Noah Holdings Ltd (NOAH) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Noah Holdings Limited first quarter 2012 results conference call. At this time all participants are in a listen-only mode. Following management's prepared remarks there will be a Q&A session. During the Q&A session we ask that you please limit yourself to two questions and one follow up that we may have further participation. If you would like to ask further questions you may re-enter the queue to do so. As a reminder, this conference is being recorded.

Joining the conference today are Ms. Jingbo Wang, Co-Founder, Chairwoman and CEO, and Mr. Tom Wu, CFO.

After the close of the US market on Wednesday, Noah issued a press release announcing its first quarter 2012 financial results, which is available on the Company's IR web page at ir.noahwm.com. This call is also being webcast live and will be available for replay purposes on the Company's website.

I would like to call your attention to the Safe Harbor statement in connection with today's call. The Company will make forward-looking statements, including those with respect to expected future operating results and expansion of its business. Please refer to the risk factors inherent in the Company's business and that have been filed with the SEC. Actual results can be materially different from any forward-looking statements the Company makes today.

Noah Holdings Limited does not undertake any obligation to update any forward-looking statements as a result of new information, future events or otherwise, except as required under applicable law.

The results announced today are unaudited and subject to adjustment in connection with the completion of the Company's audit. Additionally, certain non-GAAP measures will be used in our financial discussion. A reconciliation of GAAP and non-GAAP financial results can be found in the earnings press release posted on the Company's website.

I would now like to turn the call over to Ms. Wang, CEO. Ms. Wang will be speaking in Chinese and Mr. Shang Chuang, the Company's IR Director, will translate her statements into English.

(Interpreted) Thank you, operator, and thank you all for joining us today. With me today is Tom Wu, our Chief Financial Officer.

I will start by reviewing our first quarter 2012 performance, and providing an update on our new business initiatives as well as our strategy throughout the year. Then Tom will discuss the details of our financial and operating results. We will be happy to take your questions after that.

In the first quarter of 2012 we saw macro environments stabilizing compared to the previous quarter, and gradual improvement in our business. We distributed RMB5.3 billion worth of products to 952 clients, and achieved net revenues of $16.8 million, a 10% increase year over year and 17% increase quarter over quarter; generally consistent with our expectations.

Our non-GAAP net income for the quarter was $3.7 million. Tom will explain the changes in costs later. Overall we are cautiously optimistic by the signs of recovery in client investment confidence.

I would like to take this opportunity to discuss with you our mutual fund distribution business, Noah Upright, and our offshore business, Noah Hong Kong. As you know, Noah Upright received license from CSRC on February 22 and Noah Hong Kong received license from SFC on January 4.

There are short-term cost pressures associated with developing new businesses, but we believe we should continue to invest in these strategic initiatives because they will help to systematically engage clients and deepen client relationships.

In the past we've serviced high net worth clients, we had access to client information but did not have access to money flow. Noah Upright's CSRC license allows us to open accounts for clients and have access to client money. Recently we completed account opening testing, and now promoting client account opening.

Going forward, new registered clients will concurrently open accounts with Noah Upright. Noah's existing 30,000 clients will also open accounts in batches. By July, clients can open accounts and place orders online.

Noah Upright also allows us to better service and acquire enterprise clients, including our product providers, through low-risk money market funds. For example, Noah Upright recently spent several days introducing its services and products to an enterprise client and acquired about RMB100 million worth of short-term cash management and products.

Managing client accounts is transforming our business model and moving us closer to becoming a more full-fledged wealth management firm.

We believe it is an opportune time to enter the A-Share industry. The A-Share market offers attractive risk-adjusted upside potential and the Government is committed to reforming the stock market. CSRC under the new leadership of Chairman Guo Shuqing, has issued a series of favorable policies to broaden A-Share investor base, streamline IPO and de-listing procedures, strengthen market supervision and enforcement, and reduce transaction fees.

In fact, on May 1, CSRC announced four new policies and recently initiated discussion on reforming security firms. Last year we distributed $315 million of A-Share add-on security funds. So far all these products have performed well, despite the drop in the A-Share market over the last year. We think clients will benefit from increasing A-Share allocation. The timing is right for Noah Upright to receive its license and develop its business now.

Although A-Share product fund raising continues to be challenging, we firmly believe by doing the right thing, even in difficult times, we can add value to our clients. As John Bogle once said, you make most of your money in a bear market; you just don't realize it at the time.

Likewise, Noah Hong Kong is strategically important because it allows us to service our existing clients' overall asset allocation needs by developing offshore products.

In the past, Chinese investors were very willing to invest abroad, but their appetite was hurt by the 2008 global financial crisis. Client confidence to invest overseas is in the process of recovering, and we are getting ready.

We are in the process of researching and developing offshore products and have completed due diligence on over 20 product providers. Furthermore, we are preparing to launch offshore products, and we target to complete several funds this year.

And, in the next two to three years, we will build our offshore wealth management capability and continue to better understand our clients' global asset allocation needs.

Overall, Noah Upright and Noah Hong Kong are strategic investments for our long-term development. Through comprehensive and differentiated wealth management services, we'll be able to systematically engage clients, deepen client relationships and increase client loyalty.

I would now like to give you an update on the progress and challenges of our strategic initiatives this year.

First of all, in terms of products, we continue to engage clients with short-term cash management products in the first quarter as investment confidence remains weak.

Our product strategy for the year is to focus on quality rather than quantity of products by establishing strategic partnerships with leading influential product providers.

In the first quarter of this year, we raised a Renminbi-denominated real estate fund for Tishman Speyer. It is the first time for a foreign developer to do so. We expect this is only the beginning of a strategic cooperation with Tishman Speyer, one of the leading real estate players globally.

Despite challenging markets we also distributed a natural resources fund, the largest private equity fund in the first quarter of 2012.

The success of these landmark products illustrate our continued product diversification and innovation. It also demonstrates the importance of understanding clients' needs, and well-designed products which are effectively communicated to clients still have significant demand.

We are confident of our product pipeline for 2012 as key projects have been planned. One of our product priorities is expanding our fund of funds business Gopher. We recommenced the fundraising of our fund of private equity funds last quarter and have attracted good demand from clients.

Recently, we recruited a senior partner for Gopher Mr. Gan Shixiong, a veteran in China's finance industry, with over 20 years of experience. Prior to joining, Mr. Qian had served as head of an asset management company and CEO of an investment banking firm.

We're also designing new fund of fund products, such as fund of fixed income funds.

In addition, you may have read in the press of our plan to raise a fund of real estate funds. We believe real estate funds will play an important role in the development of the real estate industry in China by diversifying financing sources for developers.

Our fund of real estate fund will partner with the top 50 developers in China, and, unlike previous fundraising, it will focus on enterprise clients.

As mentioned on our last call about risk management, RMB5.3 billion of real estate-related trusts will mature this year, of which RMB700 million has matured in the first quarter.

Second, our network strategy this year is to improve branch profitability by deepening regional management. For the first half of this year, we aim to optimize existing branches by increasing their productivity and only opened one new branch in the first quarter.

In addition, we will continue to build and train our branch general manager talent pool and selectively open branches in the second half of the year, depending on market environment.

At the same time, we are facing rising rental and employee costs. We plan to address cost pressures by improving productivity and improving internal management systems.

There is also difficulty with recruiting and training talent. Not only is competition for talent intensifying, but our training has not caught up with increasing product sophistication.

The number of relationship managers increased to 580, from 510 at the end of fourth quarter 2011. How to systematically improve relationship managers' productivity continues to be one of our key challenges.

Third, I would like to highlight our continued investment in IT. The demand, as well as resources required, for technology is high. Our primary objective this year is to complete Noah Upright online trading platform, enhance our existing client website and roll out wireless APPs.

We want to deepen client relationships and increase customer loyalty through our IT platform. At the same time, we want to leverage our IT platform to enhance consistency of service, increase customer satisfaction and improve RM productivity.

Lastly, we plan to further enhance regulators' recognition of our business. We have also emphasized the importance of compliance in our business in the past. We will continue to maintain discipline and regular dialog with all regulatory bodies, and monitor new regulatory developments.

With that, I now pass it to Tom to share with you details of our first quarter performance.

Thank you, Madam Wang, and good morning or good evening, everyone.

We saw a gradual stabilization of the macro environment and client risk appetite in the first quarter. Our client transaction value for the first quarter was $844 million, a 23% growth on a quarter-by-quarter basis, and a slight increase on the year before.

Client risk appetite is also stabilizing, with fixed income products representing 45% of our overall transaction value; down from 65% the previous quarter. However, duration within fixed income products purchased by clients remains shorter than average for 2011, reflecting, perhaps, continued cautiousness on the part of clients.

This, the shorter duration, impacts our commission rate and our revenues on a relative basis. Our commission rate for the first quarter was 1.15% versus 1.47% for the year, last year, 2011.

Net revenues in the first quarter were $16.8 million. One-time commission declined on year-over-year basis, even though with higher transaction value due to the aforementioned shorter cash management products clients purchased. The short-term product purchase will obviously help serve as a source of the current business going forward.

Recurring revenues increased 98% year over year as a result of the cumulative effect of private equity and securities investment funds we distributed previously, and represented 45% of our total revenues for the first quarter. We continue to think that our recurring revenue helps provide good visibility and stability for our business.

The number of active clients was 952 for the quarter, up from 659 active clients for the corresponding period in 2010. We think that it's important to be actively engaged with clients, especially during times of uncertainty.

Gross margin for the first quarter was 77% as compensations for relationship managers represented a bigger percentage of our net revenues. As Madam Wang mentioned, we have added a net increase of 70 relationship managers during the first quarter.

Operating margins declined to 15.7% as cost outpaced the growth of revenues on a year over year basis as we invested in our platform, we opened a number of branches during the third and fourth quarter last year, both the rental cost and the additional cost of relationship managers, and our investments in mutual funds business, and our Hong Kong office; both which are strategic, as discussed earlier.

We expect operating margin to improve in the upcoming quarters as revenue improves and we start to realize economies of scale.

This quarter we did not benefit from currency gains with RMB staying essentially flat over the quarter.

Our balance sheet continues to be strong. As of March 31, 2012, the total balance of cash and investments were about $160 billion.

Accounts receivables increased due to seasonality, as several projects were completed later in the quarter after Chinese New Year. We continue to enjoy excellent accounts receivable quality with no bad debt.

Finally, our first quarter results were largely consistent with our initial expectations. At this point we will maintain our 2011 non-GAAP net income guidance range for the year of $30 million to $35 million.

So that completes our prepared remarks. Thank you for your time today, and Madam Wang and I will be happy to address any questions you may have. Operator?

(Operator Instructions). Michael Li, Bank of America Merrill Lynch.

(interpreted) The first question is regarding 2012 full-year guidance. It seems that the first quarter on net income is a small percentage of the full-year guidance. How confident is management of meeting the full year guidance of $30 million to $35 million? What are the measures that will be implemented to either increase revenue or decrease cost, or both?

The second question is, please comment on the growth of relationship managers. We noted in the first quarter relationship managers increased quite significantly, while the number of branches have remained relatively flat. What is the plan for the remaining three quarters in 2012? And also can you please comment on whether there'll be any changes to RM compensation, their base salaries, their commissions, etc.

(interpreted) First, we are very confident to meet our guidance range for 2012. I would like to comment that, in fact, our costs have increased quite quickly in the first quarter. This is mainly because we opened the majority of acclaimed new branches of 2011 in the second half of last year. So for these new branches, they will not realize their productivity until later this year.

Second, we are quite optimistic of the recovery and the stabilization of the macro environment. I think the recovery of the macro environment will also lead to changes in the product mix. If you remember, in the fourth quarter of 2011, as well as this quarter, we distributed a number of short-term cash management products. These, as Tom mentioned, have a lower commission rate, and leading to lower margin. So once we see the market recovery and improvement of product mix, we will expect improvement to profitability.

Quickly commenting on the question on RMs. Again, as mentioned, we opened the majority of our new branches last year in the second half, so the recruiting of RMs for these branches were mainly occurred this quarter.

Actually it's a good strategy because first quarter of the year is usually the golden period for recruitment because people usually change their job in the first quarter. And so we believe, after a quarter of training, these new relationship managers will start having results toward the later part of this year.

And additionally, our new business initiatives, mainly Noah Upright and Noah Hong Kong, obviously have short-term cost pressures; but we believe these are strategic initiatives, and will enhance our position and leadership in the long term.

I would add just a couple more points, perhaps color. One is that the first quarter results, as we mentioned, are largely in line with our expectations. That's the first point, in terms of not changing our guidance range.

And the second point, just wanted to add some color in terms of our commission rate. Our commission rate for the first quarter was 1.15%. That's down by almost 30% compared to last year. Roughly about 20% of the fixed income products purchased by clients were short-term bills of acceptance types of products. So this is an improvement over the fourth quarter; fourth quarter the commission rate was only about 1%.

But I think part of the guidance is based on the macro environment that is stabilizing and improving. We are seeing that, in terms of improvement in commission rate, but obviously not to a degree that we would consider as normal. So we're hopeful that things are improving, and that client risk appetite improves, and that the types of products that they purchase will change, which will impact our revenues as well.

I think the rest Madam Wang illustrated in terms of our focus on cost.

Ella Ji, Oppenheimer.

So my first question is regarding your mutual fund business. So seems you've made some good progress in that line, so do you still expect to distribute about RMB4 billion to RMB5 billion of such products in this year?

And also, if you could comment on the economics of -- for Noah for that product, that would be great. Thanks.

(interpreted) Regarding our mutual fund distribution business, Noah Upright, I would like to highlight that it's not just about another business line contributing to the bottom line. Noah Upright's license is, in fact, changing our business model. In the past we only had access to client information; but now, through account opening and through Noah Upright we will be managing client accounts over their money.

So our current priority for Noah Upright is to conduct mass account openings, so going forward all of our new clients will concurrently open accounts with Noah Upright. At the same time, we are systematically promoting our existing 30,000 clients to open accounts with Noah Upright, starting with the high priority our biggest clients, as well as the companies that they control, which is enterprise clients. And we want to, through account openings, systematically engage our clients.

So I think the questions about, what is our target for mutual fund business this year; certainly we have our plans, but I think that is not the highest priority for this business. And the key is to how to build this platform for long-term development, because we recognize that mutual fund is typically targeted at retail clients. So, in this regard, we do not have any obvious competitor strength.

So our focus, rather, is on segregated accounts, large clients', enterprise clients', cash management needs. This will help us to better serve the development of family offices in China in the future, as well as generational wealth management. So we consider, how do we improve on that and build a Noah Upright platform for sustainable growth?

I would just add two more points on this point. One is that it's a very meaningful change, in terms of our business model. You probably know that, in the past, we actually don't touch clients' assets, and we get paid through commissions and recurring management fees.

But the license would allow us to actually hold custody of clients' assets, so it's more of an asset management concept, rather than a pure broker business model. So I wanted to make sure that people understand that. It's a very meaningful step forward, in terms of business model.

And I think, Ella, you also asked about the economics for our business. The commissions -- it's a very established industry in China, in terms of mutual fund distribution. Roughly, it's probably less than 1%, in terms of commissions people generally pay for mutual funds. So slightly lower, but largely comparable to the revenues or economics for other products that we distribute. I hope that clarifies the point.

Yes, thank you. Just a follow up on, when you say that you hold the custody of your clients' money, does that mean that those money will show on your balance sheet, going forward?

No, no.

(interpreted) So the account opening for Noah Upright is comparable and similar to accounts managed by securities funds.

No, they will not show up on our balance sheets, no.

(interpreted) We will appoint a custodian bank --

Confirmed, no. It will not show up on the balance sheet.

Okay, great. Thank you for the clarification.

Hans Fan, Standard Chartered Bank.

(interpreted) The first question is, you mentioned that the Company is preparing for fundraising for top 50 real estate fund of funds. It's going to be fundraised primarily from institutional enterprise clients.

Can you please comment on what is the expected size? And how many quarters it's expected (inaudible) to be completed or how long will this project take? And has this been incorporated in your full-year guidance?

And the second question is, can you please let us know how much fund of funds business were completed or recognized in the first quarter of this year?

(interpreted) First, in regard to the top 50 fund of real estate funds, I would like to highlight that it's managed also by our asset management firm, Gopher, and is also obviously in the form of a fund of funds in a fund of funds. And it is our intention to complete this project this year.

So the size for this project will be quite meaningful. At our second quarter result announcement we'll update the market, but we expect it should be completed primarily in the next one to two quarters. So, again, we'll give the market update on our progress, the fund raising for the top 50 real estate funds, in the second quarter.

For the first quarter, there was no recognition of fund of funds for the first quarter, but obviously, that will get into the second quarter.

(Operator Instructions). Joseph Tse, Fil Investment.

I'd like you to probably talk a bit more about the competitive environment. That's number one; how it may be changing.

And secondly, your human resources turnover ratio, how it has been changing and that's it, yes. Thanks.

(interpreted) First, I would like to comment on the question on relationship manager turnover. We have about roughly 500 plus relationship managers. I think the turnover rate is quite different.

If you look for different segments of this relationship management team, if you look at the top 100 relationship managers who perhaps generate 70% of our business, this turnover rate is quite low, in the single digit.

However, if you look at the last 200 in terms of ranking of relationship managers, these are primarily new relationship managers. They may or may not have any sales. The turnover for this segment is quite high; it's 20%, 30%. I think some leave voluntarily and some we'll make because of performance.

So, obviously, we recognize that the cost of having unproductive relationship managers is quite high, so we continuously think about how to optimize our recruitment of talent, as well as training of talent, how to minimize the turnover rate for new RMs, how to increase the success rate of a new RM.

Currently, typically, a new RM will take (inaudible) about three to six months before they have their first order or their first sale. We're aiming, hopefully, with internal training, to shorten that cycle.

So, in terms of the competitive landscape, I think the most visible trend is that security firms in China are getting into the wealth management business. This is partially due to the new leadership of CSRC. Chairman Guo Shuqing, in fact, recently, a couple days ago, he hosted a financial reform discussion encouraging or discussing new developments for security firms.

I think the entrance of the security firms presents both pros and cons. The con is obviously with more competition, it will be harder for perhaps some of the smaller independent wealth management companies to survive.

But the pro is the senior management team of Noah originally came from security houses, so we actually understand the business rather quite well. So, in fact, we have gotten a lot of inquiries from leading security firms about possible cooperation.

As you may know, a portion of revenue comes from wholesale business, so we're planning or perhaps there's opportunity for us to grow our wholesale business by working with security firms.

And also I would like to comment on development in the wealth management industry. I think, historically, the industry is driven by product push, or very sales driven.

I think we are evolving and making progress, in couple of areas. One is how to establish strategic relationships with key product providers. Also how to better educate clients where they will express or drive their own asset allocation better.

So, as you know, we have spent quite a lot of effort developing our fund of funds business. Recently we are preparing for the fundraising of our top 50 fund of real estate funds. I think these are ways for us to strategically establish relationships with key product providers.

So I think we are making progress in this evolution of (inaudible) China wealth management, but there are certainly are quite more things that we can do.

Operator, can we go on to the next question? Maybe it's two. Couple more questions.

Hans Fan, Standard Chartered Bank.

(interpreted) You mentioned that the new business initiatives and Noah Upright and Noah Hong Kong have short term cost pressures. Can you comment on what is their costs going to be like for the remaining three quarters of this year?

(interpreted) Again, these two new businesses are strategic initiatives for our long-term development, so we will continue to invest in these two businesses, perhaps not only this year but also next year as well.

At the same time, we are committed to profitable growth. So how do we meet our profit expectation and, at the same time, invest in this long-term initiative?

There are a couple of areas. Certainly we will focus on revenue growth. Also we are focused on improving branch management or internal management system. Through better productivity, or increases in productivity, we can better address these costs pressures.

And another big cost component are the new branches that we opened last year. We opened total of 20 new branches in 2011, and the bulk of those branch openings were third quarter and perhaps fourth quarter. And so, these branches are still in optimizing or training mode. As it becomes more productive towards the later in the year, they will be able to contribute to profit and absorb some of the costs associated with our strategic initiatives.

This year we are also focused on deepening regional management. We hope regional management will improve branch management profitability.

We have previously mentioned that the class of 2010 new branches in 2011 as a whole were profitable. And so our focus is, how do we get the class of 2011 to be profitable in 2012? Obviously, there are challenges, because some of these branches that were opened in 2011 perhaps were in smaller cities or smaller markets, and they may need a longer time to break even or contribute to profit.

There should be no further questions, operator. Can I confirm that?

That is correct. Please continue.

Okay. Well thank you, all, for joining us tonight and we look forward to reporting back to you three months from now. Thank you.

Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect

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.