Noah Holdings Limited (NOAH) Q1 2021 Earnings Call Transcript

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Noah Holdings Limited (NOAH 6.71%)
Q1 2021 Earnings Call
May 11, 2021, 8:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good evening, and welcome to the Noah Holdings 1Q '21 Earnings Conference Call. [Operator Instructions].

I would now like to turn the conference over to Ms. Jingbo Wang. Please go ahead.

Jingbo Wang -- Co-Founder and Chief Executive Officer

[Foreign Speech]

For the teleconference agenda today, I will first introduce the overall performance of Noah in the first quarter of 2021, the developments of our major business segments and the strategy of the Group, then talk about the changes and progress of Noah's management thinking from product-driven to clients oriented. We will then brief you on Noah's planning to purchase a headquarter premises located in the core zone of Hongqiao CBD in Shanghai. After that, please welcome Pan Qing to introduce the financial results of the quarter followed by the Q&A.

Looking back to 2020, its a year full of challenges and uncertainty. However, all staff of Noah faced with such uncertainty, continue the transition and reform and make some achievements. I'm very pleased that we lived up to the expectations of our shareholders and investors and Noah delivered a very successful quarter.

[Foreign Speech]

In the first quarter of 2021, Noah reported net revenues of RMB1.22 billion, with a year-on-year growth of 64.1%, in which one-time commissions were RMB323.2 million, a 53.3% year-on-year growth. Recurring service fees were RMB474.9 million, a year-on-year growth of 5.6%. Performance-based income was RMB403.1 million, which grew nearly 20 times year-on-year. Non-GAAP net income attributable to shareholders amounted to a historical high of RMB461.9 million, representing a year-on-year growth of 79.7%.

In terms of our main business segments, the transaction value of financial products in the wealth management segment reached RMB27.1 billion, with a year-on-year growth of 16.8%. The transaction value of standardized products was RMB21.5 billion, with an year-on-year growth of 12.5%, among which, secondary market equity funds grew 23.4% year-on-year to RMB11.2 billion, setting a new record for a single quarter.

Mutual funds grew 8.6% year-on-year to RMB10 billion. The net revenues of overseas business reached RMB337.5 million, with a year-on-year growth of 62.5%. The overseas assets on the management was RMB25.92 billion as of March 31st, 2021, a 3.9% increase, compared with the end of 2020 accounting for 16.8% of the Group's total AUM.

In March, we successfully held an insurance Summit in Macau and invited targeted clients based on big data. The number of attendees was 77% of the 2019 Insurance Summit in Macau. However, the total transaction value more than doubled, reflecting the accurate matching results of our KYC, KYP, KYA systems, which we put great efforts into.

Aside from the financial data, the management is more encouraged by the gradual infiltration of our new management culture. The management idea from product-driven to client-centric, survival first, is reflected on the client talent and business side. With the further deepening of our transformation and reform, Noah is on a continuous journey of building organizational capacity, which is the right way from the venturing to the EMUs, electric multiple units.

First, our core clients activity continued to rebound. In the first quarter of 2021, Noah's high net worth clients, the number of active clients including mutual fund only clients exceeded 27,000, an increase of 65.4% year-on-year. As of March 31st, the number of registered clients exceeded 380,000 -- sorry 380,000 yes, up 6.5% from the end of 2020. The number of black card clients were 992, an increase of 12.7% year-on-year. Client oriented and pursuing in depth understanding of client needs is the core guiding ideology for our reform on the front line.

The implementation of the new relationship managers' compensation scheme, from a single relationship manager to the establishment of the Noah Triangle Service Model of a strengthened process management with the Supernova Quantitative Client and Communications plan, as well as the comprehensive promotion of KYC, KYP and KYA received the approval of clients and relationship managers.

Secondly, our core frontline talents after experiencing the survival of the fittest and replenishment of fresh blood, has stabilized and recovered. With the pilot of the new relationship managers' compensation scheme, the production capacity of the team began to release after seven quarters of transformation. The number of elite relationship managers was 598 in the first quarter of 2021; 241 more than that at the end of 2020 and the turnover rate of elite relationship managers was only 0.28%.

Nova will continue to improve our incentive system, vigorously promote employee training and team building, continuously empower relationship managers, screen qualified investors and provide better services for high net worth and ultra high net worth clients.

[Foreign Speech]

As of March 31st, 2021, the AUM of Gopher reached RMB154.1 billion, among which, the continued redemption of non-standardized single counterparty private credit products from zero launch to zero inventory and the scale of non-performing assets were dropping too. The other funds on the active management realized the different degrees of growth, among which, the AUM of public securities reached RMB10.5 billion, up 14.5% year-on-year. The AUM of private equity was RMB121.9 billion, up 10.4% year-on-year.

In February 2021, Gopher was selected as one of the top 20 secondary funds in the world by Global FOF Association. Gopher China Equity Selection Fund ranked the number one FOF in the world. In terms of compound annual return for three years ending December 2020, Our pathway hedges posted with AUM on the $250 million.

Among the asset management product provided by Gopher for our clients, Gopher continues to promote the reform and product upgrade from product-driven to client-oriented is the core concept of the reform. The most important product of Gopher in 2021 is the target strategy product, which implements a target-oriented strategy. We invested more time and effort into product research and development, investment management and talent entity, as well as introduced the IPD, Integrated Product Development process to fully elevate Gopher's capacity in investment management and operations like Noah. Gopher's new journey and strategy experienced a constant change from product-driven to client-oriented.

At the end of March 2021, Gopher's megatrends month and top 30 secondary market multi-strategy investment products have track records of seven and four years were upgraded to Gopher growth target strategy and balanced target strategy, respectively. Now back on the market again, the growth target strategy products realized an annualized return of 15.24% since launch, ranking top 10% in terms of return among comparable products. The balance of target strategy products reported an annualized return of 12.76% since launch, ranking top 2% by return among comparable products. Once launched, Gopher's flagship target strategy products have been winning the recognition of high net worth clients.

[Foreign Speech]

In terms of operational efficiencies, due to the expansions of [Technical Issues] and marketing activity, the operating income of the fourth quarter reached RMB722.3 million, up 47.5% year-on-year. Noah's continuous online digital and intelligent transformation and efforts have contributed to the continuous and stable improvement of operating efficiency. The non-GAAP net income increased from -- sorry, the non-GAAP net profit margin increased from 34.2% in 2020 to 37.7% in the quarter. The operating profit margin increased from 38.1% in 2020 to 41% in the quarter. This year, Noah will start to expand the capacity of the Noah triangle relationship managers team and deepen operations in the core cities. We have set new targets for our market shares in core cities and the increase in coverage of high net worth and ultra-high net worth clients.

In 2020, Noah fully initiated its organization reform with a core direction from individual leadership to organizational capacity. First, we upgraded from divisional structure to matrix management, implemented qualification system and person-to-person matching and started to define and arrange internal personnel levels by positions, salaries by levels, as well as linked the change of salaries with positions changes. The implementation of the new qualification system optimized our compensation structure, making us more competitive when recruiting senior talents in the market. Meanwhile, we determined the company's annual budget of strategy product -- project in the aspects of strategy and key tasks and became more flexible to focus on our targets in key projects, cities and positions.

2021 is the initial year of Noah's transformation. We aim to build an organization of processes from the aspects of culture, process, organization and IT, strengthen strategic quality control and process management to make client service and product and operation standardized and of high quality, to integrate marketing planning into brand management, to carry out comprehensive strategy-based budget management and to promote the internal control management system to help operations, prevent corruption and control risks, as well as to use the qualification system to lead the growth of management team members on human resources front.

Noah is actively practicing IPD, Integrated Product Development project management and has established the different IPD projects on product, channel and international operations. For example, the KYC, KYP and KYA digitalization project we mentioned, is to realize in-depth collaborations among the three, through project operation standardization, and the appointment of project teams and its responsible persons. Finally, everything falls into the core management idea of client-centric and survival first.

[Foreign Speech]

Last but not least, I'd like to brief you, Noah has been running businesses in Shanghai for 16 years and being listed for nearly 11 years, without our own headquarter building. In this quarter, we have finally found a satisfying headquarter premises in the core zone of the Hongqiao comprehensive transportation hub, to meet the increasing office usage demand of Noah. More importantly, as a trending Chinese private banking brand, in line with the surge of favoring Chinese brands in consumption market over the past few years, we primarily serve China's high net worth and ultra-high net worth clients. The new premises demonstrates an upgrade of our core culture and philosophy, on the journey from a product-driven start-up to a century-old enterprise of serving three generations of clients. The location of the Hongqiao Hub enables us to connect with our clients from around China, especially from Jiangsu, Zhejiang provinces and Shanghai in a swifter and more convenient way to practice client-centric theory, providing us with the client interface with both quality and convenience.

The premises is designed by Foster + Partners. The firm also designed renowned buildings, such as Apple's headquarters, the Apple Park; the Swiss Re building in London; the HSBC headquarters in Hong Kong; and the Beijing Capital International Airport. One of the buildings in this project is the only office building with an outer core cylinder in Shanghai, with LED letters arranged throughout. After several rounds of adjustments and improvements by Foster + Partners, under the basic cylindrical structure, the cylinder body is hollowed out in the middle, and the lighting and space utilization rate of the building are altered to maximum. The project has a total construction area of 72,000 square meters, and the leasable area is 63,000 square meters. It is located in the core business room of Hongqiao, Shanghai, adjacent to Hongqiao Airport and railway station, with convenient transportations.

Client centric includes, creating the best experience for clients, authorizing the frontline managers who are the closest to clients, to make decisions, providing various services, meeting clients' needs with various products, promoting digital transformation and gradually realizing intellectualization through online business. Data and analysis are the basis for us to improve service efficiency, and more accurately understand client needs, so as to build our service ecosystems around their needs. We may say that the purchase of Noah's headquarters is a milestone of Noah's second venture, and upgrading the company's new management concept of client-centric and survival first. We look forward to welcoming all shareholders and investors to visit the new Noah headquarters.

Next, let's invite our CFO, Mr. Pan Qing, to introduce the quarterly data in detail. Thank you.

Grant Pan -- Chief Financial Officer

Thank you, Sonia. Thank you, Chairlady and dear investors and analysts, good morning. Very excited to share with you another record-setting quarter, in which we have accomplished new heights across various financial and operational metrics, including revenues, profits, client activities, transaction value and elite RM retention rate. As our client investment passion and confidence in economic outlook continues recovering, and overall team morale continues growing, benefiting from implementation of various new organizational improvements and the upgraded client service model, as part of overall strategic transformation so far.

I'm also happy to share with you that we are ahead of the schedule to meet the full year non-GAAP net income guidance of RMB1.2 billion to RMB1.3 billion, as we concluded this quarter with a record high non-GAAP net income of RMB461.9 million, mainly due to also record high performance-based income of RMB403.1 million, accompanied with growth across other revenue segments.

Now, please let me walk you through more detailed results of the first quarter. We recorded net revenues of RMB1.2 billion, which was unprecedented for a single quarter since listing. This was mainly contributed by performance-based income of RMB403.1 million, also a record high, a result of the strong performances of the public securities products we have placed for our clients in the past, accounting for over 60% of the total performance-based income during the quarter.

Just to give you a rough idea of what this means for our clients, for every RMB1 million of performance-based income we earn based on our average sharing with the GPs, our clients would have made RMB20 million of investment return above the hurdle rate of the return, after accounting for the performance-based fee charged by the GPs.

Onetime commissions in the first quarter was RMB323.2 million, up 53.2% year-over-year and 19% quarter-over-quarter, driven by strong transaction value during the quarter, while maintaining a very healthy fee rate of 1.2%, on the products we placed for our clients. This demonstrates our successful efforts in optimization of product mix. Recurring service fee was RMB474.9 million, up 5.6% year-over-year and 8.9% quarter-over-quarter as we harvest on the recovery of transaction value we place for our clients.

As Chairlady has mentioned, one of our strategic objectives for 2021 is to achieve core client growth, especially in the tier of Diamond and Black Card clients. We're happy to see that the number of Black Card clients has grown 12.7% year-over-year to 992. We have also recorded unparalleled client activities, as close to 28,000 active clients, up 65.4% year-over-year and 42.8% quarter-over-quarter. The number of active conventional clients was 6,300, also up 54.6% year-over-year and close to 20% quarter-over-quarter. The robust client activity is a clear indication of the successful implementation of several of our key strategic initiatives, including the Noah triangle service model, which helps our RMs utilize their full client engagement potentials, with the help of product experts.

During the first quarter, a record setting close to 600 of RMs were qualified as elite RMs, up 68% from the previous quarter, and we have managed to keep our most valuable sales force intact, with a record low elite RM turnover rate of only 0.28%. As a result, total transaction value was RMB27.1 billion during the quarter, up 16.8% year-over-year and 27.1% quarter-over-quarter. We placed an unmatched level of RMB21.5 billion of public market products for our clients, consisting of RMB11.2 billion of private hedge funds, which doubled from previous quarter and RMB10 billion of mutual fund products, also increased 21.8% quarter-over-quarter. So for private equity products, the total transaction value is RMB4.8 billion, a 62.5% increase year-over-year and 7.9% decrease quarter-over-quarter.

Operating income was RMB502.4 million during the quarter, up 96% year-over-year and almost 50% quarter-over-quarter. The operating margin was 41%, an improvement from 35.2% from the previous quarter. Comp related expenses were RMB582.1 million, close to 60% year-over-year and 30% quarter-over-quarter, a reflection of our increasing efforts in recruiting new talents.

Non-GAAP net income was RMB461.9 million, also a historical high. Just for the purpose of getting a sense at a normalized number, by adjusting the carry to the same level as last quarter, we would still have recorded a 41% year-over-year growth and 38% quarter-over-quarter growth for non-GAAP net income.

As for our segmented results, net revenues from wealth management segment was RMB946.5 million, up 71.3% year-over-year and 47% quarter-over-quarter, accounting for 77% of total net revenues for the quarter. The strong results in our wealth business segment was driven by robust client transaction activities, while maintaining a high overall fee rate.

Net revenues from asset management segment is RMB270 million, up 63% year-over-year and down 11.8% quarter-over-quarter. Total AUM has grown 0.8% since the end of last year to RMB154.1 billion, mostly driven by growth in private equity and public security products, with effect of exiting of credit products.

So moving on to balance sheet, we remain in a healthy liquidity position, as our current ratio stood at 3.2 times. The debt-to-asset ratio was 24.8%, and we continue to have no interest-bearing debt on our book. By the end of first quarter, we had R&D close to RMB5 billion in cash. We're on track to deploy the budgeted spending with relation to R&D investments and other growth initiatives.

As is mentioned by Chairlady Wang, we have entered into definitive agreements to acquire a Class A office property located in the Shanghai Hongqiao Central Business District, with a gross floor area of 72,000 square meters and a gross leasable area of 63,000 square meters. The total consideration is approximately RMB2.2 billion, which is equivalent to RMB35,000 per square meter based on the GLA. An undoubtedly good deal, when compared to the average of RMB40,000 to RMB50,000 trading price in adjacent comparable properties in that area in the past few years. We plan to finance the transaction with cash on balance sheet, but we'll also look for opportunities to refinance, when the cost of financing and timing is right. This is the first time in Noah history, we have our own headquarters, that will be able to support the growth of business and the need for additional office space in the next five to six years in Shanghai. And because of its close proximity to one of the nation's busiest transportation hubs, the facility is also an ideal premise to house various client conferences for the Yangtze River Delta region, including Shanghai, Zhejiang and Jiangsu provinces, which is our most important geographic segment, and in total, contributes to more than half of our business. The deal is expected to close within the next couple of months upon the satisfaction of further closing conditions and government approval.

Moreover, I would like to note that we have published our seventh ESG report for the year 2020, outlining our long-term commitments to ESG and responsible investments, and is available on the ESG section of our website. Overall, we're very pleased with our first quarter results, and the strong growth in client activities, as well as in the key sales force. We also hosted our Annual Macau Conference in March and received very nice attendance, that is showing that our clients are still very eager to learn about the overseas asset allocation, as well as insurance products. I'm confident with our business development outlook, as we will continue to improve our client service experience and optimize our product offerings.

So thank you, everyone, and I will now open the floor for questions. Operator?

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from Emma Xu with Bank of America. Please go ahead.

Emma Xu -- Bank of America -- Analyst

[Foreign Speech]

Congratulations on Noah for the very good first quarter results. But my question is, why don't you revise up your non-GAAP net income guidance for the full year? Because according to the current guidance, it seems that it implies for the next three quarters, the non-GAAP net income will decline close to 13% year-on-year. So what factors hold you back from revising up the non-GAAP net income guidance? Thank you.

Grant Pan -- Chief Financial Officer

Okay, thank you, Emma. That's a very fair question. First off, obviously, very happy to see the results in the first quarter. But at the same time, we're also conscious about the volatility, especially in the Asian market in China for the outlook of the rest of the year. So for that, as much we are confident with our top line, we're still pretty -- I guess, we will be pretty reasonably conservative in terms for the expectation of the super overperformance for the rest of the year for the market, which, in turn, obviously, will impact on the transaction values or clients' investment passion.

And two, as we have mentioned, we will continue to invest in our strategic initiatives, especially in this year. It's a very critical year to open up our transformation and some of the investments actually are in talent, and some of them are in technology. So the full year impact has not shown in the first quarter, and we expect that investment to continue to ramp up for the rest of the year. So from that standpoint, we're pretty confident of top line growth, but at the same time, we want to also make sure that we have enough room for investment in strategic initiatives.

Jingbo Wang -- Co-Founder and Chief Executive Officer

[Foreign Speech]

Grant Pan -- Chief Financial Officer

Yeah, so Chairlady has also complemented [Phonetic], in the last few quarters, when we were going through our transformation strategy, especially the upgrade, our management and also our organization capabilities, we're trying to, I guess, transform from a so-called start-up company, into a really mid-sized level type of modern corporation and organization, which actually requires heavier investments on the management and organizational resources.

Emma Xu -- Bank of America -- Analyst

[Foreign Speech]

So, thank you so much for answering my previous question, and I have a follow -- actually two follow-up questions. Could you please introduce the latest progress in the second quarter, including the major business metrics? And certainly, many domestic Chinese banks are paying more attention to the wealth management sector, because this is a very promising sector. So do you have increasing competition from the Chinese banks, and how will you respond to them? Thank you.

Jingbo Wang -- Co-Founder and Chief Executive Officer

[Foreign Speech]

Grant Pan -- Chief Financial Officer

So yeah, to address your second question first, Emma, that, as you know, we're always in a very highly competitive market, and because it seems that the transformation or the shift really in the regulatory and policy environment, seems we're facing more and more security brokerage firms, as well as banks in this particular market space. But from a standpoint, Noah has already moved on to Stage 2.0 in terms of wealth management industry that, it seemed that the banks are just starting their stage in terms of designing the right products and product-driven type strategy in wealth management, while Noah has moved on to really trying our best to match our clients' need with the right products and services as well as the agent and sales network that serve them. So we're really moving on to the right direction and moving into the right stage. Obviously, initial part will be tough and difficult, but we're very confident that we're actually walking on the right track.

Jingbo Wang -- Co-Founder and Chief Executive Officer

[Foreign Speech]

Grant Pan -- Chief Financial Officer

Yeah, so to add a little more color on to that, especially to elaborate what we mean about our bottom lines for commercial survival or commercial success, is that we always try to ensure, that we have a higher standard in terms of compliance than what the regulators have put on -- put out for the industry. For example, we are being very selective in terms of our acceptance. We're screening the clients' profiles, and we actually will take on some clients, at the same time, will give up on some clients. Just want to make sure, that we always try our best to place the right products for the right clients at the right place. But it seems that our competitors, as the new and rising competitors, you mentioned Emma, are still trying to copy probably our older sort of compensation scheme, for example, in their sales force, when we have actually moved on several generations, several upgrades on the compensation schemes for the sales force. So we believe that we're ahead of the curve, but we want to make sure also, we understand initial status -- initial part will be tough, but we're ready for the challenge.

And to your first question, in terms of the operational situation for the second quarter, obviously, I can't tell you too much about the numbers, but we will continue to market Gopher's target return products, which is met with a pretty good acceptance by the clients. We're pretty confident that the numbers will show up in the first quarter -- in the second quarter. And also, we continue to host actually little smaller conferences in Macau for the overseas insurance products, and I'm pretty happy to see the results, especially the positive results on the top line and the profits.

Emma Xu -- Bank of America -- Analyst

[Foreign Speech]

Grant Pan -- Chief Financial Officer

[Foreign Speech]

Operator

Thank you. [Operator Instructions] This concludes our question-and-answer session. I would like to turn the conference back to Mr. Pan for closing remarks.

Grant Pan -- Chief Financial Officer

[Foreign Speech]

Jingbo Wang -- Co-Founder and Chief Executive Officer

[Foreign Speech]

Operator

[Operator Closing Remarks].

Duration: 48 minutes

Call participants:

Jingbo Wang -- Co-Founder and Chief Executive Officer

Grant Pan -- Chief Financial Officer

Emma Xu -- Bank of America -- Analyst

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