Ladies and gentlemen, thank you for standing by, and welcome to Futu Holdings Limited First Quarter 2019 Earnings Conference Call. [Operator Instructions] This conference is being recorded today, 24th of May 2019. I would now like to hand the conference over to your first presenter today, Daniel Yuan, Chief Staff of Futu. Thank you. Please go ahead.

Thank you, Operator. Thank you for joining us today to discuss our first quarter 2019 results. On the call today are Leaf Li, Chairman and CEO; Arthur Chen, CFO and Robin Xu, Vice President of Products. Before management begins their prepared remarks, I would like to remind you of the Company's safe harbor statement in connection with today's conference call. Except for any historical information, the material discussed on this conference call may contain forward-looking statements. These statements are based on current plans, estimates and projections and therefore you should not place undue reliance on them. 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 Securities and Exchange Commission 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. It's my pleasure to host our first conference call as a publicly traded Company. We recorded solid performance in the first quarter of 2019 as we saw most of our major operating and financial matrices demonstrate strong growth momentum. Our total revenues increased 37.1% year-over-year to HKD236.4 million, and our non-GAAP adjusted net income grew 2.5% year-over-year to HKD49.3 million. As of March 31st, 2019 we had an attractive and rapidly growing user base of 5.7 million, about 548,000 registered clients and over 148,000 paying clients. Our total client assets grew 20.7% year-over-year to HKD62.3 billion and we brokered a total of HKD223.8 billion in client trades. We are an advanced technology Company, and we view our comprehensive and user-oriented technology platform as our biggest competitive advantage. In the first quarter, we continued to invest heavily in our proprietary technology infrastructure, which translates into unparalleled product and service extendibility as well as an elegant and ever-evolving user experience. We launched new iterations of our Futu NiuNiu app on a weekly basis, while maintaining 99.98% service availability. We also launched real-time Level II U.S. stock quotes and a U.S. IPO subscription service in the past quarter. As a result, total client asset balance in U.S. dollar accounts in the form of either stock or cash amounted to $3.2 billion, as of March 31st, 2019 and the number of paying clients with assets in U.S. dollar account increased significantly by 62.9% year-over-year. In the coming quarters, we intend to offer a number of new trading products for both the Hong Kong and U.S. stock markets that we believe will attract more paying clients, improve the stickiness of our existing client base and increase client wallet share. We are also establishing an increasingly…

Thanks Leaf. Solid growth in the number of paying clients and the client assets drove robust top line growth of 37% year-over-year for our first quarter as a public Company. Overall, we recorded total revenues of HKD236 million. Brokerage Commission and the handling charges income was HKD115 million, an increase of 21% from the same period in 2018. The rise was mainly attributable to the increase in trading volume in the U.S. markets as well as growth in effective fee rates. This contributes to about 48% of our total revenue. Our blended growth commission rate including handling charges remains stable compared with last quarter and we expect that such situation will carry on over the second quarter of this year. Interest income generating from margin financing, stock lending and the client deposits was HKD108 million an increase of 62% year-over-year and a 5% quarter-over-quarter. The rise was mainly due to the increase in the margin financing and the security lending activities and improved return on client deposits due to interest rate hike. Other income was HKD14 million, an increase of 26% year-over-year, mainly driven by increasing corporate service including our PR service and ESOP service. On the costs side, total cost was HKD61 million, an increase of 17% year-over-year. Brokerage Commission and handling charges expenses were HKD21 million, an increase of 8% year-over-year which was in line with our brokerage commission income growth. Interest expenses increased 18% year-over-year to HKD21 million, primarily due to the growth of our margin financing and securities lending business and increase in the effective rate of borrowing from other financial institutions. Processing and service costs were HKD20 million, an increase of 27% for the same period in 2018. The rise was primarily due to the increase in both market information and the data fees and…

[Operator Instructions] Your first question comes from the line of Wei Chen of Goldman Sachs. You may now ask the question.

Thanks for the opportunity for a question, and first, congratulations on the continuous growth despite the turbulence in the market. I got two questions. One is regarding the clients. So we see Q-on-Q you still deliver about 160,000 new clients and I wonder what's the mix of those new paying clients from Hong Kong, Mainland and probably like ESOP. And what would you see for that client growths maybe in the second quarter or rest of the year like, which will be the major driver for the paying client growths like because we have seen like a tightening in capital control in China, so it might be more difficult to acquire new clients from the China mainland. So I just want to get a sense on how management team look at end-client growth, that's the first one. The second is regarding the brokerage trading volume. So we see, if we calculated the turnover rate between volume and client assets, the turnover rate slightly declined Q-on-Q, I think it's - based on our calculation, it's 16 times versus 19 times last quarter. And I wonder what's the cause of the decline in the turnover rate in your view, because in Mainland we've seen the new - I'll say the retail participation in Asia market only started to pick up after the Chinese New Year, I wonder if that would be the case for Futu. Also, on a monthly basis, it's higher turnover rate in maybe February or March versus January, is that the case and what's maybe in April, what's the trading volume would imply. And third one, sorry that I had a third one, I just got from Leaf that you are guiding that you will have the U.S. trading license at the end of this month, is that correct? And what's the definition of that? Is it means that when you finish the application process, you will be able to directly take client assets and you know like Interactive Brokers, they can use some the idle cash on marginal loans. Is that a case to a fully operated - self-operating entity in U.S., just like IB? Thank you.

Let me take the questions. In terms of the first question, in terms of the number of paying clients, as you mentioned we generated close to 16,000 new paying clients in the first quarters. In terms of detailed breakdowns; Hong Kong local clients roughly accounts for 60% of new paying clients we generating in the first quarters, and the remaining 40% came from the Mainland. And, in terms of the trading velocity, I think your statement was correct. Similar to the Asia markets, what we witnessed is the markets start to recover and the retail investors' confidence start to become stable after Chinese New Year. So in terms of the trading velocity, on a quarterly basis, you may see slightly velocity turning down compared with the last quarters. But we think it is just a seasonality effect. And also in terms of the clearing license, we have got written confirmations from the FINRA to accept our applications, there were just some routine logistics arrangements possibly in the next week. We are every confidence you will see our license through the Broker Checklist in the U.S. within this month. But this not means we will start to transfer our clients from our U.S. business partners to our own clearing house, because it may still take a very long journey for us to build our own clearing capabilities. We are also doing the evaluations despite it is still premature to give a precise number in terms of financial impact. However, as Leaf mentioned before that would give us a very meaningful financial and operational reward in the long term for sure. Just - I just want to give you some statistics, only 3% of broker dealers in the United States have their own clearing capabilities. We think self-clearing capability is a very essential and hardcore element of Wall Street. We plan to leverage our own R&D capabilities to build an independent clearing system that will allow us to settle and to clear transactions and provide custodians for assets which providing new space for our monetization. Having said that, it would be a very long journey and you may not see any positive impact, it's purely from an accounting base perspective into our P&L in the next six to nine months.

I just had one quick follow up. I don't know if you are okay to - but can you just describe like in terms like April or May what or maybe the guidance on the second quarter was - because it's the end of May, so you know...

Sure, no problem. I think that the recent global equity market volatilities may enhance investor's concerns about the trading volumes and also our new paying client's acquisitions despite you know the - in particular, in May, we see a very volatile market. We still are very confident we look for at least the same number i.e. close to 16,000 new paying clients in the second quarter if not more.

Your next question comes from the line of Kelvin Chu from UBS. Your line is now open.

Hey, congratulation again, regarding the progress you have on the U.S. clearance license. Just follow-up question on that, Arthur, you mentioned, it's likely a long journey between the approval of the application to the moment we launch our own platform, the moment we will be able to move our client assets to the U.S. I just wanted to have an idea, what kind of timeline are you talking about, is it like a two to three years and what kind of milestones should we be expecting over the course in the - let's say in the next two, three years so that we can track the potential establishment of your settlement infrastructure. Second question is on expenses. We have noticed a - quite a sharp increase in marketing expense and R&D. I think this will reflect your long-term commitment on growth or cost, we just want to have more idea, are there any particular projects that you want to focus on for this year? And also regarding the budget for both marketing expense and R&D, can you remind us your budget for this year? Two questions for me. Thank you.

Sure. Thank you very much, Kelvin for your two questions. Number one, in terms of clearing capabilities, actually I think this is one of the reasons we may spend more R&D efforts into 2019 because we want to accelerate our capabilities in this areas. Just to give you examples, for instance, the Robinhood in the United States, according to the outlook statements, it takes roughly two years to complete their own clearing capabilities i.e. the clearing by Robinhood. I think in terms of our research and development team's capability and also we have already start the relevant - the technology developments, it may for us take less times, within two years to complete this journey. In terms of the marketing expenses and also the R&D expenses ratio. I think, we will continue heavily invest in the R&D which is a key for our long term growth strategy. In order to further engage our user and clients in a stick manner, we need to accelerate our new product and services launch to expand our total addressable market and to gain market share as well. As such, we will continue to recruit and invest talents in this regard. Number wise, I expect the absolute amount of R&D expenses will continue to increase in the next quarter and I expect R&D versus revenue ratio will remain over 28% in the second quarters. In terms of marketing spending, in order to fulfill our ambitions of becoming a full range of digital financial service platform, we should become more long-term greedy mentality. It is our belief that as long as we can engage more and more clients and keep our current retention rate alongside it with the client's asset increase, we will create more shareholder values. Given the second quarter to-date, the equity market was quite volatile and we have more marketing campaign to be launched in the second quarter in connection with our new product offering. I'd expect the marketing expenses plus the rate, as well as the revenue ratio will go up slightly compared with that in the first quarter - in the coming quarter. Thank you.

Thank you, Arthur, one more questions if I may.

Hello?

Regarding the client growth, if I look at it on a sequential basis you're paying client growth was pretty solid in the first quarter. But if I look at it also user growth, it tends to be much slower than paying clients. Can I have more idea on that?

Sure, no problem, Kelvin. I'll let Leaf to answer this question for you regarding the number of the user increase.

[Foreign Language] Yes. So I think in terms of the number of users that is the metric that we look at. It's not something we attach too much importance to in the first quarter and we didn't do that much to stimulate our user growth. And paying client is still the operating metrics that we look most closely at. And in the past quarter and in the quarters to come I think we will continue to launch more products for trading in both Hong Kong and U.S. markets and also we have online the market data and market news for people interested in Asia investing as well.

[Operator Instructions] Your next question comes from the line of [Ivan Yeo] from Bank of China. Your line is now open.

[Foreign Language] So I have two questions. The first is regarding the paying user. Can management share us some difference between the China pace and the Hong Kong pace in paying user for example the trading frequency and ARPU and also [indiscernible] addressable market for both investors. And my second question is about the competitive landscape. So our competitor has also listed in the U.S. So how do you think the competitive landscape will evolve? Thank you.

Thank you, Ivan let me take the first question and Leaf will answer the second question about the competitor landscape. In terms of the characteristics of the Hong Kong based local clients and also the Mainland's clients in terms of trading velocity, actually we don't see significant difference in terms of trading velocities between the mainland-based Chinese clients and also the Hong Kong local clients. In terms of the client asset size, Hong Kong local clients average assets will be around the 20% to 25% lower compared with the mainland people, as this year will be, still for us, regarded as the first year to penetrate and expand in the Hong Kong local people - local people market.

[Foreign Language] So in terms of our competitive landscape, I think - we talked about IPO subscription services in ESOP. So for our ESOP service, we actually started brainstorming in 2015 and we officially launched our ESOP service in 2016. So actually, we think it's a very difficult capability to acquire because the ESOP services touches on some of the most important and sensitive data of the company. So it really requires a high security of the platform. So actually our first ESOP client is Tencent and we had ongoing discussions with their finance team, with their securities team and it took us two years to set up the whole system and to polish the system. So, after having Tencent, as an example, and after developing this prototype we keep honing our capabilities and I think it became easier for us to plucking more ESOP clients. And in terms of our IPO subscription service, so in the past year, you should realize that we are involved in almost all of the landmark transactions on the Hong Kong IPO market, including Xiaomi and Meituan. So, for both of these cases, I think we cover over 30% of demand from the retail tranche. And starting this year we're started to offer U.S. IPO subscription service and we give our users access to the IPOs of [indiscernible] including Luckin Coffee and we actually provided exclusive IPO subscription service for Luckin Coffee.

[Operator Instructions] Your next question comes from the line of Wei Chen of Goldman Sachs. Your line is now open.

Just got one follow up questions on the Asia, because as Leaf just introduce that you are looking to expand even the Asia trading through the Connect, absolutely, in China. So I'm just curious, given the Asia market actually has been quite heated in the first quarter even in April. So I wonder among over HKD200 billion transactional volume, how much is that is from Asia? And if you can also breakdown the Hong Kong and U.S. stock trading that would be fantastic. Thanks.

Sure, no problems. Wei Chan, in terms of the total trading volumes now that Asia's i.e. Northbound Connect roughly accounts for 2% of our total trading volume generated in the first quarter and the remaining was almost evenly split between the Hong Kong markets and also the U.S. markets.

[Operator Instructions] Your next question comes from the line of [indiscernible]. Your line is now open.

My first one is about client engagement. So despite the constant increase in DAUs and trading frequencies, I've noticed that the trading volume for paying client has been declining for a consecutive four quarters and there seems no signs of an uptick. So that could basically offset your paying client growth in terms of your overall trading commission revenue. So I'd like to know how would you comment on that. And my second question is about the registered client profile especially for the 45 newcomers, and how are they different from your previous cohorts in terms of age like working industry, income levels et cetera? Thank you.

Thanks very much. I would take the first question and the second questions will be answered by our Vice President, Robin. In terms of the trading volumes, as you said, you know our overall trading volume generate in this quarter has slightly decreased quarter-on-quarters compared to last Q4. And actually our internal, the major KPI indicators for us is not actually the trading volumes. We do not encourage people to trade more. Actually, what we more focus is investment education and to keep them supplied in this markets in a much longer term, so that their whole lifetime value will become more valuable to us. And also, we will be more focusing on the number of the paying client increase and also the client assets, we generate this year alongside with the retention rate i.e. as long as you can engage more and more clients. And at the same time, you can retain them in your platform and you can keep their assets as much as possible in our platforms. We can deliver the value to our shareholders in the long run.

[Foreign Language] Yes, so in terms of the client profile, our new cohort, so the ARPU and the trading volume has been pretty much consistent and we see a lot of more paying clients from Hong Kong and this group tends to be very young and trades more frequently than our mainland China clients. And as for our new China paying clients, we still observe that majority of them comes from the TMT industry as well as the finance industry.

[Operator Instructions] There are no further questions at this time Mr. Daniel Yuan, you may proceed with your remarks.

That concludes our call today. On behalf of the entire Futu management team, I would like to thank you for joining us today. If you have further questions, please feel free to contact us. Thank you and goodbye.

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