Noah Holdings Ltd (NOAH) 2016 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Noah Holdings Limited First Quarter 2016 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 first quarter 2016 financial results, which is available on the company's IR website at http://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 expansions 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 subjected 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 Kenny Lam, Noah's Group President. Please go ahead.

Kenny Lam;President^ Thank you, operator. Hello, everyone. Joining me today are Ms. Jingbo Wang, Chairman and CEO; and Ms. Ching Tao, Noah's CFO. I'll start by providing an overview of our financial highlights for the first quarter of 2016 and walking through the performance of our core wealth and asset management businesses. I'll also talk about the development of Noah's mid- and back-office capacities. After that, Chairman Wang will provide an update on the group's strategic positioning, product strategy and new business development. Lastly, Ching will provide further insights into our performance -- our financial performance in the first quarter of 2016. Then we'll be happy to take any questions at end of our prepared remarks.

First of all, I'm pleased to report that both the operational and financial results in the first quarter of 2016 were in line with our expectations. Net revenues in the first quarter of 2016 were CNY 607 million, a 35.6% increase from the corresponding period in 2015, and non-GAAP net income was CNY 214 million, up 52.6% year-on-year. Operating margin in the first quarter of 2016 improved most notably to 37.4% from 8.2% in the fourth quarter of 2015 and from 31.7% in the first quarter of 2015. These results demonstrated we have effectively managed the growth of operating cost and expenses. We distributed CNY 24.8 billion of wealth management products in the first quarter, a 0.9% increase from the same period a year ago or a 23.8% increase from the previous quarter. Total assets under management as of March 31, 2016, reached CNY 94.6 billion, a 60.7% increase from March 31, 2015, and a 9.2% increase from December 31, 2015.

For our wealth management business, as of March 31, 2016, our registered clients totaled 105,557, representing a 6.6% increase from the end of 2015 or a 40.9% increase since March 31, 2015. The total number of active clients during first quarter 2016 saw an increase of 7.5% quarter-over-quarter. We're also glad to see that our continuous efforts in educating investors, adjusting our product mix for the market environment have translated into stronger client trust in Noah, especially among long-term clients. This is reflected in the increase in average transaction value per client in the first quarter, which grew to CNY 5.01 million.

We have also been strengthening the development of our traditional off-line network. The coverage network included 166 branches and subbranches covering 68 cities as of March 31, 2016. We have also enhanced the coverage of first-tier and second-tier cities in main regional economies as well as second-tier and third-tier cities in developed regions. The number of relationship managers was 1,137 as of March 31, 2016, an increase of 36.3% year-over-year. Our focus on RM retention also helped us maintain a 0.5% turnover rate for elite relationship managers in the first quarter, which is extremely low in the industry. This can be attributed to our ongoing efforts in building a team of relationship managers who are committed to Noah's values and aligning their interest closely with our clients.

We have been constantly optimizing and upgrading our product mix to protect our clients' long-term interest while ensuring the sustainability of our growth. In the first quarter of 2016, we distributed CNY 6.1 billion of private equity products, which represents a 12.8% increase compared to the same period in 2015 and accounts for 24.4% of all wealth management products that we distributed last quarter. Compared with other major product categories, the weighted average duration of private equity products with recurring service fees is longer. A higher share of PE/VC products in the overall product mix helps us increase our earnings sustainability in the long term. More specifically, net recurring revenues accounted for 40.7% of total net revenues in the first quarter of 2016.

For our overseas business, we've maintained steady, robust growth in both top and bottom lines. We will continue to build an integrated global financial product platform and improve our overseas product origination capability such that we can offer a fuller mix of investment products and services to our clients.

As of March 31, 2016, Gopher Asset Management had CNY 94.6 billion assets under management, which was a record new high. Total AUM increased to 60.7% from the same period in 2015 and rose 9.2% from the previous quarter. In the first quarter, private equity fund of funds AUM represented 46.9% of total assets under management, remain the largest asset class at Gopher. Real estate funds of funds and real estate funds accounted for 28.9% of total AUM, and secondary market equity fund of funds represented 10.6% of total AUM. Gopher's net revenues from recurring service fees reached CNY 127 million in the first quarter of 2016, a 57.9% year-over-year increase, becoming an even larger contributor to the overall business performance of the group.

Gopher Asset Management's family office and full discretionary portfolio management services have made convincing progress since the inception in early 2015. As of March 31, 2016, we've served more than 80 family offices in total. As part of our plan to help traditional high-net-worth clients to move towards full discretionary portfolio management, we've set up an overseas family office center in the first quarter of 2016. The offshore center is now being integrated with the domestic family office team to better help clients with highly customized and value-added solutions covering a wide range of services.

Lastly, I'll briefly talk about our talent and mid- and back-office initiatives. Since Noah was listed, we've experienced tremendous growth and scale. Year 2016 is about consolidation. We're focused on ensuring that our previous growth is properly absorbed and our resources effectively deployed. As of March 31, 2016, the total workforce number 2,780 employees, a modest increase of 3% from the end of last year. Our emphasis has always been in staff training. We've now built a comprehensive program that covers a wide range of topics for all levels of employees. This is key to our success in the future.

On the IT front, Noah's new core business management system, [CBS] , has gone live, completely replacing the old ERP system. In the meantime, this CRM system has been also put in place. The finance system and HR system and many other apps across business sectors are all up and running on schedule in the first quarter. This has significantly optimized user experience, improved processing efficiency and enhanced our data analysis capability.

Now I will turn the call over to Ms. Jingbo Wang, Chairman and CEO of Noah. She will speak in Chinese, and her remarks will be translated into English.

(foreign language) Thank you, Kenny. In the first quarter of 2016, both market conditions and the regulatory environment have undergone significant changes, but as Kenny just summarized, we are pleased with the business and financial results we achieved in the first quarter. The good performance was attributable to our deep understanding of the industry in our efforts to develop a global open product platform to focus on continuous client education and to expand our product and service offerings with our product differentiation and innovation.

(foreign language) Growing and maturing these services will enable us to continuously acquire high-quality assets and clients. Our insurance brokerage service helps our clients screen cost-effective and suitable insurance products to meet their needs. Our offshore trust and insurance brokerage services provide overseas trust planning and insurance services to our family office clients.

(foreign language) Six months ago, we were foreseeing the changing tides in the marketplace, so we adopted a conservative product strategy and proactively adjusted the product mix, allowing us to feel more comfortable with today's challenging market. The extreme volatility in the markets in the first quarter has led to changes in our high-net-worth clients' demand for wealth management products. Instead of focusing on high absolute return, clients are more risk averse and becoming more aware of the importance of prudent risk management, preferring wealth management -- wealth managers with a strong brand and reputation.

(foreign language) In a dynamic market environment, we believe that we must increase our client communications and relationship managers' skills training in addition to optimizing the product mix and quality. As our clients mature from new money to old money and smart money from short-term to long-term investments, our core principles remain value investment and portfolio diversification for long-term benefits.

In the first quarter alone, we conducted training and investment seminars reaching 30,000 clients, and Noah's Enoch Education has become an important gateway for us to advocate corporate values and modern investment principles to our clients. In the current market environment, it is particularly important to help our clients understand the market dynamics and to continuously improve the training and service of our relationship managers to help our clients build wealth for the long term.

(foreign language) Next, I would like to talk about our products. In our fixed income products, we diversified the product mix towards high-quality supply chain financing, consumer financing and mezzanine financing for listed corporates. In the first quarter, non-real-estate fixed income products such as these accounted for over 50% of the fixed income total. We improved the underlying asset quality of our fixed income products and established relationships with a number of high-quality institutional product partners.

(foreign language) In private equity, Gopher's private equity funds of funds reached CNY 44.4 billion by the end of the first quarter, up 200% year-over-year and 17% quarter-over-quarter, accounting for 47% of the total AUM. Total transaction value of private equity funds distributed in the first quarter amounted to CNY 6.1 billion, up 13% year-over-year. In the 2016 Noah private wealth white paper report, we find that 70% of high-net-worth individuals have plans to increase their allocation in private equity and offshore investments. Based on our knowledge of industry trends, we continue to strengthen our relationships with the best fund managers who invest in the Internet, health care, culture, education and smart hardware industries. Gopher's fund investment capability combined with Noah's product selection capability and disciplined fundraising operations will help us gain more market share in the PE and VC products.

(foreign language) Regarding secondary market equity products, investors' enthusiasm for these products has waned remarkably in the recent months, making it more difficult to maintain client interest for this particular product category. However, we still hold the view that the worse the market is currently, the better opportunity there is for clients to position themselves for the long term. Going forward, we believe the Asia market has significant potential with many structural opportunities, in particular with ongoing economic reforms on the supply side, which will bring more well-run companies to be listed in China and in turn, usher in more good investment opportunities.

Currently our secondary market fund of funds AUM exceeded CNY 10 billion, accounting for over 10% of the total assets managed by Gopher. We will continue to invest more resources in research and investment for mutual funds of funds; hedge funds, funds of funds and quant funds of funds to strengthen Gopher's long-term investment capacity. And we believe our hedge funds, funds of funds and quant funds of funds can help our clients better manage risks, smooth the risk return curve and generate more and stable security holdings.

(foreign language) Regarding Caifupai, our Internet wealth management business, the number of registered clients has grown to 294,796 as of March 31, 2016, which represents a 361% increase over March of last year, maintaining growth momentum. The transformation of Caifupai's product mix has made notable progress and will be focused on standard products in the future.

(foreign language) Noah's family office and discretionary investment management services have been making steady progress, now serving 80 families. Starting this year, we are developing a comprehensive family office service package, expanding this business model beyond Mainland China by offering global wealth and asset management services to our high-net-worth clients.

In 2016, compliance and risk management are the lifelines of wealth management companies. In an environment of strong customer demand, ample system liquidity but barren supply of high-quality products, we need to stay vigilant in distinguishing between temptation and opportunity. As we tighten our risk control standards and adhere to compliance requirements, we preserve the quality of our products and protect our clients' interest as our priority even if that means sacrificing short-term product distribution volume growth.

One of our top priorities in 2016 is to improve our training for relationship managers and require them to be certified. Noah has one of the highest ratios of licensed relationship managers, and we embrace the new supervisory measures for the wealth management industry.

(foreign language) Lastly, I want to talk about the financial industry regulations, which have become much stricter in 2016. After the wild growth of many disreputable Internet finance companies and private investment funds in recent years, a series of extremely negative scandals have unfolded, such as (inaudible) and Zhong Tian. Such incidents have eroded investor confidence and hurt the wealth management industry. However, for disciplined companies like Noah, the long-term impact is positive. The recent release of the measures for the administration of the offering of private investment funds requiring more stringent compliance for the wealth management industry is essential to the long-term healthy development of our industry.

Regarding overseas investment, we expect cross-border capital controls to remain tight or even tighter than before. In the long term, the macroeconomic conditions and regulatory environment are net positive to Noah. In this challenging environment, we are focused on enhancing our core competencies for the long term. Our continuous efforts in investor education, portfolio diversification, product optimization, compliance reinforcement and risk control will strengthen our core competitiveness in the future and at the same time, help us achieve our strategic goals during this tough period.

(foreign language) Looking at our history, it is clear that we are not a company that is significantly impacted by cyclical volatility in the capital markets, and we continue to respect the markets as we prepare to embrace the future. We are committed to our prudent risk management standards, selecting the best-quality products in the global market and enhancing the professional service skills of our relationship managers. We continue to invest in our asset management team and drive the development of our Internet wealth management business.

I just want to highlight again that the strict risk management control is our bottom line, which we will never compromise. In a market of dwindling high-quality products, we will uphold the highest professional standards and strengthen risk management through tactical initiatives. We would rather sacrifice some volume growth for improving asset quality and protecting client interest. We are confident that if we continue to enhance our core competencies, adhere to the values of sustainable development, reflect then act, then we can keep optimizing our business model and deliver value to our shareholders and customers.

(foreign language) Now I will turn the call over to our CFO, Ching Tao, to review our financials for the first quarter of 2016. Thank you.

Ching Tao;Chief Financial Officer^ Thank you, Chairman Wang, and hello, everyone. Today, I'll give you an overview of our first quarter 2016 results and then open up the call for questions.

As Kenny and Chairman Wang have noted, we are pleased to have delivered solid results for the first quarter of 2016. First quarter net revenues increased 35.6% year-over-year or 5.8% quarter-over-quarter to CNY 607.2 million. On the bottom line, non-GAAP net income grew to 52.6% year-over-year or 101.4% quarter-over-quarter to CNY 214 million in the first quarter.

Looking more closely at our first quarter performance. We distributed approximately CNY 24.8 billion of wealth management products in the first quarter, a 0.9% increase from the same period a year ago or a 23.8% increase from the previous quarter. You can find a breakdown of operating metrics in our wealth management business at the back of the earnings release.

Net revenues from onetime commissions for the first quarter of 2016 were CNY 275.9 million, accounting for 45.4% of total net revenues and representing a 43.3% year-over-year increase from the corresponding period in 2015. The increase was primarily due to a change in the product mix in the first quarter.

Net revenues from recurring service fees for the first quarter of 2016 were CNY 295.6 million, accounting for 48.7% of total net revenues in the first quarter and representing a 36.7% year-over-year increase from the corresponding period in 2015. The increase was mainly due to the cumulative effect of wealth management products with a recurring service fee previously distributed by Noah and the increase in outstanding assets under management by Noah. Going forward, we expect recurring revenues to account for around 50% of net revenues in the long term.

Net revenues from our Internet wealth management business in the first quarter were CNY 5.8 million, a 36.2% decrease from the corresponding period in 2015. The decline was primarily due to the ongoing transformation of this business, which will focus more on the distribution of standard products going forward. While the Internet wealth management business is still in the investment phase, we believe it'll be an important part of our comprehensive platform and service offerings in the long term.

We received CNY 15.9 million in net revenues from performance-based income during the first quarter compared to CNY 25.1 million in the year-ago period. Note that we recognize performance-based income when the cash flow can be reasonably assured.

Looking at our profitability. Operating margin for the first quarter of 2016 was 37.4% compared to 31.7% for the corresponding period in 2015. The year-over-year increase in this ratio was primarily due to an increase in government subsidies received in the first quarter of 2016 compared with a year ago. Operating margin for the first quarter of 2016 was also significantly higher than for the fourth quarter of 2015, and this was due to a quarter-over-quarter decline in operating expenses as well as a sequential increase in government subsidies.

The year-over-year increase in compensation and benefits expenses was mainly due to an increased headcount in 2015 as a result of our strong business growth. Headcount growth had slowed in the first quarter of 2016, but the substantial increase last year had a cumulative impact on our compensation and benefits expenses on a year-over-year basis. Non-GAAP net margin for quarter 1 was 34.2% compared to 30.5% a year ago.

Our balance sheet remains very healthy. As of March 31, 2016, the company had approximately RMB 2.48 billion in cash and cash equivalents, an increase of around RMB 347.4 million from the previous quarter. We posted positive operating cash flow in the first quarter of RMB 730.8 million, which was mainly due to a temporary increase in short-term other payables. Accounts receivable turnover days was 58 days compared with 68 -- 60 days last quarter.

Finally, I would like reiterate our net profit guidance for 2016. We expect non-GAAP net income to be between CNY 690 million and CNY 720 million for the full year 2016, representing an increase of 14.4% to 19.4% compared to the full year 2015. 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) Our first question comes from Bolun Tang of CICC.

Bolun Tang, CICC. Two questions from me. The first question is from the onetime commission rate. Actually, in 1Q '16, your commission rate reached 1.29%, which is almost the highest level since 2011. Could you explain -- could you please explain as the reason behind? My second question is around the RMB 68.9 million government subsidies. Could you please give us some color on the ground in terms of the subsidies? So basically, the amount of subsidies equate to about 30% of your 1Q net profits. Just want to understand the rationale behind the subsidies. What's the guideline for subsidy from the local government? Is it sustainable or one-off?

Ching Tao;Chief Financial Officer^ I'd be happy to answer those 2 questions. First of all, regarding the commission rate increase, the reason for the commission rate increase is a shift in the product mix, which continues to shift quarter-over-quarter. In particular, we distributed more insurance products. Regarding your second question on the government subsidy, these are akin to investment bonuses related to economic development in the particular regions and cities where we may open new businesses or new branch offices. They relate to economic activity and business activity that happened several periods ago. So for example, the CNY 68 million in government subsidies posted at Gopher does not specifically relate to increased economic activity from the past year specifically. So these sorts of economic investment bonuses are sustainable. We typically have long-term 8- to 10-year arrangements with the local government authorities and tax bureaus, and we expect to continue to receive them going forward.

Kenny Lam;President^ Just add to that point, the word subsidy may not be the best word to reflect all that (inaudible). Essentially, what we've created in that region before is completely related to the amount of activities we've created in that particular region. So it's not exactly a subsidy in the full sense of that word. And thus also, if you look at our previous years, the year-over-year amount that we get from "subsidies" is relatively stable, but the quarter-to-quarter tends to fluctuate a lot because the timing of that subsidy is not within our control. But over -- year-over-year, the amount and volume tends to be quite stable.

Our next question comes from Sam Dubinsky of Carlson Capital.

Sam Dubinsky;Carlson Capital, L.P.;Analyst^ Just a follow-up on the subsidy income, how should we think about it as a percentage of your net income guidance for the year?

Ching Tao;Chief Financial Officer^ I'll take that question. Government subsidies year-over-year do have some fluctuation. Quarter-over-quarter, there's much more fluctuation. I think if you look at our historical disclosures, you can see that there is some general relationship to net revenues because, as Kenny explained, in general, it's related to the economic activity that we help create and enhance in the areas. We are a new economy business, not an old economy business, so the local governments are typically very welcoming and willing to work with us as we continue to build out our businesses. So I'd encourage you to look at that metric instead.

Sam Dubinsky;Carlson Capital, L.P.;Analyst^ Okay. But that -- you can't provide just a basic, like as a percentage of revenue or you gave net income guidance just to smooth out the quarterly fluctuations. Just trying to understand the base level to use as a percent of your annual guide, is there any way to kind of provide that type of transparency?

Ching Tao;Chief Financial Officer^ I think, in the past, we've never really mentioned that. I think conservatively for this year, however, I will say we expect to receive somewhere from RMB 80 million to RMB 100 million in government subsidies.

Sam Dubinsky;Carlson Capital, L.P.;Analyst^ Okay. And then you had a 44% sequential increase in the value of fixed income products you sold through your distribution business. You mentioned greater supply chain and consumer financing mix within that. Can you just give some more color on the underlying industry that these types of financing relationships are tied to? Like is it retail, steel, solar? Just trying to get a view and maybe historical default rates for this type of business.

Kenny Lam;President^ (foreign language)

(foreign language)

Kenny Lam;President^ So basically -- I was just translating for Chairman Wang. We are extremely careful in selecting partners, and the partners that we work with are the #1 and #2 in the industry. And most of these are actually supply chain and consumer finance assets related to the consumer industry in China, which is then exposed to the retail end of China. Just to give you a sense, right, for example, in consumer finance, we're now working quite extensively with the #1 player in China in consumer finance, and we're one of the leading provider of funding for government service. Sam, is that helpful?

Sam Dubinsky;Carlson Capital, L.P.;Analyst^ Yes, that was helpful. And then just the last one, I noticed that your relationship managers, the number of relationship managers slowed a little bit quarter-over-quarter. I think you added 39 people, and it's been kind of being trimmed down. How do we think about that? Are you being more selective? Or are you -- is there attrition? Or how should we think about that number? And how does that impact OpEx going forward?

Kenny Lam;President^ I think 2016, as I mentioned, is a year of consolidation. We've grown literally nonstop for 4 years at 20%, 30% in terms of employees and relationship managers. The management is quite conscious that to have that kind of intake, we need to make sure that these new intake subscribe to our values, aligned of interests and all that, so it takes time. That's why we were a lot more cautious in terms of growing our RM base. At the same time, similarly, we're also a lot more cautious in growing our employee base. So you should continue to see that this year is much less about growth in the actual number of relationship managers and much more focused on the quality of the clients, are much more focused on the productivity of these clients.

Ching Tao;Chief Financial Officer^ In terms of operating expense, I would just note that we now break out relationship manager compensation as a line item under compensation and benefits. For the first quarter, it was running at 22% of net revenues, which is similar to the same period last year, about 22% of net revenues. We feel that is a reasonable amount, and we are continuing to look at the expense base.

(Operator Instructions) And this does conclude our question-and-answer session. I would like to turn the conference back over to Kenny Lam for any closing remarks.

Kenny Lam;President^ Well, why don't we just wait for another 2 or 3 minutes to see if there are other questions, yes?

Absolutely, not a problem. (Operator Instructions) And it looks like we do have a follow-up question from Sam Dubinsky of Carlson Capital.

Sam Dubinsky;Carlson Capital, L.P.;Analyst^ One last question as long as I have you. On the working capital, you've had some benefit this quarter from better working capital management. Does -- how does the cash flows trend in like Q2?

Ching Tao;Chief Financial Officer^ I think we had an increase in cash flow in parts due to some other payables and current liabilities. Q2 will be more normalized to historic trend.

Sam Dubinsky;Carlson Capital, L.P.;Analyst^ Okay. What exactly where those other liabilities if you can disclose?

Ching Tao;Chief Financial Officer^ They're just other current liabilities related to our Caifupai Internet wealth management business.

Our next question comes from [Damien Adella of EFNS].

In the internet finance business continues to act as a drag on earnings. I was wondering if you could comment just on the outlook for that business and if you see it turning around in the near future.

Kenny Lam;President^ (foreign language) Let me take the question. I was just translating for Chairman Wang. We think this is actually not a 1- or 2-year investment. It's going to be a 3- to 5-year investment, first of all. The Internet finance market in China has actually undergone quite substantial changes in the last 12 months, both in terms of regulation and in terms of competition. And so if you look at the numbers, first quarter this year, we have been more cautious in terms of investment, so our quarter-over-quarter expenses actually have declined slightly. Two is we're now a lot clearer on our business model. We focus a lot more on white collars standardized products. And so what we see is what is, one, is a more stable business model that allows for a more steady growth -- a more sustainable growth for the business. And two is a lot more control in terms of expenses that we put into the business. In terms of specifics, I think we still expect this to be a investment we want to make in the near future. We can't give a specific number but expect this to be at least a 3- to 5-year investment. We think that the only way to disrupt yourself is to create something that would allow us to look into the future and disrupt the traditional model. So that's what we're trying to do.

(Operator Instructions) And currently, at this time, Mr. Lam, I'm showing no further questions.

Kenny Lam;President^ Yes. Let's give it another 2 to 3 minutes and see if there are others, please.

Not a problem. (Operator Instructions)

Kenny Lam;President^ Okay. If there are no further questions, then we will wrap the call. If after this call, there are questions, of course, please reach out to our IR, and we could -- we will answer your questions as soon as we can.

And I am showing no further questions, so I will turn the call back over to Kenny Lam for any closing remarks.

Kenny Lam;President^ Okay, no more. Thank you all for taking the time to listen to our remarks, and again, any questions, please direct to IR. Thanks very much.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.