Jupai Holdings Q2 2017 Note

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Jupai Holdings Limited (JP)

Exchange: NYSE Ticker: JP

Jupai Holding Limited (Jupai), formerly Jupai Investment Group, is a leading third-party wealth management service provider to high-net-worth individuals (HNWI or HNWIs) in China.

Investment Thesis

Jupai is Currently Benefiting from China's Fast Growing Wealth Management Sector

The Chinese wealth management sector is currently following the same trend as the real estate market. HNWIs have increased from 0.71 million to 1.87 million between 2012 and 2017. Total HNWIs' investable assets have reached RMB 188 trillion, a 21.4% CAGR since 2012.

Jupai's Synergistic Relationship with E-House Has Helped It Maintain and Expand Its Market Share in the Fixed Income Sector

Leveraging its strategic relationship with E-house, Jupai is able to provide competitive fixed income products for its HNWIs, with attractive financial metrics. Growth for fixed income products distributed by the Company was more than 100% YoY in the first half of 2017. The Company quickly captured the HNWIs' appetite and strengthened its fixed income product offering in early 2017, due to economic uncertainty, RMB currency depreciation, and short duration product demand.

Jupai Has Strong Financial Performance with Higher Margin and Strong Economies of Scale

Jupai has an asset light business model where net revenue has increased from RMB 469 million in the first half of 2016 to RMB 805 million in the same period of 2017, representing 71.6% YoY increase. Operating margin for the second quarter rose substantially to 38%, up from 22.3% in the same period last year due to cost control measures which Jupai initiated at the beginning of 2016. Jupai was able to keep costs low with a strong management team even when the company grew at a very rapid pace.

Jupai is Undervalued Compared to Its Peer Noah in Terms P/E and Growth in Past 5 Years

Jupai is currently trading at 2.78x EV/EBIT and 8.02x TTM PE ratio, compared to Noah, who is trading at 14.04x EV/EBIT and 17.83x TTM PE ratio. Between 2012 and 2016, Jupai's net income attributed to shareholders increased by more than 8 times (69.6% CAGR), while Noah's net income attributed to shareholders increased by about 4 times (45.4% CAGR). Jupai is undervalued in terms of multiples and growth compared to Noah.

Industry Outlook

A Young and Robust Industry in China

The wealth management market in China is a young and growing industry with a low penetration rate. According to the 2017 China Private Wealth Report that was jointly issued by China's Merchant Bank and Bain & Company, the aggregate individual investable assets has reached RMB 165 trillion in 2016 and is estimated to reach RMB 188 trillion, a 14% growth rate, at the end of 2017.

The total number of Chinese HNWIs who own more than RMB 10 million investable assets reached 1.58 million in 2016 and is estimated to reach 1.87 million by the end of 2017, an 18.4% growth rate. Total HNWIs with more than RMB 100 million investable assets increased at a CAGR of 30% in last 10 years from 10,000 in 2006 to 150,000 in 2017. According to China's Merchant Bank report, total investable assets controlled by HNWIs were RMB 50 trillion and are estimated to reach RMB 58 trillion in 2017.

Exhibit 1 Total Number of HNWIs in China (million）

Source: "2017 China Private Wealth Report" by China Merchant Bank and Bain & Company

According to Jupai 2017 Investor Presentation, there were 2.07 million High Net Worth households in 2015 with the trend expected to reach 3.88 million by 2020, representing a 13% CAGR. Corresponding investable assets would increase from RMB 50 trillion in 2015 to RMB 102 trillion in 2020 with 15% CAGR.

In 2014, China had only 1% third-party wealth management penetration rate while the US and UK market had approximate 60% and 55% penetration rate, respectively. The low penetration rate creates a strong potential for growth for China's third-part wealth management market.

HNWIs Are Advocates for Accepting Professional Wealth Management Services

Given the complexity of their affairs and activities, HNWIs are advocates of paying for professional advice. When managing their investments, an ongoing advisory relationship is consistently the most popular option across all age groups and geographic regions, far more so than a fully discretionary service or an ad-hoc advisory relationship.

Four drivers for HNWIs and professional wealth management services:

• The transition from "Create Value" to "Maintain Value," since 2009, "Create More Value" as an investment goal has decreased from 20% to 13% in 2017. While investment goal as "Wealth Inherit" increased from 10% to 18% and "Maintain Wealth safety" increasing from 0% to 18% from 2009 to 2017 according to a China Merchant Bank report.

• Majority HNWIs tend to become moderate return/risk investors. The percentage of high return/risk preference has decreased dramatically from 20% in 2009 to 5% in 2017 (Exhibit 2) due to stock and real estate market volatility in recent years according to the China Merchant Bank report.

• Improved confidence and trust on wealth management firms. Years of good track records, continually improving turnkey solutions, and professional expertise have gained wealth management firms great reputation.

• Diversified portfolio management have played an important role. With increasing risk awareness, HNWIs tend to use wealth management firms to diversify total investable assets due to lack of expertise in specialized investment opportunities, such as PE/VC.

Exhibit 2 Risk Appetite of HNWIs in China, (2009-2017)

Source: "2017 China Private Wealth Report" by China Merchant Bank and Bain & Company

More than 20 Chinese provinces have over 20,000 HNWIs with more even distribution among different provinces

Since 2009, HNWIs in different provinces have grown quickly and evenly. By the end of 2016, there are 22 provinces that have over 20,000 HNWIs whereas only Guangdong Province had more than 20,000 HNWIs 10 years ago.

Competitive Analysis

Industry Environment

China's HNWIs wealth management services industry is at an early stage of development, characterized by low market penetration, increasing sophistication, a fragmented market and strong growth potential.

Key market participants include banks, insurance companies, fund management companies, securities firms, and third-party wealth management firms.

The industry now is a highly fragmented and competitive, with more than 1,000 firms without a dominant player. Jupai, as an independent wealth management firm, has the advantage of maintaining the independence of its products when referring these to customers. Since independent wealth management firms don't belong to any issuers or underlying corporation, they can use unbiased judgment to provide wealth management products and services to HNWIs.

Jupai's Competitive Advantages

Strong Sales Networks Covering Mmost of the HNWI Cities in China

Number of HNWIs not only grew significantly in the Chinese province over the past 5 years, they are also evenly distributed geographically. By the end of 2016, there were 22 provinces that have over 20,000 HNWIs, whereas only Guangdong Province had more than 20,000 HNWIs in 2006, shown in Exhibit 3. At the end of 2016, Jupai had 79 client centers that cover 43 major cities in China compared to its 50 client centers in 29 cities in 2015. Additional 26 client offices in 18 cities had supported Jupai's 72% revenue growth in 2016.

Exhibit 3 The HNWIs Allocation Map in 2017E & Jupai's Network Map

Source: "2017 China Private Wealth Report" by China Merchant Bank & Bain & Company, Jupai Investor Presentation

Jupai's Competitive Fixed Income Products Well Satisfied HNWIs' Demand Under the Increasing Economic Uncertainty in China

In the second half of 2016, the macroeconomic environment in China was full of uncertainty, and the expectation of RMB depreciation was very high. HNWIs showed little interests in allocating their assets into PE and VC products which have relatively long durations. Instead, fixed income products with short durations were in high-demand and Jupai leveraged its relationship with E-House, a top real estate service company and owner of advanced real estate information and analysis to provide competitive real estate fixed income products with attractive risk return profiles, which provided Jupai a competitive advantage among its peers.

The Solid Management Team Has Strong Executive Ability to Reduce Operating Expense and Stimulate EPS and Margins in the Long-Term

Jupai's operating margin for the second quarter rose substantially to 38%, up from 22.3% in the same period of last year due to cost control measures which Jupai initiated at the beginning of 2016. As Jupai further expanded the business and enhanced operating efficiency, they will continue to strengthen EPS while still maintaining healthy margins in the long-term.

Company Overview

Company Description

Founded in 2010, Jupai Holdings Limited is a leading third-party wealth management service provider, focused on distributing wealth management products and providing quality product advisory services to high-net-worth individuals in China.

By the end of Q2 2017, Jupai had served more than 20,000 clients and owned more than 1,600 wealth management consultants that cover 47 major cities with 76 office centers. And Jupai had 3,698 active clients in the Q2 2017.

By the end of Q2 2017, Jupai had RMB 48 billion (US $7.1billion) in Assets under Management (AUM). This represents an 11.3% increase compared to Q1 2017 and 85.6% increase compared to Q2 2016.

Business Model

Jupai generates revenues in connection with its wealth management product-related services from one-time commissions and recurring service fees paid by third-party product providers and corporate borrowers and usually does not charge its clients directly.

Jupai operates under a proven and cost-efficient client service model, which features a team approach that covers the full-service cycle for each client. Each wealth management product advisor is supported by several client managers and a centralized client care unit. Client managers will be responsible for sourcing potential clients and introducing wealth management products and a centralized client care unit dedicated to the ongoing maintenance of client relationships and collection of client feedback.

Exhibit 4 Jupai Business Model

Source: Jupai Investor Presentation

Corporate Strategy

According to Jupai's Chief Strategist, Ge Xu, Jupai focuses on distributing wealth management products and providing quality product advisory services as a one-stop shop for Chinese HNWIs who have investable assets in excess of RMB 3 million.

Jupai Has Strategically Focused on Investors Who Are More Conservative During the Current Economic Transition Period

From 2008 to 2016, the rapid growth of the Chinese economy led to the rapid rise of HNWIs. These HNWIs are more nervous and conservative due to the current economic slowdown and transition period. Jupai is likely to continually develop its competitive fixed income products to satisfy those demands of low risk.

Jupai Intends to Maintain Its Focus on Chinses market, and Gradually Allocate Assets Globally

It is expected that by 2030, China will account for almost 20% of the global economy; ranked in 2^nd place after the US. With the rapid growth of the Chinese economy, Jupai has been focusing on the Chinese market to capture high-speed revenue growth but is now starting to focus on global asset allocation to hedge market risk.

Main Products

Jupai provides two service lines to its customer: Wealth management product advisory services and asset management:

On product categories, Jupai serves as a one-stop wealth management product aggregator and recommend both third-party and self-developed products to its client. In 2016, Jupai sourced products from 8 domestic and 7 overseas product providers as a recommendation in order to maximize its clients' best interest. Its underlying assets can be classified as following four categories:

• Fixed Income products. Referring to projects that are distributed or managed by Jupai with potential prospective fixed rates of return and which mainly include investments in corporate bonds, real estate-related bonds, or government bonds, either directly or via vehicles distributed by mutual fund manager or securities companies and collateralized fixed income products sponsored by trust companies and fund of funds products.

• Private equity and venture capital funds. Products including direct investments in private equity and venture capital funds sponsored by leading domestic or international asset management companies and indirect investments in such funds via participation in asset management plans sponsored by mutual fund management companies or securities companies.

• Secondary market products. Referring to a type of wealth management products that invest in publicly traded securities in China and which mainly including investments in securities publicly traded on the capital markets via vehicles such as privately raised funds investing in publicly traded stocks and bonds, sponsored by leading asset management companies in China.

• Other products. Insurance products and alternative investment. Jupai works with insurance companies and insurance brokerage firms both in China and overseas to introduce products such as whole life coverage and universal life coverage.

Ownership Structure

Jupai Enjoys Strategic Relationship Benefit from Its Diversified Shareholder Structure

By the end of Q2 2017, Jupai's strategic investor ownership represents 53.56% of total shares. The largest strategic shareholder is E-house with 35.27% shares. Senior management has maintained a significant 18.83% ownership. Other investors represent the rest of 27.61%.

Noah's Dual-Class share structure with centralized power within senior management team could become a limitation for its potential due to its lack of resources. On the contrary, Jupai obtains more opportunities and synergies from shareholders in various industries, such as E-house and Julius Baer.

Relationship with E-House

The strategic relationship with E-house enables Jupai to provide competitive in-house fixed Income products by identifying high quality underlying real estate assets with attractive risk and return profiles.

E-house is a leading real estate service company in China and wholly owns E-house capital, which provides asset management services with a focus on the design and management of real estate or related investment projects.

After investment in Jupai in 2014, E-house became the single largest shareholder of Jupai. E-house provides Jupai full access to real estate market with its proprietary database, CRIC. As the largest real estate data-center in China, CRIC provides Jupai access to the most attractive real estate projects with superior financial metrics. Direct contact with real estate developers enables Jupai to distribute more attractive and differentiated self-developed wealth management products. E-house and Jupai may visit a real estate company together and offering a financial product design plan for funding as well as a sales plan. On the other hand, E-house helps Jupai minimize intermediate layers and associated expense when Jupai directly connects with real estate developers.

Exhibit 5 JP Shareholder Structure

Source: Jupai Investor Presentation

Financial Analysis

Quarterly Performance

Jupai had strong growth in first half of 2017 both on revenue and assets under management. Net revenue in Q2 17 was $64.4 million (RMB 436 million), a 78.4% increase from $36.8 million (RMB 244.7 million) in Q2 2016. The increase was mainly generated by One-time commissions (54.5% in YoY change), Recurring management fees (51.4% in YoY change), and other service fees (100% in YoY change). And the main component of revenue in the first half 2017 are as follow:

• One-time Commission - RMB 464 million income as of 57% of total revenues in first half of 2017. One-time commission is calculated based on the value of wealth management products that Jupai distributed to its clients. When Jupai acts as a self-developed product provider, it charges one-time commission from the corporate borrowers or fees from its clients.

• Recurring management fee was RMB 161.5 million in first half year of 2017, 63.7% growth compared to RMB 99 million in 2016 or 20% of total net revenue. Recurring management include fees for managing a fund as general partner, co-general partner or manager.

• Recurring service fee - RMB 59.5 million in first half year of 2017, decreased from RMB 66 million in H1 2016, mainly due to Jupai's increasing In-house self-developing ability.

Assets under management have increased from RMB 25.8 billion as of June 2016 to approximate RMB 48 billion as of June 2017, an 85.6% YoY growth.⁸ Fixed Income products as the main product category had distributed RMB 26.6 billion in first half of 2017, compared to RMB 10.9 billion in the same period of 2016, representing a 143% YoY growth rate. However, Private Equity products contributed RMB 18.4 billion in the first half of 2017 comapred to RMB 12.8 billion in the same period last year, representing a 43.8% YoY growth. Private Equity products are still growing fast but tend to receive less attention among compared to Fixed Income products due to clients' changing risk tolerance.

Customer Base

"Client-centered" business model has continuously boosted client loyalty. The repeat purchase rate by active clients of Jupai has been rising steadily from 21.4% in 2012 to 61.4% in Q2 2017, demonstrating the company's strong capabilities of retaining and addressing existing clients' needs amid rapid business expansion. Majority of new clients are referred by existing clients, which is a testimony to the trust from clients.

Wealth management product transaction value increased from RMB 2.8 billion in 2012 to RMB 45.3 billion in 2016, a CAGR of 100.8%. For the short term, Q2 2017 transaction value increased to RMB 12.3 billion from RMB 8.2 billion in Q2 2016, representing a 50.9% YoY growth.

Exhibit 6 Repeat purchase rate

Source: Jupai Investor Presentation

Operating Cash Flow

From FY 2012 to FY 2016, the operating cash flow expanded significantly from 1.6 million USD to 27.1 million USD, indicating Jupai ability to generate sufficient cash flow to maintain and grow its operations. In 2015, the significant increase of Jupai's operating cash flow was caused by the account payable and accruals increased.

Margins Analysis

Operating Margin increased from 22.3% in Q2 2016 to 38% in Q2 2017 (Exhibit 7) due to economies of scale and implementation of a cost reduction plan by Jupai's management team. Consequently, Net Income to common margin increased from 16.4% in Q2 2016 to 25.8% in Q2 2017. As net revenues are expected to grow by more than 30% in Q3 2017, with margin improvements expected in next earning season.

Exhibit 7 JP Margin Breakdown

Source: Bloomberg

Earnings Per Share

From 2012 to 2016, Jupai's diluted EPS has significantly increased 312%, from RMB 0.25 per share to RMB 1.03 per share, with a compound annual growth rate of 42.5%. Though Jupai's EPS got further diluted after the company issued additional shares tailed for Sina and Julius Baer in 2016, it has kept a stable uptrend in general.

Exhibit 8 JP EPS Performance（RMB）

Source: Bloomberg

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