Kenny Lam - President Jingbo Wang - Chairlady and CEO Shang Chuan - CFO

Yuan Xue - China International Capital Corporation Limited Anurag Rajat - J.P. Morgan Securities Ziqin Shao - CITIC Securities Katherine Lei - J.P. Morgan Securities

Good day ladies and gentlemen. Welcome to Noah Holdings Limited Second Quarter of 2017 Financial Results Conference Call. At this time, all participants are in listen-only mode. Following management's prepared remarks, there will be a Q&A session. [Operator Instructions] As a reminder, this conference call will be recorded. After the close of the U.S. market on Monday Noah issued a press release announcing its second quarter of 2017 financial results, which is available on the Company's IR Web site at http/ir.noahwm.com. This call is also being webcast live and will be available for replay purposes on the Company's Web site. I'd like to call your attention to the Safe Harbor statements in connection with today's call. The Company will make forward-looking statements including those with respect to expected future operating results and expansion of its businesses. Please refer to the risk factors inherent in the Company's business and -- that have been filed with the SEC. Actual results may be materially different from any forward-looking statements the Company makes today. Noah Holdings Limited does not undertake any obligation to update any forward-looking statement as a result of the new information, future events or otherwise except as required under the applicable law. The results announced today are unaudited and subject to adjustments in connection with the completion of the Company's audit. In addition, certain non-GAAP measures will be used in our financial discussion. A reconciliation of GAAP and non-GAAP financial results could be found in the earnings press release posted on the Company's Web site. I'd now like to turn the call over to Kenny Lam, Noah's Group President.

Thank you, Operator. Thank you everyone for participating in today’s earnings conference call. 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 begin by providing a brief overview of the financial highlights for the first half of 2017 as well as discussing our core wealth management and asset management businesses. I will share the recent development of our overseas business and mid and back-office initiatives. Then Chairlady, Wang will provide an update on the business and product strategy and share her views on the macro environment and regulatory development. After that, Shang will wrap-up our prepared remarks by providing further insights into our second quarter financial performance before we take any questions you may have. Since early 2017, volatility in the global macro environment has decreased, and by midyear global capital markets in general appeared to have reached a more stabilized state. In China, macroeconomic conditions have largely stabilized, despite persistent structural imbalance issues and unabated debt default fears. Across the financial industry, there are still challenges, especially for the asset management sector that continues to face rising regulatory cost and constrained product supply among other issues. Against this constantly evolving macro backdrop of EBIT flow, Noah remains resilient and confident. As a leading wealth and asset management service provider in China with over a decade of operating experience, we continue to provide outstanding comprehensive financial services to our high net worth clients, while at the same time constantly optimizing and enhancing our risk and asset management procedures to strengthen our core competitiveness. In the first half of 2017, Noah's wealth management business distributed a total of RMB65.6 billion financial products, up 24.9% year-over-year. As of June 30, 2017, a total of AUM of our asset management business grew to RMB138.7 billion, up 37.1% from a year-ago. Furthermore, during the first half of 2017, Noah's total revenue increased 12.8% year-over-year to RMB1.42 billion and non-GAAP net income attributable for Noah's shareholders reached RMB464 million, an increase of 12.6% from a year ago. Overall, we are pleased with our solid operational and financial performance in the first half of 2017. With regard to our wealth management segment, as of June 30, 2017, the total number of registered clients was 164,728, up 43% year-over-year. Ongoing high quality investor education and client service support, our high client retention engagement level. It is worth noting that approximately 30% of our clients made transactions in back-to-back quarters and the average transaction value per active clients in the second quarter was RMB7.4 million in line with the prior quarters. Due to lower volumes of secondary products distributed in the second quarter, the total number of active clients decreased 9% year-over-year to 4,484, relatively flat from the previous quarter. In an effort to continually meet our clients’ evolving needs for high-quality products and comprehensive services, we’ve upgraded and expanded the portfolio client services. Especially for ultra high net worth clients, our Black Card services now include differentiated products and terms , customized financial services focusing on highly selective investment opportunities with top VC and PE funds, direct investment opportunities into emerging Silicon Valley startups, as well as family office accounting management services. Among the many special events, hosted in the second quarter for our Black Card clients, highlights include an inclusive luncheon with Mr. David Rubenstein, Co-CEO of Carlyle Group and premium invitations to the Wharton Global Forum in Hong Kong of which Noah was elite sponsor. Our efforts in the segment are paying off as we added more than 90 new Black Card clients in the first half of 2017, bringing the total number to about 550, representing over RMB40 billion asset under management or advisory. During the quarter, we continued to increase our network coverage across China, and strengthen our relationship management team. As of June 30, 2017, we had 205 branches covering 76 cities compared to 199 branches covering 74 cities in the prior quarter. The number of relationship managers grew to 1,259 as of June 30, 2017, representing 15% year-over-year growth and we continue to enjoy an exceptionally low turnover rate among our elite relationship managers. Ongoing training is vital for the success of these crucial employees. During the quarter, we launched a new training program for our lead relationship managers, which integrate the best elements of our training and reward systems with an interactive new learning platform to help these high potential individuals develop into qualified private bankers. As for our asset management segment, as of June 30, 2017, Gopher’s AUM reached RMB138.7 billion, representing a year-over-year growth of 37.1%. The AUM of PE, VC was RMB72.2 billion, representing 52% of our total AUM for the quarter. Credit, real estate, and secondary market investments accounted for 29%, 11%, and 5% total AUM respectively. As the leading asset management brand in China with diversified investment strategy, Gopher has been strengthening its core investment capabilities in Noah asset categories, along with its growing AUM. Over the years, Gopher has become more of a sophisticated active asset management platform that can leverage its years of experience and capitalize on its scale in addition to the investment team. Gopher has helped an independent FDD team which seeks input from external independent due diligence and fraud protection teams into consideration. This process is further enhanced through extensive onsite research and interviews. This multi-angle, multi-channel approach allows Gopher to better optimize its risk control and strengthen its prudent judgment towards potential investment target. A key focus in 2017 is to further explore and expand overseas distribution channels. Our grand vision is to become the provider of choice for wealth and asset management services for high net worth Chinese around the world. Pursuant to this, Noah has been accelerating its pace of international expansion. As of June 30, 2017, the Group's overseas AUM reached RMB18.2 billion, an increase of 23% year-over-year. In The U.S., Noah U.S. has successfully received a registered investment advisor license, an insurance agency license, that is able to provide Mainland Chinese clients with dollar asset allocation, U.S. insurance, children's education, and other comprehensive financial services. Additionally, Noah Hong Kong has recently established a global family office to provide wealth management services for ultra high net worth Chinese families. We also pointed our first candidate CEO, who is now helping us with the preparatory works for business launch in Canada. Going forward, as we continue to execute on this initiative, we intend to target expansion in key geographical markets where large Populations of high net worth Chinese are already present. With over a decade of experience in the wealth management sector, we frequently receive industry recognitions both domestically and internationally. During the second quarter, Noah won several notable awards including China's Best Private Bank as awarded by Private Bank International Magazine and best high net worth wealth management institution and best overseas asset management institution, both recognized by Asia Money Magazine. And finally, we are extremely proud to report that in July Noah became the first Chinese wealth management company to receive an investment grade rating from S&P. This rating report S&P recognized Noah's long-term relationship with high net worth clients and partnership with top fund managers as well as prudent risk management practices. Globally, matters of environment sustainability and governance, or ESG are going in importance. Towards this end, for the third consecutive year, we published the Noah's sustainability report, which comprehensively outlines our initiatives to optimize corporate governance, fulfill social responsibilities, increase sustainable economic environmental and social value to the world. At Noah, we are committed to delivering long-term value to our shareholders as well as all shareholders through a meaningful contributions to our community. Next, I’d like to briefly talk about our mid and back office initiatives. In the second quarter, we continue to upgrade our IT system with the initial integration of big and smart data technologies. We are simultaneously working on several fronts such as Phase 2 of our proprietary transaction system, Gophers investment management platform, credit product structure and platform, and mutual funds, global advisory system, just to name a few. Last but not least, in terms of talent management, we continue to proactively invest in developing the SKUs and abilities of our people by enhancing on incentive plans, creating personal development programs, and launching a new management trainee program. In addition, we further added to our suite of senior executive managers with several key hires. Some of these include, a new Chief Strategy and Talent Officer for Noah, the Global Head of Family Office, and as we mentioned before a new CEO for Noah Canada. All of these top individuals bring with them extensive industry and international experience. We are looking forward to the contributions to organization. With that, I will now turn the call to Ms. Jingbo Wang, who will deliver her remarks in Chinese followed by English translation.

Thank you, Kenny. China's wealth management industry attend a new chapter in the first half of 2017 to investors, practitioners, and regulators. We saw positive development in the industry with tighter regulation in an increasing number of sophisticated investors. The unprecedented growth patterns, constant regulatory changes, and market volatility have eliminated many players out from the market. We believe the current market condition present challenges, but also opportunities to Noah. With China leading the world in national and individual wealth creation, we believe wealth management and asset management in China is a growing industry with enormous market potential. We also believe that after a decade of long development, China's wealth management industry enter into its third development phase beginning at the end of 2016. The tightening regulatory landscape has advanced the industry from guaranteed repayment and top-notch players have started focusing on growth with quality rather than sale. Being the market leader, Noah is also getting more mature by consistently predicting and solving problems and focusing on several key values, including understanding the market drivers to deliver services and products that serve as our clients expectation, insisting on compliance to enhance risk control and grow active management capability, establishing outstanding process in operational management capability, maintaining growth in both revenue and cash flow. After experiencing market adjustments in four economic cycles since our inception 12 years ago, we have gained a greater appreciation for the risk inherent in the financial market, learning from our inadequacies and mistakes has been crucial to the gains and efficiency and innovation to inspire our team. Whoever never makes a mistake will never make anything. In fact, the faster we recognize our own inadequacies and mistakes, the faster we can diagnose and analyze them and the sooner we can implement improvements. The combination of endurance and introspection is a passage way to progress. We treat every problem as an opportunity to enhance our teams capability and we never ignore or neglect it until we are certain the cause and solution. We believe our culture and the attitude toward proactively addressing problems will enable Noah and Gopher to consistently expand its leading position in China's management and asset management industry. Next I would like to talk about the main product categories and initiatives. The primary market has been our main competitive arena and that is where our core competency lies. By retaining the world's top performing managers who are facilitating developments in technology and innovation, we are able to create value and share this benefits with our clients. The ever prominent head [ph] effect in the PE VC market enables top performers to lead the market. As such, Noah will continue to select the best fund managers by assessing their performance over time with a focus on growth and sustainability, and as we believe the value of something is measured by the timeframe to achieve it. Noah launched VC PE products in 2007 and started covering top managers. With 10 years of dedication and diligence in value investing, we are glad to report strong results for the first half of 2017. According to statistics, the number of VC PE backed public companies reached 147 in the first half of 2017 with a 55% IPO penetration rate. Among the 200 VC PE firms and the 20 newly listed companies in China, 50% had involvement with Noah as we covered 90% of the GP's in the top 10 VC PE firm. In addition, Noah has established long lasting relationships with the GP's invested in 17% -- in 17 IPOs during the first half of 2017. The performance in the first half of 2017 has already reached the historical record that we achieved in the full-year of 2015. Four additional companies have received CSRC approval and are currently awaiting listing, establishing a remarkable 100% passing rate. As of June 30, 2017, Noah's GP partners have invested in 80 companies that went public successfully with 63 through IPO, 8 through M&A and 9 through reverse merger. Based on our latest quarterly results, total transaction value of VC PE product distributed in the second quarter reached RMB8.25 billion, up 9% year-over-year. Total transaction value in the first half of 2017 reached RMB17.3 billion accounting for 26% of total distribution of wealth management product. As of the second quarter, Gopher's VC PE AUM reached RMB72.2 billion, up 43% year-over-year and now representing 52% of total AUM. We believe both the percentage and the AUM of Gopher's VC PE product has strong growth potential. As the Gopher investment team enhances its sophistication with strength and investment capabilities, we have expanded our product offering from FOF to co-investment and direct investment with a goal to increase revenue and profitability. We also adopted new initiatives to cover the dark horse and white horse funds embedding co-investment strategy. In terms of the public market, while the U.S stock market has set record highs, the Asia index remains flattish, but underneath the surface we’ve seen a trend towards value investing over short-term speculation becoming the mainstream among investors. The inclusion of Asia and the MSCI was a catalyst for the sustainable development of the Chinese capital market as more retail investors invest in the Asia market through investment fund and professional investment methods and strategies continue to generate good risk adjusted returns. The modest revival of the Asia markets has restored the financing function of the market, providing normalized asset opportunities for VC PE and thus promoting the valuation of high quality companies. This will provide long-term benefits to those institutions that manage in rates VC PE. Given the above, we believe this is a golden era for equity investments, especially the high quality VC PE products and the public market products managed by top fund managers. We believe the second half of the year will still be a critical time for positioning in the secondary market by selecting top fund hedge fund managers and strategies to increase long-term value. With Noah and Gopher's consistent coverage, we believe our fast strategy needs -- investors needs with stable returns, while our innovation of manager strategies need investors need for more enhanced returns. As an upgrade to the FOF model, MOM demands even higher requirements of managers. With a three year record of success with institutional investors, Gopher's model is now open to individual investors. Gopher's model enables more transparency in transaction data and is more efficient and accurate in terms of performance evaluation, thereby increasing the efficiency and accuracy of portfolio management. We also customize the lock up periods based on clients preferences and different investment strategies to reduce the redemption pressure for the managers. Although this strategy will limit our products short-term liquidity, it will ensure investors to return in the mid to long-term. As of June 30, 2017, two of Gopher's manager of managers fund have outperformed the CSI 300 Index with the biggest drawdown less than 1.7% versus 3.8% for the CSI 30 Index. In terms of overseas performance, Gopher's China Offshore Select Fund has achieved a return of 17.1% in the first six months this year, one of the top performers in the area as annualized return over the past three years has reached 16.6%, the highest among global top tiers according to Barclays. Fixed income products are basics for individual and investment portfolio. These product has been in high demand for high net worth clients during recent month, representing 60% of the total transaction value in the first half of 2017. With tightened regulations and continued risk control and deleveraging, we are presented with both risks and opportunities ,as credit risk escalate. We believe investment strategies should progress from passive and single non-standard assets to active and portfolio investment. At the current stage, we believe that investing in single real estate project or single unsecured corporate debt will result in higher results -- higher risks for individual clients than in the past. In terms of real estate products and investments, China's real estate market has evolved from project development driven to property management driven, after the rollercoaster year of 2016 with restrictions on purchase, mortgage, pricing and selling with 2017 as the watershed of the new and with promising new opportunity. After two years of adjustments and transformation, Gopher has enhanced its reputation and gain more experience with both clients and partners and has shaped up its three core product lines including core office building funds, real estate, M&A mezzanine funds, and special opportunity fund. As of the second quarter, our AUM in this area had reached RMB15.4 billion with weighted average IRR ranging from 12% to 15%. We believe investment opportunities are emerging in this area. With regard to the group's future development strategy, the Internet financial business is an essential part. The fintech companies relating to wealth management, mortgage and payment have been performing well this year. In the midst of regulatory tightening, our Internet finance this year has surpassed strategic positioning is becoming more focused, which is to use standardized product such as mutual funds and ETFs, combined with smart investment advisory technologies to provide services for the mass affluent individuals in China, driven by big data proprietary trading system and artificial intelligence, Caifupai [ph] has developed industry leading services and products including online personal wealth management, specifically tailored services in automated investment solution. As of the second quarter, the number of total registered users on Caifupai [ph] reached 440,000, an increase of 35% from June 30, 2016. Additionally, with the growing needs from our high net worth clients and mortgage Noah's micro lending subsidiary [indiscernible] has developed a variety of products, including but not limited to financial products, home equity loans and car financing products. We have also launched U.S mortgage products to cater to a high net worth clients real estate needs in the U.S. Investing intelligently has been one of our core beliefs and investor education is one of our principal value. In the first half of 2017, we have hosted seven Noah University events to share our concepts, processes and product details with over 1,100 clients. As the wealth management market continues to grow, we believe investor education and screening has become an important barrier to entry. Our Enoch Education programs have also been optimizing existing courseware and developing new ones, such as Angel investment, secondary market, insurance planning and investment philosophy development. These new courses have been well received by our clients, providing them with a better understanding of the market cycle, economic trends and portfolio management theory. Moreover, we have listed more than 10 professional investment forums with thousands of attendees, while at the same time organizing routine education events in 11 regions and our offices across China, which have attracted over 150,000 investors in total. Lastly, let me touch on regulation and their impacts on Noah. China Securities Regulatory commissions recent release of new rules on stock selling by major shareholders heated discussion and raised concern as investors worry it might reduce liquidity and limit exit opportunities for VC PE investments. From VC PE to Gopher's fund of funds and to co and direct investment, Noah has established a 10-year track record. Our abundant experience tells us that the core to drive the return for VC PE funds is the investee companies high growth potential, not any valuation premiere on the secondary market or the valuation gap between primary and secondary market. Access return should rather be generated only from the consistent and authentic value creation process. A professional investor should focus on the finding of the companies that are strategically aligned with the macro trend and can drive the development of the society rather than try to catch a short-term market growth fluctuation. This value investment concept resonates with western investors as well, and we believe opportunism cannot create a healthy market. As such, we believe the new rules will have a positive influence on the true value players and guide the market in the right direction. The asset management industry on the other hand is facing more standardized regulations to reduce arbitrage, in both functional and transmission regulation, eliminate guaranteed repayment, enhance liquidity risk management, contain leverage and limit conduit businesses. Noah's core principles in operations are fully aligned with these regulatory intension, and we have pledged since day one to only distribute and manage products that are independent custodian and never to sell products backed by capital pools, products with guaranteed returns and products with maturity mismatches or undue leverages. We believe the recently announced measures for the administration of the suitability of securities and futures investors will further create a more transparent and regulated market, while cultivating a well-educated investors and professionals. We are resolute in our belief that this market will benefit Noah in the long-term and help stimulate the economy, thus creating more investment opportunities for our clients. Furthermore, a more regulated market will underscore our strength in product selection, asset management, risk control and operations, and help us gain client trust and market share. In conclusion, I’d like to summarize our development strategies and drivers in four major aspect. First, in wealth management, we will shift our focus from product driven to a comprehensive service driven model as we expand our network internationally and will better understand and satisfy our clients' needs, while enhancing the client experience. Second, in asset management, we will evolve from FOF to co and direct investment to improve our investment and revenue generating capability, while perfecting products to provide tailored services for institutional clients. Third, in Fintech, we plan to serve more well-educated professionals like mass affluent individuals through standardized products and smart investment advisory and emphasize the development of proprietary systems and data accumulation to improve the average performance of our relationship managers, while forming deeper insights into the industry through data analytics. Fourth, we continue to execute on investor education and reinforce risk control and operation capability within compliance and to maintain long-term sustainable growth in a fast developing sector. As globalization progresses, there is concurrent two way demand from onshore Chinese clients to allocate assets globally and from overseas Chinese to invest back in China. We aim to become the top financial solution provider capitalizing on the investment needs of Chinese worldwide. 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. [Technical difficulty] which include our strong second quarter that I will further discuss here. For the second quarter of 2017, net revenues were RMB707.3 million, an increase of 8.5% year-over-year. And non-GAAP attributable net income was RMB226.5 million, up 14.4% year-over-year. One-time commission received in the second quarter remains strong at RMB300.6 million. Since its a combined result of one-time commission from RMB33 billion of wealth management product distributed during the period, which increased 18.8% year-over-year, partially offset by a decrease in effective commission rate due to the decrease of insurance products distributed. We also realized recurring service fees of RMB340.1 million in the second quarter, up 9.7% from the same period last year, with accumulation of products we’ve previously distributed and the consistent growth of Gopher's asset under management, the proportion of recurring service fees contributed to total revenue at the group level has been relatively stable at 45% to 50% in recent years. Performance based income, another important part of our revenue amounted to RMB22.8 million in the second quarter. Thanks to our long-term commitment to alternative investments in our multi asset strategy approach, we’ve realized performance based income for 12 consecutive quarters, and we expect this trend will continue. By segment, net revenues from our core wealth management business amounted to RMB550.6 million, up 9% year-over-year and represented 77.8% of total revenues. The asset management and internet financial services businesses contributed net revenues of RMB130.3 million and RMB26.4 million, respectively. Total operating expenses in the second quarter were RMB483.1 million, an increase of 5.6% from a year-ago. Excluding the impact of government subsidies, total operating expenses decreased 0.2% year-over-year, reflecting successful cost control initiative. As a result, operating income of the second quarter increased 15.5% year-over-year to RMB224.3 million and operating margin improved to 31.7% from 29.8% a year-ago. Non-GAAP net margin attributable to Noah shareholders for the second quarter also increased to 32% from 30.4% year-over-year. I’d like to highlight that we posted RMB23.3 million of income from equity and affiliates for the second quarter, increasing a 154.4% from the corresponding period in 2016. Gopher asset management in line with industry practice often invest 1% to 2% and fund and manages asset general partner. Since these funds are categorized as investment affiliates on the balance sheet, the increase in net asset values of these investments were booked under income from equity and affiliate. On the balance sheet side, as of June 30, 2017 the Company had RMB2 billion in cash and cash equivalents, a decrease from RMB2.6 billion in the previous quarter. The decrease reflected increased cash outflows in investing activities resulting from a cash management effort in recent quarters. This is evidenced by a steady level of interest income and investment income in our income statement. Finally, I would like to highlight our performance in the second quarter of 2017, reflect a strong fundamentals and improved cost efficiency in our business. We remain confident in achieving our full-year 2017 non-GAAP attributable net income guidance of RMB825 million to RMB860 million. With that, Chairlady Wang, Kenny and myself will be happy to take any questions. Operator?

Yes, thank you. [Operator Instructions] And the first question comes from Yuan Xue with CICC.

[Foreign Language]

For the benefit of our audience, I will translate the questions from Yuan Xue of CICC. So Yuan has two questions. The first question is I know that for asset management business, revenue was down year-over-year, because performance fee was decreased. Can the management provide guidance on Gopher's asset management performance going forward? My second question is regarding the latest development on [technical difficulty]? Yes, so I will handle the first question and Chairlady Wang will handle the second question. So you’re right, asset management's revenue were down year-over-year because we did not recognized that much performance fees for the second quarter of 2017. If you look at our management fees, that’s in line and have grown year-over-year. As for alternative assets, I think the exit and maturity of our investments are not -- it is more periodical, so we expect performance to be matured over the next few years. In terms of the performances, as Gopher's fund, they actually are doing quite well. And just lastly, I’d like to remind everybody on the call that in terms of the recognition of performance fees, we are quite conservative, so we only recognize performance fee when it’s realized and distributed.

[Foreign Language]

Yes. So Madam will like to supplement for the first question. So if you look at Gopher's performance over the last two years, 2015 was a more recent peak that was attributable to performance-based fee income that was realized for Asia related products or public markets related product. Last year, a lot of performance fees was real estate related. This year, we did not recognize as much performance fees. In terms of our asset management strategy going forward, our strategy is to increase overall net management fees that we are able to pick up in terms of the revenue side. We will do that by evolving our business model, previously more fund of fund based to now manager on management -- manager on manager as well as core investment in direct investment that will improve the quality of our asset management and also increase the fees that we are able to realize on our AUM.

[Foreign Language]

Yes. In terms of the latest development in LeTV, I’d like to provide some background on this particular product. This is actually a private equity venture capital style equity investment fund. It raised around 1 billion in capital from LeTV. It raised about 600 million from city government and our investors invested at a preferred level. So actually that provides a very strong safety question. If there is any losses to the fund, LeTV and the city government capital suffers a loss -- bear the loss first. Now this private equity venture capital sell fund invests in non-LeTV assets. In addition to the structural capital safety that we created, the LeTV listco also has a guarantee to buy back the assets of the fund, and this guarantee was publicly disclosed by listco. Now in terms of what we are doing, we are working with the fund general partner to sell the portfolio company, some of the portfolio companies are doing well, some are not doing as well, but we are working proactively with the general partner in selling the assets and distributing the capital back to our investors. Now for this particular fund, most of the investors that we service or distributed to are institutional investors. So they’re quite -- they’re very sophisticated and they understand the current situation, so not so much of negative impact to our business. Thank you.

Just to reiterate, this is Kenny here. There is lot of media coverage on this. The fund itself has not invested in anything related to LeTV. So it's actually the separate fund that is invested by LeTV not investing into LeTV's companies.

[Foreign Language]

Great. Thanks.

Thank you. [Operator Instructions] And the next question comes from Anurag Rajat of JPMorgan.

Hey, good morning. Thanks for taking my question. I’ve two quick ones. First, I think you touched upon this a little bit, but the fee rate for the wealth management seem to have little bit under pressure, especially the upfront rates. Can you just discuss a little more what’s causing that? And second longer term or little bit big picture, how are you seeing the competitive landscape evolving, especially at the wealth management? Thanks.

So the first question is fee rate on which business?

Wealth management.

Wealth management, right? Let me translate for Madam Wang and then we will answer both questions. Thank you. [Foreign Language] So I will answer the first question regarding the effective one-time commission rate for our wealth management business. Now for the wealth management business, you’re right. The effective one-time commission rate declined from 1.08% to about 0.91% year-over-year. This is primarily due to the product mix change. We distributed less insurance product in the second quarter of 2017 compared to that a year-ago. And overall we feel quite comfortable in terms of the effective commission rate being in line with our long-term range of 0.8% to 1.2%. As previously mentioned to the investors, the effective commission rate will vary depending on the specific product mix that we distribute quarter-to-quarter.

Maybe I will ask to what Shang said first before, Chairlady Wang talk about the market. I think it's important to note, if you look through our financials for the last two, three years, the effective rate tend to fluctuate between 0.8% to 1.2% quarter-to-quarter given the mix of products. That’s point one. Point two is we do believe that last year was a unique year in terms of insurance product volume. What we’ve seen in the last quarter -- two quarter is a stabilization of insurance volume. Early '15 was a bit of a unsustainable volume. I think what we see now in '17 is actually much more sustainable. So that’s where we are now in terms of upfront fee.

[Foreign Language]

Yes. So in terms of the wealth management landscape, I think the key going forward obviously will be compliance and regulation. The last 10 years obviously was an emerging industry. Everybody was just starting to get into the wealth management industry and there were a lot of players, some were more compliant, some were not, but everybody was trying to grow their revenue, grab market share. Now in the recent year or so, there has been a increased regulation. Some players are like its limiting their business growth, but we actually view it more positively. We think that the increased focus on compliance and regulation will help the industry grow in a more healthy manner. And so, compliance obviously we feel is the biggest risk in the industry and so we are quite prepared to grow in a long-term. Now if you look at the industry ahead itself, I think we still maintain the view that, obviously, it's a very huge industry and its growing very quickly and more than 10%, 15% on an annualized long-term basis. This is driven by the ongoing wealth creation in China as well as the strong demand for investments by individuals. I think if you ask any Chinese investors, I think they all very now accepted of the belief that investments for the long-term asset allocation are very, very important. Now in the last two, three years, we saw an emergence of, I guess, not so compliant players or peers, P2P, Ponzi schemes etcetera. Now the regulation has cleaned up some of these unhealthy competition, a lot of the players were eliminated, so I think we are now at a point where the industry can really grow on a more sustainable healthy level going forward.

Thanks.

Thank you for the question.

Thank you. [Operator Instructions] And the next question comes from Shao Ziqin with CITIC.

[Foreign Language]

Yes. For the benefit of the audience, I will translate the question from CITIC. You mentioned or the management mentioned that the amount of insurance distributed in the second quarter of 2017 decreased year-over-year and that affected the -- blended effective commission rates. Can you comment if this is a ongoing trend and what would be the likely development in terms of insurance going forward? Now I know that investment linked insurance in China has been increasing in the last few quarter. So can you help us bridge the development at the company and the observation I’m seeing from the domestic market? Thank you. Yes. So I will just provide some color in terms of our insurance business. Now last -- in the last year and a half, I think we’ve installed base, strong robust growth in terms of our insurance business, specifically in Hong Kong. I think there is more than normal demand for the last year and half, and so we’ve really capitalized on that opportunity. Now in terms of our insurance volume now, our insurance revenue is -- makes up roughly about 10% of our total revenue for the second quarter. That is down from around 15% last year. We feel that for high net worth individuals insurance is obviously a very important part of its overall asset allocation, Chinese investor continues to be under invested insurance, so we feel like insurance is a business that will continue to grow and develop and use as a very efficient tool for our client. But I think we’re seeing the demand normalizing, but going forward I think we expect insurance activities or business to be around similar levels that we’re seeing in the second quarter. So I think that’s both offshore as well as onshore. So the insurance industry as a whole is growing. I think they were just a very outsize demand specifically last year.

I want to add to what Shang just said. I think the important word is we are now normalizing to a sustainable level. If you compare our insurance proportion of the revenue to the last '16 second quarter, I don’t think especially a useful benchmark, because if you look back to early last year, it was quite a bit of a unhealthy surge in terms of insurance sales. What we see now in the second quarter of this year is much more sustainable. That’s point one. Point two is we have basically successfully transformed our front line team to be real asset allocation team. Meaning that they not only talk about investments, but also insurance as -- and after allocation asset class. So that’s proved in the last six quarters where we’ve quite strong insurance volume. So short, simply put, having the second quarter proportion is much more sustainable.

Thank you.

Thank you. [Operator Instructions] And the next question comes from Katherine Lei with J.P. Morgan.

[Foreign Language]

Yes. For the benefit of the audience, I will translate the question from Katherine of J.P. Morgan. If the management team can give us the latest update on Huishan Dairy. We note that the company or the fund manager was taking legal proceedings to freeze assets, what is the latest development in terms of just particular products? Thank you.

[Foreign Language]

Yes. So, a couple of updates. So in terms of the legal proceedings we have taken as of fund manager for the particular fund of Huishan Dairy. We have froze assets for the Chairman in PRC that includes company equity as real estate he personally owned. In terms of our insurance in Hong Kong, unfortunately that was canceled, but we are proceeding to liquidate his assets in the PRC. Now in terms of Huishan Dairy, the listco [ph] it is still ongoing discussion on the restructuring. I think there has been some progress. In terms of our particular fund, it is categorized as special debt., i.e. it that cover within the listco scope and is the debt that will not be converted into equity. So now the proposal that we’ve received suggest for us to convert the debt into what extended debt into a five-year debt that will with principal and interest being paid back over that five-year period. Obviously we feel like there are room for better terms, and so we are negotiating with Huishan as well as other debt holders. And so we are working very hard on the situation and we’ve kept our investors updated on the progress. Thank you.

Thank you. [Operator Instructions] And the next question comes from [indiscernible].

[Foreign Language]

For the benefit of the audience, I will translate the question from [indiscernible]. So first question is regarding two metrics. The first one is active clients and I note that it declined year-over-year and at the same time I note that average transaction value per client increased in the second quarter of 2017 year-over-year. Can you comment on what is a strategy that the company is adopting in terms of these two metrics and is there a strategy to move up in terms of the client segmentation? The second question is regarding problematic products over the years and more recently LeTV and Huishan. I note that it's -- from time-to-time there will be problematic products, but I would like to get some color on what is the impact to client demand on our business? I will answer the first question and Madam Wang will answer the second question. Now you are right, active client for the second quarter was down around 9% year-over-year. Our active clients are roughly about 4,500. Now a decrease from a year-ago was because in the second quarter of 2016, our secondary market equity product was much stronger. We distributed about 28 billion of secondary market equity product in the second quarter of 2016 representing about 10% of overall transaction of product mix. Now the secondary market equity product often tend to attract a lot more client participation. So the decrease in active client for the second quarter of 2017 was because we do not do as much secondary market equity product. We ended about a billion representing about 3.4% of overall product mix, so that’s the reason. Now in terms of average transaction value per client, I think our strategy on a going forward basis or long-term basis obviously is to increase that. That reflect the stickiness with our clients and also will reflect the deepening on client wallet share, also improving in terms of client segmentation that you mentioned. Both Kenny and Madam Wang in their prepared remarks highlighted one of our more recent client segmentation strategy of focusing on ultra high net worth, what we call Black Card client. Now for average transaction value metrics on a quarter-to-quarter basis, there may be some variance because of the product mix. For example, private equity typically have higher minimum starts than fixed income or public market. And so if we do more private equity product, then that metric will go up and vice versa. But on a long-term basis, we have seen average transaction value go up as we implement our strategy. And one last point I would like to add on this particular question is Kenny mentioned that in the second quarter we have 30% client repurchasing, that on a quarter-to-quarter basis. That will also improve our average transaction value per client on an annualized basis. So a client would buy four or five times throughout a year, and so that will help with that metrics. So if you know typically our annualized or annual average transaction value is much higher than quarter numbers, and so that is in line with our strategy. I will pass, just one more point around the Black Card client. I think you’re right, our strategy is now to highly segment our clients and provide even more unique services for the highest end. And so we -- I mentioned in my remarks about the Black Card clients, were up around 95 to about 550 on that segment, which is the highest end of our client base. And then we are also opening a new family office out of Hong Kong, that is serving large families. I think the -- when you look at the market, it's now gearing towards a highly segmented market whereas they -- where the highest end will get the -- with the most unique services, and that’s where we are gaining a lot of traction, a lot of loyalty.

Okay. [Foreign Language]

Yes. So coming to the second question, for problematic product such as LeTV and Huishan, what is the impact on our clients? Generally I think I view it quite positively. I mean, it helps our client better understand a risk in the market, and for them to understand that guaranteed returns or guaranteed repayment are not sustainable. I mean, it helps us in terms of our investor education efforts. I think has he pointed out, I think as you get larger in the industry, I think it's normal to meet problematic product from time to time. Over the last 12, 13 years, we have cumulatively distributed nearly RMB500 billion of product. Now problem product -- problematic product represent less than 1% of that RMB500 billion. So I think generally clients note that our risk management and our product selection are quite strong compared to peers in the market. I feel this year the LeTV and Huishan is almost like a stress testing on our business from our result in the first quarter and second quarter, you can see that it hasn’t negatively impacted our business. So I think generally we have passed this stress testing. Now going forward, a couple of things that we will continue to do. One, obviously we will continue to focus on compliance. We are one in the few players in a market that have not -- do not operate or has ever operated of a capital pool. Second, we will continue to insist on the investor education, and three, obviously, we will not make any of our product whole. I think when a client -- a Huishan client asked me whether I will make the product whole, I said we will handle it using market processes, such as restructuring and obviously we will fulfill our fund manager fiduciary duty. And I think our efforts has been appreciated by international organization, in the last two, three months, we’ve worked with Standard & Poor's and they have given us an investment grade rating, and I think that it also reflects on our efforts in terms of helping the market develop in a more mature and healthy manner. I guess, some comparison I will make, I think for a wealth management, asset management company as you develop in the long-term, there are certainly the problems you deal with, just like a jade [ph]. I don’t think very high priced jade, obviously will still have some impurity. If a jade is completely clean, then probably fake or [indiscernible] Ponzi scheme. And so as the industry become more regulated, become more mature, I think it will -- the water will become more pure after the rainstorm. And so, in the market there are still obviously very larger institution, some banks, some trusts, that are very hesitant to break, again, the concept of a guaranteed return or repayment, but we think that’s inevitable for that concept to be completely taken down. And so, the fact that we have passed our stress testing shows the competitive dynamics that we’ve developed over the years. Thank you.

I think I will add a bit more from the industry experience I’ve gained from serving clients in the previous line both domestically and globally. The issue with Chinese wealth management so far has been really to: one is, implied guarantees. Two, is in many players being not compliant with the regulation, particularly what Chairlady Wang mentioned, about capital pooled assets. And so the two products, the so-called problematic products has really helped us and helped the industry understand that, one, there is really no implied guarantee and we are not going to provide any implied guarantee. And two is actually allowing us to really look at the industry in a healthy way in using market methods to restructure. I think I want to emphasize one more point, which is if you look at the products we’ve issued so far, Chairlady Wang mentioned RMB500 billion under 1% being problematic. We are actually reviewing our products on a weekly basis with a red, yellow, green light, and so far off the close to a thousand products we’ve issued so far in the last 13 years, under 10 products are rated in the red and yellow column. And so we are still extremely stringent in our risk practices in the whole environment.

[Foreign Language]

Thank you. [Operator Instructions] All right. As there are no more questions at the present time, I would like to turn the call to Kenny Lam for any closing comments.

Well, thank you all. And if you have questions, please direct all questions to IR, we will respond promptly. Thanks very much.

Thank you.

Thank you. The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.