Ladies and gentlemen, thank you for standing by, and welcome to the Futu Holdings Fourth Quarter and Full-Year 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that this conference is being recorded. I'd like now to hand the conference to your first speaker today, Chief of Staff and Head of IR at Futu, Mr. Daniel Yuan. Thank you. Please go ahead, sir.

Thank you, operator. And thank you for joining us today to discuss our fourth quarter and full-year 2019 results. Joining me on the call today are Leaf Li, our 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 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. I am pleased to once again announce a strong quarter, driven by robust growth in paying clients and total client assets. [Foreign Language] We added 21,620 paying clients in the fourth quarter of 2019, the highest quarterly paying client net addition we have witnessed so far. As of year-end, the total number of paying clients reached over 198,000, representing a 49% increase year-over-year. When we reported our third quarter earnings, our guidance was 190,000 to 195,000 paying clients. We're pleased that our actual results surpassed our previous expectations. In 2020, we're aiming for 45% growth in the number of paying clients, which means that our total paying clients will surpass 285,000 by the end of 2020. [Foreign Language] We attribute our strong paying client growth in the fourth quarter to a combination of optimized marketing efforts, upbeat market sentiment and high-profile Hong Kong IPOs. In the fourth quarter, we selectively worked with a number of targeted third-party channels whose client profile is similar to ours. The active IPO market was also beneficial for us. Our clients' total subscription for Alibaba and Poly Property Development IPOs both exceeded HKD5 billion. Notably, our clients accounted for 13% of Alibaba's total number of retail subscribers and 5% of its public tranche allocation. The frenzy around Alibaba's secondary listing in Hong Kong gives us confidence that our business will be a key beneficiary of the continued dual and secondary listings of high-quality Chinese new economy companies in Hong Kong. [Foreign Language] Total client assets jumped 71% year-over-year to HKD87.1 billion. Average client assets totaled HKD439,000 as of year-end, up 15% year-over-year. As we transform to a business model that increasingly relies on AUM-based income, we're encouraged that clients continue to entrust us with more…

Thanks, Leaf and Daniel. In the fourth quarter, we recorded total revenue of HKD254 million, up 37% year-over-year and 20% Q-on-Q. Let me walk you through some of our key financial details for this quarter. Brokerage commission and handling charge income was HKD152 million, an increase of 34% from the same period in 2018, and up 23% Q-on-Q. Total trading volume in this quarter was relatively flat year-over-year, but was up 7% sequentially. Our blended commission rate climbed to 6.7 basis point in the fourth quarter. This rate hike can be attributed to higher IPO subscription fees amid active Hong Kong IPO market and growing contributions from derivative tradings. Brokerage commission and handling charge income contributed about 49% of our total revenue in this past quarter. Interest income was HKD128 million, an increase of 24% year-over-year and 11% Q-on-Q. This growth was mostly due to a 52% year-over-year increase in margin financing and the security lending balance. IPO financing interest income also surged due to higher Hong Kong IPO subscription. Interest income contributed about 41% of our total revenues. Other revenue was HKD31 million. This 185% year-over-year increase was mainly attributed to our new mutual fund distribution business and higher IPO financing service charges income as well. Other income contributed about 10% of our total revenue. On the cost side, total cost was HKD87 million, an increase of 35% year-over-year and 24% Q-on-Q. Most of the costs grew in line with our revenue. As a result, gross margin was 72%, which was relatively flat compared with the same period last year. In terms of the operating expenses, total expenses was HKD181 million, an increase of 81% year-over-year. Breaking down our operating expenses, R&D expenses was HKD74 million, an increase of 63% from the -- from last year and up 4%…

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] We have our first question coming from Goldman Sachs, Chen Wei. Please go ahead.

Hi, hi, Leaf, Arthur and Daniel. Can you hear me?

[Foreign Language]

[Foreign Language]

Okay, okay. So congratulations on the strong first quarter -- fourth quarter. I've got two questions, one is regarding the client, the second is regarding the service pricing. So for the clients, we actually see a very strong new paying client growth in the fourth quarter. I think you elaborated some more on the results about the IPO of Alibaba and some of the third-party channels you're working with. So can you elaborate more on the third-party channels like how do they work with you in terms of like client traffic attracting? And secondly is, can you break it down more on the percentage of -- or the mix of Mainland's investors, Hong Kong local investors and ESOP clients, what's the mix of those three types in the new paying clients? And is there any like profiling or is there like how they -- how much they're putting money and also how frequent they trade on these three type of clients? And secondly, I just want to ask, you see the brokerage commission rate has picked up quite a lot in the fourth quarter, we calculate it's around like the gross commission rate is around 6.7 bps. And can you, yes, just explain some more on why there is a strong pickup? And also regarding the margin financing pricing, so we see the Hong Kong Financial Bureau has cut the benchmark interest rate. So not the prime rate yet, but would that be subsequent rate cuts on margin financing loans to 2020? Thank you.

Okay. Thank you, Wei Chen. This is Arthur. I think that you mentioned four points. Maybe I address the first -- the second to fourth questions, I will leave the first question to my colleague, Robin Xu, who can elaborate our cooperations with third-party channels in terms of new client acquisitions in the fourth quarter. In terms of the client profiles, we see a very strong growth from the Mainland in fourth quarter. I think partially because of many hot IPOs such as Alibaba and the Poly Project Management. The names, these Chinese clients are quite familiar. So they are more willing to participate in these activities. So far I think at the end of last year, the Hong Kong based clients account for roughly 30% of our total paying clients. And I do think this percentage-wise this portion may continue to increase in the first quarter of this year. We got a very strong momentum in Hong Kong in terms of new client acquisitions. And in terms of the pricing or the fee rate, I think the major reason as Leaf and I mentioned in the opening remarks, there are certain one-off activities, such as the IPO subscription fees, which also we blended into our trading commission rate into our total commission revenue in fourth quarter. And also as we mentioned to investor earlier because certain of our new clients, normally, we will offer them three to six months commission-free period. As more and more people, the commission-free period expires, this will boost our blended commission rate. And in terms of the margin and also the impact of the interest rate cut, we do notice that recently, the Fed cut rates very aggressively. I think for the time being, we will continue to maintain our margin rate policies. Even back we -- just to recall, when we launched our margin business three to four years ago, at that time, the Fed was also keeping the zero rate. So for the time being, we will continue to keep our fixed margin rate in Hong Kong and in the U.S. as well. I will leave the first question to Robin.

Okay. [Foreign Language] So breaking down our new paying client acquisition in the fourth quarter, so our paying clients from word-of-mouth referral was strong as always. And as for ESOP clients, it may take some time for their shares and RSU to get tested. So you will see some of the impact from our strong ESOP business later on in the following quarters. And regarding the third-party channel collaboration, and as we mentioned, the fourth quarter was very hot -- we saw very hot Hong Kong IPO market. And through these third-party channels, we're able to reach a lot of clients that are interested in these high-quality Chinese new economy companies, and in the fourth quarter, roughly 20% of our new paying clients come from this channel. And in terms of our Hong Kong new paying clients, so in the third quarter due to social situation, the client acquisition growth came down a bit, but we are very glad to see that the growth rate has rebounded in the fourth quarter and the contribution from Hong Kong paying clients continue to increase steadily.

Yes, thank you, Robin and Arthur. I just follow up a bit on the client acquisition. So, given all -- like you said, the social events is phasing out like what we can see from the first quarter new clients from Hong Kong local investors. So is there any change of your marketing strategies in the Hong Kong local markets, and maybe broadly overall like in China, Mainland, so is there any change of your marketing strategy or client acquisition strategies, including like the third-party channel you mentioned that you work with in the first quarter. Is that the norm that you collaborate in 2020 to attract more clients?

I will leave the question to Robin.

Okay. [Foreign Language] Right. So, in terms of our Hong Kong strategy, so we see a growing contribution from our online marketing channels. So, in the fourth quarter and also in the first quarter of 2020, we have over 90% of our paying clients that come from online marketing. And in the short time being, we'll also prioritize online client acquisition in Hong Kong. And as for Mainland China client acquisition strategy, I think we want to change our strategy dynamically based on the market sentiment and also based on the hot topics in the market and obviously, the hot IPO -- hot Hong Kong IPO market in the fourth quarter kind of fueled the growth of the third-party channels marketing. So we'll also keep an eye on what's going on in the market and timely adjust our strategy.

Okay, thank you.

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

Hi, hi, management. Thanks for taking my question. So I have a couple of questions here. I probably will go one by one. So, the first question is about your -- the trading volume or the turnover, is that we observed the turnover has been declining like over the past few quarters, which is if we divided trading volume by your average client assets. So I would be wondering whether that is a structural trend because of the change in like client profile whether your clients are getting less active compared to the previously acquired clients, and yes, so, what is the outlook here? And also related to that since you're launching some new derivative products, whether that will help improve the turnover going forward?

Okay. Thank you, Daphne. This is Arthur. Let me answer your questions. I think it is still too early to judge whether the investors' profile or characteristics have been dramatically changed. You're right. Our -- in terms of trading velocities of our clients in 2019 was softer compared with what they did in 2018, but we think it is mainly due to the market fluctuations and the market -- the overall market hangover slowdowns in 2019. Year-to-date, actually, we see the trading velocities increase a lot partially due to the volatile markets, and secondly, due to our continued expansions of our new clients. So I think it is still too early to tell there's any structural changes for the trading velocity assumptions going forward.

Okay. But do you expect like the product launch to help actually to improve or have you seen any impact so far like with the launch of the futures products?

Yes. We launched our Hong Kong option trading in last fourth quarter, and also we just launched our index future products in Hong Kong this March. We do think -- we do observe that the trading velocities for these new products help our – overall, trading velocity increased a lot. And I think we will continue to enrich our products in the future, this asset class going forward. So I do think this will help us regain the momentum in terms of trading velocity this year.

And the next question is about the trading volume breakdown as well. Can you give us the breakdown by market like Hong Kong versus U.S. and also by products like how much contribution you have from derivatives in Q4?

Sure. Similarly to the previous quarter -- in the fourth quarter, the trading volume was roughly evenly spread over Hong Kong and U.S. And in terms of the asset class, still Mainland comes from the cash products given that we just launched the option trading in Hong Kong last November. But I do expect in the coming quarters, you can see percentage-wise, the derivatives contribution will become much, much higher.

Okay. And the next question is actually a follow-up about the interest rate cut cycle. So, you mentioned just now that your product pricing on the margin to remain stable. So does it means that your NIM is actually going to expand in the rate cut cycle because I guess, funding costs should be coming down as well?

Yes. We are still doing the detailed evaluations on the impasse as the news was just out earlier this week. On a static basis, I think the rate cut may hurt our top-line by 7% to 8% given we will suffer the interest income from clients' idle cash. Definitely, the rate cut will hurt our profitabilities, but I think on the flip side, it is also an opportunity for us to get closer to clients as people are seeking for more investment products and a useful investment education, and we will become more determined to move forward our wealth management business initiative this year.

Okay. So, you mean the decline in the, basically, the client idle cash interest income will be the key driver here?

Yes. I think in terms of margin, as I answered Wei Chen's questions before, initially or for the time being, we will continue to maintain our fixed rate, which the pricing charge declined. So in terms of the margin spread, actually we will get some benefit from the rate cut, but this benefit cannot fully offset the revenue loss we generate from the clients' idle cash.

Right, right, understand. And -- okay, and lastly is about the commission rate, the brokerage commission rate. So, can you give us some outlook on the trend here because we've seen that it has been rising in the past few quarter. Do you think that is the current level like the 4Q level, 6.7 basis point, is this sustainable or, yes, so how should we expect the trend going forward?

Sure. I think there are some one-off reasons for the fourth quarter high commission rates because of the, we blended the IPO's contributions into the commission income. So, on a like-for-like basis, I do think there is no near-term pressures in terms of commission pressures from a competitive landscape. So I think the average numbers which we generate in 2019 can be a reference point for 2020.

Okay. Actually related to that IPO contribution, so may I know like how do you book that IPO revenue because I see that comes in actually different revenue lines? So that contributed to both your brokerage commission income and also part of that is booked under the other income. So how do you like split between the two categories?

Yes. For the Hong Kong IPO for example, we do some marketing campaigns and PR activities for these IPO companies or the corporates. So we book the revenue generating from such kind of service into the other income. And for the IPO retail portion participations besides the normal trading commissions when people participate in the IPO subscriptions, we will have additional one-off commission charge. We will book these commission charge into the overall, our commission revenues.

Okay, got it. That's very helpful too [ph]. Thank you.

Thank you.

Our next question comes from the line of Stanley Chiu from Goldman Sachs. Please go ahead.

Hi, management team. Thank you for taking my questions. I actually want to follow up a bit on wealth management sector. We see that the total client assets in mutual funds surpassed HKD6 billion, which beat the last management guidance. I was just wondering what is the main driver for this? And on top of that, I'd really appreciate if management team could provide some more outlook for wealth management business in 2020? Thanks.

Sure. Thank you. I think one of the major reasons for the increase in terms of AUMs in the wealth management in fourth quarter is more product offerings because in the third quarter, we just have less than 10 mutual fund products launched in our platforms. Actually, in the fourth quarter last year, we provided more products. In particular, we diversified from money market funds to more fixed income products and also the equity funds, not only just concentrate in Hong Kong, China or even Asia, actually, we'll provide more diversified global products which can further enhance our clients' interest. We will maintain such strategy. I do think product availability is very important when we start to kicking this new business. As Leaf mentioned in the opening remarks, we do expect in our platforms, you can see over 15 new mutual funds products launched in the middle -- before the middle of this year. In terms of the client assets, it is very difficult to tell in particular, judging from the recent market volatilities, we do see a very strong good momentum in terms of AUM growth in January and also in February. But suddenly it has been pulled back a lot in the past two weeks because of the market volatilities. A lot of people just redeemed their money market funds and try to average down their stock positions. But despite these near-term market volatilities, we do think we should make very big efforts in terms of the -- growing the wealth management's AUM this year. I think one of the reasons we have some hesitation last year is because of the rate cycle, as I answered the questions to Daphne and also Wei Chen before. But this hurdle has been erased given that the Fed has cut the rates into zero. So the opportunity cost for us now actually become nothing. So we will make more efforts into the fund distribution.

That's very helpful. Thank you.

Thank you.

[Operator Instructions] Our next question comes from the line of Lily Liu from HSBC. Please go ahead.

[Foreign Language] I will ask this question in English, because we see a very significant growth in the balance of margin loan. So going forward, what we'll see the source of funding for this business growth and we see a massive margin call pressure from our clients in the recent market crash? Thank you.

Okay, thank you, Lily. This is Arthur. For your two questions, I will answer your second question first. I will leave the first question about growth and the competitive landscape to my colleagues, Leaf and Robin. In terms of margin balance, you're right. We've maintained a very good momentum in 2019, partially thanks to the overall good benign market condition. In terms of funding source, last year, equity fundings, i.e. our own capital contributed about 50% of the funding source and the remaining 50% mainly come from our financial partners, such as commercial banks in Hong Kong et cetera. Currently, after our last year's IPO, I do think that our leverage ratio is still quite healthy. So in terms of the leverage upside, we still have a very room to -- big room to grow.

[Foreign Language]

[Foreign Language]

[Foreign Language]

Sure. I think the recent market volatility may lead people concerned whether there's any margin cost. I think in Hong Kong market and also in the U.S. market, we still use a very prudent margin policies, but we did not provide a very high leverage to our clients. We do see some small margin cost, but I think the overall the size is not very material compared with our coming first quarter P&L impact.

[Foreign Language]

[Operator Instructions] There are no further questions at this time. I'd like to hand the conference back to our presenters. Please continue.

Thank you. That concludes our call today. On behalf of the Futu management team, I'd 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.

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