Noah Holdings Ltd (NOAH) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen. Welcome to Noah Holdings Limited Third 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.

(Operator instructions)

As a reminder, this conference is being recorded. Joining the conference today are Ms. Jingbo Wang, Co-Founder, Chairwoman and CEO; and Ms. Theresa Tang, Company CFO.

After the close of the US market on Wednesday, Noah issued a press release announcing its third 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 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 has 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 adjustment in connection with the completion of the Company's audit. Additionally, certain non-GAAP measures will be used in our financial discussions. 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 Ms. Jing Ou-Yang, the Company's IR Director, will translate her statement into English.

(Interpreted) Thank you, operator, and thank you all for joining us today. Today, I will begin the call by briefly reviewing our performance in the third quarter of 2013 followed with an update on our business initiatives. Afterwards, Theresa will discuss the details of our financial and operating results. We will be happy to take your questions after that.

As all of you already know, we updated our 2013 forecast last quarter according to our performance in the first half of this year. I'm pleased that our third quarter results were in line with our updated expectations. For the quarter we achieved transaction value of $1.96 billion, a 63.1% increase year-over-year. Net revenues of $41.5 million or 61% increase year-over-year. Non-GAAP net income reached $15.26 million, a 78.4% increase year-over-year.

As of September 30, the total number of registered clients reached 50,084. Number of active clients during the third quarter was 2,245, a 39.2% increase from the corresponding period in 2012. At the end of the third quarter, our asset management business, Gopher, achieved the AUM of approximately $3.61 [billion] (Company corrected after the conference call), a 22.5% increase compared to last quarter.

As I shared with you last quarter, we believe that this significant growth in our business is driven by overall structural improvements. This improvement includes enhancement in product development, client servicing and operating capability, which has brought us to a new growth base.

In terms of operational management, all of our six regions were profitable in the quarter. In order to drive the profitability and continued growth of each region in a more comprehensive way, we deployed professional staff of product design and asset allocation in all areas. Because of the management system reform, which were well suited to the market situation in each region, we got to see the enthusiasm of staff were much improved.

At the branch level, we allocated more resources into our unique training program to increase productivity, business skill and average compensation package of relationship managers. By the above long-term and important effort encouraged our staff; as for results, every productivity increased significantly from last year with the total number of relationship managers remain at the similar level.

As part of the ELITE program, we raised our recruitment standard of relationship manager and regional general manager to ensure vital qualification. We faced a challenging and understaffed in the beginning of the year, but we did not lower our recruitment standards. In the third quarter, we're glad to see the concrete reputation has been widely recognized by industry professions and the quality of our staff has improved.

We were awarded the Best Employee Award by 51job, a provider of integrated human resource service in China. We believe our efforts are upgrading our IT and HR systems, which including consultations of McKenzie and Towers Watson, will benefit our profit development in the long run.

In our point of view, product innovation is still the key growth driver on the Chinese wealth management market, maintain product quality and develop new products to meet the diverse needs of our customer remains our most important core competitiveness. During the third quarter, we collaborated with Bona Film and then launched the Film Fund which was the first of its kind in the history of Chinese film.

We believe the equity investment product can provide more sufficient financial support to the emerging industry in China such as the [Gopher] industry and the TMT sector to satisfy the structural development of Chinese economy, there would be a relatively large room of growth in this kind of product with our high level clients allocating about 5% to 10% of their asset into this type of equity investment fund.

As part of our business strategy, we had invested more resources into the asset management business to focus its long-term development with larger scale and higher management capacity, Gopher's brand name was more recognized and better accepted by the industry and institutional clients. Currently, Gopher's AUM reached approximately $3.6 billion. This number will keep increasing with the expansion of our institutional client base.

More importantly, we have attracted partners of real estate funds, mutual funds to form a new and outstanding asset management team. We will continue to focus on portfolio management of the firm and strengthen our research, product selection and portfolio allocation capabilities for venture capital, private equity, real estate funds, hedge funds and fixed income product.

Benefiting from our growing financial reform in China on private enterprises, our wholly-owned [Rong Yi Tong] micro-lending subsidiaries obtained its license with RMB100 million in registered capital while positioning Rong Yi Tong to be [asset-light] differentiate its operation from other micro-lending companies in the markets.

Primarily Rong Yi Tong will operate credit asset securitization and serve the short-term financing needs of Noah's high net-worth clients collaborating on financial products they purchase. Rong Yi Tong will operate through asset light notes and limit its scale within the registered capital gain.

I would like to take this opportunity to introduce the CEO of Rong Yi Tong, Mr. [Wang Zheng]. Mr. Wang's past professional background includes risk management director of our American Express Asia Pacific division; Vice President at ABN Amro, and a general manager of risk management of Shenzhen Development Bank.

Rong Yi Tong is certainly a further step we took to allow group quality underlying assets for securitization after our successful collaboration with Alibaba Credit and China Financial Service, to launch and complete credit asset utilization products in the second quarter.

Our overseas layout, especially our Hong Kong company, also made impressive progress in this quarter in term of recruiting qualified staff, launching new products, expanding customer base and reaching new AUM scale. Third quarter revenue of our Hong Kong company increased about 50% compared to the second quarter. In the third quarter, we started the initiated staff to open our branch office in Taiwan as well.

Last quarter I had introduced Mr. Lou Daoyong, general manager of our insurance distribution business. As the first generation of Chinese actuary, Mr. Lou has extensive experience in insurance product design and [inflection]. With his team's efforts, we launched our first high end total health insurance product exclusively for our high net-worth customers. We are confident that this product will be well accepted by our clients and help us to explore [gold-collar] customer base.

Going forward we plan to launch another high-end insurance product. At the same time we're building up the insurance team and upgrading operational capability of this product.

Finally, I would like to comment on the latest regulatory environment. We believe that although our policy was more open for private capital to enter into the financial industry, the third plenum of the 18th Central Committee held recently ,also announced initiatives such as improving the development of capital markets, promote equity financing through a different channel and encourage direct financing.

Competition will become more intense along with higher customer expectations and professionalism standards. The establishment of Shanghai Free Trade bonds also illustrates the Chinese government determination on pushing forward the economic reform which includes wider access to the financial industry.

The future success will be determined by talent, the ability to satisfy customer needs, professionalism and the risk control capability. Recently, we had participated in several research programs held by different regulatory authorities. But we felt that they are very firm on further driving the commercialization of financial institutions. We also took the chance to gain their understanding and confidence [in Noah] through a deep communication.

Recently I participated at a financial forum and listened to a speech given by one of the economists. He mentioned a recent research result that as the population is aging, the need to investment and wealth management will increase, but the consumer [amount] will decrease. Just like what happened in Japan during 1990, wealth management industry achieved sustainable growth despite the overall economy slowdown. I'm positive that Noah's future strategy plan confirms this trend.

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

Thank you, Madam Wang. And hello to every new and old friend. I'm very delighted to update our most recent results. In the third quarter, we continued our strong momentum from previous quarters, in operating efficiency as well as business development. The Company not only performed good growth progress but also solid profitability margins.

Both revenue and transaction value expand a strong trend from last quarter. Total net revenue reached $41.5 million or 61% growth year-over-year. Overall transaction value was around $2 billion or 63% growth from the corresponding period of 2012. The growth was mainly contributed by the further diversified product mix, strong capability of our asset management team and even more efficient regional office function, benefiting from the ELITE program Madam Wang just mentioned earlier.

Recurring revenue increased to 51.9% of third quarter revenue from 45.8% in the second quarter compared to 39.5% in the corresponding period of 2012. The increase of recurring revenue percentage not only provides confidence for our future cash flows but also illustrates our increasing ability for asset management business and demand from our clients.

The AUM of our Gopher asset management topped $3.6 billion this quarter compared to around $3 billion in the previous quarter and $1.8 billion earlier this year. With the expansion of our asset management business, we believe recurring revenues will keep contributing, meanwhile maintain the appropriate portion for one-time commission revenue which allows us to work together with more superior counterparts and to provide more product varieties on our platform.

And the result of our continued effort for product diversification, our PE and other products accounted for 24% of total transaction value this quarter. Fixed income represented 76%, declined accordingly from over 80% in the previous quarter. Effective commission rate for this quarter was around 1% which is in line with our expectation. Since we have more product, which we tend to receive both one-time commission as well as the current management fees, this may lower our upfront effective commission rate while increase our recurring revenues as well as total revenue over the life of the product.

Related party revenue represented 48.3% of total net revenues this quarter, increased from 46.2% in the second quarter which was primarily due to an increase in product managed by our asset management arm. Number of total active clients in the third quarter was 2,245, up from 1,613 in the corresponding period of 2012, a decrease from 2,602 in the second quarter. However, the average transaction value for active clients increased to around RMB5.4 million thanks to our enhanced client satisfaction and product mix improvement during this quarter.

Profitability improved significantly on a year-on-year basis and then came at a highly efficient level of the well performed second quarter, reflecting economics of scale, both business efficiency and cost control management improved to secure our return. Operating margin was 41% up from 35.9% a year ago and net margin improved to almost 35.1%, up significantly from 29.3% a year ago. We will continue to focus on delivering profitability growth in 2013.

We ended the quarter with a balance of $226 million in cash, cash equivalents and short-term investment and real debt. This is a $9.56 million increase from last quarter. Our business continues to generate solid operating cash flow of $14.2 million this quarter and reached around $30 million at a year-to-date basis. Since more products were launched towards the cut-off date towards the end of the quarter and a good amount of AR were collected on time right after the quarter end. We are very confident that the Company can continue to perform strong balance sheet numbers.

Looking to the future, we expect that our strategic plan will in time result in an even more convincing recurring revenue and further develop profitability streams. We would like to reiterate our 2013 guidance of non-GAAP net income to be between $50 million to $55 million. The range represents growth of about 86% to 105% on a year-over-year basis. The growth rate reflects strong fundamentals in our business as well as some of the key strategic initiatives Madam Wang mentioned in her remarks. The management remains confident for our full year results.

This concludes our remarks. Now we would like to take questions you may have. Operator, you can open the lines for Q&A.

(Operator Instructions). Your first question comes from the line of Ella Ji from Oppenheimer. Please ask your question.

Good morning, Wang and Theresa. My first question is with regards to your Gopher asset management business. You increased about $600,000 under your management. What is the main category of assets within that $600,000 that you did still mostly real estate related fund?

Hello? As Madam Wang mentioned, our focus with the Gopher will be the portfolio of a manager of a portfolio upfront. So this will include not only real estate but also other industry, so we have to check the underlying fund, the final investment target of theirs. So it competes with [Baiyi] and then PE and their portfolio.

(Interpreted) This is an overall improvement in our asset management business which includes fixed income products, private equity products and also real estate funds.

Okay, thank you. My second question is with regards to your one-time sales commission in the quarter, it declined sequentially from the first half of the year. What is the average duration of the fixed income products that you have initiated during the quarter? And with regard to this sequential decline in the commission rate, do you think this is because of stronger competition on the market?

The average duration is around 1.1 years. And your second question was?

I wonder what is the reason for lower sales commission? Do you think it is because of stronger competition on the market?

That just clearly was a product mix change and, as mentioned in my remarks, in the sense that the product we make (inaudible) one-time and recurring, that may make the one-time commission look smaller. But overall the revenue has increased over the life of the product and the second reason was because of product mix. Thanks.

So if I could just follow-up, so for a same type of product with the same duration, are you seeing a decline in sales commission or is it about the same?

You mean the commission there is on the duration of the product?

Yes.

Yes, that would be great.

(Interpreted) Our overall revenue actually has increased due to the development of asset management business and the decrease of the effective commission rate was caused by the changes in product mix and the more short-term duration products in this quarter.

Ella, I think you can still ask one more question.

Sure. And then I think my next question is I just want to ask you about your thoughts on dividend. Obviously you have achieved a very strong year. Can management discuss your dividend; do you think you will keep the same payout ratio?

(Interpreted) Yes, we're really seriously considering this at this moment because we believe the growth is in term of structural development and also at a very fast speed. So at this moment we're still in discussion about this.

All right, thank you so much.

Thank you.

Thank you. Your next question comes from the line of Charles Kueh, a private investor. Please ask your questions.

Hello. This is Charles Kueh calling. Thanks for taking my call and congratulations on a great quarter. I see in the 2013 end of quarter forecast that the non-GAAP net income should be between the range of $50 million to $55 million and I'm just wondering it's just in line with what was expected. What's holding you back from increasing beyond that?

Hi, Charles. Actually we raised the public confidence as well as us by raising the targets from early this year around $30 million level to $50 million to $55 million level, we think it's a big profit but we can, we definitely will do our best to target for that range. But again we believe that a big jump from last year will keep improving. Thanks for your question.

I wish you luck, of course, as a shareholder.

(Interpreted) We have just upgraded our new guidance last quarter, so we wanted to be more conservative.

Are you seeing that as conservative guidance then?

(Interpreted) We do want to prove that we can make it for every word we promised and we did not mention that this guidance has come serviceable now, it just reflect comparably practical situation. As mentioned earlier, if we can work even harder on the fourth quarter, I don't see why not we can [superior] of that range. But then again, we'll try to keep our promise. And thanks for your question. We fully understand that you (inaudible) of ours.

Thank you very much and congratulations again.

Thanks a lot, Charles.

(Operator Instructions). Your next question comes from Chen Gu from Artisan Partners. Please ask your question.

For the benefit of the audience, I will translate the question. Chen Gu just asked, because we mentioned the increase of this quarter is really a structural development of our overall business, so she wants the management to further explain how should they foresee the future growth of the business is over a quarter, change is going to be flat or because of the difference between the second quarter and third quarter is not too much?

(Interpreted) I will translate for the benefit of the audience. Madam Wang mentioned that actually year 2013 we have a very significant growth compared to last year and we do wanted to well manage the increasingly scale of the business. The best option is structure and also the IT and HR system that we have mentioned in our call, the improvement of the management are also very important.

So if the business is going to be brought into another stage, Chen Gu asked if there's going to be a huge amount of capital reduction investment...

(Interpreted) Madam Wang said that it really depends on your definition of the investment. We are running our business in an asset-light mode and so all the investments we have in the IT or HR system, such as engaged (inaudible) for the competency, those expenses will be covered by the increase of our bottom line.

Your next question comes from the line of (Xun Yee) from Greenwoods Asset. Please ask your question.

(Interpreted) The question was through the consultation of McKenzie and other corporate strategy research that we have done, he wants Madam Wang to comment on the future of corporate growth strategy?

(Interpreted) From the corporate strategy point of view, right now we're positioning ourselves as the wealth management service distributor with asset management capability, so that's our long-term corporate strategy. And for corporate structure, before we had a quite flat corporate structure and right now we add another layer of our branch office which is regional office and then we changed the KPI of the branch office from profitability to business scale.

And also as the ELITE program that we mentioned in the call we're increasing the product productiveness and also the business scale and customer service qualification of our relationship manager.

(Interpreted) So compared to the traditional trust company, what is our core competitiveness or how do we differentiate ourselves?

(Interpreted) So for the benefit of the audience, so in terms of our asset management strategy I think our key core competency is our selection and management of a cost asset category.

So I think this is our core competency in terms of asset allocation, how do we help find -- adjust that allocation and our ongoing research and coverage of various fund managers in the market. I think in China's overall asset management industry it's getting more mature, it's developing in the right direction. So I think we will further capitalize on our competency in this regard.

There appears to be no further questions at this time. So I'll hand it back to your speakers for any closing remarks.

(Interpreted) Thank you everyone.

Thanks.

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.