NOAH - Noah Holdings: Watch New Capital Return Framework And Insurance Products

2023-12-09 03:33:44 ET

Summary

• NOAH has decided to raise its minimum dividend payout ratio from 10% earlier to 35% going forward.
• Noah Holdings' insurance fee income derived from its international insurance business operations grew by +381.8% YoY in the first nine months of this year.
• I make no changes to my existing Buy rating for NOAH, as I like its new shareholder capital return policy and I have a favorable opinion of insurance product demand.

Elevator Pitch

I still assign a Buy investment rating to Noah Holdings Limited ( NOAH ) [6686:HK]. I touched on NOAH's balance sheet strength and the company's growth in international markets with my previous September 29, 2023 update .

My current article analyzes recent developments such as NOAH's new shareholder capital return approach and the company's strong insurance product sales. I come to the conclusion that NOAH is still deserving of a Buy rating in view of an increase in the future dividend payout ratio and the favorable outlook for insurance product demand.

Eyes On Noah Holdings' Future Dividends And Buybacks

Towards the end of the prior month, Noah Holdings issued a press release announcing updates for the company's existing capital allocation strategy, in particular how NOAH returns capital to its shareholders.

NOAH noted in its November 29, 2023 announcement that "up to 50% the Company's non-GAAP net income attributable to shareholders" will "be allocated to a Corporate Actions Budget" that includes "distribution and share repurchases" going forward. This implies that Noah Holdings might possibly be distributing as much as half of its bottom line to shareholders in the future. Based on the current consensus FY 2024 normalized net profit of RMB1,235 million (source: S&P Capital IQ ) for NOAH, the stock's total shareholder return yield could be as high as +10.9% next year assuming 50% of its earnings are distributed as dividends and share repurchases.

In specific terms, NOAH has raised the floor for its dividend payout ratio from 10% previously to 35% now. As such, it is no surprise that the consensus FY 2023, FY 2024, and FY 2025 dividend per share estimates in local currency or RMB terms have been revised upwards by +53%, +61%, and +54%, respectively in the past one month as per S&P Capital IQ data. This translates into consensus FY 2023, FY 2024, and FY 2025 dividend yields of +4.8%, +5.5%, and +5.9%, respectively for Noah Holdings.

Noah Holdings' actual total shareholder return yields in the coming years could turn out to be higher than expectations, if the company either pays out a higher proportion of earnings as dividends or buys back more of its own shares.

With its November 29, 2023 press release, Noah Holdings also mentioned that the "timing of any share repurchase program will be determined at the company's fourth quarter board meeting in March 2024 and announced thereafter."

In my late-September 2023 write-up for the stock, I highlighted that NOAH's "financial strength allows the company to invest in future growth and return excess capital to shareholders at the same time." Noah Holdings' recent move to have a more shareholder-friendly capital return strategy validates my earlier positive opinion of the company's strong financial position.

Insurance Products Are The Main Growth Driver For NOAH

The analysts currently expect Noah Holdings' top line and normalized net profit (in local currency or RMB terms) to expand by reasonably decent CAGRs of +12.0% and +11.3% (source: S&P Capital IQ ), respectively for the FY 2023-2025 period. In contrast, the market values NOAH at a much more modest consensus forward next twelve months' normalized P/E multiple of 5.2 times as per S&P Capital IQ's valuation data.

It is reasonable to expect NOAH's valuation multiple to expand going forward, if the company can achieve revenue and earnings growth rates in the teens percentage range like what the sell side is projecting. I am of the view that Noah Holdings will be able to register good results in the next few years thanks to strong insurance product sales.

In the most recent third quarter, Noah Holdings' top line grew by close to +10%, which the company credited to "one-time commissions from the distribution of insurance products" in its Q3 results release . At its latest quarterly earnings briefing at the end of last month, NOAH highlighted that its insurance commission fees generated from its Mainland Chinese and overseas insurance businesses grew by +63.4% YoY and +381.8% YoY, respectively in 9M 2023. The company also shared at the Q3 2023 results call that its "active overseas insurance clients increased more than fourfold" in the third quarter on a YoY basis.

I am of the opinion that it is realistic to think that NOAH's insurance product sales will remain strong in the near term.

Reinsurer Swiss Re has forecasted that the worldwide insurance premium will increase at a CAGR of +2.2% for the FY 2024-2025 time frame, which will be better than the historical +1.6% CAGR during the FY 2018-2022 time period. In its forecast, Swiss Re cited its Chief Economist's comments that "fading economic tailwinds and geopolitical uncertainties reinforce the primary insurance industry's essential role in risk transfer." This helps to explain why there should still be solid demand for Noah Holdings' insurance products in the foreseeable future.

Concluding Thoughts

An undemanding mid-single digit P/E valuation multiple for Noah Holdings is unjustified in my view. I think that it is a matter of time before NOAH commands a higher valuation ratio, as its insurance product sales grow and it returns a larger percentage of earnings to shareholders.

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