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Edited Transcript of JP earnings conference call or presentation 7-Dec-18 12:00pm GMT

Q3 2018 Jupai Holdings Ltd Earnings Call

SHANGHAI Jan 11, 2019 (Thomson StreetEvents) -- Edited Transcript of Jupai Holdings Ltd earnings conference call or presentation Friday, December 7, 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 of IR

* Ni Jianda

Jupai Holdings Limited - Chairman of the Board & CEO

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Presentation

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Operator [1]

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Thank you for standing by for Jupai's Third Quarter 2018 Earnings Conference Call. (Operator Instructions) Please note today's conference call is being recorded. (Operator Instructions) I'd now like to turn the meeting over to your host for today's conference, Mr. Harry He, Jupai's Investor Relations Director. Thank you. Please go ahead, sir.

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

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Thank you, operator. Hello, everyone and welcome to Jupai's Earnings Conference Call for the third quarter ended September 30, 2018.

Leading the call today is Mr. Jianda Ni, our Chairman and CEO, who will review the highlights for the third 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 the -- 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 interpretation for his remarks for you.

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Ni Jianda, Jupai Holdings Limited - Chairman of the Board & CEO [3]

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(foreign language)

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

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Thank you, Harry, and welcome, everyone, to today's conference call.

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Ni Jianda, Jupai Holdings Limited - Chairman of the Board & CEO [5]

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(foreign language)

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

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China's wealth management industry has been facing strong headwinds over the past few quarters. Since early 2018, we have seen investors becoming increasingly conservative due to uncertain economic outlook in China and globally. A weakening real economy as a result of deleveraging and the tightened regulations in the financial service industry. As a result, the aggregate value of wealth management product distributed by Jupai during the first 9 months of 2018 decreased by 32.8% from that in the corresponding period, in 2017, to RMB 25.9 billion.

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Ni Jianda, Jupai Holdings Limited - Chairman of the Board & CEO [7]

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(foreign language)

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

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However, as real estate companies continue to face rising cost of capital, we have benefited from our enhanced bargaining power. Our average onetime commission rate reached 2.8% in the third quarter, up from 2.2% in the corresponding period in 2017, reflecting Jupai's competitive advantage across the wealth management industry value chain.

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Ni Jianda, Jupai Holdings Limited - Chairman of the Board & CEO [9]

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(foreign language)

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Harry He, Jupai Holdings Limited - Director of IR [10]

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Leveraging our rich resources and network within the real estate industry, Jupai remained dedicated to developing high-quality real estate related products during the first 9 months of 2018. Our total assets under management grew to RMB 57.8 billion as of September 30, 2018, up 15.3% year-over-year. Looking ahead, in order to build a healthy long-term growth rate, we will put more effort into the development of proactively managed funds, further diversify the industries underlying our products, and continue to enhance the quality of our AUM, so as to create room for further growth in recurring management fees and the performance fees.

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Ni Jianda, Jupai Holdings Limited - Chairman of the Board & CEO [11]

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(foreign language)

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

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Although we expect China's wealth management and asset management industry to remain in a transition period, given the current macro level deleveraging and the changing regulatory landscape. We believe that China's decades of rapid economic expansion have laid the foundation for a vibrant future for our industry. Additionally, we are confident that investors will increasingly choose to work with the well-known, reputable industry leaders such as Jupai given this turbulent times in the capital markets.

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Ni Jianda, Jupai Holdings Limited - Chairman of the Board & CEO [13]

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(foreign language)

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

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Jupai will continue to adapt to changes in the wealth management and asset management industry in order to better manage our funds, strengthen our talent base, increase product diversity and to improve our risk control system. We look forward to building Jupai into the leading wealth and asset management brand in China and creating long-term value for our shareholders.

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Ni Jianda, Jupai Holdings Limited - Chairman of the Board & CEO [15]

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(foreign language)

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

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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.

Thank you, Ni Jianda. While we face ongoing challenges in our industry, we will use this period of transition to increase operating efficiencies through cost controls, personnel optimization, and IT system enhancement. We believe that these measures will help us lay a solid foundation to expand our margins in the mid- to long term.

Now, let me walk you through our financial highlights for the third quarter of 2018. Net revenues for the third quarter of 2018 were RMB 310.6 million, a 29.5% decrease from corresponding period in 2017, primarily due to decreases in both onetime commissions and the recurring service fees. Net revenues were RMB 1,187.4 million for the first 9 months of 2018, a decrease of 4.7% from the same period in 2017.

Net revenues from onetime commissions for the third quarter of 2018 were RMB 147.7 million, a 44.3% decrease from the corresponding period in 2017, primarily as a result of decrease in aggregate value of wealth management products distributed by the company. For the first 9 months of 2018, net revenues from onetime commissions were RMB 706.4 million, a decrease of 3.2% from the same period in 2017.

Net revenues from recurring management fees for the third quarter of 2018 were RMB 96.4 million, a 6.3% increase from corresponding period in 2017, primarily due to an increase in the value of assets under management. The company recognized RMB 5.7 million, and RMB 18.1 million carried interest in the third quarter of 2018 and '17, respectively. For the first 9 months of 2018, net revenues from recurring management fee was RMB 341 million, a 35.2% increase from the same period in 2017. RMB 49.7 million and RMB 41.6 million carried interest was recognized as part of Jupai's recurring management fee for the first 9 months of 2018 and the same period in 2017, respectively.

Net revenues from recurring service fees for the third quarter of 2018 was RMB 10.1 million, a 53.3% decrease from corresponding period in 2017, primarily because the company provided ongoing service to fewer product suppliers. The company recognized 0 and RMB 0.9 million variable performance fees in the third quarter of 2018 and '17, respectively. For the first 9 months of 2018, net revenues from recurring service fee were RMB 36.6 million, a 54.9% decrease from the same period in 2017. The company recognized RMB 0.3 million and RMB 13.7 million variable performance fees for the first 9 months of 2018 and in the same period in 2017, respectively.

Net revenues from other service fees for the third quarter of 2018 were RMB 56.3 million, an 11.1% decrease from the corresponding period in 2017, primarily due to a decrease in sub-advisory fees collected from other companies. For the first 9 months of 2018, net revenues from other service fees was RMB 103.4 million, a decrease of 43.5% from the same period in 2017.

Starting from the 1st of January, 2018, the company adopted Accounting Standards Update 2014-09, Revenue from Contracts with Customers, on a modified retrospective basis. That adoption has no material impact on the company's financial position, results of operation, or cash flows.

Operating costs and expenses for the third quarter of 2018 were RMB 283.3 million, an increase of 4% from corresponding period in 2017. For the first 9 months of 2018, operating costs and expenses were RMB 847.3 million, an increase of 7.7% from the same period in 2017. Largely due to higher marketing expenses as well as G&A cost.

Operating margin for the third quarter of 2018 was 8.8% compared to 38.2% from the corresponding period in 2017. For the first 9 months of 2018, operating margin was 28.6% compared to 36.9% from the same period in 2017.

Loss from equity in affiliates for the third quarter of 2018 was RMB 18.7 million as compared to income from equity in affiliates of RMB 0.2 million for the corresponding period in 2017. The loss was primarily attributable to RMB 15.8 million of impairment loss relating to the company's investment in Shanghai Runju Financial Information Service Corporation, a noncontrolling investee of the company. As the industry regulations newly introduced on March 28, 2018 emphasize that the asset management business conducted through Internet are subject to oversight from financial regulatory authorities, Runju has formulated a new business plan to adjust to its business model and is in the transition of its business. Based on management's latest evaluation, impairment loss of RMB 33.8 million was recorded as loss from equity in affiliates for the 9 months ended September 30, 2018, including RMB 15.8 million recorded in the third quarter of 2018. Future impairment analysis will be performed at each quarter-end.

Net income attributable to ordinary shareholders for the third quarter of 2018 was RMB 1.7 million, a 98.5% decrease from the corresponding period in 2017. For the first 9 months of 2018, net income attributable to ordinary shareholders was RMB 205.4 million, a decrease of 35.6% from the same period in 2017.

Net margin attributable to ordinary shareholders for the third quarter of 2018 was 0.5% as compared to 26.2% for the corresponding period in 2017. For the first 9 months of 2018, net margin attributable to ordinary shareholders was 17.3% compared to 25.6% for the same period in 2017.

Net income attributable to ordinary shareholders per basic and diluted American depository share for the third quarter of 2018 was RMB 0.05 and RMB 0.05, respectively, as compared to RMB 3.54 and RMB 3.39, respectively, for the corresponding period in 2017. For the first 9 months of 2018, net income attributable to ordinary shareholders per basic and the diluted ADS was RMB 6.16 and RMB 5.85, respectively, as compared to RMB 9.83 and RMB 9.43, respectively, for the same period in 2017.

Non-GAAP net income attributable to ordinary shareholders for the third quarter of 2018 was RMB 25.5 million, a 79.8% decrease from corresponding period in 2017. For the first 9 months of 2018, non-GAAP net income attributable to ordinary shareholders was RMB 267.1 million, a 24.2% decrease from the same period in 2017.

Non-GAAP net margin attributable to ordinary shareholders for the third quarter of 2018 was 8.2% as compared to 28.6% for the corresponding period in 2017. For the first 9 months of 2018, non-GAAP net margin attributable to ordinary shareholders was 22.5% as compared to 28.3% for the same period in 2017.

Non-GAAP net income attributable to ordinary shareholders per diluted ADS for the third quarter of 2018 was RMB 0.73 as compared to RMB 3.69 for the corresponding period in 2017. For the first 9 months of 2018, non-GAAP net income attributable to ordinary shareholders per diluted ADS was RMB 7.60, as compared to RMB 10.42 for the same period in 2017.

Looking to our balance sheet and the cash flow. As of September 30, 2018, the company had RMB 740.6 million (sic) [RMB 740.7 million] in cash and cash equivalents as compared to RMB 1,527.8 million as of December 31, 2017.

Net cash used in operating activities during the third quarter of 2018 was RMB 104.7 million. For the first 9 months of 2018, net cash used in operating activities was RMB 115.9 million.

Net cash used in investing activities during the third quarter of 2018 was to RMB 217.6 million. For the first 9 months of 2018, net cash used in investing activities was RMB 550 million.

Net cash used in financing activities during the third quarter of 2018 was RMB 17.5 million. For the first 9 months of 2018, net cash used in financing activities was RMB 121.2 million.

That concludes our prepared remarks. I will now turn the call back to 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) Our first question comes from the line of [Haifong Kao] from UBS.

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Unidentified Analyst, [2]

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I'm [Haifong Kao] from UBS. I have 3 questions. Firstly, the wealth and asset management industries in China has been under pressure and facing lots of challenges since the beginning of this year. Can you share with us your view on the outlook for the industry and Jupai also? Secondly, we understand that Jupai's onetime commission rate has been stable in the third quarter despite challenging industry environments. Can the management share with us your view on the trends in your onetime commission rate going forward? This my second question. And my third question is, I wonder what is your expectations on Jupai's performance fee income going forward? And when do you expect to complete the exit of your Focus Media related fund products? That's my 3 questions.

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Harry He, Jupai Holdings Limited - Director of IR [3]

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Sure, [Haifong]. I mean, thank you very much for asking these good questions. And let me do a translation for our Chairman. And we will answer your question one by one. Our Chairman will address your first question first.

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Ni Jianda, Jupai Holdings Limited - Chairman of the Board & CEO [4]

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(foreign language)

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Harry He, Jupai Holdings Limited - Director of IR [5]

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Since the beginning of 2018, we have seen the supply and the demand of wealth management and asset management products being impacted by 2 factor: the continued deleverage by the government; and the continued tightening of regulatory requirements.

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Ni Jianda, Jupai Holdings Limited - Chairman of the Board & CEO [6]

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(foreign language)

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Harry He, Jupai Holdings Limited - Director of IR [7]

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From the supply perspective, the strict review process has led to the prolonged product registration time frames, leading to decreased supply of wealth and asset management products. Although we noticed that the review process had loosened up a bit over the past 1 month or so. We believe the pressure on product supply will remain for a while going forward.

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Ni Jianda, Jupai Holdings Limited - Chairman of the Board & CEO [8]

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(foreign language)

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Harry He, Jupai Holdings Limited - Director of IR [9]

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From the demand perspective, due to a continued deleverage by the government, our funding costs had been rising, driving many medium, small companies as well as low-quality of wealth management and asset management companies out of business, or causing significant cash flow problems. The result in the fourth have made investors extremely cautious about investing in wealth management products, which have inevitably impacted Jupai's business performance.

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Ni Jianda, Jupai Holdings Limited - Chairman of the Board & CEO [10]

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(foreign language)

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Harry He, Jupai Holdings Limited - Director of IR [11]

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Given the high uncertainty in the current macro environment, management believe that the -- it will be more prudent for us to cease providing specific guidance on our financial outlook. However, we do plan to offer investor official guidance again when the industry and the market outlook becomes clear -- more clear. To offer investors with some general visibility, we expect the aggregate value of wealth management products distributed by Jupai for the first -- for the fourth quarter of 2018 to be around RMB 5 billion.

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Ni Jianda, Jupai Holdings Limited - Chairman of the Board & CEO [12]

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(foreign language)

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Harry He, Jupai Holdings Limited - Director of IR [13]

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We believe that the wealth management industry has entered into a critical transition period since the beginning of this year. As Jupai will also prepare ourselves with various strategic measures to enhance our operating efficiency. Two of the most important measures are IT system upgrade and optimization of our talent resources.

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Ni Jianda, Jupai Holdings Limited - Chairman of the Board & CEO [14]

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(foreign language)

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Harry He, Jupai Holdings Limited - Director of IR [15]

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For the IT system upgrade, post the -- for upgrade, our new IT system and the mobile app will significantly increase the degree of digitalization throughout the entire transition -- transaction process, covering contract signings, client account management and the interim product reports. Which we believe will greatly increase the efficiency of our client managers. Moreover, through analyzing client data such as product browsing history and clients' actuals transactions, we can more effectively understand our clients' needs and further strengthen our product design and the customer service capabilities. Regarding the talent enhancement, we continually provide online training sessions to our client managers through our e-learning systems, covering topics such as sales techniques, management and finance.

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Ni Jianda, Jupai Holdings Limited - Chairman of the Board & CEO [16]

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(foreign language)

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Harry He, Jupai Holdings Limited - Director of IR [17]

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In 2019, we look to launch our product management system for asset management [all]. This system will cover functions across the entire business cycle from project screening, peer analysis, collaboration partner management, product risk management and internal approval as well as post investment management, and we believe it will allow online management and big data analysis, raising our Asset Management division.

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Ni Jianda, Jupai Holdings Limited - Chairman of the Board & CEO [18]

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(foreign language)

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Harry He, Jupai Holdings Limited - Director of IR [19]

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Further optimization of talent resources. From the beginning of this year, we increasingly motivated our staff mainly through optimizing our incentive program and raising performance requirement bar. In addition, we effectively streamlined our talent resources, which will be likely reflected in the next 1 or 2 quarters. As we continue to enhance capabilities of our team, we look to greatly improve work efficiency and the customer satisfaction. With these measures in place, we believe that Jupai can further strengthen our competitive advantages, which allow -- which will allow us to swiftly capture new market opportunities when the industry moves beyond current transition period.

That'll be the end of your first question, and I would do translation for the second question for our Chairman.

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Ni Jianda, Jupai Holdings Limited - Chairman of the Board & CEO [20]

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(foreign language)

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

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Jupai was able to achieve a stable average onetime commission rate in Q3 in line with our previous expectation. Our average onetime commission rate for Q3 rose to 2.8% from 2.2% in the same period last year and it stayed relatively flat compared to Q2.

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Ni Jianda, Jupai Holdings Limited - Chairman of the Board & CEO [22]

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(foreign language)

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Harry He, Jupai Holdings Limited - Director of IR [23]

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As the impact from property purchase restriction policy started to kick in, in the second half of 2017, cash cycles for property developers have been greatly extended. Moreover, commercial banks have been reducing their funding support for property developers. As a result, property developers are [willing] to accept higher funding costs, which enhance Jupai's bargaining power.

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Ni Jianda, Jupai Holdings Limited - Chairman of the Board & CEO [24]

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(foreign language)

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Harry He, Jupai Holdings Limited - Director of IR [25]

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Looking ahead, we expect the overall real estate industry to continue facing very tight cash cycles. Consequently, we believe that it is higher likely -- highly likely that our onetime commission rate will remain at the current, relatively high level over the following quarters. So that'll be the second question.

And let me do the translation for the last question for our Chairman.

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Ni Jianda, Jupai Holdings Limited - Chairman of the Board & CEO [26]

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(foreign language)

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Harry He, Jupai Holdings Limited - Director of IR [27]

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From a mid- to long-term perspective, it would be that Jupai's performance fee income will continue on a rising trend going forward, mainly due to the increasing of AUM over the past few years and the change in our product mix. Since early this year, we have been devoted to optimizing our product structure. So launch more -- so launching more products that are actively managed and developing more equity-related products, which we believe will allow us to achieve higher management fee income and a carried interest.

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Ni Jianda, Jupai Holdings Limited - Chairman of the Board & CEO [28]

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(foreign language)

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Harry He, Jupai Holdings Limited - Director of IR [29]

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Specifically, regarding the performance fee income related to the exit of our Focus Media fund. We originally expected that to complete our exit by the end of 2018. But there has been some delay in the timeline, so Jupai has signed a contract with a well-known player in the industry for the share disposal. And we expect to complete this transaction in the first quarter of 2019. So that'll be the answer for all your questions, [Haifong]. Was that helpful?

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Unidentified Analyst, [30]

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Yes, it's very comprehensive.

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Harry He, Jupai Holdings Limited - Director of IR [31]

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Thank you. Thank you, [Haifong].

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Operator [32]

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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 of IR [33]

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

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Operator [34]

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