Earnings Call Transcript - NOAH Q2 2022

Jingbo Wang, CEO

Thank you. On the agenda of today's teleconference, I will first share my views on the micro environment, then introduce the overall performance of Noah in the second quarter of 2022, the developments of our major business segments and our overall strategy. Next, I will invite our Group CFO, Pan Qin, to introduce the quarterly financial information, followed by our Q&A. In the past two years, the global real economy deleveraging and capacity reduction caused by the epidemic and the impact of the Russia-Ukraine war have exacerbated global inflation in the first half of 2022. China's continuous epidemic prevention and control policy has brought unprecedented challenges to the economic growth of core regions, including the Pearl River Delta and the Yangtze River Delta. On one hand, the supply side has been impacted, and the demand side has contracted significantly. On the other hand, expectations are weakening, the economy reached the bottom and the market bottomed out in the second quarter. As a company headquartered in Shanghai, more than 1,800 employees experienced a lockdown at home in the second quarter. We observed that the investment sentiment of high net worth families and private enterprise clients has changed significantly; improving the safety and liquidity of assets is the first demand of clients. At the same time, the global allocation needs of Chinese private enterprises and high net worth families have been significantly improved. Noah's judgment on client demand and asset allocation suggestions are stability first, survival of the fittest, and domestic international consideration with Chinese enterprises and high net worth families. We suggest that clients saw the rebalancing of their global asset allocation. The ratio of Chinese and overseas asset allocation is 100 to 100. Domestic assets are allocated to the Chinese market and overseas assets are allocated to the international market. Chinese private enterprises are establishing new brands or international headquarters in overseas markets and cultivating the international market completely independently. Domestic headquarters and international headquarters assume different functions. Over time, China's private enterprises and high net worth families may make great progress in the process of passive globalization and even have unexpected surprises. Noah has been in business for 18 years and has experienced many market cycles. We're also fortunate that we had suggested clients withdraw from assets such as domestic real estate developers' bonds and protected the assets of clients as much as possible. Noah was listed on the New York Stock Exchange in 2010 and successfully listed in Hong Kong on July 13, 2022. We have also announced the start of the conversion to dual primary listing. Today, I would like to sincerely thank the shareholders and investors who have given us great support during the Hong Kong secondary listing process. Under the turbulent market environment, our global offering was 5.9x oversubscribed, the Hong Kong public offering was 3.3x oversubscribed. Specifically, we saw long-term value investors 2.6x oversubscribed. During the secondary listing offerings, we received support from many types of new institutional shareholders, which is quite an investor onboarding achievement in the sluggish market environment. At the beginning of this month, the Board of Directors approved a long-term annual dividend mechanism. We plan to pay dividends of no less than 10% of any non-GAAP net income in the future, aiming to deliver stable and sustainable returns to shareholders. In the second quarter of 2022, Noah achieved net revenues of RMB738 million and a non-GAAP net income attributable to shareholders of RMB365 million, up 5.4% year-on-year and 13.3% quarter-on-quarter. As of June 30, the accumulated non-GAAP net income was RMB669 million, reaching 46% of the annual guidance. In terms of core business data, the transaction value of the second quarter was RMB19.3 billion, a year-on-year decrease of 22.7% and a quarter-on-quarter increase of 28.8%. Among them, the transaction value of private equity was RMB3.9 billion, an increase of 23.2% quarter-on-quarter. Mutual funds were RMB12.2 billion, up 30% year-on-year and 71.4% quarter-on-quarter. We're gratified by the outcome that although clients have insufficient investment confidence amidst a sluggish market, they're still willing to let Noah manage a larger share of their wallets in this quarter affected by the market environment and investment sentiment. The overall household savings rate has risen by a large margin while the transaction value of private secondary funds dropped significantly year-on-year and quarter-on-quarter. High net worth and ultra high net worth clients are our core client group and Noah's diamond and black card clients have been growing steadily. As of June 30, 2022, Noah has 6,774 diamond clients, which grew 6.1% year-on-year. The number of black card clients reached 1,786 with a year-on-year increase of 20.5%. While continuing to focus on diamond and black card clients, we are also making efforts to identify and serve potential diamond and black card clients, as well as recover lost clients and reactivate dormant accounts. In terms of recovering lost clients and dormant clients, great progress has been made this year. As of August 19, we have recovered 714 lost clients this year. As of June 30, 2022, the growth of AUM was RMB155.4 billion, which slightly decreased by 0.4% compared with the end of the previous quarter, due to more distributions. Among them, the AUM of private equity stabilized at RMB132 billion and public securities increased by 3% over the end of the last quarter, reaching RMB10.7 billion. In terms of growth of real estate AUM, it is mainly composed of U.S. rental apartments and office buildings located in two commercial core areas in China. Growth of overseas AUM increased by 6.2% year-on-year and 1.5% quarter-on-quarter, reaching RMB29.6 billion, with private equity, public securities, and real estate achieving 1.1%, 6.4%, and 2% quarter-on-quarter growth, respectively. In terms of the primary market, we completed the exit of four projects in the second quarter. The Series 6 of secondary funds continues to raise capital and with a gradual return of the secondary market valuation, the investment of secondary funds has entered a safer valuation margin. Gopher's private equity funds raised to RMB2.6 billion in the second quarter. Growth of target strategy products has three types of strategies: conservative, balanced, and positive. Although the market environment in 2022 remains severe, as of August 2022, the performances of the three strategies were 0.4%, -3.3%, and -4.7%, respectively, while that of CSI300 and CSI800 were -15.2% and -14.6%, respectively in the same period. The performances of Gopher's target strategy funds have been far better than that of the comparable indices, effectively controlling volatilities and pullbacks and playing the role of wealth stabilizer. At the same time, Gopher is also actively incubating different strategies and complementary equity direct investment products. After the secondary listing in Hong Kong, we began to establish a larger international private banking team and a global product screening team in Hong Kong to meet the global asset allocation and service needs of clients. Noah's Singapore office also began to promote new business plans. Gopher International has also started to build new research capabilities and enrich international product lines to meet client demand. Since its establishment in 2021, the Sustainable Development Committee of Noah Holdings has been practicing the value proposition that sustainable development brings long-term kinetic energy to Noah. It has held regular and irregular meetings to promote the inclusion of relevant ESG issues in the decision making of investment and product selection, to improve the ESG awareness of clients and business partners and regularly report to the Board of Directors and senior management. In the past year, our ESG promotion work was fruitful. We conducted an ESG survey on black card and diamond card clients in 2021, and the results showed that the popularity of ESG among high net worth clients increased by 35% and reached 80%. ESG investments in pensions among our client base increased by about 3.5x to 50%. Gopher also issued an ESG questionnaire to its investment partners in May this year. The results show that the ESG behavior of the leading asset managers has become more prominent in the past year. Most of them plan to increase the proportion of ESG-related investment products in the next 1 to 3 years, and more than 70% of the institutions have started to practice. At the same time, we have constantly enriched the product offerings of our dedicated online ESG investment sections, both onshore and offshore, conducted continuous ESG special investment consultancy training for our relationship managers, and implanted more ESG information and product information into internal and external media platforms. Noah and Gopher are duty-bound to continue to exert our positive influence, improve the research and development of ESG products, and enhance the sustainable operation of the Group. Finally, I would like to say that the future is bright and the road is winding. There was an article entitled 'Strategy,' which said that the name of a company often contains a certain strategy but also embodies a certain vision, planning, and intention. On the other hand, vision, planning, and intention will shape our behavior. Noah's name is taken from the Bible; first of all, Noah was a righteous man. He chose to live an honest and upright life regardless of the behavior of those around him. He insisted on giving trust and lived a full life. His life was full of possible risks. He took precautions and built an ark with Gopher wood, making full preparations for the possible flood. Noah was full of courage, forward-looking perspective, and correct judgment. The ark carried pairs of healthy species, and Noah and them sailed through the future on the ark. This is the meaning of Noah's Ark, and it seems to be a metaphor for Noah Holdings’ own mission, vision, and values. In 2022, we deeply feel that we have a greater responsibility to our clients. The greater the macro uncertainty, the more we need to think calmly and make mature judgments. We believe that beyond wealth lies the wisdom of life. Noah devotes itself to creating a legacy for clients for generations to come. Next, let's invite CFO, Pan Qin, to introduce the financial data of this quarter in detail. Thank you.

Qin Pan, CFO

Thank you. Thank you, Chairlady, and hello dear investors and analysts, including our new shareholders who supported our secondary listing in Hong Kong. Following the impacts of major events such as geopolitical conflicts in the first quarter, the macro environment in the second quarter continued to be under pressure. As of the end of July 2022, the United States Federal Reserve has raised interest rates by a cumulative 225 basis points. In China, prolonged COVID-19 restrictions resulted in only 0.4% GDP growth in the second quarter. Investor sentiment hasn't fully recovered, evidenced by the distribution value of mutual fund products decreasing by 25.8% year-over-year in the quarter and dropping a whopping 57.8% year-over-year for the first half of the year, while the savings rate has risen to 34% as of the end of the second quarter, compared to roughly 30% prior to the pandemic. At the same time, we're mindful of the tensions between the two largest economies in the world. In July, Noah successfully completed the secondary listing in Hong Kong, partially mitigating the ADR listing risk. This month, we have also announced our pursuit of a voluntary conversion to dual primary listing status in the U.S. and Hong Kong, open to further reduce listing pressure. We have a long-term scheme to pay at least 10% of our non-GAAP net income as annual dividends to shareholders starting from April next year. Now please allow me to walk you through more detailed results of the second quarter. Non-GAAP net income was RMB355 million for the quarter, up 5.4% year-over-year and 13.3% quarter-over-quarter. For the first half, it was RMB669 million, representing 46.1% of our full-year non-GAAP net income guidance. Income from operations for the quarter was RMB323 million, a 3.6% decrease year-over-year, but a 3% growth over the last quarter, mainly because the decreased net revenues for the quarter were partially offset by lower expenses, including general administrative expenses, marketing, and spending, as well as more government grants received in the second quarter due to the COVID-19 lockdown in parts of China, especially in Shanghai. Consequently, the operating margin was 43.8%, up 17.4% year-over-year and 11% quarter-over-quarter. With the orderly resumption of work in major domestic economic regions since June, it is encouraging to witness a recovery in transaction value as expected, which recorded a 28.8% increase over the last quarter, from RMB15 billion to RMB19.3 billion. However, compared to last year, this is still down 22%, especially when we had a really strong second quarter last year. Noticeably, the transaction value of mutual fund products continued to grow against the odds, with a significant increase of 71.4% quarter-over-quarter and 30% year-over-year to RMB12.2 billion. In the second quarter, the total number of mutual fund active clients was 11,248. The transaction value of private equity increased 23.2% over the last quarter to RMB3.9 billion but decreased 39% year-over-year, representing a quarterly recovery that has been expected, while the transaction value of private equity products decreased by 40% quarter-over-quarter and 6% to 8.9% year-over-year due to a volatile market environment and less investor interest in the asset class as anticipated. Benefiting from continued strategic investments in our core client groups, the number of diamond and black card clients grew to 8,560, up 3.3% quarter-over-quarter and 8.8% year-over-year, of which the number of black card clients increased by 20% year-over-year. We have also been making efforts to reactivate dormant accounts and retrieve lost accounts due to the transformation to standardized products. Our client-centric philosophy will continue to be key in the long run. It's also worth mentioning that among active clients, the number of clients who purchased insurance products during the quarter was 1,009, which is 16 times more than the first quarter of 2022 and three times more than the same period last year, as we resumed the sales of certain products after a temporary regulatory requirement in the first quarter this year. Net revenues for the quarter was RMB738.1 million, down 17.9% and 7.2% quarter-over-quarter, primarily due to decreases in performance-based income. As the transaction value of private equity, mutual funds, and insurance products recovered in the quarter, our one-time commission more than doubled quarter-over-quarter to RMB207 million, but is still down 16.1% year-over-year due to fewer public securities distributed. Recurring service fees remained relatively stable at RMB458.9 million, a decline of 7.9% year-over-year and 5.2% quarter-over-quarter, mainly due to NAV adjustments. Performance-based income dropped to RMB25.9 million, down 78.8% and 85% quarter-over-quarter, primarily due to the lack of profitable exits from public securities. Net revenues from other service fees for the second quarter of 2022 were RMB46.4 million, a 44% increase from the corresponding period in 2021, primarily due to the more value-added services Noah offers to our high net worth clients since the Shanghai lockdown. I need to correct myself; when I mentioned the transaction value of private products, the decrease of 40% quarter-over-quarter should refer to the transaction value of private secondary products. Now, moving on to our segmented results. Net revenues from the Wealth Management segment were RMB509 million, down 18.7% year-over-year and 12% quarter-over-quarter due to a slowdown in transaction value. Net revenues from the asset management segments were RMB210 million, down 17% year-over-year but up 5% quarter-over-quarter. Gopher's AUM was RMB155.4 billion as of June 30, 2022, slightly lower than RMB156.1 billion at the end of the first quarter due to more distributions and redemptions during the quarter. Moving on to the balance sheet, we remain in a healthy liquidity position with the current ratio standing at 3.2x. The debt-to-asset ratio was 19.4%, still with no interest-bearing debt on our books. By the end of the second quarter, we have RMB3.6 billion in cash. It's worth noting that net proceeds from the Hong Kong listing have not yet been included until the next quarter. Supported by this healthy balance sheet and continuous strong cash flow generating capabilities, we announced that the Board had approved and adopted an annual dividend policy on August 10. In normal circumstances, the annual dividends declared and distributed each calendar year shall be no less than 10% of the Group's non-GAAP net income attributable to shareholders of the preceding financial year, as reported in the company's audited financial statements, which aims to provide stable and sustainable returns to shareholders. The dividend will be subject to shareholder approval at the AGM, no later than the end of June each year. Once approved, the dividend shall be declared by the company and paid out to shareholders. In the face of the current complex international geopolitical environment, the Board has approved a motion to pursue voluntary conversion to dual primary listing at Hong Kong, which will further mitigate the risk of U.S. delisting. We want to thank the investors who supported our Hong Kong secondary listing and hope to provide the market with a positive outcome in the coming months. The CIO office also published the management outlook for the second half of 2022, reiterating the protection to full growth strategy for our clients. Meanwhile, we suggest our clients to initiate investments strategically, both onshore and offshore, also known as dual circulation. We're mindful of changing market scenarios, and we'll adjust our strategy accordingly. Again, we sincerely thank our shareholders for their ongoing trust and support and strive to create long-term value for our clients and our shareholders. Thank you everyone for listening. And I will now open the floor for questions.

Unidentified Analyst, Analyst

Maybe I'll just briefly translate. The first question is about the client base. We are delighted to see, given a very volatile market environment, that we are still achieving a steady growth in the number of our key clients, both in black card and diamond card categories. So I'm just wondering, management, if we can share any of the drivers behind this and if we have any targets or plans regarding the decline in growth numbers this year or next year? The second question is on the number of relationship managers, which we think is important to maintain high-level service. We see that number has been fluctuating between 1,200 and 1,300 in the last two years, with a slight decline in the past two quarters. So I'm wondering how the teams are reacting or accepting the newly completed restructuring in the relationship management system, and do we have any targets for the next 2 to 3 years? Thank you.

Qin Pan, CFO

Okay. Regarding your first question, we believe that due to the complex situation, especially with the lockdown, it has been quite difficult to engage with clients, particularly in an offline environment. So what we have been doing is really focused on serving and enhancing the satisfaction level of our existing client base. The majority of the growth in diamond and black card clients has come from existing clients who have made more investments internally and upgraded their status. Additionally, our strategy of keeping existing clients happy has led them to refer more clients, which is part of our 'Member Get Member' program that has shown positive results. It seems that the strategy has been working. To supplement what the Chairlady mentioned, we have been continuously investing and upgrading our branding and benefits associated with black card and diamond card members. Previously, benefits were mostly rebates or points, but now we've added more benefits, such as free classes and educational sessions for investors, which have been very well received by clients. Essentially, during the lockdown period, clients had more time to invest and engage, which significantly increased their satisfaction levels. Regarding the relationship managers' team, we are still looking for growth. However, our strategy this year primarily focuses on making room for better talent and upgrading the talent mix, particularly investing more heavily in fresh graduates from good schools. We want to ensure we have a younger pipeline for future relationship managers. Moreover, we aim to recruit seasoned veterans into Noah. The overall strategy is undoubtedly geared toward the growth of our team, while also ensuring the quality is well-selected. Additionally, we are planning to invest heavily in teams located in Hong Kong and Singapore, which we anticipate will experience faster growth.

Unidentified Analyst, Analyst

Yes, thanks very much, management. Hello. Hi. I will do the translation. So my question is regarding the outlook for the second half of the year. Based on our focus on non-GAAP metrics, we believe it will translate into strong growth in non-GAAP profit goals. We are wondering what the key drivers will be and what the outlook is for the second half.

Qin Pan, CFO

Okay. Thank you, Peter. I appreciate your question. Yes, we are quite happy about the situation, especially considering the challenges we faced in the second quarter, particularly with one of our main cities, Shanghai, facing a two-month lockdown. Despite this, we were able to achieve a 46% growth. Our non-GAAP net income also showed growth over both the last quarter as well as year-over-year. We believe we are still on track to meet our full-year guidance, especially given the seasonal nature of the industry where most major client conferences and marketing events occur in the second half of the year. For example, we have key marketing events at both the end of the year and at the beginning, with the main event of the black card gala taking place in November and December. We maintain a prudent optimism regarding client sentiment as we approach these major conferences in October and November. Additionally, we believe that once our clients perceive some level of certainty, they will have a more positive sentiment towards making investment decisions. Thank you, operator, and thank you very much, our investors and analysts. We are working diligently and striving to achieve positive results for the market. Thank you very much for your time.

Operator, Operator

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