Noah Holdings Ltd (NOAH) 2016 Q3 法說會逐字稿

Good day, ladies and gentlemen. Welcome to Noah Holdings Limited Third 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 third quarter 2016 financial results, which is available on the company's IR website, ir.noahwm.com.

This call is also being webcast live and will be available for replay purposes on the company's website.

I would like to call your attention to the safe harbor statements in connection with today's call.

The company will make forward-looking statements, including those with respect to expected future operating results and expansion of its business. Please refer to the risk factors inherent in the company's business and that have been filed with the SEC. Actual results 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 statements 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 measure will be used in our financial discussion. A reconciliation of the 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. Go ahead, please.

Kwok Fung Lam;President^ Thank you, operator. Thank you to our investors and analysts for participating in our earnings conference call today. Joining me today are Ms. Jingbo Wang, Noah's Chairlady and CEO; and Mr. Shang Chuang, Noah's CFO.

For today's agenda, I will start by providing an overview of our financial highlights for the first 3 quarters of 2016 and walk you through the performance of our core wealth management business. I will then talk about the achievements and long-term strategic plans of Gopher Asset Management. Lastly, I will touch on the development of Noah's mid and back office. After that, Chairlady Wang will provide an update on our product strategy and share her views on the macro and regulatory environment. And then Shang will provide further insights into our financial performance in the third quarter of 2016. Lastly, we would happy to take any questions at the end of our prepared remarks.

Currently, we see Chinese macro economies still undergoing an L-shaped adjustment and the global capital markets are still further -- are still full of uncertainties. Despite a challenging macro environment, we continue to focus on clients' needs and provide them with the best possible product and services through superior fund selection with an emphasis on diversification and balance with return objectives. Thanks to our efforts in building a global product platform and strengthening our product and risk capabilities, we did not only generate a healthy returns for our clients but also ensures solid year-to-date operational and financial performance for Noah, which enabled us to further consolidate our leading position in China's wealth and asset management industry.

In the first 3 quarters of 2016, we distributed a total of CNY 74.3 billion of wealth management products, up 2.9% year-over-year. Total assets under management as of September 30, 2016, reached CNY 114.8 billion, up 49.1% a year ago. Net revenues in the first 3 quarters of 2016 were CNY 1.87 billion, a 20.8% increase from the corresponding period in 2015.

And non-GAAP net income was CNY 592 million, up 19% year-over-year. Generally speaking, we're pleased to have delivered steady results in the 3 -- in the first 3 quarters of 2016.

Noah's wealth management business provides global wealth investments and asset allocation services to high net worth individuals in China. By the end of September 2016, Noah has 130,491 registered clients, up 13.6% from the second quarter and 47.2% from the same period last year. Through our continuous investor education, coupled with comprehensive wealth management services, our clients continue to stay close to us. The average transaction value per client reached CNY 5.51 million in the third quarter of 2016. And the repeat purchase rate was maintained at about 30%, both of which are quite high compared to the industry averages. Recently, Noah has been recognized by a number of high-profile international organizations for excellence in China's wealth management industry, including best wealth management institution awarded by Asia-Pacific Fortune Forum, outstanding private bank by organic growth strategy by Private Bank International and Fortune magazine's top 100 fastest-growing U.S.-listed companies, just to name a few. These awards and recognitions are testament to our diligence and perseverance in this industry. Specifically, we have been continuously expanding our branch network, with 173 offices covering 71 cities by the end of the third quarter. While we maintained the number of relationship managers around 1,100 at the end of the third quarter, we optimized the RM team by replacing the RMs with low levels of productivity with high-potential talent. We are improving retention and loyalty by continuing to provide professional training to our relationship managers to improve the servicing skills and productivity and also expanding marketing utilities to help them broaden their client base.

As a key indicator for RM stability, the turnover rate for top-performing relationship managers was 0 for a second consecutive quarter. With regard to our overseas business, by the end of the third quarter, Noah's overseas AUM reached CNY 15.9 billion, a 42.4% increase from a year ago. The recently opened Noah U.S. office marked the beginning of version 2.0 in terms of our internationalization strategy. Noah U.S. is positioned as a product research and sourcing center at the current stage, aimed at exploring more high-quality overseas products and covering more leading PE/VC funds in the U.S. We hope the synergies between Noah U.S. and Noah Hong Kong will help our high net worth clients manage the overseas assets in a more efficient way.

Now I'd like to provide an update on Gopher Asset Management. Total AUM at Gopher reached CNY 114.8 billion, up 49.1% year-on-year. In the third quarter, private equity funds of funds AUM increased by 69.8% on a year-over-year basis and accounted for 47.5% of total quarter-end AUM, up 5.8 percentage points from a year ago. Gopher is now one of the most prominent alternative investment managers in China. Its brand is highly recognized in the market. Gopher was ranked #1 in the best fund of funds, the most-active fund of funds and best market-oriented fund of funds categories in the recently released 2016 China private equity funds rankings. In addition, to private equity funds of funds, Gopher also established mature product lines for real estate funds of funds, secondary market fund of funds and a term credit products which accounted for 21.8%, 9.0% and 21.7%, respectively, of total AUM at the end of the third quarter. For this first 3 quarters of 2016, total recurring service fee for Gopher amounted to CNY 355 million, up 35% from a year ago as the asset management business became an important contributor to the group's total revenue.

Let me talk more about Gopher's long-term strategy. Established as a multi-boutique investment firm, Gopher has been consistently enhancing its investment capabilities, expanding its asset management scale, innovating its product line and diversifying its asset classes. Gopher has systematically reviewed about 2,000 companies and projects to develop insights into specific industries and has spawned proprietary top-down views on each of them. This invaluable experience will lay a solid foundation for Gopher to upgrade its models from a single fund of funds strategy to co-investments and direct investments. The latest Gopher flagship fund of funds already plans to co-invest 50% of its AUM directly into individual asset alongside with flexible [GPs].

Gopher has also been expanding its investment horizon globally, with its upcoming global asset fund of funds, covering several first-class global PE funds and providing cross-currency investment strategies. Gopher's internationalization strategy is further boosted business with the arrival of several industry veterans with global perspectives and the opening of the U.S. office. Moreover, the client base of Gopher is expanding from high net worth individuals to institutional investors, including pension funds, insurance companies and city commercial banks. Looking ahead, Gopher is strategically aimed at becoming one of the most prominent multi-strategy and multi-asset management front in China. To achieve its goal, Gopher will adhere to stringent risk management standards, maintain longstanding relationships with top GPs all over the world to enable its investors to capitalize on the emerging economies and industry globally.

Speaking of Gopher's strategic development plans, I want to share with you more information about strategic investments by Sequoia, which is announced a few weeks ago. Sequoia Capital China invested CNY 348 million to take an 8% stake in Gopher and Noah continues to be Gopher's controlling shareholder with 92% of its total shares.

Beyond this, Gopher has no further plans to invite new strategic shareholders. Sequoia's investment into Gopher will add enormous value to our long-term strategic positioning. As you all know, Sequoia China has been an important shareholder and partner of Noah, helping us become one of the leading wealth management companies. Through the new partnership between Sequoia China and Gopher, we further develop Gopher's capabilities in PE/VC co-investments and direct investments beyond -- both in China and globally. Gopher's family office business will also benefit from Sequoia China experience with its best-in-class family office services. Based on Sequoia's heritage funds portfolio construction plus active management concept, Gopher will be rolling out a similar fund to help Chinese ultra-high net worth families globally. There is no doubt that the partnership between Sequoia and Gopher will combine Sequoia's expertise in global investing with a unique opportunities in Chinese market. We are excited to work with Sequoia to create long-term value for Gopher's future growth.

Lastly, I want to briefly talk about our mid- and back-office initiatives. One of priorities in the third quarter was to launch off a number of initiatives to drive cross-group digitalization focusing on client acquisition, marketing analytics and the creation of robo-advisory databases. The completion and implementation of these projects will help the group enhance its front-office capability as well as increase mid- and back-office efficiency in the future, providing cutting-edge technical support for Noah's development in the next decade.

Now I will turn the call over to Chairlady Wang. She will speak in Chinese, and the remarks will be translated in English.

(foreign language)

Shang-Yan Chuang;Chief Financial Officer^ Thank you, Kenny. As 2016 draw to a close, transition and divergence has become a major global economic and political theme. The U.K. has voted for Brexit, the Fed has started hiking interest rates and the U.S. presidential election results were largely surprising. Japan and Europe have both enter an era of negative interest rate at the time when the renminbi was officially included in the SDR basket. All these historical events could be signpost that a new international paradigm is gradually taking hold. A closer look at China's macroeconomic trends also seemed to confirm our judgment on its L-shaped recovery mode. The current macro environment and market are still full of challenges and uncertainties. There is increasing contrast between a barren market for quality assets in China versus rising demand for overseas investments. In the midst of recent rapid depreciation of the renminbi against the U.S. dollar, how to achieve wealth preservation and steady capital appreciation, how to avoid the market and currency risk, how to safely transfer wealth to the next generation all have become the issues that China's high net worth families are most concerned about.

(foreign language)

Shang-Yan Chuang;Chief Financial Officer^ We remain steadfast on the data under China's new normal of slower growth, Noah should place long-term interest before short-term gains, enhancing investor communication and client education and improving relationship managers' professional servicing skills are the key areas in which we should focus ourselves in the remainder of this year and beyond. Compliance and risk management are the lifelines of wealth management companies. But there are still wealth management products in the market backed by capital pools with maturity mismatches and without independent custodians. In order to spur short-term business volume, some wealth management companies offer so-called implicit guarantees, which they can't honor when products do not perform as well as they had expected. Such noncompliance behaviors pose competition pressure for us in a short term. However, we firmly believe that anything that can't last forever will not, and it is just a matter of time. In order to win out in the long run, Noah must maintain a well-defined strategy, distinguished between opportunities and completions and ensure the company sustainable development.

(foreign language)

Shang-Yan Chuang;Chief Financial Officer^ This year, we spend a lot of time and resources on investor education in RM training. We launched Noah University, organized afternoon key investment seminars and held various investment conferences and many other types of communication events, which cover more than 160,000 participants. In a tough market, the more challenging the market is, the more we challenge ourself. Our emphasis has always been in staff training. In terms of team's ability, we maintained a 0 turnover rate for elite relationship managers last quarter. So far this year, we continue to build up our risk control and due diligence system. And through covering top-tier product providers and selecting the best partners, we continue to deliver high-quality products and services to China's high net worth clients. It is these proactive initiatives which I just mentioned that enables us to achieve stable growth in the first 3 quarters of this year.

(foreign language)

Shang-Yan Chuang;Chief Financial Officer^ Next, I would like to talk about our products. Total transaction value for PE/VC products distributed in the third quarter reached CNY 5.4 billion, accounting for 23% of total distribution -- total distribution. We only team up with the top-performing fund managers in this industry by adopting a quality-over-quantity strategy in fund manager selection. The reason is that China's private equity venture capital industry has morphed from the warring states period into a new area where investment returns start to diverse widely. The 80-20 rule has manifested itself in this industry, meaning the top 20% that [GPs] can harvest 80% of the total returns. In order to earn alpha, selecting the right industry to invest in and the best fund manager to invest for you is much more important than ever before. On top of that, we're also vigorously promoting Gopher's fund of fund products. Research has found that the fund of fund strategy can effectively reduce the volatility and improve the risk-adjusted returns compared with the all-in strategy in terms of venture capital investing, where information asymmetry is rampant. Fund of funds can help accredit individuals, lower their investment thresholds of PE/VC products and reduce the concentrated investment risk. Among private equity funds of funds in China, Gopher has become the #1 brand. In addition to its already strong high net worth client base, Gopher's fund of fund institutional sales have also gained momentum this year, as more and more institutional investors such as insurance companies, listed companies and city commercial banks are warming up to private equity venture capital investing. At the end of the third quarter, Gopher's PE/VC AUM reached CNY 54.7 billion, up 70% year-over-year and now representing 40% of total AUM for Gopher.

(foreign language)

Shang-Yan Chuang;Chief Financial Officer^ Regarding the secondary market equity products, the A-share market has yet to face a secular uptrend at a time when the broad economy has shown no sign of reacceleration. However, we still hold the view that the worse the market currently is, the better the opportunity there is for us to strengthen and optimize our management portfolio and to screen out the good hedge fund managers who could outperform during the bull market phase. We also encourage our clients to position for the long term and help them identify both cyclical and structural investment opportunities to more innovative products, which we are planning to roll out in the next 2 quarters. At the end of the third quarter, secondary market equity AUM at Gopher maintained above CNY 10 billion. It is worth noting that so far this year, Gopher's major hedge funds of funds and quant funds of funds have outperformed the CSI 200 Index by more than 10%.

(foreign language)

Shang-Yan Chuang;Chief Financial Officer^ The increase in distribution of fixed income products was in part driven by some clients' robust demand for safety and yield. Our strategy in fixed income products is to diversify the product mix away from real estate and towards more new product categories by establishing relationships with new products partners with corresponding risk control mechanism, procedures and standards. We have also made significant headway into new areas such as consumer financing, auto financing, supply chain financing and mezzanine credit products. The companies that we have been working with have high creditworthiness, including Haier, China Mobile and Home Credit, just to name a few. In the third quarter, non-real estate fixed products such as these accounted for 54% of the fixed income total, reaching CNY 9.3 billion, which helped us improve underlying asset quality and secure the supply of fixed income products in the barren product landscape.

(foreign language)

Shang-Yan Chuang;Chief Financial Officer^ In terms of real estate, our core strategy is repositioning. We are shifting our focus on providing financing for residential development to acquiring operating assets, from project investment to equity investments in companies in the real estate value chain, from development projects to improvement of existing properties. We will continue to be actively involved in real estate, which remains one of the largest asset classes in the market. We believe that the redefined model of real estate funds will become mainstream in the future. And our real estate team, after 2 years of adjustment, is getting fully ready. What's worth mentioning is that Gopher center in Shanghai has been completed and put into operation recently, becoming the first Grade A office building that is solely funded and operated by Gopher. Needless to say that Noah and Gopher have a team comprised of highly experienced real estate professionals with proven operational track record. We are working hard to explore more new real estate opportunities for our clients.

(foreign language)

Shang-Yan Chuang;Chief Financial Officer^ For our overseas business, client demand remains quite strong, and our overseas AUM continues to grow. While consolidating the existing Noah platform in Hong Kong, we are strengthening the development of our global open product architecture by multi-dimensionally balancing our portfolios between traditional and alternative products, develop market in emerging market, active and passive investments. We also started exploring new opportunities in the event-driven and global macro strategies, global bio funds, European distressed assets, overseas properties and new energy investments. The new Noah in U.S. office and Jersey Island Trust Company are both up and running, together with the existing overseas platforms to provide our clients with comprehensive financial solutions ranging from offshore wealth management to insurance planning, trust and estate advisory and educational planning for their children.

(foreign language)

Shang-Yan Chuang;Chief Financial Officer^ We have been improving our servicing standards with regard to our family office in both discretionary portfolio management business. As Kenny just mentioned, we will leverage Sequoia's family business experience to further upgrade this business. In late November, we will bring another group of ultra high net worth family office clients to visit Wharton business school, where they will have the opportunity to discuss with some well-known family wealth managers to help them better understand the active asset allocation seclusions and the tools available for generational wealth transfers.

(foreign language)

Shang-Yan Chuang;Chief Financial Officer^ On the Internet wealth management business, Caifupai has been re-accelerating following the transformation, after which Caifupai focuses on distribution of standardized products, including mutual funds, mutual fund of funds, insurance products and insurance funds. Caifupai is positioned as mass affluent online private bank powered by advanced technologies, such as robo-advisory capabilities. By the end of the third quarter, registered clients totaled more than 346,000, a 120% increase from a year ago. Total transaction value in the third quarter reach CNY 4.8 billion, up 114.5% year-over-year. Average transaction value per active clients was CNY 214,000, up 110% from year ago levels. Growth prospects are enormous for Caifupai. Going forward, we will not only focus on the scale of this business but also its profitability.

(foreign language)

Shang-Yan Chuang;Chief Financial Officer^ Being an integral part of Noah's ecosystem of financial services, Noah subsidiaries are developed around the needs of high net worth clients, some of which have made significant progress after the incubation period. For example, our factoring business, micro lending company and Enoch Education have been performing well this year, and we expect them to grow even faster in 2017. Although Noah has become China's largest independent wealth management company, we still view ourself as a business in early strange of entrepreneurship. Continuous learning and evolution is what we are pursuing infinitely.

(foreign language)

Shang-Yan Chuang;Chief Financial Officer^ Lastly, I want to talk about regulation. Beginning in the second half of 2014, continue easing of monetary policy unlocked a lot of liquidity, which rattled China's stock market, bond market, housing market and commodity futures market one after another. Chinese regulators are now taking steps to tighten financial regulations in an attempt to channel the liquidity into the real economy. Particularly, to prevent any further abnormal currency volatility, the PBOC is tightening up capital controls. Chinese authorities are also planning stricter regulations on wealth management and asset management companies in a bid to ensure the financial markets play an effective role in the allocation of funds. The recent promulgation of new rules, governing private investment funds, commercial bank wealth management products and capital guarantee funds, will have a profound impact on the wealth management and asset management industry in China. In the context of broad-based tightening of regulations in 2016, Noah's overall business has been running very well and is on track to achieve the goals we set at the beginning of the year. In the long run, Noah will benefit from a more rigorous regulatory environment, where companies can be better funded and then boost economic activities, which in turn will create more investment opportunities for Noah's clients. Moreover, Noah's core competencies and product selection, asset management, risk management and back-office operations can help Noah stand out in the future by gaining more client trust and market share.

(foreign language)

Shang-Yan Chuang;Chief Financial Officer^ As ever, value investing, long-term investing and asset allocation remain our core principles. We have always maintained our focus on building our core competitive advantages in wealth and asset management, global asset allocation and comprehensive financial solutions. We have continuously improved our capabilities and research product selection, risk control and post-investment management capabilities. We have also continuously strived to understand our clients' needs. By starting from the long-term goals and adopting effective client communications, we have worked with our clients to protect and build their assets. However, by maintaining our unwavering commitment to Noah's core values and our focus on long-term goals, we may give up some short-term profit and even lose some clients in the short term. But this approach has enabled us to build a high-quality base of long-term customers that recognize Noah's value. We would like to create and maintain strong high-quality relationship with our clients as a way of contributing to the healthy development of China's wealth management markets.

Thank you. Now I will turn the call over to our CFO, Shang, to review our financial results.

Thank you, Chairlady Wang, and hello, everyone. Today, I will give an overview of our third quarter 2016 results and then open the call up for questions. As Kenny and chairlady Wang have noted, we are generally pleased with our results for the third quarter of 2016. Net revenues increased 16.9% year-over-year to CNY 608.5 million. Non-GAAP net income grew 8.7% year-over-year to CNY 179.7 million.

For our wealth management business, we distributed approximately CNY 23.9 billion of products in the third quarter, down 8.3% from the same period a year ago. However, looking more closely, net revenues from onetime commission increased 48.4% to CNY 281.2 million on a year-on-year basis. This was mainly due to changes in the product mix and higher expected onetime commission rate.

Net revenues from recurring service fees, which mainly comes from private equity and real estate products, were CNY 294.9 million in the third quarter of 2016, representing a 7.9% increase year-over-year. Recurring service fees as a percentage of total net revenues decreased year-over-year to 48.2% from 49.6% a year ago as we exited several real estate funds, which usually have higher management fees than fund of fund products, and started repositioning our real estate investment towards commercial real estate projects. We expect recurring revenues to continue to provide stable, sustainable income going forward.

We received CNY 4.7 million in net revenues from performance-based income during the third quarter compared to CNY 63.5 million in the third quarter of 2015. The decline was primarily due to large decrease of performance-based income from secondary market equity products. As we exited several real estate funds this year, we achieved total performance-based income of CNY 45.4 million for the first 9 months of this year. The solid investment performance of our products not only helps our clients with capital appreciation but also translate into income for our business.

Revenues for our internet finance business in the third quarter were CNY 11.4 million, a 28.4% decrease from the corresponding period in 2015. The year-over-year decline was primarily due to the transformation of our internet wealth management business, Caifupai, to focus on distribution of standardized products. Although that expected fee rate for standardized wealth management products are lower, we believe the market potential is huge and through increase cross-selling, their synergy which our traditional wealth management business. With the transaction value back on track, we will seek more balance between scale and profitability for our internet wealth management business going forward.

For the third quarter, operating income decreased to CNY 162.5 million year-over-year and operating margin was 26.7% compared to 33.9% for the corresponding period in 2015. The year-over-year decrease was primarily due to the decrease in government subsidy we received in the third quarter compared to the same period a year ago. Excluding government subsidy, which can vary quarter-to-quarter, operating income increased by 33.8% year-over-year.

Non-GAAP net margin for the third quarter was 28.3% compared to 32% a year ago, which is within a relatively stable range in recent years. On the balance sheet side, as of September 30, 2016, the company has approximately CNY 1.75 billion in cash and cash equivalents, an increase of CNY 357.9 million from the second quarter of this year. The sequential rebound from the second quarter was mainly due to inflow from operating activities and expiration of held-to-maturity securities. Finally, I would like to highlight our performance year-to-date reflects a strong fundamental and steady profitability in our core businesses.

With that, Chairlady Wang, Kenny, and our Gopher Asset Management CEO, Mr. Yin Zhe and I will be happy to take any questions. Operator?

(Operator Instructions)

Kwok Fung Lam;President^ I just want to also let you know that I think Shang mentioned this. Gopher Asset Management CEO and Noah's Cofounder, Mr. Yin Zhe, is also on the call. We understand that there are questions about Sequoia's investment into Gopher. So at this time, we also have Mr. Yin Zhe in the call to answer questions.

(Operator Instructions) The first question today comes from Bolun Tang of CICC.

I've got 2 questions. The first question is regarding with the recent UnionPay ban for the policies purchased in Hong Kong. Just want to understand some color on growth what's the impact like for Noah because I notice that in this quarter, actually, 2%, roughly 2% of the transaction are from the insurance policies and other products. Just want to understand what's your outlook. My second question in terms of the AUM business, so despite a strong growth in the AUM for the first 3 quarters, I noticed that the recurring service fee actually has increased in relatively low speed of 7% y-o-y. It seems like the average recurring service fee charge average AUM has decreased. Is it related to previously you said you were introduced to institutional investors? So I just want to understand the rationale behind. And when you try to introduce the institutional investments, will the ultimate trend of the recurring service fee charge rate to fall?

Kwok Fung Lam;President^ Let me just take the first question about the UnionPay and then the second question about recurring service fee, Shang will answer. I think in terms of this UnionPay, it actually has very limited impact on our overall revenue. It actually represents only about less than 10% of our total revenue that's actually in overseas and insurance. Even within that I think the UnionPay policy is just a subset within the overseas insurance. We understand that there are currently actually 3 things that's happening. One is there are other providers, Visa and MasterCard, that can actually still process in Hong Kong. Secondly is many of our clients actually do have assets on the side, and so a lot of them actually do not purchase through the UnionPay route. And so just to reiterate, overall the impact of our revenue is actually much less than 10% of the revenue in terms of overseas insurance. Even within that lower than 10% in insurance share, there are 3 or 4 routes of buying insurance in Hong Kong. Many of our clients actually have assets outside of China, and therefore they don't use the UnionPay route. And so in summary, it has very limited impact so far on our revenue and bottom line.

Shang-Yan Chuang;Chief Financial Officer^ Okay. And on your second question regarding reoccurring service fee, as you may note, Gopher Asset Management is primarily a fund of funds asset management company. However, in the real estate asset category, it has also a very strong direct investment team. For this year, we have actively managed the acceleration of maturity of many of our direct real estate funds. Now many of these real estate funds have higher management fees than fund of fund products. And so on a blended weighted average rate, our management fee has slowly come down. So that's why you can see that our overall reinsurance fee growth has slowed a bit. But as Madam Wang has mentioned, we will be repositioning our real estate investment towards more commercial rather than residential. So we feel we are quite confident on a going forward basis as our asset management business grows, our overall reoccurring service fees will grow in line with that.

(foreign language)

(foreign language)

Shang-Yan Chuang;Chief Financial Officer^ Yes. And you mentioned about the impact of institutional investors for our asset management business. You rightly pointed out this year many high-quality institutional investors have been very interested in investing in Gopher Asset Management products. And some of them have actually made commitments already. But a lot of it will have not been recognized in terms of revenues. It will be towards the later of this year as they only recently made commitments.

Kwok Fung Lam;President^ Just one more point about the insurance. Actually, we've run some numbers for our performance this year. We see a lot of clients, actually, a majority of our clients buying the low USD 50,000-type protection investment. So it's actually contrary to public belief that we're not actually selling a lot of phasing investment-link-type products. The drive of the insurance growth is still very much protection-oriented, at about USD 50,000 or below in the majority of our client base. So this UnionPay policy is actually affecting us in a very limited way.

(Operator Instructions) The next question comes from [Huston Wang] of Rosefinch.

(foreign language)

(foreign language)

(foreign language)

Shang-Yan Chuang;Chief Financial Officer^ [Sure. For the benefit of the audience, I will translate the 2 questions that was raised.] The first question was earlier this month we noted a news article by 21st Century, which commented or speculated that private funds in China won't be allowed to invest in credit assets or underlying assets. What's your view on this and will there be any impact on business? The second question was earlier this year, Kenny mentioned about ruling out new incentive scheme to improve the retention of key employees of the firm. Can you brief us on any update regarding this initiative?

(foreign language)

Shang-Yan Chuang;Chief Financial Officer^ A couple of points regarding your question regarding the news article. We consulted our relevant regulatory bodies and our view now is that the article is more of a speculation rather than a fact but, however, this also points out to an ongoing market trend or regulation trend. There will be more regulation to prevent mid-selling to prevent unhealthy investment into the credit market. What do I mean by unhealthy? Implicit guarantees that we have seen in previous years, the capital pools, the mismatches. I think there will be more regulation to make sure that this type of investment cannot continue on an ongoing forward basis. There is a number, which I didn't share on my call script but I would like to point out. Actually, this year we have noted that those clients who have invested more than CNY 10 million actually grew at a quite healthy rate of more than 16%. I think in terms of fixed income or credit products, there is going to be more and more of a divergence, so a lot of the larger clients, high-quality clients will rely on good relationship managers and a smaller client, they will probably start to buy more fixed income product online rather than relying on relationship managers. So overall, I think in terms of the development of the market and the regulation, we think that streamlining, minimizing systematic risk is actually all good for our business as we are an established player already.

(foreign language) So let me just answer the question raised on the idea of a partnership at the C, D management level at Noah. I think I've raised this concept in the beginning of the year. We've actually implemented this in concept. We've selected the top 30 C, D management in Noah to be distributed with high concentration of Noah's stock options. And so this year, we've actually done an exercise whereby we are distributing to fewer management but much more concentrated and higher allocation. So that's one. Secondly is we've also selected the next wave of management, the next tier. About 30 staff, which have also been selected to be provided with stock and stock options. And so these are basically the next generation leaders. In terms of the management team's stability, basically since 2015, for the last 18 to 24 months, we've maintained a turnover rate at the low 7% to 8%. So that's basically helping us maintain a very stable management team. We want to have some turnover but not high. So anything below 7% to 8% is something that we're shooting for.

The next question comes from Frank Lin of Lins Value Capital.

Frank Lin;Lins Value Capital;Analyst^ (foreign language)

Shang-Yan Chuang;Chief Financial Officer^ [For the benefit of the audience, I will translate Mr. Lin's question into English.] Hello, senior management. There is a couple of things I would like your comments on. Number one, I noticed that the number of senior managers this year has stayed relatively flat. Can you please provide us the rationale of these numbers? Second, I also do hedge fund investing in China, and I'm also a big believer of value investing. And I think that echoes what Madam Wang says. I think that's the way to go in the future. I know for Gopher, more than 50% of the AUM is in private equity and hedge fund. In your opinion, what are good private equity hedge fund products? I note that for this equity product, the average duration is 0.6. Can you comment on that as well?

Well, Kenny? (foreign language)

Kwok Fung Lam;President^ (foreign language) [Well, so let me just translate the whole thing in English.] There's a question about the RM growth. We've actually seen a limited growth this year. We're maintaining about 1,100 in terms of RM. But if you've seen our growth recently, end of '14 we have about 750 RM. So we've grown about 50% in the last 18 months. We'll monitor during the last 3 quarters just to basically improve the quality of our RMs, including we have a special program to train the top 100 RM to be leading private bankers. We've also focused on overall productivity of our RM and the capabilities of our RMs. So you will see that they will be generating more revenue and also generating more AUM for each RM and that's the focus this year which is the quality of the RM.

I'll let Ms. Wang talk a bit about the product question.

Shang-Yan Chuang;Chief Financial Officer^ I'll answer. In terms of our private equity and hedge funds products in China, I think we are very stringent in terms of our manager selection process. We review multiple factors, including the investment teams, their track record, their investment philosophy, et cetera. I think what we have ended up with, over the last 5 to 10 years, is we built strategic long-term relationship with the high-quality asset managers that's in the market. Many of them continue to outperform. They're often in the top quartile in terms of performance. For our various asset categories, I think the product durations are quite in line with market standards. For private equity funds, the typical hold cycle is anywhere between 5 to 10 years. For hedge funds in China, usually, there is a 1-year lock and quarterly or biannual redemption window thereafter. You mentioned a particular number, 0.6. I think that is possibly referring to our 6k. That is the amount of secondary market equity funds that expired in the third quarter of this year. So that 600 million that have expired versus 200 million of new flow. Despite the Asia weakness this year, our secondary market equity fund of funds AUM for Gopher has remained quite stable and steady at more than CNY 10 billion for the most of this year. So I guess that points out and illustrates the fact that we have very good manager selection. The performance exceeds the index. And generally, I think our clients appreciate that. And so that translated into the fact that we have maintained our AUM over the last 9 months.

(foreign language)

Shang-Yan Chuang;Chief Financial Officer^ [Sure. Madam Wang would like to add a bit more commentary on both questions actually.] The first question regarding relationship managers, she would like to highlight for the wealth management industry in China, over the last 5, 10 years of development, I think we're seeing the industry as a whole advancing, it's not just a number growth or plus, hiring as many relationship managers as we can. I think we're now focusing more on quality over quantity. So we are very focused on improving the productivity of our relationship manager. So if we're able to improve the productivity of a typical relationship manager from CNY 300 million of new inflow per year to USD 300 million of new inflow per year, that alone will help us increase our overall business volume 6, 7 times without adding new relationship managers, so, and especially in this year, in 2016, where the macro environment is quite uncertain, we think focusing on quality is a more prudent way of expanding our business rather than just hiring new RMs. So the overall tone is more of optimization, so you will see in terms of relationship managers, in terms of branch number, we have it quite steady this year. That is showing we are optimizing the overall team layout. However, I would like to point out that we are adding new city coverage, so the number of cities that we have covered actually increased this year. So I think there are some markets in China we have yet to cover well. So I think we will plan to increase the number of city covered going forward. Now you mentioned about our product strategy. I would like to reiterate that I think Noah in the market we have a very strong reputation for selecting and working with the top quartile manager. We believe that there is a very strong 20-80 rule in terms of alternative, i.e., the top 20 managers will earn more than 80% of the returns in the market. So we are focused on deepening long-term strategic relationships with the best-in-class managers that's in the market.

The next question comes from [Stanley Groh] of Wharton Investment Fund.

(foreign language)

Shang-Yan Chuang;Chief Financial Officer^ [Sure. Before the senior management team will answer the question, let me quickly translate for the benefit of the audience. [Stanley] from Wharton Investment Fund have 2 questions. The first question is] I noted that for the third quarter of this year, in terms of the amount of private equity funds that were distributed, it's roughly about CNY 5.4 billion, which is down about 48% year-over-year. Given the current landscape of the more barren market for quality assets in China, do you think there is going to be a bottleneck to secure high-quality private equity managers going forward? The second question is you mentioned that we are now -- you are seeing more interest from institutional investors in terms of our Gopher Asset Management business. Can you give us a bit more color and commentary on how that is growing and what is the percentage of AUM that's contributed by institutional investors currently and going forward?

(foreign language)

Shang-Yan Chuang;Chief Financial Officer^ Sure. On your first question regarding securing quality managers for our private equity business, I think there's a lot of factors in play. Obviously, you've mentioned that there is a barren market for quality assets in China. But I think we have so far been able to secure long-term relationships with the top quartile managers. For private equity space, the managers do not -- the quality managers don't always raise funds every single year. They usually raise a fund and it takes about 2 to 3 years to invest before they raise a new fund. So there are some cyclicality in terms of fundraising. So for example, last year we raised the fourth private equity renminbi fund for Sequoia. So obviously, they're not in the market this year. So for the third quarter, I think we picked a couple of quality managers. And I think our clients are still very interested in this type of long-term anti-cyclical products. I think on a quarter-to-quarter basis, depending on who we're fund-raising for, there may be some volatility in terms of the actual amount that we have raised each quarter.

(foreign language)

Shang-Yan Chuang;Chief Financial Officer^ [So Mr. Yin, who is currently the CEO of our Asset Management business, Gopher, would like to answer the second question.]

So if you remember, Gopher Asset Management was set up about 6 years ago and after 6 years of operation, I think, we're at a very good potential inflection point in terms of institutional investors. Number one, we have developed capability in multiple strategies including private equity, real estate secondary market, equity products and credit. We have built a very strong investment team around that and have demonstrated very steady investment ability and performance. In terms of the -- second, in terms of the regulators and institutional investors, I think many of them are now realizing and appreciating the values in hand with the fund of fund structure. As the asset management industry in China grows rapidly, there are more and more managers that emerge every single day. And I think selecting the right manager is becoming much harder now versus a couple of years ago. So through our fund of fund approach, many of these institutional investors can reduce their risks when they invest in alternative vis-a-vis a fund of fund model. And so this year, I have been interacting with a lot of insurance companies, banks, government-led funds. They're all very interested in terms of working with Gopher to increase the alternative asset allocation. So for the fourth quarter and going forward, I think we will be able to report a lot of good progress in terms of our relationship and our cooperation with institutional investors.

(Operator Instructions) The next question comes from Shao Ziqin of Citic.

(foreign language)

Shang-Yan Chuang;Chief Financial Officer^ [Let me translate the question before Mr. Yin from Gopher Asset Management answer the question. So the gentleman from CICC (sic) [Citic] only has one question. The question is,] we note that for Gopher, the AUM has increased at a quite rapid pace, 49% year-over-year for the third quarter. However, the management fee revenue only increased 16%. Can you give us some commentary on the differences between these 2 percentages?

(foreign language)

Shang-Yan Chuang;Chief Financial Officer^ As mentioned by Madam Wang, Gopher Asset Management is a multi-strategy, multi product line asset management firm. So we have not only private equity, real estate, secondary market equity products and other strategies as well. I think if you look at the mix of our AUM this quarter versus the last 2 years, you will have noted that the AUM, though it has increased, the mix has changed. Currently, private equity is the largest asset category, but 1 year or 2 years ago, real estate was actually a very significant volume of our overall AUM. This year, based on the overall real estate market trends, I think we have actively sold and matured a lot of our real estate funds. And we have recognized the performance fee, meaning that we have made good money for our investors. And as mentioned, for many of our direct real estate funds, the management fee is much higher than a fund of fund structure. So we are repositioning our real estate business to focus more on commercial rather than residential, and we have already have many plans to launch new funds to meet the new opportunities that we see in the real estate industry.

(foreign language)

Shang-Yan Chuang;Chief Financial Officer^ [So Madam Wang would like to add to the question.] So previously, real estate, this particular asset category was the largest in terms of contribution to Gopher AUM. For direct real estate funds we were -- our typical fee rate was 2% management fee and 20% carried. This year, given the development of the residential property market in China, our view is that we would rather be a seller rather than a buyer. So we have managed the acceleration of many of our real estate funds. Going forward, I think the opportunity will be more on the first tier cities like Beijing, Shanghai, holding operating assets that are located, situated in core business districts. I think going forward in 2017, I think we see a lot of fundraising opportunity around this particular strategy. And so I think the differences in percentages is more of the changes in the AUM mix rather than any structural issues.

(Operator Instructions) This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Lam for any closing remarks.

Kwok Fung Lam;President^ Okay. If there are no more questions, we want to thank you all for dialing in. If you have further questions after this call, please do reach out to our Investor Relations. They will answer your questions. Thank you so much.

Shang-Yan Chuang;Chief Financial Officer^ Thank you.

Thank you.