Noah Holdings Ltd (NOAH) 2021 Q3 法說會逐字稿

Good day, and welcome to the Noah Holdings Third Quarter 2021 Earnings Conference Call. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Mr. Grant Pan, Chief Financial Officer. Please go ahead.

Thank you, operator. And for today's conference, I will first introduce the quarterly financial results. I will hand back to Chairlady Wang, followed by a Q&A session.

Good morning, everybody. Dear investors and analysts, I'm very happy to share with you the solid financial results for the third quarter of 2021 with continued growth achieved across revenues and client activities. We're excited to see continued growth in our black card and diamond card clients, demonstrating successful implementation and execution of the upgraded client servicing strategy as well as record high recurring service fees, thanks to the improved asset mix we allocate for our clients.

We're also very happy to report that we're ahead of the schedule to deliver the full year non-GAAP net income guidance with RMB 1.1 billion recorded in the first 3 quarters of 2021. Net revenue in the third quarter was RMB $908.9 million, up 1.1% quarter-over-quarter and 5.8% year-over-year. Onetime commissions were RMB 215.1 million, down 12.9% amid market turbulence and increased prudence over policy outlook from the last quarter, but still up 10.4% year-over-year. Recurring service fees were RMB 566.9 million, a record high since listing, up 13.7% quarter-over-quarter and 1.2% year-over-year. The growth in recurring service fees was attributed to our growing assets under advisory, or AUA.

Performance-based income was RMB 82.1 million, down 32.6% quarter-over-quarter and up 16.5% year-over-year, mainly contributed by profitable exits from our overseas PE products.

Income from operations were RMB 228.9 million, down 31.8% quarter-over-quarter and 34.1% year-over-year with an operating margin of 25.2%. The decline in operating margin was mainly due to increased efforts in talent acquisitions and retentions, continued investment in IT infrastructure, increased marketing activities, including depreciation and amortization expenses related to our newly acquired headquarter as well as the preplanned execution of our yearly strategic investment budget.

Non-GAAP net income for the quarter was RMB 284.2 million and RMB 1.08 billion for the first 3 quarters, giving us confidence to meet RMB 1.2 billion to 1.3 billion full year guidance.

It's also very encouraging for us to see sustained momentum in client activities and growth in black card and diamond card clients. Despite the challenging market conditions, the number of active clients that transacted with us during this quarter was over 21,000, up 4.8% quarter-over-quarter and 3.7% year-over-year. The number of black card and diamond card clients also increased by 16% since the end of 2020. This growth also makes us the fastest in the industry in the acquisition of core clients compared to an industry average of close to 10%.

The strong growth in black card and diamond card client group is a reflection of the successful execution of the diamond black program supported by our strategic investment budget. The implementation of Noah Triangle service model as well as the upgraded client acquisition strategy. In large in this client group, which contributed to around 80% of our AUA, will continue to be one of the key strategic focus in the long run.

Transaction value during the quarter was RMB 24.1 billion, down 3.7% quarter-over-quarter and 16.4% year-over-year, mainly due to the overall performance in the secondary markets and the seasonality nature of the primary market fundraising activity.

Notably, the amount of private secondary products we placed for our clients was RMB 10.6 billion, up 36.8% quarter-over-quarter and 22.6% year-over-year. As our clients seek long duration products when facing market uncertainties, which demonstrates our client sophistication as a result of Noah's continued investor education efforts. Our historical data also shows that our onshore private secondary market -- secondary product clients, who subscribed exited for over 3 years, tend to achieve higher returns in the double-digit range than those who exited earlier. When looking at year-to-date figure, transaction value during the first 3 quarters of 2021 was RMB 76.2 billion, up 3.7% year-over-year.

By segment, net revenues from the wealth management business was RMB 653.6 million, up 4.5% quarter-over-quarter and 4.1% year-over-year, which contributed to 72% of total net revenues. Net revenues from the asset management business amounted to RMB 241.4 million, down 5.8% quarter-over-quarter, but up 8.5% year-over-year.

Total AUM increased marginally from the previous quarter to RMB 156.1 billion as the growth on PE AUM was partially offset by redemptions of real estate-related investments.

After the continuous efforts in exiting real estate related assets, we had exited the majority of our onshore real estate assets with only office properties located in Shanghai actively managed by our own operations team and U.S. rental home assets managed by our investment team based in New York.

Net revenues derived from overseas business was RMB 250.4 million, up 10% quarter-over-quarter and 58.5% year-over-year, mainly contributed by carry income realized by successful assets in the U.S. dollar investment products we place for our clients. We'll continue to strengthen our international platform to meet with the growing overseas asset allocation demands from our clients.

On the balance sheet side, we're pleased to announce that our total assets have first time exceeded RMB 10 billion mark for the first time, marking another remarkable milestone in Noah's 16-year history. We have a healthy cash balance of RMB 2.8 billion by end of this quarter as well as improved debt-to-asset ratio of 22% with no interesting -- with no interest-bearing debt.

Lastly, I would like to highlight our recent developments in ESG initiatives. Go first investment professionals are working diligently to develop ESG-oriented fund products, and we hope to launch these products by as early as next year.

In conclusion, we have concluded the quarter with solid financial operating results despite the challenging capital market conditions, demonstrating the resilience in our business model. And we're determined to invest in key areas where we can strengthen our competitiveness through our strategic investment budget, both in the fourth quarter and going forward.

And now let me pass the speech to our Chairlady Wang.

(foreign language)

[Interpreted] Thank you, Grant. I will first talk about my view on the macro situation and then report on a overall performance in the first half of 2021 with the developments of major business segments, the progress of the client-centric comprehensive reform as well as Noah's new positioning and future development strategy under the ever-changing market environment. We will then open the floor for questions.

In 2021, we gained a more immersive experience of China's economy changing from high-speed growth to high-quality development. China's economy has entered an era of new certainty. And the only thing that can be expected is certainty. Incentive and restrained mechanisms go hand-in-hand. China not only attaches importance to the quantity but also pays more attention to the quality of development. So as to realize the effective quantitative growth with substantial improvement of quality, the nation will achieve long-term economic development transform into a high-income country and is on track to achieve robust and sustainable growth.

Driven by the sustained economic growth, we are confident about the prospects of China's wealth management and asset management industry, although the country's GDP growth is adjusting to a more sustainable level, it should still maintain an average annual growth of 4.5% to reach USD 29 trillion before 2030. Currently, China is moving smoothly towards the capital income target of USD 20,000 in 2030 and should be able to cross the high-income threshold. Although wealth growth is not linearly related to income growth, we believe that when China becomes a high-count income country in 2022, its wealth to GDP ratio will enter an inflection point. And thereafter, the compound growth rate of China's household wealth will exceed that of GDP.

We think that China's financial industry is going to experience a stage of rapid growth and swift change. The wealth management and asset management industry will be able to take full advantage of these opportunities. Like all other industries, with Chinese characteristics, the development path of wealth management and asset management will be different from that of the West, especially the United States. For example, China's infrastructure-led economic growth model attached great importance to encouraging entrepreneurship and increasing resident income. This model was highly dependent on credit support. So it created a large number of underlying assets for fixed income products.

However, not all of these assets are suitable for the wealth management industry. After 2 years of unswerving efforts in transformation, Noah took the lead in successfully clearing non-standardized assets in the first half of 2021, laying a solid foundation for our healthy development in the future. Today, we stand humbly at a historical turning point of the industry and deeply realized that to achieve future development and quality guaranteed growth, we need to stay focused on the wealth and asset management industry move.

Noah has also made a comprehensive transformation from a product-driven firm in the early establishment to a client-centric and survival as the bottom-line company. In the first 3 quarters of this year, with the adoption of the Noah Triangle service model and the systematic business development from the headquarter to the frontline cities, Noah's diamond and black card clients continued to maintain a satisfactory growth, up 16% over the end of 2020, exceeding 8,000 people.

(foreign language)

[Interpreted] In the third quarter of 2021, Noah achieved net revenues of RMB 910 million, an increase of 5.8% year-on-year, of which the recurring service fees reached RMB 570 million due to the snowball effect of the scale of our assets on advisory, setting a record high as we release the group's strategic investment budget as we planned. Non-GAAP net income attributable to shareholders was RMB 280 million, a year-on-year decrease of 4.2%. As of September 30, the accumulated non-GAAP net income reached RMB 1.1 billion, completing 90.3% of the guidance ahead of schedule.

In terms of core business data, transaction value in the third quarter was RMB 24.1 billion. The total transaction value in the first 3 quarters continued to grow, reaching RMB 76.1 billion, a year-on-year increase of 3.7%. Among them, the transaction value of private secondary funds was RMB 10.6 billion, an increase of 22.7% year-on-year and 36.8% quarter-on-quarter.

While the transaction value of mutual funds was CNY 8.94 billion, which decreased both year-on-year and quarter-on-quarter due to the overall market performance. With the transformation, we reiterated our focus on serving high net worth and ultra-high net worth clients as our core client base. I'm very glad to report that in the first 3 quarters this year, our diamond card clients increased to 14.6%, and our black card clients grew 22.3%. The Noah Triangle service model has been recognized by our core client base.

At the same time, our clients' activeness improved steadily. In the third quarter of 2021, the total number of active clients, including mutual fund-only clients, increased by 3.7% year-on-year and 4.8% quarter-on-quarter. The number of conventional active clients increased by 25.5% year-on-year.

Digital transformation has helped in Noah's reform from product driven to client centric, and we have increased investments in technology in the past 2 years. The group's technology center has had 13% of new hires this year, reshaping the whole business flow system of client development, client operation, products and solutions as well as operation management.

With the continuous improvement of our KYC/KYP/KYA system labels, the group's management dashboard of Noah Triangle team has been formed, connecting the 3K application scenarios. The marketing map integrates all kinds of labels into the business development process of relationship managers, making the client profiles more accurate and the management of clients and products matching increasingly refined. The upgraded CRM system also provides relationship managers with mobile management options throughout the life cycle of clients.

Moreover, at the product screening end, we have also realized the digitalization of the whole process, creating a full category diversified and high-quality product shelf as well as making the product launching process more standardized and systematic. The wealth management market is constantly maturing and clients are more rational. Noah has introduced the organizational reform, breaking the past and incentive mechanism for relationship managers that was similar to insurance sales. The client-centric philosophy requires us to serve high net worth clients with top-notch personnels, and the talent density of our frontline relationship managers continues to increase.

We have also reformed our business process so that high net worth clients can enjoy the same services available to institutional investors. By taking clients at the center and meeting the multidimensional needs of clients with small service teams, the satisfaction rate of core clients have improved greatly.

(foreign language)

[Interpreted] As of September 30, 2021, thanks to the distribution of non-standardized assets and the redemption of all of these assets, Noah's AUM reached RMB 156.1 billion. It can be seen that incremental public securities have supplemented a gap, thus achieving stability and recovery of the total AUM. The continued optimization of asset management structure and the snowball effect will be more obvious in the next few years.

The public securities assets actively managed by Gopher kept stable in the third quarter at RMB 11 billion. Same as the end of the last quarter, the AUM of private equity was RMB 130.4 billion, an increase of 2% over the end of the previous quarter. Gopher's client-centric transformation is positioned to improve its active management capacity adhered to the research-driven investment performance and further become the preferred wealth management brand with stabilized functions for clients.

It is worth mention that as of September 30, the investment team of Gopher's target strategy product classified as public securities has effectively reduced portfolio volatility and obtained a relatively stable excessive returns with a positive, stable and balanced funds each achieved their target investment performance. On private equity side, Gopher's award-winning [F] Fund Series 5 has basically completed its investment process and Series 6 has been officially launched in November.

Gopher has built a blueprint for digital transformation in 2021 and 2022. Gopher mainly focuses on the objectives of digitalizing investment and research data governance and structuralization as well as continued client experience improvement in the third quarter. Gopher launched the fund investment and research management system, which provides a multi-strategy investment team with a standardized evaluation and pool entry process, combining quantitative analysis and qualitative evaluation.

(foreign language)

[Interpreted] Subject to regulation is a global phenomenon. Compliance is the lifeline and the barrier of competition. Noah respects common senses and reviews the market. From the first day of our establishment, there has been no capital approval, no implicit guarantee, no duration mismatch, no leverage allocation and no cross-border capital operations. Noah operates fully compliant in the countries and regions where we hold licenses.

After 17 years of development, we are increasingly [clear] about our market positioning and determined to be deeply rooted in the wealth management and asset management industry. Noah's core values are client centric and survival as the bottom line we connect with the world's leading asset management companies, make continuous improvement and make friends with time.

In 2017, President Xi Jinping said at the Central Economic Work Conference, China's high-quality development is that to meet the people's growing needs for better life to reflect new development concepts with innovation as the foremost driving force. Coordination as an endogenous feature, going as universal philosophy, open it as a requisite way and sharing as the fundamental goal of development, we couldn't agree more.

Noah has been releasing a corporate sustainability report every year since 2014. During the China International Import Expo this month, at an international forum under the corporate social responsibility co-sponsored by the Ministry of Industry and Information Technology and United Nation's Global Compact, the Ministry of Industry and Information Technology awarded Noah the highest AAA rating for excellent corporate social responsibility reporting, making Noah the only private financial enterprise awarded with this high rating.

In 2021, we also won the ESG Responsible Enterprise Award of the Year granted by the Summit Forum on CSI in China. Noah will adhere to high-quality development and keep continuing to the sustainable -- sorry, keep contributing to the sustainable development and green GDP.

Now let's open the floor for questions. Thank you.

(Operator Instructions) The first question will come from Ethan Wang with CLSA.

(foreign language) I have two questions. The first one is on the investment advisory services. So China has been given out investment advisories licenses to financial institutions, and we've seen brokers are renting their services on this front. Just wondering that it's not going to change the competition landscape. And how does Noah pursue this new trend of investment advisory services?

And second question is on the recent criticism from regulators on cross-border brokers. And we're seeing a ramp-up interest on this circumstances on the professional managers overseas products from Chinese investors. So could management help us -- give us more color on Noah's product offerings on this front?

(foreign language)

[Interpreted] Thanks, Ethan. I'll translate Chairlady Wang's answer and also have a little bit my own input. In terms of the [IC] license, we agree with you that it's probably going to be a pretty big market, and we're in the process of applying since last year. But I think our view is that for the independent wealth managers probably will be in the next batch of the application after the water has been tested for a few months.

And we do believe that it probably doesn't have as much impact on us as one would imagine, as you could see that we actually break down the clients into 3 groups based on their investment preference. Obviously, first type is the product driven. They basically just go after the right products they like. And the second one is that they just pretty much give you a discretion in terms of investing.

We believe that the IC license is probably targeting the semi-discretionary clients. They want to have a little bit of participation in the investment process and at the same time actually receiving professional rights from the IC. Noah is pretty good on the first 2 types in terms of product-driven discretionary management. Nothing that we're giving up on the last type, but -- which don't think the, honestly, the industry is ready to provide professional advice plus the actual portfolio.

As you know that the regulator is actually -- doesn't allow virtual portfolio. So it has to be an actual portfolio of investments. So we believe it's probably still in the process of water testing. But obviously, we'll be very active by pursuing this license.

I think one of the things that I would like to mention that Gopher's target return products actually is -- to some extent actually helps the client with their purpose of having a diversified portfolio, similar to what IC is doing.

So on the second question, we understand from a regulator standpoint, the pressure actually comes from whether or not they're helping certain clients to move sort of asset overseas in little pieces. We don't believe -- we think it's probably dangerous move. That's why we'll sort of understand why the regulator is getting nervous on that. But in terms of Noah, when we have our first branch in -- overseas branch in Hong Kong in 2012, we have been pretty much serving clients who already have assets overseas. And a lot of the investment directions is actually -- they try to invest back into China's development opportunities. So we believe actually we hold more advantage on that type of product.

So we don't think it's going to have too much impact on us. Our ESOP plans and ESOP business is pretty much helping clients basically pure trust services. We actually don't interfere with any of their fund transfers.

So that answers your question, Ethan?

The next question will come from [Nick Xu] with Credit Suisse.

My question is Noah is selling other people's mutual funds in a bigger way, in a very good way. In the meantime, your asset management business in the private market is also booming. And your targeted portfolio, in my view, is very much the [detailed] business. My question to Mr. Pan is, since you are doing basically everything, that's a large asset management is doing. Have you ever sort of convert Noah into a full-scale asset management company in China context, a mutual fund company with the private market capability?

(foreign language)

(foreign language)

[Interpreted] Thank you, Nick. Yes, it's a great question. We actually think that probably you could help us communicate with the regulators that the application process for mutual fund license in China is very stringent. So you either hold a sort of main license domestically already or you have to basically apply in the name -- or in the identity of as an individual. So for example, maybe Chairlady Wang and Mr. Yin, they could apply for that as individuals. But obviously, that's not going to serve the group well from the holding company standpoint.

So that's one of the strategic points that we have talked about in the past. But we didn't believe that with this effort in everything that comes with -- you probably are required to separate or spin off any privately raised fund business if we do hold a mutual fund license.

And considering what we have right now as wealth management, asset management and also Noah Global Intelligence by giving all these up, having only mutual fund license, I think that's going to be a pretty major transformation, especially in the client segmentation from high net worth to more or less to the retail side. So it's obviously one of the main licenses that probably will help boost business. But at the same time, I think that it changes our entity and also the segmentation of clients. So hopefully, that answers your question, Nick.

The next question will come from [Yi-Juan Lee] with Guolian Securities.

(foreign language)

My question is that we have a sharp increase in the management costs and such as compensation, selling expenses, and we would like to ask how the management will integrate this and what's the future plan for the incoming operation of the (inaudible).

(foreign language)

(foreign language)

[Interpreted] So Chairlady Wang actually wishes to supplement a little bit on this asset. It's a very important point that the actual structural change actually comes as a result of the transformation that we're doing. As you might be familiar that in the past, although our relation managers are full-time employees of ours, but their pay structure actually has a lower base pay, but a higher commission component in the past scheme. But after the -- since the third quarter of this year, we have increased the portion of the base pay off significantly. And their bonus actually now is tied with not only with the sales of transactions but also with the satisfaction from the clients as well as the quality of operations and services.

So we want to transfer. Basically, they are not being viewed as a salesperson, but rather a private banker or investment consultant. So when they actually pull out their business card, they will get the respect they deserve. As you can see that the so-called insurance agent model in the industry is actually deteriorating. As you will see, the cross-sell and also everything is still first type of compensation schemes actually is not working. The basic reasons that the interest of the salesperson where the client is actually not aligned. So it's going to be very difficult to last.

We have seen pretty obvious results in terms of talent acquisition since the transformation as we are very happy to see that the first graduates now come from top schools in China and also the private bankers that we hire are now basically the senior or seasoned private bankers from the banks that we typically wouldn't be able to track with the old composition scheme. So this is something that we're going to insist on and continue to invest to make sure that we actually win the first battle of the very important war, that is the talent.

(foreign language)

(foreign language)

(foreign language)

The next question will come from You Fan with CICC.

(foreign language)

I will translate my questions. So the first question is regarding the AUA. Would you please share more data on AUA and breakdown by different types products? And for the second quarter, since we have plenty of cash on our balance sheet, so I just wonder, do we have any plan for dividends payout?

Okay. Thank you, [CC]. I'll respond to these two questions. First, in terms of AUA, probably over -- close to 60% that we help our clients places in the private equity. And it's also the category that we see pretty consistent growth for the last few quarters. And also, the next major category is obviously the private securities, which accounts for about 30% of the total AUA.

And we're seeing some fluctuations, but it's actually probably more or less related to the NAV of the total market and also their products. But that is also the main category that we see the clear traction for our clients.

One category that we're seeing obviously is will continue to exit and help the clients realize the return is obviously the assets relating to real estate. And happy to share with you that we have very, very limited exposure in this, which actually allows us to be able to have a pretty good asset mix for our clients. So the growth in the private equity, actually also the growth in the private securities, is the direction we're seeing their clients pretty interested in.

And the second question, in terms of cash balance, we do maintain very good cash balance as well as operational and investing cash flows. In terms of dividend, we do plan to have a more extended discussions and hopefully, will have something for the market in the next few months.

The next question will come from Ethan Wang with CLSA.

(foreign language)

Just a very quick question on our status as a foreign listed company, which we understand there's still delisting risk surrounding China's ADRs. And since Hong Kong has just changed its listing rule to allow non-innovation-related companies to listed -- to be listed through secretary listing channel, just wondering if Noah has such kind of consideration in the near future.

Thanks, Ethan. We actually do pay attention to the development of -- especially the holding foreign company (inaudible). And we have had discussions with both our lawyers and our auditors. Obviously, it's something that we do keep a very close eye on. But the professional side, they believe there will be at least some solutions between the 2 governments. It's more political than actual market governance. And considering the impact of having the whole group of foreign companies that to be exited or actually delisted sort of violently from the market, we don't see that possibility as very high and imminent.

But obviously, whatever they put together to comply with, especially, I believe the recent requirements, our auditors actually communicated to us that it's a very heightened disclosure requirement, especially around the VI structure, blah, blah, blah. All these are, we believe, actually along the line of having more information, more transparency.

In terms of having listing plan on the second market, it's obviously in the sort of plan Bs. We're not actively seeking to do so. We understand the new rules, the Hong Kong listing rules. We also understand the backlog in the application process. And considering, especially for Noah, we believe that Hong Kong market probably doesn't provide additional meaningful liquidity for us, but it remains an interesting option.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Grant Pan for any closing remarks. Please go ahead.

Thank you, operator. I'm very happy to be able to communicate with all investors and analysts, and we're happy to deliver another quarter of solid results, especially seeing the good results in client activities. We will have separate con call later on. And if you have further questions, I'm very happy to speak to you. Thank you.

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

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]