Noah Holdings Finds Resurgent Riches in China’s Wealthy

One of the nation’s oldest private wealth managers posts record business in first quarter, but forecasts more modest profit gains for all 2021 

Key points:

• Asset manager Noah Holdings is focusing on higher-margin, affluent customers over more mainstream ones
• The strategy could position it for stronger growth in the next few years as it emerges as one of the survivors from China’s recent P2P cleanup  

By Doug Young

Forget the Average Joe and focus on the rich.

That’s the message coming in the latest earnings report from Noah Holdings Ltd. (NYSE: NOAH), one of China’s oldest privately-owned asset management companies. The report shows a company emerging strongly from a difficult year where it fell into the red after getting caught up in a scandal involving one of its investment products.

Investors didn’t seem extremely impressed with the report, even as Noah posted record revenue and profits for the quarter. Its shares managed a 4.3% rally in after-hours trading in New York after the results came out. But the stock fell 2.1% during the regular trading day on Monday, suggesting the markets were bracing for bad news.

The latest results reflect an ongoing focus to wealthier clients away from more average investors, though Noah didn’t highlight that element in any of its comments accompanying the announcement.

The company’s first-quarter revenue jumped 64% year-on-year to 1.22 billion yuan ($190 million), which, as we’ve already pointed out, was a record. The main two pieces of that pie are the company’s wealth management and asset management businesses, which moved in distinctly different directions.

Revenue from Noah’s wealth management business was by far the bigger of the two pieces, rising 71% in the first quarter to 946 million yuan – accounting for more than three-quarters of its total. Asset management revenue also grew by a healthy 63% to 270 million yuan.

In terms of cities served and assets, the wealth management business also posted growth even as the asset management business moved in the opposite direction. Noah had wealth management offices in 82 cities at the end of March, up from 78 a year earlier. The number of relationship managers in those offices also grew 3.1% year-on-year to 1,246.

By comparison, the asset management business had 154 billion yuan in assets under management at the end of March, down 4.7% year on year.

A look at margins further reinforces the view of two diverging businesses. Operating margin for Noah’s wealth management business in the first quarter improved markedly to 44.2% from 30.1% a year earlier. The same margin for its asset management business moved in the opposite direction, falling to 42.4% from 56.5% a year earlier.

It’s not completely surprising that Noah is shifting its focus to wealth management, following a major scandal in the asset management business that cost the company dearly in 2020. That scandal didn’t involve any direct wrongdoing by Noah, but rather stemmed from a bad investment product it offered to clients of its asset management business.

Noah ended up settling that case, which resulted in a hefty one-time settlement expense of 1.8 billion yuan that pushed the company into the red last year.

Back in the Black

With that scandal in the past, Noah was squarely back in the black in this year’s first quarter. Its profit grew largely in line with its big revenue growth, with the latest quarterly profit up 87% to 454 million yuan. It attributed the big gains in both revenue and profits largely to “performance based” income, most likely linked to booming stock markets.

The strong quarter may be an aberration, as the company took the somewhat unusual step of issuing profit guidance for the entire year, saying it expects to report non-GAAP net income of 1.2 billion yuan to 1.3 billion yuan for all 2021. The midpoint of that figure would represent a far more modest 10% gain from its non-GAAP profit for 2020.

With all that background in mind, it’s useful to take a step back and look at China’s asset management market and how it’s evolved over the last decade and where it might be going. As we’ve said earlier, Noah is one of the older players in the space, founded back in 2005 and listed in New York since 2010.

The asset management business in China experienced a huge explosion around 2013 and 2014, largely on the back of a concurrent explosion in the peer-to-peer (P2P) lending business at that time. The P2P boom saw a new generation of fintech companies set up shop as middlemen who took in money from mostly mom-and-pop investors. They then invested the funds into larger projects that offered better returns than traditional bank deposits.

The problem was that most of these P2P operators, which branded themselves as asset managers, often had little or no experience in risk management and put the money into high-yield, high-risk products, many of which were almost doomed to fail. Some of the operators were also little more than pyramid schemes that used new funds they raised to pay big returns to older investors.

The sector all came crashing down starting about three years ago with a regulatory cleanup that closed down most shops that hadn’t already failed. So the fact that Noah managed to survive all that is a major accomplishment in itself, as many of its rivals are no longer in business.

All that said, the company’s financials from the past few years look rather ho-hum despite the latest strong quarter. Its annual revenue has remained relatively constant over the last three years, even as stock markets have performed quite well over that time and other financial service providers have done much better.

The company’s stock now trades at a price-to-earnings ratio (PE) of 20 based on its 2019 results, since the figure was negative last year due to the scandal. Based on its non-GAAP profit estimate for this year, the figure would drop to a PE of 14. That’s lower than global giant BlackRock’s PE of 20, but roughly in line with the figure for U.S. giant State Street, both based on their 2020 results.

At the end of the day, Noah should probably get a premium of some sort not only because it’s in the high-growth China market, but also because it managed to survive the P2P cleanup. The focus on wealthier clients who tend to be more profitable could also position it for strong growth in the next few years.

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