Liu of Morgan Stanley. Please ask your question.

[Foreign Language] I will translate for myself. So I have two questions. First is, can the management please give us some guidance in terms of the third quarter-to-date results, including client acquisition pace, AUM per capita, turnover velocity, client acquisition cost and maybe some operating expenses growth rates? And, second, in light of the regulatory uncertainties regarding restructured companies and ADRs, does the company have any plans regarding Hong Kong listing? Thank you.

Thank you, Katherine. This is Arthur. I will take these two questions. First of all, just quarter-to-date, I just want to share some color. Definitely, I think the market fluctuations quarter-to-date have some negative impacts on our average client assets. So far in the wealth play, our average client assets will be down along in the range of 10% to 20%, mainly attributed to the markets and market loss, but we are very confident because even quarter-to-date almost every day we still see meaningful net asset inflows in terms of the wealth accumulations in Futu platforms. Therefore, as you think, if the market back to normal, since marketing - market loss or gain will be come to the average numbers. And in terms of the clients trading velocity, we do expect trading velocity have some rebound in the - in July and August, given the market - especially high tax costs have meaningful setbacks, we do see some from more transitions, from the retail investors and unlike - meaning, unlike the situation in second quarter, many investors set on the sidelines, we do see some participations in the third quarter. So it's based on the current run rate. I would expect in terms of top lines, we may see some sequential Q-on-Q increase in the third quarter compared with the second quarter. In terms of the client acquisition cost, I think on an absolute amount levels, this marketing campaign spending will be roughly in line with what we gave in the second quarter, but definitely the client acquisition speed will slow down due to the market conditions. So this will affect the normal denominator numbers and then we will let our CAC numbers have certain increase in the first quarter compared with the second quarter. For your second questions, I think number one, our BI structure is slightly different for many - compared with many Chinese ADR companies, because most of our revenue are now derived from the offshore, essentially we do not generate any revenues from our BI structures. So even there will be some new regulations on the BI structure, I do not expect that we will have some meaningful impact operational wise or financial wise to our business. And definitely we have noted some recent trends in the capital markets and we are actively conducting quality research and valuation gets sorted out. We will make a very comprehensive assessment to ensure that decision to maximize our shareholders' - that the long-term interest is met. Thank you.

Your next question comes from Ethan Wang from CLSA. Please ask your question.

[Foreign Language] Okay. So, thank you management. I have two questions surrounding the Chinese ADR delisting risk. The first one is wonder whether management can share some color on the current percentage of Chinese ADR's as a percentage of the total trading volume of the U.S. stocks on Futu? And the second one is, if the risk of delisting for the China ADRs really happens, then these companies may very likely to convert their Hong Kong listing into primary ones, that means they will be included in a Connect scheme, which means the Chinese investor can trade those stocks to online China brokers. Does that mean a very big risk for your firm, so how does the management look at this? Thank you.

Okay. Thank you. I would take the first question and I will leave my colleagues Robin and Leaf for the second questions. In terms of our current U.S. stock trading, that - essentially ADR just accounts for a very small part. If we do some back-testing around 15% of our U.S. stock trading belong to these Chinese ADRs. Robin or Leaf?

[Foreign Language]

Yes. We think the return of China ADR's back to Hong Kong could be a structural trend, although we don't really take a stance on how the regulations will evolve and the Hong Kong IPOs generally have very high monetization potentials and we generate a pretty sizable percentage of our revenue from the IPO subscription and margin financing interest and also in Hong Kong there is more friendly trading hours for our client. And also just to add on to your other point about converting to primary listing, well, we don't think there is - the onshore brokers will necessarily pose a great threat to our business, because a lot of the popular China - the Chinese companies listed on Hong Kong right now already accessible to our Mainland Chinese investors through Stock Connect, for example Tencent, but some of these large cap tech companies still account for a majority of our asset balance in Hong Kong stocks. And in comparison to trading through Stock Connect, trading directly into Hong Kong market offers more flexible and more favorable trading hours and trading time. So like if Mainland China has a public holiday, does not affect our trading hours in Hong Kong and also there is a lot more flexibility as our margin financing and there is a wider selection of stock that you can invest in. So we don't believe that a number of Chinese companies converting from secondary listing to primary listing will change our competitive edge in this market.

Sure. Got it. That's it for now. Thank you.

[Foreign Language]

[Foreign Language]

And we also have a very differentiated client cohort as compared to some of the onshore broker, so we don't think our competitive advantage will be diluted should this circumstance actually realizes.

Your next question comes from the line of Zoey Zong from Jefferies. Please ask your question.

[Foreign Language] Hi, management. Thanks for taking my question. This is Zoey Zong from Jefferies, and I have two questions. My first question is regarding the tax rate. I believe we have noted that the effective tax rate for Q2 was 14.5%, which is much higher than the previous quarter. I wonder what's rate of - for the increase? And how should we estimate this number going forward? And my second question is, we know that Hong Kong Exchange plans to adopt a T+2 settlement cycle instead of the current T+5 in the first quarter 2022. I was wondering how should we think about the impact of our IPO financing business? Thank you.

Thank you, Zoey. I will answer the first question and will leave the second question to Leaf. Actually I had mentioned this in our opening remarks. You're right, our effective tax rate increased from 9% in the first quarter to 14.5% in the second quarter. The reason actually comes from twofold. Number one is our tax credit arising historical accumulated loss in the China operation has been fully utilized. So this is a permanent effect. And secondly is our net revenue derived from our U.S. stock trading belonged to these Mainland individuals. Actually, we can make our offshore claims in Hong Kong, but you know their U.S. stock trading volume in the second quarter declined. Therefore, we have some temporary impact in the second quarter arising from these second regions. Going forward, we expect our effective tax rate will be in the range of 12% to 14%. Thank you.

[Foreign Language]

Sure. So the IPO financing income accounted for about 4% of our revenue in the first half of this year and contribution was less than 6% in 2020. So if we were to assume that the settlement period goes from T+5 to T+2 from a statistics point of view, this will have only a 2% to 3% negative impact on our topline, which we think it's manageable.

[Foreign Language]

Secondly, to provide the IPO subscription period kind of overlap with each other, so we believe some of the needs for IPO subscription happened to subdued under the current regulations and we think that could change after reform. So especially when the markets are performing really well and there are lot of IPOs happening at the same time, having a T+2 settlement period can increase the capital efficiency of our clients and therefore may potentially help increase their engagement in this IPO subscription process. And also we understand that the regulations are not only shortening the settlement period, but also maybe touch on in avoiding the retail clients from subscribing to IPOs through multiple brokers and we believe that the IPO financing income makes up a very significant income for a lot of their mid to small sized brokers. So this policy could actually contribute to industry consolidation and direct a lot of these retail investors to platforms like Futu that have better user experience and more capital for them to use during the IPO.

[Operator Instructions] Your next question comes from Hanyang Wang from 86 Research. Please ask your question.

[Foreign Language] I will translate my questions. Thanks management for taking my questions. Congratulations on another great quarter. I have a question on the IPO business, so the uncertainties for China ADR's IPO throughout the recent slowdown of Hong Kong IPOs impact our ESOP business and will that also impact our user acquisition in Mainland China to - so ESOP? Thank you.

Well, thank you. Let me take this question. I think, number one, the slowdown of Chinese companies overseas ADR IPO is just a temporary situation. We do understand that many Chinese companies in the pipelines and they are waiting for more clarity in terms of the regulations from China and also from the U.S. regulators down the road. Therefore, I think the impact will be very short term. And, having said that, we also see, as Leaf mentioned before, we see more and more U.S. listed companies and also pre-IPO companies will consider Hong Kong as their primary listing stage rather than U.S. in the past. We do have a very strong edge in Hong Kong market, given Hong Kong is our home base, therefore we do think our client position through the ESOP, through the IPO will continue. Just give you too some breakdowns, in terms of our current client acquisition channels, organic already account for over 50%. If we just calculate ESOP channel combined with this group account opening, we are just account for around the 10% of our total new paying clients enhanced every quarter. So I think the impact is manageable.

We have another question from the line of Katherine Liu from Morgan Stanley. Please ask your question.

[Foreign Language] I will translate for myself. Just wondering, I understand that your line of new market initial monetization may be through less importance versus clients' market share, but then just wondering, has the management considered increasing the monetization for the Singapore market? Whether it will be some guidance from companies or some hints from companies, or it will be a natural result as clients assets increase on the platform? Thank you.

Sure. Katherine, let me give you some colors in terms of our client profile in Singapore. I think in terms of age and their trading velocity, this population is a very similar to what we see in Hong Kong markets. The average age is around the 30 years old and that they do trade a lot, in particularly for the U.S. markets. Now the average client assets in Singapore is around the SGD6,000. Of course, it is relatively low compared with the assets what we witnessed in China and in Hong Kong, but encouragingly, I think, if we look at the cohort basis, the new clients we acquired in March and April, their cohort assets are really almost double in the past four to five months. So back to your question, I think, number one, definitely, we think the nature of our business, it's just more like a rolling a snowball. We are very happy to go along with our clients in their investment journeys. We believe as times go by, their average assets will become bigger and bulk - and bigger. Number two, definitely we will have a more service offering, more product offerings in the pipeline. Hopefully, we will launch more business in the coming two quarters. For instance, we will provide Singapore clients to participate in the Hong Kong IPO retail tranche and not to mention we will also expand our wealth management product offerings. Currently just offering to the Mainland and Hong Kong people to the Singapore local residence as well. Therefore, I think as we provide more and more products and service, we will find more and more monetization areas to enhance our ARPU.

As there are no further questions at this time, I would now like to hand the conference back to Daniel for closing remarks.

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.

Thank you. That does conclude our conference for today. Thank you for participating. You may now all disconnect.