Jupai Holdings Limited (JP) released this week its unaudited 2018 sales and earnings numbers. The results as expected are not pretty which led to a nasty sell-off in the share price down to the $3.40 level at the open on Tuesday the 23rd. The question now is how much of this expected down-move has already been priced into the shares. We state this because shares looked like they were undergoing a bottoming formation since December of last year. The annual results, however, mean that we now have a lower low on the daily chart. Before we get into the technicals, however, let's have a look at the main numbers in the report to see if there is more here than meets the eye.
Sales came in a full 22% lower than 2017 at RMB1,321.7 million which led to an operating loss of RMB159.9 million for the year. With any potential value play, we always strive to steer away from companies which are reporting negative earnings. However, we would give Jupai the benefit of the doubt here as the firm has grown its operating profit by around 75% on average per year over the past five years. Suffice it to say, this is new territory for Jupai and our job is to find out whether this trend will end up being a temporary or permanent one.
The 2018 earnings call stated that one of the principal reasons for the operating loss was the RMB268 million goodwill impairment charge from the Scepter purchase back in 2015. Goodwill draw-downs happen when management is forced to write down the value of an acquisition because of a lack of performance. This obviously has ramifications for the balance sheet also as goodwill is reported as an asset. Writing down goodwill means the net worth or equity of the company decreases in value.
So when we combine this draw-down with the economic situation in China (where regulation in the wealth management sector has really been tightened), it is easy to see why shares of Jupai have fallen off a cliff over the past 10 months or so.
Looking ahead, management is confident that the Chinese economy will bounce back in the next few years which will be a nice tailwind for Jupai's offerings. We already seem to have green shoots such as the range of stimulus initiatives the government has introduced to get economic growth back on track which seems to have brought stability to the situation.
Some investors may be worried about how Jupai's gross margins, for example, have declined over the past few years. This key metric has declined from 95% back in 2012 to close to 50% at present. Operating margins had slipped back to the 20s before 2018. The presence of stable elevated margins invariably means the company in question has a competitive advantage. Jupai, though, (as it heavily depends on a strong economy where it is selling into) may have volatility here due to external factors it cannot control. However, as long as revenues can keep on growing, we would be backing Jupai's track record here.
Despite the goodwill write-off, Jupai is still trading well under book value and continues to run a very strong balance sheet. The RMB1,321.7 million (US$192.2 million) sales numbers for 2018 also shows that the firm's turnover is far higher than its market cap ($128 million). The goodwill line item after Q4 has now been pared down to around RMB0.3 million which means that not a lot of damage can be done here with respect to reducing the future net worth of the firm. In fact, if one takes this number out, Jupai would have reported around RMB110 million in operating profit which is about $16.5 million.
If we look at the chart below, we can see nice divergences between price and the RSI momentum oscillator. Initially, we believed we had an exhaustion gap in play yesterday when shares gapped down to the $3.40 level. However, the gap got filled very quickly which led us to believe that we had a "reversal day" in play. Price, though, still has not risen above this Monday's close, so it will be interesting to see where shares end up by the end of the week
To sum up, due to the valuation and financials of this company, we see little downside here. Remaining long.
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Disclosure: I am/we are long JP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.