Key Takeaways:
- Noah Holdings was approved for a secondary listing in Hong Kong, offsetting the risk of its shares being ousted from New York
- The company posted record profits last year from a super-rich client base, but revenues and profits fell more than 30% in the first quarter in a choppy investment market
By Lau Ming
China’s economic boom spawned a growing industry of firms wanting to invest the cash of newly minted millionaires. One of the early leaders, Noah Holdings Private Wealth and Asset Management Ltd. (NYSE:NOAH) stumbled in the market frenzy but is banking on a Hong Kong listing to help secure its long-term prosperity.
Founded in 2005 and listed on the New York Stock Exchange five years later, Noah expanded quickly along with the flourishing Chinese economy, with annual profit growth of up to 20% from 2015 to 2017. However, since 2018 its performance has been slowed by tighter supervision of the financial industry to rein in investment risks.
In 2019, Noah paid a settlement of 1.8 billion yuan ($270 million) after getting caught up in a scandal over a fraudulent shadow banking product offered to its customers. After posting a loss of 745 million yuan in 2020, the company shifted its focus to serving the wealthiest customers, cutting back its mainstream client businesses such as loan services.
The company provides affluent customers with wealth management services such as investment products and customized investment allocation. It makes money by distributing partners’ products and taking a cut from sales, management or performance fees.
Noah also operates an asset management business for regular investors through its Gopher subsidiary, managing investments in private equity, real estate and financial markets, as well as getting income from managed funds.
The wealth management business is now Noah’s major earner. In the past two years its revenues reached 2.37 billion yuan and 3.2 billion yuan, amounting to around 72% and 74% of the company’s total revenue. Its core clients include high-net-worth individuals, so-called “diamond-card” investors with assets of 10 million to 50 million yuan and ultra-wealthy “black-card” investors with a target asset allocation of more than 50 million yuan.
Last year, the number of customers in the diamond and black categories increased by 14% and 38% respectively, pushing the company’s profit to a record high of 1.31 billion yuan.
Revenue plunged in the first quarter
According to its prospectus, Noah was China’s 8th largest wealth management service provider by revenue in 2021 for clients with high net worth and ultra-high net worth, with just under 4% of the market. Meanwhile, the top seven service providers are all affiliated to major banks. In other words, Noah is the leading independent wealth manager for the richest customer segments – those of high or ultra-high net worth – with nearly 22% of the non-bank market share.
Shifting investment patterns and policies have created new opportunities for China’s wealth management industry.
Traditionally, Chinese investors put their money in property rather than financial market instruments, but real estate has lost some of its appeal after China began to crack down on rampant property sector speculation.
The “China Wealth Report 2022”, issued by economist Ren Zeping and Xinhu Wealth Management, found that physical assets accounted for around 69% of total wealth for Chinese residents, while financial assets made up around 31%, lower than a range of 36% to 72% for financial investments in North America, Western Europe and Asia (excluding Japan). The results showed that China’s financial investment market is still in its infancy.
At present, financial institutions dominate the high- and ultra-net-worth business, with independent wealth management companies controlling less than 20% of the overall market in 2021, though there is room for smaller players to prosper by offering more varied and flexible products.
The financial institutions typically offer a standardized portfolio of domestic cash management services and a small number of alternative investment products.
By contrast, Noah selects products from a range of external suppliers, providing customized investments including private equity, venture capital, alternative investments and global asset allocation, along with its overseas partners. It also designs customized portfolios through Gopher Asset Management to meet the needs of wealthy clients. These differentiating services can offer Noah a competitive advantage, with ongoing investment to maintain its market position and promote its brand.
Noah has been spending heavily on talent, technology and marketing to attract more business and keep its customers loyal. Operating costs and expenses jumped 51% last year, exceeding a 30% rise in revenue.
The proceeds of the Hong Kong listing will mainly be spent on expanding its wealth and asset management business, as well as on technology R&D and operating expenses.
But capital market turbulence in the first quarter showed that Noah could be vulnerable to a darkening investment climate. Sluggish client demand sent the company’s revenue and profit plunging by more than 30% in the quarter from the same period a year earlier. The number of active clients fell 46% and the commission fees on fund sales fell by 68%. To add to the pressure, the company is also mired in a controversy about forced salary cuts for employees.
Facing delisting risk
A market recovery supported by government stimulus should bolster Noah’s profits, but its business may continue to be buffeted over the longer term.
Indeed, Noah faces the risk of being delisted in the United States, where it was among Chinese firms identified by U.S. securities regulators as being in danger of failing to comply with tighter U.S. auditing rules.
JPMorgan said in a report that Noah’s secondary listing on the Hong Kong Stock Exchange could mitigate the risk of being expelled from New York. And the share price could benefit if Noah’s managers decide to pay special dividends or buy back shares after the listing, to bolster returns and reduce the dilution effect.
Noah’s U.S. share price has suffered from a barrage of blows including the stock market tumble, U.S.-China tensions and repeated outbreaks of the Covid pandemic. The price nearly halved this year from its level at the end of last year, falling to $15.47 before recently rebounding to $20. That equates to about 11 times price-to-earnings (P/E) in the last 12 months, which is lower than the P/E ratios of global asset management leaders Charles Schwab (NYSE:SCHW) and BlackRock (NYSE:BLK), at 23 times and 16 times.
The pricing and scale of Noah’s listing on the Hong Kong Stock Exchange have not yet been determined, but if the valuation is discounted compared with its New York listing, the company may attract investors who are looking to bank on the long-term future of financial services for China’s super-rich.
