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Noah Holdings (NYSE:NOAH)
Q3 2018 Earnings Conference Call
Nov. 19, 2018 8:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen. Welcome to Noah Holdings Limited third-quarter 2018 financial results conference call. [Operator instructions] As a reminder, this conference is being recorded. After the close of the U.S.

market on Monday, Noah issued a press release announcing its third quarter 2018 financial results, which is available on the company's IR website at www.ir.noahgroup.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 have been filed with the SEC. Actual results may differ materially from those 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 applicable law. The results announced today are unaudited and subject to adjustments in connection with the completion of company's audit.

Additionally, certain non-GAAP measures will be used in our financial discussion. A reconciliation of GAAP and non-GAAP financial results can be found in the earnings press release posted on the company's website. With that, I would now like to hand the call over to Kenny Lam, Noah's group president.

Kenny Lam -- Investor Relations

Thank you, operator. I want to welcome everyone to our earnings conference call today. In addition to myself, Ms. Wang Jingbo, chairlady and CEO of Noah; and our CFO, Shang, will also be participating in our call.

For today's agenda, I will first briefly summarize Noah's overall performance for the first three quarters of 2018, as well as the development of our core wealth management and asset management businesses. Chairlady Wang will then provide her current views on the overall market, regulatory environment and our product strategies. Our CFO, Shang, will then follow with a detailed discussion of Noah's third quarter financial performance. We will conclude the call with a questions-and-answer session.

As we entered into the second half of 2018, market sentiments remained volatile. Amidst trade disputes, stringent financial regulatory reforms and deleveraging, investment appetite has been substantially reduced. Despite some clear policy signals, including tax cuts and encouragement of private enterprise development and continued open door policies, market confidence is still very fragile. During this transitional period, many Chinese companies are undergoing brutal tests of the market.

This is true also for China's wealth and asset management industries. As a leading firm, Noah continues to focus on providing high-quality services and creating value for our clients, while improving our risk management and other core competencies, maintaining sustainable growth and preparing for challenges we might face. In the first three quarters of 2018, the company's business grew steadily and performed well across the board. In the third quarter, non-GAAP net income attributable to our shareholders was up 41% year on year to RMB 294 million and up 19% year on year to RMB 802 million for the first three quarters of 2018.

The group's net revenues for the first three quarters was RMB 2.5 billion, up 17% year over year. In the wealth management segment, we raised RMB 85 billion in financial products for the first three quarters, while the transaction value for the third quarter was up 19% year over year. We are very pleased to have achieved such financial performance in a challenging environment. In the wealth management business, demand for professional wealth management services in China is still strong.

Recruiting suitable talent and fostering steady development are particularly important during this period. As of the end of the third quarter 2018, our front line covered 83 cities across the country, and the number of relationship managers increased 21% year over year to 1,559. In order to grow with our clients and further enhance our ability to provide comprehensive services to them, Noah continues to host in-depth investor education events in 2018. Since the beginning of this year, we've held hundreds of events, such as Noah company visit, small investment sessions and in-depth one-on-one client meetings.

For ultrahigh net worth clients, we provide more customized services and activities, such as closed sessions with senior management, tailored trust planning services and private events for our Black Card clients. Through detailed analysis of client profiles, our relationship with Black Card clients could truly be driven by comprehensive services rather than pure financial product sales. For existing clients, we're focused heavily on the improvement of our post-investment services. Periodic fund performance reports has been comprehensively systemized and templated and are now more concise and easier for clients to read and retrieve online.

Fund updates and other information can now be communicated with clients via voice through our app for relationship managers, adding an enhanced human touch. We further integrated our client service resources into a new client operation center in 2018. In addition to the existing client service hotline, we added AI-supported customer service assistants and also actively reached out to existing clients to better understand their needs. During the past 5 months, the client operation center has hosted 59 LP conferences for both Gopher and externally managed funds.

We believe that these initiatives will help our relationship managers provide more professional post-investment services to their clients in a planned and organized manner. Furthermore, the research work of the revamped Noah research team has become a lot more systematic and professional. In the first three quarters, our research team has provided 165 training sessions for our frontline professionals covering 42 fund managers in different asset classes. They've also published 422 internal and external research reports and conducted 83 interviews with domestic and international media.

A substantial number of media and online platforms have cited our research results, and the brand reputation and market influence of Noah research have been firmly established. Active users of the Noah research online channel has increased by more than fivefold in the last six months. Our asset management business is also growing healthily in 2018. As of the end of third quarter, Gopher total assets under management reached RMB 164.1 billion, increasing 15% year over year.

Breaking down by asset classes, the AUM of our private equity investments increased by 19% year over year to reach RMB 96.9 billion, accounting for 59% of the total assets under management. The AUM of our credit, real estate, secondary market equity and discretionary management, respectively, accounted for 25%, 10%, 3% and 3% of our total assets under management. With the demand of Chinese high net worth clients becoming more specialized and institutionalized, Gopher continues to enhance its investment capabilities both in breadth and depth. The demand from institutional investors has also been rising along the development of the Chinese asset management industry.

Gopher recently won the bid as the manager of a RMB 1 billion angel fund invested by the government of Xiangjiang New District of Hunan Province. It is an important recognition of our fund management experience. As a leading alternative asset manager in the industry, Gopher has established standardized process for online operations covering the entire process of fundraising investment management redemption. Gopher has comprehensively sorted and integrated its investment management system.

Through a visualized display interface, the system can display a parametric views of our historic investment database, including dozens of our fund of funds, hundreds of our investment funds and thousands of portfolio companies. We are also striving to fully deploy the value of data resources. These initiatives to further integrate resources of capital, technology, operation and back-office support will provide a strong foundation for Gopher's growth. For our overseas business, in 2018, as high net worth clients become more active in global asset allocation, Noah's globalization strategy continues to move forward steadily.

Our offices in Hong Kong, the U.S., Canada, Australia and Singapore are providing more diversified product and service offerings for clients. As of the end of the third quarter, Gopher's overseas assets under management reached RMB 23.7 billion, increasing 20% on a yearly basis. As we continue to expand our global business, we are also attracting overseas investors who are interested in China. At the end of October, the China Australia Family Office Alliance was created.

In this alliance, Noah joins hands with six of Australia's top family offices to open up investment opportunities for family offices in the two countries and brings more cooperation opportunities and experience sharing in wealth management and estate planning. Lastly, I would like to share some of the group's progress in technology and operations. Recently, our intelligent customer service robot have been launched on our official website, WeChat public account and Noah online app. Questions and issues in eight major categories, including the group's introduction, products and services and daily conversations, can all be resolved by AI.

As of the end of September, intelligent robots have answered nearly 6,000 customer questions. Our one-stop Noah account system has been continuously improved. Audio and visual recording of client audit information, contract signing and product status updates have all been launched online, and product information can now be delivered to customers more timely and accurately. We believe that embracing technology will further help Noah's client service capability.

2018 is a year of change. It puts higher demand on our company's operations, management and risk control. But this is not the first time that Noah has faced harsh market conditions. We believe that the short-term market fluctuations caused by external sentiments actually give rise to more opportunities and long-term return.

We will continue to adhere to a strategy of doing our core competency, maintaining compliant and stable management and focusing our own growth in an uncertain market environment. With that, I will now turn the call to Noah's chairlady and CEO, Ms. Wang Jingbo. She will speak in Chinese and her remarks will be followed by English translation.

Jingbo Wang -- Chairlady and Chief Executive Officer

[Foreign language] Thank you, Kenny. In the third quarter of 2018, from a macro perspective, the market sentiment in China reached a new low point. The impact of domestic deleveraging exceeded expectations. The downward pressure on China's economy increased, and Asia index continue to sink.

Moreover, the Sino U.S. trade war was in the stalemate, and the market generally believe that we would need to prepare for the long haul. That being said, from a micro perspective, on the enterprise operations, Noah's senior management team has already completed the adjustments to both business strategy and our own mentality. We believe that macro pressure is a reality of the market that we must face and tackle.

It is at the micro level of operations where we can take action and make a difference. Thanks to the experience gained through our past track record with conservative approach coupled with our respect to the market, such a critical point in 2018 is not daunting to us. We believe that as long as Noah can maintain our strategic strength, the opportunities actually outweigh challenges. We still strongly believe that both wealth management and asset management are emerging industries in China.

The implementation of the new asset management regulations and the recent exposures of risk will clear out the lower-quality participants in the market and provide real-life education for investors. The correct concepts of long-term investing and asset allocation are being accepted by more and more clients. All these are beneficial to the long-term development of the industry. From our growth data in the third quarter, we can see that increased comprehensive services coupled with global asset allocation for high net worth clients as well as the combination of wealth management and asset management in business model has reduced the impact of industry cycle volatility and allow our company to develop in a healthier and steadier manner.

[Foreign language] With the current risk exposure in the market, the demand from clients for asset allocation services has increased significantly. For our ultrahigh net worth clients, the demand for comprehensive services is even more prominent. Insurance products, trust planning services and other low correlation assets were strong in demand, and Noah's revenues from such products and services increased by 197% year over year in the third quarter. Noah's core strategy this year is to continuously upgrade our core customer service system, providing high-quality services to Black Card and Family Office clients.

As of the end of the third quarter, we had more than 700 Black Card clients who's total assets with Noah have exceeded RMB 60 billion. Gopher's Family Office services have also been recognized by many ultrahigh net worth clients. In the first three quarters of 2018, the AUM of Gopher's discretionary and family office investments grew by 50% from the end of last year. We believe that this sector will become a new driver for Noah's future growth.

Of course, it will also put higher pressure and demand for our comprehensive service capability. During the third quarter of 2018, in the primary market, the fundraising side remains sluggish, while the investment side gradually improved. Bubbles and risk levels have been reduced both in terms of valuation and company quality. Some projects that Gopher had coinvested in during the past few years have begun to seek overseas listings, and we're confident that this will help us to provide increasing performance-based income to our clients and shareholders in the future.

Although the scale of PE fundraising for Noah kept declining in the third quarter, Gopher's asset under management in private equity still maintained a year-over-year growth of nearly 20% to reach RMB 96.9 billion, accounting for 59% of the total AUM. We have learned from past experience that often during periods when fundraising is difficult, it is the best time to invest. Our strategy remains to work closely with leading fund managers to keep the number of funds offer stable and to take small but consistent steps to continue moving forward. In the third quarter, we raised capital for and invested in the new funds from Zhongwei, Innovation Works, Yingwei and several other top fund managers in China.

At the same time, we strengthened cooperation in coinvestment and direct investments with leading fund managers. Gopher's direct investment capabilities and its team construction have always been a major direction of our effort. The strategy of secondary funds is also a main success of ours as the demand from institutional clients has been increasing. [Foreign language] In terms of real estate funds, we have optimized our investment strategy and risk management process.

Strategy-wise, we continue to promote preferred shares portfolio funds and core and value-added acquisition funds focusing on equity investment and cooperating with core real estate developers. At the end of the third quarter of 2018, the AUM of Gopher's real estate investment has increased by 43% year over year to RMB 16.6 billion. At the same time, several new real estate funds have finished filing and are either being or will be launched. Gopher's real estate asset acquisition team has also been actively working with the goal to acquire core properties in core cities during the economic downturn.

Our real estate operations team has been gaining valuable experience in terms of property operations. It is also worth mentioning that the U.S. real estate funds managed by Gopher's New York real estate team has also been officially launched and completed the investment in its first project. As of the end of the third quarter, most of the real estate funds managed by Gopher were equity investment funds and property holding funds.

On the secondary market products front, affected by the market downturn, the scale of funds raised in the third quarter decreased significantly to around RMB 1.5 billion. That being said, we believe that the current market valuation is in the reasonable investment range. Increasing allocation in outperforming fund manager should be the core strategy now. Recently, we have launched the value investment fund with a three-year lockup period, and it has already garnered recognition from high net worth clients.

In terms of Gopher's secondary market funds performance, Gopher's quantitative strategy and market-neutral strategy fund of funds performance is eye-catching in this market, both generating more than 5% in positive returns since the beginning of the year. Gopher's flagship fund of funds and MoM funds have also significantly outperformed the CSI 300 Index by 12 and seven percentage points, respectively, in the first three quarters. We are well aware that fixed income funds and interest-bearing assets remain in high demand from high net worth clients. Since 2015, Noah has actively promoted portfolio investment and net asset value management for fixed income funds.

We have adhered to the diversification of underlying assets and selected engagement with quality counterparties, only market-leading licensees and enhancement of risk management with our proprietary risk control system. These measures, together with other long-term inputs, have enabled us to maintain a sound level of asset quality and risk control amid a somewhat chaotic 2018 for the greater market. In the third quarter, the fundraising volume for Noah's fixed income products reached RMB 22.8 billion, accounting for 81% of our transaction value. [Foreign language] Lastly, I would like to briefly talk about our view on recent regulatory actions and our macro economy.

The new asset management guidelines is navigating the domestic industry development to correct supervisory deficiencies, manage market irregularities and prevent systemic risks. High leverage is indeed a sword of Damocles hanging over the Chinese economy and deleveraging is very much necessary. However, the deleveraging process needs to be carried out gradually and strategically to prevent further harm to the Chinese economy in the future. Clearing out lower-quality industry participants and establishing a new market order are necessary for the long-term healthy development of the asset management industry as well as for the country as a whole.

Although current economic conditions are weak, for enterprises, it is not necessarily a bad thing. This could also be a rare opportunity for us to reexamine our strategy, talent pool and resources as well as to cut unnecessary cost, optimize our business model and grow into a healthier enterprise. Now we are indeed facing such an opportunity as the market demands us to build new capabilities to continuously improve and to convert the growing pains into the driving force for further development. As Kazuo Inamori once said, the growth of bamboo can be used as a metaphor for the development of a corporate enterprise.

When the economy is booming, the enterprise, just like a bamboo, often grows rapidly without forming nodes, thus eventually becoming weak and fragile. Bamboo only forms nodes that gives it structural strength during times of less favorable conditions. Likewise, it is only when an enterprise experiences and overcomes various difficulties that it develops the foundational strength of its structure to enhance its overall corporate competitiveness and resilience. We believe this also applies to our industry and the country as a whole.

Noah wealth management was formed in 2003, and Noah Holdings was publicly listed in 2010. Today, we stand as an enterprise with a 15-year operating history. Over the past 15 years, we have experienced 4 economic cycles and suffered from various risks, such as investment fraud, industry cycle adjustment errors and credit defaults. This year, we have also witnessed some of the most accomplished, successful entrepreneurs being closed out the position of stock pledge and losing all their shares in a company.

This has left an indelible impression on us. For Noah, our senior management team has always been absolutely transparent in all communications and facing both ourselves and the market honestly. Although we strive to understand risks without experiencing risk, we believe that every mistake we make, if we learn from it, can make us stronger and wiser over time. With the passage of time and our own growing maturity, our fear, awe and appreciation of common sense and respect for the power of the market are only getting stronger.

We strive to become a friend of time. That is our expectation. [Foreign language] Thank you all. Now I will turn the call over to our CFO, Shang, to review our financial results.

Shang Yan Chuang -- Chief Financial Officer

Thank you, chairlady, and hello, everyone. As Kenny and chairlady Wang both noted, we are satisfied with our financial results for the third quarter of 2018, and we are on track to deliver a solid result for the full year amid the volatile environment this year. Net revenues for the third quarter of 2018 were RMB 839 million, an increase of 22.6% year over year, and non-GAAP attributable net income in the same period was RMB 293.9 million, up 40.5% year over year. By revenue contribution, we achieved onetime commissions in the amount of RMB 232.6 million compared with RMB 213.1 million in the same quarter last year, up 9.2% year over year as we continue to engage with our clients through diversified product and service offerings.

Total transaction value of financial products we distributed during the quarter was RMB 28 billion, an increase of 18.9% from a year ago. Our effective onetime commission rate for the third quarter was down year over year due to changes in product mix and slightly increased quarter-over-quarter. Recurring service fees in the third quarter of 2018 were RMB 478.6 million, up 39% from the same period last year, contributing to 56.7% of revenues. The growth of our accumulated distributed products and the high quality of our assets under management continue to provide strong revenue streams.

Total performance-based income for the third quarter of 2018 was RMB 33.6 million compared to RMB 74.8 million for the same period last year. We have realized performance-based income for 17 consecutive quarters, reflecting our ability to deliver investment return to our clients through market cycles. It demonstrates our efforts to build a leading multi-strategy asset management platform with strong investment capabilities. By segment, net revenues from wealth management business contributed over 58% of total net revenues with RMB 576.9 million and grew 18% year over year.

Net revenues for the asset management business amounted to RMB 198.5 million, up 20.7% year over year. Our other financial services segment continued to grow and achieved net revenue of RMB 63.6 million, doubled year over year. We are especially pleased that our other financial services business broke even this quarter. In the third quarter, operating income was RMB 271.1 million, a 69.1% increase year over year, and the margin increased to 32.3% from 23.4% a year ago and 27.7% in the second quarter of 2018, mainly thanks to our focus on cost management.

In this quarter, our selling expense was RMB 81.2 million, slightly higher by 5.5% year over year and down 32.6% quarter-to-quarter as we completed most of our brand campaign spending in the first half of the year. General and administrative expenses was RMB 60 million, flat year over year and decreased 12.4% quarter over quarter. Non-GAAP net income attributable to shareholders for the third quarter was RMB 293.9 million, a strong increase of 40.5% year over year. This quarter, we adjusted for RMB 35.7 million of share-based compensation, RMB 20.7 million of losses from unrealized fair value changes of equity securities and RMB 29.9 million of gain from sales of equity securities.

On the balance sheet side, as of September 30, 2018, the company had RMB 2.4 billion in cash and cash equivalents, improved from RMB 2.1 billion in the previous quarter. The cash inflow for the quarter -- the operating cash inflow for the quarter was RMB 449.8 million, was mainly due to strong cash generation in our core businesses. Finally, I would like to highlight that our performance year to date reflects strong fundamentals and steady profitability in our businesses. We remain confident in achieving our full-year 2018 non-GAAP attributable net income guidance of RMB 1 billion to RMB 1.05 billion.

With that, let's open up the call for questions. Operator? 

Questions and Answers:

Operator

[Operator instructions] The first question today will come from Katherine Lei with JPMorgan. Please go ahead.

Katherine Lei -- J.P. Morgan -- Analyst

Hi, good morning. Thanks for giving me here opportunity to ask the first question. So when I look at the results, right, I think on the profit lines, it is better than expected. But, however, I have two key points that we wanted to ask.

First question is on WMP sales because we noted that actually in the third quarter, sales volume continued to contract mainly on the PE products and on the secondary market products and as well as the insurance as well. So can I get a clarity or management guidance on where do you think the sales trends will be? And also that I would like to ask, because PE product has been a flagship product of Noah, then going forward, do you think this will be continued a trend? Or you are developing some other brand-name products as well? So this is the first question. The second question is actually also related to volume. It's on Gopher's AUM.

Gopher's AUM, only up 2% q-o-q in the 3Q. So on this one, what do you think will be the growth rate could be? And what do you think the mix of the new AUM would be in the coming year?

Shang Yan Chuang -- Chief Financial Officer

So Katherine, on the second question, Gopher, AUM mix, right?

Katherine Lei -- J.P. Morgan -- Analyst

Yes. I think both questions, actually, at the end of the day, tied to the same theme is that investors believe that Noah has been very good at doing PE no matter if it's on the Gopher side or the WMP sell side. But, however, people are thinking that maybe the PE industry as a whole, the growth have plateaued at this stage. Then for Noah, then what are you going to sell going forward? And what kind of product you are going to develop into the flagship product, something that people -- because now when clients think about PE products, it's likely that the first name came into their mind would be Noah, but I think you may not be able to say the same thing for other products.

So how is Noah going to face this challenge?

Shang Yan Chuang -- Chief Financial Officer

Yes, Katherine, I will take a crack at answering both of your questions, and we'll ask if Madame Wang and Kenny have anything to add further. So as Madame Wang mentioned earlier, since inception, we have actually been through four whole economic cycles in China, and our strategy and business model has always been to continue to strengthen our diversified product and service offering. So since IPO, actually I recall back in 2012, 2013 period, it was actually the economic environment was also quite challenging. And the investment appetite for equity product as a whole, including private equity, in Asia market was quite weak.

But we continue to engage with products -- engage with our clients through other products, such as fixed income. And so the recent downturn in terms of investor appetite, we're not particularly worried in the long term because we still continue to see very robust wealth creation. And we think the different demands for different large asset categories comes and goes. So this year is likely going to end up to be a weaker year for private equity and a bit for public issuers.

But as this cycle continue to develop, it is most likely we're going to see of a reverse in investment appetite and then equity product will become more in favor. So the important thing for us is that we continue to strengthen our product and investment capability across the large asset category. And we feel quite satisfied that both in terms of private equity, A-share, real estate, fixed income and even for insurance and now a lot of complementary services, such as trust planning, we have really cemented our expertise. And so that's on the wealth management side.

On the asset management side, you can see that in terms of our product mix, nearly 60% of our AUM comes from private equity. And so that really solidifies our leading position in terms of the private equity industry in China. These are very long-term duration products. And the fact that we have been able to accumulate now nearly RMB 100 billion AUM shows that we have very strong position going forward.

And we continue not only to invest in the leading funds, such as those mentioned by Madame Wang such as Matrix Zhongwei, but we have also been, in the most recent year, adding our coinvestment and direct investment capabilities.

Kenny Lam -- Investor Relations

Shang -- I'll add to what Shang said. Katherine, thanks for the questions. This is Kenny here. I think in the market indeed Noah is known for private equity and VC, but as you can see in this quarter results, we've proved that clients also coming to the Noah platform for other things.

So if you look at the release of the results, the value of the products distributed this quarter was actually up 18.9% year over year. And if you look at the mix, as Shang said, it fluctuates between four different types. It fluctuates between fixed income, private equity, secondary market and other products. So it -- I think it shows that our platform, while not perfect, is now beginning to attract clients for things other than private equity.

And we're able to withstand the cyclical demand that may change from product to product. That's Point No. 1. Point No.

2, I think you mentioned about insurance. I think we disclosed in our speeches that other services, which includes insurance, actually went up by 197% quarter -- year over year. And so actually, demand for insurance products through our insurance brokerage platform has increased substantially. So again, it showed our efforts in recent years to be a lot more diversified in revenue base and the product base.

Operator

The next question today will come from Xue Yuan with CICC. Please go ahead.

Xue Yuan -- CICC -- Analyst

[Foreign language]

Kenny Lam -- Investor Relations

So maybe I'll take it [Inaudible] . So the two questions are similar to the first one in the mix of the products were distributed, there is a much higher percentage in fixed income. And so the question is what we expect going forward. The second question was in the third segment, in the financial -- other financial services, we are in the first quarter breaking even or actually, slightly profitable.

So where is that coming from? Shang, you want to?

Shang Yan Chuang -- Chief Financial Officer

Yes. Sure. So on the -- both in terms of the other financial services, most of the growth we saw this quarter came from our lending business. So we make loans to our registered clients and the majority of these loans are backed by high-quality assets, some of them are financial products.

And we continue to see short-term borrowing needs from our clients, and we continue to, again, provide comprehensive product and service offerings to our clients. And this is one example.

Operator

And the next question will come from Edward Du with Deutsche Bank. Please go ahead.

Edward Du -- Deutsche Bank -- Analyst

Good morning, management. Can you hear me? OK. Two question. My first question is about that recently, we've seen many supporting policy to the private sector financing, especially for the SMEs.

And the regulator also mentioned that they encourage the private funds to participate in the funding support no matter the equity side or debt side like a bank or something. My question is about that. Do you see any further business opportunity in the SME financing in terms of Noah's position? Or any benefit we can enjoy from the encouraging policies like the tax benefit or something else? This is my first question. And my second question is that for your micro financing company, you just mentioned before for the Rong Yi Tong, may I know more about its current capital position leverage? And do you have any further capital injection plan? And then can you share more view on the business development for Rong Yi Tong and any outlook for its loan balance and volume in this year and next year? And above are my two questions.

Shang Yan Chuang -- Chief Financial Officer

Thank you, Edward. I'll provide a little bit more background on our lending services business. And the business was set up several -- a couple of years ago, and it was mainly targeting toward our registered clients. Currently it has a registered share capital of roughly around RMB 350 million, and the business model is that it would securitize its loan receivable.

And so it really -- the basic basis is forming quality assets and then through securitization, make a net fee and service -- and help service the securitization. We see loan -- we expect loan growth this year to double of last year. It's going to probably reach somewhere around RMB 10 billion this year. And the most of the average duration is around less than one year.

I mentioned earlier, most of it would have high-quality collateral, most [Inaudible] of the loans have collateral. Going forward, we continue to see growth opportunities. And as part of our budgeting processes for 2019, we are considering how best to allocate our resources across the various business lines. But I think it's -- we will look into increasing the capital base for our lending businesses to help further expand its business.

But exactly how much, I think we don't have a conclusion yet. I think it will be in line and in pace with the growth of the business and as well as the other capital needs of our other business lines. And for your first question, madam Wong will like to provide answers to.

Jingbo Wang -- Chairlady and Chief Executive Officer

[Foreign language]

Shang Yan Chuang -- Chief Financial Officer

OK. So two points that Madame Wong want to provide in terms of the first question regarding the latest regulatory policies. So from -- most recently, we're seeing some improvement of the operating environment from the signals and latest policy announcements. For our business in particular, we're seeing that registration of private funds to now improve.

In the middle of this year, it was quite delayed. But we're seeing an improvement in terms of the speed of registration. Particularly -- the second point is particularly in terms of providing new liquidity or financing to private enterprises. We're closely observing this development.

As of now, we expect that most of the capital to come from state-owned enterprises and large institutions. Possible business opportunity for us is if we can be managers to these capital and helping them structure and allocate to mezzanine types of investments. But this is quite new, and we're closely monitoring and following up on potential business opportunities.

Edward Du -- Deutsche Bank -- Analyst

Thank you.

Operator

The next question comes from Daphne Poon with Citi. Please go ahead.

Daphne Poon -- Citi -- Analyst

Hi, thanks for taking my questions. So my first question would be about the fixed income products sales. So we see the transaction volume have increased strong this quarter. But then if we look at the Gopher, fixed income AUM especially down q-on-q.

So I'm just wondering what would be the mix of those fixed income product sales. Is it mainly driven by third-party products? Or what would be the underlying asset mix? And I guess second is just on the regulatory environment. So we see recently, there's been lots of relaxation on different products, including the new asset management rule or the [Inaudible] product. So for example, we are seeing a couple of relaxation on the WMP side.

So I would just like to hear your view [Inaudible]. Do you think it's possible that the customer may just pull back on the new asset management rule tightening earlier this year? And do you see a potential negative in the longer term. Just would like to hear your view on this.

Shang Yan Chuang -- Chief Financial Officer

Hold on for one second, we're translating the question. Your two questions, I will answer the first one. Madam Wang will answer the question regarding the regulatory development and our expectation going forward. In terms of the fixed income product that we distributed in the third quarter, most of it is still shorter-duration product, as in the third quarter, we can -- there was still quite a bit of volatility in terms of the capital market.

And so clients were -- continue to be nervous about making new investments or long-term investment decision. But as we mentioned in the second quarter, we think that in situation like that, it's still quite important to engage our client and maintain their capital with us. So we were quite nimble in terms of rolling out shorter-duration product which met the client's need. So these are much shorter in duration.

So it didn't help Gopher's credit AUM growth too much in the third quarter. But I think it's really a balance of trying to meet the client need and our views on the overall long-term investment decisions of our clients. But I think we need to balance both. In terms of the second question, I will ask Madam Wong to provide her thoughts on regulatory development.

Jingbo Wang -- Chairlady and Chief Executive Officer

[Foreign language]

Shang Yan Chuang -- Chief Financial Officer

Yes. In terms of the regulation, I think earlier this year with -- what we saw with regulation was very stringent and tight. It almost felt it was a complete pendulum swing to the other side, to the opposite side. So several years ago, there was little or lack of regulation in terms of new forms of financial services businesses.

And we saw starting late last year and early this year, there's a lot of new regulation that came into play. But some of the regulation perhaps didn't cater for how the market was operating. And so we are seeing some adjustments to the regulation to make sure that private enterprises who previously got financing are not completely cut off. And so we're also seeing the improvement in registering of private funds.

So we see the recent months should be fine tuning and adjustment rather than a reversal of regulation objectives. But we certainly feel that regulatory environment is slowly, but surely, getting better and better.

Kenny Lam -- Investor Relations

It's Kenny here. I want to emphasize two points. One is, I echo chairlady Wang's and Shang's point that the core principles books that were laid out in the new regulations on the asset management are not going to change. I think those core principles are very much estimating to a global standard that we like in this market.

The second point is around the regulators actually learning to strike a balance in terms of its regulatory push. And so we're seeing that the balance is actually better struck in the last half or so. And that actually makes for a player like us to understand that the regulators are actually improving. And we believe that it will still be relatively volatile in the months ahead, but it's actually going in the right direction.

Operator

Our next question comes from [Inaudible] with JL Warren Capital. Please go ahead.

Unknown Speaker

[Foreign language] I have two question. The first question is about the lending business, about how do you recognize your interest income. What is your average interest rate? And are you lending to your existing high net worth clients or the corporates? The second question is about the selling expense. In the third quarter, your selling expense was recorded as RMB 81 million, [Inaudible] down from RMB 120 million in the second quarter and RMB 106 million in the first quarter.

So what is implication in the longer term? Thanks.

Shang Yan Chuang -- Chief Financial Officer

Thank you for the question and the translation. So I will answer both of our -- both of the question. On the first question regarding our lending business. As I mentioned earlier is we're providing short-term lending to our registered clients.

They -- that would include individuals as well as company. The average interest rate is in the low teens, and this reflect the high quality in terms of the borrower as well as the high-quality collateral that we obtain when we make these loans. In terms of the revenue recognition policy, the majority of the revenue is basically accrual of interest fee payable or the net fees we're making when we're servicing those loans receivable that we have securitized out. In terms of your second question of selling expenses.

In the second -- in the third quarter of this year, we had selling expenses roughly about RMB 80 million, which is around -- flat year over year and down 32% from the second quarter. It was down from the second quarter is because for the first half of the year, primarily in second quarter, we spent most of [Inaudible] this quarter, we spent most of our brand campaign dollars. For the full year, we have budgeted roughly about RMB 60 million to RMB 80 million to spend on strengthening our brand campaign, and most of it was booked in the second quarter. So that was the -- a main reason why second quarter -- third quarter selling expenses came down.

But we continue to be very focused on cost management. So versus a year ago, selling expense is flat. So we don't expect any major brand campaign initiatives at least for the next 12 months. But as I mentioned, we're in the process of doing our budget for 2019.

If there's any major investments or spending, we'll keep the market updated in our next call.

Operator

The next question will come from George Yi with JPMorgan.

Unknown Speaker

I have a few questions. The first one is on WMP sales and Gopher AUM. So do we have a guidance, year-over-year growth guidance toward 2019 in terms of the WMP sales and Gopher AUM. So this is my first question.

My second question is on fee rate. So we continue to see the recurring fee rate improved in the third quarter. So we guess this is mainly due to the product mix, due to more sales of fixed income products. So besides that, are there any other reasons for the recurring -- or for the firm fee rate increase as well as the recurring fee? So this is my second question.

So the third question is on Rong Yi Tong. So we can see from the balance sheet that the loans receivables net balance is now RMB 680 million. But then just wanted to clarify if there was some -- you probably mentioned that loan could double to reach RMB 10 billion next -- this year. So I just want to double-check with this number.

And then we want to ask the provision level and any potential default of the Rong Yi Tong business. So this is my third question. My last question is, any updates on the Huishan case develop? Thank you.

Shang Yan Chuang -- Chief Financial Officer

OK. Thank you, George, for your multiple questions. If you give us a minute, we'll translate it to management, one second. So we will answer your questions in order, I guess.

So in terms of the transaction value for 2019 and going forward, I think we continue to want to improve market share. I think we have been continuously saying that for several years now. As you look at various industry reports, I think we're still seeing wealth management, asset management businesses growing at double digits. So I think there will definitely be a goal for us medium to long-term.

But the growth will not be linear growth, because obviously, we need to deal with the macro environment. But I would like to highlight that from the financial result we saw for the first three quarters this year, I think our revenue growth is no longer just correlated to overall volume growth, because we have been strengthening our investment capability, which helps us improve the revenue quality from the -- from our AUM. So that ties into your second question. We have been very actively and strategically adding our investment capabilities around co-investment and direct investments.

And these are able to help us in terms of effective fee rate. So if you do the math in terms of the recurring service fee rate over our AUM, that has been steadily improving over the last few quarter. And we continue to see opportunities and room for that to grow further. And in terms of on the onetime commission effective fee, that is more related to the transaction value mix for that particular quarter.

I mentioned earlier on my prepared remarks that it was around 83 basis point for the third quarter, slightly up versus the second quarter and down versus the third quarter of 2017. I think we are generally comfortable when our effective onetime commission fee rate is around 80 to 120 basis point. And quarter-to-quarter variance really depends on transaction value and product mix. And now moving on to...

Kenny Lam -- Investor Relations

Shang, before Rong Yi Tong, can I mention one point about the recurring fee? I think the group here should understand that it has been a long-term strategy of Noah to try to move away its reliance on the single quarter volume sales and actually more -- moving more toward recurring revenue, because we believe that that actually is a much stronger basis for our revenue base. And so you see that it is a strategy that has been in place for the last four or five years, where we're building up our asset management capabilities, we're building up diversified revenue sources that goes beyond the volume for the particular quarter. So I think that Shang has mentioned around how we should not only focus on volume for that particular quarter, but actually look at how we built a broader ways of generating revenue is actually quite important.

Shang Yan Chuang -- Chief Financial Officer

Yes. Now in terms of your third question on our lending business, our lending service business. So as of the end of September 30, 2018, we had a loan receivable roughly about RMB 700 million. So that is the loan receivable that we have yet secured.

I mentioned the business model for our lending business is to form high-quality loan receivables and then securitize them out. From all the loans that were originated and secured and eventually will be securitized, we expect this year, we're going to probably reach somewhere around near RMB 10 billion, which would be -- if we achieve that, that will be double of what we did for last year. We have currently a provision of 1% for those loans that are on our balance sheet. But that's a temporary position, as we will eventually securitize our loan receivables.

But as of now, for the last two, three years that we have been operating this business, we have not had any defaults. The main reason is because of the fact that we focus primarily on high-quality borrower and the fact that we have high-quality collateral. On your fourth question on Huishan, I will pass it to madame Wang.

Jingbo Wang -- Chairlady and Chief Executive Officer

[Foreign language]

Shang Yan Chuang -- Chief Financial Officer

So a couple of points on the Huishan products that we have been helping our clients to undergo restructuring. So overall, we continue to see progress in terms of the restructuring of the Huishan investment. It's -- we're still currently under an official bankruptcy process, so I think that is a good time. In terms of the actual operations of Huishan, we have now seen and observed several consecutive months of positive cash flows.

In terms of from the government policy perspective, the state council has at multiple occasion highlighted that the dairy industry is a really important strategic industry for China. And the latest regulatory policies in terms of helping private enterprises access financing, encouraging a lot of the debt to be converted to equity, I think this may also be beneficial to the restructuring of Huishan. And lastly, the Huishan management is very focused on repaying that sensitive bidder, including -- which includes our fund investment. And as of now, I think we will probably give more clarity on a repayment plan sometime next year.

Operator

Next question comes from Craig Cao with UBS. Please go ahead.

Unknown Speaker

[Foreign language]

Shang Yan Chuang -- Chief Financial Officer

OK. Thank you, [Inaudible]. For the benefit of the audience, I will translate the two questions from the analyst from UBS, [Inaudible] . So first question is that I noted that for fixed income transaction value for the third quarter increased meaningfully.

At the same time, we also saw operating margin to improve in this quarter. Can you explain the reason for the margin improvement, given the strong fixed income product distribution? The second question is in terms of the overall regulatory timing that we saw for most of this year. Noah was still able to achieve relationship manager growth. So relationship manager grew roughly around 20% year to date over the same period last year.

I know for other financial services companies, such as insurance company, it has -- actually has been difficult for them to increase the number of salespeople or front-line employees. So if management can share with us how Noah is able to increase relationship managers and what is the plan in terms of relationship manager growth going forward. So those are the two questions. I will answer the first question, and Kenny will answer the second question.

So [Inaudible], you're right. So for the third quarter, we saw fixed income product to -- transaction value increase meaningfully, primarily because we were able to engage with our clients despite volatility in capital market, with shorter-duration credit product. Shorter-duration credit product have lower onetime commission rate, but we still feel that it's important to maintain that engagement with client. The improvement in margin for the third quarter primarily is because of two reasons.

One, on the top line side, we saw a very robust recurring revenue growth. This is because of the continued growth in AUM as well as improvement in fee rate of the AUM that we manage. The second reason is on the cost side. Given the volatility we saw in the first half, we were very focused on tightening cost and improving cost management starting the third quarter.

And we felt that we have -- did a fairly good job. And so both, I think across the board, cost has been quite managed in the third quarter. And particularly, we didn't spend any large amount of brand campaign dollars this quarter. Most of it was done in the second quarter.

So we were able to on a net basis improve operating margin on a year over year as well as quarter-over-quarter basis to above 30%. So I think on a full-year basis, I think it will be good if we end up with an operating margin of somewhere near 30%. Medium to long-term basis, I feel that there is margin improvement as we continue to focus on productivity gains. But in the short term, on a quarter-to-quarter basis, I think it really depends on what type of spending and investment we are making for that particular quarter.

Kenny Lam -- Investor Relations

And it's Kenny here. I'll answer the question around relationship managers. I actually think that our relationship manager career development and training program has been the key attraction for new talent. You can see that the way we manage our RM sales force is actually not a very short-term focus.

So we look at each RM and believe that it would take at least two, three years before he or she becomes productive, he or she becomes a client-trusted advisor. And therefore, if you see the way we developed the program, we focus a lot more on how we help the RMs build their skills. We invest a lot in training. We actually invest an enormous amount in thinking about their career development.

So that's why we attract now in this actually down market a lot of relationship managers to the platform. The second point I want to make is if you look at the churn rate of our high-performing relationship managers, it's actually probably the best in the industry. We're below 3% in terms of churn rate for the high-performing relationship managers. And the tenure of our relationship managers are usually actually over around three to four years.

And so I think just to summarize, we think that if you look at the front line, it is the key interface to our clients and the key to loyalty. And therefore, we spend a lot of time in terms of thinking through how we invest in terms of training and how we invest in terms of career development.

Operator

Your next question comes from Connie Shen with JPMorgan. Please go ahead.

Connie Shen -- JP Morgan Asset -- Analyst

[Foreign language]

Shang Yan Chuang -- Chief Financial Officer

Thank you, Connie. I guess, for the benefit of the audience, I'll translate the questions into English first. So Connie from JPMorgan had a question regarding the relationship and the strategy on several metrics. So she notes that for registered clients, this particular metric has more than doubled over the last two years, while active client number has only increased in double-digit in the same period.

In addition, the number of relationship managers increased roughly about 50% over the last two years. So given these three metrics, can management share with us what is the strategy on clients going forward? Is it to focus more on deepening client wallet share of existing clients? Or it's trying to get more clients to become more active from the registered?

Jingbo Wang -- Chairlady and Chief Executive Officer

[Foreign language]

Shang Yan Chuang -- Chief Financial Officer

A couple of points from madame Wang regarding Connie's question. So we're actually quite excited about the medium- to long-term growth aspect of our industry. And so we have been continuously recruiting high-quality relationship managers as well as employees, because we think these will be the basis of supporting our growth going forward. In terms of the registered clients, I think over the last two years, we have been very focused on getting our brand out there to the potential clients and getting them to becoming our registered clients.

So you can see it as almost like enlarging the funnel and getting an access to high net worth individuals, both in terms of offline through our relationship managers, who are now in more than 83 cities, and also the last two, three years, I have also seen that we have done quite well in terms of our online effort. And so if you download our app, you can see that you're able to get some -- our views on the market through our app, and you can get a better understanding of Noah. And so this is really to help enlarge our breadth in terms of being able to get in touch with high net worth individuals. But in this particular year, we actually have focused our wealth management, particularly on the investment side, on larger clients.

Because when the market is quite volatile, we actually think it's better to serve large clients because they would understand the volatility more rationally and more sophisticatedly. For smaller clients, I think it's harder to service them in a volatile market because they can be quite anxious. But we will service these newer registered clients or these smaller clients through other related services. For example, we have an education subsidiary that really focus on getting Chinese investors to be more abreast on how the capital market is and what is the more proper way to invest their money long term.

For example, we have more market low correlation products such as insurance. So I think going forward, I think we're really focusing on getting in touch with more clients by being able to deliver and offer not just financial products, but also financial services offerings. Now -- so whether we are going to focus on deepening wallet share of existing clients or trying to convert more registered clients to active clients, I think that strategy, and particularly in such a dynamic market such as China, we need to remain flexible. In years where it's challenging in terms of the investment environment, we probably will focus more on deepening client wallet share.

In environment where the investment is not so difficult, we'll probably try -- want to do more conversion of registered clients. So we will adjust it according to our view of the market. Now on our leading position on VC and private equity, I will also like -- Madame Wang would also like to add that, I think, fundraising this year is lower than that of last year, but actually we continue to put -- make a lot of effort in strengthening our position in this particular segment. We have invested in very top-tier funds, and our investment is more valuable, because even for the leading GPs in China.

I mean, the environment like this is very difficult for them to raise new funds. Actually, if you follow the industry statistics, I think new fundraising for VC, venture capital, and private equity this year is down 80%. So the fact that we're still able to raise new money, make new deployment make us a very active participant, and this will cement and further solidify our positioning for this particular business. OK.

I guess, with that, if we don't have any further questions, we will end the call today.

Operator

There are no more questions at this time.

Kenny Lam -- Investor Relations

OK. Well, thank you all for today's call.

Shang Yan Chuang -- Chief Financial Officer

Thank you. Bye.

Operator

[Operator signoff]

Duration: 91 minutes

Call Participants:

Kenny Lam -- Investor Relations

Jingbo Wang -- Chairlady and Chief Executive Officer

Shang Yan Chuang -- Chief Financial Officer

Katherine Lei -- J.P. Morgan -- Analyst

Xue Yuan -- CICC -- Analyst

Edward Du -- Deutsche Bank -- Analyst

Daphne Poon -- Citi -- Analyst

Unknown Speaker

Connie Shen -- JP Morgan Asset -- Analyst

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