Noah Holdings Ltd (NOAH) 2020 Q3 法說會逐字稿

Good day, and welcome to the Noah Holdings Limited Third Quarter 2020 Earnings Conference Call. (Operator Instructions) Please note that this event is being recorded.

I would now like to turn the conference over to Jingbo Wang. Please go ahead, sir.

(foreign language)

[Interpreted]

2020 is a new beginning. After 30 years of development, Shanghai has developed into an international financial center, specializes in renminbi-oriented asset allocation. Currently, more than 50% of the renminbi assets held by overseas market entities are here, making the city an open renminbi asset allocation center. This year, 2020 also marks Noah's 15th year of inception and Noah Holdings 10th listing anniversary on the New York Stock Exchange.

Noah was founded in Shanghai. We're still headquartered here. We're grateful for this great city's development and its support for us as a firm. It has been 5 quarters since the Camsing incident last year and have a transformative shift from single counterparty private credit products into standardized products. We thank our team for their efforts and the market for its support.

Today, I feel honored to report our satisfactory achievements in the third quarter to our shareholders and analysts. Both transaction value of standardized products and a number of active clients reached a record high. Clients' confidence are restored and team morale is good. It is evident that our strategic transformation has reached a successful milestone.

I would like to first brief you on Noah Holding's overall performance in the third quarter of 2020. The development of our major business segments, the growth targets as well as investment strategy. Then I would like to share my opinions on macro and regulatory landscapes. Then Grant will present the financial results for the third quarter, followed by a Q&A session.

(foreign language)

[Interpreted]

Starting from the third quarter of 2019, Noah sees the offering of nonstandardized single counterparty private credit products, accelerated the redemption of these products and transformed to full-scale public securities products. After 5 quarters of transformation, with the strong support of our clients and the continuous efforts of our team, transaction value for the quarter reached RMB 28.8 billion, up 158.3% year-on-year and 34.2% quarter-on-quarter, marking one of the highest quarters for transaction value in the past 15 years. Among which, the transaction value of standardized products reached RMB 20.8 billion this quarter, up 18% year-on-year and up 16% quarter-on-quarter, a historical high. The transaction value of onshore and offshore mutual funds reached RMB 14.1 billion, up 206.3% year-on-year and up 18.6% quarter-on-quarter.

We have established close partnerships with 18 out of the 20 mutual funds in China. For secondary market equity funds, we raised RMB 6.3 billion, which grew nearly tenfold year-on-year and up 25.6% quarter-on-quarter. We also maintained our leading position in private equity products this quarter with a transaction value of RMB 7.2 billion, up driven 107.7% year-on-year and up 183.1% quarter-on-quarter. It is worth mentioning that those -- secondary from Series 5 received commitments of RMB 1.5 billion in the quarter and has become our clients' preferred featured products in terms of both scale and performance.

In the third quarter of 2020, Noah achieved net revenues of RMB 859.1 million, up 14.9% quarter-on-quarter and achieved non-GAAP net income attributable to shareholders of RMB 301 million, maintaining the record high level of last quarter. Overseas revenue was still soft due to COVID-19, but was offset by the increased onshore revenue. We are confident in meeting our full year non-GAAP net income guidance.

Due to impact from the pandemic, the net revenue of our overseas business has achieved RMB 158 million, down 30.2% year-on-year and down 14.6% quarter-on-quarter, accounting for 18.4% of the Group's total net revenue. In the third quarter of 2020, the number of active clients, inclusive of mutual funds clients, rose to 20,509, up 105.9% year-on-year and up 39.5% quarter-on-quarter, reflecting the restoration of client confidence. Specifically, there was 17,536 onshore and offshore active mutual funds clients, up 167.6% year-on-year and up 42.1% quarter-on-quarter. Moreover, as of the end of September 2020, there were 944 black card clients, up 7.9% year-on-year and up 4.9% quarter-on-quarter.

As of September 30, the turnover rate of elite relationship managers remained at the industry's lowest level of 2.3%. In an effort to upgrade the model of relationship managers serving clients, we have transformed the single relationship manager service model into 18 work based (inaudible) triangle model, ensuring that there is a dedicated team providing services to our diamond and black card core clients, continuously improving our service quality and operational efficiency. At the 2021 group strategy meeting held in October, the company has established a client-centric growth strategy to further improve client service experience and to better reach and serve our high net worth clients. We have also implemented a new talent strategy to continuously recruit and invest in new talent and relationship managers.

(foreign language)

[Interpreted]

For asset management, as of September 2020, growth of AUM stood at RMB 155.7 billion, driven by continued voluntary early redemption of single counterpart crediting, down 11.8% year-on-year and down 2.3% quarter-on-quarter. The share of PE and public security funds in total AUM increased by 10.3% and 1.6% year-on-year, respectively. The overseas AUM was RMB 25.5 billion, accounting for 16.4% of the total AUM, a slight increase from the previous quarter.

According to the new regulations on mutual fund distribution, Gopher has started establishing a direct GP sales system to provide support for its direct sales management of various fund managers. Gopher is expected to further expand its PE force size in the future. As the size of Gopher's force extends, we will continue to promote our ecological collaborations with leading VCP partners. The reform of the Chinese capital markets, including high-tech innovation board, aka the STAR Market, and registration based IPO system will play a long-term role in improving the performance of leading primary market funds, consequently benefiting non-US clients.

In addition to the continuous development of PE funds, Gopher will also improve its R&D and investment research to circle around the purpose of creating value for our clients, to expand the AUM PE funds is a key strategy to provide differentiated investment solutions for our high and ultra-high net worth clients by focusing on generating absolute returns for them through modest strategy funds. The scale of Gopher's target return multi strategy funds increased 571.4% year-on-year in 2020.

(foreign language)

[Interpreted]

In terms of company management in 2020, we have initiated a comprehensive business transformation by digitalizing Noah's 15 year-long industry knowledge and offline operations experience to improve the position and efficiency of our daily operations. We're committed to focusing on KYC, know your client, KYA, know your agents, and KYP, know your products, in order to digitally understand client needs, identify the ability and type of relationship managers as well as labor fund products in order to accurately matching the 3.

Digitalizing our component capacity based on KYC, KYA and KYP is also our key focus. 2020 is the turning point of the wealth management industry in China. Wealth management industry has bidden farewell to the area based on implicit guarantee and entered into a new stage of standardized NAV-based assets, testing the all-round capabilities of financial institutions. We believe that in the new era of transparency and fair competition, the industry will develop faster after adjustments. Institutions that survive the transformation will capture higher market share as a result.

China's personnel and household savings have reached RMB 100 trillion. The overall AUM of private banks has reached RMB 14 trillion. There are more than 800,000 high net worth private bank clients. Yet 80% of the total investable assets still remain in the savings account or haven't been managed by wealth managers. This deep and broad market competitive landscape is still fragmented, and we expect the market consolidation and the formation of major players in the industry to be completed around 2025. Meanwhile, an industry transformation will be preliminary completed through digitalization of operation capacities and industry research-based investment capacities.

Noah is currently at a turning point -- a key turning point. We need to build a process-oriented company with a clearer organizational structure and methodology, conduct a digital transformation to make information more accessible and transparent. Use KYC, KYA and KYP to improve the quality of the services offered by relationship managers to clients. Accuracy and efficiency are the 2 keywords.

(foreign language)

[Interpreted]

Looking ahead to 2021, we have proposed to achieve high-quality growth in the future based on digitalization and such challenging goals in key dimensions, including high net worth client base, AUM, transaction values and revenue targets.

We plan to invest at no less than 3% of the annual total net revenues in the R&D of client user interface and technology, respectively. As we celebrated our 15th inception anniversary and 10th listing anniversary on the New York Stock Exchange on November 10, 2020. We raised the theme, one vision, one heart and one battle. Noah's forefounders, more than 100 core management and 15 black card clients departed from (inaudible), part of the Gobi to walk along the road, led the legendary monk Shenzhen of the Tang dynasty had covered to rewind Noah's funding journey once more.

It's clear to us that this is a journey of exploration and refinements for the brave. It is also a tough growing process in which both the team and individuals need to work hard and challenge ourselves. Noah's staff and clients spent 2 days walking 66 kilometers in the Gobi desert, resembling Noah's determination to start a new undertaking. That journey represented one promising company with endless future having united one group of hard workers in order to pursue one new dream from one new beginning.

During the challenging journey to the Gobi Desert, everybody deeply understood the spirit of Gobi. It didn't [mattered] where we came from or how strong we were, but that we were all determined to challenge everything and win victory and take action to go all out and work hard. At a recapped meeting on the Gobi journey, the forefounders of Noah, myself, (inaudible) decided to let go of our titles as founders and reinvent ourselves collectively by being elected again. Today, we have also announced a share buyback plan approved by the Board of Directors based on our confidence in the company's development and long-term value. We have been granted permission to install a 2-year maximum USD 100 million share buyback plan. We thank the shareholders for your patience and support. Now let's welcome our CFO, Grant Pen to present the third quarter financial results.

Thank you, Chair Lady. And thank you, Sonia, for translating. Hello, everyone. We're very excited to share with you the strong financial results for the third quarter 2020, marking very successful transformation rising from resumed client trust and confidence of the economic outlook. We're also very happy to report that we're ahead of schedule to deliver the full year non-GAAP net income guidance amidst a very volatile and challenging environment this year.

Net revenues for the third quarter of 2020 were RMB 859 million, up 2% year-over-year and 15% quarter-over-quarter. Non-GAAP net income for the quarter was RMB 301 million marking a total year-to-date. Non-GAAP net income of 2020 of RMB 864.2 million, achieving 96% of full year guidance. By revenue contribution, we achieved onetime commission revenue in the amount of RMB 194.8 million compared with RMB 150 million the same quarter last year, up almost 30% and 53.5% quarter-over-quarter.

Considering this growth is achieved with very little contribution from overseas insurance due to the COVID-19 situation, we're very happy to see the full recovery of capability of providing the right products to our clients.

As mentioned by Chair Lady Wang, what's truly encouraging for us is to see the record number of active clients, reaching 20,509 this quarter, up 105.9% year-over-year and almost 40% quarter-over-quarter. The growth was filled by increased activities in both the conventional products and mutual funds distributions. We believe this indicates a restored client confidence and a sign of resumed rapid business growth.

Total transaction values the financial product we distributed during this quarter was RMB 28.8 billion, an increase of 122% from a year ago, among which RMB 20.8 billion were public security products or standardized products, also a record high for this category since listing. After 5 quarters of transformation, public security product has fully replaced nonstandardized single counterparty credit funds and became the number one, onetime commission contributor. At the same time, PE products, Noah's specialty, also had good distribution momentum and recorded RMB 7.2 billion, a 107.7% increase supported by leading GP's products as well as Gopher's own PE secondary fund that recorded RMB 1.5 billion of fundraising.

The recurring service fees in third quarter were RMB 560 million, up 8% year-over-year and 18% quarter-over-quarter, contributing to 65.2% of total revenues. The growth of our accumulated distributed products as well as the high-quality of our assets under management continue to provide strong revenue streams. Another key attribute of the growth was back-ended management fees arising from accelerated redemption of the credit products. Total performance-based income for the third quarter of 2020 was RMB 70.5 million compared to RMB 42.4 million for the same period last year, up 66% year-over-year. The main drivers for strong performance-based income were private equity products as well as private security funds we place for our clients, demonstrating our increasing capabilities in product selection and also investments.

Operating profit for this quarter was RMB 340.72 million, up 48.2% year-over-year and 8.7% quarter-over-quarter. Operating margin stood at 40.4%, even with decreased government subsidies. Total compensation cost was down by 8.2% year-over-year this quarter, but up by 9.6% quarter-over-quarter due to relation managers commissions arising from increased distribution values as well as continued recruitment of senior executives and relation managers.

By segment, net revenues from the wealth management business were RMB 627.7 million, up 15.7% and 15.6% quarter-over-quarter, which contributed to over 73% of total net revenues. And the net revenues from the asset management business amounted to RMB 222.4 million, down 7.5% year-over-year, but up 22.4% quarter-over-quarter. Our lending and other business continued to contract as we are now in the process of restructuring that segment to form a digital and technology powered wealth management ecosystem, with new channels, new platforms and new products, including the new comprehensive services called Noah digital intelligence on the backdrop of the evolving regulation as well as industry digitalization.

On the balance sheet side, as of September 30, 2020, the company had RMB 4.6 billion in cash and cash equivalents improved from RMB 4.2 billion in the last quarter. We continue to maintain a very healthy financial position with no interest-bearing debt on our book, and our healthy cash flows also allows us to announce a 2-year up to USD 100 million share buyback plan today, which reflects our continued confidence in our business and China's wealth management and asset management industries in the future.

As Chair Lady mentioned, we just celebrated our 10th listing anniversary on New York Stock Exchange, and we believe this quarter's strong performance marked just the beginning of the next exciting chapter for Noah. I'm very proud that at this firm, we have demonstrated resilience when facing such a major strategy shift and a huge environment pressure of 2020 by continuously delivering strong financial results quarter-by-quarter. Our key metrics, including top line net revenues, bottom line, distribution values as well as the number of active clients.

Looking ahead, as a member of management team on top of the continuously managing healthy profit margin and cash flows, I'm also dedicated to investments in areas where we can develop our strategic capabilities for the long term, especially in technology in enhancing client experience as well as strategic investments, which will help our client-centric digitalization of our operations and growth targets. Now we open the floor for questions. Thank you.

(Operator Instructions)

And our first question will come from Ethan Wang with CLSA.

I have two questions. The first is on our full year guidance. Just wondering, is our full year guidance too conservative because based on our 3 quarters results. It seems like we really improve our full year guidance a bit. So we're going to have -- so the fourth quarter revenue, if we think about like a reasonable growth from last year, then our full year guidance should be higher? How should we think about this? That's my first question.

And second question is on regulations. Two parts. Can we get an update on the latest development of advisory licensing? And second is on the internet deposits. It seems like regulators have recently tightened the group in this area. So how will this affect our business on the growth and what's our latest trend for our deposit business.

Ethan, can you repeat the last half of your question about the internet deposits?

Sure. It seems like regulators have recently tightened on this internet deposits. PBOC, Financial Stability Board went out to -- based on irregularities in this area. So what would affect our business because previously, we were selling, we would plan to go into this business, does this affect our plan.

Sure, Ethan. Thank you for the question. I'll take the first question, and Chair Lady Wang will address the second. For the first question, I believe when we actually gave the full year financial guidance at the beginning of the year, obviously, the outlook for 2020 was quite uncertain. We believe that we made a, I would say reasonable, I wouldn't say it's overly conservative. I believe at that time was still pretty challenging. Looking ahead at the road ahead of us, especially knowing that the gate to Hong Kong wouldn't be open very soon. So we'll be missing a pretty big chunk of revenue from overseas insurance.

So we don't believe that target was set too overly conservative. And we were lucky to see a very strong financial performance in the third quarter, but remain calm for the rest of the year as in the industry, we do experience some sort of seasonality in the fourth quarter because of holiday season as well as the fund uses for institutions.

So we still remain -- maintain the same guidance, although we're very confident that we'll be able to at least get to the very high end of that range, a little bit exceeding that particular guidance. So I'll let Chair Lady Wang take the first -- the second question.

(foreign language)

(foreign language)

And our next question will come from [Yu Yang] with BICC.

(foreign language)

(foreign language)

(foreign language)

Our next question will come from Daphne Poon.

Congratulations on strong results. So I have three questions. So first is regarding your Gopher management fee. We saw that the management fee has been picking up quite consistently in the past few quarters. So in the latest quarter, by -- our calculation is by 92 basis points. So just wondering if there's any particular drivers behind and whether the management see this as a sustainable trend?

And second is also regarding Gopher. So we noticed that the AUM for the public securities from the Gopher, the growth has been a bit muted in the past few quarters. So just wondering what's the reason behind? And what's the outlook there? And also if the management can share the outlook on the overall Gopher AUM, where do you expect for a turnaround maybe sometime into next year?

And lastly, just wondering if there's any update on the Camsing settlement plan in terms of your clients' staffing so far?

Thank you, Daphne. Let me translate the question first.

(foreign language)

[Interpreted]

Daphne, you question on the Gopher management fee. First of all, it keeps going up once we're actually having thicker layer on private equity. So -- which actually comes in with the higher management fee than the credit products that had little management fee -- recurring management fee.

And two is the increase this quarter actually still has a little to do with the continued exit of some of the credit products that have back end management fees. We expect that to -- at least increasing in the PE products will continue to bring in healthy management fee flow.

And in terms of the Camsing update, we have -- as of the November 13, the first batch date for the settlement plan, we have two batch dates. As of the first batch date, we have signed about 240 contracts with our clients, so 1/3 in terms of number of people. And it's almost 30% as well for the total amount outstanding.

So it's about $1 billion, in dollar amount and about 240 in number of holders.

And the second batch comes along at the end of the year, which will be the end of the settlement plan. We expect that to be probably going to be around 50% to 60% total number of people to be conservative.

Okay. Sorry, can I just clarify the (inaudible) that is just for second batch or total number of clients?

Total number of clients? Usually, it also coincides with amount. So it's about of 50% to 60% and 50% to 60% of the dollar value. So that's on the conservative side. If we are being a little bit optimistic, I think it's probably in the range of 70% to 80%. We'll see.

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.

Okay. So thank you, shareholders and analysts. Very excited to be able to deliver these results for you. And we'll have, obviously, one-on-one calls afterwards, so we could probably talk a little bit in more details. So see you in a bit.

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.]