Noah Holdings Ltd (NOAH) 2024 Q1 法說會逐字稿

Good day and welcome to the Noah Holdings first quarter 2024 earnings conference call. (Operator Instructions) Please note this event is being recorded. I would now like to turn the conference over to Melo Xi, Director of IR. Please go ahead.

Thank you, operator. Good morning, and welcome to Noah's 2024 first quarter earnings call. Joining me today on the call are Ms. Wang Jingbo, our Co-founder and Chairlady, Mr. Zander Yin, Co-founder, Director and CEO, and Mr. Grant Pan, our CFO. Mr. Yin will begin with an overview of recent business highlights, followed by Mr. Pan will discuss our financial and operational results. It will all be available to take your questions in the Q&A session that follows.

Before we begin, please note that this discussion today will contain forward-looking statements that are subject to risks and uncertainties that may cause actual results to differ materially from those in our forward-looking statements. Potential risks and uncertainties include, but are not limited to those outlined in our public filings with the SEC and the Hong Kong Stock Exchange nor does not undertake any obligation to update any forward-looking statements except as required under applicable law.

In addition, today's call will include discussions of certain non-GAAP financial measures. A reconciliation of non-GAAP measures to the most directly comparable GAAP measures can be found in our earnings release. Lastly, this call should not be interpreted as solicitation to sell or purchase any interest in any Noah affiliated products.

Please also be aware that a link to a live webcast with presentation materials is available on our Investor Relations website. With that, I'd like to pass the call to Mr. Yin. Please go ahead.

(interpreted) Good morning, Noah investors and analysts. I'm Danner in and this is my first time sharing and discussing the company's performance as CEO of Noah Holding. Thank you all for joining us today. I'd like to start today's call by sharing our views on the macroeconomic environment, our performance for the first quarter of 2024 and the strategy we're deploying going forward.

Domestic capital market continued to experience extreme fluctuation during the first quarter, the real estate market remains sluggish. While the primary market faced hurdles due to the periodic policy restrictions, resulting in a slow exit process. It's clear the high-net-worth individuals are becoming increasingly cautious with their investments.

Adding to the challenge, some noncompliant wealth management companies, a cap with capital pooling have collapsed severely affecting domestic clients and leading to a stricter regulatory environment. I would like to reiterate that since our inception Noah has never engage in capital [cooling] has no maturity mismatches and does not offer high leverage financing options to clients.

As of today, Noah does not have any non-standardized private credit products and RMB will residential real estate (inaudible) overseas, persistent inflation over the past three months, has cooled has expectations for a Federal Reserve rate cuts indicating that a higher for longer rate environment, it's likely to remain in place. As a result, investors will continue to allocate capital towards cash management and deposit for a longer period of time.

Mandarin speaking, clients are also strongly demanding for global asset allocations. With this trend continues, we are expanding our international RM team and actively increasing our influence on wallet share among overseas Mandarin-speaking clients.

Turning to our financials for the quarter, total revenues were RMB654 million, a decrease of 19.2% year on year, primarily due to the proactive restructuring of our business. Our overseas business strategy has achieved solid results, contributing 77.1% of the revenue generated from new businesses and products in the first quarter.

While domestic business contributed 22.9%. By region breakdown, our domestic business contributed RMB348 million, accounting for 53.1% of the total revenues. Within the domestic business revenues from legacy distributed products accounted for 89.6%. Our overseas business generated RMB307 million, a decrease of 4.5% year on year mainly due to the carried interest earned from private equity assets in the same period last year.

If we back out the impact from carried interest overseas, net revenue actually increased by 22.4% year on year. Breaking it down by segment, our wealth management business generated RMB464 million, within Wealth Management, our domestic business contributed RMB235 million, while the overseas business contributed RMB229 million.

Our asset management business generated RMB181 million, within Asset Management Our domestic business contributed RMB103 million, entirely composed of revenue from legacy distributed products. Our overseas business generated RMB78 million as we expand our portfolio of overseas private equity products, the number of active clients in US dollar private equity and structured products reached RMB583 million in the first quarter, a year-on-year increase of 97%.

The value of capital raised for US dollar private equity products, which generate long-term recurring service fee revenue reached RMB165 million. This grew USD5.2 billion a year on year increase of 6.1%.

In the comprehensive services segment, domestic insurance brokerage business generated RMB19 million revenues and revenue from overseas insurance trusts and then other comprehensive services or RMB150 million, a year-on-year increase of 86.8%.

The number of active clients in the overseas comprehensive business increased by 51.9% year on year. Operating profit for the first quarter was RMB121 million with an operating profit margin of 18.7%.

(interpreted) In the wealth management segment, our domestic business objective is to ensure full compliance and steady operations. We have proactively reduced the number of branches in domestic cities from nearly 80 to 18 with plans to further narrow it down to around 10 (inaudible) cities.

We are firmly committed to reducing fixed costs and optimizing mid and back-office personnel cost. Internationally from Hong Kong and Singapore to the United States. Our strategy is to increase number of relationship managers and enhance our influence and wallet share among high-net-worth Mandarin-speaking clients.

As of the end of the first quarter, Hong Kong and Singapore had 91 relationship manager supported an increase of 225% year on year and 2.2% sequentially. Currently due to the small size of our overseas RM team. Each overseas RM serve too many clients and there is room for improvement in the quality and responsiveness in our client service.

Internationally, our primary focus is on expanding the team of overseas RMs this year. Our goal is to grow the team to 200. As we continue to invest in our international infrastructure. As of the end of the quarter, we had over 16,700 overseas registered clients by increase of 17.1% year on year. The number of clients who purchased our cash management products reached 4,108, an increase of 89.4% year on year, while the number of discretionary investment clients grew to 873, an increase of 167% sequentially.

In the asset management segment domestically, our primary challenge is to strengthen private market access in collaboration with GPs and portfolio company. In public markets, we focus on QDI, QDLP products to help clients generate better returns in the global capital markets with RMB allocations.

Internationally, since 2022, we have significantly expanded the diversity and quality of our overseas products as part of our top tier [GP] Partners and segmented flagship product strategy. During the quarter, transaction value for US dollar cash management product increased 49.4% year on year and 33.6% sequentially to our USD840 million.

At the same time, we have built a complete product matrix and launched high yield US dollars -- US dollar products to capitalize on high interest rate environment. These include private credit and infrastructure products as well as actively managed, we see fund-to-funds and the four tiers of our US real estate funds.

Transaction value of our US private equity product increased significantly. In reaching $165 million in the first quarter, an increase of 21.3% year on year and 81.3% sequentially. As of the end of the quarter, AUM for overseas products reached USD5.2 billion, an increase of 6.1% year on year, accounting for 24.4% of the group AUM compared with 21.2% during the same period last year.

AUM for overseas private equity and other primary market funds reached $3.9 billion, an increase of 5.9% year on year. Overseas AUA, which includes third party distributed products, reached $8.3 billion, a year-on-year increase of 9.2%, in recent years top global GP have increasingly turned to private wealth channels for capital raising and have been introducing more individual client friendly products with liquidity features.

Our strong brand image among and our client and RM expertise in alternative assets make us the ideal partner for those GPs.

Our goal is to increase USD AUA from the current USD8 billion to over USD20 billion in the next three to five years.

(interpreted) On the comprehensive services side, domestic insurance business has slowed, notably mainly due to the continuous decline in fixed interest rate for domestic insurance.

Our current strategy is to focus our insurance products to help clients address their parents retirement, well-being and medical needs. Overseas the Hong Kong insurance market has entered into a face of intense competition with highly homogeneous products following the COVID reopening. To address this challenge. We have strengthened client segmentation and collaborated with leading insurance companies to develop exclusive products and customized solutions.

Furthermore, we have launched a customized enterprise client solutions such as employee benefit plans for our entrepreneur clients. This has enhanced our competitive advantage with differentiated products and professional services.

During the quarter, overseas insurance revenue increased by 86.8% year on year. Serving high net worth clients through both online and offline channels is a key priority for us. We continue to further expand the range and types of clients that we can service through a Noah our overseas wealth management app.

This includes the offering of different solutions to clients, businesses, and agency. Online wealth management is becoming our new channel for us in the overseas, the number of overseas active high-net-worth clients reached 2,745, an increase of 39.6% year on year. Total transaction value during the same period reached $1.2 billion, up 50.7% year on year.

The number of active clients for US mutual funds reached 2,327, an increase of 65.2% year on year, with transaction value of $521 million, up 32.7% year on year. Overseas transaction value for corporate and institutional clients reached $85 million in the first quarter, an increase of 143% year on year with AUA reaching $107 million, a year-on-year increase of 38.5%.

For agency clients, our overseas wealth management business began trial operations in late 2023, where it is empowering EAMs and family office clients with a SaaS platform integrated with our full [suite] of products. To date, we have signed 70 agency clients. Our goal is to develop an overseas online wealth management platform that does not rely on our team of RMs. Once our overseas infrastructure is firmly in place, we target to serve 300 EAMs and family offices with this solution.

(interpreted) This [inception], we have dedicated ourselves to providing high-quality asset allocation services to Mandarin-speaking, high-net-worth investors. We have built enduring trust based relationship with each of our clients and continuously enhance our understanding of wealth management and investment through ongoing investor education.

As mandarin-speaking, high-net-worth investors become more mature and globally oriented at the deep trust-based relationships we have built domestically will allow us to continue serving them as they look overseas. We are dedicated to building a personalized service for them, which when combined with our expanding global product portfolio, will give us a significant advantage over local institutions going forward.

Our asset-light approach to expanding into key overseas markets with high concentrations of mandarin-speaking and our investors, a wide array of products services will ideally position us to serve not only our existing clients, but also build a new local client base.

I would now like to turn the call over to Grant to go over our financial results in more detail before opening the call to Q&A. Thank you, everyone.

Thank you, Melo, and thank you Zander, greetings to everyone joining us today. As Zander has mentioned, the first quarter of 2024 is impacted by continued volatility in the global capital markets. Shifting expectations around Federal Reserve interest rate cuts have created turbulent conditions in equity and bond markets around the world.

As the US dollar strengthened equity in gold prices moved in tandem, reflecting the complex environment that investors continue to face. Effective risk management and global diversified portfolio have become crucial to successfully navigating this environment.

Domestically, the [A]-share market experienced extreme fluctuations as well, which negatively impacted investor confidence, promoting them to take a more cautious and risk-averse approach to investment and further diversifying their portfolios has created substantial challenges and impacted the financial performance of China's wealth and asset management industry.

During the first quarter, 43 listed security brokerage firms saw total revenue and net profit declined by 20% and 30% from same period last year. Some leading private brands were also affected with significant declines in commission income.

In response to prevailing marketing conditions where strategically restructure our wealth management operations, consolidating teams and resources from smaller cities to core cities and pivoting operations and personnel towards global markets where demand for asset diversification is growing. Themes guiding offers in this year, our transformation and transition. While this transformation may bring short-term challenges pressures, including temporary fluctuations on financial performance, we're confident that will lay a solid foundation for robust growth towards our globalization strategy, generate enduring value of shareholders.

With that, let's get into the details of first quarter financial results. On the revenue side, we've seen a slight increase in net revenues from new transactions with one hand commissions up 6% year over year. However, the decline of recurring service fees and performance-based income put pressure on total net revenues, which decreased 19.2% year over year and 18.8% sequentially due to seasonality to RMB615 million in the first quarter.

Net revenue from recurring service fees for RMB417 million, down 12% year over year and 2.6% sequentially due to a decrease mostly in the onshore AUM resulting from changes in NAB and also exits from RMB related invest. Performance-based income was RMB14 million compared to RMB83 million in the same period last year, primarily due to the successful exit of a private equity portfolio company last year.

The bright side is that we're seeing increased interest towards USD investment products in light of the diminished expectation of a rate cut by the Federal Reserve were observing a strong and sustained demand from clients for USD cash management products.

It's worth also noting that the transaction value of overseas private equity and private secondary projects, which could bring long-term recurring fees in future are also generating significant growth, increasing 21.3% and 70.6% year over year, so respectively, demonstrating the progress we have made in expanding our high-quality alternative investment product offerings.

Looking at the financials, we can seek feeder growth oversea business on an apples to apples basis, taking out the impact of performance-based income overseas net revenues grew meaningfully by 22.4%, and the total overseas net revenues accounted for 47.2% of total revenues, up 7.2% year over year. Underscoring the growing importance have a key revenue driver.

With respect to transaction values, we distributed RMB18.9 billion of products during the quarter, up 12.4% year over year and 14% sequentially. However, the immediate contribution of revenue is not yet evident despite a high demand for US dollar cash managed products and also the revenue recurring revenue from private equity related products will not take effect in the second quarter.

It does reflect the progress of continuing making getting a larger share of the clients' wallets and the long-term benefits of the increased portion of alternative investment products to future management fees are also yet to be realized in the current term.

By currency transaction value for RMB products was RMB10.5 billion, down 8.8% year on year and 1.5% sequentially or transaction value for USD product increased by 50.7% and 40.2% sequentially to a total of 1.2 billion. Overseas AUM grew 6.1% to USD5.2 billion, accounting for 24% of total AUM, while overseas AUA grew 9.2% year over year to USD8.3 billion, accounting for 24% of total AUM, reflecting our ability to capture a larger share of the clients used to (inaudible)

Operating costs and expenses experienced a slight year-over-year increase of 0.7% of sequential decline of 8.8% due to our cost control initiatives in detailed compensation and benefits increased by 5% year over year and 29.3% sequentially. This was primarily due to an increase in share-based compensation expense to motivate and retain core talents. As I mentioned last quarter, we're continuing to consolidate our network in smaller cities and further improving capital efficiency by reducing overhead expenses.

While the financial benefits of these optimizations may not be immediately apparent, we anticipate a gradual and noticeable impact on our cost savings, infusion, selling and general administrative expenses combined decreased 6.3% year over year and 47.9% sequentially, reflecting the progress our cost controls and efficiency improvement initiatives are already making.

Operating profit during the quarter was RMB121 million, a decrease of 56.4% year over year and 45% sequentially. Operating profit margin was 18.7% during this quarter below our long-term target range of 30% to 35%, primarily due to the drag from domestic market revenues and periodicals and additions restructuring.

Total other income increased by 82.1% year on year to RMB55.3 million due to continued optimization of treasury management. non-GAAP net income during the quarter was RMB161 million compared with RMB239 during the same period last year.

In terms of clients, as of the end of first quarter, we had a stable total of 9,560 Diamond and Black Card clients. Specifically, the number of Diamond Card clients decreased slightly to 7,272 or the number of Black Card clients increased to 2,296. As our overseas expansion accelerates, the number of overseas registered clients continues to grow, increasing 17.1% year on year and 5.3% sequentially to 15,725.

The total number of overseas Diamond and Black Card clients, which require minimum investment with us of USD2 million and USD5 million respectively, grew rapidly to more than 1,500. During the first quarter, the total number of active clients was 10,391 up 15% sequentially, of which overseas active clients accounted for 2,745, an increase of 9.1% sequentially.

Turning to our balance sheet, we have maintained a healthy liquidity position with our current ratio of 4.1 times and debt asset ratio at 16.6% with zero interest bearing debt. Interest bearing debt, we've RMB5.1 billion in cash and cash equivalents, providing ample resources to support our global expansion plans and allocate to shareholder returns which remains a priority of the Board.

As mentioned last quarter, Noah declared annual dividend of RMB509 million and a nonrecurring special dividend of RMB509 million for 2023, subject to final approval at our AGM on June 12, 2024. We expect to pay out dividends when approved before the end of July to Hong Kong stockholders and in early August to our ADS holders. We look forward to providing stable and sustainable returns to shareholders and will drive growth across our business.

Looking ahead, our goal is to provide our clients with high quality and globalized products and services, restructuring our wealth management channels and realigned our operations and personnel that will allow us to sustainably capitalize on this growing demand.

The strategy, the strategic transition towards overseas markets still in the initial phase of being built out and will take some time to mature. But we're already beginning to see the progress we have made reflected in the performance of global business. We'll inevitably encounter bumps along the road were confident in our ability to overcome them and would like to express my sincerest gratitude to our shareholders support, and thank you for listening. I will now open the floor for questions.

We will now begin the question-and-answer session. (Operator Instructions)

Peter John, JP Morgan.

(interpreted) My first question is about the investment sentiment starting from March this year, we noticed that the chemical marketing Hong Kong has recovered. And recently there's also some real as based upon the policy in Mainland China. We are wondering whether or not observe any improvement in those domestic investment sentiment.

And management mentioned during the call that amount was domestic insurance has declined, were also wondering what the client preference for either or they're at their interest in terms of the product. And my second question is about the revenue outlook and the fee rate, we noticed that the first quarter revenue will decline lost revenues declined on a year-over-year basis [commandment] explain was the reason of drivers behind and what's our expectation for the lost revenue again 2024.

My second question is about the fee rate for our product in fourth quarter last year, domestic bancassurance channel experienced a decline in issuance theory as requested by the regulator will lose the potential fee rate declined for our domestic insurance deals, and there was the potential impact and apart from the domestic new insurance. Do we see as any other fee rate economy impactful, our other product we are currently distributing. Thank you.

Thank you Zander.

(interpreted) And thank you Peter for the question. So I'll translate on the first question regarding the changes in recent sentiment among investors. So although given that we have seen some rebound in the capital markets or Asia Capital Markets recently. I guess in summary, we haven't seen a significant shift or improvement in Hanover's investors' investment sentiment because on building confidence. It's rather a long term process rather than short term. So the short term capital market rebound will not immediately reverse the investment sentiment in that sense at the end of July.

(interpreted) So the second question regarding the domestic insurance and I guess the slowdown in demand as well as the or the trending downwards return or interest rate, I guess, is largely aligned with the domestic interest rate environment, which is also trending down on and I guess the slowdown in the clients' sentiment towards domestic insurance is also a reflection of their investment sentiment in ourselves.

And so right now, in terms of domestic insurance, we are more focusing on the products that will satisfy the retirement well-being as well as the medical needs of clients and their parents the type of product that was satisfied that those demands.

(interpreted) So the third question regarding the on the reasons behind the decline in first quarter revenue, I guess the first aspect is that the decreasing recurring service fee or management fee, mainly because of the active exit activities in our domestic portfolio. And the fact that, we do not really on introduce new products in the domestic market, which drives down our domestic AUM. But I guess that's a rather active approach.

And the second aspect is that, although given we have achieved a great improvement or progress in our overseas business and expansion on, but given the current higher for longer interest rate environment and on the product that fit into that environment. I guess the growth in overseas business is still not fully reflected in our current revenue structure, but we think that to capture and maintain clients' wallet share through even through cash management and term deposit product, it's also very important because it is building for future growth when interest rates trends down that we can translate these products into more fee-generating products like private equity and hedge fund products in the future.

And thirdly, I guess it's the fact that, the decrease in carrying on performance income because of the, I guess, the general asset environment compared to the previous quarter and I mean the previous year.

(interpreted) So I guess the fourth question, regarding the outlook on 2024 I guess overall, the strategy is rather clear, which is to ensure and in order to secure safety and compliance in our domestic operations, while focusing on and deploying more resources on and to expand our overseas business. And but, that process take will probably takes take some time up our overseas business to fully accelerate.

We have spent the past 20 years and being able to build a rather complete system in the domestic market. And we're hoping that in the three to five years' time, we'll be able to complete our overseas business infrastructure and additionally against the clients, trust with us and as I guess, is very long term and the investment demand and needs of high-net-worth investors.

It's also very long term. As clients look more towards overseas asset allocation and we will be well positioned to provide better product and services to them in overseas and global markets.

Thank you, Sander.

(interpreted) So on the question regarding the insurance commission fee decrease. So I guess the overall impact on RM business is rather small, especially compared with a lot of the insurance brokerage business in the market where most of the brokers have high commissions, but low base, our RMs are more focused on providing long-term value for our clients.

So and as a business, our primary focus is to satisfy our clients' needs and create value for clients and how to optimize their asset allocation and portfolio construction. So I guess the short term or the fluctuation in the fee rate of a certain product, it's not the most aspect that we're worried about.

In terms of other products, fee rates changes, I guess it's largely in relation to the nature of the products, for example, on cash management related products naturally have a lower fee rate, whereas the private market, including private equity and private secondary house on products on the fee rate has been rather stable.

And but that being said, we are still focused on optimizing our clients' portfolio and asset allocation, and we would rather lose a certain client than to lose money. And so also going back to creating long-term value for our clients.

So operator, so please be noted that there is no more questions are Chairlady one would like to have a closing remark as well.

Already This concludes our question-and-answer session. I will now turn it over to management for any closing remarks.

Thank you. (spoken in foreign language)

Thank you, Chairlady. So I'll translate for our Chairlady's closing remarks.

(interpreted) So we have noticed that there are a lot of noncompliance, so-called wealth manager in the China domestic market continues to default under their private credit product and which has caused significant losses among their high-net-worth clients. So I guess in our perspective, in the past 10 years, the China wealth management has experienced it rather fast growing, but not so healthy growth period.

So a standing in today's times. And we think that the largest or the biggest risks in the wealth management market in China is that the high-net-worth clients return back to poverty because of the wrong, the allocated assets or the round of asset allocation devices they got.

So right now, our main advice to our existing clients is to hold onto to their current wells and portfolio, so that they can preserve their wells on and which is driven for future growth when the opportunities is there. Internally, I guess the biggest challenge for us as we expand our overseas strategy is the, I guess how fast we can get used to or be familiar with the operation of how global private banks operate.

But that being said, we have a very talented core management team, and we do have some very global minded and top-tier RM team. So we are still rather optimistic. And regarding our future growth, especially in the overseas market.

(spoken in foreign language)

(spoken in foreign language)

So turning back to you, operator.

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

Thank you, all.

Portions of this transcript that are marked (interpreted) were spoken by an interpreter present on the live call. The interpreter was provided by the company sponsoring this event.