FUTU(FUTU) - 2022 Q4 - Annual Report

Futu Holdings Limited Supplemental and Updated Disclosures Introduction This report provides supplemental disclosures for Futu Holdings Limited's proposed dual primary listing on the Hong Kong Stock Exchange, updating its 2021 Form 20-F * The company is preparing for a dual primary listing of its Class A ordinary shares on the Hong Kong Stock Exchange, expected around December 30, 2022[1] * This document supplements the company's annual report (2021 Form 20-F) with new and updated information required by Hong Kong's listing rules[2] Forward-Looking Statements This section contains forward-looking statements about the company's goals, strategies, and financial condition, which are subject to inherent risks and uncertainties * The report includes forward-looking statements on goals, growth strategies, and financial condition, subject to known and unknown risks[4][5] * Factors causing material differences in actual results include operational prospects, customer relationships, industry trends, economic conditions, and regulatory changes[6] Recent Developments Nine Months Ended September 30, 2022 Financial Performance For the nine months ended September 30, 2022, total revenues decreased by 3.3% to HK$5.33 billion, and net income fell 14.8% to HK$1.97 billion, driven by lower trading volumes and increased operating expenses Financial Results for the Nine Months Ended Sep 30, 2022 vs 2021 (HK$ thousands) | Metric | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Change (%) | | :--- | :--- | :--- | :--- | | Total revenues | 5,512,511 | 5,333,308 | -3.3% | | Brokerage commission & handling charge | 3,056,100 | 2,959,100 | -3.2% | | Interest income | 1,900,600 | 2,076,500 | +9.3% | | Other income | 555,800 | 297,800 | -46.4% | | Total costs | (989,211) | (654,000) | -33.9% | | Total operating expenses | (1,900,940) | (2,231,100) | +17.4% | | Net income | 2,311,401 | 1,968,200 | -14.8% | | Net income margin | 41.9% | 36.9% | -5.0 p.p. | * Brokerage commission income decreased 3.2% due to lower trading volumes, partially offset by a higher blended commission rate of 7.9 basis points[11] * Interest income grew 9.3%, driven by higher interest from bank deposits amid rate hikes[11] * Total operating expenses increased by 17.4%, mainly due to a rise in employee compensation and benefits from HK$785.2 million to HK$1.50 billion, driven by increased headcount and RSU grants[12] Summary of Third Quarter 2022 Highlights In Q3 2022, Futu achieved strong year-over-year growth, with total revenues up 12.4% to HK$1.95 billion and net income up 22.7% to HK$0.75 billion, alongside significant client base expansion Q3 2022 Year-over-Year Performance Highlights | Metric | Q3 2022 Value | YoY Growth (%) | | :--- | :--- | :--- | | Total Revenues | HK$1,945.6 million | 12.4% | | Total Gross Profit | HK$1,727.5 million | 18.0% | | Net Income | HK$754.6 million | 22.7% | | Total Paying Clients | 1,444,955 | 23.8% | | Total Users | 19.2 million | 15.6% | Risk Factors Risks Related to Business and Industry The company faces significant business and industry risks, including slowing growth, extensive and evolving regulations, uncertainties regarding PRC regulations, intense competition, and risks related to cybersecurity and margin financing * Historical rapid growth may not indicate future performance; total revenues grew 211.9% in 2020 and 114.9% in 2021, but decreased 10.4% in H1 2022[17] * The company is subject to extensive and evolving regulations across Hong Kong, Singapore, the U.S., and Australia, with ongoing SFC inquiries into Futu International Hong Kong's operations[19][21] * Uncertainties exist regarding whether the company's Mainland China activities constitute securities brokerage, requiring licenses it does not hold; Mainland China clients represented 35% of individual paying clients as of June 30, 2022[26] * The online brokerage industry is intensely competitive, facing pressure on commission rates from traditional firms, other online brokers, and new entrants[29][43] * The margin financing business exposes the company to credit risk, with an outstanding balance of HK$28.9 billion as of June 30, 2022, relying on adequate funding from financial institutions[45][47] * The company lacks certain PRC licenses, such as Securities Investment Consultancy and Audio and Video Service Permission, risking penalties if its platform content is deemed regulated[51][52] Risks Related to Presence in China The company's China operations face significant risks from evolving PRC laws, potential tax residency, uncertain CSRC approvals for Hong Kong listing, and potential Nasdaq delisting under the HFCAA, despite recent PCAOB inspections * The PRC government has significant oversight and may intervene in operations, with recent policies and potential new regulations for overseas-listed companies creating uncertainty[87][90] * The HFCAA could lead to Nasdaq delisting if the PCAOB cannot inspect its auditor for consecutive years, though the PCAOB announced successful inspections in December 2022, vacating prior determinations[106][108] * New draft CSRC regulations may require filing procedures for the Hong Kong listing and future offerings, creating uncertainty regarding timing and approval[97][98] * The company may be treated as a PRC resident enterprise for tax purposes, subjecting its global income to a 25% enterprise income tax if its "de facto management body" is in China[93] * PRC subsidiaries benefit from preferential tax treatments, such as a 15% rate for "High New Technology Enterprise" status; discontinuation could adversely affect financial results[101] Risks Related to Corporate Structure The company relies on a Variable Interest Entity (VIE) structure for restricted operations in China, which carries enforcement risks, potential conflicts of interest, and uncertainty under the Foreign Investment Law, risking severe penalties if deemed non-compliant * The company depends on contractual arrangements with its VIEs to operate in restricted sectors like value-added telecommunication services, a less secure structure than direct ownership[112] * For H1 2022, VIEs contributed 0.4% of total revenues and 0.1% of total assets, indicating minor financial contribution but critical operational license holdings[112] * If the PRC government deems the VIE structure non-compliant, the company could face severe penalties, including license revocation, fines, or forced restructuring[116][120] * The PRC Foreign Investment Law, effective January 1, 2020, creates uncertainty for the VIE structure's viability by not explicitly classifying contractual arrangements as foreign investment but allowing future regulations to do so[132] * VIE shareholders, including founder Mr. Li, may have potential conflicts of interest that could adversely affect the business[113] Risks Related to Class A Ordinary Shares and ADSs The trading price of the company's shares may be volatile due to regulatory developments and market conditions; the dual-class share structure grants substantial control to the founder, limiting other shareholders' influence and potentially affecting index eligibility * The company has a dual-class voting structure, with founder Mr. Leaf Hua Li holding approximately 36.2% of total issued share capital and 59.4% of voting power as of the Latest Practicable Date[137][139] * Upon Hong Kong listing, Class B share voting power will reduce from 20 to 10 votes per share, with Mr. Li becoming the sole owner, representing approximately 73.28% of total voting rights[140] * ADS holders have limited voting rights and must act through the depositary, which may grant a discretionary proxy to the company if an ADS holder does not vote[149] * As a foreign private issuer and "controlled company" under Nasdaq rules, the company is exempt from certain U.S. corporate governance requirements, including a majority of independent directors[164][167] * The company does not expect to pay dividends in the foreseeable future, requiring investors to rely on price appreciation for returns[144] Risks Related to the Listing The dual primary listing on the Hong Kong Stock Exchange carries risks including uncertain market development, potential trading price differences between Nasdaq and HKEX, unclear Stock Connect eligibility, and potential Hong Kong stamp duty on ADSs * There is no assurance that an active trading market for Class A Ordinary Shares will develop or be sustained on the Hong Kong Stock Exchange after listing[174] * It is unclear if or when the company's WVR Class A Ordinary Shares will be eligible for Stock Connect trading, potentially limiting liquidity from PRC investors[174] * Uncertainty exists regarding Hong Kong stamp duty applicability (currently 0.26%) to ADS trading or conversions, potentially affecting investment value[177] * Trading prices of ADSs on Nasdaq and Class A Ordinary Shares on HKEX might differ due to varying trading hours, liquidity, and investor bases[175][176] Industry Overview Overview of the Global Securities Market The global securities market trading volume grew from US$163.3 trillion in 2017 to US$269.6 trillion in 2021, projected to reach US$334.5 trillion by 2026, driven by accelerating online penetration and increasing retail investor participation Global Securities Trading Volume by Listing Venue (US$ Trillion) | Year | Hong Kong | The U.S. | Singapore | Mainland China | Others | Total | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | 2017 | 22.0 | 53.6 | 0.3 | 22.0 | 65.5 | 163.3 | | 2021 | 38.6 | 106.8 | 0.3 | 70.4 | 53.6 | 269.6 | | 2026E | 62.0 | 142.0 | 0.4 | 100.0 | 57.4 | 334.5 | * Key market trends include accelerating online penetration (from 40.4% in 2017 to 62.2% in 2026), increasing retail participation (from 39.6% to 48.8%), and emerging demand for social communities[189][190][191] * The global online securities trading volume is projected to grow from US$143.5 trillion in 2021 to US$208.1 trillion in 2026, at a CAGR of 7.7%[194][195] Hong Kong, the U.S. and Singapore Online Retail Securities Markets The U.S. and Hong Kong are among the fastest-growing online retail securities markets, with Hong Kong projected to reach US$2.49 trillion and the U.S. US$47.2 trillion by 2026, driven by a growing retail investor base and integrated online services Online Retail Securities Trading Volume by Market (US$ Billions) | Market | 2017 | 2021 | 2026E | CAGR (2021-2026E) | | :--- | :--- | :--- | :--- | :--- | | Hong Kong | 701.1 | 1,367.1 | 2,488.5 | 12.7% | | The U.S. | 9,600.0 | 29,800.0 | 47,200.0 | 9.7% | | Singapore | 38.6 | 67.4 | 109.9 | 10.3% | * The number of retail investors in the Hong Kong online market is expected to grow from 8.6 million in 2021 to 13.7 million in 2026, with Mainland China investors projected to account for 48.1%[212][213] * The number of retail investors in the U.S. online market is expected to grow from 126.5 million in 2021 to 165.5 million in 2026[221] * Other Southeast Asian markets like Indonesia, Malaysia, and Thailand show enormous growth potential due to rising mobile internet penetration and improved financial access[231][232][233] Competitive Landscape and Hong Kong Wealth Management Market Futu Group is the largest player in the Hong Kong retail securities brokerage market with a 10.7% share in 2021, while the Hong Kong wealth management market is projected to grow from US$1.7 trillion to US$2.8 trillion by 2026 Top 5 Brokers in Hong Kong Retail Securities Market by Trading Volume (2021) | Ranking | Broker | Type | Total Retail Trading Volume (US$ billion) | Market Share (%) | | :--- | :--- | :--- | :--- | :--- | | 1 | The Group (Futu) | Online broker | 283.2 | 10.7% | | 2 | Company A | Traditional broker | 127.0 | 4.8% | | 3 | Company B | Online broker | 110.0 | 4.1% | | 4 | Company C | Traditional broker | 95.0 | 3.6% | | 5 | Company D | Online broker | 63.0 | 2.4% | * Key success factors for online brokers include strong brand recognition, advanced technology, superior user experience, a vibrant social community, comprehensive product offerings, and efficient user acquisition[243] * The Hong Kong wealth management market AUM is projected to grow from US$1.7 trillion in 2021 to US$2.8 trillion in 2026, at a CAGR of 9.6%[244] * Drivers for the Hong Kong wealth management market include comprehensive investment products, high liquidity, and Greater Bay Area initiatives like the Cross-boundary Wealth Management Connect Pilot Scheme[247] Regulatory Overview Regulations in Hong Kong The company's Hong Kong operations are governed by the Money Lenders Ordinance, Insurance Ordinance, and employment laws, requiring licenses, adherence to capital and conduct rules, and compliance with social welfare regulations * The Money Lenders Ordinance regulates money lending, with the statutory interest rate cap reduced from 60% to 48% per annum, effective December 30, 2022[251] * The Insurance Ordinance (IO) regulates insurance intermediaries, with the Insurance Authority (IA) serving as the sole regulator since September 2019[254] * Licensed insurance broker companies must meet requirements for capital, net assets, professional indemnity insurance, and client accounts[256] * The company must adhere to Hong Kong's employment laws, including minimum wage, employees' compensation insurance, and Mandatory Provident Fund (MPF) contributions[259][261] Regulations in China The company's China presence is subject to evolving PRC regulations on securities business, offshore stock investments, cybersecurity, and data privacy, with uncertainties in interpretation and enforcement, particularly regarding its Hong Kong listing and cross-border data transfers * PRC law prohibits engaging in securities business without CSRC approval; the company's legal advisors believe its model of redirecting users to its Hong Kong entity does not constitute such business, but uncertainties remain[264][274] * The Cybersecurity Review Measures require cybersecurity review for network platform operators with over one million users' personal information before foreign listing, though the company's legal advisors believe a Hong Kong listing is exempt[282][521] * The Personal Information Protection Law (PIPL), effective November 2021, regulates personal information and cross-border data transfers, with the company's direct data collection from PRC users not currently considered a cross-border transfer, though subject to change[293][523] * The Stock Connect program was amended to exclude Mainland China investors from purchasing A-shares after a one-year transitional period ending July 24, 2023[271][272] * The Anti-Monopoly Guidelines for Internet Platforms prohibit monopolistic behaviors like tailored pricing, exclusivity, and compulsory user data collection by dominant platforms[300] Regulations in Singapore In Singapore, Moomoo Financial Singapore is regulated by the MAS under the SFA, requiring a Capital Markets Services Licence, adherence to capital and conduct rules, and compliance with AML/CTF and data protection laws * Operations in Singapore are regulated by the Monetary Authority of Singapore (MAS) under the Securities and Futures Act (SFA), with Moomoo Financial Singapore holding a Capital Markets Services Licence (CMSL)[304] * Moomoo Financial Singapore is required to maintain a base capital of S$1 million and a minimum deposit of S$100,000 with the MAS[310][311] * The company must comply with Singapore's Anti-Money Laundering and Counter-Terrorist Financing (AML/CTF) framework, including customer due diligence and suspicious transaction reporting[312][314] * The Personal Data Protection Act (PDPA) governs personal data handling, requiring consent for collection and use, and establishing a Do-Not-Call (DNC) Registry for marketing[319][322] History and Corporate Structure Overview and Corporate Development Futu Group, founded in 2007, launched its online brokerage in Hong Kong in 2012, listed on Nasdaq in 2019, and has since expanded into a one-stop financial services platform with 19.2 million users, conducting two follow-on offerings Key Business Milestones | Date | Event | | :--- | :--- | | Dec 2007 | Commenced operations providing internet technology services | | Oct 2012 | Obtained Type 1 License from SFC and launched online brokerage in Hong Kong | | Mar 2019 | Listed on Nasdaq | | Aug 2019 | Launched wealth management product distribution services | | Mar 2021 | Launched moomoo in Singapore | | Mar 2022 | Launched moomoo in Australia | * The company listed on Nasdaq on March 8, 2019, raising approximately US$161.7 million from its IPO and a concurrent private placement[333] * Completed two Nasdaq follow-on offerings, raising approximately US$301.8 million in August 2020 and US$1.40 billion in April 2021[334][336] * The Board believes the Hong Kong listing will broaden capital market access to grow its customer base, enhance its ecosystem, and support international expansion[337] Shareholding and Corporate Structure The company's shareholding includes significant stakes from founder Mr. Li and Tencent, operating under a dual-class WVR structure that will adjust upon Hong Kong listing, maintaining Mr. Li's controlling interest, and utilizing PRC VIEs for regulatory compliance Substantial Shareholder Holdings (Immediately After Listing) | Shareholder | Class of Shares | Number of Shares | Approx. % of Class | | :--- | :--- | :--- | :--- | | Tencent | Class A Ordinary | 247,418,662 | 28.30% | | Mr. Li | Class A Ordinary | 164,086,568 | 18.77% | | Mr. Li | Class B Ordinary | 239,750,000 | 100.00% | * Tencent Group, a principal shareholder since October 2014, held approximately 22.2% of share capital and 35.0% of voting power as of the Latest Practicable Date[342][345] * The company has a dual-class share structure; upon Hong Kong listing, Class B share voting rights will reduce from 20 to 10 votes per share[342][343] * Tencent will convert all its 140,802,051 Class B shares into Class A shares upon the Hong Kong listing[342] * The company's founder, Mr. Li, has completed the necessary SAFE Circular 37 registration for his overseas investments[351] * The corporate structure includes a Cayman Islands holding company, operating subsidiaries in Hong Kong, the U.S., Singapore, and Australia, and PRC Consolidated Affiliated Entities (VIEs) controlled via contractual arrangements[352] Business Business Overview and Competitive Strengths Futu is a leading one-stop financial technology platform in Hong Kong, holding a 10.7% market share in retail securities brokerage, serving 19.2 million users with a premier experience, high-quality client base, and a vibrant community * Futu is the largest securities broker in Hong Kong by retail securities trading volume, with a 10.7% market share as of December 31, 2021[357] * The platform serves approximately 19.2 million users, 3.0 million clients, and 1.4 million paying clients as of June 30, 2022, holding 51 licenses across multiple jurisdictions[357][358] * Key competitive strengths include a market-leading brand, superior user experience (e.g., 3-minute online account opening), a high-quality customer base, and a vibrant user community (NiuNiu/Moo) with over 1,500 enterprise accounts[371][372][375][378] * The company leverages a flywheel effect where corporate services like IPO distribution and ESOP solutions acquire high-quality retail clients, and the large retail base attracts corporate clients[377] * As of June 30, 2022, the company had 519 ESOP solutions clients, covering the largest number of Chinese new economy companies listed overseas since 2018[377] Our Services Futu offers comprehensive retail services including global trade execution, margin financing, and wealth management, alongside corporate services like IPO distribution and ESOP solutions, complemented by value-added services such as market data and a user community Retail Services Futu's retail services include trade execution across global markets, margin financing with cross-market collateralization, and 'Money Plus' wealth management, which offers access to funds and bonds from 66 partners, holding HK$21.9 billion in client assets * Provides trade execution for securities across Hong Kong, U.S., Singapore, and Australia through locally licensed subsidiaries like Futu International Hong Kong and Moomoo Financial Inc[399][401] * Offers margin financing and securities lending services, with a total balance of HK$28.9 billion as of June 30, 2022[406][414] * The 'Money Plus' wealth management platform offers mutual funds, private funds, and bonds, partnering with 66 asset managers and holding HK$21.9 billion in client assets as of June 30, 2022[415][416] * The company offers innovative features like the Stock Yield Enhancement Program and automatic sweeping of idle cash into money market funds[414][415] Value-Added and Corporate Services Futu provides real-time market data, news, and analytical tools, alongside its NiuNiu/Moo Community for social interaction; corporate services include IPO distribution (underwriter for 81 HK IPOs, 15 US IPOs) and ESOP solutions, serving 519 clients * Provides real-time stock quotes and advanced analytical tools, including free Hong Kong Level II quotes for all Mainland China-based clients[417][418] * The NiuNiu/Moo Community is a large social investing network with over 1,500 enterprise accounts, facilitating direct interaction between users and companies[423][426] * Offers corporate services including IPO distribution, investor relations, and ESOP solutions, becoming a preferred IPO partner for China's new economy companies[435][436] * As of June 30, 2022, the company had 519 ESOP solutions clients and 276 IPO distribution and investor relations clients[435][443] Technology, Data Security, and IP Technology is central to Futu's operations, with 63.5% of employees in R&D, developing a proprietary, integrated cross-market system with over 99.9% service availability, secured by ISO27001-certified FMSPS, and protected by extensive IP holdings * As of June 30, 2022, 1,641 employees (63.5% of total) were engaged in research and development[388] * The proprietary trading system, built on a distributed, cloud-based infrastructure, achieved over 99.9% service availability in 2020 and 2021, processing 1,004 Hong Kong listed securities trades per second[485] * Data security is ensured by the Futu Monolith Safety Protection System (FMSPS), with ISO27001 certification, utilizing data encryption, firewalls, and two-factor authentication[490][492] * As of June 30, 2022, the company owned over 100 software copyrights, 340+ trademarks in Mainland China, and over 150 granted patents in China[494] Users, Clients, and Operations Futu serves over 18.6 million users and 1.4 million paying clients, who are typically young and affluent, acquired through diverse channels; the company maintains a large R&D-focused workforce and holds 51 licenses across jurisdictions User and Client Metrics as of June 30, 2022 | Metric | Value | | :--- | :--- | | Users | 18,649,821 | | Clients | 3,021,790 | | Paying Clients | 1,387,146 | | Total Client Asset Balance | HK$433.6 billion | | Average Paying Client Asset Balance | HK$312,579 | * The paying client base is young (average age 37) and active, with a quarterly retention rate of around 98% during the track record period[469][470] * As of June 30, 2022, the company had 2,586 employees, with 63.5% in research and development[501][502] * The company holds 51 licenses, registrations, and memberships across Hong Kong, Singapore, the U.S., Australia, and Europe[515] * Futu International Hong Kong is involved in ongoing inquiries and an investigation by the SFC concerning client onboarding, risk management, and cybersecurity[528] Contractual Arrangements PRC Foreign Ownership Restrictions and VIE Structure Due to PRC foreign ownership restrictions in value-added telecommunication and internet culture services, Futu operates these businesses through Consolidated Affiliated Entities (VIEs) controlled by contractual arrangements, which are critical for holding necessary licenses despite their minimal financial contribution * Foreign investment is restricted or prohibited in key PRC business areas for Futu, including value-added telecommunication services (capped at 50% foreign ownership) and internet culture (prohibited)[545][546] * To comply with restrictions, the company uses a VIE structure, controlling its PRC operating entities (Shenzhen Futu, Hainan Caixuetang) through contractual arrangements rather than direct ownership[553] * The revenue contribution from Consolidated Affiliated Entities was minor, accounting for 0.4% of the Group's total revenue for the six months ended June 30, 2022[546] * The company will unwind contractual arrangements if and when PRC law permits direct foreign ownership in these sectors[559] Summary of Contractual Agreements The company controls its VIEs through Exclusive Business Cooperation, Exclusive Option, Equity Pledge, and Powers of Attorney agreements, ensuring effective control and economic benefits, which PRC Legal Advisors deem valid despite ongoing uncertainties * Exclusive Business Cooperation Agreements: The WFOE provides exclusive technical and consulting services to the VIEs, entitled to a service fee equal to 100% of their total consolidated profit[561][562] * Exclusive Option Agreements: The WFOE has the exclusive right to purchase all or part of the equity interests in the VIEs from Registered Shareholders at the lowest price permitted by PRC law[565] * Equity Pledge Agreements: Registered Shareholders have pledged all their equity interests in the VIEs to the WFOE to guarantee contractual obligations[573] * Powers of Attorney: Registered Shareholders have irrevocably appointed the WFOE as their attorney-in-fact to exercise all their shareholder rights in the VIEs, including voting and director appointment[574] * The company's PRC Legal Advisors opine that contractual arrangements are valid, legal, and binding under PRC law, despite substantial uncertainties in interpretation and application[586][588] Financial Information Financial Overview and Key Performance Factors Futu experienced robust growth from 2019 to 2021, with revenue growing at a 158.9% CAGR to HK$7.1 billion and net income at 311.9% CAGR to HK$2.8 billion, though H1 2022 saw a 10.4% revenue decrease due to market headwinds Revenue and Net Income Growth (2019-2021) | Metric | 2019 (HK$M) | 2020 (HK$M) | 2021 (HK$M) | CAGR (19-21) | | :--- | :--- | :--- | :--- | :--- | | Total Revenue | 1,061.6 | 3,310.8 | 7,115.3 | 158.9% | | Net Income | 165.7 | 1,325.5 | 2,810.2 | 311.9% | * Key performance drivers include brand awareness, client trading volume, commission rates, margin financing balance, expansion of service offerings, and investment in technology[603][604][605] * Paying clients grew from 198,382 at year-end 2019 to 1,387,146 as of June 30, 2022; total client assets grew from HK$87.1 billion to HK$433.6 billion[604] * The COVID-19 pandemic accelerated the shift to online platforms, increasing new account openings and trading velocity in 2020 and 2021, though this high growth may not be sustainable[614][615][616] Results of Operations Analysis This section details period-to-period financial performance, showing a 10.4% revenue decline in H1 2022 due to market headwinds, but robust growth in FY2021 (114.9% revenue increase) and FY2020 (211.9% revenue increase) driven by trading volume and interest income, with rising operating expenses across all periods Comparison: H1 2022 vs. H1 2021 In H1 2022, revenues decreased 10.4% to HK$3.39 billion due to lower trading volumes and IPO activity, while net income fell 28.5% to HK$1.21 billion, despite cost savings from U.S. self-clearing, as operating expenses rose 29.3% Financial Comparison for Six Months Ended June 30 (HK$ millions) | Metric | H1 2021 | H1 2022 | Change (%) | | :--- | :--- | :--- | :--- | | Total Revenues | 3,781.5 | 3,387.7 | -10.4% | | Brokerage Commission Income | 2,122.7 | 2,001.2 | -5.7% | | Interest Income | 1,268.9 | 1,195.7 | -5.8% | | Total Costs | (722.0) | (435.8) | -39.6% | | Gross Profit | 3,059.5 | 2,951.9 | -3.5% | | Total Operating Expenses | (1,137.2) | (1,469.9) | +29.3% | | Net Income | 1,696.2 | 1,213.5 | -28.5% | * Brokerage commission expenses decreased 49.0%, outpacing the 5.7% decline in brokerage income, primarily due to U.S. self-clearing cost savings[677] * R&D expenses increased by 84.7% to support U.S. clearing capabilities and new product offerings[683] Comparison: FY 2021 vs. FY 2020 In FY2021, total revenues increased 114.9% to HK$7.12 billion, driven by a 96.6% rise in brokerage commission income and 160.8% surge in interest income, while net income rose 112.0% to HK$2.81 billion despite a 137.7% jump in operating expenses Financial Comparison for Year Ended December 31 (HK$ millions) | Metric | 2020 | 2021 | Change (%) | | :--- | :--- | :--- | :--- | | Total Revenues | 3,310.8 | 7,115.3 | +114.9% | | Brokerage Commission Income | 1,990.1 | 3,913.0 | +96.6% | | Interest Income | 965.6 | 2,518.2 | +160.8% | | Total Costs | (696.0) | (1,206.1) | +73.3% | | Gross Profit | 2,614.9 | 5,909.3 | +126.0% | | Total Operating Expenses | (1,147.0) | (2,726.4) | +137.7% | | Net Income | 1,325.5 | 2,810.2 | +112.0% | * Paying clients increased by 140.8% from 516,721 at year-end 2020 to 1,244,222 at year-end 2021, driving a 77.2% increase in trading volume[686] * Selling and marketing expenses increased by 261.3% to HK$1.39 billion, primarily for branding and marketing in international markets like Singapore and the U.S[690] Comparison: FY 2020 vs. FY 2019 In FY2020, total revenues surged 211.9% to HK$3.31 billion, driven by a 289.1% increase in brokerage commission income and a 107.7% rise in interest income, leading to a 700.0% increase in net income to HK$1.33 billion Financial Comparison for Year Ended December 31 (HK$ millions) | Metric | 2019 | 2020 | Change (%) | | :--- | :--- | :--- | :--- | | Total Revenues | 1,061.6 | 3,310.8 | +211.9% | | Brokerage Commission Income | 511.4 | 1,990.1 | +289.1% | | Interest Income | 464.9 | 965.6 | +107.7% | | Total Costs | (281.7) | (696.0) | +147.1% | | Gross Profit | 779.9 | 2,614.9 | +235.3% | | Total Operating Expenses | (591.9) | (1,147.0) | +93.8% | | Net Income | 165.7 | 1,325.5 | +700.0% | * Total trading volume grew 296.9% year-over-year, from HK$872.7 billion in 2019 to HK$3.46 trillion in 2020[693] * Interest income from IPO financing increased 13.5 times from HK$12.7 million in 2019 to HK$184.2 million in 2020 due to an active Hong Kong IPO market[693] Liquidity, Capital Resources, and Financial Risk The company maintains strong liquidity and capital, with HK$6.3 billion in cash as of June 30, 2022, meeting regulatory requirements; it manages foreign exchange, credit, and interest rate risks, with a 1% interest rate change impacting pre-tax profit by HK$346.8 million Cash Flow Summary (HK$ millions) | Cash Flow | FY 2020 | FY 2021 | H1 2022 | | :--- | :--- | :--- | :--- | | Net cash from operating activities | 20,456.7 | 6,012.0 | 14,118.1 | | Net cash (used in)/from investing activities | (244.2) | (963.6) | 786.1 | | Net cash from/(used in) financing activities | 8,406.9 | 10,554.2 | (4,720.1) | * As of June 30, 2022, the company had cash and cash equivalents of HK$6.30 billion[737] * The company's broker-dealer subsidiaries meet regulatory capital requirements, maintaining levels well in excess as of June 30, 2022[740][742] * The company is exposed to interest rate risk; a 1% (100 basis points) change would affect pre-tax profit by approximately HK$346.8 million as of June 30, 2022[785] * Capital expenditures were HK$70.5 million in 2021 and HK$62.7 million in H1 2022, primarily for computers, equipment, and infrastructure enhancement[767] Recent Financial Developments (Post-June 2022) For the nine months ended September 30, 2022, revenues decreased 3.3% to HK$5.33 billion, and net income fell 14.8% to HK$1.97 billion, despite cost efficiencies from U.S. self-clearing, with pro forma adjusted net tangible assets per share at HK$17.85 Financial Summary for Nine Months Ended September 30 (HK$ millions) | Metric | 9M 2021 | 9M 2022 | Change (%) | | :--- | :--- | :--- | :--- | | Total Revenues | 5,512.5 | 5,333.3 | -3.3% | | Gross Profit | 4,523.3 | 4,679.3 | +3.4% | | Net Income | 2,311.4 | 1,968.2 | -14.8% | * For the nine months ended Sep 30, 2022, interest income increased 9.3% YoY, mainly driven by higher interest from bank deposits amid rate hikes[804] * Brokerage commission expenses for the nine-month period declined 45.1% YoY, a wider margin than the 3.2% decline in brokerage income, due to U.S. self-clearing cost savings[804][805] * The unaudited pro forma adjusted net tangible assets per share is HK$17.85 as of September 30, 2022, after accounting for estimated listing expenses of HK$88.9 million[793][794] Connected Transactions Summary of Connected Transactions Upon Hong Kong listing, Futu will have continuing connected transactions with founder Mr. Li and Tencent, including fully-exempt brokerage services and non-exempt cloud services from Tencent, and the fundamental VIE contractual arrangements, for which waivers have been obtained from HKEX * Key connected persons include founder Mr. Leaf Hua Li and substantial shareholder Tencent[824] * Fully-exempt transactions include providing brokerage services to directors and ESOP services to Tencent Group, as applicable percentage ratios are below 0.1%[829][831][834] * A non-exempt transaction is the provision of cloud services by Tencent Group, with a proposed annual cap of HK$313.5 million for 2024[827][842] * The VIE contractual arrangements are non-exempt continuing connected transactions, for which the company received HKEX waivers for requirements like annual caps and fixed terms, given their fundamental business nature[827][846][851] Directors and Senior Management Board of Directors and Senior Management Upon listing, the Board will comprise six directors, including founder Mr. Leaf Hua Li as Chairman and CEO, alongside a senior management team with extensive experience, supported by two joint company secretaries * The Board comprises six directors: Leaf Hua Li (Founder, Chairman, CEO), Nineway Jie Zhang (Executive Director), Shan Lu (Non-executive Director from Tencent), and three Independent Non-executive Directors[869] * Mr. Leaf Hua Li, the founder, was the 18th founding employee of Tencent and has over 20 years of experience in technology and internet sectors[873] * Senior management includes Arthur Yu Chen (CFO), formerly a director at Citigroup, and Robin Li Xu (SVP), who previously worked at Tencent's Tenpay[880][881][883] * The aggregate remuneration for directors was HK$17.7 million in 2021 and HK$7.3 million for the first six months of 2022[891] Corporate Governance The company has established Audit, Compensation, Nomination, and Corporate Governance committees, with the latter overseeing WVR risks; while the Chairman and CEO roles are combined, the Board justifies this for consistent leadership, and a permanent compliance adviser has been appointed * The company has established four board committees: Audit, Compensation, Nomination, and Corporate Governance[895][896][900] * A dedicated Corporate Governance Committee, comprised of all three independent non-executive directors, will review and monitor all risks related to the company's WVR structure[902][904] * Mr. Leaf Hua Li serves as both Chairman and CEO, a deviation from HKEX corporate governance code justified by the Board for consistent leadership and effective strategic planning[908] * The company has appointed Guotai Junan Capital Limited as its permanent compliance adviser, as required for companies with a WVR structure[910][913] Substantial Shareholders Shareholding Structure The company's substantial shareholders include founder Mr. Leaf Hua Li and Tencent, with Mr. Li maintaining controlling interest through his Class B shares, while Tencent's Class B shares will convert to Class A upon Hong Kong listing Substantial Shareholder Holdings (Immediately After Listing) | Shareholder | Class of Shares | Number of Shares | Approx. % of Class | | :--- | :--- | :--- | :--- | | Tencent | Class A Ordinary | 247,418,662 | 28.30% | | Mr. Li | Class A Ordinary | 164,086,568 | 18.77% | | Mr. Li | Class B Ordinary | 239,750,000 | 100.00% | * As of the Latest Practicable Date, Tencent held 9.57% of Class A shares and 12.64% of total issued share capital through Class B shares[917] * As of the Latest Practicable Date, Mr. Li held a combined 36.25% of total issued share capital through his Class A and Class B share holdings[917]