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Edited Transcript of CXDC earnings conference call or presentation 9-Aug-18 1:00pm GMT

Q2 2018 China XD Plastics Company Ltd Earnings Call

Haerbin Heilongjiang Aug 31, 2018 (Thomson StreetEvents) -- Edited Transcript of China XD Plastics Company Ltd earnings conference call or presentation Thursday, August 9, 2018 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Anna Bin

* Jie Han

China XD Plastics Company Limited - Chairman, CEO & President

* Zhang Dahe

China XD Plastics Company Limited - CFO, Secretary & Director

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Conference Call Participants

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* Matthew Larson

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to Second Quarter 2018 China XD Plastics Co. Limited Earnings Conference Call. (Operator Instructions) This conference is recorded today.

I would now like to hand the conference over to your host today, Ms. Anna Bin. Please go ahead.

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Anna Bin, [2]

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Thank you all for joining us for the China XD Plastics Second Quarter 2018 Financial Results Conference Call. Joining me on the call today are Mr. Jie Han, Chairman and Chief Executive Officer; Mr. Qingwei Ma, Chief Operating Officer; Mr. Taylor Zhang, Chief Financial Officer; Mr. Junjie Ma, Chief Technology Officer; Dr. Kenan Gong, General Manager of the Dubai Subsidiary.

Earlier today, China XD Plastics issued a press release announcing the second quarter 2018 results. Before management's presentation, I would like to refer to the Safe Harbor statements in connection with today's conference call and remind our listeners that management's prepared remarks during the call may contain forward-looking statements which are subject to risk and uncertainties and that management may make additional forward-looking statements in response to your questions.

All statements other than statements of historical facts contained are forward-looking statements, including but not limited to the company's growth potential international markets; the effectiveness and the profitability of the company's product diversification; the impact of the company's product mix shift to more advanced products and related pricing policies; the volatility of the company's operating results and financial conditions; the company's projections of performance in 2018 and other risks are detailed in the company's filings with the Securities and Exchange Commission available on its website.

These forward-looking statements involve known and unknown risks and uncertainties and as such are based on current expectations, assumptions, estimates and projections about the company and the industry. The company, therefore, claims the protection of the Safe Harbor for forward-looking statements that is contained in the Private Securities Litigation Reform Act of 1995.

Actual results may differ from those discussed today, and I will refer you to our more detailed discussions for the risks and uncertainties in the company's filings with the Securities and Exchange Commission. In addition, any projection as to the company's future performance represents management's estimate as of today, August 9, 2018. China XD Plastics assumes no obligation to update those projections in the future as market conditions change.

To supplement the financial result presented in accordance with the U.S. GAAP, management will make reference to earnings before interest expenses, income taxes, depreciation and amortization, which we refer to as EBITDA. EBITDA is a non-GAAP financial measure reconciled from net income, which the company believes provide meaningful additional information to better understand its operating performance. A table reconciling net income to EBITDA can be found on the earnings press release issued earlier today.

I'd now like to turn the call over to our Chairman and the Chief Executive Officer, Mr. Han. Mr. Han will be speaking in Chinese, and I will translate his opening remarks into English. Mr. Han, please go ahead. (foreign language)

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Jie Han, China XD Plastics Company Limited - Chairman, CEO & President [3]

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(foreign language)

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Anna Bin, [4]

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We are pleased with our quarterly results with continuing top line growth, and improvement in macroeconomic environment has improved business conditions, and we are well positioned to execute our strategical plans.

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Jie Han, China XD Plastics Company Limited - Chairman, CEO & President [5]

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(foreign language)

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Anna Bin, [6]

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We are particularly pleased to see major revenue contributions from major new growth projects fostered in large part by the gradual ramp-up of our Sichuan manufacturing facility. It is a fact that the construction of the [Sichuan] facility with 300,000 metric tons of annual production will be completed by the end of September 2018, a key milestone in our Corporate Development. The new facility also further extends our geographical reach and accelerates our market penetrations beyond our established Northeast base, evidenced by our strong and consistent growth from Southwest, Central, North and the South China.

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Jie Han, China XD Plastics Company Limited - Chairman, CEO & President [7]

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(foreign language)

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Anna Bin, [8]

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Our new facility in Dubai also extends our specialized high-end products into an important new market. We are planning to complete installing 45 production lines with 12,000 metric tons of annual production capacity by the end of August 2018 and an additional 50 production lines with 13,000 metric tons of annual production capacity by the end of 2018. This will bring the total installed production capacity in our Dubai facility to 25,000 metric tons. The Dubai facilities will target high-end products for the overseas market and will ultimately enable more active inroads into the markets of Europe, the Middle East, Russia and other international regions with several global top customers in automotive sector.

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Jie Han, China XD Plastics Company Limited - Chairman, CEO & President [9]

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(foreign language)

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Anna Bin, [10]

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We take pride of our achievement in the past, and we remain confident in the long-term prospect of our business. The recent nationwide deleverage efforts in China, however, have a significant impact on activities of many companies in China, including merger and the acquisitions as well as privatization to ensure the success of the company's expansion strategy in multiple regions and sectors. We will be more fiscally vigilant and responsible and improving our capital structure by swapping more short-term debts with the longer-term instruments among other means in order to maintain a stable and a strong balance sheet and weather potential and unexpected turbulence in the future.

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Jie Han, China XD Plastics Company Limited - Chairman, CEO & President [11]

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(foreign language)

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Anna Bin, [12]

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With that, I will now turn the call over to Mr. Taylor Zhang, our Chief Financial Officer, to walk you through our financials.

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Zhang Dahe, China XD Plastics Company Limited - CFO, Secretary & Director [13]

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Thank you, Anna. Thank you, Mr. Han, and thank you, everyone, for joining the call today. Before I review the numbers, let me remind you that all figures I discuss are for this reporting period, the second quarter of 2018, unless I state otherwise. Additionally, any year-over-year comparison is to the second quarter of 2017, and any sequential comparison is to the first quarter of 2018.

So let's go over our third quarter results. Revenues we're $317.3 million for the second quarter of this year compared to $313.6 million for the same period last year, representing an increase of $3.7 million or 1.2%. The year-over-year increase was primarily due to depreciation of U.S. dollar against RMB by 7%, partially offset by a decrease of 5% in the average RMB selling price of our products and a decrease of about 0.9% in sales volume as compared with those last year.

PRC domestic revenues increased by $37 million in the second quarter of 2018 compared to the same period of 2017 as a result of increase of 2.2% in sales volume, the depreciation of U.S. dollar against RMB by 7%, an increase of 2.8% in average RMB selling price of our products as compared with those last year. According to the China Association of Automobile Manufacturers, automobile production and sales in China increased by 4.15% and 5.57% respectively. For the first half of 2018 as compared to the same period last year, improvement in macroeconomic conditions since 2017 has improved business conditions, driven by accelerating growth of 1.5% in Northeast China; 120.8% in Central China; 111.11% in South China; 52.1% in Southwest China; 1% in North China; and 1.7% in East China, our domestic sales during the 3 months ended June 30, 2018, increased by 13% as compared to the same period of last year. As for RMB selling price, the increase was mainly due to more sales of higher-end products of modified PA66, PLA and PPO in China.

For the 3 months ended June 30, 2018, revenues from overseas market was $53,353 as compared to $33 million of that in 2017. The company has tried to develop new customers overseas besides the existing oversea customer. The sales with the customer was suspended due to account receivable balance-overdue situation. As of June 30, 2018, the customer has an outstanding balance of $46.6 million, among which balance of $10.2 million was less than 3 months, $32.4 million was 3 to 6 months past due, $4 million was overdue for 7 to 12 months.

The customer expect to pay off that outstanding balance by September 2018. As the accounts receivable balance was overdue, the company suspended sales to this customer.

Premium products in total accounted for 82.5% of revenues in the second quarter of this year compared to 81.5% for the same period last year. During the second quarter 2018, the company continued to shift production mix from traditional lower-end products to higher-end products, such as PA66, PA6, Plastic Alloy and PLA, primarily due to greater gross potential for advanced modified plastics in luxury automobile models in China, stronger demand as results of promotion by Chinese government for clean energy vehicles and better quality demand from -- and consumer recognition of high-end cars made by automotive manufacturer from Chinese and Germany joint ventures, Sino-U.S. and Sino-Japanese joint ventures, which manufacturers tend to use more and higher-end modified plastics in quantity per vehicle in China.

Gross profits was $56.2 million in the second quarter ended June 30, 2018, compared to $63.1 million in the same period of last year, representing a decrease of $6.9 million or 10.9%.

Our gross margin decreased to 17.7% during the second quarter ended June 30, 2018, from 20.1% during the same period last year, primarily due to there was very little overseas sales in the second quarter ended this year, which yearly contains high profits product sales.

G&A expenses were $11.3 million for the quarter ended June 30, 2018, compared to $8.8 million in the same period of 2017, representing an increase of about 28.4% or $2.5 million. The increase was primarily due to the increase of $2.4 million in stock-based compensation, $0.1 million in salary and welfare resulting from increase in the number of management and general staff from supporting departments.

Research and development expenses were $5.3 million for the second quarter of 2018 compared to $9.5 million for the same period last year, representing a decrease of $4.2 million or 44.2%. The decrease was mainly due to the decrease of raw material used for R&D purposes. As of June 30, 2018, the number of ongoing research and development projects was 401.

Operating income was $36 million for the second quarter of 2018 compared to $44 million for the same period of 2017, representing a decrease of $8 million or 18.2%. This increase (sic) [decrease] is primarily due to lower gross profits, higher selling expenses and G&A expenses, partially offset by lower R&D expenses.

Net interest expense was $10.3 million for the second quarter of 2018 compared to net interest expense of $11 million for the same period of last year, representing a decrease of about $0.7 million or 6.4%. This decrease is mainly due to decrease of interest expense resulting from weighted average loan interest rates, decreased to 4.6% for the second quarter compared to 4.9% of the same period last year and partially offset by the increase of average short-term and long-term loan balance in the amount of $925 million for the 3-months period ended June 30, 2018, compared to $849 million for the same period last year.

Income tax expense was $5.5 million for the second quarter of 2018, representing an effective income tax rates of 16.8% compared to income tax expense of $4.1 million in the same period of last year, representing an effective income tax rate of 12.8%. The increase of effective income tax rates was primarily due to the increase of continuous operating losses in subsidiaries such as Dubai Xinda and Xinda Holding (HK). The decrease of 50% of additional deduction of R&D expense and partially offset by the increase of Sichuan Xinda's PBT percentage within consolidating entities. The effective income tax rates for the 3 months ended June 30, 2018, differs from PRC statutory income tax rate of 25%, primarily due to Sichuan Xinda's preferential income tax rates reversal of unrecognized tax benefits in year 2012, a 50% additional deduction of R&D expenses of major PRC operating entities.

Net income was $27.2 million for the second quarter of 2018 compared to $28.1 million for the same period last year, representing a decrease of about $0.9 million or 3.2%. Basic and diluted earnings per share for the 3 months period ended June 30, 2018, was $0.41 compared to $0.43 per basic and diluted shares for the same period last year.

The average number of shares used in the computation of basic and diluted earnings per share in the current quarter was 50.3 million compared to 49.5 million shares. Earnings before interest tax depreciation and amortization was $55.3 million for the second quarter of 2018 compared to $54.7 million for the same period of last year, representing an increase of about $0.6 million or 1.1%. For a detailed reconciliation of EBITDA, a non-GAAP measure to nearest GAAP equivalent, please see our -- please see the financial table at our press release issued earlier today.

Now let's turn onto the balance sheet. As of June 30, 2018, the company had $449.4 million in the total amount of cash and cash equivalents, restrict cash and time deposits, a decrease of $158.7 million or 26.1% as compared to $608.1 million as of December 31, 2017. As of June 30, 2018, working capital was minus $174.3 million, and the current ratio was 0.9 as compared to current ratio of 1 as of December 31, 2017. Stockholders' equity as of June 30, 2018, was $752.1 million, an increase of about $39.3 million or 5.5% as compared to $712.8 million as of December 31, 2017.

Inventory increased by 30.4% as compared to the end of fiscal year 2017 as a result of more purchases of raw materials and the company's strategy to stock up the finished goods for upcoming orders. Prepaid expenses and the other current assets decreased by 41% or $59.1 million as compared to end of last year. As Sichuan received refunds of prepayment from equipment suppliers.

And now the company reiterates its financial guidance for fiscal 2018 to range between $1.2 billion and $1.4 billion in revenues. Gross margin in fiscal '18 is expected to remain stable as compared to that of fiscal 2017. The company projects net income to range between $90 million to $110 million. This is based on anticipation of a steady recovery throughout the Chinese automotive supply chain and a stabilization of crude oil pricing and its impact on polymer composite materials in 2018. This forecast also assumes contribution from Sichuan plans in Dubai second-phase projects, which will be completed by the end of September 2018 and end of August 2018, respectively.

It also assumed the average exchange rates of U.S. dollar to RMB at 6.8. This financial guidance reflects company's preliminary view of its business outlook for fiscal 2018 and is subject to revision based on changing market conditions at any time.

And before we open to the call to your questions, I would like to note that for any question directed to management in China, I'll translate both their answer -- their questions and their answers. If you want to ask a question in Chinese, please also ask it in English for the benefit of other listeners.

Please also note that we'll only be able to respond to question about our financial and operating results. For other matters, including the going-private offer, we refer you to our already issued press releases. We'll not be able to respond to question that are directed to the principles of the going-private offer about a proposed transaction.

With that, we'll now open the call to your question. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) We have the first questions, comes from the line of Matthew Larson from Wells Fargo.

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Matthew Larson, [2]

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Okay, got a question for you. The most recent transaction that was announced on July 14 in reference to the sale of 25% of HLJ Xinda, it took about -- it took till August 8 to come up with a valuation that essentially values the -- the $75 million values the company at, at least $300 million. How come that only took 3 weeks to get that valuation, and yet, we're still waiting on some sort of assessment or valuation on the whole company, which is important for the overall going-private transaction, which is now 18 months in? I guess, how is that arrived at so quickly?

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Zhang Dahe, China XD Plastics Company Limited - CFO, Secretary & Director [3]

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Okay, Matthew. Thank you for your question. So basically the -- so currently, the valuation for the investments from Chairman times son -- I mean, party is still an estimate. It's only for this reporting period. However, like we stated subject to final evaluation, the number subject to change. As for the going private, although there's nothing we can talk about, but it's not only we're waiting for the valuation, but also there's some other conditions, for example, getting financing [sessions], so it's not necessarily waiting for the evaluation.

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Matthew Larson, [4]

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All right. I know you've said you can't speak about the particulars of the going-private transaction, but that is paramount to any shareholder that is isn't part of the control group, which would be Mr. Han and Morgan Stanley. Because everything else doesn't really have any impact on the long-suffering shareholders that hold your stock, and we've been very loyal shareholders, the shareholders that represent about 25% of the company. And yet, it's been over 1.5 years since the going-private acquisition has been stated. And one would have thought that with Morgan Stanley's involvement, one of the largest investment firms globally, that transaction of this size, which is very small for them, very small, okay, we're talking about taking out maybe $50 million worth of the remaining shareholders. Since your company is valued at less than USD 200 million, and 75% is owned by Mr. Han as well as Morgan Stanley, then 25% of the remaining is -- has a value of less than $50 million. I mean, that is something that Morgan Stanley can either finance or deals with on a daily basis. So with that in mind, can you at least explain why it's taking so long because that is paramount to any shareholder who's been involved in your company for the last few years?

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Zhang Dahe, China XD Plastics Company Limited - CFO, Secretary & Director [5]

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Okay. So Matthew, let me answer your question first, and then I will translate that so Chairman Han will also be able to respond. So like we stated in the press release, right now in China, there's a nationwide deleveraging efforts, so the banking sector is holding liquidity out of the system. That's why, not only for our company but for many company in China, small or large, are facing this new, unexpected situation. So it happen pretty -- it's not too long ago. So like we stating in the press release, it affects company of secure financing like they used to and also affect the M&A transaction, including privatization, so it's not a single-company situation. So like -- I mean, the point is the transaction is -- you can have the evaluation down, but eventually, you going to need the financing to be -- to close it. So with that, let me translate your question again to Chairman Han.

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Matthew Larson, [6]

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Okay, and one last thing if you're going to -- if...

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Zhang Dahe, China XD Plastics Company Limited - CFO, Secretary & Director [7]

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Okay.

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Matthew Larson, [8]

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Taylor, if you can add into the translation, it's a very small transaction in the scheme of things. Is there any all-cash buyers available that would be interested in a company that is so valuable like your company is? I mean, the valuation of your company is a fraction of what it's worth. And it would seem to me in a world awash with capital -- I mean, awash with it, all right. There's $1.3 trillion on the sideline amongst private equity firms globally. So I would think that one would not need financing, okay? In fact, all-cash buyers must be very, very much available. So can you ask why an all-cash buyer hasn't been able to help in this transaction?

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Zhang Dahe, China XD Plastics Company Limited - CFO, Secretary & Director [9]

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Okay, sure. Let me translate your question. (foreign language)

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Jie Han, China XD Plastics Company Limited - Chairman, CEO & President [10]

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(foreign language)

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Zhang Dahe, China XD Plastics Company Limited - CFO, Secretary & Director [11]

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Matthew, so here's what Chairman Han responded. So first of all, I would now repeat what Taylor has said, so for -- secondly, for the financing is mostly shouldered by -- obviously, more spending is part of the bad construction. But the majority of the responsibility was shouldered by Chairman Han, and mostly, he has discussed with the large [still] banks in China, [but] he has now reached out to other investor, such as private equities that you have mentioned. But that could be a direction for him to explore, and he will do that.

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Matthew Larson, [12]

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I mean, to me, that would've been something I would've considered a year ago. I mean, there's plenty of capital out there, and with evaluation of your company, there must be many, many, many interested parties to supply that financing. You wouldn't have to go to the Chinese banks. You just go to any of the international private banks that are, again, they're awash in capital. One last question, I'll let somebody else get him and ask some questions here. Clearly, you have an assessment of what the evaluation appraisals are from Duff & Phelps by now as well as anybody else you've hired. It's been 1.5 years, okay? And it doesn't take that long [because] it just doesn't. All right? So that if indeed you're not in a position to make a transaction for the reasons that you outlined because of the current environment in China, you could at least say that if a transaction can be done, it will be done at this new price or above, which would then set a higher bar for the company because since the transaction was announced 1.5 years ago, the stock actually went down. I've never seen that happen. Usually, it goes up, up and near where the transaction offer is. Instead, it's lower as if there was never a transaction announced. So you can understand the frustration of shareholders to be in a very great company. This thing is -- your company has done very well. It's well positioned in China. You've been expanding, and yet the stock goes down. Can you explain that?

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Zhang Dahe, China XD Plastics Company Limited - CFO, Secretary & Director [13]

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Let me translate your question. (foreign language)

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Jie Han, China XD Plastics Company Limited - Chairman, CEO & President [14]

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(foreign language)

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Zhang Dahe, China XD Plastics Company Limited - CFO, Secretary & Director [15]

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So here's the answer from Chairman Han, Matthew. So I'm also puzzled by the way the stock has been treated, given the company's fundamental performance on its operation. So I've been trying to secure financing for the transaction. I'm working very hard on that. So -- but however, the lending condition in China has become more and more challenging compared to the past. And that's why my son's investment company has put in RMB 500 million, injected that amount to the company to bolster our Chinese subs balance sheets in order for the company to get better financing to support its operation and also its expansion strategy. So we'll -- I'll continue to work on the financing. I cannot guarantee when that will happen, but I will be working on that.

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Matthew Larson, [16]

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All right, I'll just close with this. If his son's investment values the company over $300 million, all right because he invested $75 million for 25% of one of the operating subsidiaries, it values the company certainly north of $300 million, which is well north of $6 a share. If you could just put something out saying that we're working on financing. It's difficult, but clearly a revised offer for the going-private transaction when completed will certainly be north of whatever number you want to break down. It would give confidence to investors here that you are working on it and that if it does -- if and when it happens, it'll be at a higher price because the latest investment is proof of that. So I'll leave -- I've used too much of the time. I'll let somebody else jump in there, but hopefully, we can see some more news coming out of your companies to highlight the value of the company better than you have already.

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Operator [17]

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(Operator Instructions) Next questions comes from the line of [Owen Liddy] from Wells Fargo.

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Unidentified Analyst, [18]

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Taylor, hopefully I'm going to ask questions that don't require translation and give everyone some time back, but I want to confirm a comment that you just made in response to one of Matt's questions. The valuation that you provided on August 8 for the subsidiary investment, you're suggesting that's just an estimate, correct?

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Zhang Dahe, China XD Plastics Company Limited - CFO, Secretary & Director [19]

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Yes.

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Unidentified Analyst, [20]

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Okay, so when is that -- when do you expect that valuation to be finalized? And what is -- what are you waiting for in order to finalize that? What is it -- what's the variable that you're waiting to confirm to apply that valuation?

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Zhang Dahe, China XD Plastics Company Limited - CFO, Secretary & Director [21]

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Yes, so first of all, the estimate basically is for the bookkeeping and financial records purpose because we need to file the second quarter financial results. So we think this should be relatively soon. I would be surprised to be more than a month from now.

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Unidentified Analyst, [22]

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Okay, so it's more -- you intend to use book value. You're just waiting until the finalization of book value. Is that what I'm hearing?

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Zhang Dahe, China XD Plastics Company Limited - CFO, Secretary & Director [23]

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Oh, I'm waiting for the final independent evaluation.

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Unidentified Analyst, [24]

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Got it. And it -- but it's not -- my point is, it's going to be relatively close. You're not going to see a wild swing in valuation from that estimate?

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Zhang Dahe, China XD Plastics Company Limited - CFO, Secretary & Director [25]

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I believe so, yes. Because everybody use very similar methods, either discount cash flow or by looking for peers in the marketplace or a blended approach. So (inaudible).

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Unidentified Analyst, [26]

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Right, but -- you've already used some sort of methodology. You're just waiting for the finalization of the quarter's numbers, right? So are you using book value, or you're DCF-ing it. What methodology have you guys used?

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Zhang Dahe, China XD Plastics Company Limited - CFO, Secretary & Director [27]

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DCF. So we still need to get the final evaluation by independent adviser to do it and also approval by the special committee and board.

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Unidentified Analyst, [28]

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Got it, and you expect that within a month, and you're going to file an 8-K, or there'll be some sort of press release?

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Zhang Dahe, China XD Plastics Company Limited - CFO, Secretary & Director [29]

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Oh, yes. If that happens, yes.

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Unidentified Analyst, [30]

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If that happens. I thought -- this is happening, right?

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Zhang Dahe, China XD Plastics Company Limited - CFO, Secretary & Director [31]

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Yes.

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Unidentified Analyst, [32]

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You're going to finalize it within a month? Okay, great. And then the other thing, I just want to make sure, you guys still intend to take the company private. Correct? That's still the intent?

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Zhang Dahe, China XD Plastics Company Limited - CFO, Secretary & Director [33]

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Yes, the (inaudible) is still intended to.

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Unidentified Analyst, [34]

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Because I just want to highlight something to you all that the initial 8-K that was filed with the nonbinding proposal over a year ago, February of 2016 or whenever it was, there was a 6-month term on that buyer's consortium. That has obviously expired. So technically, the terms of the buyer's consortium is not valid. Are you going to renew the buyers' consortium agreement? If it is your intent to take -- to still take the company private?

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Zhang Dahe, China XD Plastics Company Limited - CFO, Secretary & Director [35]

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Yes, we have informed the parties of that, and I think that the party will take action accordingly.

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Unidentified Analyst, [36]

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I'm sorry, I don't follow. Technically, with the form that you filed with the SEC, the buyers consortium is expired. So one of the problems that I think the market is having, as I'm talking, your stock is down another 5.5%. You guys use vague, sweeping circumspect language, and we need certainty. It's just -- you're not giving us certainty with the valuation, with the buyer, with the take-private. You're not addressing any of the issues that would help lift the stock price.

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Zhang Dahe, China XD Plastics Company Limited - CFO, Secretary & Director [37]

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[Hold on], so let me clarify. The 13 [GU] was not filed by the company or any -- so basically, they are filed by the major shareholders -- by the buyer consortium. So as company, we have informed the 13G filer that the agreement is [filed]. So it's not within the company's control. So we get your point, and we did what we need to do. And we believe the buyers consortium, they will figure it out and also take action accordingly.

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Unidentified Analyst, [38]

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Okay. So there's no valid buyers consortium because that -- the terms of that have expired, although you're suggesting that it is still -- on this recorded call, that it is still your intent to take the company private once you line up proper financing?

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Zhang Dahe, China XD Plastics Company Limited - CFO, Secretary & Director [39]

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It’s not the company's intent. It's the buyer consortium intent.

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Unidentified Analyst, [40]

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The buyer's consortium intent, exactly. Can you maybe translate that to Chairman Han? Can we please -- is it still his intent to take the company private?

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Zhang Dahe, China XD Plastics Company Limited - CFO, Secretary & Director [41]

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Let me translate. Okay. (foreign language)

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Jie Han, China XD Plastics Company Limited - Chairman, CEO & President [42]

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(foreign language)

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Zhang Dahe, China XD Plastics Company Limited - CFO, Secretary & Director [43]

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[Owen], so Chairman said I have stated in the past that I'm committed to the going-private transaction. So I recently learned about the lapse of the agreement. And we are -- I'm actively working on that to assume that. So it's probably a -- just a oversight.

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Unidentified Analyst, [44]

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Well, you know it's been 18 months, so I hope that a lot of these things he's actively working on, we can finally get over the hill. And then one final question on -- in terms of the actual company performance. Revenue -- prior guidance has suggested that the device facility and additional capacity would ramp up by the second quarter. Revenue was up slightly year-over-year. Are you guys surprised by that? Were you expecting a higher lift in revenue? And when do you expect the capacity ramp-up in Dubai and some of the other expansion facilities to really hit the top line?

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Zhang Dahe, China XD Plastics Company Limited - CFO, Secretary & Director [45]

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Okay. So [Owen], so this year for the guidance, we feel we have more visibility on our Sichuan contribution as the September basically less than 2 months away. Sichuan will be able to contribute pretty much close to full swing. As for Dubai, that will come to a later stage by the end of this year. So even though we have revenue pretty much in line with what the level last year, we still believe second quarter, we'll be able to step up and also achieve the guidance.

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Unidentified Analyst, [46]

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Okay, so if I'm hearing you, Sichuan in Q3 should provide a lift in revenue but Dubai a little bit later in the year?

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Zhang Dahe, China XD Plastics Company Limited - CFO, Secretary & Director [47]

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Exactly. Yes.

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Operator [48]

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The next questions comes from the line of [Peter Series].

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Unidentified Analyst, [49]

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Taylor (inaudible). I want to just make sure I understand the transaction with Han's son. He has purchased 25% at the moment. At the moment. I understand subject to valuation of the Harbin subsidiary. Is that correct?

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Zhang Dahe, China XD Plastics Company Limited - CFO, Secretary & Director [50]

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Yes. Yes.

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Unidentified Analyst, [51]

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And based on your projections for this year, what percent of the earnings would come from the Harbin subsidiary?

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Zhang Dahe, China XD Plastics Company Limited - CFO, Secretary & Director [52]

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The Harbin subsidiary is also the parents of our Sichuan sub, so basically, that's all domestic.

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Unidentified Analyst, [53]

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Okay, so in other words, what he has purchased is 25% of the domestic operation. So excluding Dubai, he now owns 25% of the entire company. Is that correct?

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Zhang Dahe, China XD Plastics Company Limited - CFO, Secretary & Director [54]

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Yes. And also excluding some other nonrevenue -- one of profit-generating subs.

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Unidentified Analyst, [55]

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Okay. Okay. But in essence, all of the operating subs of what he has purchased. Is that correct?

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Zhang Dahe, China XD Plastics Company Limited - CFO, Secretary & Director [56]

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Majority and yes, yes. [In China].

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Unidentified Analyst, [57]

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And in terms of approval of this, Morgan Stanley, I think, paid [$6.24, $6.25] for -- their preferred is convertible into common at [$6.24], something like that. Is that correct?

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Zhang Dahe, China XD Plastics Company Limited - CFO, Secretary & Director [58]

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Yes, [$6.25], yes.

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Unidentified Analyst, [59]

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And so -- [$6.25], yes. And so my question is if the valuation comes out at less than $6.25 , will Morgan Stanley still approve that?

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Zhang Dahe, China XD Plastics Company Limited - CFO, Secretary & Director [60]

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That's a question (inaudible) -- yes, that's a question we cannot answer. I think most certainly has their view and -- but also -- they also have duty on the board. So I don't think these 2 things are necessary related because this -- if we follow your logic, there's so many other investor invest in the company at different price up and down, higher or lower. So basically, I think the real -- the best way is what we are doing is to get a independent valuation and then present it the special committee and the board for their consideration and approval.

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Unidentified Analyst, [61]

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I understand that, but Morgan Stanley, unlike the rest of us, Morgan Stanley has 2 seats on the board. So you must have had discussions with them as to whether they would approve a price of less than [$6.25]? Have you not had any discussions with them?

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Zhang Dahe, China XD Plastics Company Limited - CFO, Secretary & Director [62]

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No, the discussion is basically based on the procedure and also the paperwork, basically the agreement. They have reviewed it. So everything is about the board. So we cannot speak on behalf (inaudible) Stanley.

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Unidentified Analyst, [63]

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No, I understand that. And my next question is this. If you were facing this liquidity issue from the banks and everything, which I understand all companies in China are facing. Why do you -- why is the inventory going up so much?

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Zhang Dahe, China XD Plastics Company Limited - CFO, Secretary & Director [64]

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The inventory goes up because in Sichuan, the bulk of the capacity will be coming online in the -- expect it from end of September. And we want to be ready for that and on time deliver it to the customers.

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Unidentified Analyst, [65]

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Well, based on the amount of -- based on the new capacity...

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Zhang Dahe, China XD Plastics Company Limited - CFO, Secretary & Director [66]

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So we can probably slow down or find some savings, for example, slow down our CapEx to believe it, the liquidity issue. But for our expansion, our operation, I think the best -- the top priority will not budge as the last resort.

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Unidentified Analyst, [67]

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But based on the amount of inventory you have and the Sichuan Capacity coming onboard, and the fact that the first quarter is normally the weakest quarter, it looks to me like your revenue projections for the year are highly conservative.

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Zhang Dahe, China XD Plastics Company Limited - CFO, Secretary & Director [68]

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I'm thinking of -- right now, we have different situation. For example, there's a lot of well cars in place. For example, the currency, which has been depreciate dramatically, so we don't know where the level going to be at the end of the year because almost 10% already in the second quarter. So that's really something we cannot control.

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Unidentified Analyst, [69]

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But you intend to do -- but based on where your inventory is and the new capacity coming onboard, why aren't your sales projections higher, I guess is my question.

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Zhang Dahe, China XD Plastics Company Limited - CFO, Secretary & Director [70]

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I think if the guidance deserve to be revised at a later stage when we feel more comfortable, we'll do that. But right now, I think, of this couple of uncertainty factors, we want to be conservative.

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Operator [71]

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There are no further questions for now. We will now hand the call back to Anna for the closing remarks.

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Anna Bin, [72]

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On behalf of China XD Plastics, we want to thank you for your interest and participation in this call. If you would like to speak with us further, please call either myself or Taylor in China XD's New York office. The contact numbers for all of us are listed at the end of the press release. Thank you.

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Operator [73]

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Ladies and gentlemen, that does conclude our conference call today. Thank you for participating. You may all disconnect.