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Noah Holdings Limited (NYSE:NOAH)
Q3 2021 Earnings Call
Nov 24, 2021, 7:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Noah Holdings Third Quarter 2021 Earnings Conference Call. [Operator Instructions]

I would now like to turn the conference over to Mr. Grant Pan, Chief Financial Officer. Please go ahead.

Qin Pan -- Chief Financial Officer

Thank you, operator. And for today's conference, I'll first introduce the quarterly financial results, and will hand back to Chairlady Wang, followed by a Q&A session.

Good morning, everybody. Dear investors and analysts, I'm very happy to share with you the solid financial results for the third quarter of 2021, with continued growth achieved across revenues and client activities. We're excited to see continued growth in our black card and diamond card clients, demonstrating successful implementation and execution of the upgraded client service and strategy, as well as record high recurring service fees. Thanks to the improved asset mix we allocate for our clients.

We're also very happy to report, that we're ahead of the schedule to deliver the full year non-GAAP net income guidance with RMB1.1 billion recorded in the first three quarters of 2021. Net revenues in the third quarter was RMB908.9 million, up 1.1% quarter-over-quarter and 5.8% year-over-year. One-time commissions were RMB215.1 million, down 12.9% amid market turbulence, and increased prudence over policy outlook from the last quarter, but still up 10.4% year-over-year. Recurring service fees were RMB566.9 million, a record high since listing, up 13.7% quarter-over-quarter and 1.2% year-over-year. The growth in recurring service fee, was attributed to our growing asset under advisory or AUA. Performance-based income was RMB82.1 million, down 32.6% quarter-over-quarter and up 16.5% year-over-year, mainly contributed by profitable exits from our overseas PE products.

Income from operations were RMB228.9 million, down 31.8% quarter-over-quarter and 34.1% year-over-year, with an operating margin of 25.2%. The decline in operating margin was mainly due to increased efforts in talent acquisitions and retentions, continued investments in IT infrastructure, increased marketing activities, including depreciation, amortization expenses related to our newly acquired headquarter, as well as the preplanned execution of our yearly strategic investment budget.

Non-GAAP net income for the quarter was RMB284.2 million and RMB1.08 billion for the first three quarters, giving us confidence to meet RMB1.2 billion to RMB1.3 billion full year guidance. It's also very encouraging for us to see sustained momentum in client activities and growth in black card and diamond card clients. Despite the challenging market conditions, the number of active clients that transacted with us during this quarter, was over 21,000, up 4.8% quarter-over-quarter and 3.7% year-over-year. The number of black card and diamond card clients also increased by 16%, since the end of 2020. This growth also makes us the fastest in the industry in the acquisition of core clients, compared to an industry average of close to 10%. The strong growth in black card and diamond card client group, is a reflection of the successful execution of the diamond black program, supported by our strategic investment budget, the implementation of Noah Triangle service model, as well as the upgraded client acquisition strategy. In large, in this client group, which contributed to around 80% of our AUA will continue to be one of the key strategic focuses in the long run.

Transaction values during the quarter was RMB24.1 billion, down 3.7% quarter-over-quarter and 16.4% year-over-year, mainly due to the overall performance in the secondary markets, and the seasonality nature of the primary market fundraising activities. Notably the amount of private secondary products we placed for clients was RMB10.6 billion, up 36.8% quarter-over-quarter and 22.6% year-over-year. As our clients seek long duration products when facing market uncertainties, which demonstrates our clients' sophistication, as a result of Noah's continued investor education efforts. Our historical data also shows that our onshore private secondary market -- secondary product clients, who subscribed, exited for over three years, tend to achieve higher returns in the double digit range, than those who exited earlier. When looking at year-to-date figure transaction value during the first three quarters of 2021 was RMB76.2 billion, up 3.7% year-over-year.

By segment, net revenues from the wealth management business was RMB653.6 million, up 4.5% quarter-over-quarter and 4.1% year-over-year, which contributed to 72% of total net revenues. Net revenues from the asset management business amounted to RMB241.4 million, down 5.8% quarter-over-quarter, but up 8.5% year-over-year. Total AUM increased marginally from the previous quarter to RMB156.1 billion, as the growth in PE AUM was partially offset by redemptions of real estate-related investments.

After the continuous efforts in exiting real estate related assets, we had exited majority of our onshore real estate assets with only office properties located in Shanghai, actively managed by our own operations team, and U.S. rental home assets managed by our investment team based in New York.

Net revenues derived from overseas business was RMB250.4 million, up 10% quarter-over-quarter and 58.5% year-over-year, mainly contributed by carry income realized by successful exits [Phonetic] in the U.S. dollar investment products we place for our clients. We'll continue to strengthen our international platform to meet with the growing overseas asset allocation demands from our clients.

On the balance sheet side, we're pleased to announce that our total assets have first time exceeded RMB10 billion mark for the first time, marking another remarkable milestone in Noah's 16-year history. We have a healthy cash balance of RMB2.8 billion by end of this quarter, as well as improved debt-to-asset ratio of 22%, with no interesting -- with no interest-bearing debt.

Lastly, I would like to highlight our recent developments in ESG initiatives. Gopher's investment professionals are working diligently, to develop ESG-oriented fund products, and we hope to launch these products by as early as next year.

In conclusion, we have concluded the quarter with solid financial operating results, despite the challenging capital market conditions, demonstrating the resilience in our business model, and we're determined to invest in key areas, where we can strengthen our competitiveness through our strategic investment budget, both in the fourth quarter and going forward.

And now, let me pass the speech to our Chairlady, Jingbo Wang.

Jingbo Wang -- Co-Founder and Chief Executive Officer

[Foreign Speech]

Thank you, Grant. I will first talk about my view on the macro situation and then report on the overall performance in the first half of 2021, with developments of major business segments, the progress of the client-centric comprehensive reform, as well as Noah's new positioning and future development strategy under the everchanging market environment. We will then open the floor for questions.

In 2021, we gained a more immersive experience of China's economy changing from high-speed growth to high-quality development. China's economy has entered an era of new certainty, and the only thing that can be expected is certainty. Incentive and restrained mechanisms go hand-in-hand. China not only attaches importance to the core quantity, but also pays more attention to the quality of development. so as to realize the effective quantitative growth, with substantial improvement of quality, the nation will achieve long-term economic development, transform into a high-income country, and is on track to achieve robust and sustainable growth.

Driven by the sustained economic growth, we are confident about the prospects of China's wealth management and asset management industry. Although the country's GDP growth is adjusting to a more sustainable level, it should still maintain an average annual growth of 4.5% to reach $29 trillion before 2030. Currently, China is moving smoothly toward the capital income target of $20,000 in 2030 and should be able to cross the high-income threshold. Although wealth growth is not linearly related to income growth, we believe that when China becomes a high-income country in 2022, its wealth-to-GDP ratio will enter an inflection point, and thereafter, the compound growth rate of China's household wealth will exceed that of GDP.

We think that China's financial industry is going to experience a stage of rapid growth and swift change. The wealth management and asset management industry will be able to take full advantage of these opportunities. Like all other industries, with Chinese characteristics, the development path of wealth management and asset management will be different from that of the West, especially the United States. For example, China's infrastructure-led economic growth model attached great importance to encouraging entrepreneurship and increasing resident income.

This model was highly dependent on credit support. So it created a large number of underlying assets for fixed income products. However, not all of these assets are suitable for the wealth management industry. After two years of unswerving efforts in transformation, Noah took the lead in successfully clearing non-standardized assets in the first half of 2021, laying a solid foundation for our healthy development in the future. Today, we stand commonly at a historical turning point of the industry, and deeply realize that to achieve future development and quality guaranteed growth, we need to stay focused on the wealth and asset management industry more.

Noah has also made a comprehensive transformation from a product-driven firm in the early establishment to a client-centric and survival as the bottom line company. In the first three quarters of this year, with the adoption of the Noah Triangle service model and the systematic business development from the headquarter to the frontline cities, Noah's diamond and black card clients continued to maintain a satisfactory growth, up 16% over the end of 2020, exceeding 8,000 people.

[Foreign Speech]

In the third quarter of 2021, Noah achieved a net revenues of RMB910 million, an increase of 5.8% year-on-year, of which the recurring service fees reached RMB570 million due to the snowball effect of the scale of our assets on advisory, setting a record high, as we believe that the group's strategic investment budget as we planned. Non-GAAP net income attributable to shareholders was RMB280 million, a year-on-year decrease of 4.2%. As of September 30, the accumulated non-GAAP net income reached RMB1.1 billion, completing 90.3% of the guidance ahead of schedule.

In terms of core business data, transaction value in the third quarter was RMB24.1 billion. The total transaction value in the first three quarters continued to grow, reaching RMB76.1 billion, a year-on-year increase of 3.7%. Among them, the transaction value of private secondary firms was RMB10.6 billion, an increase of 22.7% year-on-year and 36.8% quarter-on-quarter. While the transaction value of mutual funds was RMB8.94 billion, which decreased both year-on-year and quarter-on-quarter, due to the overall market performance.

With the transformation, we reiterated our focus on serving high net worth and ultra-high net worth clients as our core client base. I'm very glad to report that in the first three quarters of this year, our diamond card clients increased to 14.6% and our black card clients grew 22.3%. The Noah Triangle service model has been recognized by our core client base. At the same time, our clients' activeness improved steadily.

In the third quarter of 2021, the total number of active clients, including mutual fund-only clients increased by 3.7% year-on-year and 4.8% quarter-on-quarter. The number of conventional active clients increased by 25.5% year-on-year.

Digital transformation has helped Noah reform from product-driven to client-centric, and we have increased investments in technology in the past two years. The Group's technology center has had 13% of new hires this year, reshaping the whole business flow system of client development, client operation, products and solutions, as well as operation management. With the continuous improvement of our KYC/KYP/KYA system labels, the Group's management dashboard of Noah Triangle team has been formed, connecting the KKK application scenarios, the marketing map integrates all kinds of labels into the business development process of relationship managers, making the client profiles more accurate and the management of clients and products matching increasingly refined. The upgraded CRM system also provides relationship managers with mobile management options, throughout the life cycle of clients.

Moreover, at the product screening end, we have also realized the digitalization of the whole process, creating a full category, diversified and high-quality product shelf as well as making the product launching process more standardized and systematic. The wealth management market is constantly maturing and clients are more rational. Noah has introduced organizational reforms, breaking the path to incentive mechanism for relationship managers, that was similar to insurance sales. The client-centric philosophy requires us to serve high net worth clients with top-notch personnel, and the talent density of our frontline relationship managers continues to increase.

We have also reformed our business process, so that high net worth clients can enjoy the same services available to institutional investors. By taking clients at the center and meeting the multidimensional needs of clients with small service teams, the satisfaction rate of core clients has improved greatly.

[Foreign Speech]

As of September 30 2021, thanks to the zero distribution of non-standardized assets and the redemption of all of these assets. Corporate AUM reached RMB156.1 billion. It can be seen that incremental public securities have supplemented the gap, thus achieving stability and recovery of the total AUM. The continued optimization of asset management structure and the snowball effect will be more obvious for the next few years.

The public securities assets actively managed by Gopher, kept stable in the third quarter at RMB11 billion, same as the end of the last quarter. The AUM of private equity was RMB130.4 billion, an increase of 2% over the end of the previous quarter. Gopher's client-centric transformation is positioned to improve its active management capacity, adhere to the research-driven investment performance and further become the preferred wealth management brand, with stabilized functions for clients.

It is worth mentioning that as of September 30, the investment team of Gopher's target strategy product classified as public securities, has effectively reduced portfolio volatility and obtained relatively stable excessive returns, where the positive, stable and balanced funds each achieved their target investment performance.

On the private equity side, Gopher's award winning Hedge Fund Series 5 has basically completed its investment process, and Series 6 has been officially launched in November. Gopher has built a blueprint for digital transformation. In 2021 and 2022, Gopher mainly focuses on the objectives of digitalizing investment and research, data governance and structuralization, as well as continued client experience improvement. In the third quarter, Gopher launched the fund investment and research management system, which provides the multi strategy investment team, with a standardized evaluation and fund pool entry process, combining quantitative analysis and qualitative evaluation.

[Foreign Speech]

Stricter regulation is a global phenomenon. Compliance is lifeline and the barrier of competition. Noah respects common senses and reveres the market. From the first day of our establishment, there has been no capital pool [Phonetic], no implicit guarantee, no duration mismatch, no leverage allocation, and no cross-border capital operations. Noah operates fully compliant in countries and regions where we hold licenses. After 17 years of development, we are increasingly clear about our market positioning, and determined to be deeply rooted in the wealth management and asset management industry.

Noah's core values are client-centric and survival at the bottom-line. We connect with the world's leading asset management companies, make continuous improvement and make friends with time. In 2017, President Xi Jinping said at a Central Economic World conference, China's high-quality development is that to meet people's growing needs for a better life, to reflect new developments concepts, with innovation as the foremost driving force, coordination as an endogenous Asia, growing as a universal philosophy, openness as a requisite way, and sharing as the fundamental goal of development. We couldn't agree more.

Noah has been releasing a corporate system ability report every year since 2014. During the China International Import Expo this month, at the International Forum on Corporate Social Responsibility co-sponsored by the Ministry of Industry and Information Technology, and the United Nations Global Compact, the Ministry of Industry and Information Technology awarded Noah, the highest AAA rating for excellent Corporate Social Responsibility reporting, making Noah the only private financial enterprise awarded with this high rating. In 2021, we also won the ESG Responsible Enterprise Award of the year, granted by the Summit Forum on ECSI in China. Noah will adhere to high-quality development and keep contributing to the sustainable development and growing GDP.

Now, let's open the floor for questions. Thank you.

Questions and Answers:

Operator

We will now begin the question-and-answer session. [Operator Instructions] And the first question will come from Ethan Wang with CLSA. Please go ahead.

Ethan Wang -- CLSA -- Analyst

[Foreign Speech]

Hi management, I have three questions. The first one is around the investment advisory services. So China has been giving out investment advisories -- licenses to financial institutions, and we've seen brokers renting out their services on their structures on this front. So just wondering, is that going to change the competition landscape, and how does Noah see this new trend of investment advisory services? And my second question is around a recent criticism from regulators on cross-border brokers, and we've seen a ramp up in interest under these circumstances, under professional managers overseas products from China's investors. So could management help us -- give us more color on Noah's product offerings on this front? Thank you.

Jingbo Wang -- Co-Founder and Chief Executive Officer

[Foreign Speech]

Qin Pan -- Chief Financial Officer

Thanks Ethan. I'll translate Chairlady Wang's answer, and also have a little bit of my input. In terms of IC license, we agree with you that it's probably going to be a pretty big market, and we're in the process of applying since last year. But I think our view is that, for the independent wealth managers, probably will be in the next batch of the application, after the water has been tested for a few months. And we do believe that it probably will have as much impact on us, as one would imagine, as you can see that we actually break down the clients into three groups, based on their investment preference. Obviously, the first type is the product-driven, they basically just go after the right products they like. And the second one is that, they just pretty much give you discretion in terms of investing.

We believe that the IC license is probably targeting the semi discretionary clients, they want to have little bit of participation in the investment process, and at the same time actually receiving professional advice from the ICs. Noah is pretty good on the first two types into the private product-driven and discretionary management. Not saying that, we're giving up on the last type, but which we don't think that -- honestly the industry is ready to provide professional advice plus the actual portfolio. As you know that, the regulators actually doesn't allow a virtual portfolio, so it has to be an actual portfolio of investments. So we believe, it's probably still in the process of water testing, but obviously, we'll be very active in pursuing this license. I think one of the things that I would like to mention that, Gopher's target return product actually is -- to some extent actually helps the client with their purpose of having a diversified portfolio, similar to what ICs are doing.

So on the second question, we understand from regulatory standpoint, the pressure actually comes from, whether or not they're helping certain clients to move sort of assets overseas in little pieces. We think it's a probably dangerous move, and that's why we'll sort of understand why the regulator is getting nervous on that. But in terms of Noah, when we had our first branch -- oversea branch in Hong Kong in 2012, we have been pretty much serving clients who already have assets overseas, and lots of the investment directions is actually to try to invest back into China's development opportunities. So we believe actually, we hold more advantage on that type of product. So we don't think it's going to have too much impact on us. Our ESOP plans and ESOP business is pretty much helping clients -- basically pure trust service, we actually don't interfere with any of their fund transfers.

Does that answer your question, Ethan? Okay. Thanks.

Ethan Wang -- CLSA -- Analyst

Yes. Thank you.

Operator

The next question will come from Nick Xu [Phonetic] with Credit Suisse. Please go ahead.

Nick Xu -- Credit Suisse -- Analyst

Thank you management for taking this question. My question is, Noah is selling other people's mutual funds in a big way, in a very good way. In the meantime, your asset management business in the private markets is also booming and your targeted portfolio in my view, is very much the DPN [Phonetic] business. My question to Mr. Pan is, since you're doing basically everything, that the large asset manager is doing, have you ever thought of converting Noah into a full scale asset management company -- in China context, mutual fund company with a private market capability?

[Foreign Speech]

Jingbo Wang -- Co-Founder and Chief Executive Officer

[Foreign Speech]

Qin Pan -- Chief Financial Officer

Thank you, Nick. Yeah, it's a great question. We actually think that probably you could help us communicate with the regulators that, the application process for mutual fund license in China is actually very stringent. So you either hold a sort of main license domestically already, or you have to basically apply in the name or in the identity -- as an individual. So for example, maybe Chairlady Wang and Mr. Yin, they could apply for that as individuals. But obviously, that's not going to serve the group well, from the foreign company's standpoints.

So, that's one of the strategic points that we have talked about in the past. But we didn't believe that, with this effort and everything that comes with, you probably are required to separate or spin off any privately raised funds business, if you do hold a mutual fund license. And considering what we have right now and as wealth management, asset management, and also Noah Global Intelligence, by giving all these up, having only mutual fund license, I think that's going to be a pretty major transformation, especially in the client segmentation, from high net worth to more or less, to the retail side. So it's obviously one of the main licenses, that probably will help boost business, but at the same time, I think that it changes our identity and also the segmentation of clients. So hopefully that answers the question.

Operator

The next question will come from Yi Wan Li with Gojian Securities [Phonetic]. Please go ahead.

Yi Wan Li -- Gojian Securities -- Analyst

[Foreign Speech]

So, my question is that, we have a sharp increase in the management costs, such as the compensation, selling expenses, and we would like to ask, how the management will integrate this in the press release and what's the future plan for the incoming operation -- for the services here?

Qin Pan -- Chief Financial Officer

[Foreign Speech]

Jingbo Wang -- Co-Founder and Chief Executive Officer

[Foreign Speech]

Qin Pan -- Chief Financial Officer

So Chairlady Wang actually wishes to supplement a little bit on this as it's a very important point that, the actual structural change, actually comes as a result of the transformation that we're doing. As you might be familiar that in the past, although our relation managers are full time employees of ours, but their pay structure actually has a lower base pay, but higher commission component in the past scheme. But after the -- since the third quarter of this year, we have increased the portion of the base pay up significantly, and their bonus actually now tied with -- not only with the sales of transaction, but also with the satisfaction from the clients, as well as the quality of operations and services.

So, we want to transfer. Basically, they are not being viewed as a salesperson, but rather a private banker or investment consultant. So when they actually pull out their business card, they will gain the respect they deserve. As you can see that, the so called the insurance agent model in the industry is actually deteriorating, as you will see the cross sell and also everything is sale first type of compensation schemes actually is not working, that the basic reasons that the interest of the salesperson with the client is actually not aligned. So it's going to be very difficult to last.

We have seen pretty obvious results in terms of talent acquisition, since the transformation, as we are very happy to see the fresh graduates now come from top schools in China, and also the private bankers that we hire, are now basically the senior or seasoned private bankers from the banks that we typically wouldn't be able to attract with the old compensation scheme. So this is something that we're going to insist on, and continue to invest, to make sure that we actually win the first battle of the very important war, is the talent.

Yi Wan Li -- Gojian Securities -- Analyst

[Foreign Speech]

Jingbo Wang -- Co-Founder and Chief Executive Officer

[Foreign Speech]

Yi Wan Li -- Gojian Securities -- Analyst

[Foreign Speech]

Operator

The next question will come from Cici Leng with CICC. Please go ahead.

Cici Leng -- CICC -- Analyst

[Foreign Speech]

Okay, I will translate my questions. So the first question is regarding AUA, would you please show more data on AUA and breakdown by different types of products? And for the second question, it seems we have plenty of cash on our balance sheet, so I just wonder, do we have any plan for dividend payout?

Qin Pan -- Chief Financial Officer

Okay. Thank you, Cici. I'll respond to these two questions. First in terms of the AUA, probably over -- close to 60% of AUA that we help our clients place, is in the private equity and it's also the category that we see pretty consistent growth for the last few quarters. And also the next major category is obviously the private securities, which accounts for about 30% of the total AUA. And we're seeing some fluctuations, but it's actually probably more or less related to the NAV of the total market, and also their products. But that is also the main category, that will see the clear attraction for our clients.

One category that we're seeing, obviously is -- we will continue to exit and help the client realize their returns, is obviously the assets relating to real estate, and happy to share with you, that we have a very limited exposure in this, which actually allows us to be able to have a pretty good asset mix for our clients. So the growth in the private equity, actually also the growth in private securities, is the direction we're seeing our clients' pretty interested in.

And the second question in terms of cash balance, we do maintain very good cash balance, as well as operational and investing cash flows. In terms of dividend, we do plan to have a more extended discussions, that hopefully will have something for the market in the next few months.

Cici Leng -- CICC -- Analyst

[Foreign Speech]

Thanks very much.

Operator

Go ahead, sir. The next question will come from Ethan Wang with CLSA. Please go ahead.

Ethan Wang -- CLSA -- Analyst

[Foreign Speech]

Just a very quick question on our status as a foreign listed company, because we understand there are still these mysteries [Phonetic] surrounding China's ADRs, since Hong Kong has just changed its listing rules to allow non-innovation related companies to be listed through statutory listing channel. Just wondering, if Noah has such kind of a conservation in the near future? Thank you.

Qin Pan -- Chief Financial Officer

Thanks Ethan. We actually do pay attention to the development, of especially the holding foreign company [Indecipherable], and we have had discussions with both our lawyers and our auditors. Obviously, it's something that we do keep a very close eye on. But the professional side, they believe, there will be at least some solutions between the two governments, it's more political than actual market governance, and considering the impact of having the whole group of foreign companies, that are to be exited, or actually delisted, sort of violently from the market, we don't see that possibility as very high and imminent. But obviously, whatever they put together to comply with, especially I believe that recent requirements, our auditors actually communicated to us, that it's very heightened disclosure requirements, especially around the VIE structure, blah, blah, blah, all these are, we believe, they are strictly along the line of having more information, more transparency.

In terms of having -- listing plan on the second market, it's obviously in the -- sort of our plan Bs. We're not actively seeking to do so. We understand the new rules of the Hong Kong listing rules. We also understand the backlogs in the application process. And considering, especially with Noah, we believe that Hong Kong market probably doesn't provide additional meaningful liquidity for us, but remains an interesting option.

Ethan Wang -- CLSA -- Analyst

Thank you.

Qin Pan -- Chief Financial Officer

[Foreign Speech]

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Grant Pan for any closing remarks. Please go ahead.

Qin Pan -- Chief Financial Officer

Thank you, operator. I'm very happy to be able to communicate with our investors and analysts, and we're happy to deliver another quarter of solid results, especially seeing the good results in client activities. We will have separate concalls later on, and if you have further questions, I'm very happy to speak to you. Thank you.

Operator

[Operator Closing Remarks]

Duration: 60 minutes

Call participants:

Qin Pan -- Chief Financial Officer

Jingbo Wang -- Co-Founder and Chief Executive Officer

Ethan Wang -- CLSA -- Analyst

Nick Xu -- Credit Suisse -- Analyst

Yi Wan Li -- Gojian Securities -- Analyst

Cici Leng -- CICC -- Analyst

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