Elevator Pitch
My Buy rating for Noah Holdings Limited (NYSE:NOAH) [6686:HK] remains unchanged. I previously highlighted that NOAH’s -26% stock price correction between mid-February and early-May this year created a chance for investors to initiate a position in its shares with my prior May 2, 2023, write-up.
NOAH’s financial outlook relating to top line growth and net profit margin for full-year FY 2023 is positive. But the market assigns a very low EV/EBITDA valuation multiple to Noah Holdings, which I think is unwarranted. Therefore, I think that NOAH deserves to be rated as a Buy.
Positive Outlook For FY 2023
Noah Holdings’ financial prospects in the current fiscal year are expected to be reasonably good.
In its prior December 22, 2022, press release, Noah Holdings had revealed that it had become “a dual-primary listed company on both the Hong Kong Stock Exchange” and “the New York Stock Exchange.” Hong Kong’s listing rules don’t allow companies to provide forward-looking guidance, so NOAH wasn’t able to offer specific quantitative financial guidance when it announced its Q1 2023 financial results in end-May.
But NOAH did indicate at the company’s Q1 2023 results call that it expects “larger growth on the top line” and “a relatively healthy profit margin” this year. Noah Holdings’ management commentary at its most recent quarterly earnings call are consistent with the sell-side analysts’ consensus financial forecasts. In local currency or RMB terms, NOAH is expected to reverse from a -28% top line contraction for FY 2022 to register a +13% increase in its revenue in FY 2023 as per S&P Capital IQ’s consensus data. Also, Noah Holdings’ normalized net profit margin is expected to improve from 32.5% in FY 2022 to 32.9% for FY 2023.
Revenue Growth Drivers
Specifically, I am of the opinion that changes to Noah Holdings’ geographic and product mix will help to drive the company’s revenue growth in this year.
At its first quarter earnings briefing, NOAH disclosed that revenue contributed by the company’s overseas segment expanded by +13% QoQ and +68% YoY to RMB321 million in Q1 2023. This meant that the overseas business operations’ top line contribution as a percentage of Noah Holdings’ total revenue rose from 24% in Q1 2022 to 40% for Q1 2023. NOAH has been aggressively expanding its team of overseas relationship managers, and this has paid off. As a reference, Noah Holdings’ number of relationship managers for its overseas business segment grew from 17 as of end-Q1 2022 to 28 as of March 31, 2023.
A July 26, 2023, Reuters news article titled “Chinese Rush To Buy Hong Kong Insurance, Dollars” cited an interview with a relationship manager who works at NOAH’s Hong Kong office. In that interview, this particular Noah Holdings relationship manager noted that “he recently arranged a group of mainland clients to sign insurance contracts in ‘long queues'”, which he referred to as a “burst of insurance buying in Hong Kong.” Hong Kong is grouped under Noah Holdings’ overseas business segment.
Separately, NOAH has been opportunistic in launching new insurance products to cater to the needs of its customers who have lower risk appetites in an uncertain economic environment. Noah Holdings noted that “the distribution of offshore insurance products took up an increasing share of revenue” in Q1 2023 as per the company’s comments at its most recent quarterly results briefing. The company’s ability to tweak its product mix to adapt to changes in the investment landscape puts in a good position to sustain top line expansion in the current year.
Profitability
With regard to future profitability, NOAH has put in place various expense optimization measures for its home market, Mainland China.
One cost reduction initiative that Noah Holdings undertook was to release underperforming relationship managers who didn’t deliver the relevant key performance indicators. Another cost optimization measure was the restructuring of Noah Holdings’ physical footprint in China. NOAH has decided to exit from specific Chinese cities while retaining its presence in bigger Chinese cities where residents are generally wealthier.
Noah Holdings’ expense reduction initiatives have enabled the company to maintain or even expand its profit margins. According to data taken from S&P Capital IQ, NOAH’s selling, general & administrative (SG&A) costs as a proportion of sales decreased significantly from 25.7% in Q4 2022 to 17.7% for Q1 2023.
Concluding Thoughts
NOAH’s growth prospects and valuation multiples aren’t aligned, and this justifies a Buy rating for Noah Holdings. Based on S&P Capital IQ data, Noah Holdings’ EBITDA is forecasted to grow by a +10.6% CAGR for the period between FY 2022 and FY 2025. Earlier, I have also discussed about the positive short-term (FY 2023) outlook for Noah Holdings in this article. But NOAH is valued by the market at a consensus forward next twelve months’ EV/EBITDA of just 1.43 times.
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