Earnings Call Transcript - NOAH Q2 2023

Operator, Operator

Good day, and welcome to the Noah Holdings Second Quarter 2023 Earnings Conference Call. I would now like to turn the conference over to Melo Xi, Director of Investor Relations. Please go ahead.

Melo Xi, Director of Investor Relations

Thank you, operator. Good morning, and welcome to Noah's 2023 Second Quarter Earnings Call. I'm Melo Xi, Director of Investor Relations at Noah Group. The presenters joining us today are Ms. Wang Jingbo, our Co-Founder, Chairlady, and CEO; and Mr. Grant Pan, our CFO. Before we start, we would like to kindly remind you that during today's call, we may make forward-looking statements based on our current expectations of the business. Please keep in mind that these statements are subject to risks and uncertainties that may cause Noah's actual results to differ from these statements. We do not undertake any duty to update these statements. For a discussion of some of the key risks that could affect results, please see the Safe Harbor statement section of our 6-K filing. We'll also refer to certain non-GAAP measures, and you will find reconciliations in our 6-K report made available on the Financial Reports section of Noah's Investor Relations website. Also, please note that nothing on this call constitutes an offer to sell or a solicitation of an offer to purchase an interest in any Noah or Noah-affiliated products. This call is copyrighted material of Noah and may not be duplicated without consent. Please also be aware that the link to a live webcast with presentation materials is available on our Investor Relations website. With that, I would like to welcome our Chairlady and CEO, Ms. Wang Jingbo. Chairlady, handing to you now. Thanks.

Wang Jingbo, Chairlady and CEO

Thank you.

Melo Xi, Director of Investor Relations

Thank you, Chairlady. For today’s conference call, I would like to begin with some insights on the macroeconomy and the wealth management sector, followed by an update on Noah's global expansion efforts and a review of our performance in the first half of the year, including the progress of our business units. Afterwards, Mr. Grant Pan, our Group CFO, will provide the financial details, and we will conclude with a Q&A session. In the second quarter of 2023, we noticed that geopolitical tensions and the global economic slowdown have overtaken inflation as the primary concerns for Chinese high net worth investors, who are considering these factors when adjusting their asset allocation strategies. Furthermore, advancements in AI technology, particularly from ChatGPT, have led high net worth individuals familiar with primary market investments, such as venture capital, to seek opportunities in this new technological advancement cycle. Given the increased macroeconomic uncertainties, having a diversified asset allocation strategy across various geographies and asset classes is crucial. We advise Noah's high net worth clients to reassess their portfolios, starting with a review to ensure adequate allocation in key areas while employing multi-strategy investments to seize growth opportunities across cycles, achieving a resilient strategic and tactical asset allocation.

Wang Jingbo, Chairlady and CEO

Noah's high net worth clients should review their portfolios, ensuring sufficient allocation in the appropriate portions, along with multi-strategy investments to capture growth opportunities across different cycles, aiming for a resilient strategic and tactical asset allocation.

Melo Xi, Director of Investor Relations

We are also aware of the recent payment default by certain wealth management companies and trust product platforms under non-standardized private credit products. I would like to point out that Noah, since its establishment in 2003, has been sticking to our founding principles and the common practices of the financial services industry for 20 years. From the inception of our company, we have insisted on the segregation of clients' capital, maintaining separate custodian accounts for our asset management products, no leveraged funding for clients, no products with maturity mismatches, and no cross-border front movement transactions. Together with our continued devotion to investing in research capabilities, such principles not only establish us as a pioneer in terms of compliance and vision, but also bolster our capacity to navigate economic headwinds and shield our clients' hard-earned capital through professional asset allocation advisories. Thanks to our continued devotion to strengthening our investment research capabilities, coupled with our management's forward-looking macroeconomic judgments. In 2016, we started to wind down our exposure in residential property assets. We have fully exited this asset class, and among the clients who invested in this type of product, 98.7% were profitable. After the Camsing incident in 2019, we also started to wind down and fully exited non-standardized private credit exposure, or so-called trust products. During this exit process, although we experienced short-term hardships and lost some of our clients and employees along the way, we have successfully completed the standardization transformation in 2021, which was proven to have effectively safeguarded our clients' wealth amid recent challenges faced by this asset class. Chairlady?

Wang Jingbo, Chairlady and CEO

We have become profitable. After the Camsing incident in 2019, we began to reduce and fully exit non-standardized private credit exposure, also known as trust products. Although this process involved short-term difficulties and cost us some clients and employees, we successfully completed the standardization transformation in 2021, which has proven to effectively protect our clients' wealth during the recent challenges faced by this asset class. Chairlady?

Melo Xi, Director of Investor Relations

In terms of financial performance, the company recorded overall net revenues of RMB 1.7 billion in the first half of 2023, an increase of 13.8% compared to the previous year. The domestic business generated RMB 1.0 billion, which represents 59.2%, a decline of 13.4% year-on-year. Thanks to our ongoing investments in distribution, product offerings, and comprehensive services, the overseas business brought in RMB 714.9 million, marking a significant rise of 104.1% year-on-year, increasing its share of total revenue to 40.8% from 22.6% last year. Breaking it down by segment, the Wealth Management segment contributed RMB 1.3 billion, an increase of 22.5% year-on-year. The domestic share was RMB 769.9 million, down slightly by 4.3% year-on-year, while the overseas portion recorded RMB 566.8 million, up 96.4% year-on-year due to the expansion of overseas product offerings and services. The Asset Management segment contributed RMB 389.9 million, a decline of 5.4% year-on-year. The domestic share was RMB 241.9 million, down 31.2% year-on-year, while the overseas share was RMB 148.1 million, up 140.3% year-on-year, primarily due to growth in overseas assets under management. In terms of comprehensive services, wealth preservation and inheritance continue to be the top concerns for high net worth clients and families. In the first half of this year, revenues from our domestic insurance brokerage business increased by 54.6% year-on-year. Meanwhile, revenues from overseas insurance, family trust, and other comprehensive services surged by 380.8% year-on-year, with active clients in this area increasing more than sixfold, supported by our growth in Hong Kong and Singapore operations. For the first half, we achieved an operating profit of RMB 628.3 million, resulting in an operating margin of 36.0%. In our domestic wealth management business, we are still focusing on expanding in China’s Tier 1 and central hub cities by recruiting top-tier talent, enhancing our asset allocation capabilities and service quality, strengthening investment and research capabilities, and offering tailored asset allocation solutions using our CCI model. By the end of the quarter, the number of domestic relationship managers reached 1,319, a rise of 5.1% year-on-year and 1.5% quarter-on-quarter. With regards to domestic online Wealth Management, we have effectively integrated our clients' portfolio reports with CCI allocation tools through continuous investment in technology, offering recommendations across four types of wallets: liquidity management, growth investments, protection inheritance, and an additional portfolio type. In the first half, mutual fund transactions exceeded RMB 22 billion, up 14% year-on-year, while private secondary product transactions surpassed RMB 8.5 billion, increasing by 33.6% year-on-year. For corporate and institutional clients, our small treasury platform launched in 2022 has attracted nearly 6,000 clients. During the first half, the number of active clients grew by 73.7% year-on-year, with an average client assets under administration of nearly RMB 600,000. Chairlady?

Wang Jingbo, Chairlady and CEO

In the first half, the transaction value of mutual funds surpassed RMB 22 billion, showing a 14% year-on-year growth, while the transaction value of private secondary products exceeded RMB 8.5 billion, reflecting a 33.6% year-on-year increase. Regarding our corporate and institutional clients, the small treasury platform, introduced in 2022, has successfully onboarded nearly 6,000 clients. During the first half, the number of active clients grew by 73.7% year-on-year, with an average client Asset Under Administration of nearly RMB 600,000. Chairlady?

Melo Xi, Director of Investor Relations

On the international wealth management side, we continue to implement our private banker recruitment program in Hong Kong and Singapore. By the end of the quarter, we had 66 relationship managers in Hong Kong and Singapore, up 100% quarter-on-quarter. We're also in the process of setting up client service stations in Los Angeles and Dubai, which should be completed in the second half of 2023, to better serve the global wealth management needs of Chinese clients around the world. As of the second quarter of 2023, Noah International had more than 13,600 international clients, where the number of clients in Hong Kong and Singapore grew by 12.8% and 185.2% year-on-year, respectively. Clients AUM with Noah under discretionary investment basis reached USD 262 million, up 20.4% quarter-on-quarter. And the cumulative number of clients for these products reached 471, up 44% quarter-on-quarter. In terms of international online wealth management, we successfully launched our Noah One Account platform, an integrated account solution that provides multi-domain and multi-asset class allocation for Noah's overseas clients. We also successfully connected nine systematically important banks globally through our nominee accounts, effectively reducing the time and cost of opening and managing separate bank accounts for our global clients. Active clients for overseas mutual funds reached 1,956 people, a significant increase of 465.3% year-on-year. Transaction value reached USD 609 million, an increase of more than 700% year-on-year. The International Smile Treasury business also began to show significant progress, and so far has successfully attracted more than 170 overseas corporate and institutional clients. The transaction value of the first half reached over USD 73 million, an increase of 193.5%. On the asset management side, Gopher's total AUM was RMB 156.9 billion, up 0.9% year-on-year. Meanwhile, Gopher has established three strategic client groups based in Shanghai, Hong Kong, and Singapore, with team members coming from diverse backgrounds, including investment banking, consulting, buy-side, and sell-side investment research and family offices. This not only enables Gopher to cooperate with domestic and international wealth management teams to provide exclusive, diversified, and customized asset allocation services for strategic level clients, but also to actively explore opportunities in expanding overseas institutional and family office clients by leveraging Gopher's diversified, actively managed products at home and abroad. In the first half of 2023, Gopher's actively managed target strategy product team dynamically deployed high volatility strategies to enhance portfolio returns while balancing pullbacks and volatilities to maximize long-term returns. During the first half, its active investment product achieved a 4% annualized return, annualized volatility of 6.3%, and a Sharpe ratio of 0.4. Its balanced investment product achieved an 8% annualized return, 5.6% annualized volatility, and a Sharpe ratio of 1.2. Lastly, a stable investment product achieved a 9% annualized return, 2.1% annualized volatility, and a Sharpe ratio of 3.6%. Overseas AUM of Gopher International actively managed products reached USD 4.7 billion, equivalent to RMB 34.3 billion, up 15.8% year-on-year and its proportion of the Group's total AUM also increased to 21.8%. In 2023, we strengthened screening, coverage, and launching of top-tier global hedge fund managers, as well as the introduction of U.S. dollar structured products, effectively completing our overseas product matrix. Chairlady?

Wang Jingbo, Chairlady and CEO

In 2023, we significantly improved our screening and coverage, launched top-tier global hedge fund managers, and introduced U.S. dollar structured products, successfully building our overseas product matrix. Chairlady?

Melo Xi, Director of Investor Relations

In terms of ESG, we continue to promote the integration of investment products with ESG concepts. Since the end of 2022, Gopher has launched an ESG public market product in cooperation with Brilliant Asset Management, which integrates an ESG evaluation framework into fundamental quantitative strategies. Maximizing long-term investment returns amid the state's effort to promote the development of various segments of key ESG initiatives, such as carbon neutrality. As of July, we have cumulatively raised nearly RMB 100 million for this product, with a cumulative return of over 14%, outperforming the CSI 300 benchmark index over the same period. In summary, Noah's long-term success as an independent wealth management firm lies in its adherence to our core strategy of client-centric survival of the bottom line, as well as respecting the common sense of the financial services industry. Our three complementary business segments, including wealth management, asset management, and comprehensive services, not only enable us to fully meet the needs of a diverse range of clients, including individuals, institutions, and family offices, but also bring a greater degree of inherent stability and balance to our business. Next, I would like to ask CFO, Grant Pan, to present the financial performance in detail. Thank you all.

Grant Pan, CFO

Thanks, Melo. Thank you, Chairlady, and hello investors and analysts. With travel restrictions lifted, the second quarter showed a steady recovery and an increase in economic activities related to contact, as highlighted by a 5.5% year-over-year GDP growth in the first half of the year. Although domestic economic activities are more active, the recovery is still in its early stages and faces uncertainties due to a slowing global economy and geopolitical concerns. Investment sentiments among high net worth individuals remain conservative as they continue to look for safe havens and ways to preserve wealth. Our commitment to focusing on clients has yielded results, with strong financial numbers reflecting alignment with the interests of our wealth management advisors. For the six months ending June 30, 2023, our net revenues grew by 13.8% year-on-year to RMB 1.7 billion, with 30.2% derived from insurance income, as we executed our CIO house view on wealth preservation and asset allocation. Additionally, our investment in talent, global research capabilities, and a wider network of top-tier global asset managers led to a 104.1% year-on-year rise in overseas business net revenues, now comprising 41% of the Group's total net revenue. We are also dedicated to enhancing client channels, resulting in a 13.1% increase in core diamond and black card clients. Active overseas clients reached nearly 2,000, reflecting a 140% year-on-year increase. We're seeing a solid recovery in net revenues, primarily from the distribution of protection-oriented products and growth in our international business. The share of insurance products distributed has increased, as seen in the quarterly one-time commission fees, which rose by 95% year-on-year and 130% quarter-on-quarter to RMB 400 million, the highest quarterly amount since 2022. In the first half, one-time commission fees totaled RMB 580 million, an 87.8% year-on-year increase. We anticipate a gradual recovery in investment sentiment in the second half of the year, potentially reviving growth in investment products. Our client events pipeline in overseas markets is robust, which should enhance opportunities for distributing offshore investment and insurance products to overseas high net worth individuals. Recurring service fees were largely stable at RMB 921 million for the first half of the year. Performance-based income was RMB 111 million, down 44% year-on-year due to a less active exit environment. Other service fee income reached RMB 133 million, a 62.8% increase year-on-year, as a result of providing more value-added services. Our effective cost efficiency strategy for G&A and selling expenses contributed to an operating profit of RMB 628 million and an operating margin of 36%, down slightly from last year due to a low base in 2022 during strict travel restrictions and higher government subsidies during COVID. We are cautious about overhead expenses but continue investing in client interfaces and international talent. The transaction value for the second quarter was RMB 18.4 billion, nearly a 10% year-on-year growth, with an aggregate transaction value of RMB 35.2 billion for the first half. In line with our global expansion, overseas transaction value was USD 1.5 billion for the six months, equivalent to RMB 10.5 billion, up 162% year-on-year, driven by discretionary investment and cash management products that increased 764.5% year-on-year to nearly USD 4.8 billion, or RMB 33.5 billion. In RMB products, our efforts to broaden our client base, both individual and institutional, resulted in a 32.2% quarter-over-quarter increase in mutual fund transaction value, though we remain cautious about fundraising in other products, especially private equity. We will continue to monitor for attractive opportunities, particularly in the technology sector, as China's economic recovery progresses. In the first half of 2023, net revenues from wealth management were RMB 1.3 billion, making up 76.3% of total net revenues, while asset management revenues were RMB 0.4 billion, or 22.3%. Our proactive approach has effectively assisted clients in wealth preservation amidst volatile markets. Our global strategy has contributed to a 15.8% year-on-year growth in overseas AUM, reaching USD 4.7 billion as of June 30, 2023, thanks to our broader offerings including structured products, mutual fund distribution, and private secondary products. On the balance sheet, we have maintained a strong liquidity position, with a current ratio of 3.2x and a gearing ratio of 19.8%. We hold RMB 4.7 billion in cash to further our globalization efforts. In June, we requested S&P Global to withdraw its credit rating coverage, which was BBB- with a stable outlook, reflecting our current capital structure needs with no plans for debt financing. The Board approved a proposal for a 1 to 10 share split for our Hong Kong traded shares, aimed at lowering investment barriers and increasing liquidity. This will not impact our ABS price on the New York Stock Exchange, and the conversion rate will be 5 to 1 post-split, pending shareholder approval at an extraordinary general meeting on October 26, 2023, Hong Kong time. In summary, our first half performance shows steady revenue growth and advances in our international strategy. Looking forward to the second half of 2023, we are optimistic about growth opportunities in China and anticipate that investor sentiment, consumer confidence, and consumption will gradually improve. Under this context, we aim to help domestic clients optimize their asset allocation strategies and enhance client experiences. Meanwhile, as global geopolitical tensions and financial instability persist, high net worth individuals are increasingly seeking global asset allocation services and market entry, leading to a faster wealth accumulation for our clients in the years ahead. We continuously adapt our strategies to evolving trends, and with more offices and talent acquisition, we believe these innovations will help us attract high net worth individuals and deliver long-term value for clients and shareholders. Thank you for your time. We will now open the floor for questions.

Operator, Operator

Our first question comes from YuYu Fan with CICC.

Unidentified Analyst, Analyst

Okay, I will translate my question. This is YuYu Fan from CICC. I have two questions. The first one is about the recent risk event faced by Wealth Management. What is the impact on the whole industry and also on Noah? The second question concerns our coverage network. We have noticed a decrease in the cities we covered this calendar year, so what are our future plans for the domestic city layout? That's my question.

Grant Pan, CFO

I will provide a brief translation and additional comments. Clearly, the stock is expected to perform better in the future. It likely depends on the composition of the assets, which mainly includes real property exposure, along with some low-priced A stocks and significant investments, as well as perhaps a sort of pseudo capital pool. Historically, we haven't seen corporations like this before. I think this is also a pivotal moment for investor education in this industry. As Warren Buffett once said, things that aren't sustainable will eventually fade away; it's just a question of time.

Wang Jingbo, Chairlady and CEO

The asset mostly consists of real property exposure, as well as some low-price A stocks and heavy investments. We also think there might be some kind of pseudo capital pool involved. Historically, we have never had corporations with their companies in this situation. I believe this is a significant moment for investor education in this industry. As Warren Buffett once said, things that are not going to last will eventually disappear; it’s just a matter of time.

Grant Pan, CFO

Our strategy has always evolved based on the locations of our clients. When we started in this industry 20 years ago, many of them were entrepreneurs in smaller cities. However, as of 2023, most have moved to major cities. This shift has given us better access to talent and has reduced the distance to our clients. Therefore, we are concentrating our resources in China's top cities, which will allow us to be more efficient and consolidate our efforts effectively.

Operator, Operator

Our next question comes from Chiyao Huang with Morgan Stanley.

Chiyao Huang, Analyst

My first question is about the management's outlook on the PBC investment and exit conditions in China, as well as the future outlook for product sales, considering the IT environment both domestically and internationally. My second question relates to the sizable cash balance that Noah has. Is there a plan for investments or any strategy to enhance shareholder returns?

Grant Pan, CFO

Okay. I'll have Chairlady answer the first question. I'll take the second question in terms of balance sheet capital.

Wang Jingbo, Chairlady and CEO

It condition in China, as well as the outlook for product sales in the future, considering the IT environment both domestically and internationally. The second question is about Noah's considerable cash balance. Is there an investment plan or any strategy to further improve shareholder returns? Grant Pan, CFO, will have the Chairlady address the first question, while I will respond to the second question regarding balance sheet capital.

Grant Pan, CFO

As you know, if you're familiar with Noah, we've been in this industry from an early stage, with peak distribution placement occurring in 2017. We remain confident in how our portfolio companies are performing. It's important for investors to exercise patience regarding exits. As long as we maintain strong companies, we believe the exit conditions will improve. We executed several exits between 2020 and 2021 when market conditions were favorable, which generated income for both the company and our clients. We conducted a survey of past investments, and as we noted during the call, 98% of investors in products related to real properties have benefited and made a profit on their exits. For existing VCP clients, over 90% are at least profitable regarding their investment costs. We are cautiously optimistic about the future of the VCP industry and will likely focus on earlier-stage technology-based companies. Regarding our cash on hand, we aim to maintain a strong liquidity position. While the balance sheet reflects $4.7 billion, we also have an additional $300 million to $400 million in short-term investments, bringing our total capital and liquidity to around $5 billion. One aspect of our plan is to support our international expansion, which requires significant capital. Additionally, we are considering increasing dividend distributions in the future to provide better returns for our clients.

Wang Jingbo, Chairlady and CEO

We do have another approximately $300 million to $400 million in short-term investments. Therefore, the total capital and liquidity position is about $5 billion in cash. One aspect of our plan is to continue supporting our international expansion, which requires significant capital. Additionally, we are considering increasing dividend distributions in the future to ensure we provide better returns to our clients.

Grant Pan, CFO

I think it's important to note that we have assembled a dedicated team focused on divesting from our portfolio companies. We're observing some interesting trends where, in the past, the founders of these companies were hesitant to return cash to shareholders as they pursued growth. However, it seems that increasingly, they are willing to distribute cash and capital back to shareholders, particularly when the timing of their IPOs is uncertain, similar to what Noah is doing.

Operator, Operator

The next question comes from Peter Zhang with JP Morgan.

Peter Zhang, Analyst

Let me translate. My first question is about the reduction in mutual fund manager fees. We have observed that a major mutual fund in China has been lowering its management fees since July, and we would like to understand what the potential impact on Noah might be. My second question concerns the outlook for the second half. In the second quarter, the insurance business accounted for a significant share of revenue. We noticed that a major insurer in China has stopped offering the 3.5% guaranteed insurance product. We would like to know what the trends might be for insurance-related businesses and revenue in the second half.

Grant Pan, CFO

Okay. Thank you, Peter. I'll take the first question. Mutual fund is actually a very important tool for us to attract new capital from clients or maintain their wallet share between products. So although we're seeing this trend of downward pressure on mutual fund fees, the actual contribution of revenue from mutual funds to our group net revenue is actually at a pretty small percentage. The total distribution fee plus the management fee contribution to the net revenue is less than 5%. So the impact on our 2023 net revenue from the fee downgrading is not going to be more than RMB 3 million. Even if we annualize that, it will be less than RMB 10 million. So I guess the direct financial impact on the group's net revenue is rather limited, but we'll continue to use mutual funds and continue to expand the distribution placement as a good way to attract new capital, and also to maintain the existing capital claims.

Wang Jingbo, Chairlady and CEO

The management fee contribution to net revenue is under 5%. Therefore, the effect on our 2023 net revenue from the fee downgrade will not exceed RMB 3 million. Even if we annualize it, it will be less than RMB 10 million. Consequently, the direct financial impact on the group's net revenue is quite limited. However, we will continue to utilize mutual funds and expand distribution channels as effective means to attract new capital and maintain existing capital claims.

Grant Pan, CFO

We believe it will be beneficial for high net worth individuals to secure new orders, as some major internet platforms for mutual funds may have reached their peak in distribution and maintenance. Additionally, many platforms have concentrated portfolios that may face significant losses due to that concentration. With changes in mutual fund placements, we think high net worth individuals are becoming increasingly aware of the fees related to mutual funds. The IT model, combined with lower transaction and associated costs, will encourage them to move more investments from traditional private hedge funds or private equity into more standardized and lower-cost mutual funds. Looking ahead to the second half of the year, we know that domestic insurance holders contributed significantly to industry revenue in the first half. For the second half, we will continue to advise our clients conservatively based on our Chief Investment Officer's insights, while overseas insurance products and diversified investment product portfolios are expected to remain a major part of transaction value.

Wang Jingbo, Chairlady and CEO

For the second half of the year, we know that insurance holders from domestic markets contributed significantly to the entire industry's revenue in the first half. However, we will continue to advise our clients based on our CIO's perspective, likely maintaining a conservative approach. Additionally, overseas insurance products and diversified investment product portfolios will still represent a considerable portion of the transaction value in the second half.

Grant Pan, CFO

In the past, insurance distribution served as a useful addition to the overall solutions we offered our clients. However, it was primarily focused on specific products or campaigns, such as the mentioned 3.5% domestic insurance. We have been developing a comprehensive infrastructure and platform for insurance as a complete solution, and we are also shifting our client focus from primarily individuals to more enterprise clients. We will continue to develop this into one of our key offerings for our clients.

Operator, Operator

As we have no further questions, this concludes the question-and-answer session, and the conference has also now concluded. Thank you for attending today's presentation. You may all now disconnect.

Grant Pan, CFO

Thank you all for listening.