Earnings Call Transcript - NOAH Q4 2020

Jingbo Wang, CEO

Today, for the agenda of the conference call, I will first talk about the macro view then report on Noah's overall performance in 2020 and the development of our major business sectors. Our CFO, Mr. Qing Pan, will then introduce the detailed annual financial results, followed by a Q&A session. Looking back on the past year, the market has been moving forward faster like a high-speed train, the supply side reform of China's financial products has continued and the transfer of household assets to NAV-based products has exceeded market expectations. Among them, the value of the new fund increased by 123% year-over-year to CNY3.2 trillion. The outstanding amount of nonmonetary funds continues to grow, reaching a historical high of CNY10.99 trillion, an increase of 59% year-over-year, with a significant increase in active funds. With the guidance on standardizing asset management business or financial institutions breaking implicit guarantee, the supply of nonstandardized credit funds continues to decrease, and the insurance of active products is accelerated. Together with the normalization that houses are for living in and not for speculative investment, capital market reform and the return rate of equity funds continued to rise. More and more individual investment behaviors have been replaced by institutional management. It is expected that the securities products in the open market will continue to reach record high in 2021. It has been six quarters since Noah started the transformation from nonstandardized products to standardized products. In 2020, the transaction value of standardized products, the number of active clients and the performance-based income have all reached historical highs, which are good results we have achieved in the transformation. In 2020, Noah recorded total net revenues of CNY3.31 billion, dropping slightly by 2.5% year-on-year. The slight decrease in revenue was mainly due to lower take rate of standardized products, lower revenues from overseas businesses due to the impact from the COVID-19 pandemic. Despite recording a GAAP net loss attributable to shareholders of CNY745.2 million, Non-GAAP net income attributable to shareholders for the year was CNY1.13 billion, up 25.3% year-on-year, exceeding our expectations. The GAAP net loss was due to a one-off equity settlement expense in the amount of CNY1.8 billion related to the Camsing settlement plan. In terms of our core business data, the total transaction value of our wealth management segment was CNY94.7 billion, up 20.6% year-on-year. The transaction value of standardized products reached CNY73.1 billion, up 177.3% year-on-year. Among standardized products, the transaction value of secondary market equity fund was CNY26 billion, up 381.8% year-on-year. The transaction value of mutual funds reached CNY43.3 billion, up 146.7% year-on-year. For our overseas businesses, net revenue for the year was CNY730 million, down 22.9% year-on-year. AUM was CNY24.9 billion, slightly higher than that of the end of 2019, accounting for 16.3% of the total AUM of the group, an increase of 1.7% year-on-year. We believe that in 2021, with the improving global epidemic situation, travel and work restrictions will gradually be lifted, and the demand of clients will bounce back significantly. In 2020, Noah's high-net-worth client group continued to expand, with annual active clients, including mutual funds of over 39,000, an increase of 11.6% year-on-year. The number of black card clients increased by 11.6%. For the service model of our black card clients, we have started to pilot the Noah triangle model of professional division and collaborative operations, while providing systematic support for relationship managers, solution experts, and operations experts. For our asset management business, the AUM dropped to CNY15.3 billion by the end of 2020, affected by the continuous voluntary redemption of nonstandardized credit products, of which nonstandardized credit products dropped by CNY19.4 billion. Other actively managed products have reached different degrees of growth, including 6.1% year-on-year growth to CNY9.9 billion in standardized public securities products and 7.7% year-on-year growth to CNY113 billion in private equity products. In terms of public securities, by the end of 2020, the annual return of Gopher fund, manager of manager funds, was 17.24%, beating benchmark return of the same period by 10.25%. The Gopher top 30 fund achieved an annualized return of 13.37%, beating benchmark return of the same period by 4.81%. For private equity, Gopher continued to promote S Funds and co-investment funds while expanding its direct sales team.

Qing Pan, CFO

Thank you, Chair Lady, and thank you, everyone. Hello, investors and analysts. Good morning. We're very excited to share with you the strong financial results for 2020, delivering successful transformation in our product offering in the midst of strong stock market performance and favorable primary market environment. Despite that, we recorded a net loss of RMB745.2 million under U.S. GAAP. We have also achieved a full year non-GAAP net income of RMB1.13 billion, up 25% year-over-year. It's an honor to have ongoing support from our clients, partners, and shareholders in the past year. We remain optimistic about the future growth in the wealth and asset management industry and the group's potential to become a major independent player. I would also like to mention that the GAAP net loss of RMB745 million for the year was due to one-off equity settlement expense of close to RMB1.8 billion related to the Camsing settlement plan. This expense consists of RMB1.3 billion, representing 67.5% of the clients we have settled with us as of December 31 and also RMB0.5 billion for the rest of the clients who have not yet signed the offer, but we anticipate a settlement will be reached in a certain way in the future at a similar cost. The latter was recorded as a contingent liability from a conservative standpoint after assessing the probability of the occurrence under GAAP. As of December 31, 2020, 100% of the Camsing-related settlement plan expenses have been booked in 2020. Excluding the settlement expense, non-GAAP net income was RMB1.1 billion, up 30% year-over-year. Now please let me walk you through more detailed financial results of the fourth quarter and full year for 2020. Despite the contraction in overseas insurance due to the COVID-19 travel ban and our continued streamlined efforts on the lending business, net revenues for the year were RMB3.3 billion, slightly down year-over-year by 2.5%. But excluding overseas insurance impact, net revenues in 2020 were up 7.2% if we compare apples to apples. Onetime commission revenue in 2020 was RMB804.3 million, down 13.3% year-over-year, again, due to a decrease in overseas insurance distribution. This overseas insurance contributed about RMB154 million net revenue in 2020, comparing with RMB462.2 million in 2019, down by 66.7%. That's a very large drop in overseas insurance revenue. Excluding that part from overseas insurance, onetime commissions were up 40% year-over-year. Recurring service fees and performance-based income were RMB1.9 billion and RMB387.4 million, up 4.5% and 244.4% year-over-year, respectively. Specifically, private equity and public securities contributed to 55.7% and 39.2% of the performance-based income, respectively, reflecting robust exit activities in the primary market and our product selection capabilities in the secondary market. Other service fees were RMB194.2 million, down 62.3% year-over-year as we continue to reduce our lending product offering. We're restructuring lending and other businesses into a new consolidated business segment, Noah Digital Intelligence, to offer open platform services to independent financial advisers and to our clients. As one of the main objectives of 2020 strategy, we have achieved a full recovery in the total transaction value with a total of RMB94.7 billion, up 20.6% year-over-year. The transaction value of standardized products was RMB73.1 billion, up 177.3% year-over-year, offsetting the decrease in offering of credit type products, making a successful transformation. In addition, private equity products recorded RMB17.9 billion of distribution, supported by the strong primary market and our strategic relationships with the top general partners in the industry. After six quarters since the transformation of our price offering, we're very happy to see the number of active clients, including mutual fund clients, increased by 11.6% to almost 40,000 in 2020. The number of black card clients stood at 985 as of December 31, 2020, also up 11.6% compared with the same period in 2019. The number of diamond clients who have over 10 million AUM under management reached 4,551, increased by 2.2% compared to last year.

Emma Xu, Analyst

The first question is about the growth plan. Noah's management mentioned that Noah is now in a growth mode, and you already have planned for the top line growth, client growth, etc. Could you provide us the guidance for active client growth in 2021 and for the long term? Because transaction volume can be volatile due to market volatility, the deep client growth and the increase in the number of clients and legitimacy of client increases, the increase of revenue and profit is just a matter of time. So could you provide us more details on your growth plans for client number and how do you plan to achieve the target? The second question is about the utilization of cash, which amounted to around RMB5 billion by the end of 2020 and accounted for 53% of total assets. You've mentioned previously that you may look to use that cash for some M&A or other potential investments. Could you provide some clues about the potential areas for M&A or investment?

Qing Pan, CFO

So I'm going to translate a little bit of Chair Lady's answer and I also have my own inputs as well. She just stressed that we have clarified our strategy focus to continue to concentrate on high-net-worth individuals and also super high, ultra-high-net-worth individuals. So basically, in addition to the number of clients that we also focus on increasing the quality of services to this type of client. In terms of market share, not just on the share number of the client groups but also the wallet share of the existing client groups. One of the things that we have mentioned in the speech is about the new service model that we have been implementing for the past year that started implementation in the last few months. Basically, we have a so-called triangle service model for our clients. In comparison to a single point of contact in the past only through the relationship manager, now we have three elements in the service. One is the Account Representative, which will be supported by one or more Solution Representatives who have expertise in the product and services that fit our client's need; as well as the Fulfillment Representative, which is basically the service representatives so that our clients experience better customer service under this new service model. We have seen the passion from the frontline individuals, and we realized through this model that they increased the service capacity to our clients, even for the so-called elite relationship managers, which will expand their capacity to serve more clients and gain higher client wallet share. In terms of the use of cash, one of the information disclosed in the 6-K, as you can see, we have used part of the proceeds to repurchase our stock for USD 100 million, where we completed that repurchase by the end of February or March. In terms of opportunities we've been looking at for acquisitions, I think we have been very actively looking. When it comes to financial type of institutions, either domestically or overseas, we've been very careful in performing due diligence or figuring out what is the right synergy before proceeding. It's very difficult to promise that we will acquire or buy anything. However, I guess one of the things I'm confident to say that it remains in our strategy to look at expanding certain capabilities or services or technology or asset management, and it also remains one of the targets that we are continuously looking at. That's the answer for the first question. In terms of the number of relationship managers that we currently have, we believe that the new triangle model will continue to help us grow the talent pool of relationship managers. The service mode has switched from a single-man army into a more coordinated group of individuals that can serve our clients. The more experienced elite relationship manager will be assisted with solution experts as well as fulfillment representatives, which this mechanism will enable younger professionals to come into the industry and learn beside a lead time, providing comprehensive service to our clients. We believe that the number of relationship managers will continue to see accelerated growth as we implement this triangle model. Okay. Thank you, investors and analysts, for your time. I'm very excited to share the strong performance for the full year with you. If you have more detailed questions, we have arranged one-on-one sessions later on. Thank you very much.