Noah Holdings Limited (NOAH) Q4 2017 Earnings Report, Transcript and Summary

Good day, and welcome to the Noah Holdings Limited Fourth Quarter and Full Year 2017 Earnings Conference Call. [Operator Instructions]. Please note this event is being recorded. With that, I'd like to turn the conference over to Kenny Lam. Please go ahead.

Thank you, operator. I want to welcome all our investor and analyst friends to our earnings conference call today. In addition to myself; Chairlady Wang; our CFO, Shang, will also be participating in our call today. For today's agenda, we'll first review Noah's overall 2017 performance as well as the development of our core wealth and asset management business. Then, I will talk about the progress in our overseas business and our mid- and back-office operations. Chairlady Wang will then speak to the state of each product segment as well as provide her overall views on the current industry and regulatory environment. Our CFO, Shang, will then follow up with more detailed discussion of Noah's fourth quarter and full year financial performance as well as our guidance for 2018. We will conclude the call with a Q&A session. In 2017, while the growth of Chinese economy has slowed, economic restructuring is starting to bear fruit. Stricter supervision has become a top priority in the financial sector. The introduction of a series of new regulations aiming to govern the asset management industry and cash flow industry will undoubtedly speed up the reshaping and upgrading of Chinese financial ecosystem. Chinese wealth management and asset management industries will usher in more standardized and orderly development while maintaining rapid growth. As a fully licensed, well-regulated and integrated financial service institution, Noah is a beneficiary of these new regulations and therefore, will embrace a new round of long-term development opportunities. Our continued objective is to meet the increasing and evolving demand of Chinese high net worth individuals. As we pursue this goal, we will continue to adhere to stringent risk control standards and actively seek financial product and integrated financial service innovation while at the same time, further expanding cross-asset, cross-regional diversification. In 2017, Noah has achieved outstanding results in risk management, business and financial performance. Our transaction value for financial products reached CNY 117.4 billion, up 15.8% from previous year. Our asset management business reached AUM of CNY 148.3 billion, up 22.6% from the end of 2016. Both figures are at all-time high. The group's net revenues for the full year 2017 reached CNY 2.83 billion, representing an increase of 12.5% over the last year. Our non-GAAP net profit attributable to common shareholders increased 19.5% year-over-year to CNY 864 million, surpassing the high end of our full year guidance. We are very satisfied with this achievement. Our traditional wealth management business had 186,918 registered clients as of December 30 -- 31, 2017, a 38% increase from the same period in 2016. The number of active clients who purchased financial products through Noah in 2017 was 12,720, and average transaction value per client reached CNY 9.23 million, up 5.8% and 9.5%, respectively, over the same period in 2016. We continue to make steady progress and push forward on our overall physical network in 2017. The number of covered cities increased from 71 to 79. The number of branches increased from 185 to 237. The number of our relationship managers also increased 14% year-over-year to 1,335. It is worth mentioning that our team of relationship managers continue to maintain a high level of stability. We saw only 3.6% turnover rate among elite relationship manager team. In terms of training, we further developed the three career paths for Noah's relationship managers, professional, managerial and private bankers; established correspondent training and incentive systems based on different development paths. We have also formulated more balanced incentive measurement, guiding our relationship managers to shift the emphasis to the services from the front-end product sales to asset allocation advisory and integrated financial services, bringing a better customer service experience. For our overall asset management business, as for fourth quarter 2017, Gopher's AUM reached CNY 148.3 billion, representing an increase of 23% year-over-year. The AUM of the largest asset class, private equity investment fund, increased by a notable 50% from a year ago, reaching CNY 86.9 billion, as a percentage of total assets under management also increased to 59% at the end of 2017 versus 48% at the end of 2016. The number of co-investment and direct investment projects continue to increase within Gopher's overall managed assets. In the fourth quarter of 2017, Gopher launched a number of direct or mostly direct investment funds, including Gopher financial industry fund and Gopher U.S. venture fund, which further upgraded our overall asset quality. As a leading diversified asset management company in China, Gopher also invests in credit, real estate, secondary markets with AUM accounting for 27%, 8% and 4%, respectively, of our total assets under management at year-end. For our overseas business, 2017 is a year of exciting new developments. Our U.S. subsidiary has not only obtained the registered investment adviser license and insurance brokerage license but also opened -- we also opened a New York office in addition to our Silicon Valley operations. Our New York office will focus on investment opportunities in the real estate sector in the U.S. Noah Canada and Noah Australia branch offices also successfully started in late '17 and early 2018. As of the end of 2017, the AUM of our overseas business reached CNY 21.7 billion, increasing 28% year-over-year. While continuing to allocate overseas assets for domestic high net worth clients, Noah aims to expand our vision globally and provide high-quality financial services to high net worth Chinese all over the world. Our efforts have garnered high recognition within the industry based on [indiscernible] Noah and Gopher won a total of 38 important domestic and international awards in 2017, including prestigious awards from Asian Private Banker, International Private Banker, Asiamoney and Fortune magazine. We also became the first independent wealth management company in China to receive an investment-grade credit rating from S&P. These recognitions not only affirm our hard work over the last 12 years but also encourage us to remain vigilant and continue to push hard on our development. Lastly, I'd like to provide a brief summary of our mid- and back-office developments. In 2017, we worked diligently on our technology upgrade and data capability within our group. We updated our Noah online app to establish a one-stop client service platform, providing more secure, compliant and convenient online trading and account management experience. We are also building our data platform for the entire group, striving to achieve a 360-degree customer profile with more than 150 labels in a few key dimensions, including historical investment behavioral focus, community participation, contribution and identity characteristics. From these profiles, we hope to form a deeper understanding of our clients. Our big data platform will be formally put into service in 2018 to help our relationship managers understand their individual clients in a better way. We hope that with active technology buildup, we will be able to better understand our clients' needs, improve our service efficiency and optimize our service quality. We've also comprehensively strengthened our investment research capabilities and reconstructing our research team and fully integrating our research into our product and marketing process. We are building Noah's own research database, systematically support our product risk management and sales and empowering our front-line teams through in-depth analysis to better serve clients. Product screening and professional services have always been Noah's core competency, and we will further strengthen this area by enhancing our investment research capability. With that, I will now turn the call to Noah's Chairlady and CEO, Wang Jingbo. She will speak in Chinese, and remarks will be followed by English interpretation.

Okay. Thank you, Kenny. 2017 marks the 12th year since Noah's founding. During the last 12 years, Noah has done many things well but has also made many mistakes along the way. We have experienced fraud, credit defaults, worse-than-expected fund performance as well as misreading industry trends at times. While publicly discussing these issues is difficult, we believe it will encourage us to reflect on and learn from our previous mistakes and ensure that these same mistakes will not occur going forward. Standing at the starting point of a new 12-year cycle, we ask ourselves, if we were to relive the last 12 years, what would be the top 3 things on our priority list. Following that train of thought, we ask, if we only focus on 3 things in the next 12 years, what would they be and how can we do them better. Human beings and organizations are never perfect, but they all have the ability to change and evolve. Whether perfection exists or not, it is the ultimate goal that encourages constant and perpetual evolution. We're confident that we will continually improve our fundamentals and take on new challenges and opportunities. We also see that in the wealth management and asset management industries, the regulators industry particularly as well as the investors are all becoming more sophisticated and rational. Judging from the current state of China's financial markets, we continue to see an imbalance between supply and demand. On the demand side, according to Bain's forecast, by the end of 2017, the total size of China's individual investable assets have reached CNY 158 trillion. On the product supply side, according to 2017 China Financial Stability Report issued by PBOC, excluding cross holding, the total size of the asset management business of various financial institutions in China is only a little over CNY 60 trillion. The demand and willingness of high net worth individuals to rely on professional asset management institutions to screen and invest in quality assets are growing. At the same time, we also see that investment yield is no longer the only factor that customers pay attention to when choosing investment institutions and products. Their vision is broader. Their investment mentality is more sophisticated, and their investment planning is more long-term oriented. This leads to a higher requirement for wealth management institutions like Noah. Whether we are able to meet the continuously escalating needs of our customers or even lead them to explore new lifestyles has been our constant consideration in pursuit and will determine the future magnitude of our corporate success. Now let me share with you the current state of major product categories at Noah and Gopher. In the area of VC/PE, as the top partner of top domestic PE managers and core entrepreneurs, Noah and Gopher have not only established a deep connection with mature and outstanding funds but also been good at allocating those dark horses, and we're pleased to see that our hard work over the last 10 years is gradually starting to bear fruit. In 2017, among the funds distributed by Noah and invested by Gopher, 40 portfolio companies successfully completed IPOs in the Asia market, accounting for nearly 10% of the total number in the year, and 3 companies were successfully listed in the United States. In the full year 2017, the total size of private equity funds distributed by Noah reached CNY 34.3 billion, increasing 24% from the full year 2016. Total AUM of Gopher's private equity investment reached CNY 86.9 billion, up an impressive 50 year -- 50% year-over-year. In addition to being a distribution channel and investing through fund of funds, we bring more value to our clients by way of co-investment and direct investment. As of the end of 2017, funds managed by Gopher completed 54 direct or co-investments of which 5 has been exited or are in the exiting process. 22 have become unicorn enterprises valued at more than USD 1 billion. Five have completed IPOs. Three have filed for IPO. Not including exited or already listed projects, 18 companies have had follow-up rounds of financing. Our entered cooperation with lead GPs is also reflected in the private equity secondary market fund as fund products. Gopher started to issue its first S funds in 2013 with 4 series of funds in operation by 2017. We're the most experienced fund manager in the Chinese market in distributing and managing independent S strategy funds. The long-duration PE/VC funds, the emergence of S strategy meets the demand of GPs and LPs to enhance liquidity. For new LP, it effectively optimizes the J-curve of the portfolio and speeds up cash return. At the same time, it brings a higher requirement for fund of funds manager's valuation capability. Gopher has the experience of investing in 163 individual funds and more than 3,500 investment projects. The valuation experience accumulated from these investments is put to great use. As a result, a complete investment strategy map of Gopher's private equity investment, P plus S plus D or primary plus secondary plus direct investment has been formed. On the secondary market investment front, the value investment managers selected by Noah and Gopher over the past few years have delivered better-than-expected performance in 2017, which brought dramatically elevated client satisfaction. For the full year 2017, secondary market products distributed by Noah increased 37% year-over-year to CNY 10.8 billion. More exceptionally, secondary market transaction value in the second half of the year comprised 80% of the full year amount. Since the beginning of 2018, the Asia market, Hong Kong market and U.S. market all exhibited increased volatility, highlighting the value of professional managers. Despite the stiffness in the market during the past few years, whether it is Noah-selected secondary market product fund or Gopher soft MoM invested funds, we strictly adhere to the ideology of value investing by high-quality managers to help our customers achieve outperforming long-term results. In 2017, Noah and Gopher-selected secondary market funds had an outstanding overall performance. 80% of the total fund assets under our advisory achieved an annual return of over 12% with top 20 funds averaging an absolute return of 39%. Gopher's flagship MoM fund also realized investment returns of over 20%, beating both benchmark returns and the market average, reflecting long-term performance values. In 2017, Noah's transaction value for fixed income products increased 11.3% year-over-year. We launched the first NAV-based credit portfolio product in Chinese market, which has been recognized and approved by the regulatory authority. With release of private equity investment fund to record notes by AMAC in January 2018, entrusted loans through private funds have come to a complete stop. We believe fixed income products are still robust amounts of individual clients, while the proactive managed products with NAV and portfolio characteristics will fully comply with the regulatory requirement and align with our industry's future trend. We managed to forecast the trend and have been well prepared of this trend. In real estate investments, after 6 years of direct project investment experience over two real estate cycles, covering and cooperating with over 40 real estate developers and more than 70 operators of all types. Noah and Gopher's real estate investment have evolved from single-fund strategy investing exclusively in the residential real estate area to a multi-format portfolio with funding plus operation model and form three major investment themes. core commercial asset acquisition, value-added property renovation and special opportunity investments. In 2017, Shanghai Gopher Center, the 5A class office building acquired by our fund earlier, successfully opened for business with rental occupancy well over 90%. Through this project, our value in both project operation and property value and content has been well recognized by institutional investors. In early 2018, Gopher's core asset acquisition strategy reached a new milestone by completing the acquisition of another 2 commercial properties in the core area of Shanghai. The project construction is expected to be completed before the end of 2019. With the industry upgrade and favorable policy in place, we're seeing an increasingly constructive environment for the formation of true real estate funds in China. Direct financing methods such as rates and preferred stocks are gradually entering invested horizon. As a manager with active management and value-added operating capabilities covering the full cycle of raising, investing, managing and exiting, Gopher will undoubtedly be facing a whole new round of opportunities. In the year 2018, funding sources for real estate market is expected to be relatively tight, and we're optimistic about the opportunities in asset acquisition, value-added renovation as well as preferred stock. Gopher's discretionary investment business has also achieved solid development in 2017. Gopher Heritage fund now have three series to meet different asset allocation strategies and to identify different investors' risk appetite. For Noah's ultra-high net worth clients, Gopher can further provide separately managed single-family office or multi-family office services, helping our core clients to construct family-owned investment teams. As of the end of 2017, we have provided wealth management services for nearly 600 Black Card families in China. It is our opinion that as the investment mentality of China's high net worth individuals continue to mature, entrusting financial investment decisions to professional asset managers or even starting their own family offices will become a future trend for Chinese wealthy families. Noah and Gopher's DNA and experience have shaped us to become the asset management company that most understands the demand of high net worth family clients in China. Besides the achievement of our wealth management and asset management businesses, in 2017 [indiscernible] Internet financial services and innovation subsidiaries have also achieved remarkable results. Our online wealth management platform, Caifupai, has accumulated its transaction value to almost CNY 55 billion. Based on our self-standardized mutual fund trading system, we further enhanced our capabilities in artificial intelligence, big data, quant fund and portfolio data processing and formed the scenario-driven Internet financial service platform that focuses on the allocation of mutual funds. Apart from that, we have also launched 2 new apps in 2017 for mutual fund automatic investment plan and investment advisory services, and we will continue to focus on the asset allocation of mutual funds for mass affluent clients in the 2018. Noah Rong Yi Tong, our micro-lending subsidiary focusing on clients with high credit profile, generated over CNY 5 million new business volumes in the full year 2017 while establishing an online SaaS platform and a completely independent risk management system. Noah Jintong, our online payment processing subsidiary, continue to provide data and information infrastructure while constructing our fundamental payment system. Revolving around the demands of high net worth individuals, we continue to extend our offerings horizon from wealth management to asset management, from renminbi investment to global asset allocation, from financial product investments to integrated financial services. At present, our Family Wealth Management Center, together with our trust, Enoch Education, Noah Charity Foundation, among others, have almost been able to meet comprehensive customer needs for comprehensive financial services. Investor education is also an important channel for us to establish in-depth links with high net worth clients. In 2017, we conducted 13 leadership summits, 2 talent seminars, seven sessions of Noah University, 17 Noah open courses as well as a variety of regional activities across the country covering almost 200,000 customers. At year-end, we hosted 3 days of annual diamond gala in Xiamen, accommodating almost 6,000 clients from 60 regions around the country. During the year, Enoch Education hosted 96 classes, both domestically and internationally, attended by 7500 participants. Both the quality of the courses and customer satisfaction have increased significantly. Last but not least, I would like to share a little bit of our view on the regulation environment. 2017 was called the most strict year for financial regulation in history. From the internal review draft of guidelines on regulating the asset management business and CBRC's inspection ways at the beginning of the year, to new rules on stock selling by major shareholders and measures on investor suitability in midyear and then to the draft for comments for guidelines on regulating the asset management business and the formal promulgation of notice on the rectification of cash credit business towards year-end, government supervision orders were issued in an intensive manner. With the convening of the 19th Party Congress and the establishment of the Financial Stability, Development Committee under the State Council, finance returning to its roots of serving the real economy and preventing systematic financial risks have become clear themes of financial regulation. With the strengthening of coordination among regulatory bodies and higher compliance costs, wealth management and asset management industries will both enter a new era where only the fittest will survive. Some long-standing industry defects such as implicit guarantee, duration mismatch and regulation arbitrage are gradually being broken down by joint efforts of all parties. In this type of regulatory environment, fully licensed and compliant financial institutions, such as Noah, will hopefully have the opportunity to expand their market shares. In the meantime, we're also being cautious and would always stick to our compliance and risk management standards as the bottom line and lifeline of our operations. Through our whole operating process from screening qualified investors at the front-end sales and product risk assessment to potential risk warning and special asset management of existing products, we adhere to the most rigorous standards and utilize the most market-oriented approaches to achieve satisfactory results. We have also set up a separate department within our company specialized in distressed assets and aimed to launch a special asset fund in the future. In fact, distressed assets represent a very large asset class in global asset management industry and could provide many investment opportunities. International investment firms, such as Blackstone and Oaktree, are all participating in China's distressed asset management. We believe a healthy industry chain is already taking shape in China. Lastly, I would like to say that after the first 12 years of development, Noah should consider 2018 as a new starting point and face the challenges of the times through constant learning and evolving process. The biggest challenge for us today is not to dwell on the past but rather to look into the future. We need to develop an instinct of continuously improving, converting the pain brought by problems to the driving force that encourages innovation. What makes a company differentiated is creativity, mentality and wisdom. We will always encounter problems, but we should not waste our time on complaining or hoping that problems won't occur anyway. Instead, we should believe in what Churchill said, "Success consists of going from failure to failure without losing enthusiasm." Noah is well positioned to grow into a technology-led and globally integrated financial service platform, serving Chinese people all around the world. Together with my team, I'm fully prepared and looking forward to Noah's breakthroughs in 2018 followed by another 12 years of remarkable success. Thank you all. Now I will turn the call over to our CFO, Shang, who will review our financial results.

Thank you, Chairlady Wang, and hello, everyone. As Kenny and Chairlady Wang noted, we are pleased with our results for the fourth quarter and full year 2017. Net revenues in the fourth quarter increased 11.7% year-over-year to CNY 722.1 million and full year net revenues increased 12.5% year-over-year to CNY 2.8 billion, reflecting our strong performance in 2017. On the bottom line, non-GAAP attributable net income in the fourth quarter grew 40.5% year-over-year to CNY 184.7 million, and full year non-GAAP net income grew 19.5% to CNY 863.8 million, exceeding our profit guidance. I'll now discuss in more details about our fourth quarter financial results. We distributed CNY 28.2 billion worth of financial product in the fourth quarter and generated CNY 244 million revenue from onetime commissions. Reoccurring service fees in the fourth quarter of 2017 totaled CNY 396.4 million and performance-based income were CNY 29.8 million. Operating income increased 62.7% year-over-year to CNY 135.7 million in the fourth quarter, and operating margin was 18.8% compared with 12.9% for the corresponding period in 2016. Non-GAAP net income attributable to Noah's shareholders were CNY 184.7 million for the fourth quarter, increasing 40.5% from a year ago. Now turning to full year 2017 results. Amidst growing competition and risk in both wealth management and asset management industries in China, we managed to achieve a record high in transaction value, distributing a total of CNY 117.4 billion of financial products, up 15.8%. Revenues from onetime commissions remained relatively flat from a year ago at CNY 1.1 billion as lower insurance volume decreased overall blended effective commission rate. As total assets under advisory and under management continue to rise, revenues from reoccurring service fees were CNY 1.4 billion in 2017. Representing a healthy 12.6% increase, reoccurring revenue continue to contribute about half of our total revenues and provide strong revenue streams going forward. We are especially pleased that performance-based income reached CNY 141 million in 2017, up 138% year-over-year, demonstrating our effort to build a leading, multi-strategy product and investment platform, which levers performance for our clients. With accumulation of assets under advisory and under management, we believe performance-based income will continue to contribute to our total revenue. Segment wise, wealth management revenues reached CNY 2.1 billion in the full year of 2017, up 10% year-over-year, while asset management revenue reached CNY 588 million, up 10.6% year-over-year. Net revenues from Internet financial services business grew 124.7% year-over-year to CNY 112.6 million. We are pleased with the robust progress of our new businesses. Total operating expenses were CNY 2 billion for the full year 2017, up 11%, lower than the growth rate of net revenues, reflecting our focus on cost optimization and improved efficiency. Specifically, total compensation costs were CNY 1.4 billion, up 8.2% year-over-year, in line with the increased number of relationship managers. Total SG&A were CNY 569.3 million, and other operating expenses were CNY 147.3 million, relatively flat compared with last year. Although government subsidy we received in 2017 decreased to CNY 74.2 million due to VAT tax reform in China, operating income for the full year 2017 still increased 16.4% year-over-year to CNY 777 million. Operating margin increased from 26.5% to 27.5% in 2017, mainly thanks to cost optimization measurements and increased operating efficiency. Income from equity and affiliates grew threefold to CNY 93.2 million compared with CNY 22.3 million in 2016, primarily contributed by the growth of valuation of the funds we manage and invest in at general partner as well as increase in net asset value of our affiliates. On the bottom line, we achieved non-GAAP net income attributable to Noah shareholders of CNY 863.8 million in 2017, increasing 19.5% from a year ago. Attributable non-GAAP net margin was 30.6% in 2017 compared with 28.8% in 2016. Our balance sheet remained healthy. As of December 31, 2017, the company had CNY 1.9 billion in cash and cash equivalents, down from CNY 2 billion in the previous quarter and CNY 3 billion at the end of 2016. This mainly reflects our effort in cash management, strategic investment and repurchase of Gopher shares from Sequoia last year. Let me close with our net profit guidance for 2018. We expect non-GAAP attributable net income for the full year 2018 to be between CNY 1 billion to CNY 1.05 billion, representing an increase of 15.8% to 21.6% compared to 2017. This guidance reflects our strategy to accelerate our revenue growth as we target to grow faster than the industry and gain market share. At the same time, 2018 will be the first time we will be launching our comprehensive marketing and advertisement program to further strengthen our brand awareness amongst the fast growing high net worth individual population within China. In conclusion, 2017 was another great year, and we are very excited about the opportunities ahead. With that, let's open up the call for questions. Operator?

[Operator Instructions]. Our first question comes from Yiqing Huang with JL Warren Capital.

We are encouraged to see the ramp of AUM in asset management and value of total product sold, and one thing that we believe that differentiates Noah from the peers is your product innovation and diversification driven by your insights of the capital market and ability to move quickly and accordingly. So can you please give us some sorts as to the trends of your portfolio allocation across fixed income, real estate, stocks and private equity in the next two years given the current environment?

Thank you. So in terms of overall asset allocation, I think we will continue to expand in terms of competitiveness, in terms of private equity and venture capital. We will leverage our industry knowledge to further push our value creation for -- on behalf of our clients as well as innovating new products. For 2018, our view is that money will become more expensive, which means that asset prices will become cheaper. As such, we think there will be a lot of opportunities in terms of real estate. And then specifically in terms of core, I think we'll plan to be exiting some of our project this year and also looking at some new purchases as well. In terms of the Asia public market, over the last two years, we're primarily focused on those funds that focus on value investing, but given the overall deleveraging globally, I think we will be also looking at those fund managers that will be looking at growth opportunities. Yes. In terms of fixed income, I think we are committed to be upgrading our strategy in terms of being an app-based approach as well as portfolio approach. At the same time in terms of the overall industry trend, we're seeing upgrade in consumers, and so we're focusing on credit that's related to mortgage-backed securities as well as auto-backed securities.

Our next question comes from Katherine Lei with JPMorgan.

So I have two questions. The first one I want to ask is that I see your fixed income product sales, actually, there is a rebound in fourth Q. So I wonder is that driven by a change of strategy. Or what is the key driver for that. This is the first one. The second question is mainly on the return on AUM for Gopher business. So I understand that for the publicly offer funds, the secondary market business the AUM expansion has been rapid in recent periods. But on the other side, will this be -- will this lead to like a decline on the return on AUM given that usually on secondary market products maybe the management fee will be slightly lower than the other products? Or will this be offset by product returns from the PE product that you enter in early days? So this is my two key questions. If I can have a third one, will be mainly on the turnover rate show of the elite RM. Can Shang, you also comment on the trends and if the competition is intensifying? Like a bit more color will be helpful.

So just want to clarify, there's three questions. First is the reason for the rebound of fixed income transaction value fourth quarter versus -- compared to third quarter. Second is to comment on the return quality of the growing AUM, particularly given in light of the decreased [indiscernible]...

First on return on AUM of the Gopher -- of Gopher going forward because in previous years or previous quarters, we see that the return on AUM, according to our calculation, is actually declining. I understand that because AUM growth is very fast. But going forward, is there a change of that trend due to like some profit released from your key products other kind of product mix change? Yes.

And the third question is on the turnover elite relationship managers, the trend, the competition, right?

Correct.

Okay, great. So yes. So I think -- one second. Yes. So in terms of our answer on the second question in terms of the AUM, so as you noted, as we have been growing our AUM over -- consistently over the last 5, 6 years that we have expanding our Gopher Asset Management, the effective net management fee rate has fluctuated. In the most recent year, 1.5 years, we have seen the effective net management fee come down over the last few quarters. This is a result that the portion of the direct investment strategy that Gopher management has declined primarily around real estate. But in the most recent 1 or 2 quarters, we're seeing the decline in the net management fee prop up, and we're seeing a steady improvement. This reflects our ongoing strategy to expand our co-investment and direct investment for all -- across all our asset classes, and this will continue to be our strategy going forward in terms of product development. We want to increase the overall net management fee rate that we'll be able to charge by adding more investment value to our clients. And so this will happen in our private equity and venture capital. This will also happen in our real estate. And we think that not only will it help our reoccurring service fee but will also help with potential in terms of realizing performance-based fee income. In terms of the turnover

I'll take the third question. I think, Katherine, on the third question around the turnover rate, we look at that number quite diligently. Basically, if you look at the overall industry nature on China, your turnover rate overall on the overall team usually is hovering around -- for the industry, hovering around 20%, 25%. So on the overall team, we're way below that average. And for the elite teams, it has always been below 5%. So it fluctuates between quarters. We don't see substantially different competition for RMs this particular quarter. It fluctuates between quarters. But it has always been below 5%. So this quarter, I think it's somewhere around 3.5%, 3.6%. So we're not seeing increased competition on RM base. We are increasing our training and career planning so that there's more stickiness to the team.

Okay. And Madame Wang will answer your first question regarding the fixed income.

Okay. So Madame Wang had three points to add, specifically on the question regarding the rebound in the fixed income transaction value from third quarter to fourth quarter. I think this reflects our cautious and continued stringent product selection, specifically on fixed income product given the credit nature and the increasing credit risk in China. And so I think we feel that as we continue to expand and focus on mortgage-backed security and auto-backed security, which we believe are 2 long-term trends in China, we will be able to have sufficient supply to meet the strong demand for credit product from our high net worth individual clients. At the same time, we'll continue to expand in terms of offering our own NAV-based, portfolio-based credit product. The second point she would like to add is regarding mutual fund, which she thinks will be a growing path for individual investors as well in China. We haven't done as much mutual fund in the past, but going forward, I think we have a lot of opportunity to do more in this area. Specifically, our Internet wealth management platform has been, the last 1 or 2 years, building a good foundation to offer mutual fund investment to our client in terms of building its own TA system or trading system or settlement system at the same time, doing AI in quant interfaces on behalf -- for clients. So for 2018, we think that -- and going forward, we think that though the mutual fund is a very difficult industry and segment to compete in, we think that we'll be able to add value to our clients and expand our client segmentation to the mass affluent clients. And the third point she would like to add is, in 2016 and 2017, we spent a lot of our time and resources on upgrading our private equity and venture capital capability from just simply investing in prime A funds to now being able to do co-investment, direct investment on behalf of our clients. Likewise for the public market investment side, we have been upgrading our capability going from fund of funds to manager of manager. And now in 2018, we're starting to build capability to invest directly in stocks to -- for our clients. So I think we're -- you're seeing us upgrade our investment capability across our asset classes. This will help us to deliver more value and more performance to our clients. At the same time, this will mean that we'll be able to receive more management fee and potentially receive more performance-based fee income.

Our next question is from Xue Yuan with CICC.

[Foreign Language]

Yes. So I'll translate the question first from our -- from CICC. So the question is regarding real estate. We note that the AUM for Gopher real estate has been declining over the last 1 or 2 years. We'd like to understand management view on real estate strategy going forward. In response, Madam Wang want to comment that, I think, at the height of our real estate asset under management, it was over CNY 100 billion, and so we obviously had managed a lot of money investing in real estate in China. Over the last few years, we felt that the risk, particularly in terms of residential credit and equity, has gone up, and so the risk and return metric, we felt that it was not as attractive as it was, let's say, say, 5 to 10 years ago. So we have strategically and actually did lower that exposure. Over the last 1 or 2 years, we have been changing or upgrading our real estate strategy to focus more on core, specifically in first- and second-tier cities as well as value-added projects in real estate-related private equity and venture capital opportunities, those opportunities where we will able to add value as an operator. So with a focus on these three real estate strategies, we are confident that we'll be able to expand our real estate AUM in 2018 and going forward. I would like to highlight that we have a very long track record of managing real estate investment on behalf of our clients of more than 6 years. In terms of our equity investment, we have achieved and generated an average IRR of 12% to 15%, and none of the equity investment that we have managed lost money on behalf of our client. So we feel very confident in terms of expanding the AUM for real estate. Particularly in this year, we feel that money will be scarce, and that means that there will be opportunity to buy cheap assets.

[Operator Instructions]. Our next question comes from Haifeng Cao with Nomura.

Sorry, my line was disconnected for some reason just now. I'm Haifeng from Nomura. I have two questions. Firstly regarding the RMs, it seems that the registered RMs in the fourth quarter [indiscernible] is 2% above our expectations. Can the management give us some color on the RM's recruitment plan for 2018? This is the first question. The second is on financials. We noticed that the other expenses decreased by around 38 percentage in the fourth quarter. Can the management give us some color on the decrease. And as Shang just mentioned the onetime commission fee rate decreasing in the fourth quarter, I wonder what's the reason for the decrease in commission rates for the onetime. That's my 2 questions.

So maybe, Shang, I'll take the first question on RM recruitment, and then you can take the second one.

Sure.

On the RM recruitment, you noted that the peak of our growth in RM was about a year or two years ago when we were really pushing on the volume of the transaction value. I think reasonably we've wanted to improve on the quality of our RMs, so we've been even more selective in who we take on. I think what you see in '18 is a gradually faster increase in terms of RM we've gone and improved trading system and improved career plan for the RMs. But overall, I do want to point out 2 things. One, it's always about quality recruitment. So given this market, we -- it will be a gradual increase. It would never be a spike in terms of our RM increase. But we see '18 to be at a higher growth rate than '17.

Okay. Thank you. Kenny, on this. I'll take the second and third question. The second question is regarding the decline in other direct operating expenses. So other direct operating expenses are primarily 2 main costs. One is sub-advisory fee that Gopher pays to other manager for manager-of-manager products or other types of public market products, where we are having a sub-adviser. And the second type of other operating direct -- other direct operating expenses are expenses related to our education subsidiary. For the fourth quarter 2017, both were moderately lower than the fourth quarter 2016. On the Gopher side, it reflects, as Madame Wang mentioned, we are in-housing a lot of our own direct investment capability for public equity. So I think this just reflects that buildup in our own capability. The third question is on onetime commission rate. I'll throw out some numbers first. For the fourth quarter 2016, the effective onetime commission rate is 1.05. For the third quarter of 2017, it's 0.9. And for the fourth quarter of 2017, it's around 0.87. The decline in effective commission rate for 2017 is primarily related to the lower insurance volume that we have seen for 2017 as compared to 2016. Insurance product, unlike other financial product, it's mostly upfront revenues without -- with very little reoccurring revenue. So the decline in the effective commission rate is primarily due to change in the product mix this year as compared to 2016. But overall, we feel that the effective commission rate is still in a very healthy range of 80 to 120 basis points, which is the long-term range that we have maintained over the last 6, 7 years.

This will conclude our question-and-answer session. I would now turn the conference back over to Kenny Lam for any closing remarks.

Should we -- why don't we wait for another minute or two and see if there's maybe 1 or 2 more questions? If not, we can close the call.

[Operator Instructions].

Okay. If there are no more questions, we'll close the call. We'll be happy to take more questions in [indiscernible], yes? Thank you, operator.

Thank you, everyone.