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Elevator Pitch
I have a Buy investment rating for Noah Holdings Limited’s (NYSE:NYSE:NOAH) [6686:HK] shares.
My prior update for NOAH published at the end of last year discussed about how the company’s Q3 2021 financial performance was negatively impacted by higher costs related to hiring.
In this latest article, my attention turns to the potential catalysts for Noah Holdings, namely the expected resumption of dividend payments next year and the planned Hong Kong primary listing conversion.
Share Price Performance And Valuations
NOAH’s stock price performance has been poor and its current valuations are depressed.
Year to date in 2022, Noah Holdings’ share price has fallen by -47%. In the same period, the S&P 500 has corrected by a relatively more modest -14%. NOAH’s last traded stock price of $15.84 as of September 12, 2022 represents a new seven-year low.
In terms of valuations, NOAH currently trades at 4.9 times consensus forward next twelve months’ normalized P/E and 0.80 times trailing P/B, as per valuation data sourced from S&P Capital IQ.
Noah Holdings’ forward P/E multiple of 4.9 times is only +14% above its all-time P/E trough of 4.3 times, while its trailing P/B ratio of 0.80 times is just slightly higher than its historical P/B low of 0.77 times.
In the next two sections of the article, I identify two key re-rating catalysts for NOAH.
New Dividend Policy
Noah Holdings disclosed last month that “the Board has approved and adopted” a “dividend policy” that will see the company paying out a minimum “10% of the Group’s non-GAAP net income attributable to the Shareholders of the preceding financial year.” NOAH also mentioned at the company’s most recent Q2 2022 investor briefing that this new dividend policy will take effect from April 2023.
Since the company’s IPO on the New York Stock Exchange in November 2010, NOAH has only paid out dividends twice in 2012 and 2013, respectively. With Noah Holdings initiating a new dividend policy, the sell-side analysts have begun incorporating dividend forecasts into their financial projections for NOAH.
According to the market’s consensus estimates taken from S&P Capital IQ, NOAH offers decent consensus forward fiscal 2023 and 2024 dividend yields of 1.5% and 1.9%, respectively. It is reasonable to assume that there is some degree of conservatism associated with these dividend forecasts since NOAH has yet to implement the dividend policy – i.e. declare the first dividend. As such, Noah Holdings’ actual dividends might be higher. One also shouldn’t rule out a further increase in NOAH’s dividend payout ratio in the intermediate to long term.
Noah Holdings might have been shunned by investors with a strong emphasis on good capital allocation in the past, as the company didn’t return excess capital to its shareholders. Separately, NOAH certainly didn’t find favor with income-focused investors, given that it suspended dividends after 2013.
The new dividend policy could potentially be a game changer for NOAH.
Income-focused investors might put Noah Holdings back on their watchlists again. Notably, NOAH had emphasized at its Q2 2022 earnings call that it “aims to provide stable and sustainable returns to the shareholders of the company.” The words “stable” and “sustainable” point to a lower risk of dividend cuts, and this could make NOAH more appealing in the eyes of certain dividend investors seeking stocks offering safe and consistent dividend payouts.
Separately, Noah Holdings could have been penalized by some investors for hoarding too much excess capital and scoring poorly on the capital allocation metric as a result. As such, NOAH’s move to initiate a new dividend policy is a step in the right direction from a capital allocation’s perspective, which will possibly drive a narrowing of the valuation discount assigned to its shares. Also, paying out dividends will help to shrink NOAH’s capital base and boost its future returns on capital to some extent in the future, and this could be another valuation re-rating driver for Noah Holdings.
In the next section, I touch on another major factor that has been a drag on NOAH’s stock price in recent times, and I highlight how things could be different going forward.
Delisting Risk
Like other US-listed Chinese companies, Noah Holdings’ share price performance was adversely affected by the risk of delisting.
Earlier on April 13, 2022, NOAH issued a press release revealing that its ADSs or American depositary shares are at risk of being “delisted from the New York Stock Exchange in early 2024” in line with the Holding Foreign Companies Accountable Act. As highlighted in this media release, Noah Holdings can’t have its shares traded in the US in the future, unless “the PCAOB (Public Company Accounting Oversight Board) is able to conduct a full inspection of the Company’s auditor during the required timeframe.”
But there have been positive developments on this front in the past month or so. A recent August 30, 2022 Seeking Alpha News article noted that Alibaba (BABA) and some other US-listed Chinese companies “will receive audit inspections next month (September 2022).” Previously, China didn’t allow Chinese companies listed in the US to have audit inspections by the PCAOB, but this is set to change after both countries reached an agreement last month.
Even if one assumes the worst case scenario where audit inspections for the initial batch of US-listed Chinese companies don’t go well and Noah Holdings is delisted from the US in two years’ time, all is not lost. NOAH has published an announcement on August 10, 2022, noting that the company will “pursue primary listing (conversion from existing secondary listing) on the Stock Exchange of Hong Kong Limited.” Noah Holdings referred to this as a move “to further resolve delisting pressure” at its most recent quarterly earnings call.
There are three key positives associated with a successful primary listing for Noah Holdings in Hong Kong. Firstly, NOAH will be a dual-listed company, so investors can still trade in Noah Holdings’ Hong Kong-listed shares in future assuming that it is compelled to delist from the NYSE. Secondly, Noah Holdings has a new venue to raise capital to finance future growth plans, if needed. Thirdly, NOAH’s Hong Kong-listed shares might be able to command a higher valuation multiple as China-focused investors have a better understanding of the company and this could push the US-listed shares up as well.
Bottom Line
Noah Holdings is worthy of a Buy rating. The company’s shares are inexpensive, and its valuations could benefit from a re-rating driven by its new dividend policy and positive developments pertaining to the delisting issue.
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