Earnings Call Transcript - NOAH Q2 2021

Operator, Operator

Good day, and welcome to the Noah Holdings Limited Second Quarter 2021 Earnings Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Ms. Jingbo Wang, CEO. Please go ahead.

Jingbo Wang, CEO

For today's teleconference agenda, I will first report on Noah's overall performance in the second quarter of 2021, the development of major business segments and the progress of our key strategic projects. Next, I will walk you through Noah's changes and strategies from product-driven to client-oriented. Then we will invite our CFO, Mr. Qing Pan to introduce the quarterly financial information followed by a Q&A. With a continuous adjustment of regulations, the compliance cost of the financial industry has increased. While compliance has become a matter of life and death for financial institutions after an eight quarter transformation, Noah has not only distributed zero new non-standardized private credit products, but also 100% completed the early or unscheduled redemption of private credit assets in our AUM in this quarter since the transformation. Noah has exited RMB32 billion of private credit products and completed distribution to clients. In the first half of 2021, with the promotion of the Noah Triangle Service Model, we achieved the fastest growth in our Diamond and Black Card clients since the transformation. With strong support from our clients and the efforts of all Noah employees, we have completed the transformation and maintained a year-on-year steady growth in the second quarter. In the second quarter of 2021, Noah reported net revenues of RMB900 million, a year-on-year increase of 20.3%, while the non-GAAP net income attributable to the shareholders reached RMB340 million, a year-on-year increase of 7.5%. As of June 30, Noah has realized a total non-GAAP net income of RMB800 million, representing 66.7% of the full-year guidance ahead of scheduled progress. In terms of core business data, transaction value in the second quarter was RMB25 billion, up 16.6% year-on-year. Specifically, the transaction value of private secondary market funds was RMB7.7 billion, up 7.6% year-on-year, while mutual funds were RMB9.4 billion, down 13.3% year-on-year affected by the overall market performance. It is worth mentioning that the AUM inflow of private equity fund-of-funds managed by Gopher was RMB6.5 billion, 2.57 times that of the same period last year. Our performance in the overseas sector also rebounded well this year. The net income of the overseas sector was RMB230 million, a year-on-year increase of 23%, and overseas AUM was RMB27.9 billion, up 7.4% over the end of the first quarter of 2021, accounting for 17.1% of the group's total AUM. At the beginning of this year, we decided to refocus on high net worth and ultra high net worth clients as our core client base. I am glad to report that as of June 30, 2021, Noah has 6,386 Diamond Card clients, an increase of 12.3% in the first half of 2021, and 1,482 Black Card clients, an increase of 18.7% in the first half of 2021. This is the fastest growing quarter for Diamond and Black Card clients since Noah's transformation. Our core clients’ activeness continued to improve year-on-year in the second quarter of 2021. The total number of active clients, including mutual fund-only clients, exceeded 20,000, a year-on-year increase of 38%. The number of active clients, excluding mutual fund-only clients, increased by 39% year-on-year in the second quarter. The number of active clients of mutual funds increased by 36% year-on-year. Noah is committed to the transformation from product-driven to client-oriented. Under the Supernova Relationship Managers Communications Quantitative plans, the completion rate of the monthly communication between relationship managers and clients has reached 98%. By serving our core clients with the Noah Triangle Service Model and through our digital transformation, we can provide suitable products and services to the right clients at the right time on the premise of better insight into client needs. In the past, relationship managers were guided by product sales. Now, the change is to adhere to screening and identifying accredited investors, adhere to comprehensive and higher compliance standards, and meet clients' key wealth management needs in the correct way. At our wealth management headquarters, we have established a client identification system to accurately identify clients, propose client business strategies, and formulate plans. On the other hand, we have improved talent density in local branches through the identification, screening, training, and examination of staff in the Noah triangles, thus realizing the transformation from sprinkler irrigation to drip irrigation. Our client-oriented philosophy helps us serve our clients more accurately and efficiently. With new talent coming in, our frontline members are undergoing a continuous survival process. In 2021, Noah ramped up the recruitment of relationship managers, adding nearly 200 new team members in the first half of the year. The turnover rate of elite relationship managers maintained an industry low of 1.7%. During the transformation, we have also made a new organizational design for our Wealth Management segment, moving from a past organizational structure focused on product promotion to today's new organizational structure and business scenarios that focus on clients' experiences and needs, as well as customized solutions. As of June 30, 2021, Gopher's AUM was RMB155.9 billion and has stabilized and recovered. We have achieved the milestone of dealer AUM of non-standardized private credit products. We feel fortunate as this has also given us time and space for reform. Our actively managed funds have posted varying degrees of growth, of which the AUM of public securities was RMB11.1 billion, an increase of 5.5% over the end of the first quarter. The AUM of private equity was RMB127.7 billion, an increase of 4.8% over the end of the first quarter. Gopher's target strategy products are also among the key strategic focuses of the group. As of July 16, both Gopher's growth fund one and balanced fund one have achieved target investment returns and outperformed the comparable market indices. Prudent products have also been launched. PE co-investment in hedge fund Series 6 will also be launched soon. Hedge fund Series 5, which focuses on growth and mature projects while partially considering the layout of some early projects, has completed its investment ahead of schedule. Like the group, Gopher's transformation is also client-oriented. Firstly, Gopher has established an investment research team of 39 members, who govern research and development, the macro strategy team, the credit rating department, and corresponding industry teams. Secondly, Gopher endeavors to delve into clients' profiles when investing in Gopher products. Based on client needs, Gopher's portfolio management reports have been revised and optimized with more detailed and readable content, which has received positive feedback from clients, thus driving the governance of portfolio management data and creating a digitalized investment management process and systems. In the second half of 2021, we will continue to expand the AR, SR, and FR teams and improve the quality of client marketing activities. First, we will build multi-level Noah triangles centered on clients, with one account representative plus one fulfillment representative and several solution representatives for collaborative teamwork. Account Managers are responsible for client origination, providing comprehensive asset allocation services for clients, and maintaining client relationships. Solution Representatives are responsible for providing clients with product introductions and solutions. Fulfillment Representatives are responsible for providing clients with integrated portfolio reports and interpretation services. Second, we will implement matrix management from the group to local branches, ensuring that each layer performs its own duties from strategic planning to market planning and from quality control to compliance quality control to improve the quality of deliverables. The transformation we are implementing is about making organizational design with clients at the center, due to new business scenarios with survival as a bottom line, identifying, evaluating, and distributing value based on data and promoting the implementation of transformation with organizational capacity building. The transformation follows the method of easy first, difficult later, from the group to business segments. We will determine the transformation milestones and key inspection points at each stage and specify the transformation roadmap. We will adhere to the philosophy of being client and future-oriented. Given the inevitable homogenization of standardized products, our services must be more targeted and client-oriented. At the same time, we will pursue long-term sustainable development, give up short-term interests, and strive to become an industry leader in terms of compliance and business operations, taking survival as the bottom line. We will input thinking frameworks, methodologies, and management actions for capacity building. In terms of human resources, we will base our evaluations on the value created and distributed by employees. Noah’s new ranking and qualification system has been released and implemented. The ranking of employees has been completed through post weighing, person-post matching, post determination of responsibilities, salary determination by post, salary linkage, etc. Noah encourages two-way movement of rankings and post retention. We have established a qualification system for professional posts covering the entire talent management life cycle of selection, education, employment, retention, and retirement, broadening the career development channel for employees and optimizing the salary system. Two-thirds of our staff in key posts have benefited from salary increases at this time, which contributes to encouraging and retaining core employees and driving the growth and development of all employees. In the mid-term employee experience survey in 2021, 83% of the employees believed that the company's objectives and missions are clearer than last year. The process of transformation has also deepened our understanding of the business. We provide financial products mostly for high net worth and ultra-high net worth clients, offering family trust, insurance, family office, and other services around client motivation, conducting marketing events based on client emotions, holding various client activities in line with their needs, and making structural changes centered on empowering the frontline, all based on compliance and the digitalization of benefit. We believe that with the planning of Noah's new headquarters buildings, our client reception interface and visiting experience will be greatly improved in the future. We also plan to comprehensively improve and rejuvenate Noah's brand image to showcase a side of Noah that is more youthful, energetic, and warm to better serve our clients and further empower our frontline. Long-term and sustainable development has always been highly regarded at Noah. The sustainable development committee of Noah Holdings has established the group's sustainable development structure to enhance ESG awareness. In May 2021, Noah released a declaration on carbon reduction. We are committed to the principles of sustainable operation, actively engage in responsible investment, and set short, medium, and long-term carbon neutrality goals. Currently, nearly two-thirds of Noah's employees are female. I also signed the Women's Empowerment Principles of UN Women, creating opportunities for women to hold management positions and helping more women improve their economic ability. We look forward to a better tomorrow for sustainable wealth management and asset management industries. Now, our CFO, Mr. Pan Qing, will introduce to you the Q2 2021 financial data in detail. Thank you.

Grant Pan, CFO

Thanks, Sonia, and thank you, Chairlady. Dear investors, analysts, good morning. I am very happy to share with you another solid quarter with strong growth achieved across revenues, profits, and transaction values over the comparable period from last year. We are also very excited to see robust growth in our client activities, especially record high growth in Black Card clients benefiting from the continuous implementation of our upgraded client service model and digitalization strategy. As of the first half of 2021, we recorded non-GAAP net income of RMB800 million, which was ahead of schedule to meet the full-year guidance of RMB1.2 billion to RMB1.3 billion. Another notable milestone in this quarter is that we have successfully exited and made full distributions to our clients for all the non-standardized single counter-party private credit products within our AUM, aside from the unsettled portions of Camsing and Huishan products. That distribution totaled over RMB32 billion since the transformation started in the second quarter of 2019. We have also successfully settled with over 70% of clients affected by the Camsing incidents. With this overhead removed, we are pleased to see that our AUM has stabilized and entered a stage of steady growth. Our efforts were also recognized by S&P Global Ratings, as S&P has recently lifted our rating outlook to stable for the next 24 months and affirmed our long-term investment grade credit rating BBB-. As the Chairlady pointed out, after eight quarters of challenging yet effective transformations, we have successfully turned the corner and are now heading into a new stage of growth. Now please let me walk you through more detailed results of this quarter. Net revenues in the second quarter were RMB899 million, down 26.6% quarter-over-quarter compared to the last quarter, but up 20% year-over-year. One-time commissions were RMB246 million, up 94.5% year-over-year driven by increased client activity and transaction values, but also down 23.6% quarter-over-quarter. Recurring service fees were close to RMB500 million, up 5% year-over-year and 5% quarter-over-quarter driven by steady growth in our AUM. Performance-based income was RMB122 million, up 34% year-over-year and down 70% quarter-over-quarter. Income from operations was RMB335.4 million during this quarter, up 5% year-over-year and down 33.2% quarter-over-quarter, and the operating margin was 37.3%. Looking at the six-month period, we achieved net revenues of RMB2.1 billion in the first half of 2021, up 42% from the same period last year. This was mainly contributed by a 69% increase in one-time commissions due to strong growth in transaction values, as well as higher than expected carry income achieved in the first half of the year. This impressive growth and our top-line performance were backed by robust client activities, especially among our Black Card and Diamond Card client groups. Our Black Card clients grew 18.7% to 1,482 from 2020, and our core client group, including Black and Diamond Card clients comparable to the traditional private banking client group, increased by 13.5% from 2020, totaling 7,868 clients. This shows that our strategy to heavily invest in this initiative has been working well and we will continue to support the Diamond and Black Card program to increase our market share among ultra-high net worth individuals. Our Black Card and Diamond Card clients typically contribute over 70% of total transaction values as well as the AUM. Over the second half of 2021, we will continue to release our strategic spending budget to better implement and improve our upgraded client service model, while continuing to focus on the retention and expansion of our core client group over the long-term. Active clients in the first half also increased by 46% year-over-year to 32,945. As a result, total transaction value is RMB52.1 billion, a 16.7% increase year-over-year compared to the first half of 2020. Notably, the transaction value of long-duration products, such as private secondary market fund products, was RMB20.6 billion, up 10% year-over-year. Additionally, the AUM of private equity fund-of-funds products managed by Gopher also increased by 13.6% year-over-year. This increase in the volume of such products will also benefit us in the long-term with steady sources of recurring service fees. Operating income for the first half was RMB837 million, up 45% from last year, and the operating margin was 39.4% compared to 38.6% from the previous year. Compensation-related expenses were RMB977.9 million, up 40.6% from the previous year. Selling expenses also increased by 70% to RMB182.3 million. The increase in compensation as well as selling-related expenses reflects our efforts in talent acquisition as well as the resumption of marketing activities, as year 2020 was impacted by the outbreak of COVID-19 when marketing activities were very limited. Non-GAAP net income for the first half was close to RMB800 million, up 40% year-over-year. As for the first half segmented results, net revenues from the Wealth Management segment were RMB1.5 billion, up 43.5% year-over-year, accounting for about 70% of total net revenues. Net revenues from the Asset Management segment were RMB526 million, up about 51.6% year-over-year. Total AUM increased by 1.2% from the previous quarter to RMB155.9 billion, and we have made adjustments to the Camsing-related AUM based on the amounts that have been settled. Looking at our balance sheet, we have successfully closed the acquisition of our new office property in the new headquarters, and the related amount has been reflected in the property and equipment section. We financed the transaction with cash on our balance sheet and still have a healthy cash balance of RMB2.7 billion by the end of the quarter. The debt-to-asset ratio improved to 22.5% from 24.8% in the previous quarter and we will continue with no interest-bearing debt on our books. We are also very excited to join the prestigious group of investors in the recently closed fundraising round at iCapital Network, a market leader in global FinTech platforms for alternative investments. Through this highly synergistic strategic partnership, we look forward to improving our overseas product offerings to include more high quality global private equity and secondary market fund products for our clients. We also worked closely with iCapital to expand the international distribution channel for Gopher products. Moreover, I would like to highlight our continuous efforts in ESG initiatives aside from the accomplishments mentioned by Chairlady Wang, while also establishing investment and product processes to incorporate criteria related to ESG. We hope to be able to offer more ESG-related investment products to our clients in the near future. In conclusion, with the successful completion of the standardized transformation that started in the second quarter of 2019, we are well positioned to enter the next phase of business growth. We will continue to invest in talent and technology infrastructure to strengthen our competitive advantage in client servicing and product diversity. Thank you, everyone for listening. I will now open the floor for questions.

Operator, Operator

We will now begin the question-and-answer session. Our first question will come from Ethan Wang with CLSA. Please go ahead.

Ethan Wang, Analyst

Okay. So thank you, management. I'll have two questions. The first one is about mutual funds. Since you disclosed the transaction volume of mutual funds, we want to understand more about the retention rate. Have you seen any material changes in the retention rates or have you seen any large redemptions from the second quarter? And if possible, can we get some color on the latest transaction volume on mutual funds in July and August so far? The second question is on real estate because recently, regulators have temporarily halted the registration of residential real estate private funds. Is that going to affect our real estate product sales in the future? Thank you.

Grant Pan, CFO

Okay. Thank you, Ethan. For the first question, I think we didn’t notice any significant slowdown in mutual fund distribution, probably about 13%. As for the retention of such mutual funds, we only noticed about four days slower or shorter in terms of the retention period as of June 30 for the total AUM mutual funds, which is still keeping a pretty stable balance. The reason being that I think how the clients purchased or allocated funds into mutual funds with Noah is actually not so much due to market volatility, but rather the product-to-product sort of interval where they need to park their funds. So I guess the behavior is a little bit different from retail markets. But as you pointed out, we believe the entire market in Asia has at least cooled down a little bit compared to prior periods. The impact on residential property funds for us was very minimal. We reached a peak—probably in 2016, we had about RMB100 billion in real estate-related funds, but we have exited fully from that maximum funds starting in 2017. Currently, we don't have anything in the residential property type of fund investments. The only things we are still holding are some equity type of real estate funds as well as holding several office buildings in Shanghai.

Ethan Wang, Analyst

Got it. Thank you.

Operator, Operator

Our next question will come from Emma Xu with Bank of America. Please go ahead.

Emma Xu, Analyst

So I have two questions. The first one is regarding the distribution of private equity and hedge fund products. We have seen the tightening of regulations impacting the transaction value of your key products, as well as the exit of your existing key projects. Recently, we have seen fixed market volatility, so it also impacts the distribution value of your hedge fund products. The second question is about the settlement expense in the second quarter. As we know most of the Camsing-related clients have been settled in the fourth quarter of last year, so what’s the additional one for the second quarter this year? Thank you.

Grant Pan, CFO

Thank you, Emma. Let me address the first question first. In terms of settlements in the second quarter, when clients approached us and asked for a bit more time and negotiated for the settlement plan, we were accommodating. So there were some settlements completed during the second quarter. We had about 30 to 40 additional clients that came to settle with us in the first half of the year. We're not going to make any broad offering or new types of settlement plans. They came and took part in a relatively similar settlement process to what we had offered last year. Regarding the distribution, the funds could exit through overseas listings as well as domestic listings. Undoubtedly, the retention pressure has increased, leading to uncertainty on the short-term outlook for the capital market. However, we believe that the transformation from the old economy to the new economy cannot be reversed in terms of how the clients are allocating and placing their funds for the future. Especially since a good portion of our clients come from traditional industries. They have the urge and demand to actually transform their enterprises through investing in the new economy to increase their exposure. Thus, although there may be short-term volatilities, the long-term outlook for how they allocate their assets will not change. Looking at today's China market, real estate is no longer an ideal target, and many non-standardized products have been nearly eliminated by the regulators. There aren’t many options for investments, which is why, despite short-term volatility, the equity markets continue to remain very active. Furthermore, our U.S. products, specifically those operated by our New York and Silicon Valley teams, are still delivering strong performance by investing in companies in the states, as well as in some real estate projects that generate significant cash flows for our clients. Therefore, these products have been quite popular in the first half of the year, as we mentioned that the income and operations for the overseas portion of Noah this year have recovered strongly. Thank you, Emma. Does that answer your question?

Emma Xu, Analyst

Thank you.

Operator, Operator

[Operator Instructions] Our next question will come from [Yoyo Sung] with CICC. Please go ahead.

Unidentified Analyst, Analyst

Okay. I will translate my question. My first question is regarding the number of clients. Would you please give more detailed explanations of the exciting growth of the Black Card and Diamond Card clients? My second question is about the relationship managers. I wonder what the numbers are—the percentage of our elite relationship managers is, and we also see that the turnover rate of elite relationship managers was 1.7%, slightly higher than that of the previous year. I wonder what’s the reason behind that. Yes, those are my questions.

Grant Pan, CFO

Thank you. Let me first break down the portion of elite relationship managers. They account for about 30% of the total relationship management team for the second quarter, which has been stable in the past quarters. In terms of growth in the Black Card and Diamond Card program, we have undertaken several initiatives aside from the Noah Triangle Service Model and digitalization. We are making additional investments and will continue to do so in the second half of the year to greatly enhance our benefit system and loyalty program in the Black Card and Diamond Card programs. You may have noticed in the past few quarters that we have held exclusive activities for the Diamond and Black Card clients, including snowboarding with a world champion who is now a full-time employee of Noah, as well as hosting private events like a gathering of Black Card clients at the Summer Palace. This systematic effort ensures that our clients not only receive suitable financial products but also an exceptional client service experience at Noah. This initiative has helped relationship managers connect or reconnect effectively with our core client group. I think that's one of the main reasons we see significant growth in the core client group, which is a target market for everyone in the industry. We are very pleased to see that our strategy is working and will continue to invest in that area.

Jingbo Wang, CEO

Yes. And the Chairlady made a very good clarification, and this will probably be the last time we refer to elite relationship managers, as our service model to our clients has transformed to a team of service providers under the Noah Triangle Service Model. In the past, we relied entirely on one person to provide service and product recommendations to our clients; that era has likely passed. We will continue to promote a service model where we serve our clients with a full team, including product specialists and service specialists, as well as a chief relationship manager who will look at clients' complete needs in terms of asset allocation and additional service requirements. I think that's a very good clarification, and we are probably moving towards a more complete service model for our clients.

Operator, Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Grant Pan, CFO, for any closing remarks.

Grant Pan, CFO

Okay, I'm the CFO, by the way. Thanks a lot for the promotion. Thank you, everybody, on behalf of the company, also to Chairlady Wang. Thanks for your time, and very happy and encouraged to see that after eight quarters of transformation, we are actually heading towards a new stage of growth and hope to continue to deliver strong results for our investors. Thank you.

Operator, Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.