In August 2007, Sequoia Capital invested $3.9 million in Shanghai-based wealth management firm Noah Holdings (Nasdaq:NOAH). A little over three years later, the provider of private equity fund-of-funds went public at $12 per ADS. (To learn more, see What Is Private Equity?) In the first day of trading last November, its stock finished 33% higher. Since then, it's settled back to slightly above its initial pricing. Normally I'm against buying IPOs in the first year of trading but in this instance I'll make an exception because the stock's come back to earth, while the growth story it sold investors leading up to the IPO is still very much intact. In 20 years, we'll be talking about Noah as if it's the Chinese version of Ameriprise (NYSE:AMP).
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The company estimates that it has 2.5% of the high net worth market in China, which is defined as $400,000 in investable assets. In 2010, its 341 relationship managers distributed $2.1 billion in wealth management products to 1,631 clients generating $37.9 million in net revenues. As of December 31, 2010, it amassed 16,296 clients over the last six years meaning approximately 10% of its client list bought product last year at an average transaction of $1.3 million. Year-over-year this figure is up almost 100%. Nonetheless, I'm sure it believes it can raise this average in coming years.
A quick calculation suggests the total number of high net worth individuals in China is approximately 651,840. In 2010, active clients (those who did business during the year) grew by 32% over 2009. Assuming an increase of 20% a year until 2015, Noah should have 4,058 active clients by then. I'll also assume the average transaction will double to $2.6 million. The company is compensated through one-time commissions and recurring service fees from both its private equity and fixed income products. In 2010, it received $29.2 million in one-time commissions and $8.6 million in recurring revenue totaling $37.9 million. Using my projections for 2015, I estimate revenues will be $189.9 million with earnings per share of $3.32. That's a forward P/E of 4.2, yet it will have barely scratched the surface of the high net worth market. The potential is significant. (To learn more, see P/E Ratio: What Is It?)
Noah Holdings and Asset Management Peers
|Evercore Partners (NYSE:EVR)||2.03|
|Gluskin Sheff & Associates (TSE:GS.TO)||8.07|
|Duff & Phelps (NYSE:DUF)||1.87|
|Artio Global Investors (NYSE:ART)||8.19|
I'm not big fan of Chinese companies listed on American exchanges because it's still a bit of a wild west in the People's Republic of China. However, the involvement of a venerable venture capital firm (VC) like Sequoia tends to get my attention. (To learn more about VC, see How Venture Capitalists Make Investment Choices.) It put $3.9 million into the business back in 2007, and today its investment is worth $82.4 million. Given the lock-up period is now over, it will be interesting to see how many of the 5.9 million shares Sequoia continues to hold. If you're skeptical of Noah's future growth, you might want to wait until the VC next reveals its holdings. If it keeps a majority of its shares, you can be sure it values them at more than $14.
As the Chinese become wealthier, the need for wealth management and investment advisory services will also increase. While there's no guarantee that Noah will make it to the finish line, it's certainly off to a good start. I wouldn't bet against it.
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