Noah Holdings Ltd (NOAH) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen. Welcome to Noah Holdings Limited Second Quarter 2015 Financial Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

After the close of the U.S. market on Monday, Noah issued a press release announcing its second quarter 2015 financial results, which is available on the company's IR website at ir.noahwm.com. This call is also being live webcast 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 may 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. Jingbo Wang, Chairman and CEO of Noah. She will be speaking in Chinese and her remarks will be translated into English. Please go ahead.

(foreign language) Thank you, operator, and take all for joining us. With me today are Mr. Kenny Lam, Noah's Group President; and Ms. Ching Tao, Noah's CFO. Mr. Lam will start by providing a brief overview of our financial highlights for the second quarter of 2015 and will walk through the performance of our core wealth and asset management businesses.

After that, I will provide an update on the progress we are making to develop a global open architecture product platform, as well as progress with our new Internet finance business. I will also review our strategic initiatives to establish an integrated financial services platform to support the sustainable growth of the company. Lastly, Ching will provide further insight into our financials and reiterate our 2015 guidance. We will be happy to take any questions at the end of our prepared remarks.

Now I'll turn the call to Mr. Lam.

Kenny Lam;President^ Thank you, Chairman Wang. We're pleased to have continued the momentum from our first quarter to deliver strong results in the second quarter, with top and bottom lines both in line with our expectations.

Net revenues in the second quarter of 2015 were USD 93.2 million, a 30.4% increase from the corresponding period in 2014 and a 29.8% increase from the first quarter of 2015.

On the bottom line, non-GAAP net income was USD 30.9 million, a 25.4% increase from the corresponding period in 2014 and a 37.4% from the last quarter.

In terms of our core businesses, we distributed CNY 36.5 billion of wealth management products during the second quarter, representing a 100.8% increase year-over-year and a 48.5% increase quarter-over-quarter.

Our total registered client and total active client base also increased at an encouraging rate. Total registered clients as of the end of quarter 2 increased by 34.8% year-over-year to 81,939, and total active clients reached 6,101, a 72.4% increase from the corresponding period in 2014.

Noah has always been focused on improving our core competitiveness in the total wealth management industry. Regardless of whether it's a bull market or a bear market, we're committed to enhancing our open global product platform, investing heavily in our asset management team, developing our new Internet finance business and improving our mid- and back-office information systems over the long term.

Recently, Chinese equity markets have experienced significant volatility, and our consistent principles of long-term investing and value investing have again been proved to be both effective and necessary. None of our secondary market products, except for IPO products, are leveraged. When selecting and recommending secondary market fund managers, we always emphasize the importance of asset allocation. As a result, we've helped our clients protect their assets and minimize losses from this round of market volatility. Later, Ms. Wang will share information about our product mix as well as investment strategy.

In our traditional wealth management business, we continued to develop our online and offline network this year. By the end of the second quarter, we have 112 offices, covering 64 cities. We also expanded our team of relationship managers from 834 at the end of the first quarter to 953 at the end of the second. Our team of top-performing relationship managers also continues to expand to 316, which accounts for 33.2% of all relationship managers.

We believe high-net-worth clients continue to demand one-to-one service. We provide services to white-collar clients through our Internet finance platform. We are continuing to provide professional training to our relationship managers and invest in marketing activities to expand our client base and increase productivity.

In our wealth management business, there are 2 areas that we are focused on over the mid- to long term. First, we are focused on leveraging our new family office and discretionary portfolio management services to deepen client relationships and significantly enhance the capabilities of our relationship managers. Second, we are committed to significantly improving the transaction platform for clients and relationship managers so that it's more open, faster and more convenient. Our family office business has witnessed rapidly growing demand for active global asset allocation.

In July 2015, we announced cooperation with the McKinley Capital Management to enable Noah to build more family office solutions with global asset allocation capabilities for our clients.

In addition, we also announced strategic cooperation with UBP, one of Europe's largest private banks and asset managers. This will enable us to build and expand our global capabilities in research and product design.

Now I'd like to provide an update on Gopher Asset Management. Established as a multi-boutique investment firm, Gopher Asset has continuously expanded its investment in asset management capabilities. It is now one of the most prominent players in terms of venture capital and private equity fund of funds in China, and continues to innovate.

As of June 30, 2015, Gopher Asset had CNY 64.4 billion assets under management, a 36.2% increase from the end of the second quarter of 2014. In terms of asset categories, real estate funds and real estate fund of funds accounted for CNY 30.1 billion, private equity funds of funds accounted for CNY 22 billion and secondary market funds of funds accounted for CNY 9.2 billion and other funds of funds accounted for CNY 3.1 billion.

Gopher Asset Management specializes in private equity and venture capital funds of funds, real estate funds of funds and secondary market funds of funds, and alternative credit products denominated both in renminbi and U.S. dollars.

As I've mentioned previously, there are a lot of synergies in the financial industry. Building on Gopher's strong foundation and leadership in real estate, PE and secondary market products, and in tandem with our continuous investments in talent, our manager of manager fund business has continued to develop; we're making direct investment in some projects.

In addition to our core wealth management services, we've always taken a client-centric, full-service approach. This includes working with our clients to facilitate a high-quality lifestyle and good health.

For example, in the first half of 2015, Enoch Education arranged a series of events to increase customer loyalty, including overseas education programs and private advisory board programs for around 1,500 people. In the second half of the year, we hope to provide even better education services to our clients, will launch more investor education programs.

In Mainland and Hong Kong, we can also provide high-end insurance services, including high-end medical insurance, critical illness, term life and so on. Noah's trust company in Hong Kong is Mainland China's only wealth management organization to set up a family trust office overseas and provides a full suite of family trust services. We are people-driven with long-term view, and we're dedicated to fulfilling and upholding our corporate social responsibilities.

We recently released the first edition of Noah sustainable development report. We hope to be -- we hope that more of our stakeholders will be able to better understand Noah's dedication to corporate social responsibility and creating sustainable economic, environmental and social values.

Lastly, I'd like to discuss some of our mid- and back-office developments in the first quarter of 2015. We focus on developing our mid- and back-office platform in 2 areas. First, we developed a forward-looking and efficient mid-/back-office platform that can service the growth of our business. Second, we are building the capabilities of each business segment to enable faster and more accurate execution. The development of our core business system, CRM, the finance system and so on are all progressing on schedule and some of the systems will be launched later this year. For example, we are already starting to see the benefits of our matrix management system, which is improving our ability to implement policies and model operations.

In the second quarter of 2015, in terms of average income generated per employee, the average per capita productivity of the group's mid- and back-office function increased by 12.6% year-on-year. This demonstrates that our operational efficiency has not been adversely affected by the firm's expansion.

Now I will turn over the call over to Ms. Jingbo Wang, Chairman and CEO of Noah, to give an update on the development of our global open architecture product platform, our product strategy for the second half of the year, progress in Internet finance and other strategic initiatives.

(foreign language) Thank you, Kenny. Noah has grown to be a wealth management firm with outstanding asset management capabilities that serves Chinese clients around the world. Over the past 10 years, we have continuously improved our core capabilities from research to product selection to asset management capabilities. In addition, we have focused on effective investor education and communication. In times of rare systemic volatility in the secondary markets, we are pleased that we have maintained our long-term approach, protecting client assets through appropriate asset allocation and staying true to our principles of long-term-investing and value-investing. This has helped us maintain strong high-quality relationships with our clients.

(foreign language) On our first quarter earnings call, we clearly stated that we will strengthen our monitoring of risk. Currently, there are many irrational elements in the market. We believe that wealth management should transition from product-driven to asset allocation-driven. Later at our PE investment summit held in Shanghai at the end of May, which attracted over 1,000 high-net-worth clients, we stated that we would reduce exposure to secondary markets and recommended that investors transition related funds to IPO funds.

(foreign language) At the end of the second quarter, we saw irrational activity and panic in the domestic capital markets. After this baptism of fire, investors, practitioners and regulators have greater respect for the market. We believe that this will help the domestic asset management industry mature.

The wealth management market in China will mature from individual investors buying shares, to individuals buying fund products. Noah's high-net-worth clients have already transitioned from financial product selection to comprehensive asset allocation. And we believe that discretionary portfolio management will become more and more popular among ultra-high net worth clients. We have continued to build our core competitive advantages in wealth management based on this trend.

(foreign language) Our approach to product allocation changed significantly in the second quarter compared with the first quarter. The core elements of our approach in the second quarter were: Number one, in terms of the open market, we continue to transition from a boutique model to a platform model, which enables our clients to purchase secondary market fund products through Noah's online platform. We selected the best value funds and recommended them to our clients. We increased IPO fund products and reduced allocation to secondary market products. We do not offer any secondary market financing or any leveraged secondary market products.

(foreign language) Number two, we continued to promote primary market and cross-cycle products, especially private equity funds. The aggregated value of new private equity funds in the second quarter reached CNY 9.9 billion, an 85.3% increase year-on-year and 83.5% from last quarter.

Number three, we enhanced our supply chain finance products and developed fixed-income products, such as real estate investment products with high-quality counterparties. We also continue to improve the quality of fixed-income products and counterparties.

Number four, we strengthened the development of our overseas product platform and continued to invest resources in the ongoing education of the client base and relationship management team to drive expansion of our overseas asset allocation business.

Number five, we also looked at asset categories that aren't as closely related to the capital markets, and we will expand our coverage and promotion of these types of products. We are confident that we will see the result of this initiative soon.

From our history, it is clear that we are not a company that is significantly impacted by cyclical volatility. On the one hand, in bull markets, it is relatively difficult for us to meet investors' expectations and may result in a slight reduction in our market share. However, after the global financial crisis in 2008, we had extremely positive development, and we regained all of the market share that we lost during the bull market and grew into the market leader. We are seeing a similar trend in this round of volatility.

(foreign language) The recent market volatility has also increased -- has helped our clients and relationship managers mature. In the second quarter, we distributed CNY 9.9 billion in primary market PE/BC products. We distributed CNY 20.9 billion of secondary market products in the second quarter, of which IPO fund products were CNY 8.2 billion.

Since the second quarter of 2014, our asset allocation-related products have become increasingly popular with our clients, and in the second quarter of 2015, we saw growth of 1,234.1% year-on-year and 325.5% quarter-on-quarter. International asset allocation also grew 500% year-on-year. We note that a growing proportion of high-net-worth clients are increasing their overseas asset allocation.

Noah Hong Kong's product platform provides Chinese clients with many opportunities just like outstanding overseas assets. In the second quarter, Noah Hong Kong distributed products with an aggregate value of RMB 3 billion.

As of the end of the second quarter, overseas cumulative assets under management reached more than CNY 8.5 billion, a 303.3% increase year-on-year and a 39.2% increase from last quarter.

The capability of Noah's overseas asset management team also continues to improve. The asset types of our overseas fund of funds in U.S. dollars are also gradually expanding from BCP funds of funds to hedge fund of funds, then to real estate fund of funds. Our partners include funds from world-renowned asset management companies, such as Sequoia, CPG, Carlyle and KKR as well as some new outstanding asset managers.

(foreign language) We are continually emphasizing me the importance of asset allocation in wealth management, and this concept is being accepted by more and more of our high-net-worth clients. This recent increase in systemic risk has helped our clients to recognize its importance even more. We are organizing a series of investor education sessions and forums to help our clients better understand asset allocation strategies to take account of cycles and geographic asset category and currency exposure.

Now I would like to share an update on our developments in the Internet finance space during the second quarter. Noah's Yuan Gong Bao platform, our online private banking platform targeting white-collar professionals, is developing rapidly. In the second quarter, the transaction value on the platform reached CNY 3.4 billion, a 56.5% increase from the first quarter. The average transaction value per client was approximately CNY 120,000. And the proportion of repeat clients was 56.6%.

Yuan Gong Bao continues to innovate with the introduction of mutual fund sales, collateralized loan products, loans to employees, crowdfunding and other functions. This will help us bring financial product, collateralized loans and independent client transfers online and facilitate a closed loop for online transactions of all our products and services. We are very pleased to see such rapid development over a very short period of time.

Yuan Gong Bao is fully aligned with Noah's fundamental values. It is designed to leverage advances in technology in the Internet to offer white-collar professionals private banking services and service their integrated financial service platforms.

(foreign language) Finally, I would like to briefly talk about our understanding of the capital markets. The core of successful capitals markets is the efficient allocation of capital. This helps to cultivate great businesses. The basis for capital markets to efficiently allocate capital is to maintain the financing functions of IPOs and delisting.

The next level of the capital allocation system is the refinancing in M&A market. On this point, we believe the IPO market will be reopened very soon, once the domestic capital markets have stabilized and a number of leading companies will list in China. There will be more opportunities in the primary market, and the secondary market will also experience long-term healthy development.

We will continue to adhere to the principles of value-investing, long-term-investing and appropriate asset allocation. After this round of market volatility, investors, market players and regulators will become more mature and we believe the market will develop more sustainably. We are confident that the wealth management and asset management industry is going to have a bright future.

(foreign language) On the Internet banking front, regulators recently announced the guidelines on promoting the healthy development of Internet finance. This document clearly defines the scope of Internet finance as a business for the first time. Most importantly, it definitively supports the development of Internet finance while emphasizing the need for risk management and standardized operations. While the Internet technology has significantly improved the efficiency of financing, we have also seen that Internet finance has, to some extent, accelerated the stock market crash. As many people in the Internet finance industry lack experience in the finance industry and have relatively limited understanding of financial risk, we believe that Internet finance companies that have significant investment and an integrated team with experience in the finance and Internet industries, such as Yuan Gong Bao, will demonstrate their competitive advantages in the future.

Appropriate investment principles, disciplined investments and processes, as well as a solid sense of value are the foundations of long-term success of financial institutions. We are consistently emphasizing self-learning, reflection and growth through every risk and crisis to make ourselves the best rather than expecting a better market.

Now I will turn the call over to our CFO, Ching Tao, to review our financials. Thank you.

Ching Tao;Chief Financial Officer^ Thank you, Chairman Wang, and hello, everyone. To make the best use of everyone's time, I'll give a high-level overview of our Q2 results and then open up the call for questions. As Kenny and Chairman Wang noted, Q2 was another solid quarter. Net revenues increased 30.4% year-over-year to USD 93.2 million. And Q2 non-GAAP net income grew 25.4% year-over-year to USD 30.9 million, both of which are largely in line with our expectation.

We distributed approximately USD 5.9 billion or CNY 36.5 billion worth of wealth management products during the quarter, more than double the figure from a year ago.

In July, an abrupt regulatory policy in China -- policy change in China led to the suspension of new IPOs. As a result, we terminated and subsequently refunded USD 1.3 billion, or approximately CNY 8.2 billion, of IPO fund products to our clients in July. Excluding that refund, the aggregate value of wealth management products during the second quarter of 2015 was USD 4.6 billion or approximately RMB 28.3 billion, which represents a 55.6% increase from the corresponding period in 2014. There's a breakdown of operating metrics in our wealth management business at the back of the earnings release.

Excluding the impact of the refund related to IPO products in July, the weighted average onetime commission rate for the second quarter of 2015 was 0.78% compared to 0.8% in the same period last year and 0.82% in the first quarter of this year. The minor fluctuations in the commission rate are due to shifts in our product mix.

Recurring revenues were USD 40.1 million, accounting for 43% of net revenue in Q2 2015 compared to $37.9 million in Q2 of 2014 or 53% of net revenue. The decline in recurring revenues as a percentage of net revenues was primarily due to a change in product mix in our wealth management business and a change in the composition of asset types in our asset management business. Going forward, we still expect recurring revenues to account for about 50% of net revenues in the long term.

Our Internet finance business delivered impressive revenue growth with revenues increasing 90% sequentially to $2.8 million in the second quarter of 2015. We're pleased with the way the segment is growing, and we will continue to invest as we expect it to become an increasingly important part of the Noah offering in the long term.

We received $15.6 million in performance-based income during the second quarter related to secondary market products. Our internal estimates for performance-based income, or carry value, are built into our full year guidance. We recognize performance-based income when the cash inflow can be reasonably assured.

And now on to profitability. Operating margin in Q2 was 33.5% compared to 39.6% a year ago. The decline is primarily attributable to ongoing investments in our Internet finance business. Non-GAAP net margin was 33.2% compared to 34.5% a year ago.

Our balance sheet remains very healthy. At the end of Q2, we had approximately $410.9 million in cash, short-term investments and long-term investments, an increase of about $31.8 million from the previous quarter.

We've posted positive operating cash flow in the second quarter of $16.9 million. Accounts receivable turnover was 61 days, which is within the reasonable range of our average AR turnover days.

Finally, I would like to reiterate our net profit guidance for 2015. We expect non-GAAP net income to be between $90 million and $95 million for the full year 2015. The midpoint of this range represents year-over-year growth of about 20%. This growth rate reflects the strong fundamentals and steady profitability in our core businesses.

With that, Chairman Wang, Kenny and I would be happy to take any questions. Operator?

(Operator Instructions) The first question comes from Su Li Chen [ph] with CICC.

(foreign language)

Kenny Lam;President^ (foreign language) Let me just translate this for the audience as this is actually an English call, so let me just briefly go over the question. The first questions is about our Internet finance business. So the question was the increase in the investment, that was actually more than the expectation and what is our forecast of Internet finance business, given that we're investing more quickly than before. That's the first question. Second question overall is about our secondary market products, the volume and how we are paying our relationship manager, as well as what kind of commission we're getting, given that we have an increase in terms of our RM compensation in the second quarter. So I'll let Wang Jing answer and I'll translate.

(foreign language)

Kenny Lam;President^ Let me just translate what Wang Jing said and add to her view as well. The Internet finance business is something that we really like a lot. We think we have something that is very unique in the market, which is a Internet finance platform for private banking focused on the white collars. This is a segment that is not well covered in the market. It is also something that we do. So it's quite unique. In terms of when we expect profit from this particular platform, we think that we want to continue to invest, given the tremendous revenue growth this quarter. We see the trend is -- in terms of momentum, is continuing to be strong, and so we will continue to invest. We can easily try to profit this year if we want to, but we think that investing in this platform is actually a future for Noah.

(foreign language)

Kenny Lam;President^ So let me just briefly summarize what Chairman Wang said. Basically, in terms of the secondary market products, a good part of the secondary market products, as we reported around CNY 8.2 billion, was actually returned to clients as a result of the above change in the policies of the IPO launch in China. We believe that, that actually shift to the secondary market products in terms of fund of funds as well as IPO funds is actually helping the clients in this volatile market because, basically, these funds would have actually gone to Asia, if not for these funds. So we were actually helping to protect the clients' assets. These clients' assets were actually returned most of it to the clients during this volatile market. We are still focused on the very much in the middle -- medium- to long-term investing for our clients. So in terms of our RM incentives, we are quite unique in the market. We're probably the only one in the market whereby the commission across products are the same. So we don't promote any particular product. And as a result then, the RMs are not incentivized to promote any particular products, except for the clients' interests. And Wang directly mentioned quite a few funds, and I will just summarize quite quickly that we actually manage fund of funds as well as few (inaudible) funds. Our performance is actually now still top in the market. IRR for our (inaudible) funds is now 20%, about 20%. And even performance of our secondary market product -- our fund of funds market product actually is still in a positive territory compared to many in the market that is now actually deep in the red. So in terms of clients' trust in us, I think we've actually increased our trust substantially over the last few months, and you could see that in our performance of the funds that we manage, as well as how we have actually recommended our products and through the way that we approach our RM incentives.

Ching Tao;Chief Financial Officer^ I would just note really quickly that in our 6-K in our earnings release, Page 12, we break out relationship management compensation. So RM compensation as a percentage of net revenue is 25%. We feel that, that is a suitable range. And actually, that puts us at the mid to low end of the market for our competitors. So overall, RM compensation as a percentage of net revenues is very, very reasonable. We're continuing to monitor its growth, but it's a very reasonable rate.

The next question comes from Matthew Larson with Morgan Stanley.

Matthew Larson;Morgan Stanley;Analyst^ I got on the conference call a little late, so if this question was already answered, then I apologize for asking it. So with the pullback in Noah's stock in the announcement of up to $50 million share repurchase program, I was wondering if any of those shares have been repurchased yet? Or what the plans are going forward regarding that announcement?

Kenny Lam;President^ (foreign language)

Ching Tao;Chief Financial Officer^ It's Ching. We announced the intention to do a share repurchase program of up to $50 million. I believe it was on the 8th of July. We're still currently in the blackout period. The trading window opens tomorrow on the 6th -- sorry, Thursday on the 6th. So we have not executed any share repurchase yet.

The next question comes from Sam Dubinsky with Carlson Capital.

Sam Dubinsky;Carlson Capital, L.P.;Analyst^ In the press release, there were a lot of footnotes regarding the $1.3 billion in proceeds that needed to be refunded to customers from the canceled IPOs. Just to be clear, did you adjust the revenue and EPS in Q2 to factor in the IPO cancellations? Or will there need to be adjustments to Q3 earnings as a lot of the refunds occurred in July?

Ching Tao;Chief Financial Officer^ Sam, it's Ching. We adjusted revenue, so we didn't -- we booked 0 revenue from that because we refunded.

Sam Dubinsky;Carlson Capital, L.P.;Analyst^ Okay, great. And then the IPO proceeds that you returned, just to be clear, did those IPOs already price and trade in the public markets, or did these companies fail to go public?

Ching Tao;Chief Financial Officer^ This was a fund that was looking for IPO allocations and IPO-type products, and so we dismantled and unwound, terminated the fund product.

Sam Dubinsky;Carlson Capital, L.P.;Analyst^ Did clients lose money in that fund? Like was it trading, or was it pre-trading?

Ching Tao;Chief Financial Officer^ No, clients did not lose money.

Sam Dubinsky;Carlson Capital, L.P.;Analyst^ Okay. But what I'm trying to figure out is, just the way -- maybe it's a government thing or maybe it's how things work in China, I'm just trying to figure out. You're not obligated to make the customers whole are you, if there's a loss or a government mandate?

Ching Tao;Chief Financial Officer^ Right, we are not obligated to make customers whole, so we bear no financial or legal ability. The risk we bear is reputational for selling these products. So we take that very seriously. So that's why I would actually say, as soon as the CSRC changed its policy, we reacted very quickly and terminated, unwound the fund and returned all of the principal to investors. So the clients did not lose money.

Sam Dubinsky;Carlson Capital, L.P.;Analyst^ Okay. And could you go a little bit more to...

Kenny Lam;President^ I'll add one more point. Actually, in the market, you see in China that we are a few that actually returned the money to clients in the IPO fund. There are a few that actually -- because they're not obligated to do that. We believe that that's actually right and our value is long-term investment for our clients. So we decided that we should return that to clients.

Sam Dubinsky;Carlson Capital, L.P.;Analyst^ Okay, great. And could you go into more detail on the performance fees you generate in Q2? Is that a -- how should we think about going forward?

Ching Tao;Chief Financial Officer^ As I mentioned, we will recognize performance-based income when the cash flow is very reasonably assured. So in that sense, we don't really do accruals on a forward basis and don't really project for it. But I did mention that we have a reasonable conservative estimate for that in our guidance.

Sam Dubinsky;Carlson Capital, L.P.;Analyst^ Okay. So is the Q2 run rate -- yes, sorry.

Ching Tao;Chief Financial Officer^ No, go ahead -- the Q -- I can't comment on the run rate because there's extreme volatility in performance-based income quarter-over-quarter. We recognize the performance-based income at the end of every quarter. For PE and BC products, we only recognize carry income or revenue upon cash settlement and termination of the fund. For secondary market products, we recognize the carry when the cash inflow can be reasonably assured. So there's very little adjustments, for example, to secondary market products performance-based income. And (inaudible) write-ups and write-downs, yes.

Sam Dubinsky;Carlson Capital, L.P.;Analyst^ And then on the AUM in Gopher, could you maybe discuss much of that was new funds raised versus performance, and how do we think about that in Q3?

Ching Tao;Chief Financial Officer^ I think Gopher AUM is continuing to grow very well. We disclosed the details in the 6-K. And we're continuing to see new funding products come out for Q3.

Sam Dubinsky;Carlson Capital, L.P.;Analyst^ Okay. And my last question just relationship management -- relationship managers increased quarter-over-quarter. How should we model OpEx going forward with the higher relationship managers? Like, is Q2 the baseline or does it fluctuate with sales?

Ching Tao;Chief Financial Officer^ Q2 is a little bit, I would say, on the high side; but overall, I would comment that, going back to my earlier comment, RM compensation as a percentage of net revenues is running in the 22% to 25% range. We feel that's very suitable for us, and we're actively monitoring that number. That actually puts us at the mid- to low end of overall RM compensation compared to our competitors. So we feel it's very appropriate. We're continuing to grow the RM team, but the focus is on RM productivity, meaning they're gaining greater share of wallet.

Kenny Lam;President^ So let me add to that. The RM number now is 953. We expect that number to increase slightly over the next half year. We want to make sure that we have enough of a quality relationship manager base for next year's growth. So a lot of our RMs actually go through training before they really become client advisors. So -- and we don't expect that to fluctuate a lot. And definitely, the number of RMs are not dependent on the type of products and the volume we sell. I think we're planning for a bit of a longer term. So you see that RM numbers are quite steady. And we expect that number to increase more by the end of the year, but it won't -- it would definitely not decline.

The next question comes from David Lee with DM Harmony Fund.

David Lee;DM Capital;Analyst^ As you mentioned, like the Chinese regulators are now producing guidelines on Internet finance industry and now the regulators are curbing Internet payments. And it's also expected that, like, online payments, there's going to be like a limit on the daily amount, so like CNY 5,000. I was wondering how might that affect Noah's Internet finance, Yuan Gong Bao. As there more regulations, would that have a big impact on your premiums going forward?

Kenny Lam;President^ (foreign language) So I'll ask Chairman Wang to answer and I'll translate in English.

(foreign language)

Kenny Lam;President^ So let me just translate. And you should possibly be aware that we actually have a payment company within Noah that actually connects directly to the People's Bank of China. As a result, all of our payment actually is done in a closed loop and the new directive on the cap on the CNY 5,000 actually does not affect us at all. The policy that was actually being consulted now is really not related to transactions of our kind. It's related to digital wallet, whereby the transfer into digital wallets is within CNY 5,000. But what we do in Yuan Gong Bao, which is a direct transfer between the banks, given that we actually have our own payment capabilities and our own payment company, we're not affected at all by that directive.

The next question comes from Kelly Li with Harmony Fund.

Kelly Li;Harmony Fund;Analyst^ (foreign language)

Kenny Lam;President^ So let me translate what the question is. It's really around the pricing of our PE fund. Given that we also issue and distribute a lot of PE funds over the second quarter, the pricing of these products may be at the high end. If we price it at a high end in the second quarter, would it be affected as we exit?

(foreign language)

Kenny Lam;President^ Three points. One is we actually in this market are able to have a lot more bargaining power in terms of selecting the right PE managers. Given that we started actually our PE fund distribution business and PE fund of funds business actually quite early, we started in 2008, we've seen many cycles. So in terms of just selecting the best managers, we were able, in this market, particularly to find the best managers. In fact, actually, we've been looking quite in a robust way, and some of the managers that we see, we believe that actually are not up to par and we haven't actually distributed their products or actually lowered the volume. So that's point one. Point two is actually many of our products is actually long term. Many of the PE and BC products are actually 10 to 12 year in duration. So it's quite long in cycle. We believe that these are -- these products will see through the cycles and will not be affected by a lot of volatility in the market. Third, actually, in this market -- actually, we were -- in the secondary market, we were selling products -- sorry, we were selling shares of the companies we invested in. So we capture a lot of the upside of the market in the second quarter. We weren't buying actively in this market. So in terms of performance, we're actually quite -- we have performed quite well, given at the height of the market, we were selling securities of these investment companies.

(foreign language)

Kenny Lam;President^ So the second question was really around the listing of Jupai. We think that -- well, we don't see a lot of competition from Jupai. They have a very different approach to products. They're heavily focused on real estate and actually, particularly in the third- and fourth-tier cities. So we don't subscribe to their philosophy, and we don't currently see a lot of competition in the market from them.

(Operator Instructions) As there are no further questions, that concludes the Q&A session. I would like to turn the conference back to management for closing remarks.

Kenny Lam;President^ Okay, well, thank you all for that time. And please continue to send questions our IR team if you have any follow-up after this call. I appreciate it.