Earnings Call Transcript - NOAH Q3 2022

Operator, Operator

Hello, dear investors and analysts, and welcome to the Noah Holdings' Third Quarter 2022 Earnings Conference Call. Please note, your line has been automatically muted and this event is being recorded. The company management team will first give a quarterly update presentation. After today's presentation, there will be an opportunity to ask questions. Thank you. I would now like to turn the conference over to Ms. Jingbo Wang, Chair, President, and CEO of Noah Holdings. Please go ahead.

Jingbo Wang, Chair, President, and CEO

[Foreign Language] The agenda of today's teleconference. I will first share my views on the macro market. I then introduce Noah's overall performance in the third quarter of 2022, the development of several business sectors, and our overall strategy. Next, let's invite Pan Qin to introduce quarterly financial information, then conclude with the interactive Q&A. First of all, I would like to report to you that we have received the acknowledgment from the Hong Kong Stock Exchange regarding our voluntary applications for conversion to do primary listing in Hong Kong. We sent the recognition from the stock exchange. Before the new year of 2023, Noah would become a dual primary-listed company both in the United States and Hong Kong. Although the compliance requirements for the two jurisdictions are stricter, Noah has also completely removed the ADR delisting risk. The third quarter of 2022 is a difficult quarter we had experienced with the Federal Reserve raising interest rates significantly and the global secondary market continuing to fluctuate. The prevention and control policy of COVID in China has continued to cause lockdowns in different cities across the country, bringing huge challenges to business operations and our client investment sentiment continued to be low. With the increasingly fierce competition between China and the United States, as well as the Russia-Ukraine war, investors' willingness to invest was down to the phrasing point in the third quarter. The most urgent demand of clients is to protect the security and liquidity of the investable assets of their own families. The increase of global uncertainty superimposed many external risks, making us feel that the period of strategic activities for peaceful development has turned into a wartime stage. In times of crisis, how to increase the frequency of contact with clients, increase the client wallet share on the management and protect current assets are the key points of our thinking and action. At such a moment, Noah’s management needs to be aware of the market situation and make decisions decisively. The execution team needs to implement efficiently, respond quickly, and reconfigure resources quickly to ensure Noah’s future survival and development and keep it in a healthy stage. We believe the current macro situation presents not only challenges, but also opportunities. The global asset allocation of China's high net worth clients will become a major trend in the future. The end of industrial globalization is exactly at the beginning of China's capital globalization. The wealth management needs of overseas Chinese-speaking client groups are not or at least have not been fully matched and need to be served by financial institutions familiar with their needs. The change of client demand is the core driving force behind Noah's international development and also the key development direction of Noah. Now aim for the future. [Foreign Language] In the third quarter of 2022, Noah realized net revenues of RMB618 million and a non-GAAP net income attributable to shareholders of RMB190 million, both decreased year-on-year and quarter-on-quarter. As of September 30, the accumulated non-GAAP net income of 2022 has reached RMB860 million, reaching 59.3% of the annual guidance, which is behind schedule. In terms of core business data, transaction revenue in the third quarter was RMB17.97 billion, down 25.3% year-on-year and 7% quarter-on-quarter. To achieve such results in this difficult environment makes us feel that the trust of our clients has not come easily. Clients were reminded to continue to put their valued shares in Noah. In this quarter, the transaction value of mutual funds increased by 30.3% year-on-year and down 4.4% quarter-on-quarter. The transaction value of private equity was RMB2.5 billion, down both year-on-year and quarter-on-quarter. In the third quarter, Noah's total number of active clients reached 22,641, up 6.5% year-on-year and 76% quarter-on-quarter. Among them, the number of overseas active clients was close to 1,400, an increase of 84% quarter-on-quarter. We maintained good growth expectations on our overseas AUM. Gopher's well stabilized the product target strategy, continued to outperform index significantly. As of November 11, 2022, returns were minus 1.19%, minus 6.69%, and minus 9.68% respectively in 2022, while those of the indices in the same period were minus 23.32% and minus 21.66%, respectively. It shows that the target strategy has continuously played a role in stabilizing client portfolio amid market fluctuation. [Foreign Language] At the beginning of 2022, Noah established a new process to serve high net worth and corporate clients. Based on the macro asset allocations reviewed by the Chief Investment Office, the client strategy and cross-product line solutions combined with the investment products and services office. Noah provides flexible adjustments and core levels of client asset allocation solutions, including high-risk priority, protection and adherence solution, stabilization solution, liquidity management solution, and growth solution. In this extremely uncertain market in 2022, we could say that we have achieved group results and have been recognized by clients. Sustainable development is our advantage. Although we have encountered great challenges, Noah adheres to the core values of client-centricity and survival at the bottom line. The organizational change promoted by Noah in the past three years has also highlighted this value this year. On the client development side, we have made hard-won achievements in the treasury management business of small to medium-sized enterprises, both in terms of clients and AUM. Psychologist Abraham Maslow once said in any given moment, we have two choices: step forward into growth or step backward into safety. It may be too grand to think about the destiny of the country, but based on ourselves, for market participants and individuals, even in difficult situations, we still believe that by gathering together the power of each new employee, we can seize opportunities in challenges, expand our international business, maintain a leading position in China, and achieve our values of professionalism and empathy. Now, let's invite the CFO, Pan Qin to introduce the quarterly data in detail. Thank you.

Qin Pan, CFO

Thanks, and thank you Chairlady. Good morning to investors and analysts online. As Chairlady has mentioned, following our successful secondary listing in Hong Kong in July. In October, we received acknowledgment from the Hong Kong Stock Exchange regarding our application for voluntary conversion to dual-primary listing in Hong Kong. The effective date on which the primary conversion is expected to be before December 31, 2022. With the successful conversion, we will be primarily received on both the Hong Kong Stock Exchange and the New York Stock Exchange, which removes our ADR delisting risk, as Hong Kong shares and ADR are fully fungible. We also hope to be able to join the Stock Connect link in the future, which will allow investors from the Chinese stock market to be our shareholders. We're mindful that following the impact from continuing geopolitical conflicts, the macro environment in the third quarter continued to be highly challenging. The United States Federal Reserve raised rates twice in the third quarter, each time by 75 basis points following its rate hikes in March, May, and June, followed by another 75 basis points on November 3. That means a total of 375 basis points in 2022, the highest level in 14 years. And in China, lockdown measures that came with the COVID-zero policy were not alleviated as many had originally anticipated and hoped, further affecting investor sentiment, especially towards making investment decisions in large sums and equity market products. This is evidenced by the drop of mutual fund net asset value in the third quarter and also the decline in revenue from fund distributions across the industry. Now please let me walk you through more detailed results for the third quarter. As a result of the challenging market environment dampening investment sentiment, total transaction value decreased to RMB18 billion, down 25.3% year-over-year and 7% quarter-over-quarter. The transaction value of private equity declined by 34% year-over-year and 36% quarter-over-quarter to RMB2.5 billion. Noticeably, the transaction value of private secondary products saw a significant increase of 38.9% quarter-over-quarter to RMB3.3 billion, representing a short rebound, but still down 68.5% year-over-year. Moreover, the transaction value of mutual funds was RMB11.7 billion, up 30% year-over-year and down slightly quarter-over-quarter. The total number of active clients for the quarter was 22,641, a 6.5% increase year-over-year and a 76% increase quarter-over-quarter, benefiting from continued strategic investments in our core client group, diamond and black card clients grew to 9,782, up 14.3% quarter-over-quarter and 21.6% year-over-year. Our client-centric philosophy will continue to be a key strategy in the long run. It is worth mentioning that through our self-developed customized treasury platform, Smile Treasury, launched in December 2021, the number of institutional clients boomed to 2,522 as of the end of the third quarter, more than doubled from the end of last quarter. We believe there remains a large treasury management market potential for these underserved small to medium-sized enterprises, and we'll keep developing the segment with our comprehensive product line and well-established service network. As a result of slower placements in equity market products, we have seen perhaps the slowest quarter in recent years. Non-GAAP net income was RMB190.9 million for the quarter, down 32% year-over-year and 46% quarter-over-quarter. Income from operations for the quarter was RMB231.8 million, a 1.3% growth year-over-year due to our tightened expense control policy, but a 28.3% decrease quarter-over-quarter due to a decrease in net revenue, and also an 8% increase in operating costs and expenses. Consequently, the operating margin was 33.9%, up 8.7% year-over-year and down 9.9% quarter-over-quarter. We expect to see continued challenges from the Fed rate hikes, sporadic lockdowns in China, and very volatile public markets. Considering the impact of these factors on clients' investment sentiments, the Company revised its estimated non-GAAP net income attributable to Noah shareholders for the full year 2022 from a range of RMB1.45 billion to RMB1.55 billion as previously published, to a range of RMB1.0 billion to RMB1.1 billion. In addition to comply with the applicable requirements under the Hong Kong Exchange rules and be in line with the general market practice for companies with primary listings in both the United States and Hong Kong, we will no longer publish our annual forecast after the conversion to a dual-primary listing in Hong Kong, starting from our results announcement next quarter. Net revenues for the third quarter were RMB684.5 million, down 25% year-over-year and 7.3% quarter-over-quarter. One-time commissions fell to RMB99.9 million, down 53% and 51% quarter-over-quarter. Recurring service fees remained stable at RMB489.6 million, up 6.7% quarter-over-quarter but still down 13% year-over-year. Performance-based income grew to RMB27.6 million, up 6.8% quarter-over-quarter but down 66.4% year-over-year, while net revenues from other service fees continued to grow to RMB67.3 million, a 50% increase year-over-year, and a 45% increase quarter-over-quarter due to more value-added services Noah offers to our high net worth clients. As for segmented results, net revenues from the Wealth Management segment were RMB465.9 million, down 28.7% year-over-year and 8.4% quarter-over-quarter due to a decrease in transaction value during the quarter. Net revenues from the asset management segment were RMB200 million, down 17% year-over-year, and down 4.8% quarter-over-quarter. By the end of the third quarter, we had RMB4.3 billion in cash. We expect to announce our dividend payout ratio in the second quarter of 2023. In light of the current volatilities in the public market, Noah's CIO office reiterated the house view of domestic international dual circulation and suggests our clients to balance their portfolio accordingly. We have implemented stricter cost control measures internally while committing to further develop our international operations. Again, we thank our shareholders and analysts for their ongoing trust and support, especially during this difficult time and thank you for listening. I will open the floor for questions.

Operator, Operator

Thank you. Now, the first question comes from [indiscernible].

Unidentified Analyst, Analyst

[Foreign Language] So, maybe I'll briefly translate. So, the first question is on the strong growth in the diamond and black card clients in the third quarter. I was just wondering what's the key drivers behind it? The second question is on the wallet share of the clients' AUM both in and offshore? And what's our current wallet share? And how do we see the potential there? Especially regarding the wallet share for clients overseas assets and what kind of drivers you would be looking at? Thanks.

Qin Pan, CFO

Great. I'll take the first question and will comment on your second question. We actually established the diamond and black card strategic program with a strategic budget set aside. That program has been running for over two years. And this is the third year, actually, the group that has been running this project has obviously gained more experiences. The programs have become more client-centric, especially with incentives for our Relationship Managers to bring in high-potential clients with more accurate Know Your Customer programs. More importantly, supported by the budget, we were able to post those mini diamond and black card client conferences locally, increasing the interaction frequency with potential clients. Another effective measure has been the MGM program we installed to encourage clients to bring in their circle of friends to participate in Noah's marketing events to help them become more familiar with Noah, as well as trust towards the brand name, which is one of the strategic program investments this year for branding. It's a comprehensive set of factors, but I think more importantly, the culture of the organization has improved greatly over the last three years, implementing client-centric policy. From our top to the front line, everybody is more client-service oriented. I think that's probably one of the important reasons.

Jingbo Wang, Chair, President, and CEO

Absolutely. Yes, first translation. I think Kelly just mentioned that as the majority of our client base or entrepreneurs, especially in the manufacturing and exporting businesses. So they do have quite a bit of demand in terms of allocation of their overseas assets. We probably serve around roughly 100,000 plus clients that have overseas asset allocations. And we have about US$2 billion in overseas insurance cumulatively and also serve over 400 families in our trust services. We're significantly strengthening the direct service teams in Hong Kong and Singapore since the last two quarters, hoping to better serve these clients, perhaps even including some local clients. Also, with the rate hikes, simple deposit products overseas are more attractive to our clients. We don't have the exact ratio between our clients' wallets this year in terms of domestic and overseas assets. But probably by estimating how our own AUM is allocated, it's probably about a 30% to 70% ratio in terms of overseas versus domestically. So we think that the ratio—and also the assets that are already overseas for our clients—are probably a little higher than we have seen. So we believe there's ample room for growth, particularly in the need for allocating their overseas assets. So yes, I hope that covers your question.

Unidentified Analyst, Analyst

Thank you very much. That's very helpful.

Jingbo Wang, Chair, President, and CEO

Okay. Thank you. We'll take another question.

Operator, Operator

The second question comes from Kan Hue from CICC.

Unidentified Analyst, Analyst

[Foreign Language] I will briefly translate my question. My first question is regarding the relationship managers. The number of relationship managers has achieved slight growth quarter-on-quarter. I was wondering about future recruitment of relationship managers. My second question is regarding overseas business. In the third quarter of 2022, overseas revenue contribution increased to 28%. Can you tell us about the overseas business expansion strategy?

Qin Pan, CFO

[Foreign Language] Thank you for your question. I think in terms of the strategy towards relationship managers, we are growing the domestic team at a controlled pace. We are actually hiring based on performance and looking for better-performing relationship managers. We have quite a bit of talent supply available to us due to difficult times from banks and security brokers, so we have the luxury to be more selective domestically. On the overseas side, we are allocating significant investment and budget to grow the teams, both in Hong Kong and Singapore. We believe this will be a strategic differentiating factor moving forward due to increasing competition from similar institutions. In terms of overseas business, we are continuing to invest significantly to enhance our product supplies, both from the direct investment side in Silicon Valley as well as real estate products in New York. We also continue to develop the iNoah platform, allowing our clients to transact both Hong Kong and US stocks online. Furthermore, we've seen very strong growth with the Smile Treasury platform this year, increasing from less than 100 institutional clients to over 2,500 accounts online. We see vast opportunities on the overseas side, especially considering small to medium enterprises that are export-oriented and require dollar-based product management.

Unidentified Analyst, Analyst

Thank you, that was very clear.

Jingbo Wang, Chair, President, and CEO

Thank you.

Operator, Operator

Dear investors and analysts, you can now use the raise hand function when selected, you can turn on the microphone to ask a question. And please mute yourself after the question. Thank you. If there are no further questions, then the conference has now concluded. Thank you all for participating. Have a nice day or a nice evening. Thank you.

Jingbo Wang, Chair, President, and CEO

Thank you very much everybody.

Qin Pan, CFO

Thank you, everyone. Bye-bye.

Jingbo Wang, Chair, President, and CEO

Bye-bye.