The wealth management company has cut its profit projection for the whole year by up to 35.5%

Key Takeaways:

  • Noah Holdings revised down its non-GAAP annual net profit forecast from a maximum of 1.55 billion yuan to a minimum of 1 billion yuan, as it posted its third consecutive quarterly revenue drop
  • The company is expanding overseas and reducing the number of cities where it operates on the Chinese mainland

By Stone Shek

Switching its focus to high net worth clients helped Noah Holdings Ltd. (NOAH.US; 6686.HK) through a time of crisis. But now that strategic shift is showing its downside in the current period of market turbulence.

Recent market turmoil that saw Hong Kong’s benchmark Hang Seng Index fall to a 14-year low last month, combined with pandemic-related lockdown measures, sent Noah’s net profit down by 33.2% to 182 million yuan ($25.5 million) in this year’s third quarter, according to the company’s latest quarterly report, its second since making a second listing in Hong Kong to complement its older New York listing.

Its non-GAAP net profit for the third quarter was down by a similar 32.8% to 191 million yuan, as the company revised down its previous whole-year non-GAAP profit forecast by up to 35.5% even as financial markets have shown signs of steadying in recent weeks.

The sagging profits came as Noah reported its third-quarter net revenue declined by 24.7% year-on-year to 685 million yuan, its third consecutive quarterly decline. Its wealth management revenue fell by 28.7% year-on-year to 466 million yuan, the worst performing part of its business, but still accounting for two-thirds of its revenue. Its asset management revenue fell by a milder 17% to 200 million yuan, accounting for most of the rest.

The big drop in its wealth management business marked the third consecutive quarter of declines for that business, reversing strong gains in last year’s fourth quarter. So, what’s causing the recent weakness? Noah mainly attributed it to its focus on rich clients since 2020. That shift has seen it provide investment products and value-added services to Chinese and overseas high net worth investors. But severe market fluctuations during the third quarter made many more cautious, which weighed on the company’s private securities and equities underwriting business.

As a result of raising less money for investment in private equity (PE) funds and insurance products, its net revenues from one-time commissions plummeted by 52.5%. And its net revenues from performance-based income and recurring service fees also fell by 52.1% and 21.6%, respectively.

Growing international business

The company’s asset management business did a bit better, banking on the expansion of its Gopher Asset Management unit’s diverse investment portfolio in assets ranging from private equities and real estate to open-market investment products and multiple currencies. Net revenue from recurring service fees for its asset management business bucked the trends by growing 4.1% year-on-year to 183 million yuan in the third quarter. But a big drop in one-time commissions from the sales of private equity investment products caused the asset management business to post an overall revenue decline.

Faced with the headwinds in the investment market, the company has followed a practice of many others in China and started to tighten its belt and cut costs. Its employee compensation and benefits expenses fell by 28.8% to 343 million yuan, and its sales and general expenses also declined. Its overall operating costs dropped by 33.4% to 453 million yuan.

Such cost controls allowed the company to grow its operating profit by 1.3% to 232 million yuan in the third quarter despite the weakness in its core businesses. Its operating profit margin increased from 25.2% in the third quarter of 2021 to 33.9% in the latest quarter, a gain of 8.7 percentage points.

Co-founder and CEO Wang Jingbo said China’s strict implementation of its “zero-Covid” policy and related lockdowns, combined with China’s recent economic slowdown, have prompted it to turn to a “dual circulation” business model of finding ways to mobilize resources both at home and abroad. The company’s latest results show its revenue outside mainland China is growing, growing from 21.6% of total revenue in the second quarter to 28.3% in the third, as the company expands its overseas business.

The company’s business network in the Chinese mainland covered 76 cities by the end of September, down from 81 last year, indicating it is adjusting its growth strategy in its home market as it expands overseas.

The company said it expects to see continued challenges for the rest of the year from a range of factors including the Fed’s steady interest rate hikes, China’s pandemic-related controls and turbulence in the open market. As a result, it revised down its forecast for full-year non-GAAP net profit from a previous range of 1.45 billion to 1.55 billion yuan to 1 billion to 1.1 billion yuan, a downgrade of up to 35.5%.

Restricted client contact

Using its non-GAAP net profit of 859 million yuan in the first three quarters and its latest full-year forecast for that figure, Noah’s fourth-quarter non-GAAP net profit should be somewhere between 141 million yuan and 241 million yuan in the fourth quarter. That means the figure is unlikely to reach the more than 300 million yuan in non-GAAP net profit the company posted in the first two quarters of this year.

As the pandemic situation worsens on the Chinese mainland, lockdown measures are hampering its wealth management experts’ direct engagement with clients. Many of the biggest of those have sizable investment portfolios, and require constant follow-up from Noah’s strategists. But not being able to meet with them face-to-face due to Covid restrictions can inhibit such existing relationships, and also get in the way of signing up new clients.

Noah’s New York-listed shares fell by 17% the day after its announcement last week before rallying by 11.6% the next day. The stock closed at $14.67 on Wednesday with a price-to-earnings (P/E) ratio of 6 times, much lower than the 24.7 times for Charles Schwab (SCHW.US) and 21.6 times of BlackRock (BLK.US).

After being put on the U.S. Securities and Exchange Commission’s list of more than 100 Chinese companies that could be forcibly delisted from New York for failing to comply with U.S. law, Noah sought a second listing in Hong Kong in July. It is currently in the process of upgrading its Hong Kong listing status to primary from the current secondary listing status.

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