Earnings Call Transcript - NOAH Q4 2022

Melo Xi, Director of Investor Relations

Hi, good morning, everyone and welcome to Noah's Fourth Quarter and Yearend Conference Call. I'm Melo Xi, Director of Investor Relations in Noah Group. The Presenter today -- joining us today are Ms. Jingbo Wang, our Co-Founder, Chairlady and CEO and Mr. Qing 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 discussion of some of the risks that could affect results, please see the safe harbor statement section of our 6-K filing. We also refer to certain non-GAAP measures and you'll find reconciliations in our 6-K report made available on the Financial Report section of Noah's Investor Relations website. Also, please know 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. Also, we appreciate you changing your display name to first and last name, plus your institution name. With that, I would like to welcome our Chairlady and CEO; Ms. Wang Jingbo.

Jingbo Wang, Chairlady and CEO

For the agenda of today’s conference call, I’d like to start by discussing the macroeconomic landscape, an update on our globalization strategy. Then report on Noah’s overall performance and development of various business segments in 2022. Year 2022 was an extraordinary year with an extremely complex global macroeconomic environment. The extreme market gyrations caused by the Russian and Ukraine conflict during the first quarter, Shanghai-like lockdown during the second and the rapid Fed rate hikes spanning almost the entire year have by far exceeded our expectations. In other words, we have seen the most drastic drop in investor confidence in decades. Domestically, the Chinese lockdown index reached its highest level twice since the first outbreak of COVID-19 in 2020. Frequent lockdowns severely restricted economic activities with the household savings rate reaching its highest levels since the beginning of the outbreak and consumer confidence hitting rock bottom. Turning to the global market. Since the subprime financial crisis in 2008, prolonged quantitative easing and abundant liquidity have led to a significant level of global asset inflation. With global supply chains severely disrupted over the past three years by the raging pandemic coupled with the impact of surging commodity prices due to geopolitical conflicts, we have seen the most acute global inflation in decades. In order to contain inflation, the world’s major central banks led by the US Federal Reserve moved quickly to raise interest rates at the fastest pace in almost 40 years. The sudden quantitative tightening measures and escalating risk rates of return led to huge losses in risk assets, with both equity and bond markets experiencing their worst year since 2008. The significant shift in investor sentiment led to a decrease in preference for high-yield products and an increase in demand for assets with lower volatility and higher liquidity. As a wealth and asset management firm focusing on serving global Chinese high-net-worth clients, Noah’s mission is to understand and gain insight into the ever-changing needs of our clients. In the CRO report published at the beginning of 2022, based on our assessment of the macroeconomic and capital market environment, we proposed our clients to adopt a protection-before-growth allocation strategy, advising them to protect and diversify their portfolios using various wealth management tools against the upcoming uncertainties. We recommend our clients to increase their allocations in absolute return-oriented multi-strategy funds and private-equity funds in order to reduce asset volatility and capture cross-cycle growth opportunities, which effectively helped our clients to protect their wealth in a turbulent capital market environment. We have become increasingly aware that the concept and understanding of wealth management through the lens of Chinese high-net-worth individuals undergoing fundamental changes with safety and security becoming the number one demand. The need for global asset allocation has also increased. Since the opening of the Hong Kong office in 2012 and gradually establishing ourselves in foreign markets including the US, Singapore, Canada, and Australia, Noah International has accumulated a decade of experience and capabilities in the Overseas segment. In the past, we served our overseas Chinese clients with our overseas staff, which mainly consisted of investment product selection, operations, and middle and back-office professionals. In 2022, we further reshaped Noah’s international capabilities by building an international wealth management team based in overseas markets, creating new overseas products in order to better serve the asset allocation needs of Chinese high-net-worth individuals living abroad. By the end of 2022, Noah’s international clients increased 8.4% year-over-year. The Overseas segment generated net revenues of RMB828 million for the year, accounting for 26.7% of the Group’s revenue, an increase from 23.5% in 2021, with this figure further increasing to 32.2% in the fourth quarter. In 2022, the company delivered solid financial performance by proactively adjusting our business strategy, achieving annual net revenues of RMB3.1 billion and non-GAAP net income of RMB1 billion, meeting annual non-GAAP earnings guidance. Operating income margin improved to 35.1% from 27.9%, driven by more efficient cost management and less travel activities due to COVID lockdowns. Wealth Management segment reported annual net revenues of RMB2.2 billion, down 31.1% year-over-year, primarily due to clients leaning more towards products with higher liquidity. Transaction value was RMB70.3 billion for the year, down 27.7% year-over-year. In 2022, with significant volatilities in the global public markets, with the MSCI World Index down 17.8%, the S&P 500 Index down 18.7%, and the MSCI China Index down 21.2%, Noah's strategy was to capture and maintain clients’ wallet share that helped clients preserve their wealth instead of trying to chase higher revenues and profits by pushing products with higher risk profiles. In terms of clients, the number of diamond and black card clients reached 9,689, an increase of 18.2% year-over-year, with a 22.2% increase in black card clients in particular. We recovered over 1,000 lost or dormant accounts, and many lost clients have started to turn back to us. In 2022, through better client segmentation strategies and personalized asset allocation advice, we recognized over 3,000 potential diamond and black card clients during the year. Winning clients to us through care and professionalism has always been the source of Noah’s success. I'm also pleased to announce the company has successfully completed the conversion to primary listing status on the Hong Kong Stock Exchange on December 23, 2022, becoming the first Chinese wealth management company to have dual primary listing status in both the US and Hong Kong. The Board has approved an annual dividend plan to pay out 17.5% of non-GAAP net income of RMB1 billion for 2022. The final dividend proposal will be evaluated at the upcoming AGM in mid-June. I’m also pleased to announce our commitment to creating value for our shareholders in a stable and sustainable manner through a long-term cash dividend plan. We are committed to becoming a leading name by capturing at least 1% of the market share in the wealth management sector for Chinese high-net-worth clients around the world. A goal that has tremendous room for growth, but also requires us to always maintain our founding principles and work hard towards achieving it. Finally, we hope that the pain of 2022 will become the gain of 2023. Now, I’d like to pass to our CFO, Mr. Pan, to give you a detailed walkthrough of this year’s results. Thank you all.

Qing Pan, CFO

Thanks, Mel, and thank you, Chairlady. Welcome investors and analysts. Looking back at 2022, it was undeniably a challenging year. The United States Federal Reserve raised interest rates by a cumulative 425 basis points to 4.4% as of the end of last year, the fastest hike in decades. Coupled with geopolitical conflicts and an ongoing increase in the global inflation rate from 4.7% to 8.8%, this created volatilities in both the equity and bond markets. Consequently, the MSCI World Index, S&P 500, and MSCI China Index have all dropped 18%, 19%, and 21% throughout the year, respectively. In China, the prolonged COVID-19 restrictions throughout 2022 greatly affected economic activities. The China effective lockdown index, a third-party index that measures the level of COVID-related restrictions, reached its highest twice since 2020. The Chinese household savings rate declined significantly from 30% pre-COVID to 37% by the end of the year, while the Chinese consumer confidence index hit a decade low. Despite the challenges, Noah has been investing to improve our research capabilities to counter this adversity, and our CIO office published investment outlook for 2022 at the beginning of last year, recommending the strategy of preservation before growth to our clients. Although 2022 was a tough year, we achieved an increase in the number of core clients, with diamond and black card clients up 18% year-over-year. That’s increased overseas AUM also increased by 15% year-over-year. Due to stricter cost management measures and higher operational efficiency, Noah’s operating margin grew from 27.9% to 35.1%. On top of that, we met our annual non-GAAP net income profit guidance, absorbing the impact of an unexpected and unfavorable outcome of legal proceedings towards the end of the year. Full-year net revenues were RMB3.1 billion, down 28% year-over-year, primarily due to the decrease in one-time commissions and performance-based income. One-time commissions fell by 46% year-over-year to RMB678 million due to lower transaction values. Performance-based income fell by 61% year-over-year to RMB308 million, as expected in the face of the bumpy capital market environment. Recurring service fees remained relatively stable at RMB1.9 billion. Operating costs and expenses were RMB2 billion, decreased 35% year-over-year, due to lower relationship manager compensation expenses as transaction values decreased. Correspondingly, our non-GAAP net income was RMB1 billion, achieving our annual profit guidance with a margin up to 32.5%. Growth in core clients still remains a top strategic priority throughout the year, benefiting from our continuous strategic investments. Now, please let me walk you through the detailed financial results of this year and the fourth quarter. In terms of the ESG, Noah has been voluntarily publishing sustainability reports since 2014. We also formulated and initiated the supply chain ESG management guidelines. Overall, full-year Overseas net revenue was RMB828 million, accounting for 27% of total net revenue compared to 24% in the year before. Looking forward to 2023, we will continue to invest talent and resources into expanding our global footprint and improving our client service experience and quality. Thank you, everyone, for listening, and I will now open the floor for questions.

Melo Xi, Director of Investor Relations

Thank you, Grant. So, if you have a question, please kindly press the raise hand button in Zoom and now I believe we have Helen from UBS. So, moderator could you please turn on her microphone. Thank you.

Helen Zhou, Analyst

Okay, let me translate my question. This is Helen from UBS. Two questions if I may. One, for insurance product distribution since the fourth quarter of 2021, the growth momentum has been very strong. Insurance products are the key driver for one-time commission fees. It’s been five quarters since the fourth quarter of 2021, so what’s the insurance product penetration rate for existing clients? Do you think that strong growth momentum could persist this year and next year? If not, what type of progress might breach that revenue gap? And could you please give us more color on transaction value outlook this year both in terms of growth outlook and product mix? The second question is on Gopher AUM. I noticed that from 2015 to 2016 private equity products were a major driver for transaction value and this product may enter the redemption period very soon, so what’s the impact on Gopher AUM? Will Gopher AUM decline in the next one to two years? What will Gopher’s product strategy be this year and in the coming two to three years? Thank you.

Qing Pan, CFO

Thank you, Helen. I’ll supplement some data points and also do a quick summary for what our Chairlady has mentioned. We look at the allocation of product mix from a slightly different angle. Throughout 2022, the sentiment of the entire market was preservation and risk-averse. The demand from insurance products actually grew across the board in the market. As mentioned by the Chairlady, the coverage of penetration rate, especially in the diamond black card clients was relatively low, showing room to grow. The contribution to total revenue by interest-related revenue for 2022 was 77%, slightly higher than 60% in 2021. In terms of Gopher’s AUM, domestically, we believe that our fund-of-funds portfolio will benefit greatly from the registration team in Asia's spot market that provides more exciting opportunities for these portfolio companies to become IPO companies. In terms of the secondary market and public security products within Gopher, we have invested heavily into the R&D team, focusing on different stocks and strategies. For overseas, we are investing heavily in both budget and talent to meet the demand for our clients, especially for overseas allocation of more products. Thank you, Helen.

Helen Zhou, Analyst

Thank you. Crystal clear.

Qing Pan, CFO

Thanks, Chia Yao. Those are great questions. We want to stress that the strategy in terms of recommending our clients to preserve first then pursue growth opportunities didn’t start in the fourth quarter last year. We published the CRO report in the first quarter when we sensed highly volatile market conditions. The majority of allocations mentioned in the market and our clients' strategies are highly liquid products, including money market funds, towards the end of last year when the Fed raised the interest rates quickly. We continue to hold a very conservative view especially for our clients. We believe that opening up new tiers or new corporate clients overseas will actually provide strong growth driving practice behind incremental revenue in 2023. Thanks, Peter. Great questions again. With respect to transaction value, we distributed RMB70.3 billion of products during the year. We raised about more than USD1 billion in the fourth quarter alone that fit clients’ needs for exposure to a deeper and stronger market in terms of overseas products. We plan to expand the interfaces where we can reach out to our clients in different ways, focusing on both domestic development and overseas growth strategies.

Peter Zhang, Analyst

Thank you, very clear.

Melo Xi, Director of Investor Relations

Thank you, Peter. We have no further questions from the audience. So with that, we would like to conclude this quarter and year-end earnings call. For our most updated financial reports, please refer to the financial statements section within our Investor Relations website. Thank you all for listening.