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Edited Transcript of 806.HK earnings conference call or presentation 19-Aug-19 9:30am GMT

Half Year 2019 Value Partners Group Ltd Earnings Call

Hong Kong Sep 7, 2019 (Thomson StreetEvents) -- Edited Transcript of Value Partners Group Ltd earnings conference call or presentation Monday, August 19, 2019 at 9:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* King Lun Au

Value Partners Group Limited - President

* Ngai Sze Wong

Value Partners Group Limited - CFO

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Conference Call Participants

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* S. Huang

JP Morgan Chase & Co, Research Division - Financial Analyst

* Scott Russell

Macquarie Research - Head of Financials Research, Asia

* Yi Zhang

SWS Research Co., Ltd. - Analyst

* Yiying Zhou

Morgan Stanley, Research Division - Equity Analyst

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Presentation

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Operator [1]

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Good evening, ladies and gentlemen. Thank you for joining the results presentation. Value Partners Group Limited, Hong Kong Stock Code 806, today announced its 2019 interim results for the 6 months ended 30th of June 2019. The management team will go through with you the financial and business performance of the company. The presentation will last for around 10 minutes.

Please allow me to introduce the management team on the call this evening. We have President, Dr. Au King Lun; and Chief Financial Officer, Icy Wong. Miss Wong will now begin the presentation.

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Ngai Sze Wong, Value Partners Group Limited - CFO [2]

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Thank you. Good evening, everyone. Thank you for joining us. I would like to begin with an overview of our financial highlights, which is presented on Slide 4 of our presentation.

For the first half of 2019 with stringent cost control and mark-to-market gains of the group's investment in its own funds, we delivered a 29.1% rise in profit attributable to owners of the company to HKD 250.9 million while a dip in performance fees sent our operating profits lower to HKD 162 million as the date of performance fee crystallization for most of our major own branded funds at the end of the year and fund performance in the second half of the year will determine our ability to collect more performance fee in 2019.

Gross management fees, our largest revenue contributor, dropped 4.7% to HKD 679.5 million, only 3.9% decrease in our average AUM to USD 17 billion. Our annualized gross management fee margin remained stable at 103 basis points and our annualized net management fee margin was narrowed down slightly to 57 basis points as management fee rebates for distribution channels increased to HKD 312 million from HKD 303 million a year ago.

Looking at Slide 5. Despite the choppy markets, our AUM stood at USD 18.1 billion, which registered a 20.1% increase compared to our end of 2018 AUM at USD 15 billion. Such a growth was mainly bolstered by positive fund return of USD 1.58 billion and net inflow of USD 1.76 billion in the first half of 2019. The resilient performance was supported by both market recovery in the first quarter and investors' continuing demands for our fixed income funds, especially the Greater China High Yield Income Fund, which generated stable income amid heightened geopolitical uncertainties and a prolonged low interest rate era. Our fast-expanding business on Mainland China also contributed to the net inflows.

On a separate note, I would also like to report that subsequent to the period end 30th of June, we have a major redemption from a white label client that will bring total redemptions from this client this year to approximately USD 2 billion as a result of the client's restructuring of this portfolio management arrangement. However, we don't expect a reduction of AUM from this particular client to cause material impacts on the earnings of the group.

Let's move on to discuss the breakdown of our AUM components. The chart on Slide 6 shows breakdowns of our AUM as of 30th of June 2019 using 2 different classifiers: by brand and by strategy. Our own branded funds account for 73% and remained as the biggest contributor to our group's AUM. On strategy perspective, Absolute Return Long-biased Funds continue to represent the largest share of the group's AUM, accounting for 56%, followed by Fixed Income Funds, which increased to 42% from 36% 6 months ago. The majority of the AUM under Fixed Income Fund was contributed by our flagship Greater China High Yield Income Fund. The share of group's AUM accounted for by Greater China High Yield Income Fund increased steadily during that period.

Geographically, Hong Kong clients continued to be our largest segment, contributing 77% of AUM. There was a notable rise in the share of AUM attributable to clients from the mainland market, which increased to 8% as our mainland business saw solid growth in the first half. The split from Singaporean market remained at 7% while clients from United States and Europe took up a combined 5%.

Looking at our cost structure on Slide 7. We continued to exercise stringent cost discipline and kept fixed operating expense well covered by net management fee income, which is a relatively stable source of income. Our total expense in the first half of 2019 dropped 3% compared to a year ago to HKD 259 million. We aim to maintain a fixed cost coverage ratio of around 2x. For the current period, our fixed rate cost coverage ratio was 2.2x.

Looking at our financial position on Slide 8. Our balance sheet and cash flow position remains strong and had HKD 2.1 billion of cash and equivalents on the balance sheet as of 30th of June 2019 compared to HKD 1.6 billion 6 months ago. We also continue to maintain a position of 0 debt.

This is the end of our financial highlights part. I would like to hand the call over to King, who will present a review of the group's business.

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King Lun Au, Value Partners Group Limited - President [3]

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Thank you, Icy. Good evening, everyone. Global financial markets experienced a turbulent ride in the first half of 2019 primarily due to the U.S.-China trade overhang and sluggish global economic growth. However, despite the squeeze that this harsh environment had on our top line, we are pleased to report that we have made great inroads with our business on Mainland China and satisfactory progress in broadening our product suite.

Highlights are shown on Slide 10. As a pioneer investor in the Greater China markets since 1993, we are pleased to see our capability and expertise being recognized as the best-in-class among global peers. Geographically, we have expanded our presence farther afield with the opening of our U.S. office in Boston at the beginning of this year. With this latest overseas office, our global footprints have extended beyond Hong Kong and Mainland China to the U.S., the U.K., Singapore and Malaysia. We have seen encouraging inflows and business opportunities across all our overseas offices so far.

Over the past year, we continued to broaden our product suite by adding alternative strategy as it represents not only a necessary and complementary addition to our revenue mix but also a new growth frontier. I will now go into a more detailed discussion of the progress that we have made with broadening our product suite, growing our mainland business and expanding our global footprint.

Slide 11 shows the breakthroughs and growth that our business on Mainland China has seen. This year not only signifies a new chapter of our China's capital market, but it is also the 10th anniversary since we established our first Shanghai office in 2009. During the past decade, we have identified and participated in many opportunities on Mainland China, making them a crucial part of our success story. The positive momentum continued well into the first half of 2019 with our AUM on the mainland increasing by more than 35% to finish at USD 1.5 billion. The growth was mainly underpinned by the winning of new onshore mandates, strong flows into existing accounts and successful fund launches.

We also further broadened the scope of our business on the mainland by tapping the public fund market. In March this year, we successfully launched our flagship Classic Fund under the MRF program. Our China business team has also established a number of channels with our key distribution partners marketing the Classic Fund. Besides, we have also established a total of 6 private fund management mandates since we became the first Hong Kong-based asset manager to be granted the license in November 2017. As the mainland quickens the pace of financial reforms, we will continue to seize every opportunity to further develop our mainland business and expand our services.

Next, I would also like to share an update on our efforts to build our alternatives capabilities and products, which is highlighted on Slide 12. Over the past year, we made great inroads in growing our alternative investment capabilities, which cover private equity and private debt. In private equity, we aim to complete our inaugural onshore private equity fund on the mainland, focusing on the higher education sector in the near future. In private debt, we completed successfully the first closing of our Asia Pacific-focused drive private debt fund in January. In February this year, we have further broadened our multi-asset solution by launching an Asian Innovation Opportunities Fund. It is a public fund authorized in Hong Kong that targets to invest in Asian companies benefiting from business and product innovation.

Please turn to Slide 13. Besides our strategic focus on the mainland market and product expansion, I'm pleased to share that our London office has made good progress in growing our business in Europe. We recently completed the restructuring of our UCITS fund platform and are now planning to register selected UCITS funds for sales in Hong Kong and other parts of Asia.

Southeast Asia, an important component of China's Belt and Road initiative, is another business focus for us in 2019. For the past year, we have been proactively preparing for business expansion in Malaysia, where we will be launching new innovative products, including Shariah-compliant funds and Southeast Asia-focused smart ETFs. We have also gained good traction with our private banking partners in Singapore.

Looking forward, headwinds from trade tensions and geopolitics will continue to put pressure on financial markets in the foreseeable future. In the light of this, we will continue to strengthen our fund management capability and develop investment solutions to help investors navigate the challenging market environment. As Icy discussed earlier, we will prudently manage our resources to ensure that we strike an important balance between achieving cost control targets and investing sufficiently in our future growth.

Value Partners is well situated to capture opportunities stemming from China's rise as one of the world's largest wealth management market and investment destination. Although with uncertainties of China's economic slowdown and trade disputes with the U.S., we still see China offering historical opportunities to asset managers like us as China continues with its rapid accumulation of household assets and financial market reforms.

That concludes our results presentation. Thank you, everyone. Operator, please proceed to the Q&A session. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question is from Jemmy Huang.

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S. Huang, JP Morgan Chase & Co, Research Division - Financial Analyst [2]

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I have two questions. First one is on the management fee. I think you -- if we look at the gross management fee, it's actually down slightly. But I think it's a little bit counterintuitive in my view that supposedly I think that if you have -- my understanding is your gross management fee for the Fixed Income Fund is higher. So supposedly with increasing proportion of your Fixed Income Fund, I would thought that your gross management fee should increase slightly rather than decrease slightly. And the second one is for the increase in distribution fees, should we interpret that as increasing market competition so you need to increase the distribution fees or it's just temporary rather than anything structural?

And the second question is on the -- I think during the presentation, Icy mentioned there is a customer, a white brand customer redemption. I didn't hear clearly. But is that the reason why the July AUM declined? And then may we know where this customer is located, either it's in China or it's in Hong Kong or U.S., U.K.? And then also if we look at the current sociopolitical movements in Hong Kong, have you observed any of your high net worth individuals or institutional individuals that are actually moving their money out of Hong Kong out of your portfolio?

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Ngai Sze Wong, Value Partners Group Limited - CFO [3]

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Thank you, Jemmy. This is Icy. Thanks for your questions. You are right -- rightly pointed out that. Actually for the first half, we have generated a very net decent inflow of USD 1.75 billion. Majority of this is actually going to our Greater China High Yield Income Fund, where we are able to earn 1.5% management fee versus our own Value Partners equity funds, of which we usually charge 1.25%. But then we also have a small portion of our net inflow actually go into our China mandate. So in -- for our China mandate because it is more like a direct distribution, so we usually would charge a slightly lower management fee compared to our Value Partners own branded fund. But then some of these mandates are not required to share distribution fees with our distribution partners. So this explains the reason that gross management fees has declined by 1 basis points in the first half of 2019.

And then your second question about the fee rebate also going slightly. Actually, we've seen the fee rebate to our distribution partners, actually we share pieces. We usually share about half of the management fee with our distribution partners. So actually, it remains the same. It's more like a market norm. So for the first half 2019, we have not increased our distribution fee rebate. But then it's because most of the fund inflow to our Fixed Income Fund actually is through our distribution network, like private banks and retail banks in the region. So that's why the proportion of AUM that actually requires us to share the fees has gone up a bit. So actually the net fee -- that's why I explained the net management fee margin also went down slightly to 57 basis points. But we don't see any continuous major pressure on the fee margin. Yes.

And then your third question is about redemption. Actually, it's the pension fund in Hong Kong that we have a major redemption, about $2 billion. But then as I highlighted earlier, we don't see this reduction of AUM to have a material impact on the earnings of the group because essentially this is a relatively low fee margin product. And then on the political thing, I think I'll pass to King to address this, but we don't see any major impacts.

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King Lun Au, Value Partners Group Limited - President [4]

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Yes. No. What we're seeing is that clients become more defensive. In fact, I've been speaking to a lot of our distributors lately, including this afternoon, in front of the major private bank distribution partners. They have seen client becoming more defensive. Some of them are holding more cash than usual. So I hope this is just a temporary reaction to the market sentiment. But we have not seen any major outflow from across our products.

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Operator [5]

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Your next question is from Yiying Zhou.

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Yi Zhang, SWS Research Co., Ltd. - Analyst [6]

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This is Yi from SWS Research. I have three questions here. You had a good start with China. I just want to know, can you introduce your China market development strategy, including any product pipelines you have in hand? Also any challenges you think you are facing in the China market now? Given that the market is opening up more and more than before, so obviously competitors are getting fiercer than before.

And second question goes -- is what is -- can you give us more details on implication of the management restructuring that was just announced? And the third question is what do you see as a healthy AUM structure, given that you have more -- in terms of a strategy classification, you have more PFM products and et cetera? Do we see a trend of fixed income products are getting -- replacing -- gradually replacing the equities products going forward? That's my question.

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King Lun Au, Value Partners Group Limited - President [7]

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Thank you so much for those questions, Yi. I'll talk about the China market strategy first. We have been in China for 10 years now and we are still the only Hong Kong manager to be given this PFM license. And now we have MRF fund, which is a classic being launched a couple of months ago in China. So our China strategy is to try and consolidate what we have now because we have the private fund management license and we have also have the QFLP for private equity, which we set up earlier last year. And then we also have the QDLP and we have 3 fully owned WFOEs in China. We definitely want to expand our business there.

And as Icy alluded to earlier, our business -- our China business grew 13% last year and 35% year to June. And on top of that, because of the recent opening up and market reform, we are watching the mutual fund license applications very closely. So we hope 1 day, we will be able to make a submission for that because that will allow us to develop both the private fund business as well as tapping into the retail market. At the moment, the only retail product that we have is through the MRF, which is the Classic Fund. And we have also applied for our High-Dividend Stocks Fund to be the next one in line. And we hope we will have some good news further down the road on that front.

And so in terms of challenges, I think as with everyone, recruiting talent in China is a big challenge. But I would say luckily for us, we have been in China for 10 years now, so we have built a very strong local network. And we also have a very robust training program in-house. A lot of our staff, our China staff, have been in the firm for a long time. Take Yu Xiaobo as an example, who is our Head of China, and he has been at the firm for 10 years now. Even our sales team has been with -- the senior sales colleagues have been with the firm for quite a number of years. So we definitely want to expand our team on the ground more aggressively going forward in anticipation for the mutual fund license application.

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Ngai Sze Wong, Value Partners Group Limited - CFO [8]

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Okay. And then -- Yi, this is Icy. Thanks for your three questions. And then your second question is about the management restructuring. Since King is here and he might supplement a bit after my answer to your second and third questions. So as you can see our public announcement, actually the management restructuring is part of the succession planning after our announcement of the appointments of Mr. Louis So as the co-Chairman of the Board. So Dr. King Au will step down from his post as Executive Director of the Board as King will continue to focus in overseeing the group's corporate affairs and engaging with group's external stakeholders. But then actually, the CEO function is right now taken up by the Leadership Committee, currently comprising of Dato' Seri Cheah, Mr. So and also Dr. Au.

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King Lun Au, Value Partners Group Limited - President [9]

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Yes. As Icy mentioned, it's part of the succession planning process. In fact, if you look at the career development of Louis, you can see that he was first promoted to co-CIO back in 2010 and then Deputy Chairman in 2012. And in April this year, he was made co-Chairman. So this is really part of a very well-structured succession planning program. And I'm still working very closely with this -- everyone, especially now focusing more on the corporate affairs as well as our overseas expansion plan. And then there's also one more question about the...

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Ngai Sze Wong, Value Partners Group Limited - CFO [10]

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The last question about the AUM mix. Right now, you are right, the fixed income has been proven to be very successful. And this accounts for close to like 50%. Right now, it's 47% of the group's AUM. But then actually the management has been also very aggressive in expanding our product suite as we mentioned earlier. Example is like the alternative product. Right now, we have already a few alternative products in the pipeline, including what we mentioned earlier, the real estate private equity fund, the private debt fund as well as our China education private fund -- private equity fund. So going forward, we will continue to also focus in our core equity products as well as the fixed income and also to expand our product suites into alternatives as well.

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Operator [11]

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Your next question is from Scott Russell.

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Scott Russell, Macquarie Research - Head of Financials Research, Asia [12]

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One of my questions was already asked, but I just had one other quick one. Icy mentioned that the -- there was a USD 2 billion redemption in total. Just clarifying some numbers here. How much of that was actually in the first half? I think you mentioned that part of it was in July. Just so that we understand how much is coming -- is already in these numbers and still to come. And if you could just elaborate on which [strategy] it was. I did hear you say that it was low margin. But is it just in a single product? Or is it across several?

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Ngai Sze Wong, Value Partners Group Limited - CFO [13]

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Sure, Scott. Actually for the first half, our AUM stood at $18.1 billion. So the net inflow for the first 6 months is USD 1.75 billion and the USD 2 billion net outflow actually happens in July. So that's why we just announced our July AUM has declined to $16 billion. So actually, majority from this single white label fund are $2 billion.

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Operator [14]

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Thank you. There are currently no questions and queue. (Operator Instructions) Your next question is from Irene Zhou from Morgan.

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Yiying Zhou, Morgan Stanley, Research Division - Equity Analyst [15]

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I have two. The first one is on the MRF. I just wonder what's the progression in terms of that. Can you share with us any data in terms of the fund placing? And the second one is on the net inflows of your Fixed Income Funds. Seems like the majority of inflow happened in the first quarter. So have you seeing any slowdown in second quarter? And wonder what's your outlook of that in the second half of this year.

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King Lun Au, Value Partners Group Limited - President [16]

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Yes. For the MRF, yes, we have signed up quite a few domestic distributors now. And Tianhong Asset Management is actually our master agent in China. So we are tapping into the distribution platform as well. So the sales distribution network is being built up across China with our major banking partner distribution network. So we hope to report more progress in the future. Because right now, we are really setting up the distribution network. And also you talk about the net inflow of fixed income. It has been very strong, as Icy mentioned, and for -- given the low interest rate environment, I think the demand for fixed income is still very strong. So we are aggressively now promoting other fixed income products that are on our platform, such as the Asian Total Return Bond Fund, which is an investment-grade bond product, alongside the Greater China High Yield.

And we also have closed our -- had the first closing of our private debt fund earlier in January, so we are working on the second closing of that fund. We also have another fixed income strategy that has proven to be quite popular, which is the credit opportunity, so credit long-short strategy. So we are trying to offer that to overseas institutional investors as well. And we also are looking at fixed maturity products that have proven to be quite popular among private banks and now retail investors in Hong Kong, too. So we will continue to broaden our fixed income capabilities. But if you look at most of the global asset management firms, fixed income tend to have a higher portion of the asset. And that's the nature of the industry. But we do want to have a balanced book of business, both from equities, fixed income as well as alternative going forward.

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Ngai Sze Wong, Value Partners Group Limited - CFO [17]

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And in terms of net flow, other than the $2 billion major redemptions that I mentioned, there are actually no like material redemptions that we noted since end of June.

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Operator [18]

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Thank you. Ladies and gentlemen, this is the end of today's conference. Once again, thank you for joining the conference call. Goodbye.