Noah : 3Q21 Edited Earnings Call Transcript (English)

Noah Holdings Limited [NOAH]

Q3 2021 Results Conference Call

November 23, 2021, 8:00 PM ET.

Company Representatives

Jingbo Wang, Co-Founder, Chief Executive Officer

Grant Pan, Chief Financial Officer

Analysts

Ethan Wang, CLSA

Nick Chu, Credit Suisse

Yi Wan Li, Gojian Securities

Yu Fan, CICC

Presentation

Operator: Good day, and welcome to the Noah Holdings Third Quarter 2021 Earnings Conference Call. (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 Mr. Grant Pan, Chief Financial Officer. Please go ahead.

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

Good morning, everybody, the investors and analysts. I'm 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 are excited to see continued growth in our black card and diamond card clients, demonstrating successful implementation and execution of the upgraded client servicing strategy, as well as record-high recurring service fees, thanks to the improved asset mix we allocate for our clients. We are also happy to report that we are 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% QoQ and 5.8% YoY. 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% YoY. Recurring service fees were RMB566.9 million, a record high since listing, up 13.7% QoQ and 1.2% YoY. The growth in recurring service fees was attributed to our growing assets

under advisory, or AUA. Performance based income was RMB82.1 million, down 32.6% QoQ and up 16.5% YoY, mainly contributed by profitable exits from our overseas PE products.

Income from operations was RMB228.9 million, down 31.8% QoQ and 34.1% YoY, 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, increased depreciation and amortization expenses related to our newly acquired headquarter, as well as the pre-planned 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 the RMB1.2 - 1.3 billion full year guidance.

It is also very encouraging for us to see sustained momentum in client activities and growth in our black card and diamond card clients. Despite the challenging market conditions, the number of active clients that transacted with us during the quarter was 21,269, up 4.8% QoQ and 3.7% YoY. The number of our 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 ~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. Enlarging 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 value during the quarter was RMB24.1 billion, down 3.7% QoQ and 16.4% YoY, mainly due to the overall performance in the secondary markets and the seasonality nature of primary market fundraising activities. Notably, the amount of private secondary products we placed for our clients was RMB10.6 billion, up 36.8% QoQ and 22.6% YoY, 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 product clients who subscribed and 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% YoY.

By segment, net revenues from the wealth management business were RMB653.6 million, up 4.5% QoQ and 4.1% YoY, which contributed to 72% of total net revenues. Net revenues from the asset management business amounted to RMB241.4 million, down 5.8% QoQ but up 8.5% YoY. Total AUM increased marginally from the previous quarter to RMB156.1 billion, as the growth in our 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 apartment

assets managed by our investment team based in New York.

Net revenues derived from our overseas business were RMB250.4 million, up 10.1% QoQ and 58.5% YoY, mainly contributed by carry income realized from successful exits in the USD investment products we placed for our clients. We will continue to strengthen our international platform to meet with the growing overseas asset allocation demands from our clients.

On the balance sheet side, we are pleased to announce that our total assets have 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 the end of the quarter, as well as an improved debt to asset ratio of 22% 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 to our clients by as early as next year.

In conclusion, we have concluded the quarter with solid financial and operating results despite the challenging capital markets conditions, demonstrating the resilience in our business model. We are 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 Chairlady Wang.

Jingbo Wang: CEO. (Speaking foreign language).

(Translated). Thank you Grant, I will first talk about my view on the macro situation, and then report on Noah's overall performance in the third quarter of 2021, the development of major business segments, the progress of Noah's "client-centric" comprehensive reform, as well as Noah's new positioning and future development strategy under the ever-changing 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 restraint mechanisms go hand in hand. China not only attaches importance to the 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 USD before 2030. Currently, China is moving

smoothly towards the per capita income target of 20,000 USD 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 residents' 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-standardised assets in the first half of 2021, laying a solid foundation for our healthy development in the future. Today, we stand calmly at the historical turning point of the industry and deeply realised 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 mode and the systematic business development from the headquarter to the front-line 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.

In the third quarter of 2021, Noah achieved net revenues of RMB 910 million, an increase of 5.8% year-on-year, of which the recurring service fees reached RMB 570 million due to the snowball effect of the scale of our Assets Under Advisory, setting a record high. As we released the group's strategic investment budget as planned, non- GAAP net income attributable to shareholders was RMB 280 million, a year-on-year decrease of 4.2%. As of September 30, the accumulated non-GAAP net income reached RMB 1.1 billion, completing 90.3% of the guidance ahead of schedule.

In terms of core business data, transaction value in the third quarter was RMB 24.1 billion; the total transaction value in the first three quarters continued to grow, reaching RMB 76.1 billion, a year-on-year increase of 3.7%. Among them, the transaction value of private secondary funds was RMB 10.6 billion, an increase of 22.7% year-on-year and 36.8% quarter-on-quarter; while the transaction value

of mutual funds was RMB 8.94 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 am very glad to report that in the first three quarters this year, our diamond-card clients increased 14.6% and our black-card clients grew 22.3%. The Noah Triangle service mode 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 investment 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 teams has been formed, connecting the 3K 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 client-and-product 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 realised the digitalization of the whole-process, creating a full-pedigree, 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 the organizational reform, breaking the past 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 front-line 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 as the center and meeting the multi-dimensional needs of clients with small service teams, the satisfaction rate of core clients has improved greatly.

As of September 30, 2021, thanks to the zero distribution of "non-standardized assets" and the redemption of all of these assets, Gopher's AUM reached RMB 156.1 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 in the next few years. The public securities assets actively managed by Gopher kept stable in the third quarter at 11 billion renminbi, same as the end of last quarter; the AUM of private equity was RMB 130.4 billion, an increase of 2% over the end of the previous quarter.

Gopher's client-centric transformation is positioned to improve its active management capability, adhere to the research-driven investment performance, and further become