Noah Holdings Ltd (NOAH) 2020 Q2 法說會逐字稿

Welcome to the Noah Holdings Limited Second Quarter 2020 Earnings Conference Call. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Chair lady Wang. Please go ahead.

Thank you, operator. (foreign language)

[Interpreted] Regarding the teleconference agenda today, I will start with my viewpoint on macro level. Then summarize Noah's overall performance in the second quarter of 2020, the developments of major business segments as well as assessments we hope to reach with our clients on the Camsing incident. Then Grant will present financial results of the second quarter. This call will be concluded after a Q&A in the end.

The wealth management industry has been experiencing underlying transformation in China, which has been accelerated by the COVID-19 epidemic. In my view, 2020 is the critical year for the transformation of Noah. Through organizational capacity building, client insight and process restructuring, Noah is changing to be more adaptable to the new environment of wealth management and asset management in China.

With the deleveraging in 2018 and the rectification of chaos in financial industry in China in 2019, the tightening of supervision and the impact of the epidemic, NAV-based products promoted by the new guidance on standardizing asset management business of financial institutions has quickly developed into the mainstream product in China's wealth management industry. The renewed demand from clients saw beyond industry expectations. We believe that further investor education and updated client perceptions are the keys to NAV-based wealth management.

For the segment of wealth management, we have made much effort to train product-driven relationship managers as investment consultants. We launched our self-developed mutual fund investment consultancy platform. For the segment of asset Management, we have strengthened our investment research and direct investments capabilities and promoted direct sales and multichannel institutional sales, all of which have made progress to some extent.

Next, I will report the second quarter results from the aspect of wealth management, asset management and operational efficiency.

Starting from the third quarter of 2019, Noah has ceased the offering of nonstandardized single counterparty private credit products and made thorough transformation to standardize the products, for which RMB 17.97 billion was distributed in the second quarter of 2020, up 198.5% year-on-year. The transaction value of standardized products in the first half of 2020 reached RMB 37.08 billion, increased more than 3x over the same corresponding period last year.

Excluding nonstandardized single counterparty private credit products, transaction value rose by 45.2% year-on-year. This data indicated a preliminary success of the transformation and the share of nonstandardized single counterparty private credit products in transaction value before the transformation has been completely replaced by that of standardized products. In the field of standardized products, our new capabilities are being developed and we expect more potential for growth in the future.

In the second quarter of 2020, Noah achieved the net revenues of RMB 750 million, up 0.2% quarter-on-quarter, and non-GAAP net income attributable to shareholders of RMB 707 million -- sorry, RMB 307 million, up 20.1% quarter-on-quarter. The impact of COVID-19 epidemic on the revenue of the overseas insurance sales has been offset by the prominent rally of the A-share market and more successful exits of primary market products, revealing our long-term product screening and direct investment capabilities and once again illustrating the countercyclical feature of our business.

In the second quarter, the net revenue of overseas sector was RMB 180 million, down 21% year-on-year and down 11% quarter-on-quarter, accounting for 24.7% of the group's total net revenues.

In the second quarter of 2020, including mutual funds, there were 14,703 active clients, up 48.7% year-on-year, of which 12,343 were active clients of mutual funds, up 140.3% year-on-year. While the number of black card clients was 900 as of the end of June 2020, up 5.4% year-on-year.

A new compensation scheme was implemented for the team of relationship managers in the second quarter. As of June 30, the turnover rate of elite relationship managers remains at the industry's lowest level of 1.4%. The online mutual fund workstation for relationship managers was launched, providing more tools for their business development.

In the second quarter, revenue from our insurance business fell by 68.6% year-on-year and 47.1% quarter-on-quarter due to the global epidemic and travel restrictions. However, more preorders have been arranged in response to client demands. And we expect, once the travel restrictions is lifted, overseas revenues will surge significantly.

For the segment of asset management, as of June 30, 2020, the asset under management of Gopher was RMB 159.4 billion, down 1.4% quarter-on-quarter and down 11.8% year-on-year, mainly due to our voluntary early redemption of single counterparty private credit funds, resulting in a net decline of RMB 5.8 billion in size. Excluding the impact of early redemption of those credit funds, the asset under management of other asset classes increased by RMB 3.52 billion quarter-on-quarter, of which private equities and public securities increased by RMB 2 billion and RMB 2.6 billion, respectively. Overseas asset under management was RMB 25.77 billion, accounting for 16.2% of the group's total asset under management, remaining at the same level of the previous quarter.

Gopher is a global multi-asset class asset management company. We have been continuously improving its asset allocation capability. An independent fixed income division has been established to meet high net worth clients' demand for stable returns. As of June 30, 2020, this specific asset category had AUM of RMB 4.66 billion, up 42.5% year-on-year and up 10.4% quarter-on-quarter.

Meanwhile, Gopher has been strengthening its credit rating and investments research capabilities. The focus of primary market is still on fund of funds, S secondary fund and co-investment funds, which AUM reached RMB 107.71 billion at the end of the second quarter, up 3.2% year-on-year and up 1.9% quarter-on-quarter.

For real estate investment, the strategy is to focus on preferred equities of residential projects, which AUM reached RMB 17.24 billion at the end of the second quarter, down 10% year-over-year and down 5.4% quarter-on-quarter. For public securities, the focus is on funds of target returns with a total of RMB 11.83 billion under management at the end of the second quarter, up 45.1% year-on-year and up 28.4% quarter-on-quarter.

In 2020, Noah and Gopher's key recommended configuration product for high net worth clients are equity and equity-debt hybrid products with 3-year lockup term. It is not an illusory rhetoric to believe in the value of the best portfolio managers and long-term value. Noah's research has found that through a 3-year average holding period, while partially sacrificing some liquidity, the level of positive returns is adequate to meet and serve the needs of wealth management clients.

In the second quarter of 2020, for the business management, we initiated the design of a new organizational structure, conducted senior management team building, cocreated a new evaluation criteria of senior management and reached a preliminary consensus. Meanwhile, the importance of technology in driving business has been upgraded to an unprecedented level compared with its previous supporting function. We believe that the investment philosophy of wealth management and asset managers cannot just stay as theory and some instrumental measures should be provided by which relationship managers and clients can gradually reach a consensus, all of these can be achieved through technological means.

Supported by technology tools, clients can identify exactly whether the product drawdown is beyond the originally set risk preference. A candid communication is formed among the asset manager, the relationship manager and the client. The previous requirement for wealth management was focused only on duration and expected returns, and the client wealth management was only focused on whether the distribution institution has the ability to provide implicit guarantee, whether implicit guarantee is promised, and investment return was the only criterion for measuring client satisfaction. Transforming into NAV-based wealth management products, the biggest difference for relationship managers is that not only are investment results important but so are [investment strategy] and process.

In June 2020, we submitted an application for the license on mutual fund investment advisory in China. And in the same month, our overseas mutual fund platform, iNoah, was launched on schedule. We are gradually building Noah's global open mutual fund platform.

The epidemic has accelerated the company's digitalization and online transformation. From January 16, 2020, Noah hosted the Virtual Investment Strategy Summit; Noah's Staying at Home online daily conference in February and March; and from April 1, 2020, 5 other online marketing programs were launched, including Fortune Life, Top Investor, Noah Live Time, Noah International Zero Distance, covering all asset classes. We invited 65 fund managers to share industry dynamics, market trends and investment strategies with clients. By the end of June, 8 series of investor education sessions generated a total of 152,500 page views, covering 30,300 clients.

Driven by new market environment and Noah's paradigm transformation, we are bound to initiate and develop management styles that can adapt to the new market. First of all, we will further clarify that global open products and distribution channels should act as two-wheel drive. Product-wise, we will establish screening criteria and quantitative data platform for mutual funds and private equity. Client-wise, we will better understand the client needs and build a complete database of client requirements.

Noah's future depends on the improvement of organizational capabilities. We will be guided by client needs led by strategic planning to create a platform-based and mission-oriented organization with two-wheel drive of qualifications and performance management. Noah aims to achieve the evolution from individual leadership to organizational leadership.

Recently, we have also learned that the regulators might introduce new management measures for independent fund distribution companies, reaffirming the focus on the sale of mutual funds by distribution institutions, for which we have also prepared, and the operation platform for mutual fund sales has been launched. There will be no direct impact on our business after the new measures comes into effect, and we will still focus on cooperating with leading private equity funds through Gopher's fund of funds [and feeder fund] models. Our clients will continue to have access to investment opportunities in outstanding private equity products.

Finally, we announce a settlement plan that has been approved regarding the Camsing incident. Noah has been in business for 15 years, and we are grateful for the trust our clients place in us. We respect the market, respect common sense and have attracted a group of clients with mature investment concepts.

Encountering the Camsing incident in 2019 and experiencing the COVID-19 pandemic in 2020 are indeed huge challenges for Noah. However, on the basis of continuous trust of clients, Noah still achieved the initial success of paradigm transformation under the difficult environment. Clients continued to trust us, employees remained united to push Noah's transformation forward with a stronger posture. In the most difficult moment, when the salary of all employees was cut, we still maintained the lowest turnover rate in the industry. Every one of us has adhered to Noah's mission and values, and clients have continued to give us trust, which have really moved and inspired the management team.

As of August 20, 2020, more than 54% of Camsing clients have continued to place orders with a total amount of nearly 5.1 billion. This is a difficult choice, but it is an active settlement plan. Although we are confident in the victory of this case, we're also very clear that this will be a protracted battle. The management team, upon receiving the approval from the Board of Directors, proposes a settlement plan with clients. This plan will last for 10 years. In the future, clients will be on the same side as our shareholders and work with us to promote Noah's progress and long-term sustainable development.

After experiencing the Camsing incident and the COVID-19 crisis, the spirit of all Noah's employees has been refreshed. Never waste a good crisis is our belief. There are still difficult times ahead, but all Noah's employees will do their best and work harder than before.

We thank clients for their patience and thank the team for their dedications and services.

Next, our CFO, Mr. Pan Qing, will present the financial report.

Thank you, [Nora]. Dear shareholders, analysts and investors, as you might recall, we had anticipated a very difficult second quarter as COVID-19 prolonged the recovery of economies, travel restrictions continued to worsen and the real impact on domestic economy, especially in global export/import situation, continued to put pressure on small and mid businesses. But today, this is why we're especially happy and very encouraged by the delivery of strong financial results for the second quarter of 2020 on the backdrop that COVID-19 has been ravaging the world's major economies.

First of all, we are not only ahead of the schedule to meet the full year guidance of RMB 800 million to RMB 900 million non-GAAP net income target as we ended up with a non-GAAP net income of RMB 307 million for this quarter and actually RMB 563.1 million for the first half of 2020, well above 60% of the range, but also reported a record-high income from operations of second quarter of RMB 300 -- almost RMB 320 million. Our operating profit margin also improved to 42.7%, attributed to high-performance based income and continuously improved operating efficiency.

But first, let me walk you through the revenue and transaction values of the second quarter. Although we're happy with the overall income and margins, we have to admit that the COVID-19-caused travel restrictions continue to impact the overseas businesses, especially in new insurance transactions, which led to a decline in onetime commission of RMB 127 million for the quarter, even when we managed to achieve second consecutive RMB 20 billion mark in transaction value this quarter, following our transformation of products in 2019. However, we have accumulated over 1,000 overseas insurance preorders that are readily converted upon the lift of travel ban.

Although our transformation of product offering is continuing to put structural pressure on onetime commission fee rate, standardized products' transaction value remained strong, which was close to RMB 18 billion for the quarter, bringing total transaction value of this quarter to RMB 21.4 billion.

For the second quarter, recurring service revenue reached RMB 474.3 million, up almost 9 -- up almost 10% year-over-year and 5.5% quarter-over-quarter driven by increased AUM in public securities and PE/VC products. We also booked in performance-based income of RMB 91 million, which was the second-highest record for us since the listing of the company, arising from private equity products as well as standardized funds we place for our clients, demonstrating increasing capabilities of our product selection and investments.

Operating margin also set a historical record for the company since the listing, a combination of attributing factors from increased operation efficiency and also a RMB 50 million government subsidy this quarter. But even without the government subsidies, the operating margin is still 35.2%, which is at a pretty high level we expect to maintain in the coming quarters.

By segment, net revenues from the wealth management business contributed 72.6% of the total net revenues with RMB 543 million, down by 13% year-over-year and flat from last quarter, showing impact by the weak performance in overseas insurance sales. Net revenues from the asset management business amounted to RMB 181.6 million, up 6.2% year-over-year and almost 10% quarter-over-quarter, which made up 24.3% of total net revenues.

Our lending business is still under strategy shift from direct lending to loan facilitation. The new business model bears minimum credit risk as we only provide facilitation services to other financial institutions. It accounted for 3.1% of total revenues. We'll continue to restructure and upgrade this business segment.

As Chairlady Wang has mentioned, we're delighted to see the clear switching in product mix that's in line with the transformation to standardized products. Comparing to the same period last year, RMB 9.75 billion out of RMB 24 billion transaction values in the quarter was the single counterparty private credit products, while standardized products only took up 25% of the pie in the second quarter in 2019. But after 1 year persistent efforts and transformation, standardized products now accounted for 83.1% of the total financial products distributed.

We're determined to put clients' needs first and to source and supply safer products and committed to diversification and asset allocations. But also on the traditional spend side, in the meantime, we're also happy to report, we have recently successfully closed the RMB 2 billion fundraising for Gopher's S5 secondary PE fund.

With the launch of our overseas mutual funds mobile app, iNoah, together with the parallel onshore mutual funds version, Fund Smile, the company has built up a global mutual funds platform offering carefully selected products for our clients around the world. And in the second quarter, we have reached RMB 10 billion AUM mark in mutual funds. For the first half 2020, we have incurred approximately RMB 100 million in IT-related expenses as we have mentioned in last quarter that we are putting strategic resources in IT- and technology-related fronts.

And moving to our balance sheet. We continue to maintain a healthy financial position and recently, Standard & Poors reaffirmed our investment-grade rating. The debt-asset ratio has been lowered to a historical low of lower than 16%, 15.9%, with no interest-bearing debt on our book. We believe it's a blessing to maintain a strong balance sheet, which can take us through the cycle of economy of uncertainties that's still filled with unknown challenges. With that said, we are also closely monitoring the market for strategic opportunities that may help us with the growth of our business and also the strengthening of capabilities in the next stage of development.

Moreover, Noah has been increasingly paying attention to responsible investment. As a practitioner of long-term value investment and sustainable development, Noah Holdings Limited and Gopher Asset Management both become signatories of the UN-supported Principles for Responsible Investments, or PRI, investor initiative in April this year. Noah is the first independent wealth management firm from China to participate in this initiative, in line with international standards. Meanwhile, Noah's MSCI ESG rating was upgraded shortly after. We also just released the sixth annual Noah sustainability report, which is available on our newly launched ESG website.

We also feel very blessed that our employees remained safe since the breakout of the virus, thanks to the effective management by local governments, paired with more online interactions with our clients, which ensured our continuously and orderly operations for the past 2 quarters. The well-being of our employees, clients as well as the community has been our top priority. And we also have emergency procedures in place if any infected case in the company caused workplace unexpected shutdown.

When it comes to the Camsing settlement plan, we believe it's the second shoe dropping that's associated with this matter, and that will allow us to move forward with lighter luggage. It's also a plan that reserves cash flow for the company and also comes with relatively manageable dilution to the stock price. In the meantime, it's also critical for us to be able to secure a group of important clients to continue to invest with us. As Chairlady Wang has mentioned previously, the group of clients' new investment have already reached over RMB 5 billion that passed the principal in that particular investment, and we're confident this number will only grow once the plan is accepted by our investors.

Overall, we're pleased with our first half results in a year full of uncertainties and challenges. Despite challenging headwinds, considering we have achieved 70% of the floor of the initial 2020 profit guidance and have the confidence on business development for the coming quarters, I'm happy to report that we'll revise our 2020 non-GAAP net income guidance upward by RMB 100 million, and the new range is RMB 900 million to RMB 1 billion. This revision reflects our stronger transaction values and performance-based income expectations as well as overall outlook of the business for the remaining year.

I will now open the floor for questions. Thank you.

(Operator Instructions) Our first question is from Stephanie Poon at Citi.

So I think mainly 2 questions from me. First is regarding your operating margin. We have seen a very meaningful improvement in your operating margin in the second quarter. So just wondering in terms of the outlook, do you think it can sustain relatively high level? I recall previously, your guidance for the full year margin is above 30%. So do you think, actually, like, you can exceed this guidance? And what is your outlook for the full year?

And the second question is regarding -- just want to get some color on your transaction volume trend in July and August. So we have seen a pretty strong A-share market performance and the demand for the home mutual fund market has also been picking up quite strongly. So yes, so if possible, can you share, like, what is your product sales run rate, like, in the past 2 months?

Sure. Just give me a second. Yes, so thank you, Daphne. Yes, the second quarter actually is a little bit higher than expected as the government obviously is supporting entrepreneurs through the difficult period, and we have received about RMB 50 million in government subsidies. It's about RMB 40 million higher-than-average subsidy we normally see in the past quarters. So without that number, the second quarter operating margin will be around 35%.

We're still maintaining the 30% operating margin guidance for the rest of the year, as you would imagine, that some of the investments, especially in IT, and strategic investment actually tend to show their impact towards the second half of the year. Some of the hiring actually is taking place slowly. So I believe it will be a little bit over 32% but probably around 32% for the full year's margin.

And in terms of transaction volumes in July, we actually -- from the numbers we have seen from our sales team in August as well, it continued the momentum. I think without too much surprise, it will be at least close to the first quarter's level. And also the mix of the transactions will be mixed with more private equity items as the actual arrangement for the launch, especially they are moving their focus on to Gopher's own product, in the product, as I just mentioned, the secondary market as well as some of the U.S. dollar PE funds.

So I'm pretty happy with what we have seen for the first 2 months in third quarter. And I'm hoping the momentum will continue, especially in light of some of the news that Hong Kong might lift the travel ban before the national holiday, which will be a strong boost in transaction values as well.

The next question is from Xue Yuan at CICC.

(foreign language)

(foreign language)

[Interpreted] So I'll try to -- it's okay. I'll try to translate for [Nora] and also throw in some of my insights here. First of all, in terms of carry income, it basically consist of 2 part. One is from the private equity. The other is from the public securities funds. We believe that with the AUM that we have in the PE AUM, that especially the government's policy as well as the activity on the STAR Board, for example, the exiting of the existing AUM will actually become more and more apparent going forward. There will be a statistic on the market that there is about, cumulatively, RMB 230 billion of funds raised for top general partners and Noah actually accounted for about RMB 80 billion of that. So obviously, we are enjoying the position of the leader in this industry.

And also, we have about 50-or-so portfolio companies that's been either in the process or already listed on a STAR Board. For example, 2 recent examples: one is the Cansino Company that, actually, we had original investment about -- at the cost of RMB 50 million, and on paper, it has 100 multiple returns; as well as the KE (foreign language), the real estate agency, we also have investments in there.

And for the secondary market funds, obviously, work with the top GPs, for example, the Hillhouse, GaoYi and (foreign language) Greenwoods, so we have a statistics that some of the clients actually have been making money since the beginning of the investment. So we are working with the top GPs, also gives us a pretty good advantage in terms of helping the client to gain and also for us to make performance fee. In terms of fee rate, obviously, it's at the market level, it's actually quite different depending on the different products and different managers. So it's hard to put a number to it.

In terms of smoothing out the volatilities, especially in transaction values, I think, we still have a pretty good private equity long-chain distribution pipeline for the rest of the year, as I just mentioned before, as well as some of the insurance and overseas trust business that's being suspended temporarily because of travel ban. And we expect that to actually pick up for the rest of the year once the travel ban is alleviated. Also, obviously, with the strengthening on the public security products will help smooth out the volatility.

And one of the main strategic products that we have is the balanced fund between bond and stock. Also, as you have -- you may be familiar with, we have been mentioning that this type of product actually have a 3-year lockup for clients to enable them to actually to ride through the tough cycles. We had original target of RMB 20 billion of this fund. Obviously, it's probably not going as fast as we want it to, but we're pretty confident that this will become a, basically, fundamental layer for our clients' allocation of the assets.

And when it comes to the competitions from so-called Internet players, I believe, we have quite different customer groups as they do. On average, the transactional values that people actually place order on our platform for mutual funds will get at least -- in general, it's around the million mark for mutual fund purchases, and that will be very, very rare for this type of retail internet platform, as you have to mention. So we do have pretty different customer segments. And we're not planning to actually go down to that level to service the real retail clients. I think we're still trying to provide more selections for our clients in the mutual fund products. (foreign language)

Operator, do we have more questions on the line?

Certainly. The next question comes from Ethan Wang at CLSA.

(foreign language)

(foreign language)

[Interpreted] Okay. So let me translate real quick. For the savings product, we actually have a internal data point that there's about 7 billion AUM for our clients who is older than 65 years old. And for the senior clients, especially the ones with age over 70, we have an internal policy that we will not recommend or actually help them to place their investment in risky reward -- riskier products. So it's almost like a fund of funds for savings products, which is safer. And actually, it does have the guarantee by the bank, up to a certain amount of principal. So we believe that's actually a safer choice and also an alternative for our senior clients who wish to continue to invest with us.

In terms of growth of iNoah, it actually did only come online in June. We haven't really put in a massive effort in terms of to promote that, really just opening that up for internal clients for their overseas assets, especially their need of purchase and selection mutual funds. In the next stage, once iNoah first version stays stable, and we actually will be launching probably a more massive and concentrated effort in promoting that, probably towards the end of this year or early next year. Currently, we have about 5,000 users, and most of them are existing clients of Noah. (foreign language)

Amy, do we have any other questions in line?

We show no further questions -- actually, we do. We have a question from Daqi Jiao at JPMorgan.

We have a question on the cost. I think we see a lot of cost reduction in the second quarter, but what kind of sense do you have -- like, salary charges and also, like, government subsidies is rising, but we want to get a sense of what's the portion? There were some strategic changes that, like, moving process online and making our cost going down in the future, like, something like that.

Okay. Yes. We actually -- without the government subsidies, we still achieved about 35% in terms of the operating margin. Obviously, that showed our continuous effort in terms of especially moving some of the conferences online with our clients, actually did save quite a bit of traveling expenses. I mean that's part of due to the restriction on travel because of the epidemic situation but, at the same time, we also find that sometimes actually people stay more focused and it's actually more efficient for us to have some conferences online.

Obviously, we're not moving online completely. We still believe the off-line seminars are good opportunities for our clients to see each other, to shake hands and to be more personable, but that's part of the effort we have been leading in terms of cost reduction. And secondly is, obviously, we're continuing investing in IT technology and it is increasing the efficiency in terms of our clients as well as relation managers to operate in business. So we'll continue to look for ways to increase the efficiency and also actually effectiveness of some of the online seminars that we'll be able to use to deliver value and also good investment opportunities for our clients.

This concludes the question-and-answer session. Would you like to make any closing remarks?

So I think that we'll be very -- it was a challenging quarter, and we're very happy to deliver the strong results for this quarter. As well as we maintain a pretty optimistic outlook for the coming quarters. (foreign language)

Thanks.

Okay. Well, thank you very much for the time of investors and shareholders, and we'll be holding the summit conference probably afterwards. So feel free to reach out to us, and happy to talk to you guys. Thank you.

Thank you. (foreign language)

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.]