Jupai Holdings Limited
Q2 2018 Earnings Call Transcript

Published: 6 Sep 2018

[Operator:]

Thank you for standing by for Jupai's Second 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 this time. I would 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 second quarter ended June 30, 2018. Leading the call today is Mr. Jianda Ni, our Chairman and CEO, who will review the highlights for the second quarter 2018. 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 interpret his remarks for you

[Jianda Ni:]

Thank you, Harry, and welcome everyone to today’s conference call. Over the past quarter, we have seen stronger headwinds in China’s wealth management industry as investor become increasingly conservative in the face of government's accelerated deleveraging at the micro economic level and the tightened regulations in the financial service sector. As a result, the aggregate value of wealth management product distributed by Jupai during the second quarter of 2018 decreased by 21% from the corresponding period in 2017 to RMB9.7 billion. However Jupai benefited from our enhanced bargaining power with real estate companies, which have been facing higher costs of capital due to the recent policy changes. Our average one-time commission rates rose better in the second quarter, reflecting Jupai’s competitive advantage across the entire wealth management industry value chain. For the first half of 2018, Jupai’s net revenues was RMB876.8 million, an 8.9% year-over-year increase and our income for operations was RMB312.8 million, up 7.4% year-over-year. Jupai continued to focus on developing high quality real estate related products during the first half of 2018, resulting 18.1% year-over-year growth in our total assets under management to RMB56.7 billion as of June 30, 2018. We expect the accumulative increase in our total AUM to create room for increase in our management and performance fees and thus enhance our bottom-line growth going forward. Looking forward, despite the industry-wide challenges, we anticipate over the next couple of quarters, we remain confident about the long term outlook for the wealth management and asset management industry in China. In our view, the recent macroeconomic policies which encourages deleveraging and strengthened regulatory control over financial services will enable the healthy development of China's wealth and asset management industry over the long run. We view this period of industry-wide transition as an opportunity to lay a solid foundation for Jupai's long term growth through implementing various strategy is to further strengthen our team, expand our product offerings, and enhance our risk control systems. We look forward to continuing to fulfill the ever changing wealth and asset management needs of our clients as we build Jupai into the leading wealth and asset management brand in China. I will now turn the call over to Mr. Harry He, our Investor Relations Director to go through the financials in more detail. Thank you.

[Harry He:]

Thank you, Ni Xian1 [ph]. Despite a challenging market environment, our ongoing improvements in operating efficiencies and cost controls allowed Jupai to maintain our margins in the first half of 2018 at healthy levels. For the first half of 2018, our non-GAAP net margin attributable to Jupai ordinary shareholders, which excluded a non-cash impairment loss of RMB18 million, was 27.6%, substantially flat compared to 28.1% in the same period last year. Jupai will further enhance our talent management, streamline our cost and improve our efficiency in order to maximize shareholders value for the long term. Now let me walk you through our financial highlights for Q2, 2018. Net revenues for the second quarter of 2018 was RMB443.6 million, a 1.6% increase from corresponding period in 2017 primarily due to increases in both onetime commissions and the recurring management fees. Net revenues was RMB876.8 million for the first half of 2018, an increase of 8.9% from the same period in 2017. Net revenues from onetime commissions for the second quarter of 2018 were RMB282.2 million, a 22.7% increase from the corresponding period in 2017, primarily as a result of our increase in fee rates. For the [indiscernible] in net revenues from onetime commissions were RMB558.7 million, increase of 20.2% from the same period in 2017. Net revenues from recurring management fees for the second quarter of 2018 was RMB121.7 million, a 29.6% increase from corresponding period in 2017, primarily due to our increase in the value of assets under management. The company recognized RMB23.3 million and RMB21.8 million carried interest in the second quarter of 2018 and '17 respectively. For the first half of 2018, net revenues from recurring management fees was RMB244.6 million, a 51.4% increase from the same period in 2017. RMB44 million and RMB23.5 million carried interest was recognized as part of Jupai's recurring management fees for the first half of 2018 and the same period in 2017 respectively. Net revenues from recurring service fees for the second quarter of 2018 was RMB11.4 million a 65.7% decrease from the corresponding period in 2017, primarily because the company provided ongoing services to fewer product suppliers. The company recognized RMB0.3 million and RMB11.4 million variable performance fees in the second quarter of 2018 and '17 respectively. For the first half of 2018, net revenues from recurring service fees was RMB26.5 million, million, a 55.5% decrease from the same period in 2017, primarily because the company provided ongoing services to fewer product suppliers, and company recognized RMB0.3 million and the RMB12.8 million variable performance fees for the first half of 2018 and the same period in 2017, respectively. Net revenues from other service fees for the second quarter of 2018 were RMB28.2 million, a 64.5% decrease from the corresponding period in 2017, primarily due to a decrease in sub advisory fees collected from other companies. For the first half of 2018, net revenues from other service fees were RMB47 million, a decrease of 60.7% from the same period in 2017. Starting from 1 of January 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 second quarter of 2018 were RMB283.3 million, an increase of 4.7% from the corresponding period in 2017. For the first half of 2018, operating costs and expenses were RMB564 million, an increase of 9.7% from the same period in 2017, largely due to higher marketing expenses, as well as G&A costs. Operating margin for the second quarter of 2018 was 36.1%, compared to 38% for the corresponding period in 2017. For the first half 2018 operating margin was 35.7% compared to 36.2% for the same period in 2017. Net income attributable to ordinary shareholders for the second quarter of 2018 was RMB87.8 million, a 21.9% decrease from corresponding period in 2017. For the first half 2018, net income attributable to ordinary shareholders was RMB203.7 million, an increase of 0.3% from the same period in 2017. Net margin attributable to ordinary shareholders for the second quarter of 2018 was 19.8%, as compared to 25.8% for the corresponding period in 2017. For the first half of 2018, net margin attributable to ordinary shareholders was 23.2%, compared to 25.2% for the same period in 2017. Net income attributable to ordinary shareholders per basic and diluted American depositary share for the second quarter of 2018 was RMB2.63 and RMB2.49, respectively, as compared to RMB3.47 and RMB3.33, respectively, for the corresponding period in 2017. For the first half of 2018, net income attributable to ordinary shareholders per basic and diluted ADS was RMB6.12 and RMB5.79, respectively, as compared to RMB6.28 and RMB6.02, respectively, for the same period in 2017. The industry regulations newly introduced on 28 March, 2018 emphasize that asset management businesses conducted through the internet are subject to oversight from financial regulatory authorities. Pursuant to these regulations, Shanghai Runju Financial Information Service, a non-controlling investee of Jupai, has formulated a new business plan to adjust its business model. Based on management's latest evaluation, RMB18 million of impairment loss was recorded in income from equity in affiliates for the second quarter ended June 30, 2018. Future impairment analysis will be performed at each quarter end. Non-GAAP net income attributable to ordinary shareholders for the second quarter of 2018 was RMB115.5 million, a 7.9% decrease from the corresponding period in 2017. For the first half of 2018, non-GAAP net income attributable to ordinary shareholders was RMB241.6 million, a 6.6% increase from the same period in 2017. Non-GAAP net margin attributable to ordinary shareholders for the second quarter of 2018 was 26%, as compared to 28.7% for the corresponding period in 2017. For the first half of 2018, non-GAAP net margin attributable to ordinary shareholders was 27.6% as compared to 28.1% for the same period in 2017. Non-GAAP net income attributable to ordinary shareholders per diluted ADS for the second quarter of 2018 was RMB3.28 as compared to RMB3.72 for the corresponding period in 2017. For the first half of 2018, non-GAAP net income attributable to ordinary shareholders per diluted ADS was RMB6.87 as compared to RMB6.72 for the same period in 2017. Looking to our balance sheet and cash flow, as June 30, 2018, the company had the RMB1080.5 million in cash and cash equivalents compared to RMB1527.8 million as of December 31, 2017. Net cash provided by operating activities during the second quarter of 2018 was RMB139.5 million. For the first half of 2018, net cash used in operating activities was RMB11.1 million. Net cash provided by investing activities during the second quarter of 2018 was RMB224.5 million. For the first half of 2017, net cash used in investing activities was RMB332.5 million. Net cash used in financing activities during the second quarter of 2017 was RMB107.8 million. For the first half of 2018, net cash used in financing activities was RMB103.7 million. Turning to our guidance, the company estimates that its 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:]

Thank you. The question-and-answer session of this conference call will start in a moment. Ladies and gentlemen we will now begin the question-and-answer session. [Operator Instructions] Our first question comes from the line of Haipong Cho [ph] from UBS. Please ask your question.

[Unidentified Analyst:]

Thanks for the opportunity. I'm Haipong from UBS. I have three questions. Firstly, lately we observed some positive trends such as loose monetary policy by the Central Bank of China and the continued tightening of the regulatory requirements on the financial institutions. I wonder what is the impact of these matters to the wealth management industry and what are management's expectations in terms of the outlook for the third quarter and the second half of this year. This is my first question. Secondly, you mentioned in your prepared remarks that management expects performance fees to be a potential driver for Jupai's earnings growth going forward. I wonder what is your expectations on Jupai's performance fee income this year? And thirdly, we understand Jupai's onetime commission rate has been on an upward trend over the past few quarters. Can management share with us your view on the trend of the onetime commission fee rate in the second half of this year? Thanks very much.

[Harry He:]

Thank you, Haipong very much for your questions. Let me do the translation for the Chairman. Let’s address your question one-by-one. Our Chairman will address your first question.

[Jianda Ni:]

To then answer your question about the impact on the wealth management industry and Jupai, from the recent change in macro policies, maybe approach your question from two aspects, short-term impact and the mid and long-term impact. We mentioned earlier that there has been a stronger headwinds in the wealth management industry in the second quarter of 2018, due to two factors. Number one, the continued deleveraging by the government and the number two, the continued tightening of the regulatory requirements. As a result overall funding costs has been rising, driving many mid and small companies and low quality wealth management and asset management companies out of business, or causing significant cash flow problems. The resulting defaults have made investors extremely cautious about investing in wealth management products, which has inevitably impacted Jupai’s business performance over the past months. However, we recently began to notice some changes in macro policy trends, the monetary policy committee of the PBOC commented that, at its second quarter meeting, that the government had achieved satisfying results from the steady and the neutral monetary policy in place, allowing the deleveraging of the overall economy to progress smoothly. We expect that to indicate that going forward the government will adopt macros policies which can better fulfill the two goals; to prevent systematic risks in the financial market and to serve financial needs of tangible business. At the same time the recent vacillation [ph] of monetary policy by PBOC can very well represent such change in sentiment. Regarding the demand for wealth and asset management products, in the short-term, we expect this recently loosened monetary policy to strengthen investors' confidence in overall economy and investment environment and thus boosts sentiment within the wealth management industry. Nonetheless, we believe that it will take a while for such change in the market sentiment to be reflected in our financial results. On the other hand, regarding the supply of wealth and asset management products, we expect the regulator to -- will continue to stick to this strict approval process which will limit the financial products availability in the market. So amid the high uncertainty with the overall industry, we expect it will still take some time for the wealth management industry to stabilize. Despite the challenging industry environment, we believe Jupai's financial result will be well supported by the increase in one time commission rate and the performance fee income. In a mid to long-term we believe that many wealth management company which fail to comply with tightening regulatory requirements will be forced out of the market. Moreover, given the numerous defaults over the past years, we also believe that investor will become more careful and reasonable when choosing financial institution to work with. Presently there are approximately 20,000 to 30,000 wealth management companies in China and we expect that at least 80% of them will be out of business, out of business in the next 5 years. We believe this represents huge opportunities for industry leaders like Jupai in the next few years. We will focus on strengthening capability of our team, promoting Jupai's brand and forming a virtuous cycle for our business from gaining customers trust to optimizing our product and to gaining market share.

[Harry He:]

So there will be the end of your first question and our Chairman will address your second question.

[Jianda Ni:]

We believe that Jupai’s performance fee income will continue on a rising trend going forward. We've been increasing our AUM over the past few years. Moreover, we are devoted to optimizing our product structure through launching more fund product that are actively managed and developing more equity related products. This type of products usually feature a longer investment fund horizon and will allow us to achieve a healthier revenue mix from performance fee income and the carried interest. More specifically Jupai will be able to exit some of our fund investments such as our Focus Media around the end of this year. Assuming that the market environment remains stable we expect to generate roughly RMB80 million in performance fee income through exiting our investment in Focus Media. To summarize, we have seen stronger headwinds in the wealth management industry due to tightening macro policies in the first half of 2018, which negatively impacted Jupai’s aggregate value of wealth management production distributed. However, we believe that Jupai’s financial result will be well supported by the increase in one-time commission rate and performance fee income. As impacts from the property purchase restriction policy started to kick-in in the second half of 2017, cash cycles for property developers has been quickly extended. Moreover commercial banks has been reducing their funding support for property developers. As a result the property developers are willing to accept higher funding costs, which enabled our one-time commission rate to grow from 2% in the second half of 2017 to 2.5% in the first quarter of 2018 and up again to roughly 2.9% this quarter. In our view, as the government continues to tighten controls in a real estate market, the overall real estate industry will continue to face tight cash cycles, which will further enhance Jupai’s bargaining problem. So we believe that it is highly likely that our one-time commission rate will remain at a high level in the foreseeable future.

[Harry He:]

So that’s end of the last question, Haipong.

[Unidentified Analyst:]

Yes, thanks very much. It's very comprehensive and clear. Thank you.

[Harry He:]

Thank you Haipong.

[Operator:]

We are now approaching the end of the conference. I will now turn 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 follow-up questions, please get in touch with us. Thank you.

[Operator:]

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