Noah Holdings Ltd (NOAH) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Noah Holdings Limited second 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 question-and-answer session. During the question-and-answer session we ask you please limit yourself to two questions and one follow up so 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 second 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 statement as a result of new information, future events, or otherwise expected 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 statement 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 begin by updating you on our strategic priorities and key challenges. Then Tom will discuss our second quarter financial and operating results in detail. We will be happy to take your questions after that.

In the second quarter of 2012 we continued to see improvement in comparison to previous quarters. We distributed RMB6.1 billion worth of product to 1,475 clients; and achieved net revenues of $19.1 million, a 14% increase quarter over quarter. Our non-GAAP net income for the quarter was $7.1 million, a 93% increase quarter over quarter.

Growth has been slower than our anticipation, since the market environment remained challenging with renewed uncertainties over the global and Chinese economy.

For the overall market, real estate trust product issuance for second quarter 2012 declined 60% year over year. And overall total PE fundraising declined more than 90% year over year to $2.1 billion. We feel that we did not launch enough products this quarter, especially fixed-income products.

As you may have read in the press, several trust products have defaulted, or are at risk of default. This has resulted in an increased awareness of the importance of risk management. Risk management has always been our focus and core competency. We continue to monitor our outstanding products closely for any possible risk.

We have also strengthened the risk management standards and became increasingly cautious with product selection and launch for our clients to feel more confident with the investments.

Clients' risk appetite and demand appear to have stabilized in the second quarter, although clients continue to remain cautious and products such as private equity are becoming increasingly difficult to distribute.

We think the clients and trust we have accumulated over the years have become a meaningful advantage. We still achieved the second-best quarter in terms of total transaction value distributed.

In response to these challenges, we decided to adopt several key strategic priorities. In terms of products, we will strengthen our co-operation with strategic product providers. Our top-50 fund of real estate fund is one of the sources to help us secure quality products.

In fact, we have already signed co-operation agreements with several leading property developers in the top 50. Only a small portion of the top 50 has been completed this quarter, and we expect the AUM to increase significantly in coming quarters.

Although private equity fund raising volume will likely remain depressed in the short term, we remain optimistic towards the development of private equity in China, since it will be a driving force in changing China's economic structure.

Our private equity strategy is to focus on a few leading product providers, or GPs, with proven track records that understand Chinese market and partner with them to increase the scale of each fund size.

At the same time we will increase our efforts to proactively develop high-quality innovative products.

We have been seeking potential product co-operation with leading mutual fund companies, for example, partnering with them on high-yield corporate-debt funds and convertible-bond funds. The development of high-yield debt is still in its early stages in China, with only 22 successful offerings and total size of approximately RMB2 billion as of July 2012.

Product diversification and innovation will continue to be the focus, as our success is based on product research and risk management on a large degree.

These core competencies determine how efficient we are in adjusting our product offering to meet changes in client needs. We believe our fund of funds business is strategic in how we satisfy clients' overall wealth management needs.

In the first half this year, our fund of funds business, or Gopher, raised over RMB760 million. In the second half of this year, Gopher will continue to fund raise as well as systematically focus on family office wealth management. Also we expect to launch our fund of fixed income funds in the coming months.

In addition, we plan to increase profitability by improving employee productivity and increasing front line to back office ratio.

This quarter we started to restructure our organizational structure to focus on three lifecycles; client lifecycle, product lifecycle and relationship manager lifecycle. We hope to strike a balance between these three lifecycles to allow the Company the ability for long-term sustainable development.

We are very focused on improving our profitability and return in our branch network expansion and strategic investment. Having made the investment to build our platform over the last few quarters, our fixed expenses have pretty much peaked. Although we continue to recruit and train talent, we did not open any additional branches this quarter.

Since the end of the second quarter, we have closed three branches and consolidated those branches to larger branches nearby. For example, we closed Erdos branch, but the Erdos clients will be covered and serviced by the Hu He Hao Te branch.

Furthermore, expanding on success of regional management, we are piloting and evaluating core satellite approach with our branches. The idea is to consolidate administrative function of back office staff of county-level branches to its nearest provincial city branch.

In addition, we continue to leverage IT to improve management efficiency, reduce costs and enhance client servicing. This quarter we have launched our Noah client app for Apple.

Our operating leverage is critical in improving our profitability and earnings growth going forward.

Next I would like to give you an update on the progress of our new business initiatives Noah Upright and Noah Hong Kong. Amongst the newly licensed mutual fund distributors, we believe Noah Upright is the largest in terms of assets under management and number of clients. As of June 30, we had RMB300 million of assets under management and over 1,500 registered clients, including employee accounts.

At the end of this quarter, Noah Upright had 260 clients with outstanding AUM in equity funds, debt funds or money market funds. Noah Upright generates revenue from one-time fund subscription fees and reoccurring fees, a percent of assets under management or fund NAV. We expect an increase in revenue contributions from Noah Upright as its AUM grows.

In the second half of this year, Noah Upright will enable clients to transact online, and aim to further diversify its fund offerings. It will also target to have 3,500 registered clients by the end of the year.

Similar to Noah Upright, Noah Hong Kong has started to generate revenue this quarter. It has completed initial closing on the first product it distributed, and plans to roll out a few more funds, such as US dollar private equity fund and fixed income fund, in the remainder of the year.

Although both Noah Upright and Noah Hong Kong continue to be a drag on our earnings, we believe these are strategic businesses and will continue our investments.

Finally I would like to discuss the regulatory environment in China, which I continue to believe is becoming more market oriented and transparent.

On June 7, China Securities Regulatory Commission Chairman, Guo Shuqing, gave a speech on the need for a robust wealth management industry in China. He pointed out that the development of the wealth management industry is important to China's economical structural reform in particular. Currently there are over RMB20 trillion of enterprise deposits, over RMB20 trillion of institutional deposits, and over RMB30 trillion of personal deposits. A large portion of these deposits will flow into wealth management to achieve capital preservation and appreciation. China needs to learn from international experience and develop a diverse range of wealth management products, and build a robust wealth management industry.

Also I would like to point out we obtained regulatory approval to change our Company name to Shanghai Noah Financial Services Company Limited, to better reflect our wealth management business. This also reflects regulatory recognition of our leading position in the industry.

Despite the current challenges, we remain positive on a long-run outlook of China's wealth management industry, driven by economic growth and liberalization of the financial market in the future. Our new business initiatives, Noah Upright and Noah Hong Kong, will further complement product capability and improve servicing needs of our client base.

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

Thank you, Madam Wang, and good morning or good evening, everyone. As Madam Wang mentioned, risk aversion continued to affect overall demand for wealth management products Noah distributes. Our transaction value for the second quarter was $960 million, which was actually the second highest quarterly volume purchased by clients in the Company's history, but it was still lower than what we had anticipated. At times, as we mentioned earlier, product supply, especially in the fixed income area, also was constraining the growth of our business.

Transaction value declined 22% on a year-over-year basis, but increased 14% on a sequential basis. The total transaction value also included, as Madam Wang mentioned earlier, about $47 million in incremental volume contributed by Noah Upright, our mutual fund distribution business. This amount was included in the "securities and others" category.

We started to distribute mutual funds for the first time in the second quarter since being granted the license by CSRC earlier this year.

For the quarter, fixed income represented about 66% of total transaction value, probably the highest amount in recent quarters, reflecting continued risk aversion, which seems to be stabilizing as clients are willing to purchase longer term, that is two- or three-year products, fixed income products.

However, overall duration of fixed income products purchased by clients remains short on a historical basis. This impacted our commission rate and our revenues.

The number of active clients was 1,475 for the quarter; the highest ever achieved on a quarterly basis. This number also includes clients who purchased mutual fund products.

On an apples-to-apples basis, that is excluding clients who purchased mutual fund products, active client number was 1,160, which is more consistent on a historical basis.

Average transaction value per active client was RMB4.2 million. Excluding mutual fund clients which have lower purchase amounts, average transaction value was RMB5.0 million, which was about $786,000 per person.

This is still somewhat lower compared to previous quarters, mainly because of product mix. As I mentioned, clients purchased more fixed income instruments this quarter. Fixed income instruments have lower threshold in terms of purchase amount, thus lowering the average transaction value per active client.

Net revenues was $19 million; a decline of 18%. First-time commissions declined on a year-over-year basis, due to lower volume of products distributed as well as lower commission rates. Commission rates started to improve this quarter, but still lower than historical average.

Recurring revenues reached a record high of $8.7 million this quarter, representing 46% of total quarterly revenues. We continue to believe our recurring revenues provide a visibility and stability for our business.

This quarter, we also recorded $400,000 foreign exchange loss from Chinese RMB cash holdings. This is a translation loss, as RMB depreciated against US dollar this quarter.

Gross margin for the quarter was 78%; a decrease from the corresponding period in 2011, due to expansions in relationship managers and lower sales volume.

Operating margin decreased to 37.7% as we invested in our platform, including new branch openings in the second half of 2011 and investments in our mutual fund business, as well as our office in Hong Kong.

Both gross margin and operating margin improved compared to previous quarter. Our business has significant operating leverage, meaning that most of our cost is fixed cost in salaries and rental cost. An increase our total volume of distribution, incremental revenues should help improve profitability.

Operating expenses, that is salaries and rentals primarily, have probably peaked or peaking as we focus on our productivity and profitability, and Madam Wang mentioned that earlier in her speech.

Balance sheet remains solid. The combined amount of cash and short-term investments was about $152 million, lower than that of the last quarter.

While our business continues to generate solid operating cash flow, about $7.2 million free cash flow this quarter, we paid out $7.8 million in annual dividends in the second quarter and we spent about $3.4 million executing our stock repurchase program. As you may recall, our Board authorized a $30 million buyback program in late May.

Overall, the balance sheet remains very liquid.

Accounts receivables declined, both in absolute dollar amount and AR days, and the quality of AR remains excellent, with no bad debt.

Finally, we would like to reiterate our updated 2012 forecast. We currently estimate that non-GAAP net income for the year will likely be in the range of $22 million to $25 million. The midpoint of the revised range represents a year-over-year decline of approximately 10% compared to 2011.

With that, Madam Wang and I will be happy to take any questions that you may have. Operator?

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

(spoken in foreign language).

For the benefit of the audience, I'm translating Michael's questions into English. The first question is, I notice that there is a government subsidy for this quarter. Can you elaborate or explain what this government subsidy is and is it one-time or is it reoccurring? If it is reoccurring, how frequent would it be?

Second question is regarding stock repurchase. We notice since Board passing of this stock repurchase program, the Company has repurchased roughly 0.65 million worth of ADSs. Can you explain or give us color whether these purchases were done on the public market or were they bought privately, in private transactions?

In connection with that, we know that Sequoia fund is probably going to mature soon. Would you guys consider using the share repurchase program to buy back some of Sequoia's shares?

I will take a stab at the questions Michael had first and Madam Wang will feel free to add.

First of all, other operating income, $2.9 billion. This is essentially tax rebates. These are tax treaties that we have signed with local governments in China, essentially rebating some of the taxes that we paid.

This is a recurring event. I would point out a similar item, the third quarter of 2011, and this is part of our tax planning for the year and will continue going forward. That's the first part of your question.

In terms of your question about buyback, we executed our buyback program entirely in the secondary market. We have not done block trades or bought back from existing shareholders; that is Sequoia in this case.

To your question about Sequoia, how they would exit, the fund which they invested in Noah still has a couple of years of longevity and, obviously, they will speak on their behalf in terms of their confidence in Noah and we do not believe this will provide any overhead in the immediate future for our stock.

Hopefully, that will be enough to provide some color in terms of your questions. I wonder if you have any questions -- things to add?

(spoken in foreign language).

Okay, next question, Michael?

(spoken in foreign language).

Ella Ji, Oppenheimer.

So my first question is I'm curious, where are the other two branches located that's being closed this quarter?

And, relating to that, could you comment on the ramp-up of your new branch? Obviously overall it's relatively slow in China, but other than the macro, are you seeing any other challenges that your new branches are facing in terms of ramping up? Thank you.

(interpreted) The three branches we closed at the end of the second quarter were the Erdos branch, Huadu branch and Zengcheng branch. I think the main rationale is these three branches were not performing particularly well in current environment and those clients and those cities can be covered by a nearby larger branches.

So for Erdos it was consolidated or it will be covered by Hu He Hao Te. For Huadu and Zengcheng it was consolidated to the nearby Guangzhou branch.

When the market is not particularly robust we think it is quite important to focus on branch productivity, and profitability, and that's part of our cost control and management.

At the same time we continue to make strategic hires for branch numbers expansion. In particular we hire branch managers for the Nanning market, for Urumchi market, but our approaches are slightly different.

We first hire and train these branch managers, and we don't set up physical branches, but let these branch managers to expand a business presence in these markets. Once they have achieved some meaningful client base or AUM then we'll open a physical branch.

I think this approach will help us lower costs, while, at the same time, still allow us to strategically expand our business presence.

In terms of our branch network for detailed financial performance, Tom can perhaps elaborate, but I think overall we are quite satisfied as a Group for the new branches that opened. The combined loss is only a couple of million RMB. But, at the same time, they have gathered new clients as well as new AUM.

So I think we're quite optimistic over the next one or two years these new branches will contribute revenue and productivity to the overall Group in a meaningful way.

Ella, I would just add a couple of points here. One is that our branch network strategy is critical to the Company's overall client engagement, servicing our clients and acquisitions. So that remains a core of how we conduct our business.

In terms of specifics, just a ball park figure, the branches that we opened in 2010 as a Group, is profitable. The branches that we opened in 2011, as a whole, continue to be loss making.

I think it's not as much of in terms of ramping these new branches; it's a function of a couple of things, primarily. Number one is the current market environment. Clients become more risk adverse, so the level of activities for these newly-opened branches would be lower compared to during more normal times.

And the second reason is also product supply. Do we have enough products to service all of our clients, existing clients and new clients? And a more constrained product supply also reduces our revenues for the new branches.

But, overall, we think ramping is progressing, and we're cautiously optimistic that they will become profitable soon.

Next question, operator.

Yes, that's very helpful. Thank you. And then my next question is regarding your Noah Upright and Noah Hong Kong business. When do you expect them to become profitable?

Well, I will take a stab at that question, Ella. I think if you recall our conference call the previous quarter, when we articulated our budget earnings guidance for the year, what we have budgeted for Noah Upright, our mutual fund and distribution business, is -- for 2012 would be in the investment phase, meaning that it will be loss making.

And for Hong Kong, 2012 will continue -- it's very early stage for Hong Kong. We are starting to generate revenues, but most likely profitability will not be achieved probably until next year.

So this year we have not assumed both Hong Kong and Upright to be profit making. And that's factored in our forecast.

Sure. And then if I can sneak in one more. You mentioned you're changing your name. That's actually interesting. Are you thinking more of expanding your business to some new areas, or changing your business to some new areas? Is there anything that you can share with us?

(interpreted) The change in our Company name was approved by the Shanghai Government and the financial department. I think, to my understanding, there's only a few companies, or non-banks, that have the name financial services in their company name. I think, in particular, this gives us a few advantages.

One, a sign of recognition by the relevant government authority. Two, it better reflects what we do and we can incorporate it in our business licenses; for example wealth management, financial planning, etc.

And, Ella, I would just add a couple of points. I think the license provides more clarity from a regulatory standpoint, providing Noah the ability to conduct the business that we currently do.

And second is that it does not mean that we're going to get into newer businesses. It's entirely a regulatory issue.

And thirdly, it just provides very clear definition of wealth management. It's a clear expression on the part of our regulators in terms of the nature of our business. So I think it's primarily a regulatory clarification. Clarity, rather than newer businesses that we're about to enter. That's not the case.

Operator, can we go on to the next question, please?

Hans Fan, Standard Chartered Bank.

(spoken in a foreign language).

For the benefit of the audience I'll translate the questions by Hans.

The first one is, you mentioned that risk appetite has stabilized in the second quarter. Can you give us some more color on duration?

The second question is, can you give us some guidance in terms of for the second half of this year on your branch network expansion? Will you open more branches or are we going to see more branch consolidation, as you mentioned?

(spoken in a foreign language).

I'll take a stab at the first question and Madam Wang will help me answer the branch strategy question.

Hans, the overall duration is still low on a weighted average basis. It's only 1.1 years, which is considerably lower at this time last year. But out of that 66% of total transaction value, which was fixed income, roughly about 15% of the products within fixed income purchased by clients had a duration of two years to three years.

So that's a good starting point. I think it's only a sign that clients are becoming slightly more confident; perhaps with a declining interest environment, more willingness on the part of clients to lock in rates at the current state.

Then I'll ask Madam Wang to talk about our branch strategy for the second half.

(interpreted). I would like to add a few points to the first question. First, in the second quarter, I think it's very obvious that demand outstripped product supply. So our results for the second quarter could have been better.

However, there were two weeks where we did not have a fixed income product online. So it was very much in the second quarter of fixed income products. A lot of our clients had to reserve in advance in terms of buying fixed income products.

The second observation, I think, a lot more clients were willing to buy one, 1.5 years, or even a higher longer duration product. So I think that is a very good base in terms of clients' recovery and risk appetite.

So for the third quarter, and even the fourth quarter, I think we have strengthened our product development to ensure that we won't have any weeks where there is not fixed income products to offer our clients.

And I think I'm optimistic that clients are going to be more willing to accept longer duration fixed income products to lock in a good rate.

In terms of our branch network expansion strategy, there is no strategic change in terms of focusing on expanding our branch network. And I think, in terms of the approach, we are adjusting it. In particular, our previous approach was for a particular region. For example, the Greater Guangzhou area will open several branches.

What we have observed is that rental has increased this year significantly. Also, whenever we open several small branches, it also adds to the number of back office staff, which is not good for us in terms of increasing operating leverage. So we're adjusting our branch network expansion strategy to focus more on provincial capitals.

What we're doing is we have hired a general manager, for example, for the mining branch, automotive branch and income branch. We trained them. And also we have a few of their RMs first and let them to cover these markets to acquire new clients before opening physical branches.

So we hope that when they have some business and open up their branch, then perhaps they can be profitable from day one of the physical branch opening.

And there are no further questions from the phones. I'd now like to hand the conference back to today's presenters for closing remarks. Please go ahead.

Shall we wait for a couple of seconds to see if there are further questions, operator?

(Operator Instructions). Hans Fan, Standard Chartered Bank.

(spoken in a foreign language).

For the benefit of the audience the question from Hans is, I notice that the number of relationship managers quarter over quarter has reduced by 30. Can you tell us where this reduction, what branches and what are the rationale?

(interpreted) I think this is consistent with our core strategy for Q2. It's our half-year evaluation of our relationship managers and so we eliminated 30 relationship managers that were ranked at the bottom of the list.

Operator, are there more questions online? Otherwise --

There are no further questions.

Well, thank you all for joining us tonight and thank you for your continued interest in Noah, and we look forward to speaking to you soon. Thank you. Have a good evening.

Ladies and gentlemen, that does conclude our conference for today. Thank you for participating.

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.