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Edited Transcript of JP earnings conference call or presentation 23-Apr-19 12:00pm GMT

Full Year 2018 Jupai Holdings Ltd Earnings Call

SHANGHAI Apr 27, 2019 (Thomson StreetEvents) -- Edited Transcript of Jupai Holdings Ltd earnings conference call or presentation Tuesday, April 23, 2019 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

* Liu Min

Jupai Holdings Limited - CFO

* 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 Full Year 2018 Earnings Conference Call. (Operator Instructions) Please note, today's conference call is being recorded. (Operator Instructions)

I'd 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 of IR [2]

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Hello, everyone, and welcome to Jupai's Earnings Conference Call for the Full Year Ended December 31, 2018. Leading the call today is Mr. Jianda Ni, our Chairman and CEO, who will review the highlights for the full year of 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 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 the 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.

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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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[Interpreted] 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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[Interpreted] 2018 was challenging for Jupai on several fronts. During the year, investors became increasingly conservative at the Chinese government's focus on deleveraging at expense of economics growth and expanding U.S.-China trade conflict, contributed to an uncertain economic outlook. In addition, China's wealth management industry contributed to experience -- continued to experience a difficult transition period, due to tightened regulations.

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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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[Interpreted] Amid this unfavorable environment, the aggregate value of wealth management product distributed by Jupai decreased by 44.3% year-over-year to RMB 30.3 billion in 2018. And the total net revenue for 2018 declined by 22.5% year-over-year to RMB 1.3 billion. We were, however, able to achieve an average onetime commission rate of 2.4% in 2018 compared to 1.9% in 2017, due to our enhanced bargaining power as -- where is the company is continued to face rising cost of capital. Based on our observation of the -- of our credit markets since the beginning of 2019, we are confident in maintaining our average onetime commission rate at a healthy level in the next few quarters.

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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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[Interpreted] Looking into 2019, we remain cautiously optimistic about China's overall economic outlook as the government has introduced various stimulus policies to support private enterprises, especially SMEs to enhance economic growth. The domestic equity market has also showed signs of recovery since the beginning of the year, which we believe will help restore investor confidence and gradually increase the appetite for wealth management products.

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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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[Interpreted] During this time of industry transition, Jupai will focus on developing new product categories, including real estate equity product and overseas products to better meet investors' evolving needs. Selecting high-quality project counter parties to control risk and the streamlining internal management to optimize costs. We are confident that we will be well positioned to seize opportunities as the market recovers. And we look forward to building Jupai into a leading wealth management and asset management brand in China.

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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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[Interpreted] I will now turn the call over to Mr. Harry He, our Investor Relations Director, who'll go through the financials in more detail. Thank you.

Thank you, Ni Jian. Jupai's operating results in 2018 were under pressure, due to severe industry overhead -- industry headwinds. And we saw declines in our revenue and the bottom line results for the full year. In the fourth quarter of 2018, based on our impairment assessment review, we recognized a goodwill impairment loss of USD 39 million from acquisition of Scepter in 2015, as the volatile market environment continued to negatively impact the company's operations and the business outlook. As we have fully written down the book value of goodwill related to the acquisition of Scepter with approximately RMB 0.3 million of goodwill on our balance sheet, we do not expect to incur any additional substantial goodwill impairment losses going forward.

Since the third quarter 2018, Jupai has adopted various measures to enhance our operating efficiencies, such as personnel optimization, IT system enhancement, business SOP streamlining and more stringent cost controls. We expect these measures to take effect gradually and have a positive influence on our operating results in the quarters to come.

Now let me walk you through our financial highlights for the full year of 2018. Net revenue for the full year of 2018 was RMB 1,321.7 million, a 22.5% decrease from 2017, primarily due to decreases in both onetime commissions and other service fees. Net revenues from onetime commissions for the full year of 2018 was RMB 737.5 million, a 29% decrease from 2017, primarily as a result of a decrease in the aggregated value of wealth management product distributed by the company.

Net revenue from recurring management fees for the full year of 2018 were RMB 435.5 million, a 19.8% increase from 2017, primarily due to an increase in moving average value of assets under management. RMB 61.6 million and RMB 81.7 million carried interest were recognized as part of Jupai's recurring management fee for the full year of 2018 and '17, respectively.

Net revenues from recurring service fees for the full year of 2018 were RMB 64.3 million, a 38.7% decrease from 2017, primarily because the company provided ongoing services to fewer product suppliers. The company recognized RMB 0.3 million and RMB 13.8 million variable performance fees for the full year of 2018 and '17, respectively. Net revenues from other service fees for the full year of 2018 were RMB 84.4 million, a 57.5% decrease from 2017 primarily due to a decrease in sub-advisory fees collected from other companies.

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

Operating costs and expenses for the full year of 2018 was RMB 1,481.7 million, a 25.3% increase from 2017, largely due to higher marketing expenses generally across -- and the impairment loss of goodwill of USD 39 million, which was the impairment of goodwill from Scepter acquisition 2015. Operating margin for the full year of 2018 was minus 12.1% compared to 30.7% in 2017.

Loss from equity in affiliates for the full year of 2018 was RMB 113.5 million as compared to income from equity in affiliates of RMB 2.6 million in 2017. The loss was primarily attributable to RMB 90.8 million of impairment loss relating to the company's investment in Shanghai Runju Financial Information Service, a noncontrolled investee of the company. Due to the new industry regulations implemented since March 2018, Runju's legacy business model had to be discontinued. By the end of 2018, an impairment provision for the full book value of investment in Runju had been provided.

Non-GAAP net income attributable to ordinary shareholders for the full year of 2018 was RMB 13 million, a 97.1% decrease from 2017. Non-GAAP net margin attributable to ordinary shareholders for the full year of 2018 was 1% as compared to 26.6% in 2017.

Non-GAAP net income attributable to ordinary shareholders per diluted American ADS for the full year of 2018 was RMB 0.37 as compared to RMB 13.24 in 2017. The loss attributable to ordinary shareholders for the full year of 2018 was RMB 387.7 million compared to net income attributable to ordinary shareholders of RMB 409.5 million in 2017.

Net margin attributable to ordinary shareholders for the full year of 2018 was minus 29.3% compared to 24% in 2017. Net loss attributable to ordinary shareholders per basic and the diluted ADS for the full year of 2018 was RMB 11.6 and RMB 11.6, respectively, as compared to net income attributable to ordinary shareholders per basic and the diluted ADS of RMB 12.57 and RMB 11.95, respectively, in 2017.

Looking to our balance sheet and the cash flow. As of December 31, 2018, the company had RMB 1,302.6 million in cash and cash equivalents and restricted cash compared to RMB 1,527.8 million as of December 31, 2017.

Net cash used in operating activities for the full year of 2018 was RMB 62.9 million. Net cash used in investing activities for the full year of 2018 was RMB 40.9 million. Net cash used in financing activities for the full year of 2018 was RMB 121.4 million.

Given the high uncertainty in the current macro environment, the management believes that 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. 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] of UBS.

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Unidentified Analyst, [2]

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I have 2 questions actually. Firstly, the wealth management industry in China has been under lots of pressure over the past few quarters. I wonder what is management's take on the outlook for the overall industry and Jupai being 2019. And secondly, Jupai incurred a large impairment loss of goodwill in 2018. And could you provide more color about the impairment losses? And do you foresee some further impairments going forward? That's my 2 questions.

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

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Sure. Thank you, [Haifong]. Let me do a translation for the Chairman. We will be with you shortly.

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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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[Haifong], the Chairman will answer your first question first, and I will do the translation for the benefits of other audience.

[Interpreted] The year 2018 was very a challenging one for both our wealth management industry and Jupai with many unexpected changes. In terms of our overall industry environment, the macroeconomic policies had placed more emphasis on pursuing better quality and the structure of economic growth, a transition from the past macro policies, which were chasing -- which were simply chasing GDP growth. The related financial deleverage has caused market worry about the possibility of potential slowdown in economic growth. Moreover, as a result of the expanding U.S.-China trade conflict it has been rising uncertainty in global economic outlook.

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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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[Interpreted] On the other hand, the tightening of the regulatory requirements continued, leading to a stricter product approval process by the government authority and the prolonged product registration time frame. The consequently decreased supply of wealth and asset management products had forced wealth management company to adjust their product strategies and business model and driven those player just failed to comply with the latest government requirements out of the market.

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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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[Interpreted] In addition, the registry market in Tier 1 and the Tier 2 cities has been weak over the past 6 months, eroding the confidence of investors in real estate-related investments. These macro factors mentioned above have made the investors become extremely cautious, which then negatively influenced Jupai's operating results in 2018.

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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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[Interpreted] Looking into 2019, we remain cautiously optimistic about our overall economics outlook. Although, the domestic economy remains lukewarm in the first quarter of 2019, we saw the government introduced various stimulus policies to support private enterprises, especially SMEs to enhance economic growth. Recently, the [NBIC] has also loosened up restrictions on household registration in larger cities. Moreover, the domestic equity market has also shown signs of recovery since the beginning of this year, which we believe along with the policy initiated will help restored investor confidence and gradually increase the appetite for wealth management products.

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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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[Interpreted] More specifically for Jupai, we remain confident about our outlook in 2019. Jupai will be dedicated to executing on the following 2 strategies: firstly, on the product front, Jupai will actively promote product innovation and enhance the quality of our project counter parties; secondly, with respect to internal management, Jupai will streamline internal management processes and optimize operational costs.

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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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[Interpreted] In terms of our products Jupai will further leverage our core competitive advantage within the industry and more actively develop innovative real estate-related products. We look to maintain steady growth within our real estate quasi fixed income product category, while gradually transitioning more of our resources into the real estate equity product category. In our view, real estate projects, given the nature of the underlying assets, bear better risk return profile compared to other types of projects, such as consumer credit or supply chain finance. At the same time, owning to our extensive network and in-depth know-how in the race, the industry, Jupai is capable of attaining real estate projects with the best quality for all kinds.

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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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[Interpreted] In the very beginning, we were mostly focused on developing real estate preferred share equity products. So as to allow our clients to invest in a relatively safer asset category, while enjoying return upside from the growth of real estate enterprises. We believe the liquidity risk of such type of product is highly controllable and the total expected return are also very competitive. Moreover, Jupai has set up a direct real estate investment division in the second quarter of 2019, which will allow us to more proactively participate in the development and the management of the real estate projects, so as to continue providing innovative real estate products to our clients.

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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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[Interpreted] We also look to further enhance the quality of our project counter parties in 2019, along with the risk control measures such as guarantees provided by the underlying companies. We will emphasize more on financial stability of our counter parties, such as -- as well as the cash flow situation and the management of the specific projects. We believe that this measure will effectively enhance the risk control quality of our projects.

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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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[Interpreted] Regarding overseas business, Jupai looks to promote our overseas insurance product to meet the rising demand of global asset allocation for our clients. Besides Jupai was strengthening collaboration with the leading global financial institutions, such as Blackstone, Brookfield, Carlyle and Oaktree, to provide world-class global key products to our clients.

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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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[Interpreted] When it comes to internal management, Linda Wong joined the management team as COO in early Jan. And with her abundant management experience in private banking industry, the company will implement various improvement measures to streamline our talent resources, strengthen operational process and to upgrade our IT system.

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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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[Interpreted] Since the second half of 2018, we have increasingly motivated our staff mainly through optimizing our incentives program and then raising the performance requirement bar. In addition, we have effectively streamlined our talent resources. We look to reduce a number of client managers as well as a number of cities covered and the client centers. Based on our current plan, we target to reduce a number of our headcount to below 1,500 staff by the end of 2019. This cost measure -- cost control measure will take time to materialize, and we expect the positive aspects -- effects from these measure to contribute more meaningfully to our earnings in the next 1 or 2 quarters, which means third or fourth quarter of 2019. We will continue to enhance the capability of our team and then look to greatly improve work efficiencies and the customer satisfaction. With these measures in place, we believe that Jupai can further strengthen our competitive advantages.

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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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[Interpreted] With regard to our IT systems. We continue to devote material resources into this area in 2018 and expect to utilize the upgraded IT system to effectively optimize our business process and enhance operating efficiencies in 2019. Post the upgrade, our new IT system and the mobile app will significantly increase the degree of digitalization throughout the entire transaction process, covering contract signing, client account management and 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 the current actual transactions, we can understand more effectively our clients' needs and further strengthen our product design and customer service capabilities. Regarding the talent enhancement, we continuously provide online training sessions to our current managers through our e-learning system, covering topics such as sales techniques, management and the finance.

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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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[Interpreted] In 2019, we are planning to launch a product management system for our asset management arm. This system will cover functions across the entire business cycle from project screening, peer analysis, project counterparties management, product risk management and internal approval as well as post investment management. And we believe it will allow online management and the big data analysis within our asset management division.

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Ni Jianda, Jupai Holdings Limited - Chairman of the Board & CEO [30]

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(foreign language)

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

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[Interpreted] In short, during this period of industry transition, Jupai will continue to focus on developing quality and innovative wealth management products and greatly enhancing operating efficiency, which will allow the company to seize market opportunities when the overall industry recovers. Specifically about our first quarter operation update, the aggregate value of wealth management products distributed by the company declined quarter-over-quarter in Q1, due to the Chinese New Year effect, which means fewer working days. However, as we expect to generate performance fee income of roughly RMB 120 million from disposing our investments in Focus Media, which will be higher than the previously expected income of RMB 80 million, we believe our net loss in Q1 will be significantly narrowed.

So that will be the answer for the first question and our Chairman will answer your second question now.

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Liu Min, Jupai Holdings Limited - CFO [32]

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(foreign language)

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Harry He, Jupai Holdings Limited - Director of IR [33]

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[Interpreted] As we disclosed in our earnings release, based on our impairment assessment review, Jupai recognized the impairment loss of goodwill of USD 39 million, equivalent to RMB 268 million. As a result of the impairment of goodwill from the acquisition of Scepter in 2015, given that the volatile market environment continued to negatively impact the company's operation and the business outlook. If excluding the impact from this impairment loss of goodwill, we estimate that the Jupai's adjusted operating profit for the full year of 2018 would be approximately RMB 110 million.

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Liu Min, Jupai Holdings Limited - CFO [34]

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(foreign language)

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Harry He, Jupai Holdings Limited - Director of IR [35]

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[Interpreted] This impairment loss goodwill is one-off and a noncash item. Additionally, as we had adopted very conservative assumptions for this impairment assessment review, we have fully written down the book value of the goodwill related to the acquisition of Scepter, and with approximately only RMB 0.3 million of goodwill on our balance sheet as of the end of 2018. As a result, the management do not expect major goodwill impairment losses going forward.

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Liu Min, Jupai Holdings Limited - CFO [36]

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(foreign language)

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Harry He, Jupai Holdings Limited - Director of IR [37]

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[Interpreted] Thank you, [Haifong] for your questions.

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Operator [38]

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Thank you. We are now approaching the end of the conference call. I'll 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 [39]

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

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Operator [40]

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