Noah Holdings Ltd. Q4 FY2024 earnings call

• Market Conditions and Results: 2024 had challenges from macroeconomic-induced subdued client sentiments but opportunities for restructuring. Implemented organizational restructuring domestically to comply with regulations and expanded overseas teams.
• Product Focus: Prioritized global RMB-denominated ETF QDII and QDLP products, shifted insurance offerings to medical and elderly care products tailored to long-term client needs.
• Operational Efforts: Consolidated presence in core cities, retained top relationship managers to reduce risk and compliance costs, enhanced online capabilities. Capitalized on Q4 market upturns with private secondary products transaction value up 200% sequentially and public security product revenues up 36.8% sequentially.
• Overseas Expansion: Launched new internationally focused brands (Arc, Olive Asset Management, Glory Family Heritage). Expanded overseas relationship managers to 138 in HK and SG, with plans to expand to US, Japan, Canada. Built commission-based overseas and domestic insurance sales team, now at nearly 100 people.

Overseas: Net revenues in 2024 were RMB 1.3 billion, accounting for 48% of total net revenues. Overseas wealth management (Arc) had net revenues of RMB 675 million in 2024. Overseas asset management had net revenues of RMB 439 million in 2024. Overseas insurance and comprehensive services had full-year net revenues of RMB 140 million. Domestic: Total net revenues from Mainland China in 2024 were RMB 1.4 billion, down 27.5% year-over-year. Domestic public securities had net revenues of RMB 487 million in 2024. Domestic asset management had net revenues of RMB 772 million in 2024. Domestic insurance brokerage had net revenues of RMB 43 million in 2024.

• Expect revenue and profitability to recover in the future as overseas business ramps up and domestic market recovers.
• Priorities for 2025 include full compliance with regulatory standards, expanding overseas relationship manager team, growing commission-based insurance sales team, optimizing global investment and asset allocation solutions, and improving technology systems.

• Macro-economic uncertainties that could impact client sentiment and investment activities.
• Regulatory changes that may affect business operations.
• Intense competition in overseas markets, particularly in Hong Kong's insurance sector.
• Fluctuations in investment sentiment and market performance that could impact product distribution and revenues.

Q: Since the beginning of this year, what has been the demand for investment products among high-leverage points? Which type of products has been more popular? What's our CRO's current investment strategy? And which types of products are being promoted? In the past three quarters, the sales of insurance products have declined year on year. Will this trend continue into 2025? In the future, which products will be the main source of revenue growth in terms of one-time commissions? My second question is about overseas business growth. Overseas revenue has been increasing quarter by quarter. It was just mentioned in the meeting that the United States is being used as a booking center. Can you provide information on our business development in the United States? Currently, which countries or regions are the main sources of overseas revenue growth? My last question, in this quarter, we have seen a sizable settlement reversal and contingent litigation reversal. Can you give us more color on that?

A: As mentioned, we published our newest edition of our CIO report in the first quarter of the year. The overall logic behind our house view is that we think the global market will remain very volatile due to various uncertainties. Our suggestion to our clients is to seek relatively certain investment products within these uncertainties. We also stress that global asset allocation is very important. In terms of client sentiment and demand, we saw the trend since the fourth quarter and also extending into the first quarter of this year that the investment sentiment and demand among Chinese high-net-worth clients have been rebounding. This is due to two main factors. First, the subdued investment sentiment since the COVID situation in China has reached a relatively bottom point before the fourth quarter last year. In the past few years, our clients and also Chinese high-net-worth clients did not engage in a lot of investment activities, but now we are seeing their confidence starting to pick up. Secondly, the market performance, whether it's the A-share, the H-share, Hong Kong stocks, or even US stocks, has been rebounding. So a lot of clients have come back to the investment demand. In terms of what types of products our clients currently prefer, liquidity is a major consideration among our clients. A lot of the popular market securities, hedge fund products, themselves are NAV-based and liquid. Some semi-liquid primary market products, such as private credits and infrastructure, are also very popular among our clients. Our concern or target is to enhance our product shelf to meet our client's demand while suggesting our clients engage in a global asset allocation strategy. In 2025, with advancements in the artificial intelligence industry, whether it's primary market or public securities, anything related to AI is also a very important investment theme for clients. The insurance market, especially in Hong Kong, is still highly competitive because there are operations that are not compliant with regulatory requirements, including commission kickbacks. We never did anything like that. We stick to compliance and regulatory requirements, and we never kick back any commissions to clients. The difference between Noah and other insurance brokerage firms is that we provide our clients with overall asset allocation advisory, and insurance is part of that advisory or solution where we suggest our clients use insurance as a tool to protect the safety net of the overall portfolio. The clients we serve and the average ticket size of insurance is higher than the peers or other brokerage shops in the market. As Zander mentioned in the previous earnings call, the overall insurance premium increased by 30% this year. The decline group is still quite different from the market competition. Looking ahead to 2025, we think there will still be competition in the market. To counter that, we have worked with insurance firms or product providers to come up with discounted plans for our clients. This is on the product side rather than kicking back commissions. During the past year, we have seen the Hong Kong government coming out with many new requirements to counter noncompliance operations in the market, which is beneficial to compliance firms like Noah. The challenge is that a lot of the onshore wealth management platforms collapsed, and after they collapsed, a lot of the employees or their relationship managers turned themselves to do overseas insurance, so the labor supply in the market is increasing. Our overall strategy for 2025 is to use asset allocation overall advisory with multi-strategy and provide better value to our clients. We are working with insurance firms to increase our competitiveness in the insurance product segment. Helen also asked about our operations in the US. The US is a very important market and a planned booking center for our business. In 2024, our majority of focus in the US has been on the product side. We have four different teams in the US, and three of them are focusing on either investment or product selection. We are happy that recently and in the near future, we will be welcoming some top-tier talents joining us who have worked in top-tier hedge funds or fund managers previously. We think this will increase our competitiveness and effectiveness in terms of product selection and GP and fund manager coverage. We think that even though we are competitive in terms of our product selection and product shelf, to keep up the competitiveness, we need to continue to cover and work with the GPs, especially in the local markets in the US. Regarding the US market, we are now constructing in four locations. We used to have two investment teams, one in Silicon Valley focusing on tech-oriented VC funds and another real estate team in New York. We are in the process of acquiring advisory capabilities that will allow us to have a third booking center in addition to Hong Kong and Singapore in the US market. We have built an OPM, which is the product selection center in Colorado, and have local cooperation with some local banking partners and another location in Irvine, Los Angeles, mainly serving our clients on the US insurance side and hosting various client activities. The new revenue from two additional locations is slowly coming into shape, but the capability of adding another booking center in North America, especially to serve Chinese immigrants in both the US and Canada, will give us a lot of advantages, especially competing with other Chinese background firms. Regarding the quarter four one-off reversal from accruals, it is a one-off event. The final outcome of a pending case was more optimistic or preferable for us.

Q: Thank you for giving me the opportunity to ask questions. This is Peter Zhang from JPMorgan. I have two questions. My first question is regarding the first quarter top trend. Can you give us an update on the first quarter trend in terms of client sentiment and the wealth management product sales in the first quarter? With the completion of our domestic strategic transformation and some improvement in domestic investment sentiment since late 2024, how should we expect our 2025 revenue trend? Can we expect the revenue to see a stabilization target category or some recovery in 2025? My second question is regarding the overseas RM. We noticed that the number of overseas relationship managers has declined by 5% sequentially in the fourth quarter and fell short of the previous target of 200 for 2024. I wish to understand more about the reason behind this relationship management adjustment in the fourth quarter last year and what will be our overseas RM headcount outlook for 2025. I also wish to understand our overall headcount outlook for 2025.

A: On the first question related to investment sentiment right now and the outlook for the financials in 2025, the overall trend, as we previously mentioned, is that we see clients' investment sentiments have been rebounding significantly. We saw the trend starting since last year's year-end flagship Black Card and Diamond Card client summit, which was the largest in terms of scale in our history in terms of client coverage and the number of clients attended. We hosted these summits in key major cities in China, as well as five sessions in Hong Kong alone. The feedback we got from clients was that it's very rare to have these large-scale and high-quality events for individual investors or high-net-worth investors because, on one hand, a lot of Chinese wealth management firms have exited this market, and some foreign firms are less motivated to host these events given the market condition. The clients who attended our summits tell us that the quality of the content and the scale is probably the best in the industry. We did a data summary that over 90% of our diamond card and black card clients are overall profitable. This is also our most important client base and a reflection of the quality of asset allocation advice that we continue to provide to our core clients. Chair Lady also mentioned that this month, we hosted a public security summit in Hangzhou, which has been quite a hot city considering all the technological investments, for example, Deep Search, which is also based in Hangzhou. We hosted two days with over 1,000 clients attending. We saw that the clients are very active and keen to learn and listen to what the managers have to say, and they think that the investment market in China has opportunities to invest. We also see a lot of transaction value generated from this summit. In terms of global asset allocation, what we have been doing in the past two to three years with eight consecutive CIO house view reports, I think the clients are now starting to buy into our advice that they shouldn't just allocate their assets in a single market, which is China. They need to consider global asset allocation and investment, and that's exactly what they're doing now. Speaking of 2025, since we don't give out concrete guidance on revenue and profit, the overall trend is that we set our KPIs and requirements for each business unit, especially in the overseas investment product segments. The client's sentiment and demand are growing, and according to our house view, this is a critical time to act. We hope that the downfall in our RMB private market product and the associated decline in recurring service fees can be gradually offset and overcome by the growing overseas investment portfolio. In terms of insurance, we think that although the market competition is fierce, among our clients, we see that a lot of them are not subscribing enough insurance products or related tools for their succession planning and asset segregation purposes. We want to utilize this window of opportunity to help our clients refine their strategy within the asset allocation, especially in a highly volatile market. Overall, we hope that 2024 was kind of the bottoming, and 2025 should be able to see some rebounding from the bottoming out. That's the outlook on 2025. Regarding the decline in the fourth quarter in terms of the overseas relationship manager and the reasoning behind it, Zander, Grant, and Chair Lady all mentioned about this. Our overall hiring strategy is that the fourth quarter is usually the year-end review window. In our prior experience in China, when we established our sales team, typically new people who join us need some time to get used to our system and our product and asset allocation advisories. There will be people who do not meet our expectations, so actions would be taken at the year-end time. Especially because overseas, the labor cost and overall salary are higher, we tend to be more conservative compared to domestic markets. Grant mentioned that the overall RM team overseas in 2023, by year-end, was 89 people. This year, it was 138 people, which was a 55% increase. On one hand, we keep having a fresh inflow of talent, but we also have the opportunity to reevaluate the RMs that joined us previously but didn't meet the expectation. Typically, the cycle is about three to six months. In terms of the hiring plan in 2025, we have a strategic program internally called ARC 200. It's not just to get to the 200 mark. Aside from the lateral recruitment from peers in the local market, we are also stressing the importance of campus recruitment. We had about 40 fresh graduates joining us last year, and this year we will continue to target the top schools globally to recruit the best of their class of graduate students. Aside from the relationship managers, since we're putting a lot of resources into new client acquisition, we are also establishing a BD team or business development team who, on the technical side, might not be able to sit within the RM requirements, but they can acquire clients and manage client relationships. Once they become more sophisticated in asset allocation and investment advice, they become future candidates for relationship managers. Lastly, Chair Lady added that in the previous year, 2024, it was really a process of involution. A lot of the investors and analysts who are familiar with us know that especially in the domestic market, the relationship managers didn't really have a good time or didn't feel like they were in their best days. But right now, especially starting from 2025, we've already sorted out the compensation scheme, which we feel will motivate our sales team. The head of sales of Noah spent a lot of time interviewing and speaking with our relationship managers in China, and his feedback was that they feel like they're ready to go now. Coming out from the bottoming in 2024, we're better positioned both in terms of client acquisition and our sales team.