Noah Holdings Ltd (NOAH) 2018 Q1 法說會逐字稿

Good day, ladies and gentlemen. Welcome to Noah Holdings Limited First Quarter 2018 Financial Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

On Monday, Noah issued a press release announcing its first quarter 2018 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 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 turn the call over to Kenny Lam, Noah's Group President.

Thank you, operator. I want to welcome all our investor and analyst friends to our earnings conference call today. In addition to myself, Ms. Wang Jingbo, Chairlady and CEO of Noah; our CFO, Shang, will also be participating in our call.

For today's agenda, we'll first review Noah's first quarter 2018 performance as well as the development of our core wealth and asset management businesses. Chairlady Wang will then provide her overall view on the current regulatory environment and share updates of each product segment that we're involved in. Our CFO, Shang, will then follow up with a more detailed discussion of Noah's first quarter financial performance. We will conclude the call with a Q&A session.

Since the beginning of 2018, the volatility of capital markets, both at home and abroad, has intensified. In China, a series of deleveraging and risk prevention regulatory measures have been implemented. In particular, with the March 13 merger announcement of the China Banking Regulatory Commission and the China Insurance Regulatory Commission to form a combined banking and insurance regulatory commission. And the official launch of the new guiding principles on regulating the asset management business of financial institutions on April 27, there will be a profound long-term impact on the entire financial industry in China.

Overseas, the United States has entered a rate increase cycle and Sino-U. S. trade disputes have gradually escalated. In such a complex environment, Noah has been steadfast in its efforts to build an open product and integrated private financial service platform centered on clients' needs.

In the first quarter of 2018, our transaction value for financial products reached CNY 27.8 billion, down 15% from the same period of last year, while our asset management business reached CNY 156.9 billion, up 21% from the same period of last year.

In terms of financial performance, the group's net revenues in the first quarter were CNY 831 million, and non-GAAP net income attributable to Noah shareholders was CNY 256 million, up 16.5% and 8.1% year-over-year, respectively. We are on track to achieving the mid-range of our annual guidance.

We believe that our first quarter 2018 operating and financial results reflect the overall strategic adjustments we have made during the past 2 years. That is to say we have not focused simply on increasing the volume of our business, but also emphasized the quality of income by strengthening our investment capacity and increasing the proportion of co-investment and direct investment. With the intensifying regulatory situation, we still maintain a steady growth rate, and we are largely satisfied with our results.

In our wealth management segment, we continued to steadily expand our physical channels. By the end of the first quarter 2018, we had 263 branches and subbranches in 81 cities nationwide, increasing from 237 branches and subbranches in 79 cities by the end of 2017. The number of relationship managers increased by 11% year-over-year to 1,386. In 2018, we will focus on expanding multiple sales channels while continuing to optimize traditional distribution channels and empowering relationship managers.

During the first quarter, we launched a new blue label brand in cooperation with our high net worth clients and started the separately managed account model for single-family office clients, with the purpose of forming deeper relationships with customers and growing together with them. To optimize our investment research system and strengthen support for the front-line teams, in the first quarter of 2018, we upgraded our research team with the official branding of [Noah Research Workshop]. The workshop functions as a sales- and market-oriented sell-side research operation, systematically covering fund managers in collaboration with Noah and fully integrating with the entire sales process, from product due diligence to client servicing.

During the first quarter, the workshop has published 76 research reports on topics ranging from macro strategies, product and industry dynamics. At the same time, we have also stepped up the development of our online knowledge base and regional research workshops, which will provide our front-line relationship managers with even more direct and effective support.

In addition, for the first time in our company's history, in 2018, we officially launched our brand promotion campaign. Our commercials feature respectable Chinese entrepreneurs who are also Noah's business partners and clients, such as Focus Media Chairman, Jiang Nanchun; NIO Automobile CEO, Li Bin; (inaudible) Founder, [Mark Chung]; and STAR VC Founder, [Ren Chen]; and [Sukhoi Capital] Global Executive Partner, [Niu Chen]. Since mid-April, these commercials have been concentrated in high-end residential and official buildings in major cities across the country as well as Shanghai and Hong Kong airports. Based on the analysis of indicators such as [Q. O Quote Conversion], Baidu Search Index, the effectiveness have been well tracked. We have also invested significant resources in online channels such as Baidu (inaudible). Our aim is to strengthen our brand awareness and reputation.

Next, I will briefly talk about our asset management business. As of March 31, 2018, Gopher's AUM reached CNY 156.9 billion, an increase of 21% year-over-year. The AUM of private equity investments increased by 39% year-over-year to CNY 91.8 billion, accounting for 59% of the total AUM. Credit, real estate, secondary market equity and other product categories, respectively accounted for 27%, 8%, 4% and 2% of the total asset under management. The new products and strategies we have been actively establishing during the recent 2 years have also begun to show the unique value to investors, and at the same time, increasing our revenue quality in the form of growing management fee and performance-based income.

Recently, Noah and Gopher have issued a number of important industry-wide papers, including 2018 high-end wealth management white paper, public market white paper, China PE/VC industry white paper and China PE secondary fund market white paper. These white papers not only help readers sort through our industry landscape, but also reflect our growing influence in the wealth and asset management industries in China. In terms of overseas business, our 2 overseas offices in Canada and Australia both held the grand opening ceremonies in the first quarter of 2018 and began to influence their local Chinese communities.

Additionally, the Mayor of Vancouver and the Canadian Finance Minister, both recently visited Noah headquarters in Shanghai. Various investor education and client relationship events, including [Visit Noah University], have also been successfully carried out in Vancouver and Melbourne. Both branches have started business development with local clients transacting on our platform. As of the end of the first quarter, our overseas AUM reached CNY 21.4 billion, a year-over-year increase of 22%. We expect Noah's overseas influence will further strengthen in the future and the contribution of our overseas business to the group will further increase.

Lastly, I would like to talk a bit about the planning and progress of our technology systems. We believe that through technology empowerment, we will enhance our client service experience and our relationship managers' efficiency. Driven by this goal, we are consolidating and mining the vast amount of product and client data that we've accumulated over the past 12 years to build a unified data platform for the group. In 2018, we'll focus on the comprehensive upgrade of our internal system and our online app experience. This includes enhancement of our information management and building an automated and intelligent investment operations system as well as pioneering the exploration of innovative business support functions with AI. We want technology to be part of Noah's DNA.

With that, I'll now turn the call over to Noah's Chairlady and CEO, Wang Jingbo. She will speak in Chinese and her remarks will be followed by an English interpretation.

(foreign language) Thank you, Kenny. On April 27, 2018, the official version of the new asset management guidelines was released. We believe this new regulation effectively redefines the asset management industry in China. It clarifies that the mainstream operations of channel plus funding pool and implicit guarantee plus maturity mismatch models in the past were pseudo asset management practices. The new regulatory logic stipulates that true wealth management and asset management need to be driven by investment and research capability. Research capabilities provide value add for clients, and investment capabilities are core to wealth management business. This is also in line with international standards and entirely consistent with Noah's long-standing strategies and core competencies. Investment- and research-driven has become the only path for the development of the wealth management and asset management industry under the new asset management guidelines. We're fully confident in the long-term healthy development of our industry in this background.

(foreign language) On the other hand, under the impact of the new asset management guidelines, the fundamentals of the industry have also changed, and the product strategies and strategic directions of many industry participants also need to change. Therefore, in the short term, there had been some rather significant impact on market funding. In the first quarter of 2018, the capital market in China experienced a state of increased volatility. Credit defaults hit new highs in terms of both the frequency and amounts, especially the defaults of equity pledged by large shareholders of public companies and public debt default. These problems affected the investment psyche of high net worth customers in the short term, and we believe we need some more time to observe and evaluate the duration and magnitude of this effect.

(foreign language) We believe that the changes in the industry as a whole and the changes in investor mentality brought about by the new asset management guidelines will require a period of adaptation. There are 3 situations for companies affected by the new regulation. The first type of companies has very poor asset quality with a lot of funding pool and maturity mismatch businesses in the past and they might experience a large number of default under the new regulation. The second type of company has done a small amount of funding pool business, but from the perspective of company operations, they have not established a compliance and risk management system that fully meets the regulatory requirement of the new regulation. The third type of company is like Noah. We have no business with funding pools, maturity mismatches or implicit guarantees in the past, thus, with very little historical burden. At the same time, most of our company's previous human resource and organizational structure have been allocated in investment, research, risk management and compliance, which is in line with the direction of the new regulation. Taking a long-term view, this a very rare opportunity for Noah to step up and grow our business with higher quality. However, in the short term, we also feel some pressure brought about by the new regulation, especially the operating and cost pressure to build a stronger compliance and risk management team. At the same time, we need to identify qualified investors more effectively through our upgraded systems and processes, strengthen our customer risk assessment, anti-money laundering and CRS system construction in order to improve sales capability precision, supervise the compliance of our relationship managers and provide more investor education. These are the critical areas where we need to allocate more time and resources now. In the new market environment, we have begun to spend more time with customers for in-depth communication, often times with face-to-face meetings. We organized various types of investor education activities such as Noah University, PE seminars, public market seminars, trust seminars, among others, all aiming to provide our customers with a deeper knowledge of different asset classes and enhance their ability to understand and make sound judgment on financial product. At the same time, we're also strengthening the day-to-day management and training programs of our relationship managers with increasing trainings for their professional knowledge and product expertise.

(foreign language) Strategically, we will focus on 3 main issues in 2018. First, we will allocate more resources to continue upgrading and strengthening our risk management and compliance system. Second, in the wealth management segment, we will follow on core -- we will focus on core clients and Family Office customers and enhance our customer experience and comprehensive service capabilities. Third, on the asset management side, we will continue to improve our investment capabilities and revenue quality, balancing between fund of funds and direct co-investment strategy.

Now let me share with you the business progress of our major product lines in the first quarter.

(foreign language) In the private equity segment, we continue to focus on top GPs in the Chinese market and expand the scale and depth of cooperation with them. Our fund of funds strategy is to explore more star GPs and to expand PE secondary market funds. In the area of co-investment and direct investment, we focus on technology-driven consumption upgrades, health care and other value-added industries and fields that high net worth customers are most interested in and have g eat growth potential. We have also made significant progress in attracting investment talents and building up our in-house direct investment team. In the first quarter of 2018, China's PE/VC industry as a whole experienced a cold winter in fundraising, with a size of raised funds decreasing by about 70% year-over-year. In this context, Noah's private equity product offerings amounted to CNY 6.3 billion, while the AUM of Gopher's private equity fund continued to increase to CNY 91.8 billion, up 39% year-over-year, and maintain a level of nearly 60% of the total AUM. From 2017, performance-based income from our private equity products have begun to be reflected in our overall financial performance. Some of our earliest launched funds have gradually entered the exit phase of the project. Recently, we have been able to exit a number of invested companies through M&A or successful IPOs such as (inaudible), Mobike and WuXi AppTec. We expect that the sustainable performance returns for both our customers and company will continue to increase going forward.

(foreign language) On the secondary market investment front, the amount of the secondary market equity products we distributed during the first quarter of 2018 reached CNY 77.9 billion, accounting for more than 28% of the total transaction value and representing a nearly sixfold year-over-year growth. We believe that with the new asset management guidelines taking effect, public and private secondary market equity funds will become a mainstream asset class for the middle-class population in China. We have also completed the construction and upgrade of our compliance management and trading system infrastructure during the past few years. Gopher's secondary market equity product, on the other hand, continues to focus on the manager of manager model. In terms of product performance, 84% of Noah's selected funds achieved positive returns in 2017, with an average return of 17.9%. Gopher's megatrend MoM fund was launched in 2017. From its inception to May 11 of this year, its accumulative return exceeded 9%, while the CSI 300 Index rose 1.46% and GM Index fell 1.63% over the same period. In the face of intensified market volatility in 2018, Gopher MoM funds risk metrics, such as annualized volatility and maximum risk treatment, have maintained excellent performance. The performance of Gopher offshore select hedge fund of funds over the last 12 and 36 months has also maintained leading position in the Barclays ranking of similar fund of funds in the past year.

(foreign language) In terms of real estate funds, we have been focusing on equity investment and active management of real estate projects over the past few years. During the first quarter of 2018, Gopher real estate investment have grown CNY 2.4 billion in growth size to an overall AUM of CNY 11.9 billion. We believe that 2018 represents a relatively good opportunity for real estate equity investments in terms of cost efficiency. We will focus on 2 major investment strategies, including preferred shares and core asset acquisitions, and provide value-added services to developers through post investment management. We are also exploring opportunities in the transformation and renovation of existing properties. At the beginning of the year, Gopher acquired 2 real estate properties with a total gross floor area of approximately 66,000 square meters in the inner ring of Shanghai. These 2 properties included office buildings, hotels and rental apartments. Our commercial property management team will work with well-known hotel and apartment operators for the operation and management of the project. This is yet another core asset acquisition project by us following the success of Gopher Center. We have a very experienced real estate investment and operations team with all its exited equity real estate funds reaching an average IRR of 12% to 15% while maintaining a 0 loss performance. We believe that in the industry and regulatory environment of 2018, our real estate funds will continue to increase the scale while maintaining the high asset quality.

(foreign language) In the area of fixed income products, we continue to focus on consumer financing, auto financing and real estate mortgages and cooperate with market-leading institutions with diversified underlying assets. We have been executing this strategy for 3 years and see it achieve strong stickiness and risk management capabilities. Our in-house risk management system has taken initial shape where the database of our counter parties are directly linked, and through which, we could continuously monitor the risk performance of the underlying assets. Through big data risk control and systematic risk identification, database linkage, product structure design and asset monitoring and the analysis on the platform with underlying assets of different categories and different counterparties, we are able to enhance the pricing accuracy based on the credit risk of our fixed income products.

(foreign language) Gopher's discretionary and Family Office team continues to dig deeper into the needs of super clients and help them invest in different multi-strategy products with different risk appetite. We also launched our [Global Family Office Alliance Program] in 2018 and started to manage single-family office accounts with the size over CNY 500 million together with our clients. As of the end of the first quarter of 2018, we were serving 612 Black Card ultra high net worth clients, including 378 clients investing in our multi-strategy funds, with an aggregate asset under advisory of over CNY 40 billion. At the same time, Noah's other innovative businesses have also continued to advance. These include the (inaudible) online wealth management platform, (inaudible) lending services and so on. Our other financial services segment realized 74% year-over-year growth in the first quarter of 2018, with operating loss decrease by 41%.

(foreign language) Lastly, I would like to reiterate my views on regulation and compliance. We have seen that the regulatory requirements and compliance costs of the global financial industry have all been trending higher in recent years. I think China is also following this trend. The promulgation of the new asset management guidelines has unified the regulatory standards of all asset management institutions and products and has eliminated regulatory arbitrage space. For asset management products, both funding sources and underlying assets should be clearly reported to regulators. Implicit guarantees have been prohibited and net asset value management is required. At the same time, through the integration and adjustment of regulatory agencies, the general government policy direction is that supervision will cover all financial institutions in all aspects. License management will be clearly implemented. These measures will have a profound influence on the long-term stability and development of the financial industry in China. For Noah, the keywords for 2018 are adherence to compliance and risk management to the highest standard. In 2017, we completed system upgrades in areas such as investor suitability match up and risk quantification. In 2018, we will conduct a thorough review improvement plan for the group's internal risk management processes and operating system. We will detect systematic loopholes by walk-through test and gradually optimize our risk modeling and comprehensive quantitative risk management system. We strive to use the most stringent standards to achieve continuous improvement for our entire operations.

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

Thank you, Chairlady Wang, and hello, everyone. For the first quarter of 2018, we achieved solid results and are on track to meet our full year guidance. Net revenues in the first quarter increased 16.5% year-over-year to CNY 830.9 million, driven by strong reoccurring revenue and performance-based income. Reoccurring revenue reached CNY 398 million, up 21.7%, as we continue to focus on scale and quality of the assets we manage. We achieved performance-based income of CNY 59.7 million, up more than threefold year-over-year. This demonstrates our effort to generate investment returns consistently for our clients, despite market volatility. Revenues from onetime commissions were down 7.7% to CNY 317.9 million due to lower transaction value this quarter, offset by higher effective onetime commission rate. With the ongoing market volatility, we intend to engage our clients with diversified product offerings and focus on both growth and quality.

By segment, net revenues from our wealth management business were CNY 594.2 million, up 5.7% year-over-year, and contributing over 70% of total revenues. Our asset management revenues were up 53.8% this quarter, reaching CNY 194.3 million. Our other financial services business segment achieved CNY 42.4 million in net revenues in the first quarter, representing a large 71% increase versus last year, primarily due to the growth of our lending services. We anticipate this business segment will break even on a quarterly basis this year as we continue to focus on revenue growth. Total operating expenses were CNY 556.4 million, up 21.9% year-over-year due to an increase in marketing expenses and lower government subsidies this quarter. We believe the comprehensive brand promotion campaign we launched this year will allow us to strengthen existing client relationships and improve new client acquisitions going forward. Total compensation costs were CNY 360.7 million, up 5.9% year-over-year. Excluding government subsidies, which can vary quarter-to-quarter, operating margin was 32.5% this quarter compared to 31.3% last year. This reflects our continued effort on cost management.

Before commenting on our net income, I would like to discuss a recently adopted accounting standard. On January 1, 2018, the company adopted ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. This new accounting standard requires that equity investments, except for those accounted for under the equity method or those that result in consolidation, be measured at fair value, i.e. mark-to-market, with subsequent changes in fair value recognized in net income. The accounting standard also includes a transition requirement on presentation that requires the amounts reported in accumulated other comprehensive income for equity securities that exist at the date of the adoption previously classified as available-for-sale to be reclassified to retained earnings. This adjustment had no overall impact on shareholders' equity. However, since these net unrealized gains are now included within retained earnings, they will not appear as realized gains on the income statement when sold.

When evaluating the company's operating performance, management reviews non-GAAP financial measures. Noah's non-GAAP financial measures on its corresponding GAAP financial measures, excluding the effect of all form of share-based compensation and fair value changes of equity securities unrealized and adjusting for sales equity securities, if any. For the first quarter of 2018, we adjusted out share-based compensation in the amount of CNY 22.7 million as well as income for unrealized fair value change of equity securities in the amount of CNY 34.8 million in our non-GAAP attributable net income. Noah adjustment for sales equity securities were included in the first quarter 2018 results. Detailed reconciliation of GAAP to non-GAAP results is included in our result announcement press release.

For the first quarter, we achieved a non-GAAP net income attributable to Noah's shareholders of CNY 256.4 million, an increase of 8.1% year-over-year. Non-GAAP net margin was 30.9% compared to 33.3% last year.

Turning to our balance sheet. As of March 31, 2018, the company had CNY 2.2 billion in cash and cash equivalents, up from CNY 1.9 billion in the previous quarter. For the first quarter, we generated CNY 344.6 million of operating cash flow, reflecting our strong financial health and cash-generative business model.

In summary, our first quarter results demonstrated the strength of our business and our emphasis on revenue quality. I would like to reiterate our full year non-GAAP attributable net income guidance of CNY 1 billion to CNY 1.05 billion, representing a growth of 16.7% to 22.6% compared to 2017.

With that, let's open up the call for questions. Operator?

(Operator Instructions) The first question comes from Haifeng Cao with Nomura.

I'm Haifeng from Nomura. I have 2 questions, actually. Firstly, I noticed that the -- actually, for the wealth management business, the fixed income transaction value decreased by roughly 40% in the first quarter, and the private equity transaction value also decreased by roughly 30% year-over-year. I wonder what's the reason of this decrease and the outlook for the rest of the year. This is the first question. And secondly, understanding more on the marketing this year, which also experienced some decline in the [OP] margin, can you give us more color on the marketing campaign so far this year across China?

So thank you. I will comment on the first question regarding the transaction value for fixed income product as well as private equity. As Mme. Wang mentioned in her prepared remarks, I think beginning of this year, we saw for the overall private equity venture capital market, fundraising has been difficult compared to 2017 and 2016. Overall market for the first quarter, fundraising was down 70%, but we still managed to raise over CNY 6 billion of private equity product year-over-year, down around 30% as you mentioned. This reflects our strength in this business and also reflects our strong -- our long-term strategic relationship with the top GPs in the market. As we continue to develop the private equity market in China, we will see that -- the top GP to gain most of the AUM as well as vast majority of the returns. So we will continue to focus on our strategy of working with the leading GPs, investing in breakout of new GPs as well as expanding a proportion of co-investment and direct investment. Regarding the fixed income volume, as we see the tightening regulation, we're starting to see short-term funding impact to the market. And as a result, there has been notable defaults with public company debt or equity pledges by a large shareholder. The over -- the increasing default in the short term is affecting the client's appetite, or the clients are now a bit cautious and now are considering much longer before investing in new fixed income products. We think this impact is short term in nature as we think the overall regulatory development is certainly on the right track for a healthy long-term development in the market and it is containing a necessary systematic risk. On the second question, I will pass to Kenny to comment on the marketing campaign. But on the margin side, I think for the first quarter, we were generally satisfied with the operating margin. Operating margin, excluding government subsidy, which can vary quarter-to-quarter, is actually up. So it reflects our continued focus on cost optimization and cost management.

It's Kenny here. On marketing campaign, as I mentioned in my talk just now, basically it's our first time ever to invest in such a broad campaign. We believe that with the new environment, it is a good time to begin building brand awareness. And it's quite targeted. The campaign is actually focused on 2 areas: One is with focused media with targeted residential buildings; and two is in very select airports, so Shanghai and Hong Kong, particularly, where we have placed commercials. And the advertisement are actually focused on showcasing our clients, who are leading business entrepreneurs that are willing to represent us actually without a fee. So that's one point. Two is, the impact has been quite enormous. We've actually gotten a tenfold increase -- about a tenfold increase in inquiries through our client hotline, and we're working through those inquiries. And we've seen -- we're seeing accelerating conversion rates from those inquiries. The exact numbers, I can't share now, as we're basically going through the -- these inquiries.

(foreign language)

Yes, Mme. Wang would like to supplement on the question regarding the fixed income volume. She would like to add that as mentioned, this -- beginning of this year, we saw the official rollout of the asset management plan. The spirit of the asset management plan is to dismantle the practice of explicit or implicit guarantees in the market, and this is having a profound effect on the overall industry. And so, what we noted was the overall volume for fixed income product in the industry was down. Given this context, we're very particularly focused on quality, and we continue to roll out and distribute high-quality fixed income products. As opposed to certain peers in the market, they are offerings pseudo equity product, but in reality, they are debt related to, for example, the real estate industry. So I think it's quite critical that in this transitional period, we continue to focus on quality.

(foreign language)

And also, in the market, we're seeing some of our peers focusing on structured or derivative financial product tied to the economic benefit of real estate-related product. I think these type of pseudo products or these type of products are gaining the attraction of regulatory. And I think going forward, we'll see fixed income product become more and more regulated, so it is increasingly important to be compliant.

(foreign language)

Yes, so venture capital and private equity, again, I think the fundraising for the beginning of the year was difficult, but we focused on our relationship with top GPs. For many of the top GPs in China, we are one of their top LP, if not the largest LP, and I think this is a very differentiated competitive advantage. For individual clients, I think for long-term investment, particularly in equity and private equity, I think it's understandable that they need to think further before making new commitments, given an increasing interest rate environment expectation and slowing economic growth. But we think for the long term, through venture capital and private equity, we can help our individual clients allocate and benefit from the development of the new economy in China.

(Operator Instructions) The next question comes from Kate Lin with Last Word.

I have 2 questions on Noah. So I know in March, the Melbourne and Vancouver offices were opened, and I want to know about what is going on there. Is it mainly attracting Chinese offshore wealth? So how is it going there? And would there be other plans to open another oversea offices in 2018? And another question would be, I know Hong Kong regulator has fined Noah for some KYC issues. So I wonder if the management have some insights into how to foster this kind of control and how to foster the confidence from clients, as well.

Great. Well, thanks so much, Kate, for the question. I think it's a very spot on question. First question around the new locations of Noah in Vancouver and Melbourne. We opened both offices fully early this year, in the first quarter. The results have been overwhelming. We believe that not only are there a lot of clients actually now with -- have strong connections between China and Canada and China and Australia, but also domestic clients are also quite interested in our services. I think most of the comments were that we have quite a broad and unique product base, and our understanding of China is something that is attractive not only to Chinese communities in Vancouver and Melbourne, but also domestic investors. One example is we're actually working with a few leading Family Offices that are domestic in Canada and domestic in Australia that are interested in investing back in China. So I think they're progressing well. We can't share specific numbers yet because they're just really starting, but they're highly promising. In terms of opening new offices, I think we're quite cautious. We're not here to try and be in every single global location. We're currently in the U.S., in New York, in Silicon Valley. They're mostly investment teams. We're in Hong Kong and Taiwan. We're also now in Vancouver and Melbourne. The next potential location is Singapore. We think that there are increasing client needs to look at our -- the potential investment teams in Singapore. And Southeast Asian Chinese are also interested in investment back in China. So that could be the potential next location we're exploring. In terms of your second question about the Hong Kong SFC fine. I think it's -- let me just kind of make a few key points for everyone here. One is, the issues identified are related to certain deficiencies in the KYC and product risk rating approach we took in 2014 through 2016. So the issues were identified for years 2014 and 2016. That was 2.5 years ago. So that's point one. The issue related were actually, the background was that, we've actually gone through several rounds of review of our own KYC and product risk rating, but there were discussions with the SFC on what the exact right methodology was for KYC and product risk rating. While we believe that we have done everything we can, we also are learning how the Hong Kong SFC approaches KYC and product risk rating. As a result, I think there was a fine for the period that I talked about, about the KYC and product risk rating approaches. And so as you can see in the notice, all of the issues have been corrected. And so basically, as of mid-2016, all of the issues that we've seen -- that's been identified have been corrected and confirmed. So that's basically point one. Point two is, for all of these identified issues, there were not one single client complaint. So basically it was a regular SFC checkup. We've had the licenses in Hong Kong for about 6 years now, and therefore, SFC was conducting its regular checkup and provided us with guidance on those specific issues. I think that's basically it. If there are more questions, we're happy to answer more on this. Sorry, the last point on client confidence. I think as I mentioned related to client complaints, so there were absolutely no client complaints during this period. I think we are basically helping to explain to clients the issues were 2.5 years ago. They have all been rectified. And so right now, basically there are no such issues anymore for all of our new products.

The next question comes from [Yun Fu] with CICC. The next question comes from Sam Dubinsky with Carlson Capital.

Just a quick one. I believe your pro forma net income was up 8%, but your guide is roughly 20% of the midpoint. How do you bridge in outer quarters to the 20% number? Do you need a recovery in fixed income or private equity products, or how do you think about that? And then I have a follow-up.

Okay. Sure. This is Shang. So over the years, our results are not evenly split between the quarter. I think there's 2 reasons for that. One is, generally, high-end season -- client demand seasonality, number one; number two, also, the overall economic environment in China has been changing or dynamic. So I think for the full year, we're still very confident in meeting our non-GAAP net income guidance. Number two, over the years, we have also been focusing on the quality of the asset we manage, i.e. the fees that we are able to earn as well as the performance-based income that we are able to realize. And for 2018, there is quite a bit of performance-based income that we are expecting in the second half rather than the first half of the year. So we think the first quarter result, I think we're still on track to meet our full year guidance, and we continue to focus on executing our strategies.

Okay. And then just in terms of that Hong Kong issue, I'm glad it's rectified, but just curious, I believe there were some statements in there that you may have to redeem the funds or I don't if there are any losses there, but regardless of loss or not, are you obligated to buy these assets back? Like, how do you deal with that type of risk and just how do you think about that?

So just to give a bit more details, right, we have been asked -- the affected client, as announced in that statement, was 757. The vast majority of the products that are affected were actually in profit. So either they are a liquid product that is -- has an NAV that is actually above the 1.0 value, or they are long-duration products that actually have a profitable net value as of the latest numbers. The SFC has actually asked -- gave us quite a lot of leeway to deal with these clients. One is we need to notify them and tell them that they do have the right to redeem these products, but we do have a 3-month period to help them transfer the products. So Noah has -- doesn't have an immediate obligation to take these products back. And as you can imagine, these are mostly profitable products, and the client's intention to redeem, our judgment, may be low. But they do have the right to redeem. If they do want -- elect to redeem, we -- our obligation first is to help them transfer the product to a third party. So our obligation is not to immediately buy those products. After that transfer, if through transfer there is a loss, our obligation is to make them back to 1.0, so we're not here to provide any type of implicit guarantee. But that only happens after 3 steps. One is, they elect to redeem, which we think is unlikely given that most of the -- actually, the vast majority of products are actually in profit. Two, if they do elect to redeem, our first role is to help them transfer. And if they -- if they're unsuccessful in transfer, then we have to help them redeem those products and basically keep them at 1.0. That's the obligation. We have actually -- our CFO has actually looked at this. All of these obligations are below the material threshold in terms of our obligations. Meaning that the actual loss is actually below the 1% of our total profit line.

Yes, so just -- this is Shang. So just let me summarize 2 points. In terms of impact on P&L, we expect the impact to be around 1% of our expected non-GAAP net income guidance. So it's not going to be a big hit to our profitability this year. Second, in terms of the balance sheet, as Kenny mentioned, I think most -- the vast majority of the transaction that were identified, the clients still holding the products are unrealized profits, so we expect the clients will continue to choose to hold these products.

(Operator Instructions) Seeing no further questions in the queue, I would like to hand the conference back over to Kenny Lam for any closing remarks.

Why don't we wait for another 2, 3 minutes to see if there are others who want to ask questions? If not, then we could close the call.

Okay. I'll stand by. (Operator Instructions)

Okay, if there are no questions, then I think we should close the call. Is that okay, operator?

Yes, that's good.

Okay. Well, thank you all for taking the time to listen to our remarks and ask questions. Of course, we will be ready to take any questions after this call. Please reach out to our Investor Relations. I think we've also set up quite a few one-on-one discussions with any of the analysts that would like to set up these meetings. Thank you so much again.

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