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Edited Transcript of YIN earnings conference call or presentation 24-Aug-18 12:00pm GMT

Q2 2018 Yintech Investment Holdings Ltd Earnings Call

Sep 8, 2018 (Thomson StreetEvents) -- Edited Transcript of Yintech Investment Holdings Ltd earnings conference call or presentation Friday, August 24, 2018 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Rene Vanguestaine

Christensen & Associates - Chairman and CEO

* Wenbin Chen

Yintech Investment Holdings Limited - Co-Founder, Chairman, CEO & CFO

* Yvonne Young

Yintech Investment Holdings Limited - IR Director

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Conference Call Participants

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* Kin Man Wong

Jefferies LLC, Research Division - Equity Analyst

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Presentation

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Operator [1]

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Good day, everyone, and welcome to the Yintech Second Quarter 2018 Earnings Conference Call. (Operator Instructions) And please note that today's event is being recorded.

I would now like to turn the conference over to Rene Vanguestaine with Christensen IR.

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Rene Vanguestaine, Christensen & Associates - Chairman and CEO [2]

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Thank you, William, and welcome all of you to Yintech Second Quarter 2018 Earnings Conference Call. Our earnings release was released earlier today and is now available on our IR website. On the call today from Yintech are Mr. Wenbin Chen, Chairman and CEO; and Ms. Yvonne Young, Investor Relations Director. Mr. Chen will review business operations and company highlights, followed by Yvonne who will go over the financials and guidance on behalf of Mr. Chen.

They will both be available to answer your questions during the Q&A session that follows. Questions can be asked in English or Chinese. If you ask your question in Chinese, please translate it into English yourself afterwards.

Before beginning, we would like to remind you that discussions during this call contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Such statements are subject to risks, uncertainties and factors that may cause actual results to differ materially from those contained in any such statements.

Further information regarding potential risks, uncertainties or factors is included in Yintech's filings with the U.S. Securities and Exchange Commission.

Yintech does not undertake any obligation to update any forward-looking statement, except as required under applicable law. During this call, we will be referring to several non-GAAP financial measures as supplemental measures to review and assess our operating performance. These non-GAAP financial measures are not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with U.S. GAAP.

For information about these non-GAAP measures and reconciliation to GAAP measures, please refer to our earnings press release. I will now turn the call over to Mr. Chen. Mr. Chen will give his remarks -- speech in Chinese and Yvonne will translate for him. Go ahead, Mr. Chen.

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Wenbin Chen, Yintech Investment Holdings Limited - Co-Founder, Chairman, CEO & CFO [3]

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(foreign language)

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Yvonne Young, Yintech Investment Holdings Limited - IR Director [4]

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Thank you, Rene, and thank you all for joining today's quarterly results earnings conference call.

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Wenbin Chen, Yintech Investment Holdings Limited - Co-Founder, Chairman, CEO & CFO [5]

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(foreign language)

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Yvonne Young, Yintech Investment Holdings Limited - IR Director [6]

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Since the beginning of 2018, volatility has intensified in capital markets in China and quality-wise during this period, the Chinese government implemented a series of regulatory reforms and new supervision measures, especially targeting the financial industry. Overall, financial market conditions remains challenging throughout the first half.

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Wenbin Chen, Yintech Investment Holdings Limited - Co-Founder, Chairman, CEO & CFO [7]

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(foreign language)

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Yvonne Young, Yintech Investment Holdings Limited - IR Director [8]

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The volatility in spot gold TD trading on the Shanghai Gold Exchange continued its downward trend, starting in 2017 and reached its lowest level since 2005, during the second quarter. This continued to negatively impact customers' trading activities on our platform. As a result, net commissions from spot commodities' trading decreased further from the previous quarter as we anticipated. We expect that the marketing environments for gold TD might persist in the second half of the year.

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Wenbin Chen, Yintech Investment Holdings Limited - Co-Founder, Chairman, CEO & CFO [9]

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(foreign language)

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Yvonne Young, Yintech Investment Holdings Limited - IR Director [10]

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Despite the unfavorable marketing environment in spot commodities, we have delivered solid results in the second quarter. We have been steadfast in our efforts to diversifying our product offerings, in particular, in strengthening our presence in securities services for individual customers in China, which carry lower risk, relative to the spot commodities, to capture the higher growth potential on this trend. Since we started this business, in the second half of last year it has grown explosively to become a major revenue engine.

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Wenbin Chen, Yintech Investment Holdings Limited - Co-Founder, Chairman, CEO & CFO [11]

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(foreign language)

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Yvonne Young, Yintech Investment Holdings Limited - IR Director [12]

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As I mentioned on our Q1 earnings call, we expected this business to contribute more than 30% of our overall net commissions and fees in the second quarter of 2018. I'm happy to report that it actually reached 40%, far exceeding our original target. With this, we have now delivered royalty growth for 3 consecutive quarters.

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Wenbin Chen, Yintech Investment Holdings Limited - Co-Founder, Chairman, CEO & CFO [13]

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(foreign language)

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Yvonne Young, Yintech Investment Holdings Limited - IR Director [14]

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Revenues of commissions and fees from securities services grew from RMB 13 million in Q4 2017 to RMB 45 million in Q1 2018 and further to RMB 87 million in Q2 2018, representing a Q-over-Q increase of 247% and 94%, respectively. We believe it's a testament to the initial success of our transitioning and a clear demonstration of our strong execution capabilities. We expect securities services to continue to expand steadily and become our second largest revenue driver after futures commodities.

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Wenbin Chen, Yintech Investment Holdings Limited - Co-Founder, Chairman, CEO & CFO [15]

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(foreign language)

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Yvonne Young, Yintech Investment Holdings Limited - IR Director [16]

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To that effect, we introduced more securities services products to our customers by leveraging our core strengths in deep understanding of an intensive experience in serving Chinese individual investors, including the more than 550,000 customers we accumulated over the past few years. One of our focuses is securities, investor education where we continued our emphasis on producing quality content and research to provide our customers with timely market information, comprehensive research analysis and investment quality specially designed for various levels of customer knowledge and experience.

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Wenbin Chen, Yintech Investment Holdings Limited - Co-Founder, Chairman, CEO & CFO [17]

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(foreign language)

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Yvonne Young, Yintech Investment Holdings Limited - IR Director [18]

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We recently launched dialogue with [big tycoon], a subscription-based service through WeChat. It's a high-end TV video program jointly sponsored by XINHUANET and Yintech, focusing on interview with recognized business and financial experts, leveraging the brand power of XINHUANET and the expertise and reach of Yintech in personal financial services. Dialogue with this [tycoon] brings together those top experts and scholars, well-known fund managers with outstanding investment track record, leading analysts from well-known securities firm offering high-quality financial and business video content to provide investment wisdom to individual investors across various asset classes. It's also a platform for marketing experts and individual investors to interact and exchange ideas.

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Wenbin Chen, Yintech Investment Holdings Limited - Co-Founder, Chairman, CEO & CFO [19]

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(foreign language)

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Yvonne Young, Yintech Investment Holdings Limited - IR Director [20]

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We believe this high-end and value-added program series will not only generate more revenue but more importantly enhance customers' [business needs]. We'll continue to invest in designing more diversified and comprehensive online securities advisory courses at various price points to address different levels of needs based on each customer's financial knowledge and sophistication.

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Wenbin Chen, Yintech Investment Holdings Limited - Co-Founder, Chairman, CEO & CFO [21]

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(foreign language)

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Yvonne Young, Yintech Investment Holdings Limited - IR Director [22]

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Now moving to our futures commodities business.

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Wenbin Chen, Yintech Investment Holdings Limited - Co-Founder, Chairman, CEO & CFO [23]

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(foreign language)

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Yvonne Young, Yintech Investment Holdings Limited - IR Director [24]

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Since the second half of last year, we have entered into a transitioning period and actively explored new business growth engines to rapidly renew our business success. Since we launched this business in May 2017, it has experienced explosive growth to become our core business and largest revenue contributor. We are proud of our ability to foster our business recovery, thanks to the great team efforts across many parts of the company.

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Wenbin Chen, Yintech Investment Holdings Limited - Co-Founder, Chairman, CEO & CFO [25]

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(foreign language)

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Yvonne Young, Yintech Investment Holdings Limited - IR Director [26]

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In the meantime, we are cautiously expanding, making sure we are in full compliance with changing regulations in all futures commodities services. In the second quarter, we strategically slowed the growth of this business, so we could deploy more internal resources and capital into securities services.

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Wenbin Chen, Yintech Investment Holdings Limited - Co-Founder, Chairman, CEO & CFO [27]

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(foreign language)

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Yvonne Young, Yintech Investment Holdings Limited - IR Director [28]

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I believe, one of our core competitiveness is our ability to swiftly shift business directions in response to dynamic market conditions and emerge to be a bigger and stronger player in the space at a faster pace than our peers.

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Wenbin Chen, Yintech Investment Holdings Limited - Co-Founder, Chairman, CEO & CFO [29]

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(foreign language)

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Yvonne Young, Yintech Investment Holdings Limited - IR Director [30]

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We'll continue to deploy resources based on changes in market conditions. As far as we can see, our futures commodities business will grow further in the second half of the year.

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Wenbin Chen, Yintech Investment Holdings Limited - Co-Founder, Chairman, CEO & CFO [31]

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(foreign language)

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Yvonne Young, Yintech Investment Holdings Limited - IR Director [32]

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As a technology-driven company focused on providing financial services, we have made significant progress and delivered strong results in offering our customers various securities information platforms.

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Wenbin Chen, Yintech Investment Holdings Limited - Co-Founder, Chairman, CEO & CFO [33]

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(foreign language)

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Yvonne Young, Yintech Investment Holdings Limited - IR Director [34]

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It not only benefited from our own proprietary IT platforms but also partnered with other respective financial experts to deliver online courses on our platforms. In July 2017, we established Sina Shi Jin, our joint venture with SINA to focus on providing financial software, information and services to individual investors, seeking investment in securities, wealth management, futures and gold products, leveraging SINA's brand recognition and tremendous user traffic as well as Yintech's leading position and professional expertise in offering investments and trading services for individual customers in China. Sina Shi Jin delivered royalty growth and contributed significantly to our securities services in the second quarter.

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Wenbin Chen, Yintech Investment Holdings Limited - Co-Founder, Chairman, CEO & CFO [35]

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(foreign language)

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Yvonne Young, Yintech Investment Holdings Limited - IR Director [36]

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We expect that business, along with other investor education and advisory services, to grow healthily.

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Wenbin Chen, Yintech Investment Holdings Limited - Co-Founder, Chairman, CEO & CFO [37]

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(foreign language)

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Yvonne Young, Yintech Investment Holdings Limited - IR Director [38]

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We also made good progress in our corporation with Baidu Cloud to explore the application of artificial intelligence in financial industry. We are now in the process of finalizing the details of our cooperation.

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Wenbin Chen, Yintech Investment Holdings Limited - Co-Founder, Chairman, CEO & CFO [39]

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(foreign language)

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Yvonne Young, Yintech Investment Holdings Limited - IR Director [40]

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The partnership with Baidu Cloud will enhance our existing CRM system and create more value in the business areas, such as marketing efficiency analysis, intelligent customer inquiry processing, 360-degree customer profiling, intelligent customer services, intelligent quality monitoring and intelligent risk management. The adoption of big data and artificial intelligence will enable us to more efficiently allocate our marketing budget and more accurately identify potential customers with higher interest who subscribe to our products and service offerings.

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Wenbin Chen, Yintech Investment Holdings Limited - Co-Founder, Chairman, CEO & CFO [41]

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(foreign language)

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Yvonne Young, Yintech Investment Holdings Limited - IR Director [42]

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Looking ahead, we'll continue to focus on diversifying our product portfolios, while maintaining high flexibility and deploying internal resources to capitalize on changing demand by offering diversified products. As a disciplined company, we adhere to and maintain the highest operational and compliance standards, and we'll continue to invest to ensure it remains so.

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Wenbin Chen, Yintech Investment Holdings Limited - Co-Founder, Chairman, CEO & CFO [43]

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(foreign language)

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Yvonne Young, Yintech Investment Holdings Limited - IR Director [44]

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To stay on top of the business -- the new business environment, we have streamlined our organization to make it more nimble, flexible and agile. We believe our innovative new products and our high standards of compliance will allow us to emerge a stronger, more diversified and resilient company in the long run.

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Wenbin Chen, Yintech Investment Holdings Limited - Co-Founder, Chairman, CEO & CFO [45]

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(foreign language)

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Yvonne Young, Yintech Investment Holdings Limited - IR Director [46]

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We expect our investments in promotional marketing campaigns during the first half of the year as well as our experience in developing new business to drive higher growth in the second half of the year. With that, we are confident that our commodities and securities services business will deliver faster growth in the second half of the year and that Yintech is confident to break even for the coming 2 quarters.

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Wenbin Chen, Yintech Investment Holdings Limited - Co-Founder, Chairman, CEO & CFO [47]

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(foreign language)

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Yvonne Young, Yintech Investment Holdings Limited - IR Director [48]

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Lastly, I would like to take this opportunity to especially thank our investors, our analysts for their consistent support and trust in us since our IPO, and your belief that we can get through the challenges we face and succeed we did before. We believe that we'll create more value for our shareholders through our persistence and continued dedication to our business development.

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Wenbin Chen, Yintech Investment Holdings Limited - Co-Founder, Chairman, CEO & CFO [49]

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(foreign language)

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Yvonne Young, Yintech Investment Holdings Limited - IR Director [50]

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With that, I will now turn the call over to Yvonne Young, our Investor Relations Director, to discuss our financial results during the second quarter of 2018 and the outlook for the third quarter of 2018.

Thanks, Mr. Chen, and thank you all for joining today's earnings conference call. I will first walk you through our second quarter 2018 financial performance, followed by our guidance for the third quarter of 2018. Our total customer trading volume from commodities and securities services for the quarter was RMB 409 billion, including RMB 406 billion from commodities services, a 54% decrease compared to the second quarter of 2017 and 18% decrease compared to the previous quarter.

Revenues for the quarter were RMB 263 million, a 54% decrease compared to the second quarter of 2017, roughly flat compared to the previous quarter. The year-over-year decrease was mainly due to a decrease in commissions and fees from spot commodities services.

The sequential decrease was mainly due to a decrease in net commissions and fees from spot and future commodities services, which was partially offset by an increase in net commissions and fees from securities services.

Our net commissions and fees for the quarter were [RMB 218 million], a decrease of 58% from the same quarter last year and a decrease of 10% from the previous quarter, primarily due to the reasons stated above.

Starting from the second quarter of 2017, we began breaking down our net commissions and fees into 2 separate revenue segments, namely commodities services and securities services. Net commissions and the fees from commodities services for the quarter were RMB 131 million, a decrease of 34% from the previous quarter, primarily due to a decrease in customer trading volume for commodities.

Net commissions and fees from securities services for the quarter were RMB 87 million, an increase of 94% from the previous quarter.

Effective fee rate for the quarter was 0.03% compared with 0.04%, partially due to the decrease in customers trading volume in commodities.

Expenses for the quarter were [RMB 315 million], a decrease of 29% from the same quarter last year and an increase of 2% from the previous quarter.

The year-over-year decrease was mainly due to cost control measures implemented on advertising and promotional expenses as well as variable components of employee compensation and benefit.

Net loss attributable to Yintech for the quarter was RMB 45 million compared to net income of RMB 85 million in the same quarter last year and net loss of CNY 50 million in the previous quarter. Diluted loss per ADS for the quarter was RMB 0.64 compared to diluted earnings per ADS of RMB 1.16 in the same quarter last year and diluted loss per ADS of RMB 0.69 in the previous quarter.

Non-GAAP net loss attributable to Yintech for the quarter, which excludes the effect of share-based compensation and amortization of intangible assets in relation to the acquisition of Gold Master, net of tax effect was RMB 31 million compared to a net loss of RMB 29 million from the same quarter last year, and net income of RMB 132 million from the previous quarter.

Non-GAAP diluted loss per ADS for the quarter was RMB 0.41 compared with non-GAAP diluted earnings per ADS of RMB 1.79 in the same quarter last year, and non-GAAP diluted loss per ADS of RMB 0.40 in the previous quarter. As of June 30, 2018, we had cash of RMB

(technical difficulty)

and short-term investments, including available for sale investments and repurchase of government bonds of RMB 1.3 billion compared with RMB 527 million and RMB 1.3 million as of March 31, 2018, respectively.

As of June 30, 2018, total shareholders' equity was RMB 3.385 billion compared with RMB 3.6 billion as of March 31, 2018.

Now let me turn over -- turn to guidance for the third quarter of 2018. Based on our current and preliminary views, in the third quarter of 2018, we expect revenues to be in the range of RMB 260 million to RMB 280 million.

This concludes my prepared remarks for today. Operator, we may now open the call to questions. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And the first questioner today will be Johnny Wong with Jefferies.

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Kin Man Wong, Jefferies LLC, Research Division - Equity Analyst [2]

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During the call, you mentioned that we will be breaking even for the next 2 quarters coming up. And given the fact that it seems that our effective commission rate has been coming down and our trading -- the active accounts are still coming down, can you give us a little bit of color on how we will achieve this? And also, will we be cutting expenses, particularly the sales and marketing expense?

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Yvonne Young, Yintech Investment Holdings Limited - IR Director [3]

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Johnny, will you translate into Chinese or I'll do the translation for Mr. Chen.

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Kin Man Wong, Jefferies LLC, Research Division - Equity Analyst [4]

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Did you want to do it?

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Yvonne Young, Yintech Investment Holdings Limited - IR Director [5]

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No. Let me do this. Okay. Just hold on for a second. I translate for Mr. Chen first. Okay.

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Wenbin Chen, Yintech Investment Holdings Limited - Co-Founder, Chairman, CEO & CFO [6]

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(foreign language)

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Yvonne Young, Yintech Investment Holdings Limited - IR Director [7]

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Okay. Thank you, Mr. Chen. Let me translate for the first question from Johnny first. There are 2 reasons that we are confident that we can -- achieving breaking even for the upcoming 2 quarters. The first one is, as I addressed in my speech about the macro environment, as I stated that in the first half of the year, the capital market in China continued to be under pressure and the A-share has been down over 10% in the first half and continued its downward pressure in the second quarter. So this is one reason that the stock market does not perform well. And the second one is that the trade war between China and the U.S. That's further decreased the trading confidence from investors. So overall, we see that the macro environment is very challenging in the first half of the year. And secondly, internally, as both business, in terms of securities services and futures business, those are the new products and service lines we developed in the second half of the year. So we invested a lot of labor power and resources in developing this business. Since it's still in the nascent stage, and we are not fully prepared or have substantial experience in operating this new business. So our operational efficiency is not as good as we expected. But into the second half, we have streamlined our business and restructured some of our business units, and -- so that we can perform more flexible and in the more nimble business structure. So based on these 2 points, we are confident that we can deliver a good result and can reach breaking even for the upcoming 2 quarters. And Johnny, hopefully, this answered your questions.

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Operator [8]

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And our next questioner today will be [Tom Hamilton] with [Parkhill] Capital.

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Unidentified Analyst, [9]

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Since the business has been facing some difficulties, did you reduce head count in the second quarter or in the first, whatever it's been, 6 weeks of the third quarter so far?

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Yvonne Young, Yintech Investment Holdings Limited - IR Director [10]

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Thank you. Let me translate for Mr. Chen. (foreign language)

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Wenbin Chen, Yintech Investment Holdings Limited - Co-Founder, Chairman, CEO & CFO [11]

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(foreign language)

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Yvonne Young, Yintech Investment Holdings Limited - IR Director [12]

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Okay. Thank you, Mr. Chen. Let me translate. Yes. So the simple answer to your question is that, yes, we do cut some head count. So our total head count actually decreased in the second quarter compared to the first quarter. And this is because, as I mentioned in the script, that we are streamlining our business and also restructure our business. And secondly, I want to highlight is that we are not simply cutting the head counts, but optimizing our current head count structure. For example, in the first half because we are entering into the new business, and we still need to develop our expertise and build up our capabilities so that we are [equipped] with knowledges and experience will enable us to keep up with development of the business involvement. So in the first half, while we don't think we are in a very good position -- very good capability building to meet our business expansion requirement. But into the second half, after some tests and experience and some [license] we learned, some experience we accumulated in the first half, we believe we are in a better position to optimize our labor power and to reach a better result in the second half.

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Operator [13]

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And this will conclude our question-and-answer session. I would like to turn the conference back over to Yvonne Young for any closing remarks.

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Yvonne Young, Yintech Investment Holdings Limited - IR Director [14]

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I think why don't we hold for another second to see if any more questions is coming.

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Operator [15]

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(Operator Instructions) And the next question will be a follow-up from Johnny Wong with Jefferies.

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Kin Man Wong, Jefferies LLC, Research Division - Equity Analyst [16]

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I just want to clarify, can you give a little bit color as to the reason why our effective fee rate has dropped to 0.32%? This is lower than what has, it's been in prior years?

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Yvonne Young, Yintech Investment Holdings Limited - IR Director [17]

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(foreign language)

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Wenbin Chen, Yintech Investment Holdings Limited - Co-Founder, Chairman, CEO & CFO [18]

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(foreign language)

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Yvonne Young, Yintech Investment Holdings Limited - IR Director [19]

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Yes, Johnny, this is Yvonne. I'm going to answer these questions on behalf of Mr. Chen. Yes, there are some couple of reasons that result in the decline of the effective fee rate. The first one is that you see the commissions and the fees from commodities services have declined Q-over-Q. So obviously, this will impact the effective fee rate, that's number one. Number two is, well, you cannot see this from our financial statement. If you look at our revenue breakdown, you will notice that other revenues has increased significantly in this quarter relatively to Q1 and Q2 last year. This is because that some of the revenues that we generated from commodities services moving to other revenues because we charge our customers not only the fees -- commissions and fees, but also on our IT information platforms we offer to our customers, for those customers who traded on the futures of the companies traded on the -- at our futures companies. So we charge our future companies the information platform service fees. So partial of the commissions and fees from commodities services actually goes to the other revenues. So if -- that's one of the major reasons that caused the decline as well.

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Operator [20]

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And the next question will be a follow-up from [Tom Hamilton] with [Parkhill] Capital.

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Unidentified Analyst, [21]

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You made a strong progress in your securities services business. Do you expect more progress on this in the second half? Can you give a bit more color on that?

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Yvonne Young, Yintech Investment Holdings Limited - IR Director [22]

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Thank you. Let me translate for Mr. Chen. (foreign language)

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Wenbin Chen, Yintech Investment Holdings Limited - Co-Founder, Chairman, CEO & CFO [23]

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(foreign language)

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Yvonne Young, Yintech Investment Holdings Limited - IR Director [24]

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Thank you. Let me translate. Our securities services business is highly impacted by the overall financial capital market conditions. So as I addressed in my speech, in the first half, we are facing quite challenging overall market conditions. And if the situation continues into the second half that will negatively impact our securities services business. So based on this conservative expectation that the situation will prolong to the second half, we expect our securities services business will grow steadily. But if the situation reversed and the market conditions changed favorably and that will -- we expect that business will generate -- will deliver much higher growth.

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Operator [25]

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(Operator Instructions)

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Yvonne Young, Yintech Investment Holdings Limited - IR Director [26]

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I guess...

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Operator [27]

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Okay. And there look to be no further questions. So I will pass the call back to Yvonne Young for any closing remarks.

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Yvonne Young, Yintech Investment Holdings Limited - IR Director [28]

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Thank you, William. Thank you, everyone, for joining Yintech's Second Quarter 2018 Earnings Conference Call. And if you have any further questions, please feel free to reach out to me. And we thank you for your patience and your time to listening to our call. Thank you very much. Operator, you may now disconnect.

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Operator [29]

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This conference is now concluded. Thank you for attending today's presentation. You may now disconnect.