Noah Holdings Ltd (NOAH) 2010 Q3 法說會逐字稿

Welcome to the Noah Holdings Limited third quarter fiscal 2010 results conference call. At this time all participants are in a listen-only mode. Following management's prepared remarks there will be a Q&A session. As a reminder this conference is being recorded.

Joining the conference today are Ms. Jingbo Wang, Co-Founder, Chairwoman and CEO, and Mr. Tom Wu, CFO. After the close of the US market on Wednesday Noah issued a press release announcing its third quarter 2010 financial results which is available on the Company's IR webpage at ir.noahwm.com. This call is also being webcast live and will be available for replay purposes on the Company's website.

I would like to call your attention to the Safe Harbor statement in connection with today's call. The Company will make forward-looking statements including those with respect to expected future operating results and expansion of our business. Please refer to the risk factors inherent in the Company's business and that have been filed with the SEC. Actual results can be materially different from any forward-looking statements the Company makes today.

Noah Holdings Limited does not undertake any obligation to update any forward-looking statements as a result of new information, future events or otherwise except as required under applicable law. The results announced today are unaudited and subject to adjustment in connection with the completion of the Company's audit. Additionally, certain non-GAAP measures will be used in our financial discussion. A reconciliation of GAAP to non-GAAP financial results can be found in the earnings press release posted on the Company's website. I would now like to turn the call over to Ms. Wang, CEO. Please go ahead.

Okay. (interpreted) Thank you, operator, and thank you all for joining us today. With me today is Tom Wu, our Chief Financial Officer.

First of all, I am delighted to be conducting this call, our very first since becoming a public company one month ago. We thank all of you for your interest in the Company and look forward to building a long-term relationship with you through regular communications.

I will begin by briefly reviewing our market opportunities and strategic priorities and then I will turn it over to Tom to discuss our third quarter operational performance and financial highlights. We will be happy to take your questions after that.

Our New York Stock Exchange listing in November was a key milestone for our Company which will undoubtedly raise our profile and help enhance our brand equity. We fully understand that the listing itself is not an end, but the beginning of a new phase for our Company. The listing which was on November 10, or 11/10, we think of the date 11/10 internally as one firm uniting one group of dedicated people moving towards one goal and starting from zero. Obviously we have a significant platform already, not zero, but we use this to motivate ourselves to focus on executions.

One of the key things our management team, especially myself, did since the IPO was to spend time with our clients to communicate and listen to our clients. In fact, I just returned from a seven-day trip to Thailand with our annual client appreciation event. It used to only take one day, but with the increasing business there were 400, some of our most important clients. We had to do it over seven days in groups.

We really spent time listening to our clients, understanding, or better understanding how they felt about our services or client satisfaction and understand how better to serve our clients, the high net worth population of China, I think it was a high return event. It better helped us focus our strategies for 2011 and beyond.

The outlook for our industry is strong in terms of both the growth potential and the opportunities for further market penetration. We have mentioned some of the statistics on our road show. Last year the high net worth population in China grew at a rate of 30%, which is the highest growth rate in the world, but in absolute terms, the population of high net worth population is still small, only about one sixth of that of the US.

The population remains underserved with only about 20% of this group currently being served by professional wealth management companies. One of the things I learned, or relearned from the trip to Thailand is our growth in the future will not only come from expanding our client base, but also deepening penetration of existing clients or gaining a greater walletshare of them.

I think that the IPO undoubtedly raised the profile of the industry and competition will most likely become further intense. Since the IPO our management has continued to think about how to differentiate ourselves. We will start from two ways.

One is product selection. That means proper risk management, but also innovation. The other is client relationship or deepening our relationship with the clients.

We have a unique business model which we believe positions us well to benefit from the industry's growth. Our business is unique in that, first, we do not directly charge for the most part our clients fees for the services we provide them.

Our revenue comes from almost exclusively from commissions and recurring management fees from the product providers. This practice of not charging clients directly is, we believe, more acceptable from a cultural standpoint. And, second, we do not deal with our clients' money which makes us an asset-light model.

We continue to focus on our market positioning and our competitive advantages. One guiding principal for us is value creation or how to create value for our clients. This is reflected through our branch network strategy focusing on second or third tier towns or cities where private economy thrives and the types of RM who subscribe to our Company culture to serve our target clients.

We also provide an institutionalized service culture and infrastructure. We want to serve clients not just by one RM, but by a team. We also yield greater benefits for our clients because we shorten the wealth management product supply chain. We also focus on risk management to help ensure a peace of mind and investment success for our clients.

In addition, we also focus on communicating our positions and value-add to our RMs, the general managers and our clients. My view is that strategic positioning and value-add of a company are accomplished in part through communication with employees and clients. We need to reach a consensus, a consensus on a common goal. Only then can we start to execute our strategy. At the same time we are also focused on our revenue, profitability and how sustainable they are.

We will continue to serve the high net worth individuals, or our individual business, enterprises that are controlled by these individuals, or our enterprise business and the wholesale business. The individual business will continue to represent the most important business for us. 70% of our clients are entrepreneurs with their own businesses so we see a lot of synergy between serving these entrepreneurs and the businesses which are controlled by these entrepreneurs, so the enterprise business is an important area for our growth going forward and we will continue to develop our wholesale business working with our distribution partners which will in turn use their own distribution networks to reach their high net worth population. The key here is product design and innovation.

We also focus on our value-add to our product providers. Our IPO is very helpful in terms of our coverage of some of the best product providers. Our strategy vis a vis our product providers is innovation, speed and efficiency and help product providers maximize their investor base. This is something that is acknowledged by some of our best product providers.

Our results for the third quarter were strong. Our registered high net worth clients number grew to over 14,000, a 62% increase compared to the same quarter last year. Net revenues were $10.2 million for the third quarter, an increase of more than 200% on the year-over-year basis and net income grew by five times year-over-year to $3.1 million. The strong financial results are a reflection of strong industry fundamentals, our unique business model and the successful execution of our strategic initiatives. And at this point I would like to ask Tom, our CFO, to provide greater detail on our financial results.

Thank you, Madam Wang, and I will cover the operational drivers and financial results. And I will also provide comment on our guidance for fiscal 2010. Our third quarter results were strong and, as Madam Wang mentioned, that they are a reflection of our strong industry fundamentals, our unique business model and successful executions of our strategic initiatives.

Our revenue growth was strong. Net revenues for the third quarter were $10.2 million, the highest quarter revenue in the history of the Company. This represents 208% growth on a year-over-year basis. We grew revenue by distributing more products to more clients. Our transaction value of products distributed increased 264% to RMB4.8 billion or approximately $714 million for the third quarter.

We grew our client base. The number of our registered clients increased to 14,218 at the end of third quarter from 8,751 of the third quarter of 2009 and our active clients also grew to 566 for the quarter from 492 on a year-over-year basis. The growth is a result of our expansion strategy in which we expanded our branch network to 28 offices as of September 30, 2010 from 15 as of September 30, 2009, and by expanding our Relationship Managers, or RM, headcount to 308 as of September 30, 2010 from 210 as of September 30, 2009.

Both onetime commissions and recurring revenues increased on a year-over-year basis. Onetime commissions increased by 156% as a result of the aforementioned increased transaction value. Recurring revenues increased from $0.1 million in the third quarter of last year to $2 million in the third quarter of this year. This is mainly due to an increase in the transaction value of the private equity fund products that we distributed.

For private equity products we earned both onetime commissions as well as recurring management fees. Private equity currently represented 68% of our total transaction value during the third quarter of 2010, up from 25% in the third quarter of 2009. The recurring revenue stream from the private equity product area also enhances our revenue visibility. Recurring revenues represented about 20% of our overall revenue in the third quarter of 2010 and we think this will continue to be an important revenue component going forward.

Our profitability remains strong. Gross margin for the third quarter was 82%. This is slightly lower than that of the third quarter of 2009 which was 82.8%. The modest decline was mainly a result of our growth as we hired more Relationship Managers and the costs associated with these managers.

Selling costs increased as we continued our expansion. This quarter selling costs as a percentage of our net revenues declined year-over-year to 23.6% from 32.4%, reflecting increasing economies of scale of our business. G&A expenses as a percentage of net revenues declined year-over-year to 16.4% from 33.4%.

Q3 non-GAAP net margin was 33.1%. This is lower than the comparable period in 2009, mainly because in the third quarter last year we benefited from a tax provision reversal, or a tax benefit which boosted net margin of the third quarter last year.

Our balance sheet continues to be strong. Our cash and cash equivalents increased by $4.7 million from the previous quarter to $21.7 million. As Madam Wang mentioned earlier, we have an asset-light business model and our business generates significant cash flow.

Accounts receivable and accounts due from related parties both increased significantly. This was mainly a function of timing as we recognized revenues for several projects later in the quarter. Almost all accounts receivables on the September 30 balance sheet have now been collected.

Now that we have covered our third quarter financial highlights, let me comment on our outlook for fiscal 2010. For fiscal 2010 we estimate that non-GAAP income is likely in the range of $12.8 million and $13.2 million, representing a year-over-year increase in the range of 138% and 146%.

So that completes our financial review and, again, thank you for your time today. I look forward to speaking to you or meeting you in person. Now Madam Wang and I will be happy to address any questions you may have. Operator?

Thank you.

(Operator Instructions)

And your first question comes from the line of Sam Chen of JPMorgan.

Hello.

Hi.

(spoken in foreign language)

Hey, Sam. Please go ahead.

Hey, Sam.

(spoken in foreign language)

Perhaps I could just translate the questions so that everybody on the call can benefit from the questions. There were two question from Sam of JPMorgan. The first is related to an increase of our related party revenue in the third quarter and the second question was about our outlook for the fourth quarter, as well as potential impact of CBRC's oversight perhaps on real estate trust loans and their impact on our business in 2011.

Let me address (spoken in foreign language) -- let me address the first question and perhaps the first half of the second question and we can open it up for Madam Wang. Yes. Related party revenue increased in the third quarter mainly as a result of a fund, private equity fund we distributed for Sequoia, one of our shareholders. It increased to I believe roughly about 20% as a percentage of total revenue. And the second reason is continued management fees that we received from Gopher, our funds of funds business as well.

So I guess two points to make there, number one, this is more of a one-off event that we raised or distributed funds for Sequoia, but we do think the related party revenue as a percentage of overall revenues will increase in the fourth quarter, mainly because the, not the entire amount that we distributed for Sequoia was recognized in the third quarter and the rest will be recognized in the fourth quarter which will probably increase percentage of revenue from related parties, but going forward in 2011 the relative amount will obviously decline. As I mentioned it is a one-off event that we distributed funds on the part of by Sequoia. I think the second question on our fourth quarter outlook --

(spoken in foreign language)

Yes.

(interpreted) So Madam Wang wanted to emphasize the growth of revenue in the third quarter, including the revenue from Sequoia in fact, was related to the Company strategy. Generally the first quarter we, our main effort was to focus on hiring the right people and the second quarter we spend a lot of time training the new hires. And the third quarter that is where the productivity will generally increase, so the point being that even if we did not distribute that fund by Sequoia we would have distributed a fund or funds on behalf of other GPs, so the point is that -- it is an arms length transaction. We treat Sequoia like we would treat anyone else.

And I think your question on the fourth quarter I will just quickly provide some color. I think one of the points is that investors should not measure us, at least in our view, on the quarter-over-quarter basis because we think that if you subscribe to our business model and we will continue to execute. Obviously we will provide sort of a longer term perhaps an annual type of comment, but it is pretty difficult to forecast quarter results with any precision, but with the annual comment I provided on the full year you could almost backtrack how the fourth quarter would pan out because you got results from the first three quarters.

And I think that the question on real estate fund or CBRC I will ask Madam Wang to provide some color.

(spoken in foreign language)

Okay.

(interpreted) Your question regarding the CBRC, the banking regulator and how they are looking at the real estate business, actually this is not, nothing new. We discussed this on our road show. What is new, or perhaps different now versus a month, a month and a half ago was, is that inflationary pickup. CPI, Chinese CPI has hit 5.1%. It is both good and bad for our business.

On the good part most likely it will increase the demand for investments as people face inflationary pressure, wanting to have a higher return on the nominal basis I guess, but the negative part, or potential negative implication is that for a fixed income business most likely people would look for shorter maturity, shorter tenure and arguably higher yields. So innovation will be important, not necessarily limited to real estate trust funds, but in other areas as well. Operator, can we take another question?

Your next question comes from the line of Mike Li of Merrill Lynch.

(spoken in foreign language)

(spoken in foreign language)

Okay. (spoken in foreign language)

(spoken in foreign language)

I guess I'll translate the question again or questions for the benefit of the audience. The first -- this is Mike from Merrill Lynch, first of all. I guess the first question is about product mix, our third quarter product mix as I mentioned on the call. Private equity increased, increased significantly to 68% and fixed income declined. I guess the question was given the maturity risk I guess, it is a longer dated instrument, how do we think about balancing and at the portfolio level?

And the second question was in terms of our active clients and I think Mike was asking for a breakdown of active clients between the three channels, individual, enterprise and wholesale business. (spoken in foreign language)

(spoken in foreign language)

If I could capture the essence of Madam Wang's reply.

(interpreted) There is something I guess unique about the Chinese market and especially the clients that Noah serves are also unique because most of our clients, as we mentioned, are entrepreneurs. They have a relatively better understanding of private equity as a product, so they have a strong preference for private equity.

And second, there is a significant opportunity for private equity as a product in China going forward. One statistic I think we shared with our investors on the road show was if you look at the list of companies in China right now between the primary board and the second board, 180 and 400, respectively, so combined roughly 580 company-listed. The expectation is that the number of listings will increase to something like 4,000 over the next few years.

With that, with the development of the secondary market the, I guess the predawn, the pre-IPO there will be a lot of private equity opportunities. One interesting statistic that we may want to share with you is that China Development Bank recently raised a fund of funds focusing on private equities RMB60 billion. Private equity, the investment amount in private equity as a percentage of GDP shows that China is still in the infancy stage of that.

On an apples-to-apples basis private equity investment per year as a percentage of GDP in the US, it is 1.42%. In India it is 0.6%. In China it is only 0.27%, so it is still in an infancy stage. With the restructuring of the economy in China private equity will play a very important role in the restructuring and the government will continue to support the development of private equity.

So we will maintain our competitive advantages in private equity. Arguably we are one of the first movers in private equity. We have a significant data set and we cover the top private equity funds in China. So next year with some of our clients having their private equity funds to see some results we think that there will be further opportunities.

Just quickly in terms of fixed income it -- obviously we will not give up on fixed income, but inflation, or inflation out, inflationary outlook will probably impact clients, as we mentioned earlier in terms of their need, probably shorter maturity and higher yields. In terms of percentage of total business going forward, fixed income may decline, but in terms of absolute dollar amount we think it will still be a very important part of our business.

I also wanted to mention funds. 99% of real estate projects in China are supported by credit lending so there is still a lot of opportunities for real estate funds from a private equity side, so we will focus on that area as well. We will work with some of the top developers in China to scope out products in the real estate funds. And, lastly, I want to also emphasize product innovation in terms of minerals or precious resources perhaps. They are also areas that we can explore on that front.

Mike, I think that was your first question. What was your second question?

The breakdown of active clients in third quarter.

All right. The breakdown of -- so the total active client number for the third quarter was 566.

Yes.

In that, 508 individual clients, and enterprise clients it was 40 and channel clients, wholesale clients was 18.

Thanks. Okay, thanks.

Operator, can we take the next question?

Your next question comes from the line of John Ma of Roth Capital Partners.

Good evening, Tom, Miss Wang. Congratulation on a strong three, third quarter. I have a couple of questions, first on your average transaction per client. It jumped from RMB2.7 million to RMB8.5 million this quarter, so the question is, is that because of some of a product offering, a onetime event skewed the result or do we expect a similar level of transaction per client going forward?

And the second question is that your -- the private equity you offer pretty much for a long term, five to seven years that is similar to what we have seen in the US, but in China right now more and more funds are offering a very short range of two to three years. Just wondering would you -- will you face some more increasing competition or would that put you a disadvantage? Well, just give you a break, I trust in myself (spoken in foreign language).

(spoken in foreign language) I'll take the first question, John. Yes. The increased, obviously transaction value per active client increased and increased significantly as we disclosed in the earnings release. It is I guess mainly a reflection of two things.

Number one is the overall rising wealth level of our clients. Clients are getting wealthier with their businesses that are turning out cash flow so they have stronger purchasing power, if you will. And the second reason, as you pointed out, it is a function of a product mix.

I think we mentioned that on our road show that a fixed income product typically would start at the RMB3 million per purchase, but for a private equity product usually the minimum purchase per client will be RMB10 million, so given the product shift that we discussed earlier with Mike from Merrill Lynch, inevitably a transaction value per active client increased and increased significantly, but obviously one should not expect the same kind of percentage increase going forward, both in terms of absolute dollar amount and relatively because right now average transaction per client is already $1.3 million. It is hard to envision increases of the same magnitude going forward. I will ask Madam Wang to comment on the second question in terms of short maturity of private equity products. (spoken in foreign language)

(spoken in foreign language)

John, would you like to translate that yourself, or --?

No, no. You go ahead.

(interpreted) I think it is a function of our value system as well. We want to do the right thing for our clients. The shorter, the two to three-year type of private equity funds that you mentioned these are typically pre-IPO funds, so if the IPO market, the secondary market were to go through a set of gyrations that is a lot of risk for these funds which typically target a quick exit from IPOs. We are more long term, so this is not the type of thing that we would look towards.

And our clients are also very unique and we spend a lot of time doing investor education in terms of the lack of liquidity for private equity products. And we share with them our view that from an asset allocation standpoint private equity probably should not exceed 10% of their overall allocation, so long-term investment in this, the sense of private equity is not necessarily a source of pressure for them. And in fact, some of the recent dialogue I have had with the clients, the clients are even envisioning perhaps longer term private equity funds, something like ten years instead of the typical seven-year the kind of funds that we are offering, so it is not a competitive threat for us. We think that in fact there is also opportunity for innovation for us in this area.

Shall we take another question, operator?

Yes. Your next question comes from the line of Ms. Ella Ji of Oppenheimer.

Hi. Thank you for taking my questions. (spoken in foreign language) I have few questions.

First off, or just a follow up with a previously discussed topic in terms of the product mix, given all the circumstances that were mentioned, what is the product mix expectation for next year? I know previously you discussed you want to have about 60% fixed income products and 40% private equity product. Is there an update for next year? (spoken in foreign language)

(interpreted) Thank you for your question and as you rightly pointed out we had a, sort of a target asset allocation of 60/40. This is primarily for 2010. We are still analyzing our budgeting, our product line up which we have mapped out pretty much for the second quarter of 2011 by now.

Obviously fixed income, certainly from a percentage standpoint, most likely will probably decline because of the inflationary concern, but we think there are considerable opportunities in the second market, or hedge funds as well as private equity arena. So generally we will approach the product lineup from four perspectives or directions, secondary market as I mentioned hedge funds, private equity, real estate funds and our fund of funds business.

Ella, you had another question.

Yes. I have some other questions. You mentioned that you are applying for an ETF license. Could you provide your progress on that and is there any other product license that you plan to apply next year? (spoken in foreign language)

(interpreted) First of all, it is probably a misunderstanding, that we are not applying for an ETF license, but a license for mutual funds. And it is progressing, progressing right now. There was a, I guess an opinion paper issued by CSRC, China Securities Regulatory Commission, and there is -- we have had further dialogue with CSRC, the regulator. The current expectation is that CSRC may consider starting to grant mutual fund licenses some time perhaps next April, but we will obviously provide an update to you on an ongoing basis.

Thank you. And then could you provide a -- you mentioned in your prospectus that you plan to use about $50 million of IPO proceeds in raising your own fund of funds. Is there an update on that and what will be your target investment areas for this fund of funds? (spoken in foreign language)

(interpreted) We -- yes, we are making decent progress on the fund of funds front. We are in the process of raising our second fund and the amount, looks like the amount that we are going to raise will most likely exceed our initial expectations. By the way, that is not included in the third quarter. Most likely it will be part of the fourth quarter revenue. We think there are a number of opportunities in the fund of funds business, not just limited to fund of funds in private equities, but in fixed income potentially and in secondary hedge funds fund of funds.

(spoken in foreign language)

So the question is are we still going to invest 1% as a GP in our new fund of funds. The short answer is yes. Nothing has changed. This is an international practice. The GP typically invests 1% as a, mainly as a good will or good faith demonstration.

Okay. And my last question relates to your gross margin because given the high inflation rate and the salary increase in China is very prevalent, I want to know what would be the year-over-year increase in the Relation Manager's payments that management is expecting for next year? (spoken in foreign language)

I will answer that question, yes.

Oh, okay.

I'll take that question. I think we have communicated that on our road show, number one, our gross margin is very solid. It was 82% and still is 82% if you look at our third quarter results, but we also articulated, communicated with the investors that most likely there will be some pressure on our gross margin, primarily as a result of two things.

Number one is as we expand, as we accelerate our growth trajectory by expanding our branch network and hiring more RMs, the fixed costs portion of these new RMs before they become truly productive most likely will be putting some pressure on the gross margin. And second, as you pointed out, there is obviously inflationary, in an inflationary environment. It is difficult to quantify where gross margin will be headed, but it is -- I think, we think that in the short term it will be deteriorating significantly, probably around 80% or so, so we don't envision significant deterioration in terms of gross margin, but there is pressure, some pressure on it.

Okay. Thank you very much. That is all my questions.

Thanks for your questions.

And your final question comes from the line of [Avok Yahi] of [Acthea Capital Management].

(spoken in foreign language)

I will translate the questions first and the first question is in terms of our transaction value per active client, whether we could provide a breakdown by channels, individual business, enterprise business and wholesale business. Frankly, we have not disclosed that I don't believe in the public forum, so whether that is something that we think is going to be meaningful in terms of investors' understanding of our business going forward we will obviously have to look into that, so we are not. We have not provided that disclosure so we are going to be consistent about it.

I think your question in terms of was it commission rate and recurring revenue?

Yes.

Yes. It is -- obviously it is a function of a couple of things. Number one is our product mix for fixed income. The pricing structure is actually pretty transparent in the industry. For fixed income generally we get paid on average 1% per year, so if it is a two-year product your upfront commission will be probably 2% on average.

So with short tenure that we think that is going to happen as people's appetite for fixed income investments, not that it is going to decline, but certainly will be on the shorter end of the curve, the commission rate per year probably will be less than what we have seen. Private equity, however, is relatively consistent. We talked about that one plus one model whereby we get paid 1% of upfront commission and 1% on a recurring basis in terms of revenue, management revenues.

So your question about the mix in terms of management fees, it will be heavily driven by the product mix, what percentage of our volume next year will be in private equities, but most likely management fees will probably increase from the current 20% because we have a pretty good look in terms of what we locked up already in absolute dollar amount and compare that to the revenue budgeting that we are going through internally, most likely it is going to increase somewhat from the current 20%. Hopefully that will have answered your question.

Okay. Thank you. (spoken in foreign language)

And the last question, I will translate the question for the benefit of everybody else on the call is the number of active clients we have as a percentage of our registered client base. And apparently the calculation was it is only 4%, 566 divided by 14,218. And the question was why so low and what are the strategies to increase that percentage?

(interpreted) Okay. Now that 4% that you quoted is probably not accurate in terms of how we look at business. Out of the client base of 14,000 registered clients, roughly about 5,000 clients, I think we mentioned that during our road show, are active or have purchased products from us and that 4% from a mathematical standpoint I guess it is correct, but it is only for this particular quarter, but it is not the most meaningful way of looking at our business.

And the second point is that it is also a function of the products, unique product structure in China. Generally there is -- per product there is generally a limit of 50 LPs or investors so there is certainly a bottleneck in terms of how many active clients can grow based on the products that we distribute, so but the 4% is probably not the accurate way of looking at it.

(spoken in foreign language)

All right. I believe that was the last question, Operator?

Yes. There are no further questions.

Okay. So let me just close by thanking you for your interest and support. We look forward to partly differentiating ourselves as a transparent company, a company that you access management which is obviously our articulated strategy and provide information in a timely manner. So we look forward to working with you in the years to come. So if you have any additional questions, certainly feel free to contact our team directly. And thank you and have a good evening.

Ladies and gentlemen, that concludes your presentation. Thank you for your participation. You may now disconnect. Have a great day.

Portions of this transcript that are marked (interpreted) were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring their Event.