Jupai Holdings Limited
Q1 2018 Earnings Call Transcript

Published: 28 May 2018

[Operator:]

Thank you for standing by for Jupai's First Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. After management's prepared remarks, there will be a question-and-answer session. Please note today's conference call is being recorded. If you have any objections, you may disconnect at any time. I’d like to turn the meeting over to your host for today's conference Mr. Harry He, Jupai's Investor Relations Director.

[Harry He:]

Hello everyone and welcome to Jupai's earnings conference call for the first quarter ended march 31st, 2018. Leading the call today is Mr. Jianda Ni, our Chairman and CEO, who will review the highlights for the first quarter2018; I will then discuss our financial results. We will then open the call to questions, at which time our CFO, Ms. Min Liu, will also be available. Before we continue, I refer you to our Safe Harbor statement in the earnings press release, which applies to this call as we will make forward-looking statements. Also, this call includes discussions of certain non-GAAP financial measures. Please refer to our earnings release, which contains a reconciliation of non-GAAP measures to the most directly comparable GAAP measures. Finally, please note that unless otherwise stated, all figures mentioned during this conference call are in Renminbi. I will now turn the call over to Mr. Jianda Ni, our Chairman and CEO and I will do the interpretations for you.

[Jianda Ni:]

[Foreign Language] Thank you, Harry, and welcome everyone to today’s conference call. [Foreign Language] Jupai had a solid first quarter of 2018 which boasts top and bottom line results surpassing expectations while net revenues for the quarter increased to RMB433.2 million at a year-over-year growth rate of 17.5%. The equity value of wealth management product distributed by Jupai saw a year-over-year decrease to RMB10.9 billion due to the Chinese New Year holiday as well as regulatory changes. We’ve benefitted however from enhanced bargaining power with real estate companies which have been facing higher cost of capital due to recent policy changes. As a result, Jupai’s average one-time commission rate for the quarter rose to approximately 2.5% as compared to 2% for the full year of 2017. Net income attributable to ordinary shareholders for the quarter reached RMB115.9 million, up 27.8 % year-over-year with net profit margin rising to 26.7% from 24.6% in the same period of last year. [Foreign language] To adopt to the newly introduced industry regulations in the first quarter of 2018, Jupai averaged our rich experience and resources in the real estate industry to accelerate development of our real estate equity related products, including mezzanine investments, convertible bonds and MAA funds. We have received very positive feedback on those products with our total assets under management reaching RMB54.5 billion as of March 31, 2018, representing a 26.5% year-over-year increase. [Foreign language] We believe that there is a solid performance we've achieved in the first quarter, reflects our team's capability to adopt to market changes and launch new product which satisfy both regulatory requirements and a customer needs and leveraging our rigorous risk control system Jupai will further broaden our product portfolio to better fulfill customers wealth management and asset allocation needs. We are optimistic that Jupai will maintain a healthy growth in 2018 as management focus on building China's leading wealth and asset management brand. [Foreign language] I will now turn the call over to Ms. Harry He, our Investor Relations Director to go through the financials in more detail. Thank you.

[Harry He:]

Thank you, [Ni Dong]. Over the first quarter of 2018, Jupai's business continue to grow steadily as we further optimize the company's cost structure and operating efficiency, which help to drive our operating margin to 35.2%. As we look to achieve additional cost efficiencies, we remain confident in our bottom line growth outlook for 2018. Now let me walk you through our financial highlights for the first quarter of 2018. Net revenues for the first quarter of 2018 was RMB433.2 million, a 17.5% increase from corresponding period in 2017, primarily due to increases in onetime commissions and a recurring management fee. Net revenues from onetime commissions for the first quarter of 2018 were RMB276.4 million, a 17.8% from corresponding period in 2017, primarily as a result of our increase in fee rate. Net revenues from recurring management fees for the first quarter of 2018 were RMB122.9 million, and 81.8% increase from corresponding period in 2017 primarily due to our increase in the value of assets under management. The company recognized the RMB20.7 million and RMB1.7 million carried interest for the first quarter of 2018 and '17 respectively. Net revenues from recurring service fees for the first quarter of 2018 were RMB15.1 million, 42.6% decrease from corresponding period in 2017, primarily because the company provided ongoing service to fewer product suppliers. The company recognized RMB1.4 million were above performance fees in the first quarter of 2018 and ’17 respectively. Net revenues from other service fees for the first quarter of 2018 were RMB18.8 million, a 53.1% decrease from corresponding period in 2017, primarily due to decreases in sub-advisory fees collected from other companies. Starting from the January 1, 2018, the company adopted accounting standards update 2014-09, revenue from contracts with customers on a modified-retrospective basis. The adoption has no material impact on the company’s financial positions, results of operations, or cash flows. Operating costs and expenses for the first quarter of 2018 were RMB280.7 million, an increase of 15.3% from corresponding period in 2017, largely due to higher marketing expenses as well as G&A cost. Operating margin for the first quarter of 2018 was 35.2%, compared to 34% for the corresponding period in 2017. Net income attributable to ordinary shareholders for the first quarter of 2018 was RMB115.9 million, a 27.8% increase from corresponding period in 2017. Net margin attributable to ordinary shareholders for the first quarter of 2018 was 26.7%, as compared to 24.6% for the corresponding period in 2017. Net income attributable to ordinary shareholders per basic diluted American depositary share for the first quarter of 2018 was RMB3.5 million and RMB3.3 million, respectively, as compared to RMB2.81 million and RMB2.69, respectively, for the corresponding period in 2017. The industry regulations newly introduced on March 28, 2018 emphasize that the asset management businesses conducted through the internet are subject to oversight from financial regulatory authorities. Pursuant to these new regulations, Shanghai Runju Financial Information Service non-controlling investee of Jupai, has formulated a new business plan to adjust to its business model. Based on management’s latest evaluation, no impairment loss needs to be recorded for the first quarter ended March 31, 2018. Future impairment analysis will be performed at each quarter end. Looking to our balance sheet and cash flow, as of March 31, 2018, the company had RMB824.2 million in cash and cash equivalents, compared to RMB1,527.8 million as of December 31, 2017. Net cash used in operating activities during the first quarter of 2018 was RMB150.6 million. Net cash used in investing activities during the first quarter of 2018 was RMB557 million. Net cash provided by financing activities during the first quarter of 2018 was RMB4 million. Turning to our guidance. We expect that Jupai’s net income attributable to ordinary shareholders for the full year of 2018 will be in the range of RMB532.3 million to RMB573.3 million, an increase of 30% to 40% compared to 2017. This forecast reflects the company's current and preliminary view, which is subject to change. That concludes our prepared remarks. I will now turn the call back to operator to begin the Q&A session. Operator?

[Operator:]

[Operator Instructions] Our first question comes from the line of Yaxuan from CICC. Please ask your question.

[Yaxuan Zhu:]

[Foreign Language]

[Harry He:]

Thank you, Yaxuan. We will address your question accordingly. Before we address your question, let me do the translation for the Chairman. For the benefit of other investors, let me translate Yaxuan’s first question. This question was, despite the challenging factors such as Chinese New Year holiday and the regulatory changes, Jupai was able to deliver a set of solid result in the first quarter of 2018, in particular the net profit increased approximately 28% year-over-year in the first quarter. What were those drivers behind the growth for the first quarter among the challenging environment?

[Jianda Ni:]

[Foreign Language]

[Harry He:]

In our view, it's crucial for any independent wealth management companies to be able to rapidly adopt to policy changes to become outstanding players in the field and to be industry leaders for the long-term. In the past, our team has faced major policy changes multiple times and have always successfully transformed ourselves to deliver satisfying results for our stakeholders. For example, in the first quarter of 2017, Asset Management Association of China demands a new policy which halted the approval of private offered wealth management products with underlying assets related to residential real estate or property within those 16 over heated cities identified by the government. In response, Jupai was able to quickly expand our project portfolio outside of those 16 cities. In the meanwhile, locate non-residential real estate project within these 16 cities. This allowed us to maintain strong growth in 2017 with our net revenue of growing at 51 % and a net profit almost double for the year.

[Jianda Ni:]

[Foreign Language]

[Harry He:]

We believe that the announcement of requirements under private investment fund filing is another piece of good news for the wealth management industry for the long-term. In particular, for the industry leaders at Jupai, government attitude towards [non-standard] fixed income products are not only targeting at where its related product but all kinds of fixed income products with loans or debt and underlying assets. While underlying assets with equity features such as convertible bonds and mezzanine investments are very much encouraged. As a result, since the beginning of this year, Jupai has been working on reducing the portion of fixed income related products with long and underlying assets and then focusing more on developing equity products such as mezzanine investments convertible bonds and under M&A funds. We have already made progress in shifting our products structure in the first quarter more specifically among wealth management products. Jupai distributed in Q1 the percentage from risk related equity products has surged significantly year-over-year.

[Jianda Ni:]

[Foreign Language]

[Harry He:]

Historically Jupai had been able to adopt to adopting in a timely manner to the ever-changing policies in China. For example, E-House Capital or subsidiary which was merged into Jupai in 2015 was originally involved in direct equity investments, especially in the real estate industry. As its merger with Jupai E-House Capital rapidly change its product offering from equity to fixed income products to fulfill the demand for more customer deal products from high network clients. This demonstrates the team's capability to adopt to changes. Over the past few years, there have been various regulatory changes within the real estate industry across the country and Jupai has always be able to launch new real estate products which suites the regulatory environment and the customer needs.

[Jianda Ni:]

[Foreign Language]

[Harry He:]

Moreover, in terms of our potential impact on our revenue structure, we believe that the expansion of equity products will help to drive our management fee and performance fee income as equity products merely have longer durations. Additionally, we expect that there will be more room to increase our onetime commission revenues as Jupai continues to gain back in power with real estate developers which in general have very tight cash flows in 2018. You can see that our average onetime commission rate increased from approximately 2% in 2017 to approximately 2.5% in Q1, 2018. We believe that as government continues to tighten controls in the real estate market, investors and real estate companies have to adopt to the new environment and the Jupai serving as a bridge between those two will benefit from such changes in long term. So that’s the end of the first question. Let me do a translation, let me translate the second question. Actually, the second question was we noticed that your latest guidance implies year-over-year net profit growth between 30 and 40% in 2018. Can you please discuss detail about the causes for such rapid profit growth?

[Jianda Ni:]

[Foreign Language]

[Harry He:]

Firstly, let me walk you through the logic behind the calculation reach out annual net profit growth of 30% to 40%. Assuming all other factors remained unchanged. We estimate Jupai’s average one-time commission rate to be at least 2.5% in 2018, which implies approximately 25% growth in the average one-time commission rate compared with last year. Taking into account net revenues from one-time commissions account for roughly [50%] of our overall net revenue. We estimate that our overall net revenue will achieve 15% year-over-year growth in 2018. Surely as a result of increase in our average one-time commission rate without incurring any additional costs. On the bottom-line, the gross rate will be even higher due to operating leverage. Even if we made a very conservative assumption that there is no profit growth from as revenue stream including recurring management fees, overseas business or insurance. We only need a very conservative growth rate in the aggregate value of wealth management products distributed to achieve our guidance of net profit growth in the range of 30% to 40% in 2018.

[Jianda Ni:]

[Foreign Language]

[Harry He:]

So, we believe, the visibility into our near-term growth outlook is reasonably high. We would like to elaborate on this profit a bit better to give you a better idea regarding our view on the outlook of the wealth management industry over the next 3 to 5 years and Jupai is relevant strategies. Some of which we might have already touched given our previous earnings call.

[Jianda Ni:]

[Foreign Language]

[Harry He:]

Firstly, we believe that as regulations become restrict more and more lower quality wealth management company will be driven out of market. Presently there are roughly 20,000, 30,000 wealth management company in China and we expect more than 80% of there will be driven out of business within the next 5 years. Consequently, we believe the next fewer years will be a period full of opportunities and is crucial for us to have the right strategy in place.

[Jianda Ni:]

[Foreign Language]

[Harry He:]

Secondly, as [operating] the tightening regulations to lower system risk, we believe that the wealth management division of commercial bank will be dedicated to the lower risk and low return financial products, while more specialized financial institution will focus on relatively high risk high return product. This means that the commercial bank will increasingly lose their wealth management clients with high risk tolerance and high return requirement. The new wealth management industry regulations in which the regulatory authorities declare the intention to completely and implicit guarantee by 2020, again is in line with the government’s plan to drive commercial bank out of the high-risk commercial -- drive out of the high-risk wealth management product market. We believe that those policies tend to represent great long-term opportunities for independent wealth management companies.

[Jianda Ni:]

[Foreign Language]

[Harry He:]

Thirdly, we expect there will be more consolidations within the real estate industry in China. According to the latest research by the Research Institute of E-House in 2017, the top 100 real estate developers in China only accounted for 55.5% of the overall market share, much lower than the figures in the developed countries. Given the current regulatory environment, we believe that the consolidations within the real estate industry will accelerate over the next few years and it’s crucial for the real estate developers to team up with the financial partners, which possess in-depth real estate industry understanding in order to complete mergers and acquisitions. As a consequence, funding needs are enormous. We believe this represents huge opportunities for wealth management companies like Jupai.

[Jianda Ni:]

[Foreign Language]

[Harry He:]

Based on the observations of the industry, we believe that the next few years will be extremely crucial for independent wealth management companies. Thus, Jupai will prepare ourselves with the following strategies.

[Jianda Ni:]

[Foreign Language]

[Harry He:]

Firstly, to enhance operating efficiency we have provided further support to our wealth management advisor and accounts manager in the following two forms

[Jianda Ni:]

[Foreign Language]

[Harry He:]

Post to the upgrade, our latest IT system on the mobile app will significantly increase the degree of digitalization throughout the entire transaction process, covering contract signed throughout account management and interim product reports. Moreover, to analyzing client data such as product browsing history and the current actual transactions we can more effectively understand our client needs and further strengthen our product design and the customer service capabilities.

[Jianda Ni:]

[Foreign Language]

[Harry He:]

We recently set up our IT department to understand both the complex technical aspects of our product, as well as demand from our clients and thus be able to bridge a gap between our product design department, and the client managers by helping client manager to answer complicated technical questions from our clients in the later part of the sale process.

[Jianda Ni:]

[Foreign Language]

[Harry He:]

Secondly, we are further strengthening the management of our client manager meaning to optimizing our incentive programs and raising the performance requirement bar. Both of these measures we believe we are increasingly motivate our client manager and consequently improve working efficiency and customer satisfaction.

[Jianda Ni:]

[Foreign Language]

[Harry He:]

Thirdly, we are further enhancing our risk management systems to more detail internal risk control measures including product to investment schemes and the product scoring systems throughout the entire product life cycle.

[Jianda Ni:]

[Foreign Language]

[Harry He:]

Fourth, we will further diversify your product offerings to the new product categories and overseas product. We believe a more comprehensive and higher quality product portfolio will allow us to increase the loyalty of the existing customers and to attract new customers.

[Jianda Ni:]

[Foreign Language]

[Harry He:]

In summary, for the near-term we are confident about achieving our guidance of 30 to 40% year-over-year net profit growth in 2018 and for a long-term we believe that for our strategic measures mentioned above will further strengthen Jupai’s competitiveness and enable us to maintain our industry leading positions. So, at the end of the second question, before we start to answer the last question, let me do the translation for the question first. The question was we see that Jupai’s operating margin for Q1 reached 35.2 % enjoying a year-over-year growth and quarter-over-quarter growth as well and can you please share with us the growth drivers and what management expectations regarding the operating margin going forward.

[Jianda Ni:]

[Foreign Language]

[Harry He:]

The strong operating margin in Q1 was partially due to the continued growth in our net revenues but more importantly because of the effective optimization of our cost structure. In particular, our cost of revenue as a percentage of our own net revenue for the first quarter of 2018 declined to 30% from 36.6% in the first quarter of 2017 and 58% in Q4 of 2017. As we discussed earlier, Jupai has enhanced the management of our account manager optimized their incentive program and raised the performance requirement bar. This management will allow us to gain better control over our cost of revenues and enhancing operating margin. We believe our Q1 result have reflected those effects already.

[Jianda Ni:]

[Foreign Language]

[Harry He:]

As to outlook of our operating margin I would have to say the management is very optimistic. One of the strategic focuses of Jupai this year is to significantly enhance our operating efficiency. We look forward to achieving those attributing this to measures we have mentioned earlier including upgrading our [IV] system and an establishing the IC department to notably increase the work efficiencies of our account manager and lay a solid foundation for Jupai mid and long-term profit growth. So, I think that be all for [indiscernible] questions. Operator can we have the next one?

[Operator:]

Thank you. Our next question comes from [indiscernible] from Nomura. Please ask your question.

[Unidentified Analyst:]

Hi, thank you for the opportunity and congratulations on your good results. I'm [indiscernible] from Nomura. I have three questions if I may. Firstly, your net revenue from the recurring management fees for the first quarter were very strong as roughly 80% year-over-year. I wonder what is your expectations on trends of the recurring management fees going forward? This is the first question. Secondly, we observed that, there has been a surge in the demand for the rate based active funds since the beginning of this year. And Jupai also performed strongly in the first quarter. I wonder what's your strategy on the [indiscernible] related active products? That's the second question. And thirdly, can you give us an update on your progression with the global [indiscernible]. That's the third question. Thank you.

[Harry He:]

Okay. Thank you. Let's address your question one-by-one before we get started and let me do the translation for our chairman. So, we will be addressing your first question.

[Jianda Ni:]

[Foreign Language]

[Harry He:]

For the full year of 2018, we expect net revenues from recurring management fees to maintain steady groups. More importantly as we are accelerating development of our equity related products including mezzanine investments, convertible bonds and M&A funds, all of which are with longer investment durations. And is thus are likely to drive Jupai’s management fee and recurring interest income higher going forward. So, your first question and let's address your second question.

[Jianda Ni:]

[Foreign Language]

[Harry He:]

I would like to grade my answer down to two points. Firstly, is outlook of real estate industry and outlook of real estate equity products in China. And secondly how Jupai can leverage our competitive advantages within this space to strengthen our industry leading position.

[Jianda Ni:]

[Foreign Language]

[Harry He:]

In terms of the outlook of real estate industry, we are very positive about the long-term outlook of the industry. And believe that it is presently one of the -- those industry, which have the best investment value. The government has published policies to tighten its control over the real estate industry mainly through regulating the market to prevent overheating and speculation and to enhance positive development of those markets and to avoid systematic risks. Thus, we believe the real estate industry will benefit from it in the longer term. Moreover, the steady development of the Chinese economy will further support the purchasing power and the demand for properties especially in those hot zones. For example, the first and second-tier cities such as Beijing, Shanghai, Guangzhou, Shenzhen and other provincial capital cities where we feel particularly optimistic in the longer term.

[Jianda Ni:]

[Foreign Language]

[Harry He:]

In addition, as we discussed earlier. Given the current regulatory environment, we believe the consolidation, we’re seeing the real estate industry will accelerate over the next few years. In the emergency of large scale and branded real estate enterprises will lay a solid foundation for the healthy development of the industry and positive operation of the market. Meanwhile, the emergence of the large real estate enterprises will all represent great opportunities for the development of real estate finance as well as real estate equity related investment.

[Jianda Ni:]

[Foreign Language]

[Harry He:]

As the consolidation within the real estate industry accelerates, it’s crucial for the real estate developers to team up with financial partners which possess in-depth real estate industry understandings to complete those merger and acquisitions and those consequent funding needs are enormous. Moreover, given the recent tightening of finance from commercial banks, real estate companies have become more open to accept equity investments and will to share profits with equity investors. On other hand, while there have been enormous -- while there have been numerous quality real estate projects out in the market, it has become more and more difficult for project developers to obtain financing. The bright spot advantage of private equity fund which we launched recently is a very good example of Jupai’s capturing the opportunities from such trend to create an active managed real estate equity product. We believe Jupai will be involved in more active management funds and have more backend power in project management which will bring higher management fees and cover interest income going forward.

[Jianda Ni:]

[Foreign Language]

[Harry He:]

As we are very positive about long-term outlook of both the real estate industry and the real estate equity products. Now I’d like to move to another topic, Jupai’s competitive advantages and strategies within this area. First, Jupai has been leveraging the rich experience in the real estate industry from our team and there’s abundant resources from our major shareholders E-House to establish long-term and stable corporations with many leading real estate developers in the past and therefore has accumulated enough experience in project management and gain trust from those developers. As a result, we believe that Jupai is much better positioned to lock down quality real estate projects than our peers and hence is more capable of obtaining quality investment targets for our clients.

[Jianda Ni:]

[Foreign Language]

[Harry He:]

In terms of strategy, Jupai was select cities with best investment value and with the highest risk resistance capability as our investment targets. This includes major cities with [indiscernible] Hong Kong, Macau Greater Bay area. Meanwhile Jupai will prefer trustworthy real estate enterprises with which Jupai has existing strategic cooperation as our equity investment counterpart. We will also have rigorous project qualification standard in place to ensure the quality of our projects. So that will be the end of the second question, let’s address the last question.

[Jianda Ni:]

[Foreign Language]

[Harry He:]

Jupai already started collaboration with JPG in 2017 to launch several products and this year we look forward to continuing and strengthening our ties with global PE funds. Lately, we have launched a global PE fund of collaborating with the global leading partner such as Blackstone, Brookfield and Cahill and Oaktree to bring the best quality overseas PE product to our high net worth clients. I believe we have already answered all your questions.

[Operator:]

Thank you, we are now approaching the end of the conference call. I will now t urn the call over to Jupai’s Investor Relations Director, Harry He for closing remarks.

[Harry He:]

This concludes today’s call, if you have any further follow-up questions, please get in contact with us. Thank you very much.

[Operator:]

Thank you for your participation in today’s conference. You may now disconnect. Good day.