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Edited Transcript of JP earnings conference call or presentation 28-May-18 12:00pm GMT

Q1 2018 Jupai Holdings Ltd Earnings Call

SHANGHAI Jun 4, 2018 (Thomson StreetEvents) -- Edited Transcript of Jupai Holdings Ltd earnings conference call or presentation Monday, May 28, 2018 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Harry He

Jupai Holdings Limited - Director, IR

* Jianda Ni

Jupai Holdings Limited - Chairman and CEO

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Conference Call Participants

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* Che Yen

CICC - Analyst

* Hai Phong

Nomura - Analyst

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Presentation

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Operator [1]

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Thank you for standing by for Jupai's first-quarter 2018 earnings conference call. (Operator Instructions) Please note, today's conference call is being recorded. If you have any objections, you may disconnect at this time.

I'll now like to turn the meeting over to your host for today's conference, Mr. Harry He, Jupai's Investor Relations director.

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Harry He, Jupai Holdings Limited - Director, IR [2]

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Hello, everyone, and welcome to Jupai's earnings conference call for the first quarter ended March 31, 2018. Leading the call today is Mr. Jianda Ni, our Chairman and CEO, who will review the highlights for the first 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 do the interpretations for you.

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Jianda Ni, Jupai Holdings Limited - Chairman and CEO [3]

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(interpreted) Thank you, Harry, and welcome, everyone, to today's conference call. Jupai had a solid first quarter of 2018, with both 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 aggregate value of wealth management products 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 benefited, however, from enhanced bargaining power with real estate companies, which have been facing higher cost of capital due to the 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.

To adapt to the newly introduced industry regulations, in the first quarter of 2018, Jupai leveraged 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 M&A 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.

We believe that the solid performance Jupai achieved in the first quarter reflects our team's capability to adapt to market changes and launch new products which satisfy both regulatory requirements and customer needs. 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 focuses on building China's leading wealth and asset management brand.

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.

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Harry He, Jupai Holdings Limited - Director, IR [4]

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Thank you, [nyu dong]. Over the first quarter of 2018, Jupai's business continued to grow steadily as we further optimized the Company's cost structure and operating efficiency, which helped 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 were RMB433.2 million, a 17.5% increase from corresponding period in 2017, primarily due to increases in one-time commissions and recurring management fees.

Net revenues from one-time commissions for the first quarter of 2018 were RMB276.4 million, a 17.8% increase from corresponding period in 2017, primarily as a result of our increase in fee rates. Net revenues from recurring management fees for the first quarter of 2018 were RMB122.9 million, an 81.8% increase from corresponding period in 2017, primarily due to our increase in the value of assets under management. The Company recognized RMB20.7 million and RMB1.7 million carry interest for the first quarter of 2018 and 2017, respectively.

Net revenues from recurring service fees for the first quarter of 2018 were RMB15.1 million, a 42.6% decrease from corresponding period in 2017, primarily because the Company provided ongoing services to fewer product suppliers. The Company recognized 0 and RMB1.4 million variable performance fees in the first quarter of 2018 and 2017, respectively.

Net revenues from other service fees for the first quarter of 2018 was RMB18.8 million, a 53.1% decrease from corresponding period in 2017, primarily due to decreases in subadvisory fees collected from other companies.

Starting from January 1, 2018, the Company adopted accounting standard update 2014-09, revenue from contracts from 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 was RMB280.7 million, an increase of 15.3% from corresponding period in 2017, largely due to higher marketing expenses as well as [sharing] costs. 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 and RMB3.3, respectively, as compared to RMB2.81 and RMB2.69, respectively, for the corresponding period in 2017.

The industry regulation newly introduced on March 28, 2018, emphasize that the asset management business conducted through the Internet are subject to oversight from financial regulatory authorities. Pursuant to these new regulations, Shanghai Runju Financial Information Service, a noncontrolling 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 the operator to begin the Q&A session. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) [Che Yen], CICC.

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Che Yen, CICC - Analyst [2]

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(interpreted) Despite the challenging factors such as Chinese New Year holiday and the regulatory changes, Jupai was able to deliver a set of solid results 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?

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Jianda Ni, Jupai Holdings Limited - Chairman and CEO [3]

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(interpreted) In our view, it's crucial for any independent wealth management companies to be able to rapidly adapt to policy changes to become an outstanding player in the field and to be an industry leader 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 announced a new policy which halted the approval of privately offered wealth management products with underlying assets related to residential real estate or property within those 16 overheated cities identified by the government.

In response, Jupai was able to quickly expand our project portfolio outside of those 16 cities. And meanwhile, locate nonresidential real estate projects within the 16 cities. This allowed us to maintain strong growth in 2017, with our net revenue growing at 51% and net profit almost double for the year.

We believe that the announcement of requirements under private investment [from] filing is another piece of great news for the wealth management industry for the long term. In particular, for the industry leaders at Jupai.

Government's attitude towards nonstandard fixed income products is not only targeting as real-estate-related products, but all kinds of fixed income products with loans or debts as underlying assets, while underlying assets with equity features, such as convertible bonds and the 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 realty products with loans as underlying assets and focusing more on developing equity products, such as mezzanine investments, convertible bonds, and M&A funds. We have already made progress in shifting our product structure in the first quarter more specifically among wealth management products Jupai distributed in Q1. The percentage from real-estate-related equity products has surged significantly year over year.

Historically, Jupai had been able to adapt in a timely matter to the ever-changing policies in China. For example, E-House Capital, our subsidiary REIT, was merged into Jupai in 2015 was originally involved in direct equity investments, especially in the real estate industry. After its merger with Jupai, E-House Capital rapidly changed its real estate product offering from equity to fixed income products to fulfill the demand for more conservative products for our high-net-worth clients.

This demonstrates the team's capability to adapt to changes. Over the past few years, there have been various regulatory changes within real estate industry across the country. And Jupai has always been able to launch new real estate products which suits the regulatory environment and the customer needs.

Moreover, in terms of the potential impact on our revenue structure, we believe that the expansion of equity product will help to drive our management fee and performance fee income, as equity products usually 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 with real estate developers, which in general have very tight cash flows in 2018. You can see that our average one-time 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 markets, investors and real estate companies have to adapt to the new environment. And Jupai serving as a bridge between those two will benefit from such changes in long term.

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Harry He, Jupai Holdings Limited - Director, IR [4]

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So that's the end of the first question. Let me do a translation -- let me translate the second question. The second question was we noticed that your latest guidance implies a 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?

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Jianda Ni, Jupai Holdings Limited - Chairman and CEO [5]

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(interpreted) Firstly, let me walk you through the logic behind the calculation to reach our annual net profit growth of 30% to 40%. Assuming all other factors remain unchanged, we estimate Jupai's average rent and 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 that the net revenues from one-time commissions account for roughly 60% of our overall net revenue, we estimate that our overall net revenue will achieve a 15% year-over-year growth in 2018, purely as a result of increase in our average rent and commission rate without incurring any additional costs.

On the bottom line, the growth rate will be even higher due to operating leverage. Even if we made very conservative assumptions that there is no profit growth from other revenue stream, including recurring management fee, overseas business, or insurance, we only need a very conservative growth rate in the aggregate value of wealth management product distributed to achieve our guidance of net profit growth in the range of 30% to 40% in 2018.

So we believe the visibility into our near-term growth outlook is reasonably high. We would like to elaborate on this topic a bit better to give you a better idea regarding our view on the outlook of the wealth management industry over the next three to five years and Jupai's relevant strategies, some of which we might have already touched on during our previous earnings calls.

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

Secondly, as authorities are tightening regulations to lower systematic risks, 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 institutions will focus on relatively high-risk, high-return products. 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 envisage the regulatory authorities declare their intention to completely end implicit guarantee by 2020. Again, it's 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 policy changes represent great long-term opportunities for independent wealth management companies.

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 shares, 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 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.

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.

Firstly, to enhance operating efficiency, we have provided further support to our wealth management advisor and the account manager in the following two forms. On the one hand, updating our IT system; on the other hand, establishing the IC department, which is called the Investment Consulting department.

Post the upgrade, our latest IT system on the mobile app will significantly increase the degree of digitalization throughout the entire transaction process, covering contracts signed, [draw] account management, and the interim product reports.

Moreover, through analyzing current data such as product browsing history and the client actual collections, we can more effectively understand our clients' needs and further strengthen our product design and customer service capabilities.

We recently set up our IT marketing department to understand both the complex technical aspect 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.

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

Thirdly, we are further enhancing our risk management systems through more detailed internal risk control measures, including product [whole] investment schemes and product scoring systems throughout entire product lifecycle.

Fourth, we will further diversify our product offering through 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.

In summary, for the near term, we are confident about achieving our guidance of 30%, 40% year-over-year net profit growth in 2018. And for the long term, we believe that our four strategic measures mentioned above will further strengthen Jupai's competitiveness and enable us to maintain our industry-leading positions.

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Harry He, Jupai Holdings Limited - Director, IR [6]

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So that will be the end of the -- for the second question. Before we start to answer the last question, let me do the translation for the question first. Che Yen's question was we see that Jupai's operating margin for Q1 reached 35.2%, enjoying a year-over-year growth and a quarter-on-quarter growth as well. Can you please share with us the growth drivers and what management expectations are regarding the operating margin going forward?

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Jianda Ni, Jupai Holdings Limited - Chairman and CEO [7]

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(interpreted) The strong operating margin in Q1 was partially due to the continued growth in our net revenue. But more importantly was 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 2017.

As we discussed earlier, Jupai has enhanced or met the management of our account manager, optimized their incentive program, and raised the performance requirement bar. This measure will allow us to gain better control over our cost of revenues and hence improve our operating margin. We believe our Q1 results have reflected those effects already.

As to the outlook of our operating margin, I would 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 these two measures we have mentioned earlier, including upgrading our IT system and establishing the IC department to notably increase the work efficiencies of our account manager and lay the solid foundation for Jupai's mid- and long-term profit growth.

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Harry He, Jupai Holdings Limited - Director, IR [8]

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So I think that will be all for Che Yen's questions. Operator, can we have the next one?

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Jianda Ni, Jupai Holdings Limited - Chairman and CEO [9]

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(spoken in Chinese)

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Operator [10]

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[Hai Phong], Nomura.

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Hai Phong, Nomura - Analyst [11]

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Thank you for the opportunity and congratulations on your good results. I am Hai Phong 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 at roughly 80% year over year. I wonder what is your expectations on the trend 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 real estate equity funds since the beginning of this year. And Jupai also performed strongly in the first quarter. I wonder what's your strategy on the real-estate-related equity product. That's the second question.

And thirdly, can you give us an update on your collaboration with the global [BDT] fund? That's the three questions. Thank you.

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Harry He, Jupai Holdings Limited - Director, IR [12]

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Thank you, Hai Phong. Let's address your questions one by one. Before we get started, let me do the translation for our Chairman.

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Jianda Ni, Jupai Holdings Limited - Chairman and CEO [13]

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(interpreted) For the full year of 2018, we expect net revenues from recurring management fees to maintain steady growth. 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 thus are likely to drive Jupai's management fee and carry interest income higher going forward.

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Harry He, Jupai Holdings Limited - Director, IR [14]

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So that would be your first questions. Let's address your second questions.

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Jianda Ni, Jupai Holdings Limited - Chairman and CEO [15]

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(interpreted) I would like to break my answer down to two parts. Firstly is the outlook of the real estate industry and the 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.

In terms of the outlook of the real estate industry, we are very positive about our long-term outlook of the industry and believe that it is presently one of those industries 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.

In addition, as we discussed earlier, given the current regulatory environment, we believe the consolidation within the real estate industry will accelerate over the next few years. The emergence of large-scale and branded real estate enterprises will lay a solid foundation for the healthy development of the industry and the positive operation of the market.

Meanwhile, the emergence of these large real estate enterprises will also represent great opportunities for the development of real estate finance as well as real-estate-equity-related investment.

As the consolidation within the real estate industry accelerates, it is 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 willing to share profits with equity investors. On the 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 property developers to obtain financing.

The [bright star] advantage of private equity funds, which will launch recently, is 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 bargaining power in project management, which will bring higher management fees and carry interest income going forward, as we are very positive about the long-term outlook of both the real estate industry and the real estate equity products.

Now I would 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 shareholder E-House to establish a long-term and stable cooperation with many leading real estate developers in the past.

And therefore, has accumulated ample enough experience in project management and gained 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.

In terms of strategy, Jupai will select cities with the best investment value and with the highest risk resistance capability as our investment targets. This includes major cities with [Pearl River Delta] and the Guangdong-Hong Kong-Macao Greater Bay area. Meanwhile, Jupai will prefer trustworthy real estate enterprises with which Jupai has existing strategic cooperations as our equity investment counterpart. We will also have rigorous project qualification standard in place to ensure the quality of our projects.

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Harry He, Jupai Holdings Limited - Director, IR [16]

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So that would be the end of the second questions. Let's address Hai Phong's last question.

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Jianda Ni, Jupai Holdings Limited - Chairman and CEO [17]

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(interpreted) Jupai already started collaboration with TPG and [Tishman] in 2017 to launch several products. And this year, we look forward to continuing strengthening our ties with global PE funds.

Lately, we have launched a global PE fund of funds, collaborating with global leading partners such as Blackstone, Brookfield, [Callio], and [Optree] to bring the best quality overseas PE products to our high-net-worth clients.

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Harry He, Jupai Holdings Limited - Director, IR [18]

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I believe we have already answered all your questions, Hai Phong.

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Hai Phong, Nomura - Analyst [19]

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Yes, got it. Thank you so much.

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Operator [20]

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Thank you. We are 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.

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Harry He, Jupai Holdings Limited - Director, IR [21]

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

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Operator [22]

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

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Editor [23]

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Portions of this transcript that are marked (interpreted) were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.