Noah Q4 2023 Earnings Call Transcript

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Provided by Quartr
March 26, 2024

There are 5 speakers on the call.

Operator

Good day, and welcome to the Noah Holdings 4th Quarter and Full Year 2023 Earnings Conference Call. All participants will be in a listen only mode. Please note this event is being recorded. I would now like to turn the conference over to Pamela Shi, Director of Investor Relations. Please go ahead.

Speaker 1

Thank you, operator. Good morning and welcome to Noah's 2023 4th quarter earnings call. Joining me on the call today are Ms. Wang Jingbo, our Co Founder and Chairlady Mr. Zander Yin, our Co Founder, Director and CEO and Mr.

Speaker 1

Grant Pan, our CFO. Ms. Wang will begin with an overview of our recent business highlights, followed by Mr. Pan, who will discuss our financials and operating results. They will all be available to take your questions in the Q and A session that follows.

Speaker 1

Before we begin, please note that the discussion today will contain forward looking statements that are subject to risks and uncertainties and may cause actual results to differ materially from those in our forward looking statements. Potential risks and uncertainties include, but not limited to, those outlined in our public filings with the SEC and the Hong Kong Stock Exchange. Noah does not undertake any obligation to update any forward looking statements, except as required under applicable law. In addition, today's call will include discussions of certain non GAAP financial measures. A reconciliation of the non GAAP measures to the most directly comparable GAAP measures can be found in our earnings release.

Speaker 1

Lastly, this call should not be interpreted as a solicitation to sell or purchase any interest in any Noah or Noah affiliated products. 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 pass the call over to Ms. Wang. Please go ahead.

Speaker 1

I'd like to begin today's call by sharing some recent thoughts on the industry and macroeconomic landscape before I review our performance of the Q4 full year and dive into our strategy going forward. Over the past year, the Chinese wealth management industry faced considerable challenges. Fundamental shifts are taking place across the sector that require a different strategy and approach to asset allocation for Mandarin speaking Hainan work individuals. Noah's relentless focus on client needs spearheaded our transition from a product focused model to a solution driven approach over the past year, ensured our ability to increase the resilience of clients' portfolios in a challenging market environment. Our proactive decisions to prematurely exit domestic real estate in 2016 and non standardized single counterparty private credit products in 2019 earned us significant trust from clients.

Speaker 1

Our semi annual CIO HouseView and CCI model continue to reflect our strategic foresight over the past 3 years, which resonated strongly with clients. We adopted a 3 pronged strategic approach to navigate this challenging market environment over the past year. Firstly, we're laser focused on ensuring our resilience and adaptability through economic downturns. Secondly, we are actively accumulating strength to emerge as a leader in the forthcoming recovery. And finally, Noah is a company built on both pragmatism and ambition, allowing us to strike a careful balance between fortifying our position and seizing new opportunities.

Speaker 1

By enhancing operational efficiency, retaining top talent, strategically calling cuts while simultaneously investing in new international markets, channels, technologies and the developments of global product and service matrix, we are ideally positioned to help clients traverse this market. Over the past year, we strengthened our full suite of wealth management products and services for Mandarin speaking clients globally. One key focus has been expanding our ability to offer clients alternative investments on a global basis. We're also seeing global fund managers increasingly focusing on underserved private wealth channels to fuel primary market fundraising. As a leading private wealth manager, recognize our expertise in alternative investments and extensive network of Mandarin speaking professional investors.

Speaker 1

This trend presents enormous opportunities for Noah. Going forward, we'll be amplifying these strategic global investments. This includes expanding our service network, bolstering investment research capabilities and significantly enhancing product selection and technological infrastructure. These investments will solidify our foundation as a leader, enabling us to meet growing demand among clients for globally diversified wealth and asset management services. Looking at our financials for the year, Noah generated total revenues of RMB3.3 billion, an increase of 6% year on year.

Speaker 1

Our domestic business contributed RMB1.9 billion, an increase of 18.1% year on year and accounting for 56 0.8% of the total revenues. Within revenue from our domestic business, revenue generated by legacy distributed products was RMB1.4 billion, accounting for 73.9 percent of the domestic revenue. Our overseas business generated RMB1.4 billion, a significant increase of 73% year on year, driving overseas revenue contribution from 26.5 percent of the total net revenues last year to 43.2% this year. Of revenue generated from new business and products in 2023, our overseas and domestic business accounted for 68.1% and 31.9%, respectively. Breaking it down by segment, our Wealth Management business generated RMB2.5 billion in 2023, an increase of 13.1 percent from last year.

Speaker 1

Within wealth management, domestic business contributed RMB1.4 billion, a decrease of 11.7 percent from last year, which was primarily composed of RMB0.9 billion in revenue generated by legacy distributed products, accounting for 67.7 percent of the domestic wealth management revenue. Our overseas business contributed RMB1.1 billion, a 71.3% increase year on year. Our asset management business generated RMB769 RMB769 1,000,000 in revenue during the year, a decrease of 8.4% from last year. Within asset management, our domestic business generated RMB469 1,000,000, a decrease of 30.3% from last year, which was primarily composed of RMB 467,000,000 in revenue generated by legacy distributed products, accounting for 99.4% of the domestic asset management revenue. Our overseas business contributed RMB299 1,000,000, an increase of 80% year on year, driven primarily by growth in overseas AUA and AUM.

Speaker 1

On the comprehensive services side, revenue from domestic insurance products increased by 1.6% in 2023, of which 88.9% was generated by new businesses. Revenue from overseas insurance, trust and other comprehensive services surged 301.5% from last year. In tandem, the number of active overseas clients for comprehensive services also grew by 370 6.3% year on year. Over the past year, we continue to make upgrades to our technology staff aimed at improving client experience globally. We're working with leading insurers to streamline our underwriting process across markets globally.

Speaker 1

We were the 1st broker in Hong Kong to launch a fully online underwriting process and allow clients the option to make insurance premium payments through our Hong Kong nominee account, which was a significant enhancement for client experience. Operating profit for the year came in at RMB1.1 billion with an operating profit margin of 33.3%. Looking at our domestic wealth management business, we continue to carry on the strategy to focus on 1st tier and core cities in China. Through our ongoing organizational restructuring, we decreased the number of offices we had from 77 to 44 by the end of the year and further relocated resources to 18 core cities as of now. As of the end of 2023, the number of domestic relationship managers decreased by 7.6% year over year and 12.6% sequentially to 11.63%.

Speaker 1

On the domestic wealth management front, our primary focus has been on strengthening the service capabilities of our relationship managers and enhancing the user experience of technological upgrades to our stack, allowing us to continuously generate new leads from ongoing client services. The small treasury platform for corporate and institutional clients we launched in 2022 now serves nearly 6,000 clients, a 28.9% increase from last year. Over the past year, the number of active client it serves increased by 73 point 7% year over year, with average client AUA exceeding RMB600000. Turning over to fees. Our Wealth Management business continued to expand its presence as more relationship managers are brought on board in Hong Kong and Singapore.

Speaker 1

As of the end of 2023, we had 89 relationship managers on boarded, an increase of 15.6% sequentially. We're committed to further expanding our international R and M team, targeting a headcount of 200 by the end of 2024. As of the end of 2023, we had over 14,900 overseas clients, reflecting a 14.2% increase from last year. The number of clients who purchased our cash management products reached 3,093, a sequential increase of 19.1%, while the number of discretionary investment clients reached 803, an increase of 23% sequentially. We continue to expand the product offered through our overseas wealth management app, providing an expanded array of solutions for clients, businesses and agencies.

Speaker 1

The number of overseas active net high net worth clients reached 4,629 in 2023, a significant 38% increase from last year. Total transaction value during the same period reached US3.3 billion dollars up 83.4 percent year on year. The number of active clients for our U. S. Dollar mutual fund products reached 3,130, up 72% year on year, with transaction value of US1.2 billion dollars up 110.1 percent from last year.

Speaker 1

On the 2B side, we have successfully onboarded more than 230 overseas corporate and institutional clients, which resulted in transaction value of overseas mutual funds reaching approximately US200 $1,000,000 On the 2 agency side, our overseas online wealth management business began trial operations in late 2023, aiming and empower EAM and family offices clients with a SaaS platform integrated with our full suite of products. As of today, we have signed 9 existing clients with a long term target of serving 300 EAMs and family office in overseas markets. In terms of asset management, Gopher's total AUM was RMB154.6 billion in 2023, a decrease of 1.6% year on year. RMB AUM decreased by 4.8% from last year to RMB118.6 billion. This was primarily driven by exits from RMB private equity assets and decline in the net asset value of some RMB public market products.

Speaker 1

Internationally, we continue to enhance our global investment product matrix. Overseas AUM reached US5.1 billion dollars in 2023, an increase of 7.6 percent from last year, driving from an increase in its contribution to total AUM from 20.7% to 23.3%. Overseas AUA, which include distributed products, reached US8.4 billion dollars an increase of 10.2 percent year on year. Beyond traditional PE and VC products, we have gradually expanded our alternative offerings to include infrastructure, GP Stake, PE Secondary and Private Credit products to provide a more comprehensive product matrix. We also recently launched a Series 4 of our actively managed U.

Speaker 1

S. Dollar U. S. Real Estate Funds, focusing on development opportunities in the suburban rental apartments in the U. S.

Speaker 1

Sunbelt area. This fund is well positioned as an upstream player within the institutional real estate value chain. As of the end of 2023, AUM for overseas private equity and other primary market funds reached US4 $1,000,000,000 an increase of 4.7% year on year. Turning to public markets, we intensified the screening coverage and inclusion of top hedge fund managers globally. We have launched 10 of the top global top 50 hedge fund products with 10 more in the due diligence process.

Speaker 1

While enhancing the diversity of fund managers and product strategies, we are simultaneously expanding to include structured products with principal protection mechanisms. In 2023, the transaction value of overseas public markets and structured products reached US180 million dollars an increase of 95.9 percent from last year. Lastly, we announced a change to our leadership structure last year by separating the roles of Chairperson and CEO. Mr. Dannard Yin was appointed CEO, while I will retain my position as Chairwoman of the Board.

Speaker 1

This decision will enhance corporate governance, organizational efficiency, promote collective decision making and facilitate Noah's succession plan and generate opportunities for Noah's deep bench of management talent. As a co founder, Zander has been part of Noah's journey since beginning. He played a pivotal role in building over asset management and possesses a deep understanding of Noah's operations and our client centric company culture. I'll firmly support Zander in his new role, while continuing to steer Noah's overall strategy and be responsible for Board Management and Corporate Governance. Please also kindly note that our CEO, Zander and CFO Grant will be reporting quarterly results starting from last quarter.

Speaker 1

I will still take part in the Q and A session. I would now like to turn the call over to Grant to go over our financial results in more detail before opening the call to Q and A where Zener and myself will also participate. Thank you everyone.

Speaker 2

Thank you, Mello. Thanks, Chairlady. I'm sure most investors are already very familiar with Xander Yin and we welcome him to join our future earnings releases and also meetings and calls with our investors. 2023 was a challenging year for China's wealth management industry. China's post pandemic economic recovery proved to be a little slower than initially anticipated, as housing and local government debt problems remained widespread and persistent, driving domestic capital markets and growth.

Speaker 2

The performances of China's domestic market share, Asia market and Hong Kong stock market also took some heavy adjustments impacting the issuance of new investment products domestically. The new issuance of mutual fund products, for example, in the domestic market fell 22.7% throughout the year. On a contrast, in 2023, the Dow Jones industry average index rose by 13.7% with S and P 500 Index and MSCI World Equity Index up over 20%. On the alternative side, global fund managers are increasingly focusing on the underserved private wealth channels to fuel primary market fundraising. According to Mackenzie, as of June 30, 2023, the total AUM in private markets reached US13.1 trillion dollars growing nearly 20% per annum since 2018.

Speaker 2

The sharp divergences in economic and capital market conditions between onshore and offshore markets have created considerable challenges for high net worth clients while demands for global asset security and diversification, insurance products and other defensive driven strategies continues to grow. As a leading wealth management company recognized for its expertise in alternative investments and extensive network of Chinese professional investors. These trends directly align with our strategic transition from a product based to a solution based offering and our ongoing investment in overseas products and services. In this context, we delivered solid financial results and our business has proven again to be resilient and adaptive in the face of challenging market environment. Net revenues for the year continue to grow along with a healthy operating margin of 33.3%.

Speaker 2

Combined with our asset light model generating strong operating cash flow and ample cash on balance sheet, we're extremely confident in the resilience of our business and ability to thrive even in complex economic conditions. With that, let's get into the details of our quarter 4 and entire fiscal year 2023 financial performance. Quarterly net revenues came in just shy of RMB800 1,000,000, a 6.6% increase sequentially. Our net revenues for the year was RMB3.3 billion, up 6.3 billion year over year. In terms of breakdown of net revenues for the year, one time commissions were RMB1.1 billion, up 60% year over year, primarily due to strong distribution of insurance products.

Speaker 2

Recurring service fees, a key stabilizer in revenue mix, were RMB1.8 billion, slightly down 4.8% year over year due to a decrease in onshore ARAM resulting from changes in NAV and structured products. Performance based income was RMB137 1,000,000 down 55.5% year over year mainly due to the underperforming domestic capital markets and limited exit opportunities. And other service fees were RMB258 1,000,000, up 23.4% year over year, primarily due to more value added services provided for our clients. Breaking down net revenues by region, overseen net revenues over the year were RMB1.4 billion increased by 73% year over year, accounting for 43.5% of total net revenues. We've been following our clients' demands and made significant progress in expanding our international presence in 2023, managed to recruit over 100 overseas relation managers as of today.

Speaker 2

At the same time, we'll continue to enrich our product offerings and enhance cooperation with top global primary and secondary market funds, managers and insurance companies driving an increase in overseas transaction value and AUA by 83.4% and 10.2% respectively. In 2023, we officially launched our office in LA and are actively exploring opportunities of rolling out services and products in many other places in the world such as Dubai and Japan, probably Southeast Asian Nations. With respect to transaction values, we distributed RMB16.4 500,000,000 products during the quarter, down 8.1% year over year and 25% quarter over quarter. By region, transaction value for RMB products in the quarter was RMB10.7 billion, down 17.4 percent year over year and 30.5% quarter over quarter, while transaction value for U. S.

Speaker 2

Dollar products increased by 12% year over year and down 13.4% quarter over quarter to US828 million dollars Total transaction values for the year reached RMB74.1 billion, up 5.4% year over year. Breaking this down by region, the transaction value for RMB products was RMB50.3 billion, down 13% year over year, while the transaction value for U. S. Dollar products increased 83.4 percent to US3.3 billion dollars driven by US dollar cash management and structured products. As of the end of the year, our overseas AUM grew 7.6% year over year to US5.1 billion dollars accounting for 23.3 percent of the total AUM.

Speaker 2

Operating costs and expenses increased by 9.2% during the year, primarily due to the low base effect created by COVID lockdowns in 2022, which curtailed both marketing activity and business traveling as well as increase in international travel this year in support of global expansion. Combined with our strategic cost controls, operating costs kept reasonable and in line with revenue growth. Spacing to operating costs for the year were number of one time expenses that would generate cost savings over the long term or the continued urbanization of China. Chinese high network investors increasingly migrating to 1st tier cities. We have been consolidating teams and resources in smaller cities to nearby hubs, mostly capital and 1st tier cities and international regions accordingly.

Speaker 2

We expect to benefit from consolidations of these networks to save approximately RMB10 1,000,000 annualized going forward. We also looked closely at improving human capital efficiency. The total headcount decreased by 10%, 10.4% overall in 2023, most of which were stemmed from mid and back office personnel, which decreased by 17.2%. This will save RMB64 1,000,000 annualized going forward. At the same time, we're allocating resources and firmly implementing overseas talent developments.

Speaker 2

Total overseas headcount increased by 16.1% to 426 in 20.3. Operating profit during this quarter was RMB221 1,000,000 effectively flat when compared to the same period last year and down 11.3% sequentially. Operating profit margin during the quarter improved on a year over year basis to 27.6%, a decrease compared with the previous quarter as we typically have more marketing and client activities during the Q4. Operating profit for the year was RMB1.1 billion, a slight increase of 0.9 percent year over year, while operating profit margin for the year remained at a healthy level of 33.3%. Total other income for the year was RMB111 1,000,000 increased by 82.2% year over year, mainly due to optimization of our capital management and currency mixes.

Speaker 2

This was partially offset by non cash investment losses from certain balance sheet investments due to mark to market adjustments. Non GAAP net income during the quarter was RMB234 1,000,000 up 56.7 percent year over year and RMB1 1,000,000,000 during the year, a slight increase of 1% from the last year. Turning to the results of each segment during the year, net revenues from wealth management were RMB2.5 million and net revenues from asset management were RMB766 million accounting for 75.26 percent and 23.3 percent of total net revenues respectively. On the client side, as of the end of quarter, we had 7,369 Diamond Card Clients, down 2.8% year over year and 1.2% quarter over quarter. However, the number of Black Card Clients higher tier clients increased by 8.8% year over year and 1.7% quarter over quarter reaching a total of 2,000 289.

Speaker 2

The total number of Diamond and Black Card clients was 9,658, slightly down 0.3% year over year, primarily due to a sluggish equity market and downbeat investment sentiment. That being said, we're still confident to capture more market share by continuing enhancements in our global product service offerings and achieving a 1% market share in high net worth individual wealth management market as a goal. Overseas registered clients at the end of the year increased by 14.2% year over year to 14,009 129 and overseas active clients of the year increased by 38% year over year to 4,629 as we continue to build up overseas presence. Turning to our balance sheet, we have maintained a healthy liquidity position with our current ratio at 3.8x and our debt to asset ratio at 17.8% with 0 interest bearing debt. We have RMB5.2 billion cash and cash equivalents providing ample resources to support our global expansion plans and make improvements in shareholder return, which the Board has always considered as a priority.

Speaker 2

Therefore, I'm very delighted to announce that based on our strong and clean balance sheet and strong liquidity position and after considering the necessary investments associated with global expansion plan, the Board has approved an annual dividend of RMB509 million for 2023, which is equivalent to 50% of the year's non GAAP net income attributable to Noah shareholders in accordance with the capital management and shareholder return policy announced last quarter. In addition, the Board has also approved a nonrecurring special dividend for the year of RMB509 1,000,000 in total for 2023. Thus, the amount of total shareholder returns for 2023 in the form of cash dividend will be RMB1 1,000,000,000, equivalent to 100 percent of 2023 non GAAP net income, subject to final approval of HEM in June 2024. At the current market value, our recurring payout plan provides a very attractive dividend yield of over 10% and the total payout plan with additional special dividend will yield over 20% for shareholders. In summary, we believe that the share price of Noah is significantly undervalued to its intrinsic value.

Speaker 2

We remain extremely confident in our long term growth prospects. We're also committed to improving our return on equity and to creating more values for shareholders through enhanced shareholder returns. Once again, we sincerely appreciate our shareholder support for your ongoing trust. Thank you for listening and I'll now open the floor for questions. Operator?

Operator

We will now begin the question and answer session. The first question today comes from Helen Lee with UBS. Please go ahead.

Speaker 3

So let me transfer my question. So this is Harlan from UBS. Two questions, if I may. First, the number of covered cities declined to 44 and RMs declined 11% in the 4th quarter. Is it because of loss of RMs from branch closure or are you laying off RM?

Speaker 3

And what's your future plan for the onshore business in terms of RM? And my second question, at last year's open day, you talked about structural product and hedge fund products, which could be a driver for one time commissions going forward. What's the penetration rate of this product? And what's your product strategy this year? And what's the business outlook for 2024?

Speaker 3

Thank you.

Speaker 2

Thank you, Helen. I think I will take the first question. So to your first question, Helen, it's I guess it's probably a result of both. One is obviously the consolidation of networks. Obviously, some of the ratio managers choose to not leave the smaller city and work in the hub city.

Speaker 2

So there's still a little bit of a commute between the hub city and the original city. So there's some natural loss, but it's actually doesn't decrease. And 2 is really obviously the optimization. We're increasingly improving the threshold in terms of assessment efficiency of these arms. So naturally for the arms, they have to reach a higher threshold, if you will, to be continually to remain in the team.

Speaker 2

But we're actually actively adjusting the structure, obviously, with heavier investments on the global side over CRMs. We're probably also emphasizing on the overall comprehensive capabilities of the skill set of the arms.

Speaker 1

Graham, so I will take the translation for gender. So in terms of the optimization of our domestic network, we always adhere to the strategy of following the footsteps of our clients. And over the past few years, we have noticed the trend of handover individual and clients to relocate from lower tier city where they basically accumulated their 1st bucket of goals to core cities and 1st tier cities and as our strategy follows them. So and also on the other hand, given the current challenging macroeconomic condition, we need to concentrate and reallocate our core strengths and resources to improve operational efficiency. Therefore, in the Q4 last year, we basically limited some of the underperforming RMs and professionals.

Speaker 1

So this is quite different from our expansion strategy in the past. So now we are more focusing on allocating our strength and resources to the individuals with high performers. And in fact, the top performers over the past year, basically their KPI and the AUM or transaction value per head has increased more than 30% over the past year. So in conclusion, in the past few quarters, we have rather focused on consolidating our domestic network. So you can probably see that the speed of the RM headcounts domestically, the decrease of the headcounts is actually slower than the decrease of the number of cities we consolidated, which means we are currently still under further evaluation for our workforce.

Speaker 1

So in terms of your second question, on the penetration rate for hedge fund products, structured products and cash management products, So we're not seeing that the penetration rate for hedge fund and structured product is still very low. However, in the Q1 of this year, in 2024, the penetration rate for structured product, especially with principal protection mechanism has been increasing. And we are also seeing the potential of clients who whose wallet with us is currently in cash management related product as the interest rate is starting to or is expected to trend down in the future, we see the opportunity to convert these wallet shares into other alternative investment products, including hedge fund and structured products. Helen?

Operator

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

Speaker 4

My first question is about the dividend. I wish to chat with management what's the rationale behind on the special dividend payment for this year and given that we still have a very strong cash balance on our balance sheet. Looking ahead, do we have any share buyback plan or other, say, long term shareholder return plan? And my second question is about investment income in the other income in our P and L. There's RMB54 1,000,000,000 investment losses in 4th quarter due to investment losses.

Speaker 4

I wish to understand what's the rationale behind and what are the underlying investments? Thank you.

Speaker 2

Thank you, Peter. I'll take the first question and Nora and Zander will jump in as needed. So for the special dividend, after ample discussions with our investors and we have basically passed on the message to the Board. We'll continue to anticipate strong cash flows from our future operations. And by after carefully evaluating the capital need for global expansions and really not any, I guess, clear target for heavy capital utilization.

Speaker 2

We believe that's the right time to return to our shareholders with heavier ratio in terms of special dividend in the form of special dividend. I guess with the depression on Chinese ADS share price mostly actually not too much associated with the fundamentals. We don't believe stock repurchase actually adds too much value at this point. We obviously would not exclude that option going forward. But for this year, we'll prioritize on the cash dividend payout in the form of special dividend.

Speaker 2

Adjustments on the valuation is pretty much on par with the market.

Operator

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

Speaker 2

Okay. Thank you very much for our shareholders and analysts for continued trust and support. And this will conclude today's earnings release. And if you have further questions, we have arranged 1 on 1 sessions. I'll be very happy to share more insights with you.

Speaker 2

Thank you.

Operator

The conference has now concluded. Thank you for attending today's

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