Noah Holdings Ltd (NOAH) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Noah Holdings Limited third quarter 2012 results conference call.

At this time all participants are in a listen-only mode. Following management's prepared remarks, there will be a question and answer session. (Operator Instructions).

As a reminder, this conference is being recorded.

Joining the conference today are Miss Jingbo Wang, Co-Founder, Chairwoman and CEO, and Mr. Tom Wu, CFO.

After the close of the US markets on Wednesday, Noah issued a press release announcing its third quarter 2012 financial results, which is available on the Company's IR web page 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 its 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 obligations 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 and 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 Miss Wang, CEO. Miss Wang will be speaking in Chinese, and Mr. Shang Chuang, the Company's IR Director, will translate her statement into English.

(interpreted) Thank you, operator, and thank you all for joining us today. With me is Tom Wu, our Chief Financial Officer. I will begin by updating you on our progress this quarter, and the status of our strategy implementation. Then Tom will discuss our third quarter financial and operating results in detail. We will be happy to take your questions after that.

Our business continued to grow this quarter, basically in line with our expectation. For the third quarter 2012 we distributed RMB7.4 billion, or $1.2 billion worth of products to 1,613 clients, the highest ever number of active clients per quarter. We achieved net revenues of $25.8 million, a 34% increase year over year; a 35% increase quarter over quarter. And it is worth noting that it is also a new record for the Company.

Our non-GAAP net income for the quarter was $8.6 million, a 34% increase year over year, and a 21% increase quarter over quarter. Up to the end of the third quarter, we have realized non-GAAP net income of $19.3 million, and we are confident of achieving our full-year forecast.

To some extent, 2012 can be considered the real start of China's wealth management industry. The potential of China's wealth management market remains significant, with robust client demand. According to McKinsey, Asia ex-Japan private banking AuM will reach $11 trillion in 2015, and more than half of the growth will come from China, as the number of Chinese high net-worth individuals will increase 20% per year.

Many leading financial institutions, such as security firms, mutual fund managers, and private equity firms, are now positioning themselves as wealth management companies, and actively approaching us to explore potential cooperation, which demonstrates our brand recognition in the market. As a first mover and leader in the industry, we remain confident that we can meet client evolving needs, and achieve sustainable growth.

Despite a still challenging market, we believe the strategies, which management set earlier this year, are proving to be effective as we are starting to see results this quarter. This year we expanded our Asset Management business, Gopher Asset Management. As of September 30, Gopher has RMB5.2 billion, or $800 million, of assets under management.

The top 50 fund of real estate funds managed by Gopher was recently awarded the Best China Real Estate FoF in 2012. We will continue to build and strengthen our Gopher team and are in the process of recruiting more investment professionals.

Additionally, Gopher has made strategic inroads into family wealth management, and, through a dedicated professional team, will provide comprehensive service to our core clients.

As planned, Gopher will be launching a fund of fixed income funds in the fourth quarter. The continued growth of our Asset Management business will not only increase our fees and profitability, but will also increase client loyalty.

Although fund raising for private equity in A-Share products is difficult, we are committed to our strategy of focusing on quality over quantity, and partnering with strategic fund managers. In the third quarter we raised close to RMB1 billion for one of the leading private equity firms in China whom we have helped raise two funds previously, and completed the fourth equity add-on securities investment fund for Aegon-Industrial.

In the long term, we believe China's financial market reform will drive the development of direct financing in China, which will benefit the growth of the private equity industry in A-Share markets. Our continued focus on establishing and solidifying partnerships with key product providers will allow us to secure long-term relationships with leading managers. As the Chinese economy grows, we believe our clients will benefit from investments in private equity and A-Share.

This year our management team is very focused on improving management efficiency by centering on client life cycle, product life cycle, and relationship manager life cycle. We have completed the first phase of our client loyalty program to better differentiate, as well as standardize, services we offer to different tiers of clients.

For product life cycle we have expanded our product management department to improve the communication to clients on outstanding products. Product risk management continues to be one of our key priorities, and to date, all of our products have matured without any problem. Also we are rolling out development and training programs on global asset allocation and family wealth management for our relationship managers to improve service quality.

As operational efficiency improves and regional management is shaping up well, some of the 20 new branches we opened in 2011 have become profitable this year, such as Bohai Rim's Yantai and Harbin, and mid west region's Chongqing. We will selectively open some branches in new markets, tapping on talent we have recruited and trained the past few quarters.

Overall, we will be strategic with our branch network expansion, and continue to implement regional management and core satellite model to improve management efficiency and reduce cost.

In terms of IT, we have upgraded our internal IT platform this quarter to better support the businesses of Noah Upright, Noah Hong Kong, and Gopher. Noah Upright is now able to accept online orders through its Internet platform. Our aim is to not only provide convenient online services to our clients, but also streamline administrative and communication costs.

Next, I would like to give you an update on the progress of our new business initiatives, Noah Upright, and Noah Hong Kong. Noah Upright's AuM continues to grow as we better understand client needs and relationship managers become more familiar with the secondary market.

This quarter Noah Upright incremental AuM contributed to 5% of total transaction value, and AuM reached RMB660 million as of September 30. Furthermore Noah Upright has approximately 4,000 registered clients, so passing its target this year, of which 17% have purchased products. Noah Upright has gained market recognition; according to industry figures, Noah Upright has more than 90% market share amongst independent mutual fund distributors, both in terms of revenue and AuM.

Compared to the amount of mutual funds distributed by banks in 2011, Noah Upright's transaction value this year will rank in the top 15. In September, Noah Upright was awarded the Most Promising Independent Mutual Fund Distributor by China Mutual Fund Association.

Our strategy for Noah Upright is becoming clearer. In terms of products Noah Upright will continue to offer a full range of products including money markets, fixed income funds and equity funds, as well as segregated accounts and mutual funds.

Likewise Noah Hong Kong is making progress and currently fundraising for its second product. It will diversify its product offering to include private equity, fixed income funds and immigration investment. Client demand for global asset allocation continues to grow which we believe will drive our offshore business.

Finally, I would like to share with you my observation of the recent regulatory developments. On October 31, China Securities Regulatory Commission announced its intention to broaden the business scope of security firms and mutual funds to include non-listed investments or assets. These market reform measures give us more opportunities to work with various financial companies, as many of them are approaching us to explore potential cooperation. We are confident that we can become a sustainable leading wealth management company with asset management capabilities.

With that I now pass you to Tom to share with you the details of our third quarter performance.

Thank you, Madam Wang, and good morning or evening everyone. It was a very solid quarter for us. We were able to grow both our revenues and net income by about 34%. As Madam Wang mentioned, a number of records were set this quarter, including net revenues and active clients, both of which achieved an all time high.

Several factors contributed to this result. While macro environment continues to be challenging, client risk aversion did not worsen this quarter. We executed well on several fronts of our strategy, including product sourcing and selection, which better met client needs.

Total net revenues reached $25.8 million, a 33.7% growth on a year-over-year basis. The growth was driven both by increasing client transaction value, and effective commission rate, while still down on the year-over-year basis, but improving sequentially.

Transaction volume reached RMB7.4 billion, or $1.2 billion, the second best quarter for the Company, and a 37% growth compared to year over year. This reflects still market potential in the penetrated market, and both demand and liquidity on the part of our clients.

Product mix was 71% in fixed income, a recent high reflecting continued risk aversion. But clients are willing to -- more willing to buy longer-dated fixed income products. The average duration for the quarter of our fixed income portfolio was 1.5 years, up from 1.1 years for the first half of this year.

Although this is still somewhat down compared to last year's overall average, the improvement in duration has a direct impact on our effective commission rate we generate. This quarter our effective commission rate was 1.4%, up from 1.1% in the first half of 2012.

I would also like to clarify the increasing related party revenue, which is primarily due to increase in products purchased by clients that are managed by our own asset management arm, Gopher. Gopher is a subsidiary of Noah, and it currently manages about $800 million, as Madam Wang mentioned.

Recurring revenue also reached a new-time high of $10.2 million this quarter, representing 39.5% of total quarterly net revenues and a 17% growth on a quarter-over-quarter basis. We continue to believe our recurring revenue provides visibility and stability for our business.

At this point I would also like to quantify the amount of recurring revenues Noah expects to receive in the future for products previously distributed. As you know, these recurring management fees are mostly for non-fixed income products and are typically collected over the product's life cycle, up to about five years.

As of the end of the third quarter, the total amount of management fees to be collected in the future for products already distributed is roughly about $170 million over the next five years. Now this is in addition to the amount of cash that we have on the balance sheet.

Let me just put this in perspective. Our net revenues last year was $72 million. So what we will collect over the next five years is more than twice the amount of total revenues we have generated last year. On a per ADS basis, this translates into about $3 per ADS.

The number of active clients was 1,613 for the quarter. Again, highest ever achieved on a quarterly basis as we're able to better engage clients with a more diversified product portfolio. This number also includes clients who purchase mutual fund products.

On an apples-to-apples basis, that is excluding clients who purchase mutual funds products only, active client number was 1,299, which again is the highest active client number in a given quarter for the Company.

Average transaction value per active client was RMB4.4 million, excluding mutual fund clients, who have lower purchase amounts. It was RMB5.4 million or about $800,000 per person, higher than that of the previous quarter. This was achieved despite products mix being more driven by fixed income products, which typically have lower thresholds for purchase amounts. More clients purchased a larger amount of products, fixed income products, this quarter than last quarter.

Profitability also improved on a year-over-year basis. Gross margin was 80.4%, slightly up from 79.6% a year ago; and operating margin improved to almost 40%, up from 33.7% a year ago. This is a reflection of the operating leverage of our business model and I would also like to highlight that our margin expansion is on top of significant investments that were made in our platform - people, branches, our mutual fund business and our Hong Kong office. We'll obviously be very focused on continuing generating profitability and delivering profitable growth.

The balance sheet remained solid. The combined amount of cash and short-term investments was about $163 million or about $10.9 million higher than that of the last quarter. Our business continues to generate solid operating cash flow; $12.2 million this quarter and we spent about $2.9 million, executing our stock repurchase program this quarter.

Overall, the balance sheet remains very liquid. Accounts receivable increased in absolute terms because of increased revenues. Accounts receivable days, which is probably more important, declined as we continue to do a good job managing our receivables. We still have very good, excellent credit quality.

Finally, I would like to update you on our full-year outlook. Currently we have a guidance range of non-GAAP net income of $22 million to $25 million for the year. As of the third quarter 2012, as Madam Wang mentioned, we have achieved a non-GAAP net income of $19.3 million year to date.

We're comfortable meeting our full-year guidance range and we'll most likely do so at the high end of the range.

With that, Madam Wang and I will be happy to take questions that you may have. Operator.

(Operator Instructions). Michael Li, BofA Merrill Lynch.

(interpreted) First of all, congratulations on very solid results this quarter. I have two questions. The first question is, from this quarter, fixed income products is still very popular with clients. Can you explain what are the industries or give some more color on the details of fixed income products? Also for duration of fixed income products, has it changed, is it longer or shorter?

My second question is regarding Noah Upright. My understanding is Noah Upright is a mutual fund distribution platform. You mentioned the AuM concept. Can you explain what it means in regards to Noah Upright? Is it a distributor or is it managing its own assets? And going forward, for Noah as a Group, would it be more of a distributor or more of an asset manager? Thank you.

(interpreted) Very good questions. For fixed income products this quarter, it's primarily from Government-related projects. Also there was some projects related to equity financing or share financing and there are some real estate projects as well.

In the long term, we're very focused on AuM growth. The AuM growth will come from primarily Gopher Asset Management Fund of Funds business, whether it's private equity, fixed income or real estate.

For Noah Upright, it is mainly a distributor, but in terms of its revenue model, it receives recurring revenue for outstanding products. So we'll be focusing on broadening its business.

Michael, I'll just provide some clarifications on the two questions you asked. One is -- I think you mentioned duration? Yes, I think we tried to address that in the script that fixed income duration this quarter has increased. It was about 1.5 years. For the first and second quarter of this year, average is about 1.1 years.

Overall, it is still below what clients were willing to purchase last year. Last year was, on average, was about 1.8 years. So I think that's the point that we're trying to make here, that risk aversion continues but perhaps less so, given the duration people are willing to purchase.

And the second point, more clarification in terms of AuM for our Upright mutual fund distribution business. What we have included in the total transaction volume, if you will, the $1.2 billion, is -- 5% of which was contributed from our Mutual Fund business, which was about 5%.

Now the 5% is the incremental, the growth of AuM from Mutual Fund business, but the total AuM from mutual fund is bigger than the 5% because -- why is that important? Because we make revenues primarily two ways from a mutual fund distribution business. One is a one-time distribution commission, but second is also management fee or our trailer on the ongoing basis.

So, in total, I think Madam Wang mentioned that the total AuM under management, assets under distribution outstanding for Mutual Fund business is about [$660 million] (corrected by company after the call). Thank you.

Ella Ji, Oppenheimer.

So my first question is regarding the market. So it's great to see that your third quarter result is very good. I just wonder on the market right now, there are very wide expectation that China's economy may have bottomed out in third quarter. So can you also talk about the market? That for your business, do you think that market environment may have also troughed in third quarter?

(interpreted) I'm hesitant to make a conclusion whether the Chinese economy has reached a bottom, but I can say that the National Congress has been completed.

Since the third quarter, fourth quarter of last year, clients became more worried about the economy. So late last year, we saw that there were ample liquidity or capital in the market, but clients are very hesitant to put it to work.

But overall, we're seeing this year clients' risk appetite is moderating and clients are more willing to buy longer-dated products, some of two years, some three years.

But yet, I'm still a bit cautious to make a conclusion on whether it has bottomed because we haven't seen definitive evidence that it has bottomed.

From the real estate industries, given it makes such a big impact on the overall economy, we have noticed in the first half of this year most of the developers were not getting new land. But in the third, fourth quarter, some of the larger developers are now actively getting new sites.

And I would just add perhaps one point, Ella. Again, it's very hard to call on the macro economy.

But even at the end of last year or first or second quarter of this year, which obviously were probably the bottom for our business, what we had observed was it was never about whether clients had the money, the liquidity. There was ample liquidity in the marketplace, ample demand, but risk preference was very different for the last three quarters, up to probably this quarter.

Even at the worst of times, if you will, first or second quarter, if you had a relatively safe product, shorter term, they're many times oversubscribed. So it was never about the liquidity.

And I think second is probably preference has become more oriented towards capital preservation, rather than more aggressive alternative assets.

So, again, it's hard to call on the macro economy, but our business is clearly improving.

Great, thank you. That's very helpful. And then my second question is if you can talk about your forecast or plan about next year. What will be the focused area that you are going to work on?

And also, can you also talk about your own Fund of Funds plan? Is there anything that you plan to initiate probably in 2013? Thank you.

Let me take a stab at it first. We are in the budgeting process right now. I think the focus for next year, most likely, will be a continuation of what we have focused on this year.

Number one is from a branch standpoint, you noticed that -- I think we did mention that on the last quarterly call, we actually closed three branches this quarter, but we continue to think that branch network is going to be important. We'll continue to selectively increase our network.

And the second is more focused on our RMs. The focus is going to be on improving productivity. We've obviously expanded our sales force very substantially over the last 12 to 18 months. So how we educate them, how we -- I think Madame Wang talked a little bit about some of the initiatives in terms of asset allocation, also offshore products.

And third is on a product standpoint, we are still putting the final print on the blueprint of product cycle. I think the overall strategy won't change significantly; that is to focus on some of the key product providers that have track record, counterparties that have really demonstrated expertise for this market and will generate resonance within the marketplace.

I'll let Madam Wang talk perhaps about our Gopher, but clearly, that is a strategic business for us and, as we mentioned earlier, we were able to grow our AuM on our Fund of Funds business to about $800 million. So some of the assets that we'll be focusing on, without giving out too much detail for competitive reasons, perhaps would be fund of fixed income fund to complement the product portfolio that we have.

And I'll let Madam Wang add a couple of points.

(interpreted) Third quarter, I think we're seeing -- in the third quarter, we're seeing the result of the implementation of the strategy that we had set early this year and particularly Gopher. I think Gopher AuM has grown quite well to $800 million. I think, going forward, we will be focusing on continuing the high growth for this Asset Management business.

In regard to Gopher, I think our vision now is to make Noah into a leading wealth management Company with asset management capability. This asset management capability would be done primarily through Gopher Asset Management.

The product suite of Gopher will be quite diversified. It will include alternative investments such as private equity real estate, but it will also include fixed income fund of funds, mutual fund fund of funds.

The last two years we've been primarily building out the team for Gopher and last quarter, we mentioned that we hired a new CEO for the Gopher business. His background is he's a finance veteran. Previous experiences include investment banking and mutual fund.

He has made quite a significant improvement to the team, certainly a more well-rounded team, more professional and we're gaining more client interest and recognition in terms of our Asset Management business.

Next year, for the Gopher platform, we'll be also expanding into family wealth management. We're already training our relationship managers in this regard and we're also adding a few more key hires.

So by large, I think next year will continue to be a growth year for our Gopher Asset Management.

Good. Thank you.

Trevor Kalcic, CIMB.

Tom, I've got two questions. The first one is on the relationship managers. You seem to have experienced a fairly high churn in the third quarter and I was wondering whether you can perhaps just help us a little bit understand what that means. Do you -- does it mean that the relationship managers that you're losing are taking clients along? Why was the loss relatively high? Where are they going to and so on and so forth? Just a little bit more color around the relationship manager churn you had in the third quarter.

My second question relates to the products that you are selling. Given the fact that we've had a fairly slow economic development, can you share with us, is there any particular measure you can share with us to give us an indication of the kind of loss experience that clients are facing on some of the products that you have bought?

So what I'm trying to understand is some sort of measure which tells us whether -- quantifies the losses that clients have, perhaps, faced on some of the products. Those are my two questions. Thanks.

(interpreted) So last year, in 2011, it was a very fast expansion year for us in terms of branch network. We opened 20 branches and hired many relationship managers to meet this expansion.

This year, as you mentioned, the economy is quite soft, so in terms of RM, we have streamlined our RM base to focus on RM productivity. So we have let go some of the RMs that were not being quite productive.

So we're seeing, as a result of the streamlining, the third quarter RM productivity increased 38% year over year and we'll continue to focus on relationship managers' productivity.

So going forward, I think we'll be focusing more on the quality of relationship manager that we have, rather than on the absolute number of RMs. We believe this is the right direction in terms of managing our front line sales force.

For our industry, we're also subject to the 20/80 rule, the top 20% of the RMs perhaps generating near 80% of the business. Certainly, our goal is to average that out to increase the RM productivity more evenly, but also, we will be letting go the bottom 10% underperformers.

And, Trevor, I just wanted to add a little bit more on your question about churn and client loss. This sounds a little bit corporate, but in Noah, we actually promote more of an institutionalized service culture and infrastructure. I can't say no, never, but it's very difficult for clients to go with a particular RM because we provide the platform on the fully-fledged basis. So we believe that impact on client relationship is fairly minimal.

Now, your question about the products and the losses; maybe three points here. One is that, obviously, for equities, those are secondary market equities, both in hedge fund products or sunshine funds called in China, as well as mutual funds focused on the secondary market.

It has not been a pleasant ride, given what's happening in the overall market, so it has been challenging. I think what Madam Wang mentioned is that those are some of the areas we'll continue to focus on in our dialog with clients because we believe, longer term, it would benefit clients.

On the fixed income side, in the market there are anecdotal evidence that some of the products were experiencing difficulty. But for us, I believe we talk about it in our script, our risk management continues to be excellent, with zero default rate, and that's partly a function of the counterparty that we choose.

I think we emphasize that it's the quality of product providers rather than quantity, so if you look at, both on the fixed income side and, perhaps, as well as on the private equity side, we're highly selective.

So I think risk management, our view is that starts with deciding who you do business with. That in itself will help provide an overall risk management architecture. So our track record so far has been solid.

But I think the last point, the third point I wanted to make is that in the longer term, investors or clients in China need to be educated. There's no such thing as a risk-free rate returning a high single digit, low double digit.

We actually think that with the volatility going on in the marketplace or even some of the defaults for some of the trust products in the marketplace, it is actually beneficial, as far as the longer-term market is concerned, as clients become more educated in terms of more careful in selecting the products that they invest in.

I think those are some of the points that we wanted to share with you.

(interpreted) Just to add a bit more color; for fixed income, as Tom mentioned, all our products to date have matured without any problem; there's a zero default rate.

For A-Share related products, certainly we cannot control the direction of the A-Share market or the index, but the products we have distributed last year and first half of this year, based on industry ranking, they are ranked in the top 10 or top 15. So the results are quite satisfying.

For real estate sector and the first real estate fund that we raised, though it was raised at the peak of the market and there have been quite a lot of timing measures the last two years, we had conducted a meeting with them and they should be yielding approximately 15% return annualized, so that is still pretty good.

Operator, perhaps just one or two final questions from our audience.

(Operator Instructions).

Okay. If there are no further questions, we thank you for your interest and we look forward to speaking to you or meeting you in person soon. Thank you and have a good day.

Thank you.

Ladies and gentlemen, that does conclude the conference for today. Thank you, all, for your participation. You may all disconnect.

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 this Event.