Noah Holdings: Look Beyond Short-Term Headwinds
- NOAH is facing short-term headwinds, and this is reflected in the company's weak Q3 results and poor full-year guidance.
- Investors should look beyond near-term challenges for the company; they should focus on the growth in Noah Holdings' active clients and Black Card clients in the recent quarter instead.
- NOAH remains a Buy-rated stock, with its current P/E multiple at a substantial discount to historical average.
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I rate Noah Holdings Limited's (NYSE:NOAH) [6686:HK] stock as a Buy.
I wrote about NOAH's "new dividend policy and reduced delisting risks" with my previous September 13, 2022 article. The focus of my current write-up for Noah Holdings is the company's most recently announced Q3 2022 earnings.
Both NOAH's third quarter performance and FY 2022 guidance were disappointing, but the negatives are already priced into the stock's mid-single digit forward P/E metric. Noah Holdings' active client and ultra high net worth client metrics suggest that the company will very likely see a recovery in its top line and bottom line when market conditions improve. Therefore, I retain my Buy rating for Noah Holdings.
Post-Results Announcement Share Price Performance
Before I analyze Noah Holdings' Q3 2022 financial performance, it is worth spending time looking at NOAH's post-earnings release stock price performance.
NOAH announced the company's financial results for the third quarter of this year on November 21, 2022 after the market closed. Noah Holdings' shares initially dropped by -17% from $14.96 as of November 21, 2022 to close at $12.41 at the end of the November 22 trading day. But NOAH's stock subsequently rebounded strongly by +12% to trade at $13.85 at the close of the November 23 trading day. In other words, Noah Holdings' share price declined by -7% in the two days following its Q3 earnings announcement.
The fact that NOAH's shares went on a rollercoaster ride after reporting Q3 results is reflective of how the market views the stock. On one hand, investors are concerned about Noah Holdings' weak financial performance in the short term. On the other hand, investors appreciate the fact that Noah Holdings' share price has priced in most of the negatives, and they have a favorable view of the company's intermediate-to-long-term outlook. In the subsequent sections of the current article, I go into detail about these various factors that have influenced NOAH's stock price.
Q3 2022 Performance Was Poor
Noah Holdings' top line and net profit attributable to shareholders decreased by -25% YoY and -48% YoY to RMB684.5 million and RMB182.4 million, respectively in the third quarter of 2022.
In the recent quarter, NOAH's revenue was negatively impacted by two key factors. Firstly, China's COVID-zero policy and related pandemic measures (e.g. lockdowns) made it challenging for the company to engage in marketing activities. Secondly, investors lowered their risk appetites as markets became more volatile. Notably, the company's total transaction value for its products declined by -25% YoY from RMB24.1 billion in the third quarter of 2021 to RMB18.0 billion in the recent quarter, in tandem with its revenue contraction.
The company's bottom line fell to a larger extent than its top line in the recent quarter due to both negative operating leverage (revenue decline on a large fixed cost base) and an unfavorable revenue mix. Mutual fund products were the sole product category for Noah Holdings that saw positive YoY transaction value growth (+30.3%) in Q3 2022. As mutual fund products carried relatively lower fees and margins as compared with private equity products and private secondary products, the increase in the proportion of revenue contributed by mutual fund products hurt NOAH's overall profitability in the third quarter.
Disappointing Fiscal 2022 Guidance
To make things worse (on top on Q3 revenue and earnings contraction), Noah Holdings' updated FY 2022 guidance was also disappointing.
NOAH lowered the mid-point of its FY 2022 non-GAAP adjusted net income guidance by -28% from RMB1.50 billion earlier to RMB1.05 billion now. This means that the company expects its bottom line to fall by -23% as compared to its FY 2021 non-GAAP net profit of RMB1,373 million.
Another thing that might be an issue for investors is that Noah Holdings might not provide full-year financial guidance in the future. NOAH noted in its Q3 2022 earnings press release that the company "will no longer publish its annual forecast" following the "conversion to a dual-primary listing in Hong Kong" which is expected to be concluded before year-end. This will make it more difficult for investors and analysts to forecast Noah Holdings' future revenue and earnings.
Two Key Metrics Suggest That NOAH's Long-Term Prospects Are Healthy
However, it is inevitable that the short-term headwinds for Noah Holdings will eventually ease. There are already signs that China is willingly to pivot away from its COVID-zero policy; while a moderation in inflationary pressures might pave the way for a Fed pivot in due course.
In fact, two key metrics disclosed as part of Noah Holdings' Q3 2022 financial results suggest that the company is well-positioned for long-term growth.
The first key metric is active client growth.
NOAH's number of active clients surged by +76% QoQ to 22,641 in the third quarter of 2022. In its third quarter results media release, Noah Holdings defined active clients as "registered high net worth investors who purchase investment products distributed or receive services provided by us during that given period."
The second key metric is the number of ultra high net worth clients.
Noah Holdings' ultra high net worth clients, which the company refers to as "Black Card clients", rose by +39% YoY to 2,129 in the most recent quarter. NOAH has been improving its execution of plans to attract more ultra high net worth clients. At its Q3 2022 earnings call, Noah Holdings noted that "the group (NOAH's employees) that's running this project (to draw in new Black card clients) has obviously gained more experience."
In conclusion, an increasing number of Noah Holdings' registered customers have become "active", and the company is making good headway in enlarging its base of ultra high net worth clients. When financial market conditions improve and China reopens (making marketing activities easier), NOAH is in a good position to do well again.
I continue to rate Noah Holdings' shares as a Buy. The market currently values NOAH at a consensus forward next twelve months' normalized P/E multiple of 5.8 times based on S&P Capital IQ's valuation data. As a comparison, Noah Holdings' 10-year mean and peak forward P/E multiples were much higher at 13.3 times and 24.9 times, respectively. I think that NOAH stock is a Buy, as its current valuations have already factored in the short-term headwinds for the company to a large extent.
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