Hywin seeks new wealth outside sagging property market

The asset manager is diversifying beyond its traditional focus on property-linked investments for wealthy investors

Key Takeaways:

• Hywin Holdings is diversifying beyond its real estate-focused wealth management business with moves into broader asset management and healthcare services
• The company’s revenue rose 17.6% in the six months through last December, though its profit was flat compared with the year-earlier period

By Chen Ruzhen

Ahead of Hywin Holdings’ (HYW.US) U.S. IPO in early 2021, the Chinese wealth management company sought to whet investor appetite with its ties to Evergrande Group (3333.HK), one of China’s leading property developers. China’s real estate market was booming then, with property values continuing a two-decade-long run of often logging double-digit gains each year.

“We are the largest distributor of real estate wealth management products in China … which are popular among investors with relatively low risk tolerance in China,” the Shanghai-based company boasted in its IPO prospectus.

Fast forward a little more than two years, when Hywin’s CEO Wang Dian is now trying to distance her company from Evergrande, which has undergone a spectacular fall from grace to become a poster child for the debt woes of China’s struggling property sector.

Not once was Evergrande, or even the real estate industry, mentioned in Wang’s lengthy 2023 shareholder letter published last Thursday, which also included a recap of Hywin’s last financial results for the six months through last December, as well as company developments since then.

Instead, Wang was focused on her company’s ongoing efforts to diversify its products and business lines, ramp up technology investment, and on its “Wealth + Health” strategy that has seen Hywin dip its toes into the more stable and potentially lucrative business of providing healthcare services to wealthy individuals.

“In spite of a challenging macroeconomic environment, further complicated by the pandemic in 2022 … Hywin was able to push ahead, finding opportunities and making breakthroughs in this past year,” Wang told shareholders.

The radical change of tack underlines how much China’s investment landscape has changed under Beijing’s efforts to rein in highly leveraged developers that thrived for years when the nation’s property market was booming. Just two years ago, Hywin believed that boom would continue for the foreseeable future, providing a powerful source of steady returns for clients.

Now, property-related investment products have become the latest “scarlet letter” among investors, many of those burned by a steady stream of bond defaults, tanking stocks and even some bankruptcy restructurings.

Hywin’s transformation plan also highlights the determination and agility of a 17-year-old company that has emerged as a true survivor through China’s many economic and policy cycles that have killed off many others. Its presence as a private company in the sensitive financial space still largely dominated by state-owned enterprises makes its endurance that much more impressive.

For now, at least, Hywin’s future is clouded by China’s flagging post-Covid recovery, lingering China-U.S. tensions, and cut-throat competition in a national wealth management market crowded with more than 1,000 players, including many of China’s top brokerages. But the company’s pivot from real estate appears to bearing fruit, at least based on its latest performance.

In the first half of its fiscal year through last December, Hywin’s revenue rose 17.6% year-on-year to 1.04 billion yuan ($143 million). Its net income rose by a far smaller 0.3% to 70.6 million yuan. The transaction value of its core wealth management business reached 40.1 billion yuan for the period, up 6.9% from the previous year.

Diversification drive

Reflecting its efforts to diversify beyond wealth management, Hywin’s asset management business more than doubled in size from a year earlier to 7.01 billion yuan in assets over the six-month period. The company also started generating revenue from its nascent business providing wealthy clients with health management services.

In its bread-and-butter wealth management segment, the company is rapidly reducing its reliance on real estate-backed products that once made up more than half of its portfolio. In 2022, real estate-related financial products accounted for 37.9% of the total transaction value of wealth management products distributed to Hywin’s clients, down from 58.2% a year earlier.

Meanwhile, transaction value in private equity and venture capital products jumped 111.8%, reflecting efforts to pivot to new growth engines in better-performing sectors.

Hywin is also shifting from longer- to shorter-term investment products, reflecting changes in its product strategy and shifting client appetite, the company said on a previous conference call. It is also rolling out more offshore products, mainly through its Hong Kong unit, to meet growing client demand to hedge against currency risks and a slowing domestic economy.

But one of Hywin’s more audacious moves is its foray into health management service, which is part of its “wealth and health” twin-engine growth program. By venturing into the health management business, Hywin is hoping to create cross-selling opportunities, and better serve deep-pocketed clients across their full life cycles.

That business is still relatively small, with 28,763 clients at the end of last year and 38 million yuan in revenue in the six months through last December. The company serves those clients through five high-end clinics in Shanghai, Beijing, Chengdu and Chongqing that it acquired over the last two years.

“We believe that as we integrate Hywin Health into our client servicing matrix, it will create substantial synergies with our wealth management business,” Wang said during the company’s latest earnings conference call. “If you look at the health management industry in China itself, we see massive opportunities for growth, especially in the high-end area.”

The business revamp has helped Hywin forge ahead through economic challenges that have ravaged many of its rivals. One of those, Jupai Holdings, which also sold products heavily concentrated in real estate, was delisted from the New York Stock Exchange last year after a tanking of its shares took its market value below the $15 million level necessary for listed companies.

But Hywin faces tough competition from bigger rival Noah Holdings (NOAH.US; 6686.HK), which owns 20% of China’s independent wealth management market, and has been aggressively growing its offshore business. Like Hywin, Noah has also been undergoing its own transformation from a general asset manager to one with a stronger focus on wealthy clients, reflecting the intense competition for such clients.

Brokerages including CICC (3908.HK; 601995.SH) and Citic Securities (6030.HK; 600030.SH) are also ramping up their wealth management business, seeking a bigger share of a market Morgan Stanley estimates could grow to $16 trillion.

While its own clients may like the changes Hywin is making, stock traders have yet to buy into the company’s rebirth story. Its shares last closed at $7.07 on the Nasdaq, down almost 30% from their IPO price of $10. CEO Wang’s upbeat shareholder letter did manage to stoke some mild enthusiasm, with Hywin’s stock rising nearly 3% on the day of its publication.

But its shares still trade at a relatively low price-to-earnings (P/E) ratio of 6, compared with 8 for Noah, and 9 for both CICC and Citic Securities’ Hong Kong-listed shares.

The company may need to show continued positive results from its transformation to truly convince investors of its value. But that could become increasingly difficult if China’s economy doesn’t start to improve soon.

Have a great investment idea but don’t know how to spread the word? We can help! Contact us for more details.

To subscribe to Bamboo Works weekly free newsletter, click here