Jupai Holdings Limited
Q4 2017 Earnings Call Transcript

Published: 12 Mar 2018

[Operator:]

Thank you for standing by for Jupai's Fourth Quarter and Full Year 2017 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 fourth quarter and full year ended December 31, 2017. Leading the call today is Mr. Jianda Ni, our Chairman and CEO, who will review the highlights for the fourth quarter and full year 2017; 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:]

[Foreign Language] Thank you, Harry, and welcome everyone to today’s conference call. [Foreign Language] We are pleased to announce a set of solid results for 2017, with both Jupai’s wealth management and asset management businesses growing rapidly, benefiting from the expansion of our business, and the increase in commission rates, our net revenues increased 51% year-over-year to RMB1.7 billion. On the bottom line, improved margins drove higher net income attributable to ordinary shareholders of RMB409.5 million, up almost 100% year-over-year compared with 2016. [Foreign Language] In 2017, we further enhanced our long-term competitive advantages. Leveraging our strength in the real estate industry, our high quality real-estate-related wealth management products remained popular among investors amid more conservative market sentiment. The aggregate value of products distributed by Jupai for the full-year 2017 grew to RMB54.3 billion, a 20% increase year-over-year, as total assets under management rose to RMB57.5 billion as of December 31, 2017, a 59% increase year-over-year. [Foreign Language] In line with Jupai’s commitment to delivering value to our shareholders, our board has declared a cash dividend of US$0.10 [ph] per ordinary share, equal to US$0.60 [ph] per ADS. Moving ahead, Jupai\ will continue to broaden our product selection and promote our real estate-related equity products, building upon our rigorous risk management system and rich real estate resources. We are confident that with our mature business lines Jupai is well-positioned to achieve healthy profit growth in 2018. [Foreign Language] In addition, we believe that performance fees and new business lines such as our overseas business and insurance offerings will generate incremental profit growth in the coming year. Management will continue to strive to fulfill our customers’ ever-changing investment needs, enhance Jupai’s capability to achieve stable long-term growth, and build Jupai into the leading wealth and asset management brand in China. [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, Nethal [ph]. Jupai concluded the year with a strong performance across our business lines. As management continued to grow our business scale, we further optimized our product mix and enhanced operating efficiency, leading to a significant expansion of our net profit margin from 18% in 2016 to 24% in 2017. We remain optimistic about our bottom line growth outlook for 2018. Now let me walk you through our financial highlights for the fourth quarter and full year 2017. Net revenues for the fourth quarter of 2017 were RMB460 million, a 35.9% increase from RMB338.5 million for the corresponding period in 2016, primarily due to increases in one-time commissions. Net revenues were RMB1,706.2 million for the full year of 2017, an increase of 51.3% from RMB1,127.7 million in 2016. Net revenues from one-time commissions for the fourth quarter of 2017 were RMB308.9 million, a 66.7% increase from RMB185.3 million for the corresponding period in 2016, primarily as a result of our increase in fee rate compared to corresponding period in 2016. For the full year of 2017, net revenues from one-time commissions were RMB1,038.7 million, an increase of 64% from RMB633.2 million in 2016. Net revenues from recurring management fees for the fourth quarter of 2017 were RMB111.4 million, a 52.5% increase from RMB73.1 million for the corresponding period in 2016. The Company recognized RMB40.1 million, and RMB3.7 million carried interest in the fourth quarter of 2017 and ‘16, respectively. For the full year of 2017, net revenues from recurring management fees were RMB363.7 million, a 39.5% increase from RMB260.6 million in 2016. RMB81.7 million and RMB15.3 million carried interest was recognized as part of Jupai’s recurring management fees for the full year of 2017 and 2016, respectively. Net revenues from recurring service fees for the fourth quarter of 2017 were RMB23.7 million, an 8.2% decrease from RMB25.8 million for the corresponding period in 2016, primarily because the Company provided ongoing services to fewer product suppliers. We expect the net revenues from recurring service fees will continue to decline going forward. The Company recognized RMB63.7 thousand and RMB1.2 million variable performance fees in the fourth quarter of 2017 and ‘16, respectively. For the full year of 2017, net revenues from recurring service fees were RMB105 million, a 14.8% decrease from RMB123.2 million in 2016. The Company recognized RMB13.8 million and RMB14.6 million variable performance fees for the full year of 2017 and ’16 respectively. Net revenues from other service fees for the fourth quarter of 2017 were RMB15.9 million, a 70.7% decrease from RMB54.3 million for the corresponding period in 2016, primarily due to decreases in sub-advisory fees collected from third-party asset management companies. For the full year of 2017, net revenues from other service fees were RMB198.8 million, an increase of 79.5% from RMB110.7 million in 2016, as the related sub-advisory fees started from the third quarter of 2016. Operating costs and expenses for the fourth quarter of 2017 were RMB396.2 million, an increase of 62.1% from RMB244.4 million for the corresponding period in 2016, largely due to higher compensation expenses, particularly commission fee paid to wealth management advisors and the client managers marketing expenses, as well as G&A cost. For the full year of 2017, operating costs and expenses were RMB1,182.6 million, an increase of 42% from RMB832.9 million in 2016. Operating margin for the fourth quarter of 2017 was 13.9%, compared to 27.8% for the corresponding period in 2016. For the full year of 2017, operating margin was 30.7%, compared to 26.1% in 2016. Net income attributable to ordinary shareholders for the fourth quarter of 2017 was RMB90.7 million, a 45% increase from RMB62.3 million for the corresponding period in 2016. For the full year of 2017, net income attributable to ordinary shareholders was RMB409.5 million, an increase of 97.3% from RMB207.6 million in 2016. Net margin attributable to ordinary shareholders for the fourth quarter of 2017 was 19.7%, as compared to 18.4% for the corresponding period in 2016. For the full year of 2017, net margin attributable to ordinary shareholders was 24%, compared to 18.4% in 2016. Net income attributable to ordinary shareholders per basic and diluted American depositary share for the fourth quarter of 2017 was RMB2.75 and RMB2.59, respectively, as compared to RMB1.93 and RMB1.85, respectively, for the corresponding period in 2016. For the full year of 2017, net income attributable to ordinary shareholders per basic and diluted ADS was RMB12.57 and RMB11.95, respectively, as compared to RMB6.46 and RMB6.20, respectively, in 2016. Looking to our balance sheet and cash flow, as of December 31, 2017, the Company had RMB1,527.8 million in cash and cash equivalents, compared to RMB1,123.2 million as of December 31, 2016. Net cash provided by operating activities during the fourth quarter of 2017 was RMB161.1 million. For the full year of 2017, net cash provided by operating activities was RMB599.7 million. Net cash provided by investing activities during the fourth quarter of 2017 was RMB144.9 million. For the full year of 2017, net cash used in investing activities was RMB74 million. Net cash provided by financing activities during the fourth quarter of 2017 was RMB1.3 million. For the full year of 2017, net cash used in financing activities was RMB121.1 million. About our dividend, Jupai board of directors has approved and declared a cash dividend of US$0.10 [ph] per ordinary share. The cash dividend will be paid on or about May 31, 2018 to shareholders of record as of the close of business on April 30, 2018. Holders of Jupai's ADSs, each representing six ordinary shares of Jupai, on the Record Date are accordingly entitled to a cash dividend of US$0.60 per ADS. The aggregate amount of cash dividends to be paid is approximately US$20 million, which will be funded by cash on the Company's balance sheet. Turning to our guidance. We expect our net revenue for the first of quarter of 2018 will be in a range of RMB4 million to RMB420 million, a increase of 8.5% to 14% compared to the same period in 2017. This forecast reflects the company current and preliminary view which is subject to change. With that, concludes our prepared remarks. I will now turn the call back to the operator to begin the Q&A session. Operator?

[Operator:]

Thank you. [Operator Instructions] Your first question comes from the line of Yaxuan Zhu of CICC. Please ask your question.

[Yaxuan Zhu:]

[Foreign Language]

[Jianda Ni:]

For the benefits of other audience, let me translate the questions for the management, and just hang-on for one second. For the benefits of other audience online, let me translate the three questions. The first one is can management share your expectation on the 2018 performance, what would be the main gross driver, that’s question one. The second question is, we know that the one-time commissions had been approached in 2017, do you expect this trend to persist into Q1 and for the full year of 2018? And the last question is what is our strategy for the secondary market and the private equity product in 2018? Let’s address the question one by one. So our Chairman will address your first question.

[Harry He:]

[Foreign Language]

[Jianda Ni:]

Let me do the translation. We are quite satisfied with what we have achieved in 2017 with revenue growing in 51% year-over-year, and the net margin reaching 24%. Looking into 2018, we remain fairly confident about Jupai’s growth and margin outlook. In terms of our growth, although we expect our growth rate to become a bit soft in the first quarter due to seasonality and the changes in regulatory environment. However, we have already adjusted our product line company and we are confident in maintaining our revenue growth reaching a reasonable range.

[Harry He:]

[Foreign Language]

[Jianda Ni:]

So in terms of profit margins there was a sequential decline in our net margin in Q4 due to seasonality factors, including year end [indiscernible] and bonuses and so forth, which temporarily boosted our operating costs in the quarter. However, based on our historical financials, our net margins is usually quite low in the first quarter in the past three years. The net margin of 2017 as a whole is still very healthy at 24%.

[Harry He:]

[Foreign Language]

[Jianda Ni:]

Looking into 2018, we have seen property companies facing more difficulties and higher costs in financing to bank loans and bond issuance. Consequently it enhanced Jupai’s bargaining power. As a result we remain highly confident about outlook of our net margin in 2018.

[Harry He:]

[Foreign Language]

[Jianda Ni:]

Overall we expect the company will still achieve a healthy bottom line growth in 2018, major growth driver includes increase in one-time commission rates, as well as the launch of real estate equity products, including convertible bonds, real estate and fund [ph] and so forth which we believe will drive our management fees and performance fee income. So that's the answer for the first question. Let's do the second one.

[Harry He:]

[Foreign Language]

[Jianda Ni:]

A short answer to your question will be yes. In fact, we can break down the increase of one-time commission in 2017 into two parts. The first part is that the one-time commission were at a low level in 2016 and only started to recover in 2017, given the strong expectation of renminbi depreciation since second half of 2016, our high net worth clients prefer to allocate more of the investments into short time fixed income products, like products with duration around 6 months and the short term products usually with lower one-time commission rate. This trend has started to change in the first half of 2017 when our client’s interests in the longer term products recovered and it started to allocate more of their investments into products with duration around one year. Consequently Jupai’s one-time commission recover from 1% in 2016 to 1.5% in the middle of 2017. This is the first part.

[Harry He:]

[Foreign Language]

[Jianda Ni:]

The second part is impact from the property purchase restriction policy started to kick in the second half of 2017 leading to extended cash cycle for the property developers. This situation enhanced Jupai’s marketing power which enabled our one-time commission rate to grow to approximately 2% in the second half of 2017. Given the current macro environment, we remain very positive about the future trends for one-time commissions and the upward trend is very likely to sustain into 2018. So that will be the answer for your second question. And we are addressing your last question, your last question is the strategy for the secondary market and a private equity product in 2018?

[Harry He:]

[Foreign Language]

[Jianda Ni:]

Lately, global stock markets have recovered from previous trough, quoting less pressure on China’s Asia market. Meanwhile China's economy has stabilized and started to move in positive direction. The variation of the China, Asia market has also become attractive after market correction in early February. As a result, we found that the risk appetite of high net worth by clients in the secondary market is increasing. We expect Jupai to generate better sales results from secondary market products in 2018 compared to 2017. We will continue to have in-depth collaboration with leading private investment company in China such as Greenwoods Asset Management, Spring Capital and Hershey Investment [ph] to launch product which will meet the needs of high net worth individuals.

[Harry He:]

[Foreign Language]

[Jianda Ni:]

Regarding PE products, we will focus on two types of PE products, the first category is ready state mezzanine and equity investment products, such as convertible bonds and MA funds [ph]. The secondary - second category is quality international PE product, while maintaining our competitive advantages within the registered area. We will further strengthen our cooperation’s with the leading PE funds overseas. For example we recently incorporated with global to PE funds, including KKR and [indiscernible] Group to provide innovative and quality FI products to high net worth individuals in China. So I think we have already answered all your questions.

[Harry He:]

[Foreign Language]

[Jianda Ni:]

Operator, can we pick up next question.

[Operator:]

Yes, sir. Thank you. Our next question is from [indiscernible] from Nomura. Please ask your question.

[Unidentified Analyst:]

Thanks for the opportunity and congratulations on the great results. I am [indiscernible] from Nomura. And I have two questions. Firstly, we understand that Jupai has a very strong competitive advantage in the real estate product. Recently the Retley [ph] actually published a new regulation in which the entirety of the non-standard fixed income products are no longer in coREACH [ph]. I wonder what kind of impact on the Jupai’s results for the first quarter and full year of 2018 management expect. And also management actually mentioned that Jupai will come out with a real estate equity products, can you give us more color on what your strategy for the equity products and then how will this impact your revenue and expenses going forward? And this is my first question. Secondly…

[Jianda Ni:]

Okay…

[Unidentified Analyst:]

It is great to see the company has announced the cash dividend today. Can the management give more color on the dividend policy going forward, that’s my two questions. Thanks.

[Jianda Ni:]

Thank you very much. Let me do a translation, okay, let me do a translation and we will come back to you shortly.

[Unidentified Analyst:]

Okay. Thank you.

[Jianda Ni:]

Okay. Management will address your first question, first.

[Harry He:]

[Foreign Language]

[Jianda Ni:]

This is very good question. Following this January’s announcement that regulatory authorities declaring their intention to completely and implicit guarantees by 2020. We believe the announcement of requirements on private investment funds filing is another great news for the wealth management industry for the long-term, in particularly for industry leader like Jupai.

[Harry He:]

[Foreign Language]

[Jianda Ni:]

In our view your question can be answered in three parts. The company level and the independent wealth management industry level, and the macro competition level. Let's start from the company level, which I believe investors care the most about. Government’s attitude towards non-standard fixed products is not targeting only at real estate related products, but all kinds of fixed income products, with loans and debts, as underlying assets, while the underlying assets with equity feature such as convertible bonds and mezzanine investments are very much encouraged. As a result in 2018 Jupai will reduce the portion of fixed income related product and focus more on developing equity products, such as mezzanine investments, convertible bonds and funds.

[Harry He:]

[Foreign Language]

[Jianda Ni:]

In terms of the potential impact on our revenue structure, we believe that expansion of equity product will help to drive our management fee and performance fee income, as equity products yearly have longer durations. Additionally, we expect that there will be more room to increase our one-time commission revenues, as Jupai continues to gain bargaining power towards real estate developers, which in general have very tight cash flow in 2018. We believe that as government continues to tighten controls in real estate market investors and real estate companies have to adapt to new environment and Jupai as a bridge between the two will benefit from such change in the longer term.

[Harry He:]

[Foreign Language]

[Jianda Ni:]

Moreover, we do not expect such changes in our product structure will cause material changes to our operating costs.

[Harry He:]

[Foreign Language]

[Jianda Ni:]

I also want to stress that we can gain deeper knowledge about this quarter at Independent wealth management industry at a macro competition level.

[Harry He:]

[Foreign Language]

[Jianda Ni:]

To succeed in the independent wealth management industry in China, company needs to adopt in timely manner to the ever changing policies in China. For example, E-House Capital, our 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 from our high net worth individuals. This demonstrates that our teams capability to adapt to changes over the past few years there have been various regulatory changes raising the real estate industry across the country. And Jupai has always been able to launch new real estate products, which will suit the new regulatory requirements and customer needs. And we are confident to adapt to the recent regulatory change again this path.

[Harry He:]

[Foreign Language]

[Jianda Ni:]

There are various way for the property industry to raise financing, including cash generated through sales, sound raising from capital markets, like buying insurance and equity financing loans from commercial banks and trust companies and financing through wealth management industry, meet the rapid development of the wealth management industry Jupai has been able to maintain rapid growth over years, driven by our deep knowledge about industry and especially our flexibility to utilize our resources to fulfill both requirements from regulatory authorities and customer needs.

[Harry He:]

[Foreign Language]

[Jianda Ni:]

We believe that the policy on non-standard fixed income products is likely to force many companies which cannot adapt to the new regulatory environment out of the industry. But for the industry leader like Jupai this represents a great opportunity for us to enhance our market share and brand which we believe to enable us to achieve greater growth after 2020 when the regulatory authorities is completed and ended - implicit guarantees.

[Harry He:]

[Foreign Language]

[Jianda Ni:]

Lastly, I would like to tackle your question from a macro competition point of view. We know that commercial banks have been dominating the wealth management market in China for a long time and there are many products have been long standard and fixed income products. We believe that due to the current regulation not of every commercial bank will be able to successfully make the transition to equity products, especially those mid and small size commercial banks. And it's likely that there were only to - there will only be able to sell monetary funds in the future. Even for the larger banks which can transform themselves to offer equity products. They will be constrained more because of regulatory requirements compared to the non-bank financial institutions, such as independent wealth management and companies. This is why I emphasised earlier that we believe the regulatory authorities decision to end the implicit guarantee and it's a good news for the industry. And also – and as restriction on the development of management products by commercial banks is another positive news for the industry. So that will be answer for your first question. And let’s address your second question.

[Harry He:]

[Foreign Language]

[Jianda Ni:]

Let me translate the question again, the question was regarding Jupai’s dividend policy going forward, the answer will be, this is the second consecutive year for Jupai to distribute cash dividend to our shareholders. Our cash dividend distributed in 2017 was US$0.50 per ADS. And this year our cash dividend rose to US$0.60 per ADS. We believe this is in line with our commitment to deliver value to shareholders. We are confident in Jupai’s prospect in 2018. Going forward, we will continue to carefully achieve a balance between Jupai’s sustainable growth and increase in return on equity and our final decision on the dividend will be made based on our operating results, cash flow and a financial status. So I believe we have already answered your questions.

[Unidentified Analyst:]

Yeah. Thank you very much for the comments and it’s very informative. Thank you.

[Jianda Ni:]

Thank you very much.

[Operator:]

Thank you. And now approaching the end of the conference call, 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 contact with us. Thank you.

[Operator:]

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