Kenny Lam - President Jingbo Wang - CEO Shang Yan Chuang - CFO

Katherine Lee - JP Morgan Xue Yuan - CICC Edward Du - Deutsche Bank Daphne Poon - Citi

Good day, ladies and gentlemen. Welcome to Noah Holdings Limited Third 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. After the close of the US market on Monday, Noah issued a press release announcing its third quarter 2018 financial results, which is available on the company's IR website at www.ir.noahgroup.com. This call also being webcast live and will be available for replay purposes on the company's website. I would 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 business. 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 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 discussion. A reconciliation of GAAP and non-GAAP financial results can be found in the earnings press release posted on the company's website. With that, I would now like to hand the call over to Kenny Lam, Noah's Group President.

Thank you, operator. I want to welcome everyone to our earnings conference call today. In addition to myself, Ms. Wang Jingbo, Chairlady and CEO of Noah; and our CFO, Shang will also be participating in our call. For today's agenda, I will first briefly summarize Noah's overall performance for the first three quarters of 2018 as well as the development of our core wealth management and asset management businesses. Chairlady Wang will then provide her current views on the overall market, regulatory environment and our product strategies. Our CFO, Shang will then follow with a detailed discussion of Noah’s third quarter financial performance. We will conclude the call with a questions-and-answer session. As we entered into the second half of 2018, market sentiments remained volatile. In these trade disputes, stringent financial regulatory reforms and de-leveraging, investment appetite has been substantially reduced. Despite some clear policy signals, including tax cuts and encouragement of private enterprise development and continued open door policies, market confidence is still very fragile. During this transitional period, many Chinese companies are undergoing brutal [ph] test on the market. This is true also for China's wealth and asset management industries. As a leading firm, Noah continues to focus on providing high quality services and creating value for our clients, while improving our risk management and other core competencies, maintaining sustainable growth and preparing for challenges we might face. In the first three quarters of 2018, the company's business grew steadily and performed well across the board. In the third quarter, non-GAAP net income attributable to our shareholders was up 41% year-on-year to RMB294 million and up 19% year-on-year to RMB802 million for the first three quarters of 2018. The group's net revenues for the first three quarters was RMB2.5 billion, up 17% year-over-year. In the wealth management segment, we raised 85 billion in financial products for the first three quarters, while the transaction value for the third quarter was up 19% year-over-year. We are very pleased to have achieved such financial performance in the challenging environment. In the wealth management business, demand for professional wealth management services in China is still strong. Recruiting suitable talent and fostering steady development are particularly important during this period. As of the end of the third quarter 2018, our frontline cover 83 cities across the country and the number of relationship managers increased 21% year-over-year to 1,559. In order to grow with our clients and further enhance our ability to provide comprehensive services to them, Noah continues to host in-depth investor education events in 2018. Since the beginning of this year, we've held hundreds of events, such as Noah company visit, small investment sessions and in-depth one-on-one client meetings. For ultra high net worth clients, we provide more customized services and activities such as closed sessions with senior management, tailored trust planning services and private events for our Black Card clients. Through a detailed analysis of client profiles, our relationship with Black Card clients could truly be driven by company enhancement services rather than pure financial product sales. For existing clients, we have focused heavily on the improvement of post investment services. Periodic fund performance reports have been comprehensively systemized and templated and are now more concise and easier for clients to read and retrieve online. Fund updates and other information can now be communicated with clients via voice through our app for relationship managers, adding an enhanced human touch. We further integrated our client service resources into a new client operation center in 2018. In addition to the existing client service hotline, we added AI-supported customer service assistance and also actively reach out to existing clients to better understand their needs. During the past five months, the client operations center has hosted 59 OP conferences for both Gopher and externally managed funds. We believe that these initiatives will help our relationship managers provide more professional post investment services to the clients in a planned and organized manner. Furthermore, the research work of the revamped Noah research team has become a lot more systematic and professional. In the first three quarters, our research team have both provided 165 training sessions for our frontline professionals, covering 42 fund managers in different asset classes. They've also published 422 internal and external research reports and conducted 83 interviews with domestic and international media. A substantial number of media and online platforms have cited our research results and the brand reputation and market influence of Noah Research have been firmly established. Active users of the Noah research online channel has increased by more than 5-fold in the last 6 months. Our asset management business is also growing healthily in 2018. As of the end of third quarter, Gopher total assets under management reached RMB164.1 billion, increasing 15% year-over-year. Breaking down by asset classes, the AUM of our private equity investments increased by 19% year-over-year to reach RMB96.9 billion, accounting for 59% of the total assets under management. The AUM of our credit, real estate, secondary market equity and discretionary management respectively accounted for 25%, 10%, 3% and 3% of our total assets under management. With the demand of China's high net worth clients becoming more specialized and institutionalized, Gopher continues to enhance its investment capabilities, both in breadth and depth. The demand from institutional investors has also been rising along the development of the Chinese asset management industry. Gopher recently won the bid as the manager of an RMB1 billion fund invested by the government [indiscernible]. It is an important recognition of our fund management experience. As the leading alternative asset manager in the industry, Gopher has established standardized process for online operations, covering the entire process of fundraising and investment management redemption. Gopher has comprehensively sorted and integrated its investment management system. Through a visualized display interface, the system can display paramedic views of our historic investment database, including dozens of our fund of funds, hundreds of our investing funds and thousands of portfolio companies. We are also striving to fully explore the value of data resources. These initiatives to further integrate resources of capital, technology, operation and back office support will provide a strong foundation for Gopher’s growth. For our overseas business, in 2018, as high net worth clients become more active in global asset allocation, Noah’s globalization strategy continues to move forward steadily. Our offices in Hong Kong, the US, Canada, Australia and Singapore are providing more diversified product and service offerings for clients. As of the end of the third quarter, Gopher’s overseas assets under management reached RMB23.7 billion, increasing 20% on a yearly basis. As we continue to expand our global business, we are also attracting overseas investors who are interested in China. At the end of October, the China, Australia family office alliance was created. In this alliance, Noah joins hands with six of the Australia's top family offices to open up investment opportunities for family offices in the two countries and brings more cooperation opportunities, experienced sharing and wealth management and estate planning. Lastly, I would like to share some of the group's progress in technology and operations. Recently, our intelligent customer service robots have been launched on our official website, which have public account and Noah online app. Questions and issues in eight major categories, including the group's introduction, products and services and daily conversations can all be resolved by AI. As of the end of September, intelligent robots have answered nearly 6000 customer questions. Our one stop Noah account system has been continuously improved, audio and visual recording of client order information, contract signing and product status updates have all been launched online and product information can now be delivered to customers more timely and accurately. We believe that embracing technology will further help Noah’s client service capabilities. 2018 is a year of change. It puts higher demand on our company's operations, management and risk control. But this is not the first time that Noah has faced harsh market conditions. We believe that the short-term market fluctuations caused by external sentiments actually give rise to more opportunities and long-term returns. We will continue to adhere to a strategy of building our core competency, maintaining compliance and stable management and focusing our own growth in an uncertain market environment. With that, I will now turn the call to Noah’s Chairlady and CEO, Ms. Wang Jingbo. She will speak in Chinese and her remarks will be followed by English translation.

[Foreign Language] Thank you, Kenny. In the third quarter of 2018, from a macro perspective, the market sentiment in China reached a new low point. The impact of domestic leveraging exceeded expectations. The downward pressure on China's economy increased and A share index continued to sink. Moreover, the Sino US trade war was in the stalemate and the market generally believed that we would need to prepare for the long haul. That being said, from a micro perspective, on the enterprise operations, Noah’s senior management team has already completed the adjustments to both business strategy and their old mentality. We believe that macro pressure is a reality of the market that we must face and tackle. It is at the micro level of operations where we can take actions and make a difference. Thanks to the experience gained through our past track record with conservative approach coupled with our respect to the market, such a critical point in 2018 is not daunting to us. We believe that as long as Noah can maintain our strategic strengths, the opportunities actually outweigh challenges. We still strongly believe that both wealth management and asset management are emerging industries in China. The implementation of the new asset management regulations and the recent exposures of risks will clear out the lower quality participants in the market and provide real life education for investors. The correct concepts of long-term investing and asset allocation are being accepted by more and more clients. All these are beneficial to the long-term development of the industry. From our growth data in the third quarter, we can see that increased comprehensive services coupled with global asset allocation for high net worth clients as well as the combination of wealth management and asset management and business model has reduced the impact of industry cycle volatility and allow a company to develop in a healthier and steadier manner. [Foreign Language] With the current risk exposure in the market, the demand from clients for asset allocation services has increased significantly. For our ultra high net worth clients, the demand for comprehensive services is even more prominent. Insurance products, trust planning services and other low correlation assets were strong in demand and Noah’s revenues from such products and services increased by 197% year-over-year in the third quarter. Noah’s core strategy this year is to continuously upgrade our core customer service system, providing high quality services to Black Card and family office clients. As of the end of the third quarter, we had more than 700 Black Card clients whose total assets with Noah have exceeded RMB60 billion. Gopher’s family office services have also been recognized by many ultra high net worth clients. In the first three quarters of 2018, the AUM of Gopher’s discretionary and family office investments grew by 50% from the end of last year. We believe that this sector will become a new driver for Noah’s future growth. Of course, it will also put higher pressure and demand for our comprehensive service capabilities. During the third quarter of 2018, in the primary market, the fund raising side remained sluggish, while the investment side gradually improved. Bubbles and risk levels have been reduced, both in terms of valuation and company quality. Some projects that Gopher had invested in during the past few years have begun to seek overseas listings and we're confident that this will help us to provide increasing performance based income to our clients and shareholders in the future. Although the scale of PE fund raising for Noah kept declining in the third quarter, Gopher’s assets under management in private equity still maintained a year-over-year growth of nearly 20% to reach RMB96.9 billion, accounting for 59% of the total AUM. We have learned from past experience that often during periods, when fundraising is difficult, it is the best time to invest. Our strategy remains to work closely with leading fund managers to keep a number of funds offered stable and to take small, but consistent steps to continue moving forward. In the third quarter, we raised capital for and invested in the new funds from [indiscernible] and several other top fund managers in China. At the same time, we strengthened cooperation in co-investment and direct investments with leading fund managers. Gopher’s direct investment capabilities and its team construction have always been a major direction of our efforts. The strategy of second refund is also a [Technical Difficulty] as the demand from institutional clients has been obviously increasing. [Foreign Language] In the terms of real estate funds, we have optimized our investment strategy and risk management process. Strategy wise, we continue to promote preferred shares portfolio funds and co and value added acquisition fund, focusing on equity investment and cooperating with core real estate developers. At the end of the third quarter of 2018, the AUM of Gopher’s real estate investment has increased by 43% year-over-year to RMB16.6 billion. At the same time, several new real estate funds have finished filing and are either being or will be launched. Gopher’s real estate asset acquisition team has also been actively working with the goal to acquire core properties in core cities during the economic downturn. Our real estate operations team has been gaining valuable experience in terms of property operations. It is also worth mentioning that the US real estate fund managed by Gopher’s New York real estate team has also been officially launched and completed the investment in its first project. As of the end of the third quarter, most of the real estate funds managed by Gopher were equity investment funds and property holding funds. On the secondary market products fund, affected by the market downturn, the scale of funds raised in the third quarter decreased significantly to around RMB1.5 billion. That being said, we believe that the current market valuation is in the reasonable investment range, increasing allocation in outperforming fund manager should be the core strategy now. Recently, we have launched a value investment fund with a free year lockup period and that has already garnered recognition from high net worth clients. In terms of Gopher secondary market fund performance, Gopher’s quantitative strategy and market neutral strategy fund to funds performance is eye-catching in this market, both generating more than 5% in positive returns since the beginning of the year. Gopher’s flagship fund of fund and MOM funds have also significantly outperformed the CSI 300 index by 12 and 7 percentage points respectively in the first three quarters. We're well aware that fixed income funds and interest bearing assets remain in high demand from high net worth clients. Since 2015, Noah has actively promoted portfolio investment and net asset value management for fixed income funds. We have adhered to the diversification of underlying assets and selective engagement with quality counter parties, online market leading licensees and enhancement of risk management with our proprietary risk control system. These measures together with other long term inputs have enabled us to maintain a sound level of asset quality and risk control amid a somewhat chaotic 2018 for the greater market. In the third quarter, the fundraising volume for Noah’s fixed income products reached RMB22.8 billion, accounting for 81% of our transaction value. [Foreign Language] Lastly, I would like to briefly talk about a review on recent regulatory actions and our macro economy. The new asset management guidelines is navigating the domestic industry development to correct supervisory deficiencies, manage market irregularities and prevent systemic risks. High leverage is indeed a Sword of Damocles hanging over the Chinese economy and de-leveraging is very much necessary. However, the de-leveraging process needs to be carried out gradually and strategically to prevent further harm to the Chinese economy in the future. Clearing out lower quality industry participants and establishing a new market order are necessary for the long-term healthy development of the asset management industry as well as for the country as a whole. Although current economic conditions are weak for enterprises, it is not necessarily bad. This could also be a rare opportunity for us to reexamine our strategy, talent pool and resources as well as to cut unnecessary costs, optimize our business model and grow into a healthier enterprise. Now we are indeed facing such an opportunity, as the market demands us to build new capabilities to continuously improve and to convert the growing pains into the driving force for further development. As [indiscernible] once said, the growth of bamboo can be used as a metaphor for the development of a corporate enterprise. When the economy is booming, the enterprise just like a bamboo often grows rapidly with outperforming notes, thus eventually becoming weak and fragile. Bamboo only forms nodes that give its structural strength during times of less favorable conditions. Likewise, it is only when an enterprise experiences and overcomes various difficulties that it develops the foundational strength of its structure to enhance its overall corporate competitiveness and resilience. We believe this also applies to our industry and the country as a whole. Noah wealth management was formed in 2003 and Noah Holdings was publicly listed in 2010. Today, we stand as an enterprise with a 15-year operating history. Over the past 15 years, we have experienced four economic cycles and suffered from various risks such as investment fraud, industry cycle adjustment errors and credit defaults. This year, we have also witnessed some of the most accomplished successful entrepreneurs being closed out of position of stock pledge and losing all their shares in the company. This has left an indelible impression on us. For Noah, our senior management team has always been absolutely transparent in all communications and facing both ourselves and the market honestly. Although we strive to understand risks without experiencing risk, we believe that every mistake we made, if we learn from it, can make us stronger and wiser over time. With the passage of time and our ongoing maturity, our fear, awe and appreciation of common sense and respect for the power of the market are all only getting stronger. We strive to become a friend of time. That is our expectation. [Foreign Language] Thank you. Now, I would turn the call over to our CFO, Shang to review our financial results.

Thank you, chairlady and hello, everyone. As Kenny and chairlady Wang both noted, we are satisfied with our financial results for the third quarter of 2018 and we are on track to deliver a solid result for the full year amidst the volatile environment this year. Net revenues for the third quarter of 2018 were RMB839 million, an increase of 22.6% year-over-year and non-GAAP attributable net income in the same period was RMB293.9 million, up 40.5% year-over-year. By revenue contribution, we achieved one-time commissions in the amount of RMB232.6 million compared with RMB213.1 million in the same quarter last year, up 9.2% year-over-year as we continue to engage with our clients through diversified product and service offerings. Total transaction value of financial products we distributed during the quarter was RMB28 billion, an increase of 18.9% from the year ago. Our effective one-time commission rate for the third quarter was down year-over-year due to changes in product mix and slightly increased quarter-over-quarter. Recurring service fees in the third quarter of 2018 were RMB478.6 million, up 39% from the same period last year, contributing to 56.7% of revenues. The growth of our accumulated, distributed product and the high quality of our assets under management continues to provide strong revenue streams. Total performance based income for the third quarter of 2018 was RMB33.6 million compared to RMB74.8 million for the same period last year. We have realized performance based income for 17 consecutive quarters, reflecting our ability to deliver investment return to our clients through market cycles. It demonstrates our effort to build a leading multi-strategy asset management platform with strong investment capabilities. By segment, net revenues from wealth management business contributed over 68% of total net revenues, was RMB576.9 million, and grew 18% year-over-year. Net revenues for the asset management business amounted to RMB198.5 million, up 20.7% year-over-year. Our other financial services segment continued to grow and achieved net revenues of RMB63.6 million, doubled year-over-year. We are especially pleased that our other financial service business broke even this quarter. In the third quarter, operating income was RMB271.1 million, a 69.1% increase year-over-year and the margin increased to 32.3% from 23.4% a year ago and 27.7% in the second quarter of 2018, mainly thanks to our focus on cost management. In this quarter, our selling expense was RMB81.2 million, slightly higher by 5.5% year-over-year and down 32.6% quarter-to-quarter, as we completed most of our brand campaign spending in the first half of the year. General and administrative expenses was RMB60 million, flat year-over-year and decreased 12.4% quarter-over-quarter. Non-GAAP net income attributed to shareholders for the third quarter was RMB293.9 million, a strong increase of 40.5% year-over-year. This quarter, we adjusted for RMB35.7 million of share based compensation, RMB20.7 million of losses from unrealized fair value changes of equity securities and RMB29.9 million of gain from sales of equity securities. On the balance sheet side, as of September 30, 2018, the company had RMB2.4 billion in cash and cash equivalents, improved from RMB2.1 billion in the previous quarter. The cash inflow for the quarter, the operating cash inflow for the quarter was RMB449.8 million, was mainly due to strong cash generation in our core businesses. Finally, I would like to highlight that our performance year-to-date reflects strong fundamentals and steady profitability in our businesses. We remain confident in achieving our full year 2018 non-GAAP attributable net income guidance of RMB1 billion to RMB1.05 billion. With that, let's open up the call for questions. Operator?

[Operator Instructions] The first question today will come from Katherine Lee with JP Morgan.

Hi. Good morning. Thanks for giving me the opportunity to ask the first question. So when I look at the results, right, I think the -- on the profit lines, it is better than expected, but however, I have two key points that we want to ask. So first question is on WMP sales, because we looked at that actually in the third quarter, sales volume continued to contract and mainly on the PE products and on the secondary market product and as well as insurance as well. So can I get a clarity on management guidance on where do you think the sales trends will be and also I would like to ask because PE product has been a flagship product of Noah. Then going forward, do you think this will continue the trend or you are developing some other brand name products as well? So this is the first question. The second question is actually also related to volume. It’s on Gopher’s AUM. Gopher’s AUM only up 2% QoQ in the 3Q. So on this one, what do you think will be the growth rate to be and what do you think the mix of the new AUM would be in the coming year? Okay. Thank you. [indiscernible] Yes. I think both questions, actually, at the end of the day, tied to the same theme. Is that investor belief that Noah has been very good at doing PE, no matter it's on the Gopher side or on the bill side [ph], but however people are thinking that maybe the PE industry as a whole, the growth has plateau at the stage. Then for Noah, then what are you going to sell going forward and what kind of product you're going to develop into the flagship product, that’s something that people -- because now when clients think about PE products, it’s likely that the first name came into their mind would be Noah, but I think you may not be able to say the same thing for other products. So how are Noah going to face this challenge?

Yeah. Katherine, I will take a crack at answering both of your questions and will ask if madam Wang and Kenny have anything to add further. So as Madam Wang mentioned on earlier, since inception, we have actually been through four whole economic cycles in China and our strategy and business model have always been to continue to strengthen our diversified product and service offering. So since IPO, actually, I recall back in 2012, 2013 period, it was actually the economic environment was also quite challenging and the investment appetite for equity products, as a whole, including private equity in A share market was quite weak. But we continue to engage with product, engage with our clients through other products such as fixed income. And so the recent downturns in the investor appetite were not particularly worrying in the long term, because we still continue to see very robust wealth creation and we think the different demand for different large asset categories comes and goes. So this year is likely going to end to be a weaker year for private equity and a bit for publication, but as the cycle continued to develop, it is most likely we're going to see a reverse in investor appetite and then equity product will become more in favor. So the important thing for us is that we continue to strengthen our product and the investment capability across the large asset category and we feel quite satisfied, both in terms of private equity, A share, real estate, fixed income, even for insurance and now a lot of complimentary services such as trust planning. We have really cemented our expertise. And so that's on the wealth management side. On the asset management side, you can see that in terms of our product mix, nearly 60% of our AUMs comes from private equity and so that really solidifies our leading position in terms of the private equity industry in China. These are very long-term duration products and the fact that we have been able to accumulate now nearly 100 billion of AUM shows that we have very strong positions going forward and we continue not only to invest in leading funds such as those that were mentioned by Madam Wang such as matrix somewhere, but we have also been, in the most recent year, adding our co-investment and direct investment capabilities.

Shang -- I'll add to what Shang said, Katherine, thanks for the questions. This is Kenny here. I think in the market, indeed, Nova is known for private equity in DC. But as you can see in this quarter results, we've proved that clients are also coming to the Noah platform for other things. So if you look at the release of the results, the value of the products distributed this quarter was actually up 18.9% year-over-year. And if you look at the mix, as Shang said, it fluctuates between different four different types. It fluctuates between fixed income, private equity, secondary market and other products. So I think it shows that our platform, while not perfect, is now beginning to attract clients for things other than private equity and we're able to withstand the cyclical demand that may change from product to product. That's point number one. Point number two, I think, you mentioned about insurance. I think we disclosed in our speeches that other services, which includes insurance, actually went up by 197% year-over-year. And so actually demand for insurance products through our insurance brokerage platform has increased substantially. So again it shows our efforts in recent years to be a lot more diversified in revenue base and our product base.

Your next question today will come from Xue Yuan with CICC.

[Foreign Language]

So maybe I’ll try to take and then you can answer. So the two questions are similar to the first one. In the mix of the products we distributed, there is a much higher percentage in fixed income as the question is what we expect going forward. The second question was in the third segment, in the financial -- other financial services, we are in the first quarter of breaking even or actually slightly profitable. So what is that coming from? Shang, you want to?

Yeah. So the growth in terms of the other finance services, most of the growth we saw this quarter came from our lending business, so we make loans to our registered clients and the majority of these loans are backed by high quality assets. Some of them are our financial products and we continue to see short-term, barring these from our clients, and we continue to again provide comprehensive product and service offerings to our clients and this is one example.

And the next question will come from Edward Du with Deutsche Bank.

Two questions. My first question is about recently we've seen many supporting policy to the private sector financing, especially for the SMEs and the regulator also mentioned that they encourage the private funds to participate in the funding support in the mid or the equity side or debt side, like bond or something. My question is about that, do you see any further business opportunity in the SME financing in terms of Noah’s position or any benefit we can enjoy from the encouraging policies like the tax benefit or something else. This is my first question. And my second question is that, for your micro financing company, you just mentioned it before [indiscernible], may I know more about current capital position, leverage and do you have any further capital injection plan? And can you share more view on the business development for the [indiscernible] and any outlook for its loan balance and volume in this year and next year and above are my two questions.

Thank you, Edward. I'll provide a little bit more background on our lending services business. The business was set up several -- a couple of years ago and then was mainly targeting towards our registered clients. Currently, it has registered share capital of roughly around RMB350 million and the business model is that, it would securitize its loan receivable. And so it really -- the basic basis is forming quality asset and then through securitization, make a net fee and service -- and help service de-securitization. We see loans -- we expect loan growth this year to double of last year. It's going to probably reach somewhere around RMB10 billion this year. And most of the – the average duration is around less than one year. I mentioned earlier most of it would have high quality collateral -- most have collateral. Going forward, we continue to see growth opportunities and as part of our budgeting processes for 2019, we are considering how best to allocate our resource across the various business line. But I think we will look into increasing the capital base for our lending businesses to help further expand its business, but exactly how much, I think we don't have a conclusion yet. I think it will be inline and in pace with the base of the business and as well as the other capital needs of our other business lines. And for your quarter first question, I will -- Madam Wang will like to provide answers to.

[Foreign Language] Okay. So two points that Madam Wang want to provide in terms of the first question regarding the latest regulatory policies. So most recently, we're seeing some improvement of the operating environment from these signals and latest policy announcements. For our business in particular, we're seeing that registration of private funds to now improve in the middle of this year, it was quite delayed, but we're seeing the improvement in terms of the speed of registration. Particularly, the second point is particularly in terms of providing new liquidity or financing to private enterprises, where our work is closely observing this development, but as of now, we expect that most of the capital to come from state-owned enterprises and large institutions. Possible, this is an opportunity for us, if we can be managers to these capital and helping them structure and allocate to mezzanine types of investments. But this is quite new and we're closely monitoring and following up on potential business opportunities.

The next question comes from Daphne Poon with Citi.

So my first question would be about the fixed income product sales. So we see the transition volume has increased strong this quarter, but then if we look at the Gopher fixed income AUM expansion, so I'm just wondering what would be the mix of those fixed income product sales if it’s mainly driven by – for products or what would be the underlying asset mix? I guess second is just on the regulatory environment, so we see reasons we have been [indiscernible] on different policies including the new asset management rule or de-leveraging in products. So [indiscernible] so I would just like to hear your view about do you think it’s possible to make [indiscernible] earlier this year and do you see a potential negative on your, in the longer term.

Just hold on for one second. We’re translating the question. Your two questions. I will answer the first one. Madam Wang will answer the question regarding the regulatory developments and our expectation going forward. In terms of the fixed income product that we distributed in the third quarter, most of it is still shorter duration product. As in the third quarter, we can -- there was still quite a bit of volatility in terms of the capital market and so clients will continue to be nervous about making new investments or long term investment decision. But as we mentioned in the second quarter, we think in a situation like that, it's still quite important to engage our client and maintain their capital with us. So we’re quite nimble in terms of ruling out shorter duration products that met the clients’ need. So, these are much shorter in duration, so it didn't help Gopher’s credit AUM growth too much in the third quarter. But I think it's really a balance of trying to meet the client need and our views on the overall long term investment decisions of our clients. But I think we need to balance both. In terms of the second question, I will ask Madam Wang to provide her thoughts on regulatory development.

[Foreign Language] Yeah. In terms of the regulation, I think earlier this year, what we saw with regulation was very stringent and tight. It almost felt it was a complete pendulum swing to the other side, to the opposite side. So several years ago, there was little or lack of regulation in terms of new forms of financial services businesses. And we saw, starting late last year and early, there is a lot of new regulations that came into play. But some of the regulation perhaps didn't cater for how the market was operating and so we're seeing some adjustments to the regulation to make sure that private enterprises who previously got financing are not completely cut off. So we're also seeing the improvement in registering a private fund. So we see the recent month to be fine in adjustments rather than a reversal of regulation objectives. But we certainly feel that regulatory environment is slowly but surely getting better and better.

It’s Ken here. I want to emphasize two points. One is, I echo, Chairlady Wang’s and Shang’s point that the core principles that were laid out in the new regulations on the asset management are not going to change. I think those core principles are very much assimilating to a global standard that we like in this market. The second point is around, the regulator is actually learning to strike a balance in terms of its regulatory push and so we're seeing that the balance is actually better struck in the last year or so. And that actually makes for a player like us to understand that the regulators are actually improving and we believe that it will still be relatively volatile in the months ahead, but is actually going in the right direction.

Our next question comes from [indiscernible] JL Warren Capital.

[Foreign Language] I have two questions. The first question is about the lending business, about how do you recognize your interest income, what is your average interest rate and are you lending to your existing high net worth clients or the corporate? The second question about the selling expense, in the third quarter, your selling expense was recorded as 81 million in RMB, got it down from 120 million in the second quarter and 106 million in the first quarter. So what is the implication in the longer term?

Thank you for the question and the translation. So I will answer both of the questions. On the first question regarding our lending business, as I mentioned earlier, we're providing short-term lending to our register clients. That would include individuals as well as companies. The average interest rate is in the low-teens and this reflects the high quality, in terms of the bar as well as the high quality collateral that we obtain, when we make these loans. In terms of the revenue recognition policy, the majority of the revenue is basically accrual of interest fee payable or the net fees we're making when we're servicing those loans receivable that we have securitized out. In terms of your second question of selling expenses, in the third quarter of this year, we had selling expenses of roughly about -- we had selling expenses roughly about 80 million, which is around flat year-over-year and down 32% from the second quarter. It was down from the second quarter, is because for the first half of the year, primarily in second quarter, we spent most of that this quarter -- we spent most of our brand campaign dollars. For the full year, we have budgeted roughly about RMB60 million to RMB80 to spend on strengthening our brand campaign and most of it was booked in the second quarter. So that was the main reason why second quarter and third quarter selling expenses came down, but we continue to be very focused on cost management. So versus a year ago, selling expense is flat. So we don't expect any major brand campaign initiatives, at lease for the next 12 months. But as I mentioned, we are in the process of doing our budgets for 2019. If there is any major investments pending, we will keep the market updated in our next call.

The next question will come from [indiscernible] with JPMorgan.

I had a few questions. The first one is on WMP sales angle. So, do we have a guidance, year over year growth guidance for 2019 in terms of the WMP sales angle. So this is my first question. My second question is on fee rate. So we continue to see the recurring fee rate improved in the third quarter. So we guess, this is mainly due to the product mix, due to more sales of fixed income products. So besides that, are there any other reasons for the recurring -- for the fee rate increase as well as the recurring fee? So this is my second question. So the third question is on [indiscernible] balance is around 680 million, but then just wanted to check, you probably mentioned that loan could double to reach RMB10 billion this year. So just want to double check with this number. And then we want to ask the provision level and any potential default of the [indiscernible] business. So this is my third question. My last question is, any updates on the recent pace development.

If you give us a minute, we’ll translate to Madam Wang, one second. So we will answer your questions in order I guess. So in terms of the transaction value for 2019 and going forward, I think we continue to want to improve market share. I think we have been continuously saying that for several years now, as you look at various industry report, I think we're still seeing wealth management, asset management businesses growing at double digits. So I think that will definitely be a goal of ours medium to long term, but the growth will not be linear growth, because obviously we need to you deal with the macro environment. I would like to highlight that from the financial result we saw for the first three quarters of this year, I think our revenue growth is no longer just correlated to overall volume growth because we have been strengthening our investment capability, which helps us improve the revenue quality from our AUMs. So that ties into your second question, we have been very actively and strategically adding our investment capabilities around the co-investment and direct investment. And these are able to help us in terms of effective fee rate. So if you do the math in terms of the recurring service fee rate over our AUM, that has been steadily improving over the last few quarters and we continue to see opportunities and room for that to grow further. In terms of, on the one time commission effective fee, that is more related to the transaction volume mix for that particular quarter. I mentioned earlier on my prepared remarks that it was around 83 basis point for the third quarter, slightly up versus the second quarter and down versus the third quarter of 2017. I think we are generally comfortable when our effective one-time commission fee rate is around 80 to 120 basis points and quarter to quarter variant really depends on the transaction value product mix. And now moving on to –

Can I mention one point about the recurring fee? I think the group here should understand that it has been a long term strategy of Noah to try to move away its reliance on the single quarter volume sales and actually moving more towards recurring revenue, because we believe that that actually is a much stronger basis for our revenue base. And so you see that it is a strategy that has been in place for the last 4 or 5 years where we're building up our asset management capabilities, we're building up diversified revenue sources that goes beyond the volume for the particular quarter. So I think that Shang's mentioned around how we should not only focus on volume for that particular quarter, but actually look at how we have built a broader ways of generating revenue is actually quite important.

Now, in terms of your third question on our lending business, our lending service business, so as of the end of September 30, 2018, we had a loan receivable roughly about RMB700 million. So that is the loan receivable that we have yet securitized. I mentioned the business model for our lending business is to form high quality loan receivables and then securitize them out. From all the loans that were originated and secured and eventually will be securitized, we expect this year we're going to probably reach somewhere around RMB10 billion, which would be -- if we achieve that, that would be double of what we did for last year. We have currently a provision of 1% for those loans that are on our balance sheet, but that's a temporary positioning as we will eventually securitize our loan receivables. But as of now, for the last 2, 3 years that we have been operating this business, we have not had any defaults. The main reason is because of the fact that we focus primarily on high quality borrower and the fact that we have high quality collateral. On your fourth question on Huishan, I will pass it to Madam Wang.

[Foreign Language] So a couple of points on the Huishan products that we have been helping our clients to undergo restructuring. So overall, we continue to see progress in terms of the restructuring of the Huishan investment. We're still currently under an official bankruptcy process. So I think that is a good sign. In terms of the actual operations of Huishan, we have now seen and those are several consecutive months of positive cash flow. In terms of from the government policy perspective, the state council has in multiple occasions highlighted that the dairy industry is a really important strategic industry for China and latest regulatory policies in terms of helping private enterprises access financing, encouraging a lot of the debt to be converted to equity, I think this may also be beneficial to the restructuring of Huishan. And lastly, the Huishan management is very focused on repaying better, including -- which includes our fund investment. And as of now, I think we will probably get more clarity on a repayment plan sometime next year.

Next question comes from [indiscernible] with UBS.

[Foreign Language]

For the benefit of audience, I will translate the two questions from the analyst from UBS. So first question is that I noted that for fixed income transactions for the third quarter and increased meaningfully. At the same time, we also saw operating margin to improve in this quarter. Can you explain the reason for the margin improvement, given the strong fixed income product distribution. The second question is in terms of the overall regulatory training that we saw for most of this year, Noah was still able to achieve relationship manager growth. So relationship manager grew roughly around 20% year-to-date over the same period last year. I know for other financial services companies, such as insurance company, it actually has been difficult for them to increase the number of sales people or frontline employees, so if management can share with us how Noah was able to increase relationship managers and what is the planned in terms of relationship manager growth going forward? So those are the two questions. I will answer the first question and Kenny will answer the second question. So, you're right. So for the third quarter, we saw fixed income product to – transaction value increase meaningfully, primarily because we were able to engage with our clients despite volatility in capital markets with shorter duration credit products. Shorter duration credit products have lower one-time commission rate. But we still feel that it's important to maintain that engagement with clients. The improvement in margins for the third quarter primarily is because of two reasons. One on the top line side, we saw very robust recurring revenue growth. This is because of the continued growth in AUM as well as improvement in fee rate of the AUM that we manage. The second reason is on the cost side, given the volatility we saw in the first half, we were very focused on tightening cost and improving cost management for -- starting in the third quarter and we felt that we had did a fairly good job and so both across the board, cost has been quite managed in the third quarter and particularly we didn't spend any large amount of brand campaign dollars this quarter. Most of it within the second quarter. So we were able to, on a net basis, improve operating margin on a year-over-year as well as quarter-over-quarter basis to above 30%. So I think on a full year basis, I think it will be good if we end up with an operating margin of somewhere near 30%. Medium to long term basis, I feel that there is margin improvement as we continue to focus on productivity gains, but in the short term, on a quarter-to-quarter basis, I think it really depends on what type of spending and investment we're making for that particular quarter.

And it’s Kenny here. I'll answer the question around the relationship managers. I actually think that our relationship manager career development and training program has been the key attraction for new talent. You can see that the way we manage our RM sales force is actually not a very short term focus. So we look at each RM and believe that it would take at least two, three years before he or she becomes productive, he or she becomes a client trusted advisor. And therefore, if you see the way we develop the program, we focus a lot more on how we help the RMs build the skills. We invest a lot in training, we actually invest a normal amount in thinking about their career development. So that's why we track now in this actually down market, a lot of relationship managers to the platform. The second point I want to make is, if you look at the churn rate of our high performing relationship managers, it's actually probably the best in the industry with below 3% in terms of churn rate for the high performing relationship managers. And the tenure of our relationship managers are usually -- actually over around 3 to 4 years. And so I think just to summarize, we think that if you look at the front line, it is the key interface to our clients and the key to loyalty and therefore we spend a lot of time in terms of thinking through how we invest in terms of training and how we invest in terms of career development.

The next question comes from [indiscernible] with JPMorgan.

[Foreign Language]

I guess for the benefit of the audience, I’ll translate the questions into English first. So [indiscernible] from JPMorgan had a question regarding the relationship and the strategy on several metrics. So she notes that for registered clients, this particular metric has more than doubled over the last few years. While active client number has only increased in double-digit in the same period, in addition, the number of relationship managers increased roughly about 50% over the last two years. So given these three metrics, can management share with us what is the strategy on clients going forward? Is it to focus more on deepening client wallet share of existing clients or is trying to get more clients become more active on the registered?

[Foreign Language] A couple of points from Madam Wang regarding the question. So we’re actually quite excited about the medium to long term growth aspect of our industry and so we have been continuously recruiting high quality relationship managers as well as employees, because we think these would be the basis of supporting our growth going forward. In terms of the registered clients, I think over the last two years, we have been very focused on getting our brand out there to the potential clients and getting them to becoming our registered clients. So, you can see it as almost like enlarging the funnel and getting access to high net worth individuals, both in terms of offline through our relationship managers who are now in more than 83 cities and also the last 2, 3 years, I have also seen that we have done quite well in terms of our online efforts. So if you download our app, you can see that you are able to get our views on the market through our assets and you can get a better understanding of Noah. And so this is really to help enlarge our breadth in terms of being able to get in touch with high net worth individuals. But in this particular year, we actually have focused our wealth management, particularly on investment side on larger clients because when the market is quite volatile, we actually think it's better to serve large client because they would understand the volatility more rationally and more sophisticatedly. For smaller clients, I think it's harder to service them in the volatile market because they can be quite anxious, but we will service these newer registered clients or these smaller clients through other related services. For example, we have an education subsidiary that really focused on getting Chinese investor to be more abreast on how the capital market is and what is a more proper way to invest their money long term. For example, we have more market, low correlation products such as insurance. So I think going forward, I think we really focus on getting in touch with more clients, but being able to deliver and offer not just financial products, but also financial services offerings. Now so whether we are going to focus on deepening wallet share of existing clients or trying to convert more registered client to active client, I think that strategy particularly in such a dynamic market such as China, we need to remain flexible in years where it’s challenging in terms of the investment environment, we probably will focus more on deepening client wallet share. In an environment where the investment is not so difficult, we’ll probably want to do more conversion of registered clients. So we will adjust it according to our view of the market. Now, on our leading position on private equity, I would also like -- madam will also like to add that I think fund raising this year is lower than that of last year, but actually we continue to put a lot -- make a lot of effort in strengthening our position in this particular segment. We have invested in very top tier funds and our investment is more valuable because even for the leading GPs in China, in an environment like this, it’s very difficult for them to raise new funds. Actually if you follow the industry statistics, I think new fund raising for VC, venture capital and private equity this year is down 80%. So the fact that we're still able to raise new money, make new deployment, make us a very active participant and this will cement and further solidify our positioning for this particular business.

Okay. I guess with that, if we don't have any further questions, we will end the call today.

Yeah. Any more questions, operator?

There are no more questions at this time.

Okay. Well thank you all for today’s call.

Thank you. Bye.

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