Noah Holdings Ltd (NOAH) 2013 Q1 法說會逐字稿

Welcome to Noah Holdings Limited First Quarter 2013 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.

During the Q&A session, we ask that you please limit yourselves to two questions and one follow-up so that we may have further participation. If you would like to ask further questions, you may re-enter the queue to do so. 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 markets on Monday, Noah issued a press release announcing its first quarter 2013 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 statements 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 and the Company -- that the Company makes today.

Noah Holdings Limited does not undertake any obligation to update any forward-looking statement as a result of new information, future events or otherwise, except as required under the applicable law.

The results announced today are unaudited and subject to adjustments 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 on the earnings press release posted on the Company's website.

I would now like to hand the call over to Ms. Wang, CEO. Ms. 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 today is Tom Wu, our Chief Financial Officer. I will begin by briefly reviewing our performance in the first quarter, followed with an overview of 2013 business plan and strategy. Then, I will ask Tom to discuss the details of our financial and operating results. We will be happy to take your questions after that.

I am pleased that the strong performance we had last quarter continued into 2013 in line with our expectations. We're glad to share that we had a robust first quarter with transaction value of RMB8.7 billion, or $1.4 billion, a 63% increase year over year; net revenues of RMB32.6 million, a 94% growth year over year; and non-GAAP net income of $10.7 million, a 194% growth year over year.

For the quarter, we had 1,778 active clients, and the number of registered clients reached 42,590. As of the end of the first quarter 2013, our asset management business, Gopher, has $1.8 billion of AUM, a 40% increase compared to the end of 4Q 2012. Our strong performance puts us in a good starting point to achieve our full-year forecast.

These results reflect positive structural improvement and implementation of strategic initiatives we have been making since last year. Over the past year, we made substantial efforts in improving management infrastructure and operational efficiency. By optimizing regional management of our extensive branch network, we greatly increased our productivity.

In the first quarter of 2013, the 20 branches we opened in 2011 as a group were profitable, and more than half of the branches were profitable on a standalone basis. As we deepen regional management, we're confident to continue increasing the number of profitable branches.

More than ever, we are focused on increasing average relationship manager productivity. We have made progress on optimizing relationship manager structure and increasing per capita AUM and revenue. The average transaction value per relationship manager increased to RMB76 million on an annualized basis in the first quarter compared to RMB55 million for the full year of 2012.

We will continue to strengthen recruitment and training of top relationship managers and establish a high-quality international private banking training program. We hope to cultivate relationship managers' ability to cross-sell a full range of products to better meet clients' overall wealth management needs.

Second, we have added product selection and development teams at each of the regional centers, laying a solid foundation to continuously source quality products. Regional centers have also added teams dedicated to cover and develop institutional clients. In 2012, we screened over 1,500 products and selected 300 products for due diligence, out of which 85 products were approved by risk management and launched.

In addition to improving product coverage and sourcing, we continue to have product innovation to meet a client's different needs. In the first quarter of 2013, we successfully launched new fixed-income funds to offer clients a portfolio of products and allow clients the option to redeem on a quarterly basis. This has helped us to better serve clients with short-term cash management needs and were well-received by institutional clients.

We have made meaningful progress with our asset management business. Not only did we grow our asset management business, Gopher, but we also strengthened our asset management capabilities. Specifically, we expanded investment teams, broadened product offerings, expanded coverage of institutional clients, strengthened research and back-office operations.

Gopher's AUM increased $600 million to $1.8 billion by the end of March. Gopher has broadened the management of different asset categories and will expand its investment team to 60 people this year. In the first quarter, it has successfully raised fund of fixed-income funds and has plans to develop secondary fund of private-equity funds. We see strong potential for China's private-equity secondary market.

In terms of wealth management for core clients, Gopher has started to research and prepare family office services. And these efforts are appreciated by our clients. We are starting to realize synergies between Gopher and our distribution franchise. We believe these synergies will be even more apparent going forward.

In summary, we are starting to see the results of our efforts that we made in the past year on improving operations and implementing our strategies. All of our business units, including our mutual fund business and our Hong Kong business, have met or exceeded our expectations.

Noah Upright, our mutual fund distribution business, grew its AUM by RMB400 million, or $69 million. We continue to strengthen research and selection of mutual funds to help clients with overall asset allocation, translating into stronger client demand for A-Share related products.

Furthermore, Noah Upright's IT system has upgraded its client account management system, helping us to deepen client loyalty by obtaining client information, as well as client money flow, allowing us to better understand our clients.

Likewise, Noah Hong Kong's team and business are developing well. We are better engaging clients on their offshore allocations. In the first quarter, both Noah Upright and Noah Hong Kong have realized fast growth and good results. We are confident these two businesses will expand further in the future.

As we grow our business further, it is important to strengthen our management team. Recently, we recruited a Chief Risk Officer to build an independent risk management team. Prior to joining us, CRO Mr. Wang has served various senior roles at American Express, ABN, and Shenzhen Development Bank. This hire reflects a strong commitment to risk management. As we deepen and optimize regional management, we'll focus on strengthening research, human resources, and IT this year. We have also made senior hires for these areas we want to focus on and make improvements.

Now I would like to comment on the regulatory development. As you may know, in recent months, a series of regulations were issued to enhance wealth management product transparency and investor protection. We believe this is beneficial, as investor education and appropriate disclosure have always been part of how we conduct business.

In addition, we see a continued trend of market liberalization for wealth management and asset management. An economist close to senior regulatory officials mentioned in a public conference that wealth management will be one of the key growth industries in China, because wealth management demand outstrips supply.

As a leader in China's wealth management industry, not only are we focused on the industry development domestically and strengthening our competitive advantages, we're also focused on the development of the wealth management industry internationally and learning from our global peers.

This past weekend, I attended Berkshire Hathaway's shareholder meeting with several senior management. I want to close out my portion of the comments by sharing with you what Mr. Warren Buffett said, which I agree with strongly. We are fortunate to enter an industry we love at a young age, doing stuff we are passionate about. You must be passionate about what you do. Only when you love your job will you be devoted to continuously improve your business.

I'm thankful to Noah's team. Because of their dedication, we are able to implement our strategy and have the results that we have today. We are full of confident about the future.

With that, I will ask Tom to share with you our financial and operating metrics for the first quarter of 2013. Thank you.

Thank you, Madam Wang. And good morning and evening, everyone. We had an outstanding quarter, by just about any measures. Net revenues grew by 95% on a year-over-year basis, reached a historic high of $32 million for the quarter, and net income grew by 194% to $10.7 million, also a record in the history of the Company.

We're obviously blessed by a secular growth of wealth management in China. But as Madam Wang mentioned, these are results of improvements that we have been making since the first half of 2012 in our management infrastructure, people strategy, and product innovation. We do not think these improvements only produce one-off results.

Total revenues for the quarter reached $32 million. Revenue growth was driven by broad-based client activities with transaction value this quarter surpassing $1.4 billion. It's also the highest ever the Company has produced on a quarterly basis. Both commission revenues and recurring revenues grew strongly, driven by client activities and growth in our asset management business.

Fixed-income products represented 75% of total products clients purchased this quarter. This number is still higher than recent averages, probably reflecting continued client risk aversion. We distributed a broader array of fixed-income products. As mentioned in the last quarter call, the ongoing regulatory liberalizations are allowing more platforms, such as wholly-owned subsidiaries of mutual fund companies other than trust companies through our packaged products.

Trust products represent about half of fixed-income products distributed this quarter. We also distributed more offshore products, as well as fund of fixed-income products, diversifying our product offerings to clients.

Effective commission rate for the last quarter was 1.17%. This is consistent with our expectations. We have mentioned before that, while these non-trust fixed-income products are similar in nature as those packaged in trusts, we tend to receive both one-time distribution commission as well as recurring management fees. Consequently, it may lower our effective offered commission rate, but most likely increasing the current revenues, as well as overall revenue over the life of the products.

Recurring revenue was again above 50% of total revenue this quarter. With the growth of our asset management business, as well as increasing non-trust-related fixed-income products, we believe recurring revenues will continue to be elevated, probably remaining above 50% for the rest of the year of 2013.

I would now like to quantify recurring revenues Noah expects to receive in the future for products previously distributed as assets under management. These recurring management fees are typically collected over the product's life cycle of about five years.

As of the end of the first quarter, the total amount of management fees contractually obligated already distributed and under management is about $195 million, up from $180 million the previous quarter, over the next five years. This is, again, in addition to the amount of cash that we have on the balance sheet. And on the per ADS basis, this translates into roughly about $3.50 per ADS.

Related product revenue represented 45% of total net revenues this quarter. Again, this increase is primarily due to increasing products purchased by clients that are managed by our asset management arm, Gopher. As we commented earlier, our asset management business has growth significantly. It currently manages about $1.8 billion worth of assets.

We again set a record in total active clients this quarter, 1,778 for the quarter. This is, again, a historical high for us. We're seeing the results of a broader engagement with the clientele, increasing client base on both a registered basis and active basis.

Average transaction value per active client was RMB4.88 million, or about $792,000 per person this quarter. This amount includes clients who have purchased mutual funds which tend to have lower purchase amounts. This figure tends to be impacted by product mix changes. As clients purchase more fixed-income products, this metric tends to be lower.

Profitability improved significantly on a year-over-year basis. Gross margin was 81.6%, up from 77% a year ago. And operating margin shot up to 36%, up from 15.7% a year ago. These improvements continue to reflect our economies of scale with surging revenues primarily coming from efficiency and productivity gains.

Again, we're also delighted to report that both our mutual fund business and our Hong Kong office, which is an offshore business, are essentially break-even this past quarter. This is less than after one year since they commenced operation. And as Madam Wang mentioned, about half of the 22 offices we opened in 2011 are profitable, when the group as a whole became profitable this quarter.

Balance sheet continues to be strong. The amount of cash, short-term and long-term investments was about $173 million, up slightly compared to that of the end of last quarter. Our business continues to generate solid cash flow with operating cash flow of about $6.6 million this quarter.

The reason why total cash and cash equivalents did not increase meaningfully this quarter is primarily because of the investments we made in affiliates. As we disclosed in our 20-F, we from time to time form joint venture in general partnerships with strategic partners for our asset management business.

For those GP investments that we hold less than majority stake, thus the cash investments are accounted for using equity method accounting, meaning that they do not show up on our balance sheet. We also invested about $8 million this past quarter investing in these affiliates. And we spent about $2.9 million executing our stock purchase program this quarter. Accounts receivable continues to be in line with long-time averages, about 54 days.

And finally, as part of our first quarter earnings release, our Board of Directors has again authorized a share buyback program of $30 million for the next 12 months. The previously approved share buyback program will expire later this month, and we utilized about $11.4 buying back our own shares over last 12 months. This, again, demonstrates the confidence that we have in the fundamentals of our business.

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

Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions). And the first question comes from the line of Michael Li calling from Bank of America-Merrill Lynch. Please ask your question.

Thank you. (spoken in Chinese)

Yes, for the benefit of the audience, I will translate the question from Michael Li of Merrill Lynch.

(interpreted) Thank you, Madam Wang and Tom. Congratulations on the good results. If you may, please give us an outlook for the remainder of the year. For the next three quarters, do you have sufficient products for business growth? What will the product structure look like? Will it be primarily fixed-income, like the first quarter?

My second question is regarding branch network. What's the plan for this year? Are there plans to open additional branches or will we see further streamlining of branches?

(interpreted) Yes. I'll answer the question on the branch network first. I think our objective is to improve our branch network efficiency. So the one branch that we closed was actually Shunde, in the southern part of China. We have an existing branch in Foshan, which is only half-an-hour away, so we decided to closeShunde to increase the overall efficiency of coveraging clients in that area.

As mentioned in my -- earlier on the call, out of the 20 branches that we opened in 2011 as a group, they were profitable already in the first quarter of this year. So I think our branch network strategy has not changed significantly. We'll continue to open new branches in provincial -- province key cities, like Nanning and Nanchang will be open later this year.

So in terms of your question on the product pipeline for the remainder of the year, I think I am quite confident on that front. We have sufficient product lined up for the growth of this year. But obviously, we will remain flexible on the changes in the market and adjusting our product launches.

Also, we have added product development teams at each of our regional centers. This will help us to better cover product providers and roll out more localized product, as well.

(spoken in Chinese)

(spoken in Chinese)

And the next question comes from the line of Ella Ji calling from Oppenheimer. Please ask your question.

(spoken in Chinese) So my first question is with regards to your 1Q outperformance. I know you mentioned it's kind of across the board, but I'm wondering if there is any one-time or any specific line of business that contributed to most of the outperformance.

(interpreted) I think our performance in the first quarter, I think, is growth in terms of our overall business across the line. I mentioned several reasons for the strong performance.

And I've got three points to highlight. One is significant improvement in terms of our management infrastructure, as well as improvements in operational efficiencies. Also, we continued to make progress in terms of better product development and product innovation. And, third, we see meaningful growth in terms of our asset management business.

Also, we're seeing more profitability at our branch level, as well as increase in productivity of our relationship manager sales force. And our new business area, Noah Upright, our mutual fund distribution business, and Noah Hong Kong, our offshore business, have also performed quite well.

So, overall, I'm quite pleased with our results in the first quarter. I think we have improved our management capabilities, and I think we have reached a new record, a new stage in terms of our business performance.

And, Ella, I would just add on to what Madam Wang just mentioned. Again, we try to emphasize that these are structural improvements that we have made, primarily in the areas of management, how we organize ourselves. I think the key word is probably growth in this case.

And, secondly, you know, I think we try to emphasize that this is not a one-off type of situation. If you look at the trend starting the third quarter of last year, we have been gaining momentum, you know, quarter after quarter. And we see no reason it's going to change, because these are structural improvements that we made. So I certainly hope that the market will be understanding on this part.

I'm glad to see that, you know, you've made a very nice improvement. So I notice that you've kept the full-year net income guidance, despite 1Q's number really outperformed the street's consensus. So is there any reason that you didn't raise the guidance to a higher level?

Sure, sure. I think that's a very fair question, Ella. I will share with you three points on that.

Number one, the first quarter results are consistent with our expectations. It was not a surprise. And second is that we would like to continue to practice conservative forecasting. And, lastly, it is relatively early in the year. You know, after all, we've only gone past the first quarter. You know, depending on how things progress, we'll be able to inform the market the latest assessment of our business in a timely manner.

But at this moment, we are keeping our current forecast. Obviously, first quarter, you know, got us on a strong start, and in terms of how to accomplish the earnings forecast that we have shared with the marketplace.

Okay. If I can sneak in one more question. You added $600 million of AUM for asset management this quarter. Any plan of additional fund of fund issuance in rest of the year?

I'll let Shang translate the question for Madam Wang first.

(interpreted) Yes. In terms of our asset management business, I think the point to take away here is that not only did we increase our AUM, but we also strengthened our asset management capabilities in terms of expanding our team, as well as building up our operations. And I think these are quite critical for having sustainable growth. I think our asset management business will continue to grow at a fast pace, but we have not really set specific target for the market at this stage.

And, Ella, I would just clarify, the growth in our AUM to $1.8 billion is not necessarily only in fund of funds. If you take a look at our 20-F, which we filed the last couple of weeks or so, it's a variety of funds, in terms of real estate fixed-income fund, in terms of real estate equity fund, as well as fund of funds. So it's a more broad-based product categories.

And we also have planned to increase that product category for the rest of the year. But I just wanted to make sure that you understand that it's not just limited to fund of funds for our asset management business.

Got it. Thank you, Madam Wang, Tom, and Shang. And congratulations on a strong quarter.

And the next question comes from the line of Hans Fan calling from CIMB. Please ask your question.

(spoken in Chinese)

For the benefit of the audience, I will translate Hans' question into English.

(interpreted) Good evening, and congratulations on the good results. I have three questions. The first question is, of the 1,700-plus asset clients, can you share with us how many of those are first-time purchase or first-time clients, or active clients, or how many were purchased product previously?

The second question is, of the 70%-plus fixed-income on product you distributed, can you give us some more further breakdown? What's the percentage in terms of trust? What's the percentage in terms of limited partnership or other formats?

The third question is, for the first quarter, were there any fund of fund fundraising that were completed? Thank you.

Hans, thanks for your questions. I'll take a stab at it. In terms of clients, in terms of repeat order, I don't have the specific numbers for this particular quarter. But generally, it's about 50/50, meaning that typically about half of the quarter's active clients are previously active clients. It's really a function of how we allocate our products, half of which is really to maintain client loyalty and the other one is that to enhance our relationships with newer clients.

As you may recall, you know, products generally are, you know, a pretty precious commodity, so we try to be more strategic about it. But if that's an important number for you, we can follow up with the actual number for you.

Your second question on the types of fixed-income funds, especially their legal structures, as I mentioned in my portion, you know, there are a number of ways that fixed-income instruments can be issued now. Out of the fixed-income products, I think I mentioned that roughly about half was issued in the trust format, roughly about -- the other half was primarily in the form of a limited partnership. And there's also a small percentage of fixed-income products that was issued through wholly-owned subsidiaries of mutual fund companies.

And this is important, because that's a business that has to be -- that's regulated, strictly regulated. And the fact that Noah Upright has a mutual fund distribution license places us in a -- in a strategic position.

So if you look at the call script from last quarter, we've talked about some of these points, meaning that the ongoing regulatory liberalizations actually opened up more channels. The implication of that is that we'll have more products suppliers and we'll have more partners to work with, rather than just being limited to being the trust format.

I think your last question, in terms of fund of funds, yes, there were fund of funds issued in the first quarter of this year, primarily in three areas. One is, in the fund of real estate equity funds that I mentioned in my answer to Ella's question earlier, and as Madam Wang mentioned in her part, we also issued fund of fixed-income funds.

And that was a particularly attractive fund product, because it provides our clients with a diversification. It also provides clients with probably shorter duration products with more flexibility for them. But the short answer is, yes, there were fund of funds issued in this past quarter.

And the final I wanted to make to you is that perhaps we didn't make it clear as much as we should have. We increasingly benefit from a more diversified product portfolio. So, you know, if you look at our product mix today versus what it was, say, a year ago, rather than just private equity, we've got real estate equity, we've got the preferred tranches of real estate equity, which is essentially a fixed-income fund and the subordinated tranche, and we have trust products, which is fixed-income, and we have fixed-income products that are structured in limited partnerships, in mutual fund wholly-owned subsidiaries, as well as fund of funds and mutual funds.

So if you look at the range of product offerings today out of that $1.4 billion, you know, it certainly is much more diversified in terms of product range and product types. So I think that's part of the reason why our business is also gaining tremendous amount of momentum, because of the product offerings that we have in place.

But, anyway, let me pause and see if you have further questions that I could clarify.

(spoken in Chinese)

Any more questions, Operator?

The next question comes from the line of Ken Chiang calling from Chilton. Please ask your question.

Tom, hi, how are you? Congratulations on a great quarter. Madam Wang, also, congratulations. Great turn and push towards recurring revenue. So congratulations to you.

I had a couple of questions, actually. The first was on the wealth management product side, whether or not with the recent regulations and, you know, coming down a little harder towards wealth management, how that has impacted your business.

And the second one is regarding, I guess, the consolidation, I guess, of some of the branches and the share buyback. And that's all great for us, but does that reflect that you're in a different mode right now, you've got enough branches and you're just looking to increase productivity per branch? You know, given your client set, are you at saturation? Thank you.

(interpreted) I will want to clarify on your question and comment about the branch network. You're right that we streamlined one branch this quarter. I think it's mainly reflecting that we noticed that some of the branches we opened in third-tier and four-tier city is not very efficient, having individual branches. Rather, it can be managed or covered by a nearby larger city.

So the branch that we actually closed was Shunde, and it's now being managed by -- those clients are managed by a nearby branch Foshan, which is only a 30-minute drive away.

So I think it's an experience in terms of how to better manage our branches. For the remainder of the year, we will increase the number of branches, but primarily in provincial cities. I think we have adjusted our branch network strategy to focus on key cities and the different provinces in China. So we have preparation to open up branches in Nanning, Nanchang, and Guiyang later this year.

Also, to share with you some figures, out of the 20 new branches we opened in 2011, as a group, they are profitable this quarter. More than 50% of them on a standalone basis were profitable. So I'm quite confident later this year we will increase the number of profitable branches.

In terms of regulation, our view remains consistent that I think it's moving in the right direction. We're seeing greater market liberalization.

Yes. You know, a lot of investors have probably noticed that there are a lot of regulations that were issued the past few months regarding bank wealth management products. I think these are primarily cash management products or shorter-duration products. The new regulations were specifically aimed at asset pool products, where banks are issuing wealth management products and investors are not clear about the underlying assets.

I think, you know, the regulators' push on transparency I think is beneficial to our business. For the fund of fixed-income product I mentioned we complete earlier this quarter, I think these are very transparent. Our investor knows exactly what are the underlying assets. So there is a lot of consistencies about how we conduct our business and the aim of the regulators. So I think, you know, this will be good for our business.

And, Ken, I just wanted to add, in terms of your question about the branch network, whether it has reached a level of maturity, I -- you know, I think the key word for what's happening over the last three, four quarters is growth. If you look at our clientele, you know, 42,000 clients -- I mean, obviously it depends on whose research you look at -- there are probably anywhere -- you know, probably near a million millionaires in China.

So, you know, we think that we're still at the tip of the iceberg, let alone that out of the 42,000 registered clients, the total active base is roughly about 8,000 or 9,000. So within the existing pie, there's still a lot of work to be done, let alone, you know, what we have covered already is less than, you know, 5% of the total addressable market. So I think that the key word for the rest of the year is continued growth.

Very good. Thank you very much. Congratulations again.

Thanks, Ken. Operator, next question?

And there are no further questions at this time. (Operator Instructions). And it appears there are no further questions.

Thank you. If there are no further questions, you know, thank you for joining us tonight. We've certainly enjoyed sharing our thoughts and outlook in terms of the business with you. And we look forward to speaking to you on the next quarterly call. Thank you.

Thank you.

Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.