Hello, ladies and gentlemen. Welcome to Futu Holdings Third Quarter 2021 Conference Call. [Operator Instructions] After management's prepared remarks, there will be a question-and-answer session. [Operator Instructions]

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.

Daniel Yuan - Chief of Staff and Head of Investor Relations

Thanks, operator, and thank you for joining us today to discuss our third 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 risks and uncertainties. We caution you that number of important factors could cause the 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.

Leaf Hua Li - Founder, Chairman, Chief Executive Officer and Chairman of the Technology Committee

[Foreign Speech]

Thank you all for joining us today. In the third quarter we added 166,000 net new paying clients, bringing our total paying clients to about 1.2 million this was the seventh consecutive quarter, where over 50% of new paying clients were acquired organically. Our quarterly paying client retention rate, slightly slipped to 97%, due to dampen market sentiment.

[Foreign Speech]

We continue to execute on our overseas strategy. In Singapore, we iterated on client incentives and budget allocation between brand and performance marketing to optimize client acquisition efficiency. In the third quarter, we observed higher retention rate and consistent outside inflow across client cohorts. We continue to expand product offerings in Singapore by launching US IPO subscriptions, structured warrants and fund products.

[Foreign Speech]

In Hong Kong, we remained the top-of-mind retail broker, asked the number of our Hong Kong users already constituted one-third of the adult population in Hong Kong. We intend further penetrate into the young and tech-savvy population, and expand into the demographics that are currently not well represented in our client base. Despite the new players entering into the Hong Kong market which is always been a very crowded space, we are confident extend our leadership position, because we believe the key success factors of the broker include a trustworthy brand, superior user experience and end-to-end proprietary trading infrastructure, a strong capital base and close relationships with commercial banks. Which all take time to cultivate and where our competitive strengths lie.

[Foreign Speech]

As of quarter-end total client assets were HKD424 billion, representing 111% year-over-year increase and 16% quarter-over-quarter decrease. The sequential decrease was largely due to the sharp pullback of some Chinese new economy stocks, so this mark-to-market impact was alleviated by robust net asset inflow. Average client asset balance dropped to HKD363,000, which is tracked by lower account balance in new markets. However, in spite of the challenging market backdrop, both total and average client assets in Singapore increased sequentially, up 52% and 11% respectively. For clients that we acquired two quarters prior, their average net asset inflow and account balance both tripled.

[Foreign Speech]

Trading volume was HKD1.4 trillion, up 33% year-over-year and 3% quarter-over-quarter. HKD680 billion or 50% of total trading volume came from US stock trading, down 19% quarter-over-quarter, due to lower trading turnover of US tech stocks. Meanwhile, we continue to gain market share in Hong Kong futures and options trading.

[Foreign Speech]

Money Plus, established new partnerships with prominent asset managers, including Schroders and Carlyle, bringing our total asset management partners to 56. By the end of the third quarter, client assets in wealth management reached HKD17.7 billion, up 132% year-over-year. About 10% of our paying clients held wealth management positions. We further leaned into products and services for high net worth clients by on-boarding more alternative funds and working with renowned asset managers to offer curated online workshops.

[Foreign Speech]

As of quarter-end we had 215 IPO and IR clients, as well as 325 ESOP solutions clients, up 165% and 158% year-over-year. Companies include HEYTEA and Simple Love Yogurt [Phonetic] adopted our ESOP service in the third quarter. Over 700 companies have opened enterprise accounts with us, including over 150 listed companies with market capitalization north of HKD10 billion. In the third quarter BYD Auto, JD Health, Pop Mart and Anta started to use our enterprise account to communicate with retail investors and post business updates.

[Foreign Speech]

Next I'd like to invite our CFO, Arthur to discuss our financial performance.

Arthur Yu Chen - Chief Financial Officer

Thanks Leaf and Daniel, 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. Our total revenue was HKD1.7 billion, up 83% year-over-year and the 10% Q-over-Q. Brokerage commission and handling charge income was HKD933 million, an increase of 66% year-over-year and the 17% Q-on-Q. The increase was driven by the 33% year-over-year growth in total trading volume and a higher blended commission rate of 6.9 basis point.

Since most of our clients adopt the commission per share pricing model for US stock trading, but a decrease in the average share price of the stock they trade resulting a higher blended commission rate. Higher contribution from derivatives trading also support our commission rate expansion.

Interest income was HKD632 million, an increase of 129% year-over-year and a 4% Q-on-Q. The year-over-year and the Q-over-Q increase was both driven by higher margin financing and the security lending income, partially offset by lower IPO financing interest income.

Other income was HKD166 million, up 56% year-over-year and down 2% Q-on-Q. The year-over-year increase was primarily due to increase in enterprise's public relationship service charge income and the currency exchange service income. The Q-over-Q decrease was mainly due to the decrease in IPO subscription fees and underwriting fee income and active by fewer market. All total costs was HKD267 million, an increase of 47% from HKD182 million in the third quarter of 2020.

Brokerage commission and handling charge expenses was HKD125 million, an increase of 24% year-over-year and a decrease of 14% Q-on-Q. The expenses didn't grow in line with the brokerage commission and handling charge income, due to our upgraded service package with our US clearing house and the lower IPO subsequent fees.

Interest expenses was HKD74 million, up 57% year-over-year and down 7% Q-over-Q. The year-over-year increase was due to higher margin financing interest expenses and higher expenses associated with our security borrowing and the lending business. Though partially offset by lower IPO financing interest. Interest expenses didn't increase in line with interest income, as we increasingly shift our funding mix towards lower cost funding sources.

Processing and servicing costs was HKD67 million, up 100% year-over-year and 25% Q-on-Q. The increase was primarily due to increase in system usage fees and the crowd service fees to process a higher number of concurrent trades. As a result, our total gross profit was HKD1.64 billion, an increase of 92% from HKD764 million in the third quarter of 2020.

Gross margin was 85%, as compared to 81% in the third quarter of 2020. Our total operating expenses was HKD764 million, up 177% year-over-year and 18% Q-over-Q. We continue to invest international markets and we estimate over 30% of our operating costs was evolved to overseas markets.

R&D expenses was HKD224 million, up 50% year-over-year and 29% Q-on-Q. We continue to have - add accounts to support the new product offering US clearing capabilities and the product customization for international markets. Approximately 40% of our R&D personnel was dedicated to our move further nowadays.

Selling and the marketing expenses were HKD403 million, up 263% year-over-year and 7% Q-on-Q. The rising spending was driven by higher branding and marketing expenses in Singapore and in the US in particular. In the third quarter approximately 40% of our selling and marketing expenses was spend on overseas client acquisition.

G&A expenses were HKD137 million, an increase of 122% year-over-year and 42% Q-on-Q. The increase was primarily, due to increasing headcount for G&A personnel. As a result, our non-GAAP adjusted net income increased by 58% year-over-year and 17% Q-on-Q to HKD646 million, these non-GAAP net margin for the quarter was 37%.

That conclude our prepared remarks. We now like to open the call to questions. Operator, please go ahead. Thank you.

Question & Answers

Operator

Thank you. [Operator Instructions] Our first question is from the line of Bella Zhang of PH Capital. Please go ahead.

Bella Zhang - PH Capital - Analyst

Hi, management. Thanks for your - thanks for taking my question. I have two, on the too many above the regulation impacts actually, the first one is, you know, the new draft [Phonetic] from cyberspace administration of China requires own cyber security assessment for leasing in Hong Kong. Well, especially for tech companies with data over 1 million users. So my question is do you actually see any negative impact on your IPO pipeline, because of the new regulation from CAC. Hence, do we expect the IPO space in fourth quarter and next year will be slowed down a lot?

The second one is in terms of your customer acquisition there are some concerns about the legality of offshore trading by online brokers. Just wondering, if management can share some light on the impact on the government regulation? Well, especially for customer acquisition in Mainland China, you know, people may feel hesitate to open new accounts, due to the regulatory concerns. Well additionally, will that affect your customer acquisition strategy. Let me translate myself.

[Foreign Speech]

Arthur Yu Chen - Chief Financial Officer

Thank you. I will take the second question first, I will leave the first question to my colleague Leaf. In terms of the China regulations, I think we are not in the best position to prejudge what the regulator will do. I think so far, if the impact to our client acquisitions in the Greater China area, it's manageable. I can share a little bit more colors, which I think may be helpful for analysts and also the investor to gauge how the negative impacts on the recent headline news, because of that, what's the implication to our client acquisitions across both.

Definitely we see certain asset outflows among clients in the Greater China areas, amid concerns over media reports. Overall speaking, we think the impact is still very short-term and manageable. From mid - from the mid-October to mid-November, the net asset outflows accounts for less than 2% of our total client assets and the situation start to back normal from last week in my personal thought, I think the worst is already behind us. Of course, the market volatility alongside with seasonality effect in Q4 together with these, you know, headline news definitely enhance the attrition rate both existing paying clients and also create some challenges both new client acquisition, across the board in the near-term. But we think the overall speaking, the situation is still within our control. Thank you.

Leaf Hua Li - Founder, Chairman, Chief Executive Officer and Chairman of the Technology Committee

[Foreign Speech]

Yes. We are business as usual here at Futu and our business model is nothing new. So before our inception this business has been there for years and our business size is small relative to the whole industry. So our business model and how we serve our clients are identical to a lot of the other international Hong Kong and China brokers and banks in Hong Kong that help Chinese-based [Technical Issues] access overseas trading. And we are upping under the same style of laws and regulations. You have to ask, so the differences then in comparison to our peers. We invest more heavily into technology and innovation and we attach more importance to user experience.

And we have always been embracing the regulations and have a very high set of standards for operational compliance, and we are actively and transparently communicating with the regulators and we anticipate and welcome more guidance from the regulators to both us and the industry as a whole and if there are new regulatory guidance is coming out, I think we will abide by these regulations as soon as possible and as a listed company we'll timely update any new information available to us.

Yes. And also to your question about whether the IPO pipeline could be influenced? We still like the IPO pipeline is more dependent on the overall market environment then on the cyber security, kind of investigations. So I think how the IPO pipeline will turn out in Hong Kong in the next couple of quarters will be largely dependent on the overall direction of the market. And also I just want to point out that historically, we achieved like high single-digit of our revenue through IPO-related businesses, including IPO subscription fees and the IPO margin financing income. So we don't think it's a material impact on our business. And we have a lot more levers to pull to further our growth and as we mentioned in our opening remarks we think there is still a huge under penetrated population in Hong Kong that we could tap into and a lot of the international markets that we have entered, including the Singapore and the US offers significant runway for growth. Thank you.

Operator

Thank you. Our next question is from the line of Katherine Liu of Morgan Stanley. Please go ahead.

Katherine Liu - Morgan Stanley - Analyst

[Foreign Speech]

I will translate for myself. Thank you very much for giving me this opportunity to ask question. So just two questions from me, first just wondering the management to help us to analyze how to view the overseas market growth opportunity or the room for growth for Futu?

And then the second question is, can the company give us some guidance in terms of the fourth quarter quarter-to-date operational data trend such as the velocity client assets, etc. Thank you.

Arthur Yu Chen - Chief Financial Officer

Okay. Sure. Katherine, let me just supplement the answer, I mentioned before for your second question. Still, I will leave the first question to Leaf. I think in terms of the client activities we see investor sentiment is warming out in the fourth quarter. Of course in fourth quarter, we faced some long holidays such as national holiday and also Christmas. If we do take out the holiday fattened in Q4, we expect the overall trading volume may be similar to Q3 based on the current run rate. In terms of client asset, as I mentioned before, we definitely got some, you know, net asset outflows, because of the headline news recently, but the situation starts to back to normal since last week. And the, in particular, we see very encouraging signals in our overseas markets such as Singapore.

In our opening remarks Leaf mentioned that our average client assets in Singapore already jumped 11% Q-on-Q basis. I do think, you know, on top of that we will continue to see on our portal and also on our absolute basis in Singapore markets, we will still see another at least a 15% increase Q-on-Q on top of the growth what we achieved in Q3. And also in terms of our wealth management products, so far, our assets on wealth management segment has demonstrate a strong resilience and we do expect more product offering to be launched in Q4, which may further drive our AUM continue to go up. Thank you.

Leaf Hua Li - Founder, Chairman, Chief Executive Officer and Chairman of the Technology Committee

[Foreign Speech]

Katherine Liu - Morgan Stanley - Analyst

[Foreign Speech]

Leaf Hua Li - Founder, Chairman, Chief Executive Officer and Chairman of the Technology Committee

As of Q3, we had about 2.2 million users in Hong Kong, accounting for about 32% of the population over age 18 in this region, meaning that about one out of every three Hong Kong adult is our user now. And our penetration rate among Hong Kong population between the age of 20 and 29 is about 20%, meaning that one out of every five in this group uses our product. So in the Hong Kong market we maintain a high penetration rate among the young the tech-savvy population. Well, focusing on acquiring the underpenetrated groups such as the middle-aged people and the female groups etc.

And in Singapore the adult population is about 4.9 million and assuming that about 30% of them have a brokerage account. There are approximately 1.5 million retail investors, representing great potential for further penetration. And also as part of our future international strategy we will take Singapore as our Southeast Asian headquarter spend into other countries in this region. And similar to Singapore other Southeast Asian countries the lag in terms of their brokerage services and capabilities and user experience. And we see that there are approximately 33 million Chinese population in SCA and 22 million of whom are Internet users, and based on the IP address of Futu existing users, we think that Futu has built a high brand recognition in many Southeast Asian countries already.

And last but not least, I think we see potential for further growth in the US market as well. We believe that NiuNiu strikes a delicate balance between user friendly mobile design and advanced product features, and that's very well filled that market gap between the incumbents in the market and a lot of these online brokers. And our net new clients in the US increased meaningfully in Q3 on a sequential basis benefiting from our initiatives and broadening client acquisition channels. And going forward, we'll adjust our client acquisition strategy based on the market dynamics to reach our targeted client groups. Thank you.

Katherine Liu - Morgan Stanley - Analyst

[Foreign Speech]

Operator

Thank you. Our next question is from the line of Zoey Zong of Jefferies. Please go ahead.

Zoey Zong - Jefferies - Analyst

Thanks.

[Foreign Speech]

Thank you, management for taking my questions. I have two questions. First, we noted that company newly added 166,000 paying clients in Q3. Could you please provide some color about the user makes like how much come from Hong Kong, Singapore and then and the US, and also could you please also share a mix for the 1.2 million Swiss opening clients?

And my second question is regarding customer acquisition cost. So, the entire customer acquisition costs towards around HKD2,400 in Q3. So, how should we expect the next year? Thank you.

Arthur Yu Chen - Chief Financial Officer

Sure, Zoey. I will take both questions. I think number one the breakdown for the new clients acquired in Q3 in general Great China areas accounts for roughly 60% of the new paying clients acquired for the quarter. The remaining 40% Singapore roughly accounts for 28% and the remaining 11% belongs to the US.

And also for your second question in terms of the market and expanding. I think what we focus internally is more, the ARPU versus CAC ratio. Definitely you see, the CAC numbers in the fourth - in the third quarter increased from a Q-on-Q basis. Mainly, I think, it's due to the - because the market conditions, which let our attrition rate temporary goes higher. Therefore on average basis, you can see the CAC number slightly go up from a Q-on-Q basis. It is very difficult for us to give you a quantitative guidance for the CAC number, which be - heavily be impacted by the market conditions as you can imagine, but I think in our conviction, user engagement is always the most important things we care, because the transition cost for the paying users to other competitors or to other channels are paid very high time threshold.

Therefore, we still will more focus on the growth. Definitely we will, on a closed basis, monitor our unit economics to make it a more justifiable. For instance, if we look at our Singapore numbers, I think, back to second quarter this year, if we use the CAC number and also our core number at that time, our payback period for our Singapore paying clients is around 2.5 years. But now, you can see after one quarter, our average client asset also already increased by 11%. And we do expect there will be another 15% chunk in the fourth quarter.

So, on a more forward-looking perspective, the unit economics will become more and more make sense, after we further gain the trust and confidence from the existing users, who will inject on more fundings into their accounts, and also at the same time we will provide more for offerings to enhance our take rate. Thank you.

Zoey Zong - Jefferies - Analyst

[Foreign Speech]

Operator

Thank you. The next question is from the line of Charles Zoe of Credit Suisse. Please go ahead.

Charles Zoe - Credit Suisse - Analyst

[Foreign Speech]

Okay, I will translate by myself. The first question, I just want to clarify the 2%, you just mentioned about outflow. So, what do you mean by that? You just mentioned Greater China, for which period? Can you maybe just give us a little more color on that?

Second question, you also mentioned that the onboarding process, the due diligence and also the risk management is seen as banks. So, do you mean that, you know, famous commercial bank or private bank for a security brokerage account?

I also have two more questions here. The first one is we understand Futu has not adopted a zero-commission policy, like many competitors do. So, we have seen some promotion that offered zero-commission treating either by using a promotion code, a account opening or redeeming coupons and afterwards. So, how do we think about the theories going forward in Hong Kong, Singapore, as far as the monetization of current AUM? Last one is also about the share buyback. So, can you maybe give us more color by your share back, say, at what price and also like how many shares have you already buyback? Thank you.

Arthur Yu Chen - Chief Financial Officer

Sure, Charles. You asked four questions. Let me just take number one, the number four first. Still, I will leave the second question and also the third question to Leaf. I think number - in terms of the client as outflows as I mentioned before, I just want to share some latest colors or in terms of the implications from the recent headline news. It is very difficult to attribute our clients asset outflows, because of - whether because of the reason headline news or because of other reasons.

But just to give you some very simple statistics, if we look back, the past one month, we do have some net asset outflow. I think the amount is roughly in the range of 1% to 2% of our total current asset balance at the end of the third quarter. So, just to give you some sense in terms of the number. And also for the share buyback, I think, definitely we will - this is a 13-months share buyback programs and also according to the SEC regulations, actually, we cannot conduct any share buyback during the result - the blackout period. Therefore, so far, we have not conducted any share buyback yet. Thank you.

Leaf Hua Li - Founder, Chairman, Chief Executive Officer and Chairman of the Technology Committee

[Foreign Speech]

Sure. Yes, we abide - as we mentioned earlier, we abide by the same set of regulations and laws in terms of our account opening procedures KYC and AML, etc. So, we believe that what we do is in line with what other brokers and banks in Hong Kong they currently do, we don't think there are differences.

[Foreign Speech]

We don't think the competitive environment has changed much in the Hong Kong market. And in fact this price war between our competitors has been happening for a number of years. And, as I mentioned in our opening remark, we believe that the key success factors of a broker include a trustworthy brand, superior user experience, this end-to-end proprietary trading infrastructure, a very strong capital base and close relationships with commercial banks. And these really all take time to develop. And Futu has developed strong competitive strengths in these areas.

And also we understand that the majority of the trading cause for Hong Kong stocks is coming from stamp duty, which is currently 3 bps. We currently charge a 3 bps commission, which is relatively low in comparison to the stamp duty cost. So, we don't feel like the price wall has affected much and we don't have plans to change our pricing. And if pricing is the only lever, our competitors can pull when they enter into the market. If they don't see financial or operational results in the short-term, they may feel a lot of pressure.

Charles Zoe - Credit Suisse - Analyst

[Foreign Speech]

Operator

Thank you. We have now reached the end of our question-and-answer session. And I'd like to hand the conference back to Mr. Yuan for closing remarks. Please continue.

Daniel Yuan - Chief of Staff and Head of Investor Relations

That concludes our call today. And on behalf of 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 other Investor Relations representative. Thank you, and goodbye.

Operator

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Q3 2021

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