Noah Holdings: Pullback Provides Buying Opportunity

Elevator Pitch

I have a Buy investment rating for Noah Holdings Limited (NYSE:NOAH) [6686:HK] stock.

In my previous February 14, 2023 update for Noah Holdings, I touched on the positive change in analyst sentiment for NOAH, and the company's primary listing conversion on the Hong Kong Stock Exchange.

Following the -26% drop in NOAH's share price since the publication of my prior write-up, Noah Holdings' valuations, in terms of forward P/E and dividend yield, have become appealing. Also, NOAH's 2023 outlook is reasonably favorable, taking into account key growth drivers such as foreign markets expansion and the growth of its core customer base. As such, I view the pullback in Noah Holdings' shares as a buying opportunity and retain my Buy rating for NOAH.

Noah Holdings' Management Commentary And FY 2022 Performance

At the company's earlier Q4 2022 earnings briefing in late-March 2023, Noah Holdings specifically highlighted that "we hope that the pain of 2022 will become the gain of 2023." Although NOAH didn't provide specific quantitative guidance, the company's comments at the most recent quarterly earnings call point to expectations of a better financial performance in the current year.

As revealed in its Q4 2022 results press release, NOAH's revenue and non-GAAP adjusted EPS decreased by -27.8% and -27.4%, respectively for fiscal 2022. Noah Holdings attributed the poor results in the prior year to lower "performance based income" as a result of "market volatilities" as indicated in the company's recent quarterly earnings release.

Eyes On NOAH's Customer Base Expansion And Foreign Markets Growth

The market is of the view that Noah Holdings will witness a robust recovery in the company's top line and bottom line this year. As per the sell-side analysts' consensus financial projections, NOAH's revenue and normalized EPS are forecasted to grow by +16.0% and +18.8% to $522.3 million and $2.55, respectively in FY 2023. In my opinion, there are two key growth drivers supporting the favorable financial outlook for Noah Holdings in the new year.

The first key growth driver is the strong growth momentum for Noah Holdings' core customer base. In the company's FY 2022 20-F filing, NOAH defines its core client base as black card clients and diamond card clients who boast Assets Under Advisory or AUA in excess of RMB50 million ($7.2 million) and RMB10 million ($1.5 million), respectively.

The number of black card clients for Noah Holdings expanded by +22% from 1,722 at the end of 2021 to 2,104 as of December 31, 2022, while the company's number of diamond card clients grew by +17% from 6,475 to 7,585 during the same time period. In other words, NOAH's core client base (black card and diamond card clients) increased by a significant +18% in the past one year.

NOAH's second key growth driver is the company's expansion in foreign markets.

The company's number of clients based outside of Mainland China grew +8.4% in 2022, while the AUM (Assets Under Management) of these foreign clients went up by +14.7% last year, as disclosed at its recent quarterly earnings briefing. Also, the share of NOAH's revenue contributed by international customers also rose from 23.5% for FY 2021 to 26.7% in FY 2022.

Noah Holdings' recruitment targets for its overseas office this year provide an indication of how serious the company is with regards to its foreign client expansion plans. Specifically, NOAH is targeting to increase the number of relationship managers at its Hong Kong office from 20 now to 100 in the current year. For the Singapore office, Noah Holdings' goal is to start recruiting new relationship managers immediately with the aim of building a 20-strong team in the country by the end of this year.

Noah Holdings stressed at its Q4 2022 results call that its long-term goal is have "at least 1% of the market share in the wealth management sector industry for Chinese high net worth clients around the world." NOAH's robust core client base growth momentum and expansion plans for international markets are aligned with the company's aspirations for the long run, and this gives me the confidence that NOAH's future growth prospects will be good.

Noah Holdings' Valuations And Dividend Yield

NOAH's shares have corrected by -26% (source: Seeking Alpha price data) since my prior mid-February article was written, while the S&P 500 rose by +1% in the same time frame. Noah Holdings' share price underperformance in recent months is likely due to the company's below-expectations FY 2022 financial results; I discussed about the decline in NOAH's revenue and earnings last year in an earlier section of this article.

As per S&P Capital IQ's valuation data, NOAH currently trades at 6.1 times consensus forward next twelve months' normalized P/E. As a comparison, Noah Holdings used to consistently trade in the 10-20 times forward P/E range between 2012 and 2021, and NOAH's 10-year average forward P/E multiple is higher at 13.0 times.

Noah Holdings' forward dividend yield is also pretty decent. At its Q4 2022 results briefing, NOAH guided for a dividend per ADS (American Depositary Share) of $0.40 for FY 2022, which works out to be a yield of 2.6% based on its last traded stock price of $15.62 as of May 1, 2023. Notably, Noah Holdings highlighted at the recent quarterly earnings call that it aims to provide "stable and sustainable returns to the shareholders," and this implies that NOAH is likely going to maintain a similar level of dividend payouts for the foreseeable future.

Closing Thoughts

My Buy rating for Noah Holdings Limited remains unchanged. I have a positive view of Noah Holdings Limited's 2023 business outlook, and the stock's current valuations are undemanding following the recent correction.

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