Hello, ladies and gentlemen. Welcome to Futu Holdings Third Quarter 2023 Conference Call. At this time, all participants are in a listen-only mode. After 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 to CEO and Head of IR at Futu. Please go ahead.

Thanks, operator, and thank you for joining us today to discuss our third quarter 2023 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 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 Annual Report on Form 20-F. 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] Thank you all for joining today. In the third quarter, we acquired around 65,000 paying clients, a 12% sequential increase. Our total paying clients reached 1.65 million, up 14% year-over-year. Three quarters into 2023, we have exceeded our full-year guidance by acquiring over 163,000 paying clients. In the third quarter, Hong Kong market contributed over 40% of new paying clients. This acceleration in client acquisition was driven by the relief rally in the first half of the quarter and successful marketing around the government's Green Bond and Silver Bond issuances in the second half. These two bond offerings attracted allocation driven clients to our platform. In late July, we opened the first offline store in Hong Kong to raise brand awareness, assist clients with account opening, demonstrate advanced product features and address inquiries regarding our products and services. Through this offline store, we managed to attract middle-aged and senior clients at a lower customer acquisition cost. In fact, clients aged 55 and above contributed over 50% of paying clients acquired through the offline store in the third quarter. In Singapore, we launched successful marketing campaigns to promote our cash management product, Cash Plus, thereby growing our paying clients by 35% year-over-year. We continue to observe improvement in client quality in the U.S. as net asset inflow of new paying clients trended higher. In September, we officially launched our brokerage business in Japan and Canada, now offering clients access to U.S. stock trading in Japan and U.S. and Canadian stock trading in Canada. During the early innings of market launch, we will remain focused on refining our account opening golden process, expanding trading products, and honing our brand positioning and marketing messages. Despite various sentiments across global equity markets, we recorded another quarter of over 98% paying client retention…

Thank you, Leaf and Daniel. Now, please allow me to walk you through our financial performance in the third quarter. All the numbers are in Hong Kong dollar, unless otherwise noted. Total revenue was HKD2.7 billion, up 36% from HKD1.9 billion in the third quarter of 2022. Brokerage commission and handling charge incomes was HKD1 billion, an increase of 5% year-over-year and 6% Q-over-Q. Higher contributions from derivative trading lift the blended commission rate from 8.8 basis point in the third quarter last year to 9.3 basis point this quarter. Interest income was HKD1.5 billion, an increase of 71% year-over-year and 7% Q-over-Q. The sequential increase was mainly driven by higher interest rate on clients' cash deposits, partially offset by lower cash balance. Other income was HKD137 million, up 28% year-over-year and 8% Q-over-Q. The increase was largely due to higher fund distribution income. Our total costs were HKD437 million, an increase of 101% from HKD218 million in the third quarter of 2022. Brokerage commission and handling charge expenses were HKD63 million, down 24% year-over-year and 14% Q-over-Q. The expenses didn't move in tandem with brokerage commission and handling charge income, mainly due to cost saving from our U.S. self-clearing business. Interest expenses were HKD289 million, up 546% year-over-year and 31% Q-over-Q. The year-over-year and the Q-over-Q increase were both driven by higher interest expenses associated with our security lending business. Processing and the servicing costs were HKD86 million, down 6% year-over-year and 13% Q-over-Q. The year-over-year decrease was mainly due to saving from cloud service fee as a result of system optimization and the Q-over-Q decrease was mainly due to lower system usage fee. As a result, total gross profit was HKD2.2 billion, an increase of 28% from HKD1.7 billion in the third quarter of 2022. Gross margin was…

[Operator Instructions] The first question comes from the line of Leon Qi with Daiwa. Please go ahead.

Hi. Thanks for taking my question. [Foreign Language] Thank management for taking my questions. This is Leon from Daiwa. My first question is regarding our new markets, especially in Japan. We understand we just launched Japan in late September. I'm interested in the user behavior in terms of our Japan new clients. Does management see any early indicators in terms of the trading velocities, margin landing penetration and the specific trading products that our Japanese clients are being engaged in? Is there any significant differences in terms of these matrix for customers in Japan versus other markets? And, also, I'm interested to know the customer acquisition cost for us in Japan, so appreciate any color on the unit economics in Japan? And my second question is on wealth management. We do appreciate the very rapid growth of our AUM in wealth management and per management introduction just now, money market fund is a major reason behind that. So, I'm sure this is partly because of the high U.S. interest rates. But if we look at it from a cross interest rate cycle perspective, how much proportion does management expect the non-money market fund products to contribute in our overall wealth management AUM and also what is our take rate on money market fund now? Thank you very much.

Thank you, Leon. Let my colleague Daniel answer the first question first and I will answer the second question. Thank you.

Sure. So, unfortunately, we now only offer U.S. cash equities trading to our Japanese clients. So, we don't have margin, we don't have Japanese stock trading, so we only have data for client behavior on the U.S. stock trading. And, so far, the turnover of the U.S. stock trading is not so different from what we've seen in other markets. That being said, we have a very aggressive and ambitious product roadmap for next year and some of the products that I mentioned that we don't support now will be rolled out in the next couple of quarters. And in terms of client acquisition cost, because we are coming from a small base of clients, whereas we have a lot of fixed costs for, like, setting up markets, setting up, like, offices in Japan, and hiring marketing personnel. So, obviously, our CAC for this quarter and next quarter in Japan will be higher than our group average. But, over time, as we increase the number of clients in Japan, the CAC will gradually come down. And, so far, we have no reason to believe that the CAC in Japan will be higher than what we've seen in other markets. And just to give you some other colors and updates on our Japan business, we now have slightly over 400,000 users on our platform, and overall users have been very active. And we observe that, on average, during the trading days, our DAU to user ratio is close to 20%, which is the highest among all of the markets we are currently in. And user growth, along with paying client growth, will be our key priorities for next year. Thank you.

Okay. For the second question regarding the wealth management, I think the key for us to do this kind of business is to engage a client and focus on the long-term values of the clients. Therefore, we do not put too emphasis on the near term monetizations. But, having said that, the take rate for these in the money market funds is essentially just similar to our other products, such as equity products or fixed income products. I think, you know, we have already established a very comprehensive matrix in terms of the product offerings in our Dasheng Taipu. For instance, besides the money market fund, we also have the equity products, fixed income products. In particular, as Leaf mentioned in the opening remarks, we have launched free floating interest -- floating rate note, FCN products in the past two quarters and record a very strong growth. We think these products will further diversify our clients' asset allocations and help them to navigate different interest cycles down the line.

Thank you very much for the color, Arthur and Daniel.

Thank you. Next question comes from the line of Chiyao Huang with MS. Please go ahead.

[Foreign Language] The first question is on idle cash, and we saw some sequential decline in idle cash. So, just wondering, what's the reason for that? And if we are seeing some of the existing clients are shifting their cash to mutual funds or other products? And, also, a related question is, for the new inflow of client AUM, what's roughly the proportion between stocks and other investment products such as mutual funds? And second question is, can management talk about the strategy in Japan as we are seeing some local brokers are offering zero commission already. So, what's our competitive strategy there and what's the thinking about the future monetization? Would we be considering, you know, building more comprehensive financial offerings and capabilities in Japan in order to improve the monetization over time? Thank you.

[Foreign Language] In terms of your first question, the idle cash decrease was primarily due to our clients shift their cash positions to more equity stocks, especially on the U.S. stock assets at the quarter end. And, also, the partial reason is because some clients allocated more on the wealth management process during the quarter end as well. In terms of the new clients' inflows, the allocations among cash, stock and also the wealth management, roughly, you know, stock positions accounts for 70% and the wealth management products accounts for 10% and the remaining belongs to the idle cash. Thank you.

And, Chiyao, I will take your second question on our monetization strategy in Japan. And, yes, as you mentioned, we have seen a couple of leading brokers in Japan gone to zero commission for Japanese stock trading and we have reasons to believe that other brokers in Japan will probably follow suit. And so, well, no one is going to make money from Japanese equities trading, but U.S. stock trading is still quite profitable. [SP and Rakuten] and for example, charge USD0.45 for U.S. stock trading. We tend to price more aggressively than these incumbents, but we still expect to make very decent margin on U.S. stock trading. And as of the end of last year, we have seen that there are 2.3 million U.S. stock investors in Japan. That's relatively low compared to Japanese stock investors, but that has been growing pretty fast. As of the end of 2019, there were about 1 million U.S. stock investors. So, over the past four years, it has more than doubled. And besides U.S. stock trading commission, we also intend to monetize over margin financing and foreign exchange fees. We observed that Japanese investors really like to trade on margin. We have seen that, for the industry, average number, like around 50% of their trades are placed with margin. So, that's going to be a key revenue driver. And then for FX charges, we understand that in order to compensate for zero commission for Japanese stock trading, all of the brokers in Japan charge pretty hefty fees for FX. So, as the trading volume of the U.S. stock trading on our platform grows, we also expect FX revenue to make a meaningful contribution. Thank you.

Thank you very much.

Thank you. Next question comes from the line of Cindy Wang with China Renaissance. Please go ahead.

[Foreign Language] Thank you for taking my question. So, I have two questions. First one is related to Japan market. Can you share the color of Japan's meeting plans progress? What's the conversion rate from registered users to paying clients? And have you seen new paying clients increasing month-over-month? Second question is for the -- if the Futu subsidiary is applying for Digital Assets Trading Platform in Hong Kong, what is the progress looks like? And what is your preparation work for Digital Assets Trading Platform? Would you be able to launch trading functions immediately once your license is approved? Thank you.

Thank you, Cindy. I will answer your second question first, and my colleague Daniel will answer your question regarding to Japan. [Foreign Language] We echo the Web3 policies advocated by the Hong Kong Government, who want to build up Hong Kong as a Web3 global centers. In the past several quarters, we carefully studied the policies and the regulations issued by the Hong Kong SFC. TensorTrade, a wholly subsidiary within Futu Group submitted VATP license applications to Hong Kong SFC last month. And we expect the whole application process may take at least six to nine months when -- if we have the luck to get approval in principles. And we have not formed a very concrete business plans afterwards. And we will continue to modify this content in the next couple of quarters and, hopefully, we can give some new updates in next Q2 or Q3. Thank you.

[Foreign Language] And I'm going to translate for myself. So, right now, in Japan, the user to client conversion rate as well as the client to paying client conversion rate are both lower than what we have observed in other international markets, and we think there are two main reasons behind it. Number one is that, our account opening golden process still has a number of friction points. And, so far, the mid to back office in the Japan brokerage industry are still characterized by a lot of outsourced systems that have really unsatisfactory user experience. And in order to start account opening soon, we leveraged some of these outsourced systems which really have a negative impact on our users experience and thus impacted the conversion rate from account opening to asset deposit. And in next couple of quarters, we plan to invest into our account opening process and gradually replace these outsourced systems with our proprietary system. And the second reason behind this low conversion rate so far is the lack of key trading products. And, as mentioned earlier, we now only offer U.S. cash equities trading to Japan users. And in the first quarter of next year, we plan to launch Japanese stock trading as well as LISA account. Although we are really confident that Futu's U.S. stock trading capabilities lead our Japanese peers by a very wide margin, in Japan the Japanese stock investing is still very, very popular, and we understand based on our user survey that lack of, you know, Japanese equity trading is a key reason that prevents them from opening accounts with us. Thank you.

Mr. Wang, are you -- Ms. Wang, are you done with your question?

Yes. Thank you.

Yes, I'm done. Thank you.

[Operator Instructions] Next question comes from the line of Peter Zhang with JPMorgan. Please go ahead.

[Foreign Language] Okay. Let me do the translation. My first question is a follow up question regarding the Japan product line. I wish to understand, going forward, will the clients in -- Futu's clients in Hong Kong or Singapore market being allowed to trade Japan stock? Is this product in your product pipeline? My second question is regarding the blended commission fee rate. We noticed that the blended commission fee rate declined sequentially in third quarter. We wish to understand what's the reason behind and what will be the trend going forward? Thank you.

[Foreign Language] Regarding two questions. Number one is for the Japan stock trading offering to the markets outside of Japan, our answer is definitely it will be a yes and has already been in our product lines. Hopefully, we can launch the U.S. -- the Japan stock trading to our clients in Hong Kong and Singapore in the near future. And we do think this kind of product offering will further -- helpful to our client engagement in these markets and also increase the client participations in our platform and also will -- our topline will also be benefit arising from that. Regarding the blended commission rate fluctuation, as we elaborated to the market several quarters, it is mainly due to the client's trading behaviors, because our U.S. stock trading commissions do have different menus, price menus, and one menu is actually not based on the percentage of the trading volume but on the number of the shares. So, when people trade these big blue chips or these OTC stocks, the combination will have the implications on the blended commission base as well. In the third quarter, the fluctuation is mainly because of that. And, going forward, we think, you know, the blend commission rate, if we take out this trading patterns' reasons, can maintain stable in the near future. Thank you.

[Foreign Language]

Thank you. Next question comes from the line of Li Wan with BOCOM International. Please go ahead.

[Foreign Language] Can you give us a breakdown of interest income, and what will be the impact from Fed's rate card next year? Thank you.

[Foreign Language] In terms of the interest incomes, year-to-date, the interest revenues contributed from client idle cash is much bigger than the interest income derived from the margin lending and the security lending business. And, going forward, we do not think, you know, the Fed's rate cut will be very fast. And in circumstances when the rate cut normally, it would be helpful to the trading volumes for the whole capital markets for our clients as well. Therefore, we do think the trading revenues arising from this rate cut will largely offset the potential idle cash revenue decrease. Thank you.

Ms. Wan, are you done with your question?

Yes. Thank you.

Thank you. Next question comes from the line of Emma Xu with BofA Securities. Please go ahead. Please go ahead, Ms. Xu. Ms. Xu, if you have muted from your end, please unmute yourself, and you can go ahead with your question. Ms. Xu, can you go ahead with your question? Ms. Emma Xu, can you go ahead with your question?

Well, it seems that Emma is not here tonight. So, if -- operator, do you have any further questions on the line?

There are no more questions. So, I will now hand the call back over to Mr. Yuan for closing comments. Thank you.

Sure. Yes. So 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. This concludes our conference for today. Thank you for participating. You may now disconnect.