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Henry Cheung
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A Chinese value-investor who aims to provide research articles with critical views. A qualified CPA and FRM, as well as a CFA Level 3 candidate. Besides a value investing philosophy, I occasionally make opportunistic trades when I identify market inefficiencies. I am currently focused on... More
  • A Bargain Price For A Chinese Wealth Management Company With Strong Growth 7 comments
    Aug 28, 2013 10:10 AM | about stocks: NOAH, EVR, AMP, GHL

    Disclosure: I am long NOAH. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Brief introduction of Noah Holdings Ltd

    Noah Holdings Ltd ("the Company") is a leading wealth management service provider focusing on distributing wealth management products to the high net worth population in China.

    As of June 30, 2013, the Company had 525 relationship managers in 56 branch offices to serve three types of clients:

    (i) high net worth individuals,

    (ii) enterprises affiliated with high net worth individuals, and

    (iii) wholesale clients, primarily local commercial banks or branches of national commercial banks that distribute wealth management products to their own clients.

    The number of its registered clients accounted for 45,839 as of June 30, 2013.

    The OTC wealth management products distributed by the Company primarily include fixed income products, private equity funds, private securities investment funds, investment-linked insurance products and mutual fund products. The Company also raises and manages proprietary and innovative wealth management products, including fund of funds products and real estate funds products.

    Financial and Operational highlights

    Results of 2008-2012

    For the last five years, the Company has consistently recorded strong results despite the financial crisis, the European debt crisis and the slower economic growth in China. During the period, the Company experienced an average compounded yearly growth of 52.3% in net revenue, or, in other words, 8 times the 2008 net revenue. The net income attributable to the shareholders of the Company had a huge turnaround from a loss of US$0.40 million in 2008 to a gain of US$22.83 million in 2012. The following chart would give you a clearer insight of the trend.

    (click to enlarge)

    Results of 2Q of 2013 and 2013 guidance (US$50 million - US$55 million)

    Due to the enhancement of the wealth management product development, the Company continues to drive significant growth in transaction value and assets under management. The Company's strong results in the second quarter of 2013 beats the market expectations impressively. Here comes with some key measures.





    Increment YoY %

    Net revenues

    US$44.3 million


    Active clients



    Aggregate value of wealth management products distributed

    US$2.0 billion


    Operating margin

    from 37.7% to 41.6%


    Net income attributable to the Company's shareholders

    US$14.4 million


    Cash flow generated from operating activities

    US$28.9 million


    In addition, the Company lifted its net income guidance for 2013 in early August, which estimates that non-GAAP net income attributable to shareholders for the full year 2013 is expected to be in a range of US$50.0 million and US$55.0 million, representing a year-over-year increase in the range of 86.4% and 105.0%.


    In this section, I am not going to give an exact figure/target price on the stock. Instead, I will show why the price is a bargain from the valuation perspective.

    (1)Comparable method

    Noah Holdings and its comparables (Data as of August 27, 2013)




    Price/Earning ratio (ttm)

    Price/Book ratio

    Net income growth YoY in the most recent period


    Noah Holdings





    Evercore Partners (NYSE:EVR)





    Gluskin Sheff & Associates (TSE:GS.TO)





    Ameriprise (NYSE:AMP)





    Greenhill & Co. (NYSE:GHL)





    Although the comparables are not exact matches, this can show the valuation of the Company is apparently below the industry average. If the net income for 2013 is going to be above US$50 million as the management expected, the PE ratio will drop further below 14. Is a company with both its revenue and profits rocketing valued at a PE of 14 reasonable? I sincerely doubt it.

    (2)DCF model

    For the DCF model, I will use some conservative figures to try deriving a rough estimate for the value of Company's equity. Say for example, the growth rate I adopt in the model is made reference to the industry average and nearly neglect the past growth record of the Company.

    Estimated FCFE for 2013

    US$50 million

    Cost of equity


    Annual growth rate

    2014 to 2016: 20%
    2017 to 2018: 15%
    2019 onwards: 5%

    Equity value

    US$923.5 million

    Net cash

    US$165.3 million

    Estimated market capitalisation

    US$1,088.8 million

    Current market capitalisation

    US$698.5 million

    Upward potential


    Other reasons to invest in the Company

    (1) A very healthy liquidity with cash amounted to US$165.3 million

    The Company has no bank borrowings. The liabilities on the balance sheet mainly represented the current payables incurred from operations and accrued staff expenses. The current ratio of the Company as of June 30, 2013 amounted to 5.2, which is a very high metrics among the industry peers.

    As of June 30, 2013, the Company had US$165.3 million in cash and cash equivalents, an increase of US$44.5 million from US$120.8 million as of March 31, 2013. So what will be the cash proceeds to be spent on? On May 22, 2013, the Company's Board of Directors authorized a new share repurchase program of up to US$30 million worth of its issued and outstanding ADSs over the course of one year. In 2012, the Company used US$7.9 million to pay an annual dividend and US$8.5 million to repurchase ADSs. I expect that the Company will keep or even increase the size of share repurchases/dividends in the coming quarters of 2013 and 2014.

    (2) A good entry point from the technical perspective

    Since its IPO in 2010, the Company has experienced five times of decline over 33% in its stock price. Such volatility, in my perspective, is mainly attributable to the low amount of outstanding shares in the market. The ADS issued in the IPO were 8.4 million shares, only representing about 20% of the total number of issued shares. On such basis, the share price of the Company will be easily greatly affected by the market sentiment.

    The share price rose from around US$12.5 to a record high of US$18.65 after the lift of management guidance on 2013 results in August. Since the issuance of 2Q results on August 22, 2013, the stock has changed the momentum and has dropped 32% to the current price of US$12.73. This means the boosted management guidance is neglected by the market. The share is priced at the same level for a further 49 percent growth (from US$37 million to US$55 million)? No way. This suggests an oversold and, like the historical decline, I will expect a rebound soon after the 32% decline.

    (3)Minimal economic influences on the Company

    The Company proved to the investors that it was able to grow at a considerable pace during the past five years, during which global financial crisis and the slowdown of the Chinese economy happened. Nonetheless, there are still market concerns over the impact of the change of market liquidity on the 2nd half of results of the Company. They concerned that the first half results of the Company was just boosted up as recent liquidity stress in inter-bank drove outsized product sales. In my perspective, I am in the opposite stance and do not see softer 2nd half results due to the following reasons:

    (1) The effect of the liquidity stress should be negative instead of positive on the Company. As the market liquidity contracted, the banks and other wealth management increased the interest rate in an attempt to attract capital. This directly increased the competition against the Company's operation.

    (2) It is highly possible that the liquidity level would not volatile as much as it did in the first half, as the priority of the Chinese government is put on the above-7.5% economic growth in the 2nd half of 2013.

    (3) Lastly, I personally believe in the credibility of the Company's management. I think the management would not raise the results forecast in August, during which they should be able to see deteriorating results in the 2nd half, if any.


    I would say this short-term decline of stock price represents a good opportunity to invest in this company. If situation warrants, I will further elaborate on my analysis of the management strategies and future business opportunities in the next article.

    Disclosure: I am long NOAH.

    Stocks: NOAH, EVR, AMP, GHL
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Comments (7)
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  • kanfeng
    , contributor
    Comments (13) | Send Message
    Chilong, thanks for your input. The article was really interesting to read. One thing I noticed on Noah is the lack of corporate communication with international investors. They have helped several domestic partners to raise funds, including Alibaba, Vanke and so on, but investors hardly see any update on Noah's company website.
    28 Aug 2013, 11:35 AM Reply Like
  • kanfeng
    , contributor
    Comments (13) | Send Message
    Company raised its FY net income guidance to $50-55MM, corresponding EPS between $0.89-0.98. If we take the midpoint of 0.94, P/E ratio is atually at 13.8x (assuming current market price of $13)
    28 Aug 2013, 11:41 AM Reply Like
  • Henry Cheung
    , contributor
    Comments (57) | Send Message
    Author’s reply » Thanks kanfeng. I agree with you that there is room for improvement in their investor relations. In fact, this also serves a common problem of Chinese stocks listed in U.S. exchanges...only few exceptions e.g. QIHU


    For the P/E problem, you are right. I just rounded it up and wrote 'below 14'.
    28 Aug 2013, 05:03 PM Reply Like
  • momoyao
    , contributor
    Comment (1) | Send Message
    It's a great wealth management company in China.
    28 Aug 2013, 03:01 PM Reply Like
  • kanfeng
    , contributor
    Comments (13) | Send Message
    I had a quick update with the company
    1. IR is trying to improve their communication transparency in terms of news release in English more promply
    2. Visited several institutional investors & research brokers in HK recently to uplift its visibility among investors. Also planning further trips this year to stabilize shareholder base
    3. Carry forward with share buyback programm (though only bought back a little in current one).
    29 Aug 2013, 08:34 AM Reply Like
  • herder1981
    , contributor
    Comment (1) | Send Message
    This is great. Thank you very much for the deep analysis and sharing.
    29 Aug 2013, 10:14 AM Reply Like
  • Monocle_CC
    , contributor
    Comments (4) | Send Message
    Thanks Henry for your analysis report and I look forward to reading your interpretation of Noah's management strategies and future business opportunities in your next article.
    1 Sep 2013, 11:27 PM Reply Like
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