Q2 2019 Earnings Call
[noise] Good day, ladies and gentlemen, welcome to Noah Holdings Limited second quarter 2019 financial results Conference call.
At this time, all participants are in listen only mode.
Following management's prepared remarks, there will be a Q and a session.
During the Q and a session.
We ask that you please limit yourselves to two questions and one follow up.
If you would like to ask additional questions you may reenter the question queue to do so.
As a reminder, this conference is being recorded.
After the U.S. market closed on Wednesday, no issued a press release announcing its second quarter 2019 financial results, which is available on the Companys IR website at H. TTP colon Ford SaaS forward Slash IR Dot no group Dot com.
This call is also being webcast live and will be available for replay purposes on the company's website.
I would like to call your attention to the safe Harbor statements in connection with todays call.
The company will make forward looking statements, including those with respect to future operating results and expansions of its business. Please refer to the risk factors inherent in the company's businesses and that may have been filed with the SEC.
Actual results may differ materially from any forward looking statements the company makes today.
Oh, the Oh, No holdings limited does not undertake any obligation to update any forward looking statements as a result of new information future events or otherwise, except as required under the applicable law.
The results announced today are unaudited and subject to adjustments in connection with the completion of the company's audit.
Additionally, certain non-GAAP measures will be used in our financial discussion reconciliation of GAAP and non-GAAP financial results can be found in the earnings press release posted on the company's website.
Today the call we hosted by him as long Jumbo Chairlady, and CEO Mr. Zhao Yi group, President, Sean <unk>, CFO and Grand Pan Group Deputy CFO of group or go for management part or partner with that I'd like to hand, the call over to Mr. value No group's president.
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Thank you operator for today's agenda I will first to briefly summarize noahs overall performance for the second quarter and the first half of 2019 as well as the development of our segments.
Chair Lady won't will then provide her current views on the company for a doctor strategies financial and operating results we have achieved.
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In the first half of 2019 law generated net revenues of RMB 1.76 billion up 8.2% year over year and non-GAAP net income of RMB 570 million up 13.2% year over year.
In terms of profit margin non-GAAP net margin in the first half of 2019 will reach the 32.2% up 140 basis points year over year, maintaining at a healthy level.
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While the number of elite.
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Further optimize the structure.
The turnover rate of elite relationship managers maintain at a low level of 1.4% with respect to the clients in the second quarter. The number of active clients increased by 31.9% year over year.
With the accumulation of client commitments with us.
The number of clients.
At all at that level increased.
Particularly the number of black card clients, our top tier clients with at least a 50 meeting assets advice to buy us grew rapidly up by 17.9% year over year, indicating the continuous trust the ultra high net worth clients happening though.
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Well over value added service drew attention in the second quarter, the reinsurance business grew by over 100% year over year, extending global insurance planning service to more than 15 hunger clients in the first half of this year. The number of newly established family Trust wealth planning and asset in Americas.
Law will continue to provide a comprehensive value added service to meet the needs of high net worth clients.
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Speaking breakthroughs in active management capabilities. It is also worth mentioning that by the end of second quarter. The total U.M. of RMB and the U.S. dollar denominated bonds, both exceeded RMB 3.8 billion.
Up by 2.2 times quarter over quarter.
Going forward, both calls will gradually replaced private credit products to meet clients' drawn these core fixed income investments.
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In June go for hosted the annual LP Conference and the P. summit that attracted over 2002 masters and dozens of basket.
Cost management.
In July North first our overseas Investor Summit, and the political battle will come closer relationship between global investors and us.
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In the first half of the year the principal amount of new loans originated totaled RMB 5.3 billion relatively flat from the same period of 2018 as part of the company hasn't won the agreement way down by what shall we use I mean be pulling me some downtime and just as they are they will do it.
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We're also happy to see that our risk overseas business and maintaining great momentum.
In the second quarter with total revenues of our overseas business reached RMB two huh.
Mark on the global reclamation of Naus compliance and a key step in our overseas expansion.
Looking ahead, nor will continue to adhere to the find the principles maintain close contact with regulators oversee market.
To further strengthen our capabilities of global asset allocation for overseas institutional and individual investors.
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Now I would like to talk about what we have done to enhance our operational efficiency. During our we have achieved in the last quarter in the second quarter.
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In order to further optimize the organizational structure, we continue to upgrade destructor of regional service centers merging small was to streamline and inefficient use of personnel and improve the productivity and our relationship managers.
Hoover's organizational structure was also improved with per capita you and often investment teams up by 22.6% quarter over quarter.
At the group level, we continue to be viewed and strengthened our professional teams upholding the lead culture.
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Moreover, in the second quarter, we launched the new nuclear bomb App called phone Smile.
This application merge that the public and the private fund accounts system.
So that user experience upgrades and the post investment monitored becomes much easier for our clients. Meanwhile, the system will automatically recommends the phone and the rebalance. According to the users risk appetite and current after making the asset allocation service more encouraging.
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In the second quarter, we also strive to establish the group's operational efficiency and efficiency and effectiveness through the following first top 10 key operating metrics for business segments.
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On the fundamentals and proactively manage the challenges and opportunities by focusing our overseas and the strengthening risk control, we endeavor to provide our clients with various and high quality products and.
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Said the size of assets held by Chinas High network clients has been rapidly increasing but we are seeing clients developing more conservative expectations as it without any capital pull businesses.
Some products either distributed by Noah or actively managed by Gopher all operated independently of each other and held in escrow by third party and reputable custodian banks are institutions without any duration mismatch highly leveraged financing or implicit guarantee et cetera.
Therefore, Noah has been able to stay away from pervasive risks that were spread over different products all asset classes, even doing several rounds of economic downturns are facing various financing risk.
And they will rebound after that I could do to help them internally.
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No the bank amendment of the Cytec Innovation Boy, which was officially launched in July among all enterprises that have been missed it on the board or approved by the CSRC golfer has indirectly in that invested in eight of them.
What's the other development of China's capital markets and expanded options for exits more unicorns and emerging industry companies I expect it to go public and bring investment income to clients and that continues to come from me actually to go next is on personal deposits now how this could have moved beyond that other CMT, so easy to find bigger number than bye bye.
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Yes, I can do more money this way more consistency than our private credit products under management and focus on meeting client demand for fixed income products with bond fund.
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For the second quarter, the U.M. of our U.S dollar denominated bond fund reached a balanced up over 500 million RMB and increased by 3.67 times comparing with the previous quarter.
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Nearly 70% of equity based funds achieved a 10% I are higher.
Gulf of discretionary multi strategy funds and family offices have also attracted more attention from ultra high net worth clients.
By the end of the second quarter of 2019, the U.M. of multi strategy investments reached 8.5 billion or maybe significantly up 20, 992% year over year.
In addition, Gulfport is currently running about 10 family offices can meet a personalized needs of ultra high net worth clients and also actively engaging with several other potential clients.
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Thank you.
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Now, let me now turn down because they tend to 18, when we do we didnt trend since 2016 golfer has been conducting due diligence and risk management measures with respected with respect to the loans and the applicable counterparties.
Up till now we have submitted detailed evidence as to the public security organization and filed a civil lawsuit to the Shanghai financial quite demanding JD dot com to assume the debt repayment obligation and for Khamsin Latino and other parties to assume joined guarantee obligations.
The civil lawsuit has been accepted by the court and we're waiting for the trial to commence.
At the same time, we are also actively seeking to preserve relevant assets, including but not limited to freezing bank accounts, including dot pledges and stop freezes and tying up other physical assets among other things.
At this time, both the criminal investigation and civil cases are ongoing and it is premature to assess the recovery rate of fund assets.
To reiterate our goal so I take the fiduciary duty of the fund manager with the utmost seriousness and remains a 100% focused on achieving the best possible results for clients, who invested in the affected credit funds honoring the trust and confidence from our clients and shareholders.
In addition to assisting the judicial authorities under investigation. We also continue to cooperate and communicate with regulators at present, both the regulators and Noah are waiting for the results of the criminal and civil lawsuits as well as further clarification of the incident. After the incident. The SMP rating team, we conducted due diligence on Noah based on current available information and we affirmed that our corporate credit rating maintained at investment grade.
In terms of client communication, we issued announcement two respective clients on June 24th and July eight to inform that were extending the redemption date for an additional six months to one year in accordance with the phone contracts and we will continue to communicate with affected clients at the situation develops.
According to our data we estimate that that their investment in the affected credit funds accounted for about 20% of their total asset at Noah on average.
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We're also conducting an internal review on this in mind to chose to purchase our products and services and invested over 7 billion renminbi with no.
Notably near 10% of clients affected by the Canada incident had placed new orders at Noah.
We're very pleased to see the gradual recovery of client confidence.
We'll have to really give you a complicated that we must have a new team competed and Glenn just one was how we timbaland continues on Moody's anchor Bay on BD pullback right now our teams within the cohort who don't do consistently is all cleaned up so consequently totaling Dougherty you will recall from Doug.
It sounds as though constant or meeting will be taking 20, Baltimore Towson Kosygin JV continued taking you could have utilization nobody went to the Latino consumer Kobacker Tensilica would you going down well as no its reputation and I'm deeply disappointed to see the situation as a member of senior management and the leader of the company.
Meanwhile, I want to be ashore.
That we will continue to use best effort to protect and promote the interest of our clients at present, our firm is committed to comprehensively promoting business and product transformation, while embracing financial supply side reforms promoted by regulators. We will continue to provide comprehensive asset allocation devices to clients and select NAV based product portfolio products as the only choice the strategic transformation from private credit funds to bond funds from product driven to comprehensive service driven strategy and from increasing transaction value to enhancing investment capabilities of active management is our future direction.
Finally, I would like to address that no. We're always trust common sense respect the market and stick to its fundamental mission.
With the passage of time, I believe I know as resilience as well as that as the market will show through.
Through the experience in handling of this incident, we believe that our team will be stronger more effective and able to turn this bump in the road entered promising opportunities.
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Thank you all now I'll turn the call to our CFO Shang to share the second quarter financial results. Thank you, Charlie and Hello, everyone. We had a solid quarter that they renewed market volatility, which we which we believe demonstrate the resilience of our business.
For the second quarter net revenues were renminbi $871.6 million up 9.3% year over year, driven by a strong increase in onetime commissions and other service fees non-GAAP net income was drilling be $263.4 million up 6.4% year over year and market was healthy at around 30%.
For the first half between 19, we realized non-GAAP net income I remember <unk> $568 million up 13.2% over the same period last year.
Our wealth management business had weaker transaction value of around drilling B 24.4 billion, but the overall product mix was much more diversified with private equity and public security contributing more than 55% of the total.
Net revenues were maybe 625.6 million up 12.4% year over year, resulting from higher effective one time commission rate of 1.2%.
Gopher asset management achieved strong ATM growth one of the most significant drivers for this segment.
Total assets under management was really be 180.8 billion or US dollar 26.3 billion at the end of the second quarter up 11.9% year over year and 5.7% quarter over quarter.
Net revenues or the asset management segment, where it really be 171.1 million a decline of 12.5% year over year as a result of lower performance based income this quarter.
We think were born based income will be a key component of total revenues going forward as we continue to strengthen our investment capabilities and realize more investment gains on behalf of our clients. It is worthwhile to note that close to 60% of our total AUM has performance the causes.
Now turning to our lending and other businesses segment net revenues were really be $74.9 million up 64.1% year over year, making up less than 10% of total group revenue.
Income from operations for the segment Reminbi $35.2 million.
Operating profit for the second quarter was renminbi 251.9 million up 13.9% year over year, we continue to manage costs and expect additional savings to be realized in the next few quarters total relationship managers compensation was only up 4.4% year over year this quarter compensation for the four other employees increased by 17.9% as we optimize our mid and back office function and we expect to see the cost benefits going forward.
Actually in a way for the quarter decreased by 13.3% as we focus on improving operating efficiencies.
However, we do expect an increase in legal and other expenses related to camping incident.
We continue to pursue action to protect the interest of affected clients and recover asset as explained by manor mall overall operating margin was 28.9% of more than 100 basis point compared to the corresponding period in 2018.
Moving to our balance sheet, we continue to maintain a healthy financial position and recently tendered for reaffirmed our investment grade rating.
One of our largest asset on the balance sheet is investment alongside funds. We managed investment in affiliates totaled roughly $1.4 billion or us all at $206 million at the end of the quarter, we expect to see appreciate overtime and future monetization will further enhance our liquidity.
Accounts receivable from Gopro managed funds increased this quarter with a strong growth in a year.
Lastly, I want to comment on or update to the 2019 forecast.
In consideration of macroeconomic conditions in China ongoing geopolitical tension as well as the expected short term impact, resulting from the camping incident, we estimate the non-GAAP net income for the full year will be in a range I really would be one to 1.1 billion.
We believe that the strength and recurring nature of our core businesses allows us to ensure profitability as we certainly upgrade our business for higher quality and sustainable long term growth with that we're happy to open the call for questions. Thank you.
Yes. Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.
If you are United Speakerphone, Please pick up your handset before pressing the Hughes anytime. Your question has been addressed and Youd like to withdraw. Please press Star then too.
At this time, we will pause momentarily to assemble the roster.
And once again as a reminder, please press star and then one if you would like to speak.
Just once more as a reminder, star and then one will allow you to speak.
Okay. A week. The first question comes from Martin Howard with Marmont with Nomura.
Hi, Hi, Martin.
Hi, Hi, Hi management.
So let me first off a question in Chinese and I will translate into English.
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Hi, Cesar Beholder Trivago unusual.
Oh, hi, Thanks, Thank you Kathy and Alvin team.
Thank you for taking our question my and my first question is about.
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Future strategy in terms of overseas business expansion and what kind of what the it's your key focus in terms of product and.
And the clients and the second question is about the landings on the other.
Second the other segments, we have seen dense.
No autonation decreased by 12.5% year over here, but.
The revenue from that segment increased by.
54%. So one thing the main reason for that is different thank you.
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Yeah. So.
I'll answer that question number one so our current offshore business is primarily in Hong Kong and we have extended 18.
Regions, such as the U.S., Singapore, Canada and Australia.
Over the years, we have seen very strong.
The man and needs for my clients and some of the global diversification and our expansion in offshore business is meeting this demand.
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Yes, so in terms of the product side for the offshore market, it's very much more mature market compared to emerging markets.
And our clients are primarily oversea Chinese and the products, we are focusing on our more standardized and more established pharma clearly those who don't get any assumed all claims previously you Tom Dave the Comcast and time, that's on those found Oh, we see TV hitting lately may just have milestones the one day.
Sylvia.
And in addition, expanding goal for active management capabilities and politics. It's also a very strong focus I'm as mentioned earlier, we saw very good growth in this regard and we're focusing on a fund to funds business. Both in terms of private equity as well as public security.
Lynn.
Transaction on new lending was slightly down year over year, but revenue was up 64%. This is due to the fact that there is a problem.
Quite a bit a re occurring revenue or recurring service or the lending business because it is the servicing agent for previously originated loans that they had sold to third parties.
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Okay. Thank you and the next question comes from Catherine Law with JP Morgan.
Hi, Catherine.
Hi, Sean I have two questions. So first question is on the overseas business do because her son Madam Wang has mentioned that Hong Kong is a key hopefully overseas development with the latest developments in Hong Kong have you seen any slowdown in pulled approach used by clients industry. Q. So this is the first thing second thing is you surrounding the cleansing incidents.
So I wouldn't like to know like because by media. So there were like the parties, which were helping the investigation. I mean are you being arrested that were not only the counterparties. So I wouldnt want to know like what is your assessment all the legal teams assessment on you know what would need to assume like you know we'll have any risk of flight are also being held accountable to compensate a pot of clients lost and it. This incident. Yeah. So this is my primary two questions.
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So on the first question.
Yeah. So the camping incident is still under a criminal investigation a lot of information its kept confidential by the police authorities. So I think it's difficult for us to really assess what will be the various outcome for the various parties involved you your item for that he sends you actually are reading about machine Coface ENTYCE, it's all kinds of them seem to be down how do they shop. They want that want the calculation. She easily can she did he or she enough. So they all have some tomiichi.
So as mentioned I think the police on working very hard on the overall pace.
We as a victim, we're assisting the investigation, but in terms of information provided to from the police to us in terms of the progress is very limited. So unlike a lot of research analysts on the call.
We have been actively monitoring the media report to assess some of the latest update they will Miss you and kind of the concept BARDA. So thanks again has the changing so how does that create great dealer geologic order from home fashion, some highlights and Tom signs pointing you towards agile and she goes without saying that the assumption Hazel dock capacity in India will need cemetery ones, which I went by adopting data table. So.
It has been reported on our various our media that the overall camping incident is a very large scale fraud, and we had been.
Very highly concealed in terms of misconduct and has affected a lot of large ecommerce platform as well.
Okay. Okay. Thank you and the next question comes from George Kelly with JP Morgan.
Hi, George.
Oh, Hi, Sheryl. Thank you for taking my question I have two questions. The first one is regarding our wealth management sales in the third quarter. So we don't have that they're still has dropped quarter over quarter, mainly driven by the credit products. So two questions here why is there a dropping quite a product and there is a certain public security products is it because of the effort of transferring some of our non standardized credit product into the standardized one and then second.
We don't have a pickup in private equity products could you share with us more color on that and the potential outlook in the second half of the 19th.
And then my second question is on fee rates. So we noted that the recurring fee rates in second quarter has dropped by 4% a year over year and then if we look at a gross basis of our recurring fee rate of asset management business by adding up both the income from asset management and wealth management other fees may seem to drop.
You have a year so could you share with us the you know the fee rate trend going forward. Thank you very much.
Sure again, and if you give me a minute or two all translate.
Your two question for wider team.
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So now I'll also comment on the first question. So I think you accurately identified I think we have been since the beginning of this year.
Actively on transferring our private credit business into more public securities. We think that it is.
Better strategic decision in terms of managing and risk. So I think that is one of the reason that you saw.
Transaction value for public security and in the second quarter to go up.
Hi, meaningfully and if we continue to implement to execute the strategy. We expect they will continue to demonstrate good growth.
At the same time I would like to slightly comment that for public securities.
On the credit side at least for bond funds, the management fee or recurring fee will be slightly lower than.
Private credit funds are we think that it.
Again still a better strategic decision.
To pursue public Securities Bond fund added protect better protect our client in the current operating environment now and from the private equity and yes, I think overall private equity fund raising in China continues to be difficult, but I think we have had some success in the second quarter, because we have very strong long term relationship with very key asset managers and this momentum we have seen it continue in the third quarter.
Now on the on the second question is regarding the recurring fee so recurring fee.
On a year over year slightly lower this is because for the middle of last year, primarily the second and third quarter. There were a couple of.
Product with higher recurring fee that matured and some of the recurring deal with a bit more back ended now the overall.
Goal for asset manage product the blended.
Gross management fee is about 68 basis point.
It has been fairly stable over the last few quarters I think.
There are two factors at play here one is as we strengthened our investment capability and do more direct investment on the private equity and real estate side I think that will be a positive for overall blended management fee rate, but on the flip side as Namal mentioned as we transfer our private credit business into our public security Bond fund and the management fee rate will be slightly lower so.
I think it really will depend how our product mix play out over the next one or two years, but I want to comment that.
Achieving a blended gross management fee rate around 60, 768 basis point it actually.
Very good metrics compared to other asset managers globally.
Operator.
Yes. Thank you all right and at this time I would like to return the floor the management for any closing comments.
No closing comments. Thank you everyone for attending our second quarter earnings call. Thank you very much.
Thank you.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.
Okay.