Noah Q2 2023 Earnings Call Transcript

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August 28, 2023

There are 5 speakers on the call.

Operator

Good day, and welcome to the Noah Holdings Second Quarter 2023 Earnings Conference Call. All participants will be in a listen only mode. After today's presentation, Please note this event is being recorded. I would now like to turn the conference over to Milose Shi, Director of Investor Relations. Please go ahead.

Speaker 1

Thank you, operator. Good morning, and welcome to Noah's 2023 Second Quarter Earnings Call. I'm Meadow Xu, Director of Investor Relations at Noah Group. The presenters joining us today are Ms. Wang Jingbo, our Co Founder, Chairlady and CEO and Mr.

Speaker 1

Glenn 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 subjected 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 ks filing.

Speaker 1

We'll also refer to certain non GAAP measures, and you will find reconciliations in our 6 ks reports 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 any 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.

Speaker 1

Wang Jingbo, Chairlady, handing to me now. Thanks.

Operator

Thank you,

Speaker 1

Thank you, Chairlady. For the agenda of today's conference call, I'd like to start with my thoughts on the macro Economy and the Wealth Management Industry, Noah's progress in our global expansion plan and then report on the overall performance of the first half of the year and the development of our business units. Then Mr. Graham Pan, our Group CFO, will present the financial information followed by Q and A session. In the Q2 of 2023, we observed that the geopolitical conflicts and global economic slowdown Has replaced inflation as the top concerns for Chinese handover investors, and they are taking account of these considerations when actively adjusting their asset allocation strategies.

Speaker 1

At the same time, due to the innovations and breakthroughs in AI technology driven by chat High network clients who are familiar with primary market investments such as venture capital are also hoping to take strategy in terms of geography and asset classes becomes increasingly important amid heightened level of macroeconomic uncertainties. We recommend that Noah's high net worth clients to review their portfolios, starting with running through a checklist across all aspects of their network, Assuring sufficient allocation in the 15 net portion, coupled with multi strategy investments to capture cross cycle growth opportunities, achieving an antifragile strategic and tactical asset allocation. We are also aware of the recent payment default by certain wealth management companies and trust product platforms on their non standardized private credit products. I would like to point out that Noah, since establishment in 2003, have 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 desegregation of clients' capital, maintaining separate Accounting accounts for asset management products, no leverage funding for clients, no products with maturity mismatches and no cross Together with our continued devotion to investing in research capabilities, Such principles not only established 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.

Speaker 1

Thanks to our continued devotion to strengthen 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 products, 98.7% were profitable. After the Khamsin incident in 2019, We also started to wind down as 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, nonetheless, which was proven to have effectively safeguarded our clients' wealth amidst recent challenges In terms of financial performance, The company recorded overall net revenues of RMB1.7 billion in the first half of twenty twenty three, up 13.8% year on year.

Speaker 1

Domestic business contributed RMB1.0 billion, accounted for 59.2%, down 13.4% year on year. With our continued investment in distribution, product selection and comprehensive services, overseas business contributed RMB714.9 million, up 104.1 percent year on year and increased its share of the group revenue to 40.8% from 22.6% last year. By segment, Wealth Management segment contributed RMB1.3 billion, up 22.5% year on year. The domestic portion contributed RMB769.9 million, down slightly by 4.3 year on year, while due to the expansion of overseas product offerings and comprehensive services income. Overseas portion contributed RMB566.8 million, up 96.4 percent year on year.

Speaker 1

Asset Management segment contributed RMB389.9 million, down 5.4% year on year. Domestic portion contributed RMB241.9 million, down 30 1 0.2% year on year, while overseas portion contributed RMB148.1 million, up 140 point 3% year on year, mainly due to the increase in overseas AUM. In terms of comprehensive services, Wealth preservation and inheritance remain the most concerned wealth management needs among high net worth clients and families. In the first half of this year, revenues contributed by domestic insurance brokerage business grew 54.6% year on year. Overseas Insurance, Family Trust and other comprehensive services grew by 380.8% year on year, with the number of active clients in this segment, increasing over 6x, thanks to the growth of operations in our Hong Kong and Singapore offices.

Speaker 1

For the first half, we achieved operating profits of the group of RMB628.3 million with an operating margin of 36.0 percent. For our domestic wealth management business, With the migration of domestic high network clients to Tier 1 and central hub cities as well as more supply of talent, We continue our strategy to focus on and expand our presence in China's Tier 1 and Central Hub Cities by increasing the recruitment of top tier talent, enhancing the asset allocation capabilities and service qualities of our relationship managers, strengthening investment and research capabilities and providing customized asset allocation solutions to our clients with the help of our CCI model. By the end of the quarter, the number of domestic RMs stood at 1319, up 5.1% year on year and 1.5% quarter on quarter. In terms of domestic online wealth management, through continuous investments in technology infrastructure, we have effectively integrated our clients' Portfolio Report with CCI Allocation Tools, which provides recommendations for clients 4 types of wallets, namely liquidity management, growth investments, protection inheritance and safety net portfolio. During the first half, Transaction value of mutual fund exceeded RMB22 1,000,000,000, up 14% year on year, while the transaction value of private secondary products Citi RMB8.5 billion, up 33.6 percent year on year.

Speaker 1

In terms of corporate and institutional clients, the Smile Treasury platform, which was launched in 2022, has successfully attracted nearly 6,000 clients on board. During the first half, active clients increased by 73.7% year on year with an average client AUA of nearly RMB 600,000. 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 progress process of setting up client service stations in Los Angeles and Dubai, which should be completed in the second half of twenty twenty three to better serve the global wealth management needs of Chinese clients around the world.

Speaker 1

As of Q2 of 2023, Noah International had more than 13,600 international clients, with the number of clients in Hong Kong and Singapore grew by 12.8% and 185.2% year on year, respectively. Client AUM with Noah on a discretionary investment basis reached US262 million dollars up 20.4% quarter on quarter. And the cumulative number of clients for this product reached 471, up 44 In terms of international online wealth management, we successfully launched our IknowaOne account platform, An integrated account solution that provides multi domain and multi asset class allocation from Noah's overseas clients. We also successfully connected 9 systematically important banks globally through our nominee accounts, effectively reducing the I am in cause of opening and managing separate bank accounts for our global clients. Active clients for overseas mutual funds reached 1950 6 people, a significant increase of 465.3 percent year on year.

Speaker 1

Transaction value reached US609 $1,000,000 an increase of more than 700% year on year. 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 US73 $1,000,000 an increase of 193.5 percent. On the asset management side, Gopher's total AUM was RMB156.9 billion, up 0.9% year on year. Meanwhile, Gopher has established 3 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.

Speaker 1

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 Nick, expanding overseas institutional and family offices clients by leveraging Gopher's diversified In the first half of twenty twenty three, Gopher's actively managed target strategy product team dynamically deployed high volatility strategies to enhance portfolio returns while balancing pullback and volatilities to maximize long term returns. During the first half, its active investment product achieved 4% annualized return, annualized volatility of 6.3% and Sharpe ratio of 0.4. Its balanced investment product achieved an 8% annualized return, 5.6 percent annualized volatility and sharp ratio of 1.2. Lastly, a stable investment product achieved a 9% annualized return, 2.1 percent annualized volatility and a Sharpe ratio of 3.6. Overseas AUM of Gopher International's asset managed products reached US4.7 billion dollars equivalent to RMB34.3 billion, up 15.8% year on year and its proportion of the group's total AUM also increased to 21.8%.

Speaker 1

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 In terms of ESG, We continue to promote the integration of investment products with the EIG concept. Since the end of 2022, Gopher has launched ESG public market products in cooperation with Rilliant Asset Management, which integrates ESG evaluation framework into fundamental Quantitative strategy, 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 RMB100 1,000,000 for this product, with a cumulative return of over 14%, outperforming the CSI-three hundred benchmark index over the same period.

Speaker 1

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 senses of the financial services industry. Our 3 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 brings 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.

Speaker 2

Thanks, Mao. Thank you, Shirley Ding, and hello, investors and analysts. With the lifting of travel restrictions, the 2nd quarter saw a steady recovery on track And the contribution of contract related activities contact related activities to economic growth also expanded as evidenced by a 5.5% year over year increase in GDP in the first half of the year. Despite more active domestic economic activities, the recovery is still at early stage and being confronted With uncertainties due to a slowing global economy and rising geopolitical concerns, the investment sentiment by high net worth individuals Still remains at a conservative side as we continue to seek out safe havens and wealth preservation. Our dedicated focus on client focused strategy has paid off and strong financial numbers showing that we're aligning clients' best interests With the wealth management advice provided by us for the 6 months ended June 30, 2023, Our net revenues increased by 13.8% year over year to RMB1.7 billion, of which 30.2% came from insurance income as we have executed our CIO house view on wealth preservation and bottom line focused asset allocation strategy.

Speaker 2

Together with our continued investment in talent capital, Global research capabilities and broadened coverage network of top tier global asset managers. Net revenues from overseas business experienced rise by 104.1 percent year over year, accounting for 41% of the group's total net revenue. In the meantime, we're committed to demonstrating the progress in building client channels, resulting in a 13.1% increase In a number of core Diamond and Black Card clients within active clients, overseas active clients reached Almost 2,000, an increase of 140% year over year. Top line wise, it's encouraging to witness a rather Solid recovery in net revenues, mainly driven by expanding distribution of protection oriented products And the growth in international business. We increased the distribution share of insurance products, both onshore and offshore, As evidenced by the quarterly one time commission fees increased by 95% year over year and 130% quarter over quarter to RMB400 1,000,000, the highest single quarter since 2022.

Speaker 2

In the first half of the year, One time commission fees amounted to RMB580 1,000,000, up 87.8% year over year. We expect a gradual recovery investment sentiment in the second half of the year, which may lead to a rebound in growth oriented investment products. In addition, we have a robust pipeline of client events in overseas markets, which will lead to increased opportunities to the distribution of offshore investment and insurance products to overseas Chinese high net worth individual clients. The stabilizing income stream, recurring service fees was RMB921 1,000,000 in the first half of the year, largely stable compared to the first half of last year. Performance based income was RMB111 1,000,000, down 44% year over year due to the relatively muted exit environment.

Speaker 2

Other service fee income in the first half of the year was RMB133 1,000,000, up 62.8 percent year over year, resulting from more value added service provided to our clients. Benefiting from our effective cost efficiency strategy implemented in G and A and selling expenses, The first half of twenty twenty three achieved operating profits of RMB628 1,000,000 and a healthy operating margin of 36%, down 1.4% and 5.5%, respectively, from the corresponding period of last year. This was mainly due to the low base of 2022 under strict restrictions on traveling and client activities, as well as higher government subsidies during COVID. Our strategy is to be cautious on our overhead expenses. We're still able to invest our resources into client interfaces and international talent acquisitions and operations.

Speaker 2

The transaction value in the 2nd quarter was RMB18.4 billion, up almost 10% year over year and aggregate transaction value of RMB35.2 billion as of the 6 months ended. In tandem, with the expansion of global footprint, Overseas transaction value reached US1.5 billion dollars for the 6 months ended, equivalent to RMB10.5 billion, up 162% year over year, primarily owing to the introduction of discretionary investment and cash management products significantly increased 764.5 percent year over year to nearly US4.8 billion dollars equivalent to RMB3.5 billion. In terms of transaction value in RMB products, our continuous efforts to expand our client base, including both individual and institutional clients, resulted in a 32.2% quarter over quarter increase in the transaction value, including both individual and institutional clients, resulted in a 32.2% quarter over quarter increase in the transaction value of mutual We will maintain a cautious approach of fundraising and investment allocation in other investment products, especially in private equity. That being said, we'll continue to closely monitor the space for attractive opportunities, especially in the technology sector as China's economic recovery continues. From the perspective of our segmented results in the first half of twenty twenty three, Net revenues from Wealth Management were RMB1.3 billion, accounting for 76.3 percent of total net revenues.

Speaker 2

Asset Management net revenues were RMB0.4 billion, accounting for RMB22.3 billion of total net revenues. Internationally, we're able to effectively assist our clients in safeguarding their wealth In volatile capital markets, thanks to our forward looking assessment of R and D macro economy and advice to clients on wealth preservation in this environment. Dedication to global expansion helped fuel growth in overseas AUM with a 15.8% year over year increase to US4.7 dollars as of June 30, 2023, primarily attributable to our expanded array of offerings, including structured products, mutual fund distribution and private secondary products. Turning to the balance sheet. We have maintained a healthy liquidity position with our current ratio at 3.2 times.

Speaker 2

The gearing ratio is 19.8 percent and we have RMB4.7 billion in cash to further execute our globalization plan. At the end of June, we voluntarily requested S and P Global to withdraw its credit rating coverage, which stood at BBB minus with a stable outlook according to S and P, given our current capital structure need No need to raise debt financing in the foreseeable future. In addition, the Board has approved a 1 to 10 share split proposal for Hong Kong traded shares in order to lower the investment barrier and increase the trading liquidity of the subdivided Hong Kong shares. Our ADS price traded on the New York Stock Exchange will not be affected, and the conversion rate between Hong Kong shares and ADS will be 5 to 1 after the subdivision takes effect. This plan will be subject to shareholder approval through an extraordinary general meeting, which is expected to take place on October 26, 2023, Hong Kong time.

Speaker 2

In conclusion, Our performance in the first half of the year has delivered steady growth in revenues and positive progress for our international expansion strategy. Looking ahead to the second half of twenty twenty three, we're optimistic that China will continue to produce growth opportunities and are confident That investor sentiment, consumer confidence and consumption will gradually but steadily Against this backdrop, we're confident that we can better assist our domestic clients optimize their asset allocation strategy and provide more advanced client experiences. On the overseas side, as geopolitical conflicts and financial environment become more unstable, Tightening conditions are still seen as top concerns for high net worth individuals across the globe. Not only is their demand for global asset allocation service increasing, but their need to enter global markets as some entrepreneurs is also on the rise, resulting in a faster wealth accumulation effect for our clients in the coming years. We have always evolved our strategy structure and footprint to adapt to changing trends.

Speaker 2

With more offices and international talent recruitment, we believe and support and we remain committed to creating diversified offerings and long term value for our clients and shareholders. Thank you for your time. And we will now open the floor for questions.

Operator

We will begin the question and answer session. Our first question comes from Yoo Hyo San with CICC. C. C, please go ahead. Okay.

Operator

I will translate my questions. Thanks, management, for taking my questions. This is Youyou Fan from CICC. I have Two questions, please. The first one is regarding the recent risk events faced by the wealth management companies jointly.

Operator

So what's the impact on the whole industry and also on our NOIA? The second question is about our coverage network. As we

Speaker 2

I think it's Yoyo, a little translation and also supplement from me. Surely, it's actually expected matter. It's probably a matter of time in terms of how their asset is Consists of mostly real property exposure as well as some of the ST or low price A stocks, Very heavy investments and also some probably we think sort of pseudo capital pool. That's in the history. We never had any cooperations with our companies.

Speaker 2

And I believe it's also a very, I guess historical moment in terms of investor education for this industry. As Warren Buffett has once said, Things that are not going to last, it's going to disappear. It's just a matter of time. So our strategy has always been evolving around The whereabouts of our clients, so as we first started in the Smedes industry, obviously, many of them are entrepreneurs in probably 4, 50 tier cities 20 years ago. But I guess, as of now, 2023, most of them are already moved into 1st tier cities.

Speaker 2

And we believe actually have better talent supplies and probably closer in terms of physical distance Sure, thanks. That's why we're focusing our resources in the top cities in China. And that way, we'll be able to be more efficient and also consolidate our resources in this hub city.

Operator

Thank you very much.

Speaker 2

Okay. Thank you.

Operator

Our next question comes from Ji Wang with Morgan Stanley. Please go ahead.

Speaker 3

My first question is regarding the management outlook on the PVC investment and exit Condition in China as well as the outlook for the PEVC fund raising and product sales in the future considering the IP environment domestically and offshore? And second question is on the plan for the cash balance that Moira has, which is quite sizable. And is there any is there any investment plan or any plan to further enhance shareholder returns? Thank you.

Speaker 2

Okay. Thanks, Chia. I will have Chair Liddie to answer the first question. I'll take the second question in terms of balance sheet capital. So as you know that if you're familiar with Noah, obviously, Xiaoyang, we have Being in this industry, PVC actually rather early stage and the peak actually distribution and placement PVC came in the year of 2017.

Speaker 2

So I guess we're still pretty confident in terms of How the portfolio companies are performing? Obviously, people need a better or longer patience in terms of exiting. But as long as you're holding on to the good companies, I would believe things will get on the brighter side in terms of exiting conditions. Another thing is we actually have did a batch of exiting in the year spent between 2020 2021, The market conditions were performing relatively well and realized carry income for both the company as well as the clients. We did a quick survey or historical statistics, if you will, for the Past historical investments for clients, as we mentioned on the call that the products relating to real properties, Actually, 98% investors' clients have benefit, have made a profit on the exit.

Speaker 2

In terms of VCP existing clients, probably also over 90% are at least profitable in terms of their investment costs. So we're optimistic, although prudently optimistic about the future of the VCP Industry. We continue to probably move a little earlier stage in terms of VCP and focusing on technology based companies. So that's for the VCP question, Xue Yao. And in terms of the cash on the balance sheet, obviously, we plan and Maintain a very strong liquidity position.

Speaker 2

Although the balance sheet under accounting principle shows RMB 4,700,000,000, We actually do have another around $300,000,000 in short term investments. So the total capital and liquidity position is around 5 Selling cash, I think one plan, one part of the plan is obviously to continue to support Our international expansion, which obviously have a pretty high demand on capital. And the second time, we're also debating to continue to increase probably dividend distributions in the future as we want to make sure that we bring better returns to our clients.

Speaker 1

Thank you very much. It's very clear.

Speaker 2

Thank you. I think one another interesting fact to I guess to supplement is that we do put together a dedicated team to work on the exiting of our portfolio companies. And we're noticing interesting trends where probably in the past the founders of these portfolio companies are not Are a little bit reluctant to give cash back to the shareholders as they continue growing, but we believe we are not The timing of their IPOs are uncertain. They're willing to giving a little bit more capital back to shareholders just like what Noah is doing.

Operator

The next question comes from Peter Jung with JPMorgan. Please go ahead.

Speaker 4

Let me do the translation. Thanks for giving me the opportunity to ask questions. My first question is regarding the mutual fund member fee cut. We noticed that major mutual fund in China has been cutting their land grant fees since July. We wish to understand what's the potential impact to Noah, my second question is regarding the second half outlook.

Speaker 4

We noticed that in second quarter, Insurance business contributes a large proportion of the revenue and with We noticed that a major insurer in China has been stopped selling the 3.5% guarantee insurance product. We wish to understand what will be the trends in second half for insurance related business or your of revenue trends. Thank you.

Speaker 2

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, obviously, it's we're seeing this trend of Downward pressure on mutual fund fees, but the actual contribution of revenue from Mutual funds to our group net revenue is actually at a pretty small percentage.

Speaker 2

The total fee plus the management fee to the contribution of the net revenue actually is less than 5%. So the impact of our 2023 net revenue of the fee count rating is not going to be more than RMB3 1,000,000. RMB, even if we annualize that, it will be less than RMB10 1,000,000. So I guess the direct financial impact Our group's net revenue is rather limited, but we'll continue to use mutual fund and continue to expand the Distribution placement as a good way to attract new capital and also, I guess, maintenance of the existing capital clients. We also think that it's probably going to be helpful for high net for the individuals to attract new orders Because some of the mega intranet platforms for mutual funds probably has reached its peak in terms of distribution and maintenance of mutual funds.

Speaker 2

And many platforms actually clients may have concentrated Portfolio that probably we experienced some significant or at least some major losses because of the concentration. Now with IC mode in terms of mutual fund placements and also we believe that high net worth individuals Are getting more and more sensitive to the fees associated with the mutual fund. So IC model as well as lower transaction costs and friction costs We'll help them to actually put more investments or transferring more investment from traditional private Hedge funds of private equity into more standard and lower cost mutual funds. In terms of the future, I guess for the second half of the year, We know that insurance products from domestic contributed quite a bit of revenue, honestly, to the entire industry for the first half. But I guess for the second half of the year, we'll continue to advise our clients based on our Inference also diversified investment product portfolios will continue to consist of So also in the past, insurance distribution probably is very helpful Supplement in total solution to our clients.

Speaker 2

But mostly in the past, it's either product driven or campaign driven like I would just mentioned 3.5 percent domestic insurance. But we have been building Putting together a lot of infrastructure and platform around insurance as a total solution to our clients. And also diversify the client types from purely individual based to probably more enterprise based. And we'll continue to build that into one of our primary solution to our clients. And I guess the way we actually conduct Insurance business is a little different from purely agency based insurance type institutions as we do Put insurance product strategy as part of the total solution to our clients.

Speaker 2

Peter?

Operator

As we have no further questions, this concludes the question and answer session. And the conference has also now concluded. Thank you for

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Key Takeaways

  • Net revenues rose 13.8% year-on-year to RMB1.7 billion in H1 2023, led by insurance income and recurring service fees.
  • Overseas revenues jumped 104.1% year-on-year to RMB714.9 million, boosting their share of group revenue to 40.8% from 22.6% a year ago.
  • The company’s strict risk management—including segregated client accounts, no leverage or maturity mismatches, and early exits from property and trust products—has shielded client capital.
  • Domestic revenues declined 13.4% year-on-year to RMB1.0 billion, reflecting Chinese high-net-worth clients’ conservative asset allocation amid macro uncertainties.
  • Noah maintains RMB4.7 billion in cash with a 19.8% gearing ratio and proposes a 1-for-10 Hong Kong share split to enhance trading liquidity without raising debt.
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Earnings Conference Call
Noah Q2 2023
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