Noah Holdings Limited (NOAH) Q3 2016 Earnings Report, Transcript and Summary

Thank you to all investors and analysts for participating in our earnings conference call today. Joining me today are Ms. Jingbo Wang, Noah’s Chairlady and CEO; and Mr. Shang Chuang, Noah’s CFO. For today’s agenda, I will start by providing an overview of our financial highlights for the first three quarters of 2016 and walk you through the performance of our core wealth management businesses. I will then talk about the achievements and long-term strategic plans of go for asset management. Lastly, I would touch on the development of Noah’s mid- and back-office. After that Chairlady, Wang will provide an update on the product strategy and share her views on the macro and regulatory environment. And then Shang will provide further insights into our financial performance in the third quarter of 2016. Lastly, we will be happy to take any questions at the end of our prepared remarks. Currently we see Chinese macro economy still undergoing and illustrated adjustment and the global capital markets are still full of uncertainties. Despite a challenging macro environment, we continue to focus on clients needs and provide them with the best possible product and services through super fund selection with an emphasis on diversification and balance with return objectives. Thanks to our efforts in building a global cloud platform and strengthening our product and risk capabilities, we did not only generate healthy returns for our pipe but also ensured solid year-to-date operational and financial performance for Noah, which enable us to further consolidate a leading position in China’s wealth and asset management industry. In the first three quarters of 2016, we distributed a total of RMB 74.3 billion of wealth management products, up 2.9% year-over-year. Total assets under management as of September 30, 2016 reached RMB 114.8 billion, up 49.1% a year ago. Net revenues in the first three quarters of 2016 were RMB 1.87 billion, a 20.8% increase from the corresponding period in 2015. And non-GAAP net income was RMB 592 million, up 19% year-over-year. Generally speaking, we are pleased to have delivered steady results in the first three quarters of 2016. Noah’s wealth management business provides global wealth investment and asset allocation services to high net worth individuals in China. By the end of September 2016, Noah has the 130,491, registered clients, up 13.6% from the second quarter and 47.2% from the same period last year. Through our continuous investor education coupled with comprehensive wealth management services, our clients continue to stay close to us. The average transaction value per client reached RMB 5.51 million in the third quarter of 2016 and a repeat purchase rate was maintained at about 30%, both of which are quite high compared to the industry averages. Recently, Noah has been recognized by a number of high-profile international organizations for excellence in China’s wealth management industry, including Best Wealth Management Institution awarded by Asia Pacific Fortune Forum; Outstanding Private Bank by Organic Growth Strategy by Private Banker International; and Fortune Magazine top 100 Fastest Growing U.S. Listed Companies, just to name a few. These awards and recognitions are testament to our diligence and perseverance. Specifically we have been continuously expanding our branch network with 173 offices covering 71 cities by the end of the third quarter. While we maintained a number of relationship managers around 1,100 at the end of the third quarter, we optimized the RM team by replacing the RMs with low levels of productivity with high potential talents. We are improving retention and loyalty by continuing to provide professional training to our relationship mangers to improve the servicing skills and productivity and also expand marketing activities to help them grow on their client base. As a key indicator for its stability, the turnover rate for top performing relationship managers was zero for a second quarter. With regard to our overseas business, by the end of the third quarter, Noah’s overseas AUM reached RMB 15.9 billion, a 42.4% increase from a year ago. A recently opened Noah U.S. office marked the beginning of version 2.0 in terms of our internalization strategy. Noah U.S. is positioned as a product research and sourcing center at current stage, aimed at exploring more high-quality overseas products and covering more leading PE/VC funds in U.S.. We hope the synergies between Noah U.S. and Noah Hong Kong will help our high net worth clients manage their overseas assets in a more efficient way. Now, I’d like to provide an update on Gopher Asset Management. Total AUM at Gopher reached RMB 114.8 billion, up 49.1% year-on-year. In the third quarter, private equity fund-to-fund AUM increased by 69.8% on a year-over-year basis and accounted for 47.5% of total quarter-end AUM, up 5.8 percentage points from a year ago. Gopher is now one of the most prominent alternative investment managers in China and its brand is highly recognized in the market. Gopher was ranked number one in the Best Fund of Funds, the Most Active Fund of Funds and the Best Market-Oriented Fund of Funds categories at a recently released 2016 China Private Equity Funds ranking. In addition to private equity fund-of-funds, Gopher also established mature product lines for real estate fund-of-funds, secondary market fund-of-funds and it’s home credit products, which accounted for 21.8%, 9.0% and 21.7% respectively of total AUM at the end of the third quarter. For the first three quarters of 2016, total recurrence for Gopher amounted to RMB 355 million, up 35% from a year ago as the asset management business became an important contributor to the Group’s total revenue. Let me talk more about Gopher’s long-term strategy. Established as a multi-boutique investments firm, Gopher has been consistently enhancing its investment capabilities, expanding its asset management scale, integrating its product line and growth line of the asset classes. Gopher has since reviewed about 2,000 companies and projects to develop insights into specific industries and it’s formed proprietary top down views on each of them. This invaluable experience will lay a solid foundation for Gopher to upgrade its model from a single fund-of-funds strategy to co-investments and direct investments. The latest Gopher flagship fund-of-funds already plans to co-invest 50% of its AUM directly into individual assets alongside with flexibility. [Ph] Gopher has also been expanding its investment horizon globally with its upcoming Gopher harvest fund-of-funds, covering several first half global PE funds and providing cross currency investment strategies. Gopher’s internalization strategy is further boosted with the arrival of several industry veterans with global perspective and the opening of the U.S. office. Moreover, the client base of Gopher is expanding from high net worth individuals to institutional investors including pension funds, insurance companies and city commercial banks. Looking ahead, Gopher is strategically aimed at becoming one of the most prominent multi-strategy and multi-asset measuring funds in China. To achieve this goal, Gopher will hear to stringent risk management standards, maintain long-standing relationships with top people [ph] all over the world to enable its investors to capitalize on emerging economies and industry globally. Speaking of Gopher’s strategic development plans, I want to share with you more information about strategic investment by Sequoia, which is announced a few weeks ago. Sequoia Capital China invested women be RMB 348 million to take 8% stake in Gopher and Noah continues to be Gopher’s controlling shareholder with 92% of total shares. Beyond this, Gopher has no further plans to invite new strategic shareholders. Sequoia’s investment into Gopher will add enormous value to our long-term strategic positioning. As you all know, Sequoia China has been an important shareholder and part of Noah, helping us to become one of the leading wealth management companies. Through the new partnership between Sequoia China and Gopher, we further developed Gopher’s capabilities in PE/VC co-investments and direct investments, both in China and globally. Gopher’s family office business will also benefit from Sequoia China experience with its best in class family office services. Based on Sequoia’s heritage fund, portfolio construction plus active management concept, Gopher will be rolling out a similar fund to help Chinese ultra-high net with families globally. There is no doubt that the partnership between Sequoia and Gopher will combine to call its expertise global investing with the unique opportunities in Chinese market. We are excited that Sequoia will create long-term value for Gopher’s future growth. Lastly, I want to briefly talk about our mid- and back-office initiatives. One of the priorities in the third quarter was to launch a number of initiatives to drive across group digitization [ph] focusing on fine acquisition, marketing analytics and the creation of robo-advisory databases. The completion and implementation of these projects will help the group enhance its fund office capability as well as increase mid and back-office efficiency in the future, providing cutting edge technical support for Noah’s development in the next decade. Now, I’ll turn the call over to Chairlady, Wang. She will speak in Chinese and her remarks will be translated in English.

[Foreign Language] Thank you, Kenny. As 2016 started, [ph] transition and diversion have become a major global economic and political theme. The UK has voted for Brexit, the fed has started hiking interest rates and U.S. presidential election results were largely surprising. Japan and Europe have both interim and era [ph] of negative interest rates at the time when the renminbi was officially included in SDR basket. All of these historical events to define that a new international paradigm is gradually taking hold. A closer look at China’s macroeconomic trends also seem to confirm our judgment on its L-shaped recovery mode. The current macro-environment and markets are still full of challenges and uncertainties. There is increasing contrast between the payment market for quality assets in China versus rising demand for overseas investment. In the midst of recent rapid depreciation of the renminbi against U.S. dollar, how to achieve wealth preservation and steady capital appreciation, how to avoid market and currency risk, how to safely transfer wealth to the next generation all have become the issues that China’s high net worth families are most concerned about. We remain steadfast as we build under China’s new normal of slower growth, Noah should place long-term before short-term gains. Enhancing investor communication and client education and improving relationship managers, professional servicing skills are the key areas on which we should focus ourselves in the remainder of this year and beyond. Compliance and risk management are the life lines of wealth management companies. But there are still wealth management products in the market backed by capital pools with maturity mismatches and without independent custodians. In order to spread short-term business volume, some wealth management companies offer so called implicit guarantees, which they can honor when products do not perform as what they expected. Such non-compiling behaviors pose competition pressure for us in a short term. However, we firmly believe that anything that can’t last forever, will not, and it is just a matter of time. In order to win out in the long run, Noah must maintain a well-defined strategy, distinguish between opportunities and temptations and insure the Company’s sustainable development. This year, we spent a lot of time and resources on investor education in RM training. We launched Noah University, organized afternoon key investment seminars and held various investment conferences and many other types of communication events which cover more than a 150,000 participants. In a tough market, the more challenging the market is, the more we challenge ourselves. Our emphasis has always been in staff training. In terms of team stability, we maintained a zero turnover rate for elite relationship managers last quarter. So, far at this year, we continue to build up our risk control and due diligence system and through covering top tier product providers and selecting the best partners, we continue to deliver high-quality products and services to China’s high net worth clients. And these proactive initiatives which I just mentioned have enabled us to achieve stable growth in the first three quarters of this year. Next, I would like to talk about our products. Total transaction value for PE/VC products distributed in the third quarter reached RMB 5.4 billion. accounting for 23% of total distribution. We only team up with the top performing fund managers in industry by adopting a quality over quantity strategy in fund manager selection. The reason is that China’s private equity venture capital industry has more from the growing stage period into a new area where investment returns start diverge widely. The 80-20 rule has manifested itself in this industry, meaning the top 20% GPs can harvest 80% of the total return. In order to earn alpha, selecting the right industry to invest in and a best fund manager to invest for you is much more important than ever before. On top of that we’re also vigorously promoting Gopher’s fund-of-funds products. Research has found that the fund-of-funds strategy can effectively reduce the volatility and improve the risk adjusted returns compared with the all-in strategy in terms of venture capital investing, where information asymmetry is ramping. Fund-of-funds can help a accredited individual lower the investment threshold of PE/VC products and reduce the concentrated investment risk. Among private equity funds-of-funds in China, Gopher has become the number one brand. In addition to its already strong high net worth client base, Gopher fund-of-funds institutional sales have also gained momentum this year as more and more institutional investors such as insurance companies, listed companies and city commercial wings are warming up to private equity venture capital investing. At the end of the third quarter, Gopher’s PE/VC AUM reached RMB 54.7 billion, up 70% year-over-year and now representing 40% of total AUM for Gopher. Regarding the secondary market equity products, the Asia market has yet to stage a secular up trend at a time when the broad economy has shown no sign of reacceleration. However, we still hold the view that the worst the market currently is, the better the opportunity there is for us to strengthen and optimize our management portfolio and to screen out the good hedge fund managers who can outperform during the falling market base. [Ph] We also encourage our clients to position for the long-term and help them identify both cyclical and structural investment opportunities through more innovative products, which we are planning to roll out in the next few quarters. At the end of the third quarter, secondary market equity AUM at Gopher maintained about RMB 10 billion. It is worth noting that so far this year, Gopher’s major hedge fund-of-funds and quantitative [ph] funds have outperformed the CSI 300 index more than 10%. The increase in distribution of fixed income products was in part driven by some clients’ robust demand for safety and yield. Our strategy in fixed income products is to diversify the product mix away from real estate and towards more new product categories by establishing relationships with new product partnered with corresponding risk control mechanism, procedures and standards. We have also made significant headway into new areas such as consumer financing, auto financing, supply chain financing and mezzanine credit products. The companies that we have been working with have high credit worthiness including Haier, China Mobile and Home Credit, just to name a few. In the third quarter, non-real estate fixed income products such as DEs [ph] accounted for 54% of the fixed income total, reaching RMB 9.3 billion, which helped us improve the underlying asset quality and secure the supply of fixed income products in advanced product landscape. In terms of real estate, our core strategy is repositioning. We are shifting our focus on providing financing for residential development to a client operating asset, from project investment to equity investments in companies and the real estate value chain, from development project to improvement of existing properties. We will continue to be actively involved in real estate which remains one of the largest asset classes in the market. We believe that the redefined model of real estate fund will become mainstream in the future. And our real estate team, after two years of adjustment is getting fully ready. What’s worth mentioning is that, Gopher center in Shanghai has been completed and put into operation recently, becoming the first grade A office building that is solely funded and operated by Gopher. Needless to say that Noah and Gopher have a team comprised of highly experienced reality professionals with proven operational track record. We are working hard to explore more new real estate opportunities for our clients. For our overseas business, client demand remains quite strong and our overseas AUM continues to grow. While consolidating the existing Noah platform in Hong Kong, we are strengthening the development of a global, open product architecture by multi-dimensionally balancing our portfolios between traditional and alternative products, developed market and emerging markets, active and passive investments. We also started exploring new opportunities and even-driven and global macro strategies, global bio [ph] fund, European distressed assets, overseas properties and new energy investment. The new Noah in U.S. office and Jersey Island Trust Company are both up and running, together with existing overseas platform to provide our clients with comprehensive financial solution ranging from offer wealth management to insurance planning, trust advisory and education planning for the children. We have been improving our servicing standards with regard to our family office in full discretionary portfolio management business. As Kenny just mentioned, we will leverage the total family business experience to further upgrade this business. In late November, we will bring another group of ultra-high net worth family office clients to visit business core where you have opportunity to discuss with some well-known family wealth managers to help them better understand to active asset allocation circulation and the tools available for generational wealth transfer. On the Internet wealth management business, Cai Fu Pai has been reaccelerating following the transformation, after which Cai Fu Pai focuses on distribution of standardized products including mutual funds, mutual fund of funds, insurance products. Cai Fu Pai is positioned as mass affluent online type of thing, powered by advanced technologies such robo-advisory capabilities. By the end of the third quarter, registered clients totaled more than 346,000, 120% increase from the year ago. Total transaction value in the third quarter reached RMB 4.8 billion, up 114.5% year-over-year. Average transaction value for per asset clients was RMB 214,000, up 110% from year a ago levels. Growth prospects are enormous for Cai Fu Pai. Going forward, we will now only focus on a scale of this business but also its profitability. Being an internal part of Noah’s ecosystem of financial services, Noah subsidiaries are developed around the needs of high net worth clients, some of which have made significant progress after the incubation period. For example our business, micro-lending company and [indiscernible] education have been performing well this year. And we expect them to grow even faster in 2017. Although Noah has become China’s largest investment and wealth ,management Company, we still view ourselves as a business in the early stage of entrepreneurship, continuous learning and evolution and so we are pursuing infinitely. Lastly, I want to talk about regulations. Beginning in the second half of 2014, continued easing of monetary policy unlocked a lot of liquidity which rattled China’s stock market, bond market, housing market and commodity futures market, one after another. Chinese regulators are now taking steps to tighten financial regulations in an attempt to channel the liquidity into the real economy. Particularly to prevent any further abnormal currency volatility, the PBOC is tightening up capital control. Chinese authorities are also planning stricter regulation on wealth management and asset management companies in a bid to insure the financial markets play an effective role in allocation of funds. The recent publications of new rules governing private investment fund, commercial bank wealth management products and capital guarantee funds which have a profound impact on the wealth management and asset management industry in China. In a context of broad-based tightening of regulations in 2016, Noah’s overall business has been running very well and is on track to achieve the goals we set at the beginning of the year. In a long run, Noah will benefit from a more vigorous, regulatory environment where companies can be better funded and then boost economic activity, which in turn will create investments opportunity for Noah’s clients. Moreover, Noah’s core financial flexibility [ph] product selection, asset management, risk management and back-office operation can help Noah stand out in the future, by gaining more client trust and market share. As ever value investing, long-term investing and asset allocation remain our core principles. We’ve always maintained our focus on building our core competitive advantages in wealth and asset management, global asset allocation and comprehensive financial solutions. We’ve continuously improved our capabilities in research, product selection, risk control and post investment management capabilities. We’ve also continuously strived to understand our client needs. By starting from the long-term goals and adopting effective client communication, we have worked with our clients to protect and build the assets. However, by maintaining our unwavering commitment to Noah’s core values and our focus on long-term goals, we may give up some shorter term profit and even lose some clients in the short term. But this approach has enabled us to build a high-quality base of long-term customers that recognize Noah’s value. We would like to create and maintaining, strong high-quality relationship with our clients, as a way of contributing to the healthy development of China’s loss management market. Thank you. Now, I’ll turn the call over to our CFO, Shang to review our financial results.

Thank you, Chairlady, Wang, and hello, everyone. Today, I’ll give you an overview of our third quarter 2016 results and then open the call up for questions. As Kenny and Chairlady Wang have noted, we are generally pleased with our results for the third quarter of 2016. Net revenues increased 16.9% year-over-year to RMB 608.5 million. Non-GAAP net income grew 8.7% year-over-year to RMB 179.7 million. For our wealth management business, we distributed approximately RMB 23.9 billion of products in the third quarter, down 8.3% from the same period a year ago. However, looking more closely, net revenues from one-time commission increased 48.4% to RMB 281.2 million on a year-on-year basis. This was mainly due to changes in the product mix and higher effective one-time commission rate. Net revenues from reoccurring services which mainly come from private equity and real estate products were RMB 294.9 million in the third quarter of 2016, representing a 7.9% increase year-over-year. Reoccurring service fees as a percentage of total net revenues decreased year-over-year to 48.2% from 49.6% a year ago, as acted [ph] several real estate funds which usually have higher management fees than fund-of-funds products, and started repositioning our real estate investment towards commercial real projects. We expect recurring revenue to continue to provide stable sustainable income going forward. We received RMB 4.7 million in net revenues from performance-based income during the third quarter compared to RMB 63.5 million in the third quarter of 2015. The decline was primarily due to a large decrease of performance-based income from secondary market equity products. As we exited several real estate funds this year, we achieved total performance based income RMB 45.4 million for the first nine months of this year. The solid investment performance of our products not only helps our clients with capital appreciation but also translate into income for our business. Revenues for our internet finance business in the third quarter was RMB 11.4 million, a 28.4% decrease from the corresponding period in 2015. The year-over-year decline was primarily due to the transformation of our internet wealth management business Cai Fu Pai to focus on distribution of standardized products. Although the effective fee rates for standardized wealth management products are lower, we believe the market potential is huge. And through increased cross-selling, their synergy was a traditional wealth management business. With the transaction value back on track, we’ll seek more balance between scale and profitability for internet wealth management business going forward. For the third quarter, operating income decreased to RMB 162.5 million year-over-year and operating margin was 26.7% compared to 33.9% for the corresponding period in 2015. The year-over-year decrease was primarily due to the decrease in government subsidy we received in the third quarter compared to the same period a year ago. Excluding government subsidy, which can vary quarter-to-quarter, operating income increased by 33.8% year-over-year. Non-GAAP net margin for the third quarter was 28.3% compared to 32% a year ago, which is within a relatively stable range in recent years. On the balance sheet side, as of September 30, 2016, the Company has approximately RMB 1.75 billion in cash and cash equivalent an increase of RMB 357.9 million from the second quarter of this year. The sequential rebound in the second quarter was mainly due to inflow from operating activity and acceleration of health, maturity and securities. Finally, I would like to highlight our performance year-to-date reflects a strong fundamental and steady probability in our core businesses. With that, Chairlady Wang, Kenny and our Gopher Asset Management CEO Mr. Yin Zhe and I will be happy to take any questions.

At this time, we will pause momentarily to assemble our roster.

Hi, all. I just want to also let you know that I think Shang mentioned this, Gopher Asset Management’s CEO and Noah’s Co-Founder Mr. Yin Zhe is also on the call. We understand that there are questions about the investment into Gopher. So, this time, we also have Mr. Yin Zhe in the call to answer questions.

[Operator Instructions] The first question today comes from Bo Lun Tang of CICC. Go ahead, please.

I’ve got two questions. The first question is regarding the recent UnionPay bank to so the policies purchased in Hong-Kong. Just want to understand some color and ground what’s that impact like for Noah? Because I noticed that in this quarter, actually 2%, roughly 2% of the transaction volume from the insurance policies and other products. Just want to understand what’s your outlook. And my second question is in terms of the AUM business. So, despite a strong growth in the AUM for the first three quarters, I noticed that the recurring service fee actually has increased in the relatively low speed of 7% Y-O-Y. It seems like the average recurring service charge as AUM has decreased. Is it related to previously you said you were introduced to institutional investors, so just want to understand the rationale behind. And when you try to introduce the institutional investments, will the ultimate trend of the recurrence of this fee charge rate to fall? Thank you.

Let me just take the first question about the UnionPay and then the second question about recurring service fee Shang will answer. I think UnionPay, it actually has very limited impact on our overall revenue. It actually represents only about less than 10% of our total revenue that’s actually in overseas insurance. Even within that, I think we didn’t pay policy, it’s just the subset within the overseas insurance. We understand that there currently two things that’s happening, one is there are others providers, Visa and MasterCard that can actually still process in Hong Kong. And then secondly, as many of our clients actually do have assets outside and so a lot of the actually do not purchase through the hidden UnionPay route. And so just to reiterate, overall, the impact of our revenue is actually much less than 10% of the revenue in terms of overseas insurance. Even within that lower than 10% insurance share, there are three or four routes of buying insurance in Hong Kong. Many of our clients actually have assets outside of China and therefore they don’t use to UnionPay route. So in summary, it’s a very limited impact so far on our revenue in front.

Okay. And on your second question regarding reoccurring service fee, as you may know, Gopher asset management is primarily a fund-of-funds asset management company. However, in the real estate asset category, it had also a very strong direct investment team. For this year, we have actively managed the acceleration maturity of many of our direct real estate funds. Now, many of the real estate funds have higher management fees and fund-of-funds products. And so on a blended weighted average rate, our management fees has slowly come down. That’s why you can see that our overall recurring service fee growth has slowed a bit. But as madam Wang has mentioned, we will be repositioning our real estate investment towards more commercial rather than residential. So, we still feel quite confident on a going forward basis as our asset management business growth, our overall recurring service fees will grow in line with that.

[Foreign Language] And you mentioned about the impact of institutional investors for asset management business. You rightly pointed out, this year, high quality institutional investors have been very interested in investing in Gopher Asset Management product. And some of them have actually made commitments already. But a lot of them have not been recognized in terms of revenues, it will be toward the later this year as they only recently made commitments.

Just one more point about insurance. Actually, we’ve run some numbers for our performance this year. We see a lot of clients, actually a majority of our clients buying with the low US$50,000 type protection investment. So, it’s actually contrary to [indiscernible] we’re not actually selling a lot of saving, investment linked type product. The drive of the insurance growth is still very much protection oriented and about US$50,000 or below in the majority of our client base. So, this UnionPay policy is actually affecting us in a very limited way.

Thank you. [Operator Instructions] The next question comes from Usdin Wang of Rosefinch. [Ph] Go ahead please.

[Foreign Language]

For the benefit of the audience, I will translate the two questions that was raised. The first question was earlier this month, we noted a news article by 21st Century was commented or speculated that private funds in China won’t be allowed to credit assets or underlying assets, what’s your view on this and will there be any impact on our business? And the second question was, earlier this year, can you mention about rolling out new incentive scheme to improve the retention of key employees of the firm, can you brief us on any update regarding this initiative? Thank you.

[Foreign Language]

A couple of points your question regarding the news article. We consulted relevant regulatory bodies and our view now is that article -- it’s more of a speculation rather than a fact. But however this also points out to you an ongoing market trend or regulation trend, there will be more regulation to prevent a misleading, [ph] to prevent unhealthy investment into the credit market. What do I mean by unhealthy, [indiscernible] that we have seen in previous years, the capital quote, the mismatches, I mean there will be more regulation to make sure that these type of investment cannot continue on a going forward basis. There is a number, which I didn’t share on my call script, I’d like to point out, actually this year we have noted that those clients who have invested more than RMB 10 million actually grew at quite a healthy rate of more than 15%. I think in terms of fixed income or credit products, there is going to be more and more of a diversion. So, a lot of the larger clients, high quality clients will rely on good relationship managers; and smaller clients, they will probably start to buy more fixed income products online rather than relying on relationship managers. So overall, I think in terms of the development of the market and the regulation, we think that streamlining, minimizing systematic risk is actually all good for our business, as we’re an established player already.

[Foreign Language]

So, let me just answer the question raised on the idea of a partnership at the senior management level at Noah. I think I’ve raised this concept in the beginning of the year. We’ve actually implemented this in concept. We’ve selected the top 30 senior management at Noah to be distributed with higher concentration of Noah’s stock option. And so, this was actually done in exercise whereby we are distributing to fewer management but much more concentrated in higher allocation, so that’s one. Secondly, is we’ve selected a significant wave of management, the next tier, about 30 staff, which have also been selected to be provided with stock and stock options. And so, these are big next generation leaders. In terms of the management team’s stability, basically since 2015 for the last 18 to 24 month we’ve maintained the turnover rate at the low 7% to 8%. So that’s basically helping us maintain a very stable management team. We want to have some turnover but not high, so anything below 7% to 8% is something that we should be doing.

Thank you. The next question comes from Frank Lin with Lins Value Capital. Go ahead please.

[Foreign Language]

To finish with audience, I would translate Frank Lin’s question into English. Hello, senior management. There’s a couple of things I would like your comment on. Number one, I noted number, our team, the management team this year has stayed relatively flat. Can you please provide us the rationale of these numbers? Second, I also do hedge fund investing in China and I’m also a big believer of value investing. And I think that echoes what madam Wang said, I think that’s the way to go in the future. I know for Gopher more than 50% of the AUM is in private equity and hedge fund. In your opinion, what are good private equity hedge fund products, I note that for -- these equity products, the average duration is 0.6. Can you comment on that as well?

[Foreign Language] So, let me just translate the whole thing in English. There’s the question about the RM growth. We’ve actually seen a limited growth this year. But we’re maintaining it about 1,100 in terms of RM. But you’ve seen growth recently, end of 2014, we had about 750 RM; so, we’ve grown about 50% in the last 18 months. Now, what we wanted to do in the last three quarters is to basically improve the quality of our RMs including with a special program to train the top 100 RMs to be leading private bankers. We have also focused on overall productivity of our RM and capabilities of our RM. So, when you see that, they will be generating more revenue and also generating more AUM for each RM, and that’s the focus this year which is the quality of the RM. Now, let’s Ms. Wang talk a bit about the product question.

I’ll answer in terms of our private equity and hedge fund products in China, I think we’re very stringent in terms of our management selection process. We review multiple factors including the investment team, their track record, their investment philosophy et cetera. I think what we’ve ended up over the last 5, 10 years is we build strategic long-term relationship with the high-quality asset managers that’s in the market; many of them continue to outperform. They are often in the top quartile in terms of performance. For our various asset categories, I think the product relations are quite in line with the market standard. For private equity fund, the tropical whole cycle is anywhere between 5 to 10 years. For hedge funds in China, usually there is a one year lock and quarterly or biannually redemption when those thereafter. You mentioned a particular number 0.6. I think that is possibly referring to our 6-K. That is the amount of secondary market equity funds that expired in the third quarter of this year. So that’s 600 million that have expired versus 200 million of new flow. Despite the Asia weakness this year, our secondary market equity fund of funds AUM for Gopher has to remain quite stable and steady at more than RMB 10 billion for the most of this year. So, I guess that points out and illustrates the fact that we have very good management selection, the performance exceeds the index. And generally, I think our clients appreciate that. And so that translates into the fact that we have maintained our AUM over the last nine months.

[Foreign Language]

Sure. Madam, Wang would like to add a bit more commentary on both questions actually. The first question regarding our relationship managers. She will like to highlight for the wealth management industry in China, I think over the last 5, 10 years of development, I think we are seeing the industry as a whole advancing, it’s not just a numbers growth or plus high as many relationship manager as you can. I think we are now focusing more on quality over quantity. So, we are very focused on improving the productivity of our relationship managers. So, if we are able to improve the productivity of a typical relationship manager from RMB 300 million of new info per year to $300 million of new info per year that alone will help us increase our overall business volume six to seven times without adding new relationship managers. So, especially in this year in 2016 where the macro environment is quite uncertain, we’ve been focusing on quality as a more prudent way of expanding our business, rather than just hiring new item. So, the overall tone is more of a optimization. So, you will see in terms of relationship managers, in terms of branch [ph] number, we have kept it quite steady this year that is showing, we are optimizing the overall team layout. However, I would like to point out that we are adding new city coverage. So, the number of cities that we cover actually increased this year. So, I think some market in China, we have yet to cover well. So, I think we’ll plan to increase the number of city coverage going forward. Now, you mentioned about our product strategy, I would like to reiterate that I think Noah in the market, we have a very strong reputation for selecting and working with the top quartile managers. We believe that is a very strong rule in terms of alternative, i.e. the top planning manager will earn more than 80% of the return in the market. So, we are focus on deepening long-term strategic relationship with the best in class managers in the market.

Thank you. The next question comes from Stanley Grove of Wharton Investment Funds. [Ph] Go ahead please.

[Foreign Language]

Sure. Before, Ms. Wang answer the question, let me quickly translate for the benefit of audience. Stanley from Wharton Investment Funds has two questions. The first question is, I noted that for the third quarter of this year in terms of the amount of private equity fund distributed is roughly about RMB 5.4 billion, which is down about 40% year-over-year. Given the current landscape a little more there in market quality assets in China, do you think that it’s going to be a bottleneck to secure high-quality private equity managers going forward. The second question is you mentioned that you are seeing more interest from institutional investors in terms of Gopher Asset Management business. Can you give us a bit more color and commentary on how that is growing and what is the percentage of AUM that’s contributed by institutional investors currently and going forward? Thank you.

[Foreign Language]

Sure. On your first question regarding securing quality manager for our private equity business, I think there is a lot of maters in play. Obviously you mentioned that there has been market for quality assets in China. But I think we have so far been able to secure long-term relationship with the top quartile managers. For private equity space, the managers -- the quality managers don’t always raise fund every single year. They usually raise a fund and takes about two, three year to invest before they raise a new fund. So, there are some seasonality in terms of fund raising. So, for example, on last year, we raised four private equity renminbi fund for Sequoia. So, obviously they are not in the market this year. So, for the third quarter, I think we paid a couple of quality managers and I think clients are still very interested in these types of long-term anti- cyclical products. I think on a quarter-to-quarter basis, depending on who we’re fund raising for, there may be some volatility in terms of the actual amount we have raised each quarter.

[Foreign Language]

So, Mr. Yin who is currently the CEO of our Asset Management Business, Gopher, would like to answer the second question. So if you remember, Gopher Asset Management was set up about six years a ago. And after six years of operations, I think we are at a very good potential inflection point in terms of institutional investor. Number one, we have developed capabilities and multiple strategies including private equity, real estate, secondary market equity products and credit. We have built a very strong investment team around that and have demonstrated very steady investment ability and performance. And in teams of the second, in terms of the regulators and institutional investors, I think many of them are now realizing and appreciating the values in hand with fund of funds structure. Asset management industry in China grows rapidly. There are more and more managers that emerges every single day. And I think having the right manager is becoming much harder now versus a couple of years ago. So, through a fund of funds approach, many of these institutional investors can reduce their risk when they invest in alternative vis-à-vis a fund of funds model. And so, this year I have been interacting with a lot of insurance companies, banks, government led funds. They all very interested in terms of working with Gopher to increase the alternative asset allocations. So, for the fourth quarter and going forward, I think we will be able to report a lot of good progress in terms of our relationship and our cooperation with institutional investors.

[Operator Instructions] The next question comes from Shao Ziqin of CITIC. Please go ahead.

[Foreign Language]

Let me translate the question before Mr. Yin from Gopher Asset Management answers the question. So, the gentleman from, CITIC only has one question. The question is we note that for Gopher, the AUM has increased at a quite rapid pace, 49% year-over-year for third quarter. However the management fee revenue only increased 16%. Can you give us some commentary on the differences between these two percentages? Thank you.

[Foreign Language]

As mentioned by madam Wang, Gopher Asset Management is a multi -strategy, multi-product line asset management firm. So, we have not only private equity, real estate, secondary market equity product and other strategies as well. I think if you look at the mix of our AUM this quarter versus the last two years, you will have noticed that the AUM, though it has increased, the mix has changed. Currently, private equity is the largest asset category but a year or two years ago real estate was actually a very significant volume of our overall AUM. This year based on the overall real estate market trend, I think we have actively sold and matured a lot of our real estate funds. And we have recognized different quantity [ph] meaning that we have made good money for our investors. And as mentioned for many of our direct real estate funds, the management fee is much higher than the fund-of-fund structure. So, we’re repositioning our real estate business to focus more on commercial rather than residential. And we’ve already have many plans to launch new funds to meet the new opportunities that we see in the real estate industry.

[Foreign Language]

So, madam Wang would like to add to the question. So, previously, real estate, this particular asset category was the largest in terms of contribution to Gopher AUM. For direct real estate funds our typical fee rate was 2% management fee and 20% carried. This year, given the development of the residential property market in China, our view is that we’d rather be a seller rather than a buyer. So, we have managed acceleration of many of our real estate funds. Going forward, I think the opportunity will be more on the first tier cities like Beijing, Shanghai, holding operating assets that are located, situated in core business districts. I think going forward in 2017, I think we see a lot of fund raising opportunity around this particular strategy. And so, I think the differences and percentages is more of the changes in the AUM mix rather than any structural issues.

Thank you.