Noah Holdings Ltd (NOAH) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen. Welcome to Noah Holdings Limited Second 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 Ms. Theresa Teng, company's new chief financial officer; and Tom Wu. After the close of the US market on Wednesday, Noah issued a press release announcing its second 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 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 in the earnings press release posted on the company's website.

I would now like to hand the call over to Ms. Wang. She 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 and our Chief Financial Officer, Ms. Theresa Teng. For personal reasons, Tom has relocated to Singapore. I would like to thank him for his more than three years tenure as CFO and significant contribution in risk management and financial control. He will remain with the company to exploit new business initiatives. Today I will begin the call by briefly reviewing our performance in the second quarter of 2013 followed with an update on our business initiative. Then I'll ask Theresa to introduce herself. Afterwards Tom will discuss the details of our financial and operating results. We will be happy to take your questions after that.

I am pleased that our second quarter results exceeded our expectations and we have updated our 2013 full-year forecast accordingly. For the quarter, we achieved transaction value of RMB12.4 billion or $2 billion, a 100% increase year-over-year. Net revenues of $44.3 million or 125% increase year-over-year, and non-GAAP net income of $15.1 million, a 128% increase year-over-year. As of June 30th, the total number of registered clients reached 45,839. Active clients during the second quarter were 2,602, a 76% increase from the corresponding period in 2012. As of the end of the second quarter 2013, our asset management business, Gopher has approximately $3 billion of AUM, a 72% increase compared to last quarter. As I shared with you last quarter, we believe that the significant growth in our business is driven by overall structural improvements. These improvements include enhancement in product development, client servicing and operating capability which has helped us scale new heights.

In terms of operational efficiency we continue to strengthen regional management capability and decent market penetration in the 56 cities we operate in. For the first half of this year, all six regions generally were profitable. We have also further defined our recruitment and selection process for relationship managers through a more targeted recruitment and systematic training program, we have meaningfully increased relationship manager productivity. This quarter average transaction values for relationship manager was over RMB100 million on an annualized basis, a 38% increase compared to third quarter. One of our strategic focuses this year is to upgrade our HR and IT. systems. We believe our efforts will pave the way for future growth.

Another driver for our strong performance is the continued enhancement of our core competency, product diversification and innovation. We have previously discussed efforts we made in ramping our product development team. Not only have we added product development professionals in the regional centers to augment product sourcing capabilities, we have also broadened our product offerings. This quarter we have worked with leading players in China's micro-lending industry. For example, we collaborated with Alibaba Credit and China Financial Services (HKSE 605) and launching and completing credit asset securitization product. We believe the development of asset securitization in China will accelerate and help to further increase product diversity. Also we have been making preparation for the launch of high-end insurance products in the second half of this year. Furthermore we have partnered with leading property development companies such as Vanke in forming real estate asset management JVs and strengthening our operational capabilities. All this will help us to better meet the growing needs of our clients.

Benefitting from the rapid development of China's asset management industry, Gopher Asset Management continues to grow. This quarter Gopher's AUM increased $1.3 billion and reached approximately $3 billion. In addition to increasing AUM, Gopher has made progress in innovating products. We completed fundraising for Gopher's private equity secondary fund, one of the first of its kind in China. Noah upright maintained its leading position amongst independent fund distribution companies in China both in terms of transaction value and profitability. We are seeing increased client demand for our offshore products. Noah Hong Kong has grown in terms of scale and profitability. Its total transaction value in the first half of 2013 has surpassed that for the full-year last year. Our offshore business project has also helped us differentiate ourselves from other independent wealth management companies. Our joint venture, Wanjia Asset Management Company has also achieved strong performance. It is now highly ranked among subsidiaries and mutual fund companies regulated by China Securities Regulatory Commission. We have started to realize benefits from these strategic investments.

Besides strengthening our product capability, we currently improved client satisfaction through more exponential marketing. In the first half of this year, we collaborated with Forbes in conducting a study on the needs of high net worth individuals in China and issued an official white paper, the Chinese High Net Worth Individuals Happiness Survey. The results show that input interaction with relationship manager is what matters most to high net-worth individuals in choosing a wealth management company. We have restructured our headquarter client servicing department into a team with over 40 professionals dedicated to client lifecycle management and quality of service. We believe one-on-one communication and service are most important to clients. At the same time we are very focused on the development of financial services via mobile Internet. We aim to use the latest technology to provide clients with more comprehensive services as well as making it more convenient for clients to subscribe products and understand ongoing product information. Our new CFO, Theresa, comes from an Internet company and we hope to bring some new thoughts to our organization.

As we continue to grow our business recruiting talent and team building become increasingly important. Our new CFO, Theresa, has over 15 years of experience in investment and finance management. Prior to joining us, she served as CFO of PPS, one of the leading Internet TV players in China and director of a leading alternative investment fund. Additionally we hired Mr. Lou Daoyong as the general manager of our insurance distribution business. As the first generation of actuaries in China, he will be a driving force at Noah in selecting and designing insurance products. We believe that the launch of high-end insurance products will be a new growth driver for the company.

Lastly, I would like to comment on the latest regulatory environment. Regulators continue to promote market liberalization for wealth management and asset management industry. Our disciplined dialog with regulators as well as first-mover advantage in terms of client base and plan allow us to capture new opportunity to broaden our business and make strategic investments. On the back of regulatory support for asset management and innovation, we have a clear understanding of how to meet clients' needs with new approaches. We remained optimistic of continuing to grow our business.

Back in May this year, I visited Tesla in the United States and with the interest by what Elon Musk shared with me. He said, Tesla is successful because it do not have any legacy baggage or liabilities unlike existing automobile companies. They were able to create electric cars based on a new vision, completely revolutionizing the cost of automobiles. In the wealth management industries, Noah is the new asset light company. We can revolve around the needs of clients in providing various services satisfying clients' unmet and potential needs during this process of meeting clients' evolving needs and being innovative along the way. As management of this company, we also experienced tremendous personal growth.

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

Thank you, everyone. This is Theresa Teng. And thanks for the introduction by our CEO, Madame Wang, and as introduced before, and this is not my first CFO role, but this is actually as exciting and impassionate as my first one.

And especially when I just transit from Internet universe to Noah, this big family, I found that Noah is no less dynamic and innovating than Internet. On the contrary and when I think of companies even more have more exposure to different industries.

And it is my great honor to devote all my past experiences and passion to the team and that we would like to work together to bring better value to not only our clients but as well as our investors. Thank you. Tom?

Good morning or evening, everyone. By just about any measure we had an outstanding quarter continuing this solid trend that we've embarked since the second half of last year. Net revenues more than doubled, growing 132% on a year-over-year basis to reach a historical high of $44.2 million for the quarter. And non-GAAP net income also more than doubled to $16.1 million, also a record in the history of the company. First half our non-GAAP net income is $26.9 million, essentially matching that of the full-year results of last year. As Madam Wang emphasized, we think these are results of structural changes that we have been making since first half of 2012 in our management infrastructure, people strategy and product innovation. As we've been saying over the last three quarters we do not think these improvements will only produce one-time results.

Revenues grew strongly to $44.3 million this quarter. The growth was driven by broad-based client activities with transaction value this quarter surpassing $2 billion, again the highest ever the company has executed on a quarterly basis. Both commission revenues and recurring revenues grew strongly driven by client activities and growth in our asset management business respectively.

Fixed income products represented 85.6% of transaction value of products clients purchased this quarter, probably the highest percentage we have ever witnessed in recent years, perhaps reflecting the continued risk aversion on the part of clients. We distributed a broad array of fixed income products both in terms of legal structures as well as underlying products. As mentioned the previous quarters, the ongoing regulatory liberalizations are allowing more platforms such as wholly-owned subsidiaries of mutual fund companies other than trust companies through packaged products. Trust products represented only 12% of fixed income products distributed this quarter, down from about 50% the previous quarter. One year ago, trust would have represented that almost 100% of fixed income products we distributed. So arguably regulatory liberalization have opened more platforms for us to cooperate with and diversifying our product offerings to clients.

Effective commission rate for the last quarter was 1.15%. While this is slightly lower compared to longer term averages it is consistent with our expectations. As we mentioned before, fixed income products we have distributed are mostly non-trust fixed income format. While these are similar in nature as those packaged in trusts, we tend to receive both one-time distribution commission revenues as well as recurring management fees; meaning it may lower our upfront effective commission rate but most likely increase recurring revenues as well as overall revenue over the life of products.

Recurring revenue was about 46% of total revenue this quarter. This is slightly lower in terms of percentages compared to the previous two quarters because of the strong growth of commission revenues. We continue to believe recurring revenues will be an important revenue driver driven by the growth of our asset management business as well as asset management changes in revenue structure for our fixed income products.

As of the end of the second quarter the total amount of management fees or recurring revenue fees contractually obligated for products already distributed and in to management is about $250 million, up from about $195 million the previous quarter over next five years. This is again in addition to the amount of cash that we have on the balance sheet.

Related party revenue represented 44% of total net revenues this quarter, fairly consistent with the previous quarters. I would again like to clarify this related party revenue, which is primarily driven by products purchased by clients that are managed by our own asset management firm, Gopher.

As we've stated previously the company broadly sees asset management as one of its two growth engines, and it's a strategic prerogative that would provide customized solutions to our clients through our asset management capability. The total asset under management, or AUM, for Gopher at the end of the quarter was about $3 billion up from about $1.8 million the previous quarter. The number of active clients this quarter was 2,602. This again is a historical high for us. We're seeing the results of more effective organizational structure, sales management and client servicing or clientele increasing total number of clients both on a registered basis and active clients.

Average transaction value per active client was RMB4.8 million or about $770,000 per person this quarter which is fairly consistent compared to previous quarter. Again this metric tends to be sensitive to product mix and it also includes clients who have purchased mutual fund products, which are lower in purchase amounts. Profitability was solid with operating margin setting a recent high of 41.6%, up both sequentially and on a year-over-year basis.

Robust revenue growth, productivity improvement and economies of scale are the key drivers of productivity -- profitability improvement. Gross margin was 79.2% down from the previous quarter. As explained in the earnings release this decline was primarily because of repositioning of certain branch managers as direct sales staff instead of sales support. And thus, their costs are now accounted for in cost of revenues as opposed to selling expenses previously.

We broadly see gross margin to be fairly consistent range bounded about 80% going forward. Again, as mentioned in the previous call, both mutual fund product business in our Hong Kong office, which is our offshore business, are now profitable on a year-to-date basis and about 23 offices we opened in 2011 became profitable as a group.

Balance sheet continues to be strong. The amount of cash, short-term and long-term investments totaled $194 million, up significantly by about $21 million compared to the end of the previous quarter. Our business continues to generate solid cash flow. Our operating cash flow this quarter was $29 million from robust revenue growth and solid management of working capital.

Investing activities also generated net cash inflow of $21 million for maturing of fixed income products previously invested by the company. We also paid off $7.7 million in annual dividend this quarter and our stock we purchased this quarter was de minimis.

Accounts receivable quality continues to be solid and we're also doing a good job managing our A/R days at 52 days this quarter, probably the lowest in recent years.

In terms of our guidance for the full-year 2013, we updated our guidance range in our previous announcement two weeks ago. We currently estimate our full-year non-GAAP net income in the range of $50 million to $55 million, representing 86% to 105% growth on a year-over-year basis.

And before we take your questions, I would also like to thank all your support for the company and for me personally over last three and half years since I've become CFO for this company. I've enjoyed very much working with you and I look forward to staying in touch with some of you.

With that, we'd like to take questions that you may have. Thank you.

Operator?

Ladies and gentlemen, we'll now begin the Question and Answer session. (Operator Instructions). Our first question comes from the line of Ella Ji from Oppenheimer. Please ask your question.

Hi, good morning everyone and congratulations on a strong quarter. Hi, Theresa, welcome on board. And, Tom, it has been very nice working with you in the past few years.

So my questions are about your asset management business. I wonder if you can share with us how much revenue does this line of business contribute in this quarter and could you also further break down to one-time sales commission and recurring revenue? That's my first question.

Yes, that's a very good question, Ella. Thanks for your kind words, first of all. Obviously, we have not broken out the results for asset management business with exception of total AUM of roughly about $3 billion. But I could qualitatively comment on the range of revenues we are generating for our asset management business. So the revenues we are generating from Gopher primarily is the form of recurring management fees.

So if you recall recurring management fees was roughly about 46% of our total revenue this quarter or about $20 million. Within that $20 million, about 20% is contributed by Gopher Asset Management, but obviously it's also a function of how we assign revenues internally because as of now, most of the Gopher assets are distributed by Noah. But roughly, it's about 20% of total recurring management fees that are generated by Gopher. I hope that answers your question.

Sure. So and then my second question is still about the Gopher asset management business. I wonder if you can also breakdown that was in the $3 billion total assets under management, could you break it down by the type of funds and also could you also share with us the product pipeline going forward?

Sure. First of all, the total AUM is $3 billion and, categorically, let me just comment on the types of products that we have under management for Gopher.

If you recall, even when we went public almost three years ago, we had roughly about $200 million worth of AUM, which was almost exclusively in the fund of private equity funds back then. But since then, we have broadened our product offerings into other product categories, for example, our fund of real estate funds and real estate funds and fund of fixed income funds. So in terms of significance, real estate funds probably currently represent the highest percentage in terms of our total AUM.

But it is our intention to continue to broaden our product portfolios in terms of assets under management, fund of fixed income funds, fixed fund of hedge funds going forward. But at this moment, real estate funds continue to be the primary driver of our total AUM.

Okay. And then could you also quickly comment on the product pipeline in the coming quarters? Thanks.

(Spoken in Chinese). As we have mentioned on previous calls, our product pipeline usually is 6 to 10 months. So for the second half of this year, we have pretty much lined up the products that we will be launching. But obviously, there will be adjustments based on changes in the market situation.

Our focus, I think, going forward continue to be broadening our product diversity. In terms of new product types, we're looking or quite hopeful of expanding in terms of asset securitization product, credit-based products. We're also looking into funds based on the cultural industry development in China.

Operator, next question please.

Our next question comes from the line of Chen Gu from Artisan Partners. Please ask your question.

(Spoken in Chinese)

For the benefit of the audience I will translate Chen Gu's question into English first. Hi, everyone as Tom mentioned, trust only made up about 12% of the transaction value for the second quarter. Can you give us more color on what are the other products categorized in fixed income? And also for the trust product you have distributed are they uni-trust or are they collective trust? Thank you.

(Interpreted) So thank you for the question. I think in terms of the industry development, I think it's in line with our expectation. I just want to clarify again that Noah is very much an open architecture business model. So we search or we select products on all assets of the market.

As mentioned before, I think the trust company, especially in the last two to three quarters has been tough for them. Their primary focus or most of their product these days are working with local government as well as banks.

Further on these two categories, our existing AUM is quite low. For local government products our existing AUM is a very low percentage and for bank products, we previously do not have any of these products.

So in this last June you have noticed that there was a liquidity, a short-term liquidity crunch in the market but that did not really affect us.

So in terms of working with a trust company, I think it's harder to select good products from trust company as a whole. But there are still some long-term trust partners that we are closely discussing with in terms of working with them in terms of having new strategy and new products types.

For fixed income products this quarter, we have worked mainly with subsidiaries, mutual fund companies as well as brokerage firms. I think I am quite optimistic of continuing our partnership with these two types of financial institutions. For brokerage firms, I think their research ability is a very strong advantage in terms of doing share financing products or even private placement.

For subsidiaries and mutual fund companies, what we have been working with them is doing credit-based products in the real estate sector or industry. I think collateral backed by top developers, I think this is a good product category for us to continue our leadership.

Operator, are there more questions on the line?

(Operator Instructions). There appears to be no further questions at this time, so I'll hand it back to our speakers for any closing remarks.

(Interpreted) Thank you, everyone. I wish everyone a good evening or good morning. Thank you.

Thank you very much, ladies and gentlemen. That does conclude our conference for today. Thank you so much for your attendance. 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.