Costs Soar At Noah Wealth As RM Ranks Swell 60 Per Cent

Tara Loader Wilkinson

11 May 2012

Noah Holdings has swelled its relationship manager ranks by nearly 60 per cent since March 2011, according to the Shanghai-based wealth manager's first quarter results today, sending its cost/income ratio soaring.

The number of relationship managers increased to 580 as of March 31, 2012, up 59.3 per cent year-over-year. It hired around 70 in the first quarter alone. As of March 31, 2012 the firm had 60 branches, having opened one within the last quarter.

The rapid growth has come at a price. Although net revenues were up 11 per cent to $16.8 million, income from operations in the first quarter of 2012 was $2.6 million, a 60.2 per cent decrease from the corresponding period in 2011. Operating margin for the first quarter of 2012 was 15.7 per cent, as compared to 43.6 per cent for the corresponding period in 2011.

“The year-over-year decrease in operating margin for the first quarter of 2012 was primarily due to an increase in operating cost and expenses resulting from the company's expansions outpacing its net revenue growth,” said Noah Holdings in a statement.

Operating cost and expenses for the first quarter of 2012, including cost of revenues, selling expenses, administration expenses and other operating income, were $14.1 million, a 65.7 per cent increase from the corresponding period in 2011.

Cost of revenues for the first quarter of 2012 totaled $3.9 million, a 47.6 per cent increase from the corresponding period in 2011. The year-over-year increase for the first quarter of 2012 was primarily due to “increases in compensation expenses paid to relationship managers mainly as a result of the expansion of the company's enlarged sales force,” said Noah.

Tom Wu, chief financial officer, said, "We are...focusing on branch management, training and productivity. We will endeavor to realize economies of scale and to improve our profitability in the coming quarters."

Nevertheless, the strategy appears to be paying off. Mirroring the growth in RMs, active client numbers as of March 31, 2012 increased by 61 per cent year-over-year to 29,814. This figure includes 28,924 registered individual clients, 824 registered enterprise clients and 66 wholesale clients that have entered into cooperation agreements with the company.

Active clients during the first quarter of 2012 were 952, a 44.5 per cent increase from the corresponding period in 2011.

The aggregate value of wealth management products distributed by the Company during the first quarter of 2012 was RMB5.3 billion (approximately $800 million), a 5.7 per cent increase from the corresponding period in 2011.

Of this aggregate value, fixed income products accounted for 53 per cent private equity fund products accounted for 44.4 per cent, and securities investment funds and investment-linked insurance products accounted for 2.6 per cent. The average transaction value per client in the first quarter of 2012 was RMB5.6 million (approximately $900,000), a 26.8 per cent decrease from the corresponding period in 2011, primarily due to changes in product mix as clients purchased more fixed income products that have lower minimum investment amount than private equity fund products.

"Market environment has started to stabilize in the first quarter and we continued to focus on implementing our strategic initiatives to develop our mutual fund distribution business and our offshore business," Jingbo Wang, co-founder and chief executive officer, said. "During this quarter, we distributed several landmark products, which demonstrated yet again the importance of understanding client's needs and product innovation."