The Paper Tiger And Noah Holdings Limited

| About: Noah Holdings (NOAH)
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Summary

Chinese economy will bring down any company associated with it.

Noah Holdings Limited exposure to real estate is a major risk.

Company is still growing, but growth is slowing down.

Short interest is increasing.

Readers of Seeking Alpha are probably well aware that there are significant problems in China. The country and its economy are gripping headlines worldwide. I have written in the recent past that there is a lot of exaggeration when it comes to China's weakness, and I firmly stand by that opinion. GDP is relatively stagnant, but that's still impressive, and production statistics are still holding firmly, however, that being said; there is still a lot that is going wrong with China.

People are calling China a ticking time bomb, but I would compare the situation more to a burning structure. The fire has already started and it's slowly eating away at the Chinese economy. There have been numerous stock market crashes globally, but more specifically in Shanghai.

^SS180 Chart

^SS180 data by YCharts

As illustrated by the chart we can see a couple major crashes just this past year that caused the SS180 to lose 45% of its value from all time highs. Why? Well, there are dozens of reasons and you could probably write an entire book on the matter. Basically toward the end of 2014 investors were borrowing way too much money and heavily inflated the market, essentially causing a bubble. When the time came for margin calls, they couldn't cover their investments. That's just one reason, the other reasons that are making more headlines include the "Currency War" and China's dishonest accounting methods.

I will elaborate a little more on those other reasons, but first I want to introduce Noah Holdings Limited (NYSE: NOAH). Noah Holdings Limited is a wealth management service provider with a focus on wealth management and asset allocation services for high end clients in China. The company operates in three segments that include: wealth management, asset management, and internet finances. Now why have I chosen to write about Noah Holdings? They are one of the largest Chinese finance companies listed on an American market. I also believe this company still has a ways to fall in value and I haven't seen any bear opinions on the firm. The following will be my analysis on why this company is a short.

The Renminbi

In the company's financial statements Noah Holdings Limited makes it clear they operate all three business segments in both USD and the renminbi. It is unclear how much exposure they have to the renminbi, but it is clear they operate with the currency and invest with it, and have holdings in it. Since the company operates in China I'm going to assume their exposure to the renminbi is high rather than low.

Why is that a concern? Currently China is engaged in what some are calling a "Currency War". Many people believe the renminbi is overvalued and the markets are making it lose value, however, the Chinese government has a different opinion on the matter and they are doing all they can to elevate the currency to its all time highs.

US Dollar to Chinese Yuan Exchange Rate Chart

US Dollar to Chinese Yuan Exchange Rate data by YCharts

In 2014 the renminbi hit its all time highs, but that didn't last long, and the currency is currently experiencing a fall to grace. Just recently the Chinese government tried to manage the currency depreciation (they spent just under half a trillion dollars from their reserves to keep the currency from crashing). Many analysts believe China can't keep playing this game forever, and the markets will have their way with the renminbi.

There is a lack of faith among the global community in the renminbi and this can be seen in the widening gap between the offshore and onshore reserves of the renminbi. The gap between the two is only widening too. Before August 2015 there was virtually no difference between the offshore and onshore renminbi rate and now it's just under 2% - which is a significant difference.

The safe bet would be that China can't keep trying to control its currency, and that the renminbi will keep falling and losing value. What does this mean for Noah Limited? They are pretty much losing value in their investments as the renminbi falls, and I believe there is much more for the renminbi to depreciate.

Real Estate

Another thing that Noah Holdings Limited is exposed to that I'm skeptical about is real estate, and in particular Chinese real estate. Again, it is unclear just how much they are exposed to Chinese real estate, but I'm going to assume it's high rather than low again. For the longest time China never had property taxes, and it was a great investment opportunity for the Chinese; even now corporations get immense benefits.

Noah Holdings currently has 46.7% of its assets business tied to real estate, and the numbers could actually be higher. It's unclear what the exposure of the other 53.3% is because they are assets invested in funds of funds, which is essentially mutual funds investing into mutual funds for diversity, but still even then there must be some exposure to real estate. So the real estate exposure could likely be over 50% of assets. Asset management is also their fastest growing business segment besides their internet sector, but I'm excluding that in comparison to the other two segments because it's still unprofitable and gets dwarfed by the other two businesses. What this means is that the company is becoming more reliable on their asset management sector which I don't think will bode well for the near future.

China could very well be in a housing bubble so investing in Chinese real estate is risky. The Economist China house-price index has fallen 6% since its all time highs (the only major economy country whose index is falling). In addition one of the metrics suggests that Chinese real estate is at unsustainable levels. The prices to rents metric which is an important statistic to investors shows that Chinese real estate is 20% overvalued. Depending on the level of real estate exposure Noah Holdings has, real estate could be and likely is a bad investment for the company.

Company Growth

One of the major aspects of the company that was lauded was its growth. Indeed, the company has had an impressive start to things and has reported immense growth; but it's unclear how much of its success has been "fluffed" by the Chinese government. I won't go too much into the Chinese government's micromanagement over its country's companies. In a sense it is just speculation, but it's likely China distorts its actual growth, and fluffs its accounting to make it seem more impressive to investors; and this trickles down to the companies the government micromanages.

It is known that Noah Holdings receives government subsidies - why would a company that reports impressive earnings receive free money from the Chinese government? It makes little sense, but they are trying to make the financial statements look more impressive. Just in the 3rd quarter of 2015 Noah Holdings received $13.8 million dollars, and they get these grants every single quarter which without a doubt inflates and distorts their actual income statements. The company reported $26 million dollars in income for the same quarter and that raises the question of if they are including the subsidies in their income statements through clever accounting methods.

NOAH Operating Margin (<a href=

NOAH Operating Margin (TTM) data by YCharts

Even if we ignore the subsidies and questionable accounting, the growth is slowing down. Annual revenue growth has fallen from highs of 50% to 30%; which is eventually expected, but this is signaling that the company may soon or has already reached their peak. And as the graph shows operating margins are also decreasing.

It is evident the company is slowing down. The company is reporting that they expect to announce a 15.9% income increase from the previous year for the year 2015, however, this is with the non-GAAP method. The actual net income will likely be several percentages lower than the 15.9% figure which can be more easily altered to make results look more impressive.

Short Interest

Short interest has been rapidly rising for Noah Holdings. In the past 6 months short interest has nearly doubled from 2,635,462 shares float to 5,396,809. The current float rate is 29%, and this is high. Investors are coming around the realize that Noah Holdings may not be a good investment, and are making short positions.

Hedgefunds are also following suit. Noah Holdings used to be in 10 major hedgefund's portfolios and now the rate has dropped to being a part of only 3 hedgefunds. If these aren't sell signals for you, I don't know what would be.

NOAH Chart

NOAH data by YCharts

Even simply looking at the simple moving averages gives an investor the idea that there is a sell off and it may very well continue. The share price crossed over the 20 day simple moving average last month and this could be a good indicator that the company has joined a bear market (with the rest of the markets).

Conclusion

Earnings are coming up for Noah Holdings next month, and I don't expect the results to wow investors. Many companies are reporting their historically worst 4th quarter results and Noah Holdings will likely be joining them, especially considering their exposure to the Chinese meltdown.

It is easy to say where this company is heading short term, likely south with the rest of the markets, but even considering that, I'm skeptical about this company long term as well for the reasons I have written about.

Exposure to the renminbi and Chinese real estate is a big red flag, growth is slowing down, and short interest is rising. That's not even mentioning the questionable affiliation with the Chinese government the company has. Simply there are better and more reliable companies to invest in out there.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.