As should be no surprise, there has been a wealth explosion in China. From 2003 to 2009, private wealth has grown at a compound annual rate of +24.8%. Even during the global financial crisis of 2008, private wealth grew by +8.3%. The rest of the world saw an -11.7% plunge.

In all, there is roughly $5.6 trillion of private wealth in China, which places it at No. 4 in the world. And in light of the country’s continued strong long-term prospects, the growth should continue.

For example, the number of millionaires in China is expected to double to 800,000 in 2013, with the average investable assets per high net worth individual reaching $3.1 million. Keep in mind that most of these people are entrepreneurs and first-generation wealth creators.

No doubt, these trends should be a boon for wealth management firms. In fact, one of the top operators recently hit the IPO markets in the US: Noah Holdings (Nasdaq: NOAH). In its offering, the company raised $100.8 million and priced its shares at $12 each. They are currently trading near $18.

Founded in 2005, Noah is now the largest independent wealth management distributer in China. The firm has more than 300 relationship managers in 28 branch offices in key locations like the Yangtze River Delta, the Pearl River Delta and the Bohai Rim. The advisors provide financial planning services and sell fixed income products, stock funds and other alternative investments.

Noah has also started to develop its own proprietary wealth management products. These are likely to better meet client needs as well as have higher margins. For example, Noah is one of the first in China to provide limited partnership interests in private equity funds that are denominated in the Chinese currency. The funds have so far attracted $737.3 million.

Noah has certainly experienced heady growth. Revenue more than doubled from 2008 to 2009. For the first half of 2010, revenue hit $13.7 million, up from $5.8 million in the same period a year ago. Net income was $4.1 million. The primary source of revenue comes from one-time commissions. However, Noah is finding ways to get recurring fees also.

Of course, to remain competitive, the firm realizes it needs to build a highly-focused client culture. This will ultimately be the key competitive advantage. This involves continuing training and state-of-the-art information technologies. And so far, Noah is getting traction with client loyalty. About 60% of new clients come from referrals.

This can lead to powerful long-term gains for the stock. After all, many of China’s high-net worth individuals are in their early to late forties. In other words, they will likely be clients for many years as their wealth continues to grow.

As with any start-up operation, Noah has some risks. Growing a client-focused business is far from easy and can be difficult to maintain quality. And what about the possibility of lower growth or even political instability in China? Actually, these situations could turn out to be benefits. Such periods can make wealth management even more attractive as clients look for better solutions.

Action to Take–> When it comes to valuation, Noah is certainly not a stock for the value-conscious. You should only consider this stock if you’re OK with the fact that investors have little choice but to pay steep premiums for fast-growing operators in China. In Noah’s case, the market cap comes close to $1 billion, which translates into a valuation of 44 times revenue and 135 times earnings.

But so long as the company continues its growth path, the valuation will become more reasonable. Besides, the company is already building a strong brand and foothold in its key markets — which will be critical in becoming a dominant player in China’s wealth management market.
 

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