NOAH - Noah Holdings: Consider Overseas Expansion And Financial Strength

2023-09-29 03:58:52 ET

Summary

• NOAH aims to grow its number of relationship managers in Hong Kong and Singapore to 120 by the end of the current year to support its overseas expansion efforts.
• NOAH's credit ratios are reasonably healthy, and this means that the company has the financial capacity to increase its future dividend distributions.
• I stick to my existing Buy investment rating for Noah Holdings, as I have a positive view of its overseas expansion plans and strong financial position.

Elevator Pitch

I continue to rate Noah Holdings Limited (NOAH) [6686:HK] shares as a Buy.

In my earlier article for NOAH written on July 14, 2023, the focus was on evaluating Noah Holdings' financial prospects and valuation metrics. With this latest write-up, I turn my attention to Noah Holdings' expansion in markets outside of Mainland China and the company's strong balance sheet.

NOAH has grown its Assets Under Management (or AUM) for overseas markets significantly in the first half of this year on a YoY basis. Going forward, the recruitment of more relationship managers will help to further expand Noah Holdings' presence in Hong Kong and Singapore. NOAH's financial strength enables the company to grow more aggressively in overseas market and distribute a larger amount of dividends to shareholders. Noah Holdings' forward FY 2023 dividend yield is a decent 3.2%, and there are expectations of further dividend growth in both FY 2024 and FY 2025. The above-mentioned factors support my Buy rating for NOAH.

Expansion Outside Of Mainland China Is Progressing Well

NOAH has done a pretty good job growing its presence outside of the company's home market.

Earlier this month, Noah Holdings issued a 6-K filing disclosing that it has published its interim report for the first half of the current fiscal year. NOAH disclosed in the company's interim report that its transaction value and AUM for markets outside of Mainland China grew by +163% YY and +16% YoY, respectively, in 1H 2023. The excellent performance of its businesses in overseas markets allowed Noah Holdings to record a Q2 2023 earnings before tax of RMB401 million, which beat the analysts' consensus estimate of RMB377 million (source: S&P Capital IQ ) by +6%.

Even though NOAH did well in expanding its overseas business operations in 1H 2023, there is still lots of room for the company to derive an even larger proportion of its top line from markets outside of Mainland China. In the first half of this year, Noah Holdings generated 59% of its revenue from its home market, Mainland China. Hong Kong and other markets contributed 33% and 8% of NOAH's 1H 2023 sales, respectively.

The number of Noah Holdings' relationship managers in overseas markets (mainly Hong Kong and Singapore) doubled QoQ from 28 as of end-Q1 2023 to 56 at the end of June this year, as disclosed in its Q2 2023 earnings press release . As mentioned in the company's 1H 2023 interim report, NOAH has set a goal of growing its team of overseas relationship managers to 120 when the year ends with the purpose of improving its service for "overseas Mandarin-speaking clientele."

NOAH is well-positioned to meet the market's favorable expectations regarding its full-year financial performance, considering its overseas markets' growth potential and expansion plans outlined above.

In specific terms, the sell-side's current consensus financial forecasts (source: S&P Capital IQ ) point to Noah Holdings' top line and normalized EPS increasing by +14% and +13% to RMB3,520 million and RMB1,141 million, respectively for fiscal 2023. NOAH's consensus FY 2023 EBIT estimate was also revised upwards by +4% to RMB,1207 million between the beginning of July and late September.

Strong Financial Position Will Support Growth Plans And Capital Return

Noah Holdings' financial strength allows the company to invest in future growth and return excess capital to shareholders at the same time.

In June this year, market research firm Cbonds reported that " S&P Global Ratings withdrew Local Currency LT (Long Term) credit rating" for NOAH. Noah Holdings subsequently explained at its Q2 2023 earnings call in late August that it "voluntarily requested S&P Global to withdraw its credit rating coverage" because there was "no need to raise debt financing in the foreseeable future" in the company's opinion. This move sent a positive signal about NOAH's strong financial position.

It is also worth noting that NOAH's key credit metrics are pretty healthy. As per financial data sourced from S&P Capital IQ , Noah Holdings' short-term liquidity is decent with its current ratio of 3.21 times. NOAH also has minimal issues relating to long-term solvency, taking into account the company's debt-to-liabilities ratio of 0.20 times.

At the company's second quarter results briefing, Noah Holdings highlighted that it has around RMB5 billion of liquidity comprising of cash and short-term investments. NOAH noted at its most recent quarterly results call that it intends to make good use of its strong balance sheet to "support our international expansion" and "increase dividend distributions in the future."

I have already touched on NOAH's overseas market expansion in the preceding section of this article.

With respect to shareholder capital return, Noah Holdings' consensus forward FY 2023 dividend yield is a reasonably attractive 3.2% . Also, the market expects NOAH to raise its dividend distribution per share by +8% and +12% for FY 2024 and FY 2025, respectively.

Closing Thoughts

Noah Holdings stock is still worthy of a Buy rating. The company has a strong balance sheet that allows it to strike a balance between capital investment and capital return. Investors in NOAH get the best of both worlds as the company has good earnings growth potential and it is willing to distribute dividends to shareholders.

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