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Chinese billionaires and multi-millionaires demand investment advice

When the average Chinese billionaire isn't trying to build a golf course in Iceland or destroy their Lamborghini, they are looking for financial advice. A recent study by McKinsey & Co. and Minsheng Bank polled 700 'high-net-worth' ('HNW') individuals across 29 Chinese cities. Their findings:

  • 40% of them dissatisfied with their current bank's offerings
  • Although more than half of the HNW individuals have offshore accounts, only 10% of all HNW assets are held offshore
  • More than 50% of the HNW assets are in basic investment products such as mutual funds or savings accounts

As this story states:
"About 20 percent of HNW individuals are business owners who have little experience of financial investment. They prefer high-return products but often lack investment experience and knowledge. They have a strong preference for a comprehensive array of products and are seeking banks that tailor products to their needs."

It seems Chinese multi-millionaires, "centa-millionaires" and billionaires have plenty of capital and pent up demand for wealth management services and products. This is an ideal situation for established Chinese company with offerings to solve this demand.

So you want to be a Billionaire! (go to China)

The number of Chinese high-net-worth individuals is continuing to grow:

  • In 2011, China nearly doubled its number of billionaires
  • "By the end of 2012, the number of Chinese high net worth households - those with investable assets of more than 6 million yuan - will reach 1.74 million, an increase of 17 percent from the same time last year."
  • "The number of high net worth people in China doubled from 2008 to 2011 and is expected to double again by 2015."
  • HNW individuals are not only politicians and entrepreneurs. For example, The Wall Street Journal found only 160 of China's 1,024 richest people were seated in the Communist Party Congress, the legislature or a prominent advisory group..."

And although many HNW Chinese are moving to live outside China, the growth in Chinese "centa-millionaires" will grow faster than almost any other region:

(click to enlarge)

Firms Catering To This Exploding Market of "Financial Services-Needy" HNW Clients

A number of types of firms are the main options for these customers. One type is large financial services institutions who also offer retail banking and a wide variety of services. These are not differentiated do not focus specifically on this customer base. A second type are focused specifically on HNW individuals. These 'pure-plays' seem well-positioned to take advantage of market growth:

Of these firms, only one--NOAH--has experienced a long duration of depressed stock price, forming what a technician might call a 'Stage One base' and recently may have 'broken out' of this pattern to the upside.

A Value Investment in Wealth Management Firms for High Net Worth Individuals

NOAH is a Chinese financial services firm exclusively focused on HNW clients. NOAH has more than RMB1.5 billion assets under management (AUM) with offices across China. It is a small-cap player with high growth dedicated to the space, performing strongly relative to competitors.

As the article "Small Caps With A High Cash Flow" explains:

"Noah Holdings Limited, through its subsidiaries and variable interest entity, engages in the distribution of OTC wealth management products to the high net worth population in China. It markets products supplied by third-party product providers, based on the underlying assets class, such as fixed income products, other products that provide investors with fixed rates of return. The company also offers proprietary wealth management products, such as private equity fund of funds, including financial planning."

As NOAH describes themselves:
"We are the leading independent service provider focusing on distributing wealth management products to the high net worth population in China. We distribute over-the-counter wealth management products that are originated in China, including primarily fixed income products, private securities investment funds and investment-linked insurance products."

Highlights from NOAH's most recent annual report (2011) give signs that Noah is benefiting from the explosion of its customer base:

  • "Our net revenues grew at a compound annual growth rate, or CAGR, of 117.8% from 2007 to 2011"
  • "...wealth management services industry in China is at an early stage of development..."
  • NOAH has over 37,000 clients and client base shows consistent growth

NOAH's CEO is also the company founder. She has grown the firm from a small spin-out of Xingcai Security into a dominant firm with 1.5B RMB AUM. In 2007, NOAH accepted an investment from the US from the world's largest venture firm, Sequioa Capital, in 2007. Independent depth at the board level is provided by Sequoia's Chinese arm, as well as an executive from ABN Amro. Another independent director is an entrepreneur whose company was purchased by Danone Group--surely someone who represents a 'sample customer' of NOAH. NOAH's strategy is to stay focused on areas where it can provide a differentiator vs. larger competitors. It does not try to drive a wide breadth of offerings, but rather has a high focus on its core areas and focuses on personal client attention.

Source: Noah Holdings Limited

Due to the high growth in the customer base, NOAH's expectation of future growth need not require 'stealing share' from competitors. Simply maintaining existing market share alone would drive aggressive growth.

The Value Investment

When one compares NOAH vs. their three main competitors, a 5 year stock performance chart looks like this:

(click to enlarge)

NOAH's stock price has underperformed that of larger competitors. However, from a fundamentals basis, there is no obvious causal factor:

 NOAHCIHHF.PK (Merchants)CMAKY.PK (Minsheng)CEVIF.PK (Everbright)
Revenue$76M$16.3B$14.4B$101M
Enterprise Value$170.5M$ -19.31B$ -43.2B$ -16.82M
Return on Assets7.08%1.47%1.47%1.02%
Cash$163M$115B$122B$463M
Debt$0$47B$45B$111M

Source: Yahoo Finance

NOAH has a high return on assets, no debt, and a positive enterprise value.

NOAH's margins are showing a trend toward increasing quarter-over-quarter performance, even with a dip in revenue, a potential sign of management's relative control over expenses:

NOAH FiguresQ2 2012Q3 2012
Revenue$25.8M$19.1M
Operating Margin35.9%37.7%
Net Margin29.3%32.5%

Source: Noah public statements

The Technical View

(click to enlarge)

Takeaways from the chart include:

  • NOAH began trading on the NYSE in late 2010
  • NOAH price dropped consistently from inception, perhaps due in part from an over-exuberant opening price
  • It appears to have formed a Stage 1 base
  • The Stage 1 base has lasted through most of 2012, allowing plenty of time for the sellers to exhaust themselves
  • In November 2012, NOAH relative strength index jumped into the positive for the first time in many months
  • On Demand Volume is no longer dropping and is showing an uptick
  • In December 2012, NOAH crossed above it's 50 day SMA

In Mid-November, Roberto Pedone from StockPickr noticed this potential breakout. In his prescient words:

(click to enlarge)

Since Pedone's article, NOAH has risen 14%+ in just over a month.

Conclusion

NOAH has no debt, strong margins, a focused strategy, and caters to an exploding market. It has a depressed stock price showing signs of strength. One can imagine NOAH continuing its breakout from a Stage One base and a price increase at least to the resistance shown earlier this year at $8.60 from current price of $6.04, a 30%+ gain.

Source: Chinese Billionaires Use Noah For Wealth Management