Kenny Lam - President Jingbo Wang - Co Founder, Chairwoman and CEO Shang Yan Chuang - CFO

Haifeng Cao - Nomura Securities Sam Dubinsky - Carlson Capital

Good day, ladies and gentlemen. Welcome to the Noah Holdings Limited First Quarter 2018 Financial Results Conference Call. At this time, all participants are in listen only mode. [Operator Instructions] As a reminder, this conference is being recorded. On Monday, Noah issues a press release announcing its first quarter 2017 financial results which is available on the company's IR website at http://ir.noahwm.com. This call also being webcast live and will be available for replay purposes on the company's website. I'd like to call your attention to the Safe Harbor statement 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 business. Please refer to the risk factors inherent in the company's business and 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 statements as a result of 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. Additionally, certain non-GAAP measures will be used in our financial discussions. Reconciliation of GAAP and non-GAAP financial results can be found in earnings press release posted on the company's website. I'd now like to turn the call over to Kenny Lam, Noah's Group President.

Thank you, operator. I want to welcome all our investor and analyst friends to our earnings conference call today. In addition to myself, Ms. Wang Jingbo, Chairlady and CEO of Noah; our CFO, Shang will also be participating in our call. For today's agenda, we'll first review Noah's first quarter 2018 performance, as well as the development of our core wealth and asset management businesses. Chairlady Wang will then provide her overall view on the current regulatory environment and share updates of each product segment that we are involved in. Our CFO, Shang will then follow up with more detailed discussion of Noah's first quarter financial performance. We will conclude the call with a Q&A session. Since the beginning of 2018 the volatility of capital markets both at home and abroad has intensified. In China, a series of de-leveraging and risk prevention regulatory measures have been implemented. In particular, with the March 13 merger announcement of the China Banking Regulatory Commission and the China Insurance Regulatory Commission to form a combined Banking and Insurance Regulatory Commission. And the official launch of a new guiding principles on regulating the asset management business of national institutions on April 27. There will be a profound long-term impact on the entire financial industry in China. Overseas, the United States has entered a rate increase cycle and SINO-US trade disputes have gradually escalated. In such a complex environment, Noah has been steadfast in its efforts to build an open product and integrated private financial service platform centered on client's needs. In the first quarter of 2018, our transaction value for financial products reached RMB27.8 billion, down 15% from the same period of last year, while our asset management business reached RMB156.9 billion, up 21% from the same period of last year. In terms of financial performance, the group's net revenues in the first quarter were RMB831 million and non-GAAP net income attributable to Noah shareholders was RMB256 million, up 16.5% and 8.1% year-over-year respectively. We are on track to achieving the middle range of our annual guidance. We believe that our first quarter 2018 operating and financials results reflect the overall strategic adjustments we've made during the past two years. That is to say we have not focused simply on increasing the volume of our business, but also emphasize the quality of income by strengthening our investment capacity and increasing the proportion of co investment and direct investment. With the intensifying regulatory situation, we still maintain a steady growth rate. And we're largely satisfied with our results. In our wealth management segment, we continue to steadily expand our physical channels. By the end of the first quarter of 2018, we had 263 branches and sub-branches in 81 cities nationwide, increasing from 237 branches and sub-branches in 79 cities by the end of 2017. The number of relationship managers increased by 11% year-over-year to 1,386. In 2018, we'll focus on expanding multiple sales channels, while continuing to optimize traditional distribution channels and empowering relationship managers. During the first quarter, we launched a new blue label brand in cooperation with our high net worth clients, and started these separately managed account model for single- family office clients with the purpose of forming deeper relationships with customers and going together with them. To optimize our investment research system and strengthen support for the frontline teams, in the first quarter of 2018 we upgraded our research team with the official branding of Noah Research workshop. The workshop functions as a sales and market oriented sales and research operation systematically covering fund managers in collaboration with Noah and fully integrating with the entire sales process. From product due diligence to client servicing. During the first quarter, the workshop has published 76 research reports on topics ranging from macro strategies, product and industry dynamics. At the same time, we've also stepped up the development of our online knowledge base and regional research workshops, which will provide our frontline relationship managers with even more directly and effective support. In addition, for the first time in our company's history in 2018 we officially launched our brand promotion campaign. Our commercials feature a respectable Chinese entrepreneur who also knows business partners and clients such as Focused Media Chairman, Jiang Nanchun; Nio Automobile CEO, Li Bin; [Indiscernible] Founder, Mark Chung; and [Star VC Founder, Rin Chen; and Sukhoi Capital Global Executive Partner, Niu Chen]. Since Mid-April, these commercials have been concentrated in high-end residential and official buildings in major cities across the country, as well as Shanghai and Hong Kong airports. Based on the analysis of indicators such as [Q. O Quote conversion], Baidu search index, the effectiveness have been well tracked. We have also invested significant resources in online channels such as Baidu Total. Our aim is to strengthen our brand awareness and reputation. Next, I will briefly talk about our asset management business. As of March 31st, 2018 Gopher's AUM reach RMB156.9 billion, an increase of 21% year-over-year. The AUM of private equity investments increased by 39% year-over-year to RMB91.8 billion accounting for 59% of the total AUM. Credit, real estate, secondary market equity and other product categories respectively accounted for 27%, 8%, 4% and 2% of the total assets under management. The new products and strategies we've been actively establishing during the recent two years have also begun to show the unique value to investors. And at the same time increasing our revenue quality in the form of growing management fee and performance based income. Recently, Noah and Gopher have issued a number of important industry white papers including 2018 high-end wealth management white paper, public market white paper, China PEVC industry white paper and China PE secondary fund mark white paper. These white papers not only help readers sort through our industry landscape but also reflect our growing influence in the wealth and asset management industries in China. In terms of overseas business, our two overseas offices in Canada and Australia both held the grand opening ceremonies in the first quarter of 2018 began to influence their local Chinese communities. Additionally, the Mayor of Vancouver and Canadian finance minister both recently visited Noah headquarters in Shanghai. Various investor education and client relationship events including visit Noah University have also been successfully carried out in Vancouver and Melbourne. Both branches have started business development with local clients transacting on a platform. As of the end of the first quarter, our overseas AUM reached RMB21.4 billion, a year-over-year increase of 22%. We expect Noah's overseas influence will further strengthen in the future and the contribution of our overseas business to the group will further increase. Lastly, I would like to talk a bit about the planning and progress of our technology system. We believe that through technology empowerment, we will enhance our client service experience and our relationship managers' efficiency, driven by this goal we are consolidating and mining the vast amount of product and client data that we've accumulated over the past 12 years to build a unified data platform for the group. In 2018, we'll focus on the comprehensive upgrade of internal system and our online app experience. This includes enhancement of our information management and doing an automated and intelligent investment operation system, as well as pioneering the exploration of innovative business support functions with AI. We want technology to be part of Noah's DNA. With that I now turn the call to Noah's Chairlady and CEO Wang Jingbo. She will speak in Chinese and her remarks will be followed by English interpretation.

Thank you, Kenny. On April 27, 2018 the official version of the new asset management guideline was released. We believe this new regulation effectively redefines the asset management industry in China. It clarifies that the mainstream operations of channel plus funding pool and implicit guarantee plus maturity mismatch models in the past was pseudo asset management practices. The new regulatory logic stipulates that true wealth management and asset management need to be driven by investment and research capabilities. Research capabilities provide value add for clients and investment capabilities are core to wealth management business. This is also in line with international standards and entirely consistent with Noah's long-standing strategies and core competencies. Investment and research driven has become the only path for the development of the wealth management and asset management industry under the new asset management guidelines. We're fully confident in the long-term healthy development of our industry in this background. On the other hand, under the impact of the new asset management guidelines, the fundamentals of the industry have also changed and the product strategies and strategic direction of many industry participants also need to change. Therefore, in the short term there has been some rather significant impact on market funding. In the first quarter of 2018, the capital market in China experienced the state of increased volatility. Credit default hit new highs in terms of both the frequency and amount, especially the default of equity pledged by large shareholders of public company and public debt default. These problems affected the investment psyche of high net worth customers in the short term and we believe we need some more time to observe and evaluate the duration and magnitude of this effect. We believe that the changes in the industry as a whole and the changes in investor mentally brought about the new asset management guideline will require a period of adaptation. There are three situations for company affected by the new regulation. The first types of companies have very poor asset quality with a lot of funding pool and maturity mismatch businesses in the past, and they might experience a large number of people under the new regulation. The second type of company had done a small amount of funding pool business but from the perspective of company operations, they have not established a compliance and risk management system that fully meets the regulatory requirements of the new regulation. The third type of company is like Noah. We have no business with funding pools, maturity mismatches or implicit guarantees in the past thus with very little historical burden. At the same time, most of our company's previous human resource and organizational structure have been allocated in investment, research, risk management and compliance, which is in line with the direction of the new regulation. Taking a long-term view, this is a very rare opportunity for Noah to step up and grow our business with higher quality. However, in the short term we also feel some pressure brought about by the new regulation especially the operating and cost pressure to build a stronger compliance and risk management team. At the same time, we need to identify qualified investors more effectively through our upgraded systems and processes, strengthen our customer risk assessment, anti money laundering and CIS system construction. In order to improve capability precision, supervise the compliance of relationship managers and provide more investor education. These are the critical areas where we need to allocate more time and resources now. In the new market environment, we have begun to spend more time with customers for in-depth communication often times with face-to-face meetings. We organize various types of investor education activities such as Noah University, PE seminars, public market seminars, trusts seminars among others, all aiming to provide our customers with a deeper knowledge of different asset classes and enhance their ability to understand and make sound judgments on financial products. At the same time, we're also strengthening the day-to-day management and training programs of our relationship managers with increasing trainings for the professional knowledge and products expertise. Strategically, we will focus on three main issues in 2018. First, we will allocate more resources to continue upgrading and strengthening our risk management and compliant system. Second, in the wealth management segment we will follow on core, we will focus on core client and family office customers and enhance our customer experience and comprehensive service capability. Third, on the asset management side, we will continue to improve our investment capabilities and revenue quality, balancing between fund to fund and direct co-investment strategy. Now let me share with you the business progress of our major product lines in the first quarter. In the private equity segment, we continue to focus on top GPs in the Chinese market and expand the scale and depth of cooperation with them. Our fund-to-fund strategy is to explore more star GPs and to expand PE secondary market funds. In the area of a co-investment and direct investment, we focus on technology driven consumption upgrade health care and other value-added industries and fields that harness what customers are most interested in and have great growth potential. We have also made significant progress in attracting investment talents and building up our in-house direct investment team. In the first quarter of 2018, China's PEVC industry as a whole experienced the cold winter in fund raising. With the size of raised funds decreasing by about 70% year-over-year. In this context, Noah's private equity product offerings amounted to RMB6.3 billion while the AUM of Gophers private equity funds continue to increase to RMB91.8 billion, up 39% year-over-year, and maintain a level of nearly 60% of the total AUM. From 2017, performance-based income from our private equity products has begun to be reflected in our overall financial performance. Some of our earlier launched funds have gradually entered the active phase of the project. Recently, we have been able to exit a number of invested companies to M&A or successful IPOs such as [Olma], Mobike, and WuXi AppTec. We expect that the sustainable performance returns for both our customers and company will continue to increase going forward. Our secondary market investment fund, the amount of the secondary market equity products we distributed during the first quarter of 2018 reached RMB7.9 billion accounting for more than 28% of the total transaction value and representing a nearly six fold year-over-year growth. We believe that with a new asset management guideline taking effect, public and private secondary market equity fund will become a main stream asset class for the middle class population in China. We have also completed a construction and upgrade of our compliance management and trading system infrastructure during the past few years. Gopher's secondary market equity product on the other hand continues to focus on the manager of manager model. In terms of product performance, 84% of Noah's selected funds achieved positive returns in 2017 with an average return of 17.9%. Gopher's mega trend MoM fund was launched in 2017 from its inception to May 11 of this year; its cumulative return exceeded 9%. While at the CI3100 index rose 1.46% and GEM index fell 1.63% over the same period. In the face of intensified market volatility in 2018, Gopher's MoM fund risk metrics, such as annualized volatility and maximum risk treatment has maintained excellent performance. The performance of Gopher offshore select hedge fund to fund over the last 12 and 36 months has also maintained leading position in the Barclay's ranking of similar fund-to-fund in the past year. In terms of real estate fund, we have been focusing on equity investment and asset management of real estate projects over the past few years. During the first quarter of 2018, Gopher real estate investment has grown RMB2.4 billion in growth size to an overall AUM of RMB11.9 billion. We believe that 2018 represents a relatively good opportunity for real estate equity investment in terms of cost efficiency. We will focus on two major investment strategies including preferred shares and co-asset acquisition and provide value added services to developers through post investment management. We will also exploring opportunities in the transformation of renovation of existing property. At the beginning of the year, Gopher acquired two real estate properties with the total gross floor area of approximately 66,000 square meters in the inner ring of Shanghai. These two properties included office building, hotels and rental apartments. Our commercial property management team will work with well known hotel and apartment operators for the operation and management of the project. This is yet another core asset acquisition project by us following the success of Gopher center. We have a very experienced real estate investment and operations team with all its exited equity real estate fund reaching an average IRR of 12% to 15% while maintaining a zero loss performance. We believe that in the industry and regulatory environment of 2018, our real estate fund will continue to increase the scale while maintaining the high asset quality. In the area of fixed income product, we continue to focus on consumer financing, auto financing and real estate mortgages and cooperate with market leading licensed institutions with diversified underlying assets. We have been executing this strategy for three years. And see it achieve strong stickiness and risk management capability. Our in-house risk management system has taken initial shape with a database of our counter parties are directly linked and through which we could continuously monitor the risk performance of the underlying assets. Through big data risk control and systematic risk identification, database linkage, product structure design and asset monitoring and analysis on the platform with underlying asset of different categories and different counter parties, we are able to enhance the pricing accuracy based on the credit risk of our fixed income product. Gopher's discretionary and family office team continues to dig deeper into the needs of super clients and help them invest in different multi-strategy products with different risk appetites. We also launched our global family office alliance program in 2018 and started to manage single family office accounts with the size over RMB500 million together with our clients. As at the end of the first quarter of 2018, we were serving 612 Black Card ultra high net worth clients including 378 clients investing in our multi-strategy funds, with an aggregate asset under advisory of over RMB40 billion. At the same time, Noah's other innovative businesses have also continued to advance. These include the type of high online wealth management platform, [low income] lending services and so on. Our other financial services segment realized 74% year-over-year growth in the first quarter of 2018 with operating loss increased by 41%. Lastly, I would like to reiterate my views on regulation and compliance. We have seen that the regulatory requirements and compliance cost of the global financial industry have all been trending higher in recent years. I think China is also following this trend. The promulgation of the new asset management guidelines has unified the regulatory standards of all asset management institutions and products and has eliminated regulatory arbitrage space. For asset management products both funding sources and underlying asset should be clearly reported to regulators. Implicit guarantees have been prohibited and net asset value management is required. At the same time through the integration and adjustment of regulatory agencies, the general government policy direction is that supervision will cover all financial institutions in all aspects. License management will be clearly implemented. These measures will have a profound influence on the long-term stability and development of the financial industry in China. For Noah, the keywords for 2018 are adherence to compliance and risk management to the highest standard. In 2017, we completed system upgrades in areas such as investors' suitability match-ups and risk quantification. In 2018, we will conduct a thorough review and improvement plan for the group's internal risk management processes and operating system. We will detect systematic loopholes by walkthrough tests and gradually optimize our risk modeling and comprehensive quantitative risk management system. We strive to use the most stringent standards to achieve continuous improvement for entire operation. Thank you all. Now we turn the call over to a CFO Shang who will review our financial results.

Thank you Chairlady Wang and hello everyone. For the first quarter of 2018 we achieved solid results and are on track to meet our full-year guidance. Net revenues in the first quarter increased 16.5% year-over-year to RMB830.9 million, driven by strong reoccurring revenue and performance based income. Reoccurring revenues reached RMB398 million, up 21.7% as we continue to focus on scale and quality of the assets we manage. We achieved performance based income of RMB59.7 million, up more than three-fold year-over-year. This demonstrates our efforts to generate investment returns consistently for our clients despite market volatility. Revenues from one-time commissions were down 7.7% to RMB317.9 million due to lower transaction value this quarter; offset a higher effective one-time submission rate. With ongoing market volatility, we intent to engage our clients with diversify product offerings and focus on both growth and quality. By segment, net revenues from our wealth management business were RMB594.2 million, up 5.7% year-over-year and contributing over 70% of total revenues. Our asset management revenues were up 53.8 % this quarter reaching RMB194.3 million. Our other financial services business segment achieved RMB42.4 million in net revenues in the first quarter, representing a large 71% increase versus last year, primarily due to the growth of our lending services. We anticipate this business segment will breakeven on a quarterly basis this year as we continue to focus on revenue growth. Total operating expenses were RMB556.4 million, up 21.9% year-over-year due to an increase in marketing expenses and lower government subsidies this quarter. We believe the comprehensive brand promotion campaign we launched this year will allow us to strengthen existing client relationships and improve new client acquisitions going forward. Total compensation costs were RMB360.7 million, up 5.9% year-over-year. Excluding government subsidies which vary quarter-to-quarter operating margin was 32.5% this quarter compared to 31.3% last year. This reflects our continued effort on cost management. Before commenting on our net income, I would like to discuss a recently adopted accounting standard. On January 1st, 2018 the company adopted ASU 2016-01 recognition and measurement of financial assets and financial liability. This new accounting standard requires that equity investments except for those accounted for under the equity method are those that result in consolidation be measured at fair value i.e. mark-to-market with subsequent changes in fair value recognized in their income. The accounting standard also includes a transition requirement on presentation that requires the amounts reported and accumulated other comprehensive income for equity security that exists at the date of the adoption previously classified as available for sale to be reclassified to retained earnings. This adjustment had no overall impact on shareholders equity. However, since these net unrealized gains are now included within retained earnings they will now appear as realized gain on the income statement when sold. When evaluating the company's operating performance management reviews non-GAAP financial measures. Noah's non-GAAP financial measures are as corresponding GAAP financial measures excluding the effects of all forms of share based compensation and fair value changes of equity securities unrealized, and adjusting for sale of equity securities if any. For the first quarter of 2018, we adjusted out share based compensation in the amount of RMB22.7 million as well as income for unrealized fair value change of equity securities in the amount of RMB34.8 million in our non-GAAP attributable net income. No adjustments for sales equity securities were included in the first quarter 2018 results. Detailed reconciliation of GAAP to non-GAAP result is included in our result announcement press release. For the first quarter, we achieved non GAAP net income attributable Noah shareholders of RMB256.4 million, an increase of 8.1% year-over-year. Non-GAAP net margin was 30.9% compared to 33.3% last year. Turning to our balance sheet. As of March 31, 2018, the company had RMB2.2 billion in cash and cash equivalents, up from RMB1.9 billion in the previous quarter. For the first quarter, we generated RMB344.6 million of operating cash flow, reflecting our strong financial health and cash generative business results. In summary, our first quarter results demonstrated the strengths of our business and our emphasis on revenue quality. I would like to reiterate our full-year non-GAAP attributable net income guidance of RMB1 billion to RMB1.05 billion, representing a growth of 16.7% to 22.6% compared to 2017. With that let's open up the call for questions. Operator?

[Operator Instructions] The first question comes from Haifeng Cao with Nomura. Please go ahead.

Good morning and thank you for the opportunity. I'm Haifeng from Nomura. I have two questions actually. Firstly, I noticed that the actually for the wealth management and business the fixed-income transaction value decreased by roughly 40% in the first quarter. And the private equity transaction value also decreased by roughly 30% year-over-year. I wonder what the reason of this decrease and the outlook the rest of the year. This is a first question. And secondly, understanding spending more on the marketing this year which also explains some decline in the [OP] margin and it can give us more color on the marketing campaign so far this year across China. Thank you very much.

Okay, sure. So thank you. I will comment on the first question regarding the transaction value for fixed income product as well as private equity. As madam Wang mentioned in her prepared remarks, I think beginning of this year we saw for the overall private equity venture capital market fundraising has been difficult compared to 2017 and in 2016. Overall market for the first quarter fundraising with down 70%, but we still managed to raise over RMB6 billion of private equity product year-over-year down around 30% as you mentioned. This reflects our strength in this business and also reflects our strong long-term strategic relationship with the top GPs in the market. I think as we continue to develop the private equity market in China, we will see that the top GP to gain most of the AUM as well as vast majority of the returns. So we will continue to focus on a strategy of working with a leading GP investing in breakout new GPs as well expanding our proportion of co-investment to recommend. Regarding the fixed income volume, we see the tightening regulation; we're starting to see short term funding impact to the market and as a result there has been notable of defaults with public company debt or equity pledges by a large shareholder. The increasing default in the short term is affecting the client appetite or the clients are now a bit cautious and now considering much longer before investing in new fixed income product. But we think this impact is a short-term in nature as we think the overall regulatory development it certainly on the right track for a healthy long-term development in the market as it is containing unnecessary systematic risk. On a second question I'll past to Kenny to comment on the marketing campaign but on the margin side, I think for the first quarter we were generally satisfied with the operating margin, operating margin excluding government subsidy which can vary quarter-to-quarter is actually up so it reflects our continued focus on cost optimization and cost management.

It's Kenny here. On marketing campaign, as I mentioned in my talk just now basically it's our first time ever to invest in such a broad campaign. We believe that with the new environment, it is a good time to begin building brand awareness. And it's quite targeted. The campaign is actually focused on two areas. One is with focused media with targeted residential building. And two is in very select airport. So Shanghai and Hong Kong particularly where we have placed commercials. And the advertisements are actually focused on showcasing our clients or leading business entrepreneurs that are willing to represent us actually without paying fee. So that's one point. Two is the impact has been quite enormous. We've actually gained a 10 fold increase about 10-fold increase through our client hotline and we are working through those inquiries and we are seeing accelerating conversion rate from those increase. The exact numbers I can't share now as we are basically going through this increase. Yes. Madam Wang would like to supplement on the question regarding the fixed income volume. She would like to add that as mentioned this -- beginning of this year we saw the official rollout of asset management plan. The spirit of the asset management plan is to dismantle the practice of explicit or implicit guarantees in the market, and this is having profound effect on the overall industry. And so what we note was overall volume for fixed income product in the industry was down. Given this context we are very particularly focused on quality and we continue to rollout and distribute high quality technical product as opposed to just certain peers in the market they are offering pseudo equity product in reality they are debt related, for example the real estate industry. So I think it's quite critical that in this transitional period we continue to focus on quality. And also in the market we are seeing some of our peers focusing on structure or derivative financial product tied to the economic benefit of real estate related product. I think this type of pseudo product or these types of product are gaining the attraction of regulatory. And I think going forward we will see fixed income product become more and more regulated so it is increasingly important to be compliant. Yes. For venture capital and private equity, again I think the fund raising for the beginning of year was difficult but we focused on our relationship with top GPs. For many of the top GPs in China, we are one of their top LP if not the largest LP and I think this is a very differentiated competitive advantage. For individual client, I think for long-term investment particularly in equity and private equity I think it's understandable that they need to think further before making new commitments given increasing interest rate environment expectation and slowing economic growth. But we think for the long term through venture capital and private equity we can help our individual clients allocate and benefit from the development of new economy in China.

Thank you. The next question comes from Kaith Lynn with Last Word. Please go ahead.

Hi, good morning management. I have two questions on Noah. So I know in March the Melbourne and Vancouver offices were open and I want to know about what is going on there. Is it mainly attracting Chinese offshore well so how is it going there? And would there be other plans to open and other oversea offices in 2018? And another question would be I know Hong Kong the regulator has fined Noah for some KYC issues. So I wonder if the management has some insights into how to foster this kind of control and how to foster the confidence from clients as well? Thank you.

Great, well thanks so much for the question. I think it's very spot on question. First question around the new locations of Noah in Vancouver and Melbourne. We open both offices fully earlier this year in the first quarter. The results have been overwhelming. We believe that not only are there a lot of clients actually now with have strong connections between China and Canada and China and Australia but also domestic clients are also quite interested in our services. I think most of the comments were that we have quite a broad and unique product base and our understanding of China is something that is attractive not only to Chinese communities in Vancouver and Melbourne, but also domestic investors. One example is we're actually working with a few leading family offices that are domestic in Canada and domestic in Australia that are interested in investing back in China. So I think they're progressing well. We can't share specific numbers yet because they're just really starting but they're highly promising. In terms of opening new offices I think we're quite cautious. We're not here to try and be in everything of global locations. We're currently in the US in New York in Silicon Valley. They're mostly investment team. We're in Hong Kong and Taiwan. We're also now including Melbourne. The next potential location is Singapore. We think that there are increasing high needs to look at our potential investment team in Singapore. And Southeast Asian Chinese are also interested in investment back in China. So that could be the potential next location we are exploring. In terms of your second question about the Hong Kong SFC fine. I think it's --let me just kind of make a few key points for everyone here. One is the issues identified are related to certain deficiencies in the KYC and the product risk rating approach we took in 2014 to 2016. So the issues were identified for years 2014 and 2016. That was two and a half years ago. So that's the point one. The issue related were actually the background was that we've actually gone through several rounds of review of our own KYC and product risk rating. But there were discussions with the SFC on what the exact right methodology was for KYC and product risk rating. While we believe that we have done everything we can we also are learning how the Hong Kong SFC approaches KYC and product risk rating. As a result, I think there was fine for the period that I talked about, about the KYC and product risk rating approaches. And so if you can see the notice all of the issues have been corrected. And so basically as of mid 2016 all of the issues that we've seen or that's been identified have been corrected and confirmed. So that's basically point one point. Point two is for all of these identified issues there was not one single client complaint. So basically it was a regular SFC checkup. We've had the licenses in Hong Kong for about six years now and therefore SFC was conducting its regular checkup and provided us with guidance on those specific issues. I think that's basically it. If there are more questions we're happy to answer more on this. Sorry the last point client confidence. I think as I mentioned related to client complaint so there were absolutely no client complaints during this period. I think we are basically helping to explain to clients the issues were two and a half years ago. They have all been rectified. And so right now basically there no such issues anymore for all of our new products.

The next question comes from Sam Dubinsky with Carlson Capital. Please go ahead.

Hey, guys. Thanks for taking my question. Just a quick one. I believe your pro forma net income was up 8% but your guide is roughly 20% of the midpoint. How do you bridge in outer quarters to that 20% number? Do you need a recovery and fixed income or private equity products or how do you think about that? And then I have a follow-up.

Okay, sure. And this is Shang. So over the years, our results are not evenly split between the quarters. I think there are two reasons for that. One is generally clients --clients demand seasonality number one. Number two also the overall economic environment in China has been changing or dynamic. So I think for the full year we're still very confident and meeting our non-GAAP net income guidance. Number two, over the years we have also been focusing on the quality of the assets we manage, i.e. fees that we are able to earn, as well as the performance based income that we're able to realize. And for 2018 there is a quite of a bit of performances income that we are expecting in the second half rather than the first half of the year. So we think the first quarter results I think we're still on track to meet our full year guidance and we continue to focus on executing our strategies.

Okay and then just in terms of that Hong Kong issue. I'm glad it's rectified but just curious I believe there were some statements in there that you may have to redeem the funds or I don't know if there are any losses there but regardless of loss or not, are you obligated to buy these assets back or like how do you deal with that type of risk and just how do you think about that?

So just to give a bit more details right. We have been asked affected client as announced in that statement was a 757. The vast majority of the products that are affected were actually in profit. So either they are a liquid product that is - has NAV that that is actually above the 1.0 value or they are long duration products that actually have a profitable net value as of the latest numbers. The SFC has actually asked -- gave us quite a lot of leeway to deal with this price. One is we need to notify them and tell them that they do have the right to redeem these products, but we do have a three-month period to help them transfer the products. So Noah has --doesn't have an immediate obligation to take these products back. And as you can imagine these are mostly profitable products. And the clients intention to redeem, our judgment may be low, but they do have the right to redeem. If they do want to elect to redeem we --our obligations first is to help them transfer that product to a third party. So our obligation is not immediately to buy those products. After that transfer if through transfer there is a loss, our obligation is to make them back to 1.0. So we're not here to provide any type of implicit guarantee, but that only happens after three steps. One is they elect to redeem which we think is unlikely given that most of the -actually the vast majority products are actually in profit. Two, if they do elect to redeem, our first role is to help them transfer and if they're unsuccessful in transfer then we have to help them redeem those products and basically keep them at 1.0. That's the obligation. We have actually-- our CFO has actually looked at this. All of these obligations are below the material threshold in terms of our obligations, meaning that the actual loss is actually below the 1% of our total profit line.

Yes. This is Shang. So just let me summarize on two points. In terms of impact on P&L, we expect the impact to be around 1% of our expected non-GAAP net income guidance. So it's not going to be a big hit to our profitability this year. Second, in terms of the balance sheet as Kenny mentioned, I think most the vast majority of the transaction that were identified, the clients still holding a product or but are unrealized profit. So we expect the clients will continue to choose to hold these products.

Seeing no further questions in the queue. I would like to hand the conference back over to Kenny Lam for any closing remarks.

Why don't we wait for another two or three minutes to see if there are others who want to ask questions. If not then we could close the call.

Okay. I'll stand by.

Okay. If there are no questions then I think we should close to call. Is that okay operator?

Yes. That's good.

Okay. Well thank you all for taking in time to listen to our remarks and ask questions. Of course, we will be ready to take any questions after this call. Please reach out to our Investor Relations. I think we've also set up quite a few one-on-one discussions with any of the analysts that would like to set up these meetings. Thank you so much again.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.