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…

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…

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…

[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.