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Operator: Hello, ladies and gentlemen. Welcome to Futu Holdings Fourth Quarter and Full Year 2022 Earnings Conference Call. Today’s conference call is being recorded. If you have any objections, you may disconnect at this time. I’d 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, sir.

Daniel Yuan: Thanks, operator and thank you for joining us today to discuss our fourth quarter and full year 2022 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 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.

Leaf Li: Thank you all for joining our earnings call today. In the fourth quarter, we added over 42,000 paying clients, down 27% sequentially. Stock market plummet in the first half of the quarter and uncertainties around the sustainability of market rebound in the second half affected user sentiment, which led to the deceleration of client acquisition. Our total paying clients reached around 1.5 million, representing 20% growth year-over-year. In 2022, we managed to add over 240,000 paying claims exceeding our full year guidance by 20%. Despite a challenging market backdrop, our average quarterly client retention rate in 2022 remained above 98%, which speaks to the stickiness of our product. In Hong Kong, we continue to promote our product among the population age over 35 through offline workshops and campaigns as well as targeted online apps.

In the past quarter, people over 35 contributed over 50% of our new paying clients in Hong Kong. We will further rollout offline events and refine product offerings to reach and serve this population. In the U.S. market, we saw an improvement in client quality at the first month average net asset inflow of new paying clients increased by approximately 40% sequentially. Client acquisition in Singapore remained resilient in the fourth quarter, mainly attributable to continued client interest in money market and fixed income fund products. Total client assets increased by 2% year-over-year and 13% quarter-over-quarter to HKD417 billion. The sequential increase was largely due to market appreciation of our clients’ Hong Kong stock holding and robust net asset inflow across all regions.

As of quarter end, margin financing and securities lending balance declined by 10% sequentially. While we saw an uptick in securities lending balance amid market volatility, margin financing balance declined as clients unwound some of their positions during hard call market rebound. Solar trading volume was flattish quarter-over-quarter at HKD1.1 trillion, of which Hong Kong stock trading constituted 36%. In the fourth quarter, Hong Kong stock trading volume increased by 31% sequentially to HKD397 billion. The increase can be attributed to higher trading volume of China new economy companies and leveraged and inversed ETF, which clients used as tactical tool to make short-term bets on market trends. Our market shares in Hong Kong futures and options trading further climbed to historic highs of 8% and 15% respectively.

U.S. stock trading volume was HKD675 billion, down 10% sequentially amid market sell-off as mainly to U.S. technology name. Total client assets in wealth management grew 68% year-over-year and 22% quarter-over-quarter to HKD32 billion, mainly driven by sustained interest in money market funds amid interest rate hikes. We onboarded commodity funds and alternative funds in Singapore. In Hong Kong, we expanded equity and index-linked structured product offerings for high net worth clients to meet their different risk/return objectives during market turmoil. In the fourth quarter, we also became the first retail platform in Hong Kong to distribute the BGF China Innovation Fund as BlackRock, thereby enhancing the brand awareness of Futu Money Plus.

Our enterprise business had 333 IPO distribution and IR clients as well as 638 ESOP clients, up 41% and 60% year-over-year respectively. We acted as joint book runners for several high-profile Hong Kong IPOs, including those of 360 DigiTech and Weilong Delicious. We underwrote 41 Hong Kong IPOs in 2022 and ranked first among all brokers according to Wind. Of all 28 companies listed in 2022 with market cap over HKD10 billion by the end of the year, 23 companies have used to one or more of our enterprise product offerings. In the fourth quarter, we also launched Momo ESOP in Singapore to provide corporate clients with ESOP solution services. Next, I’d like to invite our CFO, Arthur, to discuss our financial performance.

Arthur Chen: Thank you, Leaf and Daniel. Before going through our financial performance, I’d like to give you an update on our latest share repurchase program announced on March 11, 2022. At the end of last year, we have repurchased an aggregate of 8 million ADS with approximately $250 million total repurchase amount in the open market transactions. This constitutes about 50% of the maximum purchase amount of $500 million approved under our share repurchase program. Now please allow me to walk you through our financial performance in the fourth quarter. All numbers are in Hong Kong dollars unless otherwise noted. Total revenue was HKD2.3 billion, up 42% from HKD1.6 billion in the fourth quarter of 2021. Despite market volatility, we ended 2022 with full year revenue growing 7% to HKD7.6 billion.

Brokerage commission and handling charge income was HKD1 billion, an increase of 22% year-over-year and 10% Q-over-Q. The increase was mainly driven by a higher blended commission rate of 9.6 basis points. The commission per share pricing model for U.S. stock trading led to a further hike in blended commission rate as stock price dropped and the number of the shares trade increased. Interest income was HKD1.1 billion, an increase of 84% year-over-year and 29% Q-over-Q. The increase was mainly driven by higher interest income from cash deposits due to higher benchmark interest rates, which more than offset by the lower margin finance income due to lower daily average margin financing balance. Other income was HKD94 million, down 26.5% , an increase of 58% from HKD217 million in the fourth quarter of 2021.

Brokerage commission and handling charge expenses was HKD64 million, down 27% year-over-year and 23% Q-over-Q. Expenses didn’t move in line with our brokerage commission and handling charge income mainly due to cost savings from our U.S. self-clearing business. Interest income was HKD182 million, up 227% year-over-year and 307% Q-over-Q. The year-over-year and Q-over-Q increase was mainly driven by higher interest expenses associated with our security lending business. Processing and servicing costs were HKD96 million, up 31% year-over-year and 6% Q-over-Q. The year-over-year increase was due to higher data transmission fee and system upgrade fees. As a result, our total gross profit was HKD1.9 billion, an increase of 40% from HKD1.4 billion in the fourth quarter of 2021.

Gross margin was 85% as compared to 86% in the fourth quarter of 2021. Operating expenses were down 1% year-over-year and up 7% Q-over-Q to HKD818 million. To break it down, R&D expenses were HKD334 million, up 24% year-over-year and 7% Q-over-Q. The increase €“ the year-over-year increase was mainly due to increase in R&D headcount. We continue to support new product offerings investing in the U.S. self-clearing capabilities and the customized products for international markets. Looking into 2023, we intend to further grow our headcount by middle to high-teens on top of our 2,800 employees at the end of last year to support expansion into new international markets. Selling and marketing expenses was HKD153 million, down 55% year-over-year and 35% Q-over-Q.

Expenses declined due to slower client acquisition amid weak market sentiment and the lower client acquisition costs. G&A expenses were HKD330 million, up 52% year-over-year and 56% Q-over-Q. The rise was primarily due to increase in headcount for general and administrative personnel and to a lesser extent, an increase in professional fees relating to our proposed Hong Kong IPO listing. As a result, our net income increased by 92% year-over-year and 27% Q-over-Q to HKD959 million. Net income margin expanded to 42% in the fourth quarter as compared to 31% in the same quarter last year, mainly due to lower marketing spending. Our effective tax rate for the quarter was 14.7% in due to higher tax rate from our U.S. operations. That concludes our prepared remarks.

We now like to open the call to questions. Operator, please go ahead.

Operator: Thank you. Our first question comes from the line of Han Pu from CICC. Please ask you question, Han.

Han Pu: This is Han from CICC. Thanks very much for taking the question. And congrats on another strong quarter. I have two questions. Firstly, how about the latest progress in the new market, such as Australia and Japan, for example, the user profile and the products and service? Secondly, we see the continued rapid growth in the wealth business. Could you please share more color on the driver behind the product structure and our forward plan, besides how about the revenue contribution in the fourth quarter of the growth management business and also the user penetration to our brokerage business? Thanks.

Leaf Li: In Q4 we continued from various client acquisition channels in the Australian market, reduced the budget for inefficient client acquisition channels, and constantly optimize the account opening funnel. And by deepening connection with clients via online and offline exchanges, we also improved clients’ product experience. So as a result, the client acquisition cost in Q4 in Australia fell substantially on a Q-o-Q basis. And in the future, we will continue to improve our product capability and the ability to efficiently acquire clients as well as upgrade our marketing strategy. Thank you. Wealth Management business maintained strong growth momentum in the fourth quarter, mainly because low-risk fund products remain attractive to our clients during the rate hike cycle.

And meanwhile, we have been broadening in offerings to meet the investment and financial needs of customers with different risk appetites. And in Q4, wealth management business helped attract a lot of clients and assets, specifically the growth in wealth management AUM in Q4 is almost entirely driven by new asset inflows and the percentage of our new paying clients brought by fund products has also been growing. That’s especially true in the Singapore market. And looking ahead, we see a lot of room for growth in wealth management business, and we plan to continuously diversify structured products in Hong Kong with an aim to provide five types of notes, including fixed dividend structured products and fund linked notes in the first half of this year to better maybe asset allocation needs professional investors and high net worth clients.

And in Singapore, we have comprehensive mutual fund product offerings and we will focus on introducing more low-risk fund portfolios and dividend-paying fund portfolios, while gradually expanding other product categories, including bonds, private equity funds, structured notes, etcetera. Thank you.

Operator: Thank you. Our next question comes from the line of Chiyao Huang from Morgan Stanley. Please ask you question, Chiyao.

Chiyao Huang: Hi. My first question is on the driver for higher brokerage commission rate in the fourth quarter and roughly what’s the contribution from the derivative products? And how is the management’s outlook on the brokerage commission rating to 2023? And my second question is on the interest income, which we are seeing a rapid growth in the fourth quarter. And so basically, wondering how is our plan to utilize the client idle cash and what do we invest? And what’s the percentage and the scale of client idle cash that we plan to utilize in 2023? Thank you.

Arthur Chen: Thank you. I will take these two questions. Number one, in terms of the commission rate, I think the hike was mainly driven by our typical reasons because the market was quite volatile in fourth quarter. The U.S. stock markets make meaningful corrections, which implies our pricing model, effective pricing model become much higher. The other reason is, as you mentioned, these derivative tradings continue to increase in the fourth quarter given the market volatility, which also has a positive benefit on our blend commission rate. And in terms of the contribution in the fourth quarter derivatives, commissions roughly account for one-third of our total commission, maintaining a relatively high level in our history. But as I mentioned in last earnings call, we do not set any top €“ specific targets for our director products.

Instead, what we focus will be more on the investment education side, and also further enhance our product itself. For instance, this year, we will gradually roll out our U.S. option portfolio or the functions to attract more of these professional derivative traders. And we are not inclined to push or how sell these derivative products to these clients with low risk appetite. The second question regarding the interest income, it is very difficult to quantify how much idle cash we can utilize, but it depends on the market volatility, but I can give you some general range, say, in our history, the idle cash percentage-wise accounts for roughly 20% to 10% of our total client assets, different markets €“ different market conditions. For instance, in the fourth quarter, or even in the whole last year because the market was very €“ not very good.

Actually, our clients’ idle cash position, percentage-wise, it was relatively higher. I think looking forward this year, the interest income will continue to grow on a year-on-year basis, mainly benefiting from the high interest rate environment. And for the deployment usage, actually, we do not have a lot of choice. The reason is, according to the SFC regulations, we can only put clients idle cash into the bank deposits to the commercial banks with the duration of less than 6 months. Thank you.

Operator: Thank you. Our next question comes from the line of Cindy Wang from China Renaissance. Please ask you question, Cindy.

Cindy Wang: So, thanks management for giving me this chance to ask questions. So I have two questions. First question is related to the U.S. market. So, in fourth quarter, the average net asset inflow of new paying clients for their first month of onboarding to increase by 40% quarter-over-quarter. So, what’s the U.S. client acquisition strategy in fourth quarter to help the new asset inflow increase? And do you have any expectation in terms of net asset inflow and the number of new paying client contribution in U.S. in 2023. So the second question is related to customer acquisition costs. So in fourth quarter, the CAC was down 11% quarter-over-quarter. Can you kind of give us the recent declines there? And if this trend will be sustained in the first quarter of 2023 and how do we see the full year? Thank you.

Arthur Chen: Thank you. I will take your second question first. I’ll leave the first question to Leaf to answer. For the CAC in the fourth quarter, actually, we further optimized our channel distributions in Hong Kong and also in overseas markets. We adjust certain incentives to our clients on a dynamic basis not only just focus on the speed of our clients, but also, more importantly, on the quality of our clients. Going forward, I think it is still very difficult to predict 2023 situations. I think our base case will be the CAC largely will be the same as 2022. Client acquisition in the U.S. in Q4 slowed down on a sequential basis. On one hand, market sentiment remained weak, which affected clients’ willingness to enter the market.

And on the other hand, we deliberately slowed down client acquisition to focus on improving client quality. And as mentioned, the first month average net asset inflows from our new paying clients in the U.S. increased by around 40%, mainly because we focused on attracting client assets and adjusted the reward threshold. And in the first quarter this year, we already launched multi-leg options for U.S. stocks and we plan to add and improve advanced derivative products and functions, such as index options this year. And going forward, we will continue to enhance our product capabilities and gradually improve our product portfolio centered on U.S. docs and U.S. derivatives to enhance our competitiveness in the local market, while also controlling client acquisition cost and focusing on improving client quality.

And regarding the guidance, we now have no guidance for the U.S. clients or asset inflow growth in 2023. Thank you.

Operator: Thank you. Our next question comes from Frank Zheng from Credit Suisse. Please ask your question, Frank.

Frank Zheng: This is Frank Zheng from Credit Suisse. I have two questions. The first one is new market entries. What is the latest progress in the timetable? Is the services in Japan already online? The second question is related to interest rates, fourth quarter interest expense surged quarter-on-quarter and we would like to understand, in general, when interest rate is in an up cycle, with the interest rate spread of margin financing fixed rate value in business be affected considering that the fee rate income is relatively fixed, but the fee expenses could elevate.

Arthur Chen: Thank you very much. Frank, I will take both of your questions. Number one, in terms of the new market expansion, I think you are right. We do have some new markets in our pipelines. In the base case, we are looking for to expand two new markets, both are in Asia this year. I think though, in terms of total addressable market for these two potential markets, will be very meaningful. But in terms of the exact timeline, it is still very difficult to predict nowadays given we are still waiting for the regulators’ confirmations for our license approval. Hopefully, we will give you some update more and more color in the coming quarters. Second, regarding the interest expenses, I think relatively speaking, the spread will be narrowed a little bit given that our pricing strategy on the margin financing is fixed rate.

But on the funding cost side, it will be impacted from the high interest rate environment, but thanks to our U.S. sales clearing capabilities and also a very strong balance sheet. If you look at our total equity base, you can see actually, a lot of margin financing, the funding source came from our own money. So therefore, I think the pressures from the funding cost is still manageable in 2023. Thank you.

Operator: Thank you. Our next question comes from Leon Qi from Daiwa. Please ask your question, Leon.

Leon Qi: Hi. This is Leon Qi from Daiwa. Thanks for taking my questions. Two questions today. Firstly is regarding Hong Kong business. We noticed that recently, Futu has been carrying out more and more offline services. I appreciate if management can give us any color on how should we think about our offline business strategy in Hong Kong? Does that help us in terms of increasing the customer wallet share in AUM? And the second question is regarding your latest plans for Hong Kong listing. Thank you very much.

Arthur Chen: Thank you very much Leon. I will take your second question first, and I will leave the first question to Leaf to answer. There is no any confirmed timelines for our Hong Kong IPO listing nowadays. I think the top priority for the management this year is to fully cooperate and collaborate with the Mainland regulators to complete our inspection as soon as possible. So, this is our top priority and we will further assess the feasibilities of our Hong Kong IPO listing later, depending on the market conditions and also depending our use of proceeds. Thank you.

Leaf Li: So, in Hong Kong, Futu has higher penetration rate among the younger generations than the middle age groups. And we hope to better serve the middle age groups of clients. And compared with the younger generations on our platform, we see that the middle age groups are generally less tax savvy and have longer conversion cycles. As such, we carried out offline account opening services in Hong Kong as face-to-face communication can shorten the conversion cycle of these clients. And we also plan to reach potential clients through multiple touch points, including offline campaigns, cooperation with KOLs, etcetera, so as to improve the quantity and the quality of the clients acquired. Thank you.

Operator: Our next question comes from the line of Katherine Lei from JPMorgan. Please ask your question, Katherine.

Peter Zhang: Sorry, this is Peter asking question on behalf of Katherine. So, let me do the translation. We understood that there is a CAC announcement on tightening of the offshore brokers. And we wish to understand what’s the impact on Futu’s business operation, in particular, does Futu see any current AUM outflow fall in the CAC announcement last December? Thank you.

Arthur Chen: Thank you, Peter. Let me answer your question. First of all, I will give you some general colors about our clients’ movement following the end of last year’s inflow. We do witness some our Hong Kong clients because of the €“ there are some sentiment concerns, there are some client outflows in €“ particularly in the first half of January. But I think the overall amount is quite manageable. Roughly, I think the net outflow at the time accounts for roughly 1% to 2% of our total client assets, which compared with the situation we faced at the end of 2021, we think the situation was manageable. And the net outflow situation gradually reversed starting from February. And nowadays, we record daily asset interest. Secondly, regarding the CSRC’s news at the end of last year, I think we €“ number one, we fully accept the regulator’s point of view, and we have a full cooperation with the regulators.

On a net-to-net basis, we do think it will be healthy for the industry’s long-term growth. And also, if you follow the news, there are some clarities from the CSRC spoke persons in the middle of February, mentioning how to deal with the existing clients. They ask for orderly deal with the existing clients. It will be an industry-wide situation. So, we will take very constructive manners to cooperate with the regulators in this regard. Thank you very much.

Operator: Alright. I am showing no further questions. Thank you very much for all your questions. I will now turn the conference back to Daniel for closing remarks.

Daniel Yuan: Thank you, operator. And 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.

Operator: Thank you. This concludes today’s conference call. Thank you for participating. You may now disconnect.