Noah Holdings' CEO Discusses Q4 2013 Results - Earnings Call Transcript

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 |  About: Noah Holdings Limited (NOAH)
by: SA Transcripts

Noah Holdings Limited (NYSE:NOAH)

Q4 2013 Earnings Conference Call

February 27, 2014 8:00 PM ET

Executives

Jingbo Wang - Co-founder, Chairman and CEO

Theresa Teng – CFO

Jing Ou-Yang – IR Director

Analysts

Michael Li – Bank of America Merrill Lynch

Eric Swergold – Firestorm Capital

Chen Gu – Artisan Partners

Liu Yong [ph] – CBN

Chao Zhang – China Orient Asset Management

Operator

Good day, ladies and gentlemen. Welcome to Noah Holdings Limited Fourth Quarter 2013 Results Conference Call.

At this time, all participants are in a listen-only mode. Following management’s prepared remarks, there will be a Q&A session. During the Q&A session, we ask that you please limit yourselves to two questions and one follow-up, so that we may have further participation. If you would like to ask further questions, you may reenter the queue to do so. As a reminder, this conference is being recorded.

Joining the conference today are Ms. Jingbo Wang, Co-Founder, Chairwoman and CEO; and Ms. Theresa Teng, the company’s CFO.

After the close of the U.S. market on Wednesday, Noah issued a press release announcing its fourth quarter 2013 financial results, which is available on the company’s IR webpage at ir.noahwm.com. This call is also being webcast live and will be available for replay purposes on the company’s website.

I would like to call your attention to the Safe Harbor statements in connection with today’s call. The company will make forward-looking statements, including those with respect to expected future operating results and expansion of its business. Please refer to the risk factors inherent in the company’s business and that has been filed with the SEC. Actual results can be materially different in any forward-looking statements the company makes today. Noah Holdings Limited does not undertake any obligation to update any forward-looking statement as a result of new information, future events or otherwise except as required under the applicable law.

The results announced today are unaudited and subject to adjustments in connection with the completion of the company’s audit. Additionally, certain non-GAAP measures will be used in our financial discussions. A reconciliation of GAAP and non-GAAP financial results can be found in the earnings press release posted on the company’s website.

I would now like to hand the call over to Ms. Wang. She will be speaking in Chinese and Ms. Jing Ou-Yang, the company’s IR Director, will translate her statement into English. Madam Wang, you please go ahead.

Jingbo Wang

[Foreign Language – Chinese] Thank you, operator, and thank you all for joining us today. Today, I will begin the call by briefly reviewing our performance in the year 2013 and discuss about our corporate strategies in the year 2014. Afterwards, Theresa will discuss in detail of our fourth quarter and full year financial and operating results and forecast for year 2014. We will be happy to take your questions after that.

We concluded 2013 with a strong fourth quarter. We achieved transaction value of RMB 11.4 billion, 81% increase year-over-year. Net revenue reached US$45.4 million, 81.1% increase compared to last year.

Non-GAAP net income was US$14.6 million, increased 92.6% year-over-year. For the year, we distributed RMB 44.5 billion or US$7.2 billion worth of products, a 77.1% growth from year 2012 to 6,445 active clients. The number of total registered clients reached 53,501 by the end of year 2013.

As of the end of year 2013, net revenue was US$163.8 million, 88.9% growth compared to the previous year. And non-GAAP net income was US$56.7 million, increased 111.3% and exceeds our full year forecast.

In 2013, we had maintained a favorable growth and we see the positive momentum has continued. The strong performance was driven by effective corporate strategy and an improvement in overall operational capability. We made great progress in developing our wealth management business, asset management business and further enhanced our financial platforms with basic financial products, offshore asset allocation products, micro-lending and the insurance products.

We built solid foundation to provide more comprehensive service to high net worth clients. At the operational level, we reinforced our IT and HR system, strengthened our regional management, which lays out the foundation for future growth of business scale. I would like to emphasize that productivity of our relationship managers has increased substantially and the turnover rate of our top relationship managers was close to zero in year 2013.

In addition, the brand recognition of Noah and Gopher, our asset management business has been greatly improved. Traditionally, fourth quarter tends to be weaker due to seasonality. Especially this year, we faced high liquidity situation on the market and great demand of internet financing products such as [indiscernible].

But we still maintain good growth moment, which reflected in the improvement of our management capability and operational efficiencies.

Next, I would like to discuss in detail on developments of our Gopher Asset Management. We have been focusing on improving our professionalism in asset management business. As of the end of 2013, Gopher’s AUM reached RMB 31 billion, approximately US$5 billion, which grew 400% from year 2012. Gopher was gradually developed into a comprehensive asset management company, providing the investment opportunities in all different types of asset and products.

Product tool covers fund of PE funds, fund of hedge funds, fund of real estate funds, global asset allocation and family office business. Clearly, we manage the largest fund of PE funds and fund of secondary market products in China. Our financial product database and professional teams are highly appreciated by institutional clients, and we expect to further grow our institutional client base in the year 2014.

For real estate funds, we cooperated deeply with first tier real estate constructors and developers that have strong product sourcing capability as always. Recently, we reviewed real estate equity fund we invested between 2010 and 2012. Return of all the investments exceeds our original expectations.

We believe the professional asset management team is the foundation of the effective risk control expansion of our business scale. Gopher now has more than 100 professionals in its asset management team and we will continue to recruit talent.

Our wealth management and distribution business also has significant growth in 2013. Total transaction value increased more than 70%. All six regions were profitable in the year, and our business scale and profitability improved at the same time. Average productivity of relationship managers increased more than 60% with close to zero turnover rates. At the branch levels, we added more service officers in the same city to penetrate our network coverage with low cost and more room for employees to grow.

For our Hong Kong office, we put in great efforts to speed up its development to satisfy the increasing demand of offshore asset allocation of Chinese high net worth individuals. Our offshore product tool now includes fixed income products, PE products, real estate funds, hedge funds and life insurance products. Fourth quarter revenue of our Hong Kong offices exceeds total of first three quarters and was profitable in year 2013.

At the same time, it attracted more professional staff to join the team as the business is growing. In the third quarter of 2013, we opened up our Taiwan office and have seen great momentum. We’re optimistic about the development and growth of our offshore business in the future.

In 2013, we focused on the demand of our high net worth clients to provide comprehensive financial service, which included mutual fund products, short-term financing, high-end global medical insurance, and received good response from our customers on those products. How to make our existing business and services more effective and efficient through internet will be one of the important areas to develop and invest for us in year 2014.

Internet financing in China had grown rapidly in 2013. We also had some preliminary thinking and strategies of how to take the advantage of internet platforms, leveraging our strong product selection capability to expand our customer base and further serve the mass affluent. We’re looking forward to sharing more details with you on this in this year.

On the other hand, we continue to strengthen our relationship with high net worth customers. In the fourth quarter, we cooperated with Wharton Business School to provide customized program on family wealth heritage and asset allocation to 40 of our clients and their families. This unique service enhanced our market competitiveness and gave necessary education to our customer of family office business. We expect to make meaningful progress in family office business in year 2014.

I would like to especially point out the great effort we put into business operation and management. Our operational team has spent great amount of time, money and resource to complete very meaningful review and reinforcement of our IT and HR systems. As a result, management structure and operational efficiency improved substantially, with now scalable platforms with high tech capabilities which laid out solid foundations for developments going forward.

Through the strategic adjustment in 2012 and after the significant growth in 2013, Noah has grown to become a wealth management company with asset management capability from simply a distributor of financial product. We provide global investment opportunities and asset allocation service to high net worth individual clients here and outside China. At the same time, we will be interested in asset light [ph] more comprehensive end-to-end financial service.

Finally, I would like to talk about the overall financial industry environment and recent regulatory changes. Financial industry in China is in the process of interest rate stabilization, which puts pressure on and also creates motivation for us. From one point of view, return on risk free products is very high. Guarantee payment on financial products causes difficulty in customer education about risk.

Institutions that have strict risk control systems like Noah have to face massive competition. This situation also motivates us as we believe unsustainable things will disappear sooner or later, will continue to constantly communicate with our investors, and believe risk control is of core capability of a financial service companies. When the return of risk free products adjusts to normal level, investors will pay more attention to balancing out risk and returns, and appreciate more of our valuable service.

In 2013, our new Chief Risk Officer joined Noah. He was used to be the Chief Risk Officer of Ping An Bank and Bank of China Hong Kong with more than 25 years’ experience in financial risk management. With him joining the team, our risk management structure, standard and process, all have been improved.

We believe as the market is more regulated, our strong product selection and asset management capability, ability to secure quality underlined asset, take risk control and customer education on financial product risk will help us gain more recognitions from the customers and from the regulators.

With that, I will ask Theresa to share with you our financial and operating metrics of year 2013 and our forecast for year 2014. Thank you.

Theresa Teng

Thank you, madam Wang, and good day to everyone. In the midst of high liquidity in the market and traditional seasonality in fourth quarter as our CEO just mentioned, we do have a very pleasant and robust fourth quarter to close out 2013.

Year-over-year net revenue growth was over 81.8% and reached to a record high of US$45.4 million. Net income was US$13.4 million. Year-over-year growth was over 111%, which was one of the fastest growth rates for the company we had in the recent years. For the whole year, net revenue was US$163.8 million, 88.9% increase compared to year 2012.

Also we were able to surpass our revised full year guidance with non-GAAP net income achieved US$56.7 million, 111.3% increase from the year of 2012. The ongoing significant progress we have made in our asset management business and our further improved productivity, operating efficiency were the main drivers for the growth.

Total net revenue for the quarter reaches US$45.4 million. This is the highest quarterly revenue the company has achieved. Revenue growth was driven by strong distribution volumes with overall transaction value, which is US$1.9 billion, 81% growth on a year-over-year basis and increasing recurring revenue.

Fixed income product represents 83.5% of overall transaction values, about the same level as last year’s same period, reflecting a continued client interest and the risk aversion. We were also able to diversify our fixed income product beyond traditional structures.

As our CEO mentioned, the ongoing financials reforms and liberalization allowed more selling platforms. As a result, the third-party trust product is diminishing for us to very limited levels. For the fourth quarter of 2013, third-party trust product distribution accounted about 13% of our total transaction value. Effective commission rate for this quarter was 1.05%, slightly higher than that of third quarter due to change of product mix.

I would like to again clarify our increasing related party revenue, which represented 44.4 of our quarter revenues this quarter compared to 42.8 in the corresponding period of 2012. This increase is primarily due to our increase in product purchase by clients that are managed by our own asset management arm, which is Gopher. As we mentioned earlier, our asset management has been growing significantly. We currently manage about US$5.1 billion, up from US$3.6 billion of the previous quarter.

Recurring revenue was 56% of fourth quarter revenue, further increase from the previous quarter of 52%, well representing the overall changing of our business model. The recurring revenue was generated by our asset management business, as well as PE products we distributed overtime.

We continue to believe our recurring revenue enhances revenue visibility as well as the ability of our business. We again set a record in total active clients this quarter to 2,927 increased 78.9% from 1,636 a year ago. Total active clients for the year 2013 was 6,445, increased 55.2% from 4,152 in 2012.

Average transaction value for active clients for the fourth quarter was RMB 3.9 million, compared to RMB 3.8 million in the corresponding period last year. Full year average transaction value per client for active client was RMB 6.9 million, compared to RMB 6.1 million in 2012.

Profitability improved on a year-over-year basis, reflecting economies to scale [ph] as revenues surged. Operating margin improved to almost 29.2%, up from 27% a year ago. While net margin reached 30.7% compared to 25.6% a year ago. We will continue to focus on delivering profitable growth in 2014. Our balance sheet remains very solid and liquid. The combined amount of cash, short-term and long-term investment was about US$238 million or about US$32.5 million higher that of last quarter.

Our business continue to generate positive operating cash flow of US$43.9 million this quarter, mainly due to net profit performance and good efforts in accounts receivable collection. Account receivable turnover day was 53 days in the fourth quarter, compared to 67 days in third quarter.

Account receivable turnover days was 36 days for the year 2013 compared to 48 days for the year 2012. Shorten of AR turnover days reflects our improvement in operating efficiency while business scale is growing.

Also as our CEO just mentioned in her remarks, we will continue to expand our business in several areas such as insurance, high-end education, offshore asset management and internet finance to build an even more comprehensive financial platform, which will increase customer stickiness and our future business. Taking in consideration of this new project, our Board of Directors has approved not to issue any cash dividend for the year 2013, and reallocate company resources toward more essential functions which will drive further business growth and enhance shareholder value in the long run.

Lastly, I would like to comment on our guidance range for 2014. We will again provide an annual guidance in the form of non-GAAP net income for the year. Our 2014 non-GAAP net income guidance will be US$72 million to US$76 million. The midpoint of the range represents growth of about 30% on a year-over-year basis. The growth rate reflects strong fundamental in our business, and even though the firm will further expand in 2014, we can still provide stable profitability.

With that, madam Wang and I will be happy to take questions that you may have.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions) At this time, we will pause momentarily to assemble our roster. The first question will come from Michael Li of Bank of America Merrill Lynch. Please go ahead.

Michael Li – Bank of America Merrill Lynch

[Foreign Language – Chinese]

Jing Ou-Yang

We will translate the question one-by-one first, and then we will translate the answer. The first question was regarding about internet financing, and Michael mentioned that the current customer base for internet financing is quite different from what Noah has traditionally. Noah is more focusing on high net worth individuals, while the internet financing serve the mass affluent at this moment. Michael is asking, if Noah has any potential plans on the internet financing product, and how we will differentiate ourselves with the current product in the market?

Jingbo Wang

[Foreign Language – Chinese] Michael, you are right. I think the internet financing is more focusing on sort of the low-income or mass influent population, but at the same time we paid attention that internet financing provides very good quality of customer experience. So that’s something that we should learn from that. And actually recently we provided an institutional product called Jigoba [ph] which is quite competitive with [indiscernible] at the same time.

As to the internet, we are thinking about how we can well connect our current existing business model with internet financing. For example, with internet financing we should be able to cover customers in the areas that we do not have a branch office or service office at.

I think the products we’re providing right now, such as the global high-end medical insurance can also serve the mass affluent. So with the internet financing, we will lower our operating costs to expand the business with products such as insurance.

Regarding one of the second questions, right now we have worked less with trust companies, but worked more with the security companies and mutual fund companies and subsidiaries, and if we have any potential risk on the COHIMA [ph] product – actually I am very proud with our strict risk control system. And to answer your question, we do not have any product that relates to COHIMA [ph] at this time.

At the current stage, we paid more attention to ABS product, such as credit card payment ABS and secondary market products, and we have still great demand on those products from the market.

And you’ll also note that we have great advantage in issuing PE products. And with the CSRC [ph] opened the limitation of IPO market in China, I think Noah and our customers will be great benefit from that.

A few of the PE funds that we issued before, actually have some project on the IPO market in China with one or two companies listed in the A shares. We already received almost all of our principal back.

Most of the PE fund that we invested is focusing on TMT or emerging industry and we’re very glad that none of them are related to local government financial vehicles or traditional manufacturing industries. Thank you.

Michael Li – Bank of America Merrill Lynch

[Foreign Language – Chinese].

Operator

The next question will come from Eric Swergold of Firestorm Capital. Please go ahead.

Eric Swergold – Firestorm Capital

Hi, good morning over there, and good evening here. Congratulations on a very solid quarter and good growth in a challenging environment, and congratulations on diversifying your product offering over the last year. Can you give us some figures on what percentage of your product outstanding at this point is unrated or non-investment grade of construction, real estate etcetera? And who in China is providing ratings at this point on the products that you offer? Thank you.

Theresa Teng

Hi Eric, this is Theresa. And I think to further diversify our products and actually that underlying equity applies to different areas. This is especially when our CEO just mentioned one of niches is PE fund. If it’s a PE fund, the industries that investor will be further diversified. But if we pick a real estate itself specifically, I can provide you a percentage. And the majority of the real estate fund we invested is fixed income, but that is under a very strict long to collateral levels, and it’s comparably a savor to the clients.

The equity-related real estate part, actually it’s very limited to only 7.6% of our total product. And that I think is more related to the risk of the real estate. And then the other information I would like to provide to you that the majority of our clients are very sophisticated. And this part is actually what they are interested in more.

Jingbo Wang

[Foreign Language – Chinese]

Jing Ou-Yang

There are few more that madam Wang would like to make. First of all, we have a very strong real estate asset management team with working experience, both in China and outside China. Also at this moment, we believe China’s urbanization programs will continue and the real estate industry has entered into a consolidation and the centralization period.

Last year we had a joint venture with Tianjin [ph] to further support their development in the future. And when we look back year 2010, as I mentioned in my remarks, was also – year 2010 was a tough year for real estate, but the investment that we have made right now when we look back all the returns had exceeded the original expectations.

We do not think there will be any huge systematic risk for the real estate industry in China, but if there were, then we’ll be more interested in the distressed asset investment. We see a great potential or investment opportunity in that area.

Eric Swergold – Firestorm Capital

Thank you. And the final part of my question was again on the – are there any credit rating agencies in China that are currently rating or providing ratings on any of the products that you offer to customers?

Jing Ou-Yang

Yes, there are. There are such agency or rating companies.

Eric Swergold – Firestorm Capital

Are the ratings in your products available online, or is there somewhere where it’s easy for investors in your company to find these?

Jingbo Wang

[Foreign Language – Chinese] So in China if we’re selling real estate product to individual customers, we do not have to rate the product. If we sell the real estate product to institutional clients, then we have to rate the product. If you’re referencing the counterparty that was looking with, most of them are either listed on the A-Share market or Hong Kong listed companies, but at this moment we do not have exact ratings for our real estate products.

Eric Swergold – Firestorm Capital

Okay. So who pays for the ratings in China? Is it similar to the U.S. where the issuers pay for the ratings?

Theresa Teng

Hi Eric, this is Theresa. And I think that the prevailing market practice is as our CEO just mentioned, it’s for individual and then they don’t normally require it. Institution they will. And normally they were paid by the portfolio manager of the fund. So it’s pretty much independent.

Eric Swergold – Firestorm Capital

Okay. Thank you very much. I’ve taken more than enough of your time. Thank you.

Jing Ou-Yang

Thank you.

Operator

The next question will come from Chen Gu of Artisan Partners. Please go ahead.

Chen Gu – Artisan Partners

[Foreign Language – Chinese]

Jing Ou-Yang

Okay, the first question is with the [indiscernible] of assets and decreasing of the real estate product selling price. Will the customers or investor paying more attention to the risk and then decrease their demand in purchasing financial products?

Jingbo Wang

[Foreign Language – Chinese] We understand peoples concern regarding about slowdown of Chinese economy, but through our constant communication with our customers, we have not seen any of concerns on purchasing financial products.

Regarding about the money flow out of China, we see that is a sign of decreasing of asset allocation or asset management needs overseas for Chinese people. And as I mentioned in my remarks, with our Hong Kong office and Taiwan office, we’re well prepared and we see that demand increasing in that very clearly.

In regard about the decreasing in housing price, we think that is kind of a special case or single case in some of the cities only, and we believe that was caused by the demand of supply change in some of particular areas. And we have been familiar from the past perspectives [ph]. We have been paying attention to invest more of our products in the first and second tier cities and only focusing on great demand.

Regarding about the customer paying more attention on the risk of the product, we actually would appreciate that there is no guarantee payment on the risk free and high return products. Right now it’s a little hard for us to selling or push out a product, such as PE or VC or secondary market products, with risk free products with such a high return.

Jing Ou-Yang

So the second question from Gu was regarding about that we decided not to issue cash dividend in year 2013, while we have about US$200 million cash on hand. Madam Wang mentioned that, Noah has been continued to invest in business actions or to develop IT systems, which can provide long-term value for the company. So we will do that continually in year 2014.

Theresa Teng

Yes, also add on more points about the risk aversion in the market and also at our strategy. As our CEO just mentioned that, we’ve been always educating and inform our clients that the risk concept is very important. Take the last quarter for example, if the risk free interest does keep surging, I think that will be a threat to us, because it’s hard for us to explain to our clients that there is really risk, but it would be kind of comforting to see that the market works efficient to the recent risk free rated swapping. And I think we fairly do – I would be very delighted to see that our clients, the overall market have more risk aversion, the right concept for us for their investment.

Chen Gu – Artisan Partners

Thank you.

Operator

The next question will come from Liu Yong [ph] of CBN. Please go ahead.

Liu Yong [ph] – CBN

[Foreign Language – Chinese]

Jing Ou-Yang

Yes. The question is the recent newly launched institutional product which we [indiscernible] what is that product invested in?

Jingbo Wang

[Foreign Language – Chinese] It is actually a T+1 product, exclusively for institutional clients. This product was cooperated with one of the largest insurance company and is a money market fund product.

Liu Yong [ph] – CBN

[Foreign Language – Chinese]

Jing Ou-Yang

The question is how we interpreted the limitation of starting commercial loan from the bank towards the real estate developers?

Jingbo Wang

[Foreign Language – Chinese] Yes, the bank actually announced that they will stop doing financing for real estate developers. That bank is not really focusing on real estate financing, and most of their business is financing the on and off balance sheet financial needs for banks. So banks advantage is not really in the equity investments in real estate, which that we believe is our advantage.

And with bank limitation on the real estate loan and financing, it would give more room for us to cooperate with good real estate developer in the market.

Operator

The next question will come from Chao Zhang of China Orient Asset Management. Please go ahead.

Chao Zhang – China Orient Asset Management

[Foreign Language – Chinese]

Jing Ou-Yang

The first question is, what will be the focusing of asset management allocation in your 2014 and what will be the asset that might create risk in year 2014?

Theresa Teng

I’ll start with your question about 2013 performance. I think in our 2013, the whole year performance, the one-off – I don’t know what’s the definition for your one-off elements, actually that’s very limited. I think what you want to ask is that whether or not the same goodies will happen in 2014. As mentioned in my remarks, and I believe the good performance is mainly contributed by our overall profitability and our overall operating efficiency. And I think that will continue in 2014.

Now I’ll leave the strategy to our CEO for 2014 strategy.

Jingbo Wang

[Foreign Language – Chinese] Two of the main focus for asset allocation in 2014 will be the secondary market and the Asia open market, we see a great demand. And with regulation change of IPO in the Chinese market, we believe we’re very optimistic about the Asia in 2014.

And the other focus will be PE product with three to seven years duration. Right now most of investment of PE products will be focusing in medical service, TMT and education. Some of the PE products that customer has to pay even higher interest to get the secondary reinvest opportunities.

For real estate products, we will continue to cooperate with the first tier real estate developers and focusing our rigid demands as we mentioned, and we’ll also pay more attention to industrial real estate projects this year.

Jingbo Wang

[Foreign Language – Chinese] Also at the same time, we’ll pay more attention to the culture and the entertainment industry. The PE fund that we invested with Bona Film actually had very good results.

Operator

And that will conclude our question-and-answer session. I would like to turn the conference back over to Jing Ou-Yang, Investor Relations of Noah for any closing remarks.

Jing Ou-Yang

Thank you everyone for joining the call today. We’re looking forward to updating you in our first quarter 2014 results. Thank you.

Theresa Teng

Thank you.

Operator

The conference has now concluded. We thank you for attending today’s presentation. You may now disconnect.

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