Noah Q1 2024 Earnings Call Transcript

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Provided by Quartr
May 29, 2024

There are 4 speakers on the call.

Operator

Good day, and welcome to the Noah Holdings First Quarter 2024 Earnings Conference Call. All participants will be in listen only mode. Please note this event is being recorded. I would now like to turn the conference over to Mello He, Director of IR. Please go ahead.

Speaker 1

Thank you, operator. Good morning, and welcome to Noah's 2024 Q1 earnings call. Joining me today on the call are Ms. Wang Jingbo, our Co Founder and Chairlady Mr. Daniel Ng, our Co Founder, Director and CEO and Mr.

Speaker 1

Graham Pan, our CFO. Mr. Ng will begin with an overview of our recent business highlights, followed by Mr. Pan, who will discuss our financial and operational 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 this discussion today will contain forward looking statements that are subject to risks and uncertainties that 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 a link to a live webcast with presentation materials is available on our Investor Relations website. With that, I would like to pass the call to Mr. Yin. Please go ahead.

Speaker 1

Good morning, Noah Investors and Analysts. I'm Denner Yin, and this is my first time sharing and discussing company's performance as CEO of Noah Holdings. Thank you all for joining us today. I'd like to start today's call by sharing our views on the macroeconomic environment, our performance for the Q1 of 2024 and the strategy we're deploying going forward. Domestic capital market continued to experience extreme fluctuations during the Q1.

Speaker 1

The real estate market remained sluggish, while the primary market faced hurdle due to the periodic policy restrictions, resulting in a slow exit process. It's clear that handout worth individuals are becoming increasingly cautious with their investments. Adding to the challenge, some non compliant wealth management companies with capital pooling have collapsed, severely affecting domestic lines and leading to a stricter regulatory environment. I would like to reiterate that since our inception, Noah has never engaged in capital pooling, has no maturity mismatches and does not offer high leverage financing options to clients. As of today, Noah does not have any non standardized private credit products and RMB Residential Real Estate Funds.

Speaker 1

Overseas, persistent inflation over the past 3 months has cooled expectations for Federal Reserve rate cuts, indicating that a higher for longer rate environment is likely to remain in place. As a result, investors will continue to allocate capital towards cash management and deposits for a longer period of time. Mandarin speaking clients are also strongly demanding for global asset allocations. With this trend continues, we're expanding our international R and M team and actively increasing our influence and wallet share among overseas Mandarin speaking clients. Turning to our financials for the quarter.

Speaker 1

Total revenues were RMB654 1,000,000, a decrease of 19.2 year on year, primarily due to the proactive restructuring of our business. Our overseas business strategy has achieved solid results, contributing 77.1% of the revenue generated from new businesses and products in the Q1, while our domestic business contributed 22.9%. By region breakdown, our domestic business contributed RMB348 1,000,000, accounting for 53.1 percent of the total revenues. Within the domestic business, revenues from legacy distributed products accounted for 89.6%. Our overseas business generated RMB307 1,000,000, a decrease of 4.5% year on year, mainly due to the carried interest earned from private equity assets in the same period last year.

Speaker 1

As we back out the impact from carried interest, overseas net revenue actually increased by 22.4% year on year. Breaking it down by segments, our wealth management business generated RMB464 1,000,000 within wealth management. Our domestic business contributed RMB235 1,000,000, while the overseas business contributed RMB229 1,000,000. Our asset management business generated RMB 181 1,000,000. Within asset management, our domestic business contributed RMB103,000,000 entirely composed of revenue from legacy distributed products.

Speaker 1

Our overseas business generated RMB78 1,000,000. As we expand our portfolio of overseas private equity products, the number of equity the number of active clients in U. S. Dollar private equity and structured products reached 583 in 1st quarter, a year on year increase of 97%. The value of capital raise for U.

Speaker 1

S. Dollar private equity products, which generate long term recurring service fee revenue, reached RMB165 1,000,000. This grew U. S. Dollar AUM to $5,200,000,000 a year on year increase of 6.1%.

Speaker 1

In the comprehensive services segment, domestic insurance brokerage business generated RMB19 1,000,000 in revenue and revenue from overseas insurance, trusts and other comprehensive services were RMB150 1,000,000, a year on year increase of 86.8%. The number of active clients in the overseas comprehensive business increased by 51.9% year on year. Operating profit for the Q1 was RMB121 1,000,000 with an operating profit margin of 18.7%. In the Wealth Management segment, our domestic business objective is to ensure full compliance and steady operations. We have proactively reduced the number of branches in domestic cities from nearly 80 to 18, with plans to further narrow it down to around 10 core cities.

Speaker 1

We are firmly committed to reducing fixed costs and optimizing mid and back office personnel costs. Internationally, from Hong Kong and Singapore to the United States, our strategy is to increase the number of relationship managers and enhance our influence and wallet share among high network Mandarin speaking clients. As of the end of the Q1, Hong Kong and Singapore had 91 relationship managers on boarded, an increase of 2 25% year on year and 2.2% sequentially. Currently, due to the small size of our overseas RM team, each overseas RM serve too many clients and there is room for improvement in the quality and responsiveness in our client service. Internationally, our primary focus is on expanding the team of overseas RMs.

Speaker 1

This year, our goal is to grow the team to 200. As we continue to invest in our international infrastructure, as of the end of the quarter, we had over 15,700 overseas registered clients, an increase of 17.1% year on year. The number of clients who purchased our cash management products reached 4,108, an increase of 89.4 percent year on year, while the number of discretionary investment clients reached 873, an increase of 167% sequentially. In the Asset Management segment, domestically, our primary challenge is to strengthen private market exits in collaboration with GPs and portfolio companies. In public markets, we focus on QDI and QD LP products to help clients generate better returns in the global capital markets with RMB allocations.

Speaker 1

Internationally, since 2022, we have significantly expanded the diversity and quality of our overseas products as part of our top tier GP partners and segmented flagship product strategy. During the quarter, the transaction value for U. S. Dollar cash management product increased 49.4% year on year and 33.6% sequentially to US840 $1,000,000 At the same time, we have built a complete product matrix and launched high yield U. S.

Speaker 1

Dollar products to capitalize on high interest rate environment. These include private credit and infrastructure products, as well as actively managed VC fund funds and the 4th series of our U. S. Real estate funds. Transaction value of our U.

Speaker 1

S. Private equity products increased significantly, reaching $165,000,000 in the Q1, an increase of 21.3% year on year and 81.3% sequentially. As of the end of the quarter, AUM for overseas products reached US5.2 billion dollars an increase of 6.1% year on year, accounting for 24.4 percent of the group AUM, compared with 21.2% during the same period last year. AUM for overseas private equity and other primary market funds reached $3,900,000,000 an increase of 5.9 percent year on year. Overseas AUA, which includes third party distributed products, reached $8,300,000,000 a year on year increase of 9.2%.

Speaker 1

In recent years, top global GPs have increasingly turned to private wealth channels for capital raising and have been introducing more individual client friendly products with liquidity features. Our strong brand image among high network clients and Rm's expertise in alternative assets make us the ideal partner for those GPs. Our goal is to increase U. S. Dollar AUA from the current US8 $1,000,000,000 to over US20 $1,000,000,000 in the next 3 to 5 years.

Speaker 1

On the comprehensive services side, domestic insurance business has slowed notably, mainly due to the continuous decline in fixed interest rates for domestic insurance. Our current strategy is to focus on insurance products that help clients address their parents' retirement, well-being and medical needs. Overseas, the Hong Kong insurance market has entered into a phase of intense competition with highly homogeneous products following the COVID reopening. To address this challenge, we have strengthened client segmentation and collaborated with leading insurance companies to develop exclusive products and customized solutions. Furthermore, we have launched customized enterprise client solutions, such as employee benefit clients for our entrepreneur clients.

Speaker 1

This has enhanced our competitive advantage with differentiated products and professional services. During the quarter, overseas insurance revenue increased by 86.8% year on year. Serving high net worth clients through both online and offline channels is a key priority for us. We continue to further expand the range and types of clients that we can service through I know our overseas wealth management app. This includes the offering of different solutions to clients, businesses and agencies.

Speaker 1

Online wealth management is becoming our new channel for us in the overseas. The number of overseas active high net worth clients reached 2,745, an increase of 39.6% year on year. Total transaction value during the same period reached $1,200,000,000 up 50.7% year on year. The number of active clients for U. S.

Speaker 1

Mutual funds reached 2,327, an increase of 65.2 percent year on year, with transaction value of $521,000,000 up 52.7 percent year on year. Overseas transaction value for corporate and institutional clients reached $85,000,000 in the Q1, an increase of 143% year on year, with AUA reaching $187,000,000 a year on year increase of 58.5%. For agency clients, our overseas wealth management business began trial operations in late 2023 where it is empowering EAMs and family office clients with a SaaS platform integrated with our full suite of products. To date, we have signed 17 agency clients. Our goal is to develop an overseas online wealth management platform that does not rely on our team of RMs.

Speaker 1

Once our overseas infrastructure is firmly in place, we target to serve 300 EAMs and family offices with this solution. Since inception, we have dedicated ourselves to providing high quality asset allocation services to Mandarin speaking high net worth investors. We have built enduring trust based relationships with each of our clients and continuously enhanced our understanding of wealth management and investment through ongoing investor education. As Mandarin speaking high net worth investors become more mature and globally oriented, the deep trust based relationships we have built domestically will allow us to continue serving them as they look overseas. We are dedicated to building a personalized service for them, which when combined with our expanding global product portfolio will give us a significant advantage over local institutions going forward.

Speaker 1

Our asset light approach to expanding into key overseas markets with high concentrations of Mandarin speaking Hainanwazi investors and wide array of product services will ideally position us to serve not only our existing clients, but also build a new local client base. 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. Thank you, everyone.

Speaker 2

Thank you, Mao, and thank you, Xander. And greetings to everyone joining us today. As Xander has mentioned, the Q1 of 2024 was impacted by continued volatility in the global cat markets. Shifting expectations around Federal Reserve interest rate cuts have created turbulent conditions in equity and bond markets around the world. As the U.

Speaker 2

S. Dollar strengthened, equity and gold prices moved in tandem, reflecting the complex environment that investors continue to face. Effective risk management and global diversified portfolio have become crucial to successfully navigating this environment. Domestically, the A share market experienced extreme fluctuations as well, which negatively impacted investor confidence, promoting them to take a more cautious and risk averse approach to investment and further diversifying their portfolio. This created substantial challenges and impacted the financial performance of China's wealth and asset management industry.

Speaker 2

During the Q1, 43 listed security brokerage firms saw total revenue and net profit decline by 20 percent 30% from the same period last year. Some leading private banks were also affected with with strategically restructuring our wealth management operations, consolidating teams and resources from smaller cities to core cities, and pivoting operations and personnel towards global markets where demand for asset diversification is growing. Themes guiding operation this year are transformation and transition. While this transformation may bring short term challenges, pressures including temporary fluctuations on financial performance, we're confident that we'll lay a solid foundation for robust sustainable growth towards our globalization strategy and generate enduring value for shareholders. With that, let's get into the details of the Q1 financial results.

Speaker 2

On the revenue side, we have seen a slight increase in net revenues from new transactions, with one time commissions up 6% year over year. However, the decline in recurring service fees and performance based income put pressure on total net revenues, which decreased 19.2% year over year and 18.8% sequentially due to seasonality to RMB 650,000,000 in the Q1. Net revenue from recurring service fees were RMB417 1,000,000, down 12% year over year and 2.6% sequentially due to a decrease mostly in onshore AUM resulting from changes in NAV and also exits from RMB related investments. Performance based income was RMB14 1,000,000 compared to RMB83 1,000,000 in the same period last year, primarily due to the successful exit of a private equity portfolio company last year. The bright side is that we're seeing increased interest towards U.

Speaker 2

S. Dollar investment products. In light of the diminished expectation of a rate cut by the Federal Reserve, we're observing a strong sustained demand from clients for U. S. Dollar cash management products.

Speaker 2

It's worth also noting that the transaction value for overseas private equity and private secondary products, which could bring long term return fees in future, are also generating significant growth, increasing 21.3% 70.6% year over year, respectively, demonstrating the progress we have made in expanding our high quality alternative investment product offerings. Looking at financials, we can see clear growth in overseas business. On an apple to apple basis, taking out the impact of performance based income, overseas net revenues grew meaningfully by 22.4%. And the total overseas net revenues accounted for 47.2 percent of total revenues, up 7.2% year over year, underscoring the growing importance of a key revenue driver. With respect to transaction values, we distributed RMB18.9 million of products during the quarter, up 12.4% year over year and 14% sequentially.

Speaker 2

However, the immediate contribution on revenue is not yet evident despite the high demand for U. S. Dollar cash managed products and also the revenue, recurring revenue from private equity related products will not take effect in the same quarter, but it does reflect the progress of continuing making in getting a larger share of the clients' wallets. And the long term benefits of the increased portion of alternative investment products to future management fees are also yet to be realized in the current term. By currency, transaction value for RMB products was RMB10.5 billion, down 8.8 percent year on year and 1.5% sequentially, or transaction value for U.

Speaker 2

S. Dollar products increased by 50.7 percent and 40.2 percent sequentially to US1.2 billion dollars Overseas AUM grew 6.1 percent to US5.2 billion dollars accounting for 24% of total AUM, while overseas AUA grew 9.2% year over year to US8.3 billion dollars accounting 24% of total Aave, reflecting our ability to capture a larger share of clients used to our wallet. Operating costs and expenses experienced a slight year on year increase of 0.7%, a sequential decline of 8.8% due to our cost control initiatives. In details, compensation and benefits increased by 5 percent year over year and 29.3% sequentially. This was primarily due to increase in share based compensation expense to motivate and retain core tenants.

Speaker 2

As I mentioned last quarter, we're continuing to consolidate our network in smaller cities and further improving human capital efficiency by reducing overhead expenses. While the financial benefits of these optimizations may not be immediately apparent, we anticipate a gradual and noticeable impact on our cost savings in the future. Selling and general and administrative expenses combined decreased 6.3% year over year and 47.9% sequentially, reflecting the progress our cost controls and efficiency improvement initiatives are already making. Operating profit during the quarter was RMB121 1,000,000, a decrease of 56.4% year over year and 45% sequentially. Operating profit margin was 18.7% during this quarter, below our long term target range of 30% to 35%, primarily due to the drag from domestic market revenues and periodical organization's restructuring.

Speaker 2

Total other income increased by 82.1% year on year to 55,300,000 due to continued optimization of treasury management. Non GAAP net income during the quarter was RMB160 1,000,000 compared with RMB239 during the same period last year. In terms of clients, as of the end of Q1, we had a stable total of 9,560 with Diamond and Black Card clients. Specifically, the number of diamond card clients decreased slightly to 7,272 or the number of black card clients increased to 2,296. As our overseas expansion accelerates, the number of overseas registered clients continues to grow, increasing 17.1% year on year and 5.3% sequentially to 15,725.

Speaker 2

The total number of overseas diamond and black card clients, which require minimum investment with us of $2,000,000 $5,000,000 respectively, grew rapidly to more than 1500. During the Q1, the total number of active clients was 10,391, up 15% sequentially, of which overseas active clients accounted for 2,745, an increase of 9.1 percent sequentially. Turning to our balance sheet. We have maintained a healthy liquidity position with our current ratio of 4.1 times and debt to asset ratio at 16.6 percent with 0 interest bearing rate. Interest bearing debt, We have RMB5.1 billion in cash and cash equivalents, providing ample resources to support our global expansion plans and allocate to shareholder returns, which remains a priority for the Board.

Speaker 2

As mentioned last quarter, Noah declared annual dividend of RMB509 1,000,000 and a non recurring special dividend of RMB509 1,000,000 for 2023, subject to final approval at our AGM on June 12, 2024. We expect to pay out dividends when approved before the end of July to Hong Kong stockholders and in early August to our ADS holders. We look forward providing stable and sustainable returns to shareholders that would drive growth across our business. Looking ahead, our goal is to provide clients with high quality and globalized products and services, restructuring our wealth management channels and realigning our operations and personnel that will allow us to sustainably capitalize on this growing demand. The strategy the strategic transition towards overseas markets still in the initial phase of being built out and will take some time to mature, but we're already beginning to see the progress we have made reflected in the performance of global business.

Speaker 2

When we inevitably encounter bumps along the road, we're confident in our ability to overcome them and would like to express a sincere gratitude to our shareholders' support. And thank you for listening. I'll now open the floor for questions.

Operator

We will now begin the question and answer session. The first question comes from Peter John with JPMorgan. Please go ahead.

Speaker 3

My first question is about the investment sentiment. Starting from the March this year, we noticed that the capital market in Hong Kong has recovered and recently there's also some real estate supported policy in Mainland China. We are wondering whether Noah observed any improvement in domestic investment sentiment. And management mentioned during the call that demand for domestic insurance has declined. We're also wondering what the clients' preference for other or their interest in terms of the products?

Speaker 3

My second question is about revenue outlook and fee rates. We noticed that the 1st quarter revenue decline loss revenue decline on year over year basis. Can management give us can management explain what's the reason or drivers behind and what's our expectation for the NOS revenue in 2024? My second question is about the fee rate for our product. In Q4 last year, domestic bancassurance channel experienced a decline in insurance fee rate as request by the regulator.

Speaker 1

We will see potential fee rate decline for

Speaker 3

our domestic insurance potential impact? And apart from the domestic insurance, do we see other any other fee rate declining impact for our other product we are currently distributing? Thank you.

Speaker 1

Thank you, Xander and thank you, Peter, for the question. So I'll translate on the first question regarding the changes in recent sentiment among investors. So although given that we have seen some rebound in the capital markets or HCR Capital Markets recently. I guess in summary, we haven't seen a significant shift or improvement in Hanover's investors' investment sentiment because building confidence is rather a long term process rather than short term. So the short term capital market rebound will not immediately reverse the investment sentiment in that sense.

Speaker 1

So the second question regarding the domestic insurance and I guess the slowdown in demand as well as the trending downward return or interest rate, I guess it's largely aligned with the domestic interest rate environment, which is also trending down. And I guess the slowdown in the clients' sentiment towards domestic insurance is also a reflection of their investment sentiment in that sense. So right now, in terms of domestic insurance, we are more focusing on the products that will satisfy the retirement, the well-being as well as the medical needs of clients and their parents, the type of product that will satisfy those demands. So the third question regarding the reasons behind the decline in 1st quarter revenue. I guess the first aspect is that the decrease in recurring service fee or the management fee, mainly because of the active exit activities in our domestic portfolio.

Speaker 1

And the fact that we did not really introduce new products in the domestic market, which drives down our domestic AUM, but I guess that's a rather active approach. And the second aspect is that, although given we have achieved great improvement or progress in our overseas business and expansion, but given the current higher for longer interest rate environment and the product that fit into that environment, I guess the growth in overseas business is still not fully reflected in our current revenue structure. But we think that to capture and maintain clients' wallet share through even through cash management and term deposit product is also very important because it is building for future growth when interest rate trends down that we can translate these products into more fee generating products like private equity and hedge fund products in the future. And thirdly, I guess, it's the fact that the decrease in carried income and performance based income because of the, I guess, the general asset environment comparing to the previous quarter and I mean the previous year. So I guess the 4th question regarding the outlook on 2024.

Speaker 1

I guess overall the strategy is rather clear, which is to ensure, I guess, safety and compliance in our domestic operation, while focusing on deploying more resources and to expand our overseas business. But that process will probably take some time for our overseas business to fully accelerate. We have spent the past 20 years being able to build a rather complete system in the domestic market. And we're hoping that in the 3 to 5 years' time, we'll be able to complete our overseas business infrastructure. And additionally, I guess, the client trust with us is, I guess, is very long term.

Speaker 1

And the investment demand and needs of Hanover's investors is also very long term. So as clients look more towards overseas asset allocation, we will be or we'll be well positioned to provide better products and services to or we'll be well positioned to provide better products and services to them in overseas and global markets. Thank you, Xander. So the question regarding the insurance commission fee decrease, so I guess the overall impact on our business is rather small, especially comparing with a lot of the insurance brokerage business in the market, where most of the brokers have high commissions, but low base. Our RMs are more focused on providing long term value for our clients.

Speaker 1

And as a business, our primary focus is to satisfy our clients' needs and create value for clients and how to optimize their asset allocation and portfolio construction. So I guess the short term or the fluctuation in the fee rate of a certain product is not the most aspect that we're worried about. In terms of other products fee rate changes, I guess it's largely in relation to the nature of the products. For example, cash management related products naturally have a lower fee rate, whereas the private market, including private equity and private secondary hedge fund products, the fee rate has been rather stable. But that being said, we are still focused on optimizing our clients' portfolio and asset allocation, and we would rather lose a certain client than to lose money.

Speaker 1

So also going back to creating long term value for our clients. So operator, so please be noted that there is no more questions. Our Chair Lady Wang would like to have a closing remark as well.

Operator

All righty. This concludes our question and answer session. I will now turn it over to management for any closing remarks.

Speaker 1

Thank you. Could you hear us? Thank you, Chair Lidi. So I'll translate for Chair Lidi's closing remarks. So we have noticed that there are a lot of non compliance so called wealth manager in the China domestic market continues to default on their private credit products, which has caused significant losses among their high net worth clients.

Speaker 1

So I guess in our perspective, in the past 10 years, the China Wealth Management has experienced a rather fast growing, but not so healthy growth period. So standing in today's time, we think that the largest or the biggest risk in the wealth management market in China is that the high net worth clients return back to poverty because of the wrongly allocated assets or the wrong asset allocation advices they got. So right now, our main advice to our existing clients is to hold on to their current wealth and portfolio, so that they can preserve their wealth and which is driven for future growth when the opportunity is there. Internally, I guess, the biggest challenge for us as we expand our overseas strategy is the I guess how fast we can get used to or be familiar with the operation of how global private banks operate. But that being said, we have a very talented core management team and we do have some very global minded and top tier R and M team.

Speaker 1

So we are still rather optimistic regarding our future growth, especially in the overseas market. So turning back to you, operator.

Operator

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

Speaker 1

Thank you,

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Key Takeaways

  • Noah reported Q1 revenues of RMB 654.1 million, down 19.2% YoY on proactive restructuring, and achieved operating profit of RMB 121.1 million with an 18.7% margin.
  • Overseas operations contributed 47.2% of total revenue, with net revenues up 22.4% YoY (ex-carried interest) and overseas AUM growing 6.1% YoY to US$5.2 billion.
  • Domestically, the firm reduced its branch network from nearly 80 to 18 (targeting ~10 core cities) to strengthen compliance, lower fixed costs, and preserve client wealth amid market uncertainty.
  • Client demand for US dollar cash management and alternative products accelerated, with US$840 million in cash management transactions (+49.4% YoY) and RMB 165 million raised for USD private equity (+21.3% YoY).
  • Noah’s strategic shift toward globalization includes growing its overseas RM team from 91 to 200 and targeting US$20 billion in USD AUA within 3–5 years to serve Mandarin-speaking high-net-worth investors.
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Earnings Conference Call
Noah Q1 2024
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