Noah Holdings Limited (NYSE:NOAH) Q3 2024 Earnings Call Transcript November 26, 2024 7:00 PM ET

Company Participants

Melo Xi - Senior Director and Head of Global Capital Markets Group
Zander Yin - Co-Founder, Director and CEO
Grant Pan - CFO
Wang Jingbo - Co-Founder and Chair

Conference Call Participants

Chiyao Huang - Morgan Stanley
Peter Zhang - JPMorgan

Operator

Good day and welcome to the Noah Holdings Third Quarter 2024 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Melo Xi, Senior Director and Head of Global Capital Markets Group. Please go ahead.

Melo Xi

Thank you, operator. Good morning and welcome to Noah's third quarter 2024 earnings conference call. Joining me today on the call today are Ms. Wang Jingbo, our Co-Founder and Chair Lady; Mr. Zander Yin, our Co-Founder, Director and CEO, and Mr. Grant Pan, our CFO. Mr. Yin will begin with an overview of our recent business highlights followed by Mr. Pan who will discuss our financial and operational results. They'll all be available to take your questions in the Q&A session that follows.

Before we begin, I'd like to gently remind everyone that we'll be hosting a Corporate Open Day in Hong Kong on the afternoon of December 6th. The event will host analysts and investors and feature today's executive management team as well as others who will offer insights into the wealth management needs of our target client base, discuss global investment allocation strategies and showcase the progress we have made with our competitive global investment product offerings and comprehensive service metrics. Advanced registration is required to attend in person. A link to register was included in the press release announcing the event we issued last week. The event can also be viewed live by webcast or replay on our IR website. Please feel free to reach out to our IR team should you have any questions about how to register or watch the event online.

In addition, please note that the discussion today will contain forward-looking statements that are subject to risks and uncertainties that may cause actual results to differ materially from those in our forward-looking statements. Potential risks and uncertainties include, but not limited to those outlined in our public filings with SEC and Hong Kong Stock Exchange. Noah does not undertake any obligation to update any forward-looking statements except as required under applicable law.

With that, I would like to pass the call over to Mr. Zander Yin. Please go ahead.

Zander Yin

[Foreign Language]

Thank you and good morning or evening to everyone. Similar to last quarter, we'll share our financial results and domestic -- by domestic and international segments, followed by the overview of our growth strategy for both. As noted on last quarter's call, we're actively pursuing the strategy of refining the domestic market while expanding internationally. Domestically, we're strategically deploying sales personnel to specific independent and licensed business units. We're leveraging Noah Upright Fund Distribution whose core strategy is to focus on developing an online-first business model, complemented by offline services to allocate RMB assets globally.

In the insurance brokerage segment, Glory Insurance Brokerage is focusing on building a commission-only agency team. In the asset management segment, Gopher Asset Management is focused on managing exits in the primary market and cross-border products in the secondary market. At the group level, we are establishing a dedicated business development team to engage more effectively with high net worth clients through investor education and cross-industry partnerships. The evolving regulatory environment requires us to adjust each business unit to adopt a distinct service model to ensure compliance and improve operational efficiency.

Globally, we launched new brands to serve overseas Mandarin-speaking clients this year, including our wealth management arm ARK Private Wealth, asset management arm, Olive Asset Management, and global insurance trust and comprehensive services arm, Glory Family Heritage. At the same time, we are accelerating our expansion into global markets by gradually rolling out our wealth management services targeting key markets such as Southeast Asia, Japan, Canada, the United States, and Europe. We target three client segments, high net worth families and companies that recently relocated overseas or are preparing to do so. Secondly, Mandarin-speaking individuals or businesses who have immigrated abroad for less than five years. Thirdly, Mandarin-speaking settled immigrants who have resided overseas for a prolonged period of time. Our strategy focuses squarely on addressing the diverse needs of these client segments by offering a tailored range of products and services.

[Foreign Language]

Turning to our financials for the quarter, total revenues were RMB689 million, a decrease of 8.8% year-on-year and an increase of 11% sequentially, primarily due to a 32.6% year-on-year decrease in revenues from mainland China, which was partially offset by a 28.9% increase in revenues from overseas. Revenues from overseas increased 35.3% sequentially as well.

Similar to last quarter, I will use each business unit as the primary framework for updating investors on their performance and operations. Following my remarks, our CFO, Mr. Grant Pan will provide an analysis of our overall financial performance.

Internationally, we continued to enhance our product metrics to better serve our clients and improve our online service capabilities. During the quarter, we launched several products tailored to the three key client segments I mentioned earlier. During the third quarter, net revenues from overseas were RMB377 million, an increase of 28.9% year-on-year and 35.3% sequentially, accounting for over 50% of the group revenue for the first time, primarily due to an increase in revenues from offshore investment products, while US dollar AUA and AUM increased by 5.7% and 16% year-over-year respectively, as well as increased distribution of overseas insurance products. Hong Kong, Singapore, and the United States have been designated as the primary overseas booking centers for ARK Wealth. These booking centers not only service existing clients, but also facilitate engagements with new clients in Southeast Asia, Japan, Canada and other regions. As of the third quarter, we had 146 overseas relationship managers, including the direct sales team from Olive Asset Management, an increase of 89.6% year-on-year and 29.2% sequentially. Overseas AUA including third-party distributed products reached $8.7 billion, a 5.7% year-on-year increase.

As of the third quarter, ARK Private Wealth total registered clients exceeded 17,200, an increase of 20.9% year-on-year. Specifically, the number of accounts opened in Hong Kong reached 17,038, an increase of 19.8% year-on-year. In Singapore, we had 735 accounts, a substantial increase of 168.2% year-on-year. In the US, we have served over 1,000 clients cumulatively. Additionally, the number of discretionary investment clients reached 1,012, an increase of 55% year-on-year. iARK is our online wealth management platform that offers money market mutual funds and securities trading. During the quarter, it generated revenue of RMB8 million, an increase of 190.7% year-on-year. Following the launch of iARK app in Singapore, our service capabilities for Singapore local clients improved significantly. We expect Noah Singapore to reach breakeven point by the end of the year.

During the third quarter, the number of overseas active clients reached 3,139, an increase of 37.4% year-on-year. Total transaction value during the same period was $1.1 billion, an increase of 15.8% year-on-year. The number of active clients in US dollar mutual fund products reached 2,691, an increase of 53.1% year-on-year with the transaction value of mutual funds reaching $494 million, an increase of 83.7% year-on-year. Overseas transaction value for corporate and institutional clients reached $88 million in the third quarter, an increase of 57.1% year-on-year, while the AUA reached $213 million, an increase of 70.4% year-on-year.

[Foreign Language]

On the international asset management front, we launched our new asset management arm, Olive Asset Management, to provide clients with actively and externally managed overseas alternative investment products as well as mutual fund products. During the third quarter, transaction value of US dollar private equity products reached $152 million, a significant increase of 46.7% year-on-year. Transaction value of US dollar private secondary products including hedge funds, structured products and term deposits reached $395 million. [Technical Difficulty] 2023, up 21.5% year-on-year and 17.1% sequentially as we continued to enhance our public product metrics -- public market product metrics.

As of the end of the quarter, AUM for overseas products reached $5.6 billion, a 16% year-on-year increase and accounting for 26.3% of the total AUM compared to 22.8% during the same period last year. AUM for overseas private equity and other primary market funds reached $4.3 billion, a 19% year-on-year increase.

To provide comprehensive services for high-net-worth families overseas, we launched the Glory Family Heritage brand, which offers identity planning, global insurance, trust services, and other integrated solutions. This segment generated total revenue of RMB145 million in the third quarter, an increase of 42.4% year-on-year and 44.1% sequentially. Glory is actively exploring new business models as well. We are expanding our team of licensed commission-only agents and establishing new client referral models for external agency channels where we have already made significant progress. We recruited over 30 commission-only agents during the quarter with more than one-third already contributing revenue.

Regarding external agency channels, we have achieved a breakthrough from zero to one. We are targeting three types of institutions with a range of value-add services and professional capabilities for their clients, including cross-industry institutions, professional service agencies and licensed financial institutions. To date, we have signed contracts with 19 external institutions, which have already begun to contribute to revenue. We have also gained valuable insights from this model and will focus on its further developments moving forward.

[Foreign Language]

Domestically, we remain committed to our refining operations approach. We are ensuring compliance to effectively reduce costs and are focused on selecting products that can safeguard clients' interest in the long term, emphasizing investor education and foster deep engagements with our clients.

In the third quarter, net revenues from mainland China contributed RMB312 million, a decrease of 32.6% year-on-year and 8.8% sequentially. This was primarily due to limited new business activities and decreases in recurring service fees from RMB investment products and revenues from domestic insurance products. Noah Upright, which offers mutual funds and private secondary products, generated total revenues of RMB108 million in the third quarter, a decrease of 21.7% year-on-year. During the third quarter, the transaction value for RMB mutual funds reached RMB5.2 billion, a decrease of 60% year-on-year, but an increase of 4% sequentially. Transaction value of RMB private secondary products amounted to RMB786 million, a decrease of 55% year-on-year and 35.7% sequentially. These changes were primarily due to adjustments in our product strategy.

Gopher Asset Management achieved total revenue of RMB181 million in the third quarter, a decline of 17.3% year-on-year. In the primary market, Gopher's investment team continues to focus on exits for existing investments, having successfully achieved over RMB6 billion in the primary market exit so far in 2024.

Strategically, we are enhancing daily supervision and management of our portfolio funds and projects, exploring diverse exit strategies and improving dividend payouts from the underlying assets to improve DPI. Additionally, the investment team is proactively expanding the buyers market by pursuing exit opportunities through asset acquisitions or secondary fund transactions.

In the secondary market, private secondary products managed by Gopher primarily focus on deploying RMB to invest in onshore cross-border ETFs with the goal of capturing beta returns from the global market. This product series generated transaction value of nearly RMB100 million during the quarter. Total revenue from Glory Insurance Brokerage onshore during the quarter was RMB9 million, a decline of 89.9% year-on-year. The decrease was primarily due to adjustments made to the sales team and product selection strategy. We're also establishing a commission-only agents model. In terms of product selection, the focus is on medical and retirement related services. With the new sales team structure and new product mix, we expect this business to take a bit longer to ramp up.

In summary, through our strategy of refining the domestic market while expanding internationally, we are making significant progress. As we establish a global client service model, we are seeing significant demand for our overseas services among overseas Mandarin-speaking clients. Our new vision is to become the preferred wealth management platform for global Mandarin-speaking investors.

I would now like to turn the call over to Grant to go over financial results in more detail. Thank you.

Grant Pan

Thanks, Melo, and thank you Zander and greetings to everyone joining us today. Globally, the three major US stock indices reached historical highs in 2024 with the Nasdaq Composite up 25% this year and 80% since the end of 2022. Our clients have benefited from a forward-looking global CIO house view, which began recommending clients to allocate funds to QD products especially linked to US equity in 2022. We believe the overseas wealth management needs of clients remain adequately addressed. Therefore, we continue to actively expand our international businesses by increasing the number of local branches, strengthening our local relationship manager teams and enhancing our online services capabilities to improve the quality of our offerings.

Now let's get into the details of our financials. I'm very pleased to report that our third quarter results have regained positive trend with net revenue reaching RMB684 million. While this is still weaker 8.8% comparing to the same period last year, it does reflect an 11% increase sequentially comparing to last quarter despite significant market pressures. This increase is mainly driven by the growth of overseas businesses. Overseas net revenue in the third quarter reached RMB377 million, a year-over-year increase of 28.9%, accounting for 55.1% of total revenue. Specifically, revenue from US dollar denominated investment products reached RMB191 million, up 42.5% year-over-year and 40% growth sequentially.

Revenue from overseas insurance products was RMB145 million, up 42.4% year-over-year and 44% growth sequentially. Revenue from US dollar liquidity products increased significantly by 190% year-over-year, an impressive growth from online wealth management growth on iARK platform. These figures underscore the strong performance of our overseas business this quarter.

By revenue type, one-time commissions increased significantly by 28.5% quarter-over-quarter, primarily due to the recovery in overseas insurance. Recurring service fees declined 13.8% year-over-year and were relatively flat sequentially, mainly due to the aging of RMB denominated AUA and AUM. In contrast, revenue from overseas investment products continues to grow as we expand our international presence. Performance-based income was notably stronger this quarter, reaching RMB61 million, primarily driven by the successful exits of certain US dollar PE products.

Our total transaction values in the third quarter was RMB14.3 billion. As of the end of this quarter, US dollar denominated transaction value increased 15.8% year-over-year to $1.1 billion. As a proportion of total transactions, US dollar denominated products are growing and now account for 54.6% of total transaction value compared to 31% during the same period last year. As expectations of the federal reserve rate cut strengthen, we have observed a continuous trend of clients shifting from liquidity products to investment opportunities. In the third quarter, the transaction value for US dollar alternative investment products, which includes private equity, private securities and private credit products, increased significantly by 36% year-over-year and a 6.1% sequential growth to $245 million. As a proportion of total transaction value and total US dollar transaction values, alternative investment products increased to 12% and 22% respectively. We're pleased to see these products increasingly contribute to our ongoing management fee revenue.

At the end of the third quarter, our US dollar AUM grew significantly by 16% year-over-year and 4.6% sequentially to $5.6 billion, with the US dollar denominated AUA growing by 5.7% year-over-year and 1.9% sequentially to $8.7 billion. This reflects our ability to capture a larger share of clients' US dollar wallets or investment products.

Moving on to the income statement, our ongoing cost control initiatives continue to yield positive results. Total operating costs and expenses for the quarter were RMB443 million, a decrease of 11.6% year-over-year and an 8.1% decrease sequentially. Compensation benefits decreased by 22.7% year-over-year as we further improved human capital efficiency by reducing overhead costs with the proportion of middle back office down now below 50% of total headcount. Selling expenses and general, administrative expenses declined significantly by 26.1% year-over-year.

Government subsidies notably are expected to decrease this year with only RMB37 million received year-to-date. Despite the reduction in government subsidies, operating profit for the quarter remained consistent when compared to the same period last year and saw a notable sequential recovery of 80% to RMB241 million. Our operating margin has come back to 35%.

We also note that net income this quarter was impacted by certain factors, including the decrease in interest income on the RMB1 billion dividend payout from -- substantial payout earlier this year, the decline in domestic interest rates and the reallocation of some cash to short-term investments. Additionally, the US dollar's depreciation against RMB during the quarter led to a foreign exchange loss of RMB44 million. Obviously, the future appreciation of the US dollar, if any, is expected to mitigate this impact.

Tax expenses were notably higher during the quarter, primarily attributable to the withholding taxes on dividends payout. That being said, our non-GAAP net income still increased significantly on a sequential basis to RMB150 million. As of the end of the third quarter, our year-to-date net income has reached RMB418 million.

In terms of clients, as Zander mentioned, we maintained a stable total of 9,420 Diamond and Black Card clients at the end of this quarter. Meanwhile, our overseas client base continues to show robust growth with more than 17,000 overseas registered clients up 20.9% year-over-year and 3% sequentially. The total number of overseas Diamond, Black Card clients rose to 1,556. Overseas active clients also reached 3,139, a 37.4% increase year-over-year.

Turning to our balance sheet, while our cash and cash equivalents by the strict classification decreased to RMB3.4 billion this quarter due to the RMB1 billion dividend payout earlier this year, we maintain a robust liquidity position. Taking into consideration short-term investments and long-term investments, with some reclassification, our total cash reserves totaled around RMB4.8 billion, essentially unchanged from the previous quarter, if we exclude the impact from the RMB1 billion dividend payout. Our current ratio has improved to 4.4 times and the debt to asset ratio has dropped to 14.9% with no interest-bearing debt.

At the end of August, we also announced a $50 million share repurchase program and are pleased to see the subsequent rebound in our stock price. However, despite this rebound, we still believe our stock remains undervalued and doesn't truly reflect the growth prospects, robust balance sheet positions and cash reserves. It also fails to capture our special bond with Mandarin-speaking high net worth investors around the world. We plan to carry out the repurchase program at appropriate times once the trade window opens, reaffirming our commitment to delivering value to our shareholders.

In conclusion, 2024 is a year of significant transformation for Noah in every aspect as we actively deploy a more customer-centric sales model and deepen our international expansion efforts. Transformation is embedded in our corporate DNA and has been a key driver of our growth. We recognize this journey will be very challenging and we're confident that these strategic initiatives are not just about weathering the storm, they're about unlocking new horizons for long-term development and growth.

Once again, thank you all for your trust and your support. We'll now open the floor for questions.

Question-and-Answer Session

Operator

[Operator Instructions] The first question today comes from Chiyao with Morgan Stanley. Please go ahead.

Chiyao Huang

Hi, good morning. Thanks for taking my question. This is Chiyao Huang from Morgan Stanley. I got a question. Obviously we are observing quite some excitement on the equity market since September. So a lot of the momentum we think is very much retail driven. So wondering to what extent, as a wealth management provider, Noah can participate in this rising sentiment of equity market and how does that impact revenue and the profitability. So relating to that, how is Noah advising the clients on the asset allocation side under this environment? Thank you.

[Foreign Language]

Zander Yin

[Foreign Language]

So thank you, Chiyao, for the question. So with regard to the financial performances, obviously, the major policy was rollout at the end of September. So our third quarter financial results were largely not impacted by the recent policy changes and the rebound in the stock market. In terms of client sentiment, we're seeing more activities, interest among our onshore mainland China clients definitely. In the past, we have seen that the investment sentiment and confidence among our clients towards Asia market was very low or very weak, but at least right now we're seeing a rebound in trading activities and interest. But from a house view, CIO house view perspective, we still strongly believe that to advise clients to use their RMB assets to invest in global beta returns, which is still one of the most important asset allocation advice that we give to clients because we think that the policy still needs time to be implemented and the fundamentals or the economic fundamentals need time to show whether we'll be in hoop. And since we're a wealth management company, we are not a trading-driven strategy. Rather we are more taking a long-term asset allocation view. Therefore we haven't really changed our CIO house view. But that being said, we still have enhanced our product shelf on the RMB side, although we're still advocating to advise clients using QDII and then QDLP products to invest globally, but we have definitely introduced some of the RMB exposure products as well recently.

Chiyao Huang

Thank you.

Operator

[Operator Instructions] Your next question comes from Peter Zhang with JPMorgan. Please go ahead.

Peter Zhang

[Foreign Language]

Thanks, management, for giving me this opportunity to ask the question. I have -- this is Peter Zhang from JPMorgan. I have two questions. So my first question is we have been doing this refining domestic operation and expanding international strategy, and I think during the past few reporting quarter, our domestic revenue has been under pressure while our overseas revenue have been improving and the total revenue have improved sequentially in third quarter. I'm just wondering can we say that we have passed this period where Noah's value has been under pressure and going forward, our revenue trend can be stably improving. And domestic and internationally, what do you think will be the largest or most important driver for our revenue outlook in the next, say, one year or so? And then my second question is a follow-up question to the earlier question. I'm just wondering have we observed any trend in customer behavior or activity like what products are clients mostly purchasing in fourth quarter after this big stimulus in mainland China, and with this improving client sentiment, can we see that our -- the revenue trend in fourth quarter can be improved sequentially from third quarter. I will stop here. Thank you.

Grant Pan

Thank you, Peter. And I think it's probably a little bit yes and no to your question. Maybe it's a little bit too early to say that revenue growth trend has come into a turning point. As we know, the market has been changing drastically, especially after the election, but I guess it's safe to say the structure or our growth probably has come into shape that more resources and more expansion efforts are going into the international expansion. So in terms of accumulation of US dollar denominated investment opportunities, probably it's going to be more dominant in the future periods. Especially with the recurring management fees and carry, the structure of both sides probably would not stay the same or identical to the last quarter, but obviously we're hoping that we'll be able to accelerate the transformation, but at the same time, also remain very patient so that we don't deviate from the overall strategy. So I will let Zander take the question about the Asia market.

Zander Yin

[Foreign Language]

Thank you. Thank you, Peter, for the question. So I think Grant pretty much answered the first part of the question, and regarding your second point of question as a follow-on to the first question, so I think our overall view is that it's still quite difficult to see the effectiveness of the recent policies and also the continuation of these policies and to really make a decision on whether this is short term or midterm or long term driven, but we are seeing a trend among our clients or investors that they have been increasingly willing to communicate with us more. So I think at this critical point, this time window, we have the privilege of the more opportunities to engage with clients on one-on-one meetings, providing more asset allocation advice and insights and also to -- I guess, to drive more clients' transaction and also help them to reshape their portfolio allocation. So we still continue to provide long-term asset allocation advice and basically in three different perspectives. So first is to provide a safety net, which includes the different protection and inheritance tools for our clients globally. And secondly is the -- we call it cash management or cash flow portfolio that provides different liquidity and long-term inflation protection investment tools. And thirdly is to pursue growth strategy through private equity, venture capital and also AI-related investment opportunities. So also in this process, we need our different business units to provide each of their featured products and services through a client-centric mindset, but as we mentioned before, this is A -- pretty much a new sales model and we're still undergoing our transition period. It has been a few quarters, but we're still trying to work out the best way to improve efficiency under this new model. And we believe that as we gradually figure out the new sales model, it would be reflected in our future financial performance.

Melo Xi

Peter?

Peter Zhang

Thank you. Thank you management for the explanation. Really helpful.

Melo Xi

Thank you for the question too.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over for any closing remarks.

Melo Xi

Thank you all again for participating in our third quarter earnings call. And just another gentle reminder that we will be hosting our annual Corporate Open Day in Hong Kong on December 6th. So please don't hesitate to register or contact our Investor Relations team for further details. Thank you again.

Grant Pan

For those of you in the States, Happy Thanksgiving.

Melo Xi

Happy Thanksgiving.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.