U.S. Markets closed

Edited Transcript of CXDC earnings conference call or presentation 10-May-18 1:00pm GMT

Q1 2018 China XD Plastics Company Ltd Earnings Conference Call

Haerbin Heilongjiang May 17, 2018 (Thomson StreetEvents) -- Edited Transcript of China XD Plastics Company Ltd earnings conference call or presentation Thursday, May 10, 2018 at 1:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Anna Bin

* Jie Han

China XD Plastics Company Limited - Chairman, CEO & President

* Kenan Gong

* Zhang Dahe

China XD Plastics Company Limited - CFO, Secretary & Director

================================================================================

Conference Call Participants

================================================================================

* Glenn Jeffrey Krevlin

Glenhill Capital Advisors, LLC - Managing Member & President

* Jason Cooper

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(foreign language)

--------------------------------------------------------------------------------

Anna Bin, [2]

--------------------------------------------------------------------------------

Thank you, all, for joining us for China XD Plastics First Quarter 2018 Financial Results Conference Call. Joining me on the call today are Mr. Jie Han, Chairman and the 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; and Mr. Rujun Dai, General Manager of the Heilongjiang subsidiary.

Earlier today, China XD Plastics issued a press release announcing the first 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 the management's prepared remarks during the call may contain forward-looking statements, which are subject to risks 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 in the 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 the related pricing policies; the volatility of the company's operating results and the financial conditions; the company's projections of performance in 2018; and other risks detailed in the company's filings with the Securities and Exchange Commission are available on its website, www.sec.gov. These forward-looking statements involve known and unknown risks and uncertainties and 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 discussion 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 filings -- as to the company's future performance represents management's estimates as of today, May 10, 2018. China XD Plastics assumes no obligation to update those projections in the future as market conditions change.

To supplement the financial results presented in accordance with the U.S. GAAP, management will make additional 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 to provide a 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 would 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)

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

(foreign language)

--------------------------------------------------------------------------------

Anna Bin, [4]

--------------------------------------------------------------------------------

Thank you, Anna. Thank you, all, for joining us today. We're pleased with our quarter results. Both top and the bottom line growth as well as the margin improvement. In addition, an improvement in macroeconomic environment has improved business conditions, and we are well-positioned to execute our strategic plans.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

(foreign language)

--------------------------------------------------------------------------------

Anna Bin, [6]

--------------------------------------------------------------------------------

We are particularly pleased that you see major revenue contributions from major new growth structures, fostered in large part by the gradual ramp-up of our Sichuan manufacturing facility, a key milestone in our Corporate Development. The new facility also extends our geographical reach and accelerates our market penetration beyond our established Northeast base, evidenced by our strong and consistent growth from Southwest, Central, North and the South China.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

(foreign language)

--------------------------------------------------------------------------------

Anna Bin, [8]

--------------------------------------------------------------------------------

With Sichuan facility, the potential expands the footprint of our auto business in China and that we expect that automotive applications will continue to be our core business. The new facility includes the precision equipment, which will enable us to diversify our product platform into such high-growth verticals as ships, high-speed rail, airplanes, biodegradable materials, medical-grade materials, food packaging, electronic equipment, electrical products, alternative energy applications and our power devices, which will help to propel the company's growth.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

(foreign language)

--------------------------------------------------------------------------------

Anna Bin, [10]

--------------------------------------------------------------------------------

Our new facility in Dubai also extends our specialized high-tech 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 May 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 facility will target high-end products for the overseas markets and it 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.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

(foreign language)

--------------------------------------------------------------------------------

Anna Bin, [12]

--------------------------------------------------------------------------------

China XD continues to value our deep working relationships with our customers above all and is committed to creating value with our culture of hard work and innovation. We anticipate that the continued execution of our strategic plan, supported by an increase in our production capacity, our entry into new markets, our diversified customer base and our diversification with international sales will help to generate business growth for years to come. For fiscal year 2018, we are reiterating our financial guidance of between USD 1.2 billion and USD 1.4 billion in revenue and USD 90 million and USD 110 million in net income.

--------------------------------------------------------------------------------

Jie Han, China XD Plastics Company Limited - Chairman, CEO & President [13]

--------------------------------------------------------------------------------

(foreign language)

--------------------------------------------------------------------------------

Anna Bin, [14]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, Mr. Han. Thank you, Anna, 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 first quarter of 2018, unless I state otherwise. Additionally, any year-over-year comparison is to the first quarter of 2017 and any sequential comparison is to the first quarter of 2018.

So let's go over our first quarter results. Revenues were $310.5 million for the first quarter of 2018 compared to $237.8 million for the same period last year, representing an increase of $72.7 million or 30.6%. The year-over-year increase was primarily due to an increase of 24.4% in sales volume. A depreciation of U.S. dollar against RMB by 8% and offset by a decrease of 3% in the average RMB selling price of our products, as compared with those of last year.

PRC domestic revenue increased by $72.6 million in the first quarter of this year compared to the same period of last year, as a result of increase of 24.4% in sales volume, as we mentioned. And so as depreciation of U.S. dollar against RMB. According to China Association of Automobile Manufacturers, automobile sales in China increased by 2.8% for the first quarter of 2018 as compared to the same period of 2017. An improvement in macroeconomic conditions since 2017 has improved business conditions and eased pricing pressures in our industry. Driven by accelerating growth of 7.6% in Northeast China, 184% in Central China, 124% in South China, 89% in Southwest China, 26% in North China and 22% in East China, our domestic sales during the 3 months ended March 31, 2018, increased by 30.5% as compared to the same period last year. As for RMB selling price, the company also implemented a marketing strategy of offering lower-end products with some lower RMB pricing to further penetrate the new regional markets in Central China, Southwest and other areas in China.

For the 3 months ended March 31, 2018, revenues from overseas was $54,854 as compared to 0 of that in last year. The company has tried to develop new customers overseas besides the existing customers overseas. The sales with this customer was suspended due to account receivable balance overdue situation. As end of first quarter this year, the customer has outstanding balance of $48.3 million, including $5.8 million, which was 3 to 6 months past due, $32.4 million was overdue for less than 3 months. Customer expected to pay off the outstanding balance by June 2018. As the accounts receivable balance was overdue, the company suspended the sales to the customer in the first quarter of this year according to the company's standard policy.

Premium products, namely PA66, PA6, Plastic Alloy, PLA, POM and PPO, in total, accounted for 81.1% in revenues in the first quarter of this year, compared to 81.3% for the same period last year. Gross profit was $53.9 million in the first quarter ended March 31, 2018, compared to $34.8 million in the same period of last year, representing an increase of $19.1 million or 54.9%. Our gross margin increased to 17.4% for the first quarter of this year from 14.6% for the same period of last year, driven by higher gross margin of higher-end products in domestic markets for the first quarter of this year.

G&A expenses were $8.9 million in the quarter ended March 31, 2018, compared to $7.1 million in the same period of last year, representing an increase of 25.4% or $1.8 million. This increase is primarily due to the increase of $0.9 million salary and welfare, which was due to an increase of the number of management and general staff from supporting departments and increase of $0.9 million in professional fee.

R&D expenses were $5 million for the first quarter of 2018 compared to $5.9 million for the first period of 2017, representing a decrease of $0.9 million or 15.3%. The decrease was primarily due to the decrease of raw material used by Heilongjiang Xinda Group for its research activities. As of March 31, 2018, the number of ongoing Research and Development projects were 326.

Operating income was $38.9 million for the first quarter of 2018 compared to $21.3 million for the same period of last year, representing an increase of $17.6 million or 82.6%. This increase is primarily due to the increased gross profits, lower R&D expenses, partially offset by higher G&A expenses and selling expenses.

Net interest expense was $10.6 million for the first quarter of 2018 compared to net interest expense of $8.8 million for the same period of 2017, representing an increase of $1.8 million or 20.5%. This increase is primarily due to: first, an increase of average short-term and long-term loan balance in amount of $854.2 million for the 3 months ended March 31, 2018, compared to $785.4 million for the same period last year; partially offset by the decrease of interest expense resulting from average loan interest rates decreased to 4.72% for the 3 months ended March 31, 2018, compared to 4.77% of the same period last year; and third, the increase of average deposit balance in the amount of $626.8 million for the first quarter ended March 31, 2018 compared to $485.3 million for the same period last year; and number 4, the increase of interest income resulting from average deposit interest rates increased to 1.5% for the first quarter of this year compared to 1.2% of the same period last year.

Income tax expense was $6.2 million for the first quarter of 2018, representing an effective income tax rate of 24.5% compared to income tax expense of $3.6 million in the same period of last year, representing an effective income tax rate of 26.4%. The effective income tax rates reduced from 26.4% for the 3 months period ended March 31, 2017, to 24.5% for the 3-month period ended March 31, 2018, is primarily due to a decrease of continuous operating loss occurred in overseas subsidiaries, and partially offset by a decrease of Sichuan Xinda's profit before tax ratio. The effective income tax rate for the 3 months ended March 31, 2018, differs from the PRC statutory income tax rate of 25% primarily due to Sichuan Xinda's preferential income tax rates and R&D 50% additional deduction of major PRC operating entities.

Net income was $19.1 million for the first quarter of 2018 compared to $9.9 million for the same period of last year, representing an increase of $9.2 million or 92.9%. Basic and diluted earnings per share for the 3 months period ended March 31, 2018, was $0.29 compared to $0.15 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 $49.7 (sic) [49.7] million compared to 49.5 million shares for the basic and diluted earnings per share in the prior year period.

EBITDA was $49.6 million for the first quarter of 2018 compared to $34 million for the same period last year, representing an increase of $15.6 million or 45.9%. For a detailed reconciliation of EBITDA, a non-GAAP measure, to nearest GAAP equivalent, please see financial tables at the end of our press release issued early today.

Now let's turn to the balance sheet. As of March 31, 2018, the company had $564.8 million in cash and cash equivalents, restricted cash and time deposits, a decrease of about $43.3 million or 7.1% as compared to $608.1 million as of December 31, 2017. As of end of first quarter 2018, working capital was $110.1 million and the current ratio was 1.1, as compared to the current ratio of 1 as of December 31, 2017. Stockholder's equity as of March 31, 2018, was $761.6 million, an increase of $48.8 million or 6.8% as compared to $712.8 million at the end of December 31, 2017.

Accounts receivable decreased by 36.3% or $108.6 million due to the management efforts to collect outstanding balances due from the domestic customers. Inventories increased by 32.1% as a result of more purchases of raw material and the company's strategy to stock up the finished goods for the upcoming orders.

As the company released -- reiterates its financial guidance for fiscal 2018 to range between $1.2 billion and $1.4 billion in revenue, gross profits in fiscal 2018 is expected to remain stable as compared to that of fiscal 2017. The company project net income to range between $90 million and $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 this year. This forecast also assumes contribution from Sichuan plants and Dubai second phase project, which will be completed by the end of second quarter 2018 and end of 2018, respectively. It also assumes the average exchange rates of U.S. dollar to RMB at 6.3, and this financial guidance reflects the company's preliminary view of its business outlook for fiscal 2018 and is subject to revision based on changing market conditions at any time.

Before we open to the call to questions, I would like to note that for any question directed to management in China, I'll translate both their questions and their answers. If you want to ask a question in Chinese, please also ask it in English for the benefit of our other listeners. Please also note that we'll only be able to respond to questions about financial and operating results. For other matters, including the going-private offer, we refer you to our already issued press releases. We will not be able to respond to questions that are directed to the principle or to the going-private offer about the proposed transaction.

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

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) (foreign language) Our first question comes from the line of Jason Cooper. (foreign language)

--------------------------------------------------------------------------------

Jason Cooper, [2]

--------------------------------------------------------------------------------

Taylor, can you guys hear me?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Hi, Jason. We can hear you.

--------------------------------------------------------------------------------

Jason Cooper, [4]

--------------------------------------------------------------------------------

Firstly, I'd like to go over the time line for the capacity ramp-up. I know you mentioned that Dubai, the first phase should come online at the end of this month and the second phase at the end of this year. With respect to Sichuan Phase 1, which is 300,000 metric tons of primarily Automobile capacity, is that still scheduled to come online by the end of this quarter?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes, Jason. That is still the schedule that we are taking on.

--------------------------------------------------------------------------------

Jason Cooper, [6]

--------------------------------------------------------------------------------

Okay. And what about the upgrading of 100,000 metric tons in Harbin. Is that still this summer?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Okay. Jason, let me confirm with our management in China about this upgrading in Harbin. (foreign language)

--------------------------------------------------------------------------------

Unidentified Company Representative, [8]

--------------------------------------------------------------------------------

(foreign language)

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Hi, Jason. The upgrade in Harbin facility is still as we expected and scheduled previously.

--------------------------------------------------------------------------------

Jason Cooper, [10]

--------------------------------------------------------------------------------

Okay. With respect to Phase 2 of Sichuan, which is 300,000 metric tons of biodegradable plastics, is that coming online by the end of this year?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

All right. Jason, let me also confirm that as well. (foreign language)

--------------------------------------------------------------------------------

Unidentified Company Representative, [12]

--------------------------------------------------------------------------------

(foreign language)

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

So Jason, there may be possibly some delay on the bio plastics in Sichuan because of the 2 reasons: one is the facility mostly the equipments, there may be some modification or adjustments to better suit it for its purpose. And also, we may -- we're also looking at -- a possibly better location within Sichuan -- within the same city but a better location for our project.

--------------------------------------------------------------------------------

Jason Cooper, [14]

--------------------------------------------------------------------------------

Okay. How quickly can you bring this project on because at our last conference call, which is, I think, 2 months ago, you were guiding for that to be completed by the end of the year. So are you saying that you can bring on 300,000 metric tons of capacity, in like, less than a year? Is that possible, you don't even have the location? Or is this going to be a phased rollout of capacity like we saw in the first phase of Sichuan where you had 200,000 metric tons and 216,000 and then 300,000?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Okay. So Jason, basically just want to make sure I understand your question correctly and also convey that to the management correctly. It's basically, first of all, what's the time frame, given the new situation? Secondly, how we are going to roll out the project, either it's phased or it's like [shot].

--------------------------------------------------------------------------------

Jason Cooper, [16]

--------------------------------------------------------------------------------

Correct.

--------------------------------------------------------------------------------

Zhang Dahe, China XD Plastics Company Limited - CFO, Secretary & Director [17]

--------------------------------------------------------------------------------

Okay. Okay. (foreign language)

--------------------------------------------------------------------------------

Jie Han, China XD Plastics Company Limited - Chairman, CEO & President [18]

--------------------------------------------------------------------------------

(foreign language)

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Okay. Jason, so give you more details on the progress on the biodegradable project. So what happened to the original location is we have found -- after the survey, we have found that there's some underground water, which will not only increase the cost but also time consuming for us to undertake on the original sites. That's why we are embedded in other sites. The government is very supportive, and I think we will accomplish that. And secondly, with respect to the agreements. Basically, the -- it's centered around PRA production line because this biodegradable and material, there are some new equipments and technology available, we want to take advantage of that. So however, the production line facility designing has been coming to very close to the final phase. So all in, we are currently looking at probably, the project will be put off for a year. However, it will be phased. We're going to roll out our capacity in a staged manner.

--------------------------------------------------------------------------------

Jason Cooper, [20]

--------------------------------------------------------------------------------

Okay. So are you telling me that it is put off for a year and the capacity is rolled out in a staged manner? It might see the full capacity out of Sichuan by the end of 2019.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Correct.

--------------------------------------------------------------------------------

Jason Cooper, [22]

--------------------------------------------------------------------------------

Okay. Similarly, can we get some guidance from Harbin with respect to the biodegradable plastics and the cloud computing facility? Is that still on target for July 2019?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Okay. Let me also double check with the management. (foreign language)

--------------------------------------------------------------------------------

Jie Han, China XD Plastics Company Limited - Chairman, CEO & President [24]

--------------------------------------------------------------------------------

(foreign language)

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

So Jason, for Harbin, the designing phase and also the project scope are very similar to that of Sichuan. So we'll also utilize the new equipment designs. So -- and in addition, the construction in Harbin, because of the severe poor weather in winter, possibly, will be a little bit later than Sichuan. But we think about the same time, maybe delayed by a few months, the completion time for Harbin than Sichuan.

--------------------------------------------------------------------------------

Jason Cooper, [26]

--------------------------------------------------------------------------------

Okay. And out of the biodegradable facility, are we still expecting gross margin in the high 20s?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Okay. (foreign language)

--------------------------------------------------------------------------------

Jie Han, China XD Plastics Company Limited - Chairman, CEO & President [28]

--------------------------------------------------------------------------------

(foreign language)

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes, Jason. We expect to be above 20% gross margin for biodegradable with the past.

--------------------------------------------------------------------------------

Jason Cooper, [30]

--------------------------------------------------------------------------------

Okay. I guess, my next question is with respect to the new international customer that we might see you guys link up with -- the press release mentioned several top global customers in the Automotive sector. So I was wondering if you could provide any additional guidance about when you might proceed with sales to these new customers and progress that you've made in developing them.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

(foreign language)

--------------------------------------------------------------------------------

Jie Han, China XD Plastics Company Limited - Chairman, CEO & President [32]

--------------------------------------------------------------------------------

(foreign language)

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

So Jason, with the global customer, for example, with our model we have started supplying to them in China already. As for -- so to them -- are we still supplying to them globally? We think probably it will take some time, most likely by the end of this year or the next year, the latest.

--------------------------------------------------------------------------------

Jason Cooper, [34]

--------------------------------------------------------------------------------

So you'll be able to utilize the capacity, will that be coming from Dubai for the international sales?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

(foreign language)

--------------------------------------------------------------------------------

Jie Han, China XD Plastics Company Limited - Chairman, CEO & President [36]

--------------------------------------------------------------------------------

(foreign language)

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

So for -- it's basically going to be if we are supplying to their -- to them in China, will be from our Sichuan facility. If from overseas, most likely going to be from Dubai.

--------------------------------------------------------------------------------

Jason Cooper, [38]

--------------------------------------------------------------------------------

Okay. With respect to the current business, how much of your plastic production, as a percent of sales, is nonautomotive?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

So in this year or for International?

--------------------------------------------------------------------------------

Jason Cooper, [40]

--------------------------------------------------------------------------------

Yes. Do you have any or was the South Korean customer the -- so nonautomotive sales and do you -- plus you've, I believe, stopped providing them plastic products?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

I mean, for the Korean customer...

--------------------------------------------------------------------------------

Jason Cooper, [42]

--------------------------------------------------------------------------------

(inaudible) Yes.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Okay. (foreign language)

--------------------------------------------------------------------------------

Jie Han, China XD Plastics Company Limited - Chairman, CEO & President [44]

--------------------------------------------------------------------------------

(foreign language)

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

(foreign language) Okay. Jason, so for the Korean customer, the -- because the material, the product we sold to them are mostly for Automotive and also some Electronics. So sometimes, we can probably look at it from a -- we can get a sense but it's not going to be possible to say, like at least 100% accuracy. So with that, we think that possibly 80% were in auto and the rest in other area.

--------------------------------------------------------------------------------

Jason Cooper, [46]

--------------------------------------------------------------------------------

Okay. And then, one quick question about another opportunity for you guys. So instead of having this non-binding go-private agreements, have you looked into potentially listing the CDR in China or in Hong Kong? It seems that they are trying to attract companies to list there, specifically in China, companies that are like yours with respect to high-tech manufacturing companies, environmentally friendly companies. It seems like listing via CDR potentially could generate shareholder value, not only for the buyer consortium but also for the minority shareholders.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

(foreign language)

--------------------------------------------------------------------------------

Jie Han, China XD Plastics Company Limited - Chairman, CEO & President [48]

--------------------------------------------------------------------------------

(foreign language)

--------------------------------------------------------------------------------

Zhang Dahe, China XD Plastics Company Limited - CFO, Secretary & Director [49]

--------------------------------------------------------------------------------

Jason, not yet. We're not looking at those options yet.

--------------------------------------------------------------------------------

Operator [50]

--------------------------------------------------------------------------------

(foreign language)

Our next question comes from the line of [Owen Levi,] Wells Fargo.

--------------------------------------------------------------------------------

Unidentified Analyst, [51]

--------------------------------------------------------------------------------

Taylor, the $900,000 professional fee, is that the final payment to Duff & Phelps, for their independent valuation that we hired them in yield area to perform?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

The $900 (sic) [$900,000] includes other professional fees, such as legal, accounting and it does not include the final payments to Duff & Phelps.

--------------------------------------------------------------------------------

Unidentified Analyst, [53]

--------------------------------------------------------------------------------

Has Duff & Phelps completed their independent valuation?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Okay. Now let me check with the management in China. (foreign language)

--------------------------------------------------------------------------------

Jie Han, China XD Plastics Company Limited - Chairman, CEO & President [55]

--------------------------------------------------------------------------------

(foreign language)

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

[Owen], so as for the going-private transaction, Chairman Han presented some comments. So first of all, the bank consortium is first the special committee to speed up their process. So, so far, we understand, first of all, especially maybe on behalf of the minority shareholder has taken a very detailed approach in terms of the terms and structure of the proposal to get the best offer for the minority shareholders. Secondly, the bank consortium also undertaking possible financing so there are some change of structure in order to lower the cost, so which also cost some time over there. And lastly, he wants to say that the bank consortium is committed to the nonbanking offer that we issued over the last year.

--------------------------------------------------------------------------------

Unidentified Analyst, [57]

--------------------------------------------------------------------------------

Okay. Well, listen, you guys had a great quarter. I'd be a lot more excited about it if the company traded on fundamentals and it hasn't. So 15 months of this nonbinding proposal. And so I would remind that the special committee that as a public U.S. company, the board has a fiduciary obligation to maximize shareholder value for all shareholders, not just the insiders that are going to participate and think about it. The current point of action has the stock price now to come -- it's trading below $4 a share. And so I would ask, as a shareholder that's bearing the expense of Duff & Phelps and Davis Polk that the Special Committee has hired, we are their clients. (inaudible) deadline, finish the valuation, make that information public, file it as an 8-K. That will validate how insanely undervalued the stock price currently is; cancel the nonbinding proposal, which is unfair. It hasn't been -- or make a revised offer that is fair. That offer was over a year ago. The stock has performed quite well since then. You can't honestly come back to the same thought coming on the share. We'd love to hear from the Special Committee. I think silence breeds speculation. Clearly, it hasn't helped the stock price. Not only because it's the right thing to do, because they have a fiduciary obligation to tell us what their intent is for this company. Talk to us, tell your shareholders what you are doing. There are independent directors on the Board. We've been trusting you with our capital and there are real consequences for the stock price going down the way it has. So if you can at least share those comments to the Special Committee, they essentially control their stock price sales. Their earnings don't matter. Frankly, I find it silly we're spending as much time talking about the numbers at this -- your share price is completely held hostage by this nonbinding proposal.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Okay. Let me translate.(foreign language)

--------------------------------------------------------------------------------

Jie Han, China XD Plastics Company Limited - Chairman, CEO & President [59]

--------------------------------------------------------------------------------

(foreign language)

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

[Owen], lastly, Chairman Han mentioned that first, the bank consortium has done their best and we'll continue doing so in the future. Right now, their focus is getting financing for the transaction. And hopefully, they'll be the best for everybody.

--------------------------------------------------------------------------------

Operator [61]

--------------------------------------------------------------------------------

(Operator Instructions) (foreign language) Our next question comes from Glenn Krevlin from Glenhill.

--------------------------------------------------------------------------------

Glenn Jeffrey Krevlin, Glenhill Capital Advisors, LLC - Managing Member & President [62]

--------------------------------------------------------------------------------

I have 3 questions. One, what's the projected capital spending now for this year in light of some of the comments that you've made? Second, what's your plan on refinancing the short-term debt? And third, in the press release, there is a reference that overseas sales were about $55 million. Can you give us some context? Was this customers besides the Korean customer that you've had table issues with or was this the same customer that you're now doing business with, and where is this material being sourced from for overseas before Dubai is opened?

--------------------------------------------------------------------------------

Zhang Dahe, China XD Plastics Company Limited - CFO, Secretary & Director [63]

--------------------------------------------------------------------------------

Glenn, thank you for the question. So first of all, for the CapEx of [Dubai] first. So for this year, the total CapEx of 2018 is expected to be possibly $409 million, mostly for our Sichuan, Dubai and also Heilongjiang production business. For the oversea customer, it is the same South Korean customer. We have a overdue situation. However, given same situation in the past, we do believe we'll be able to collect the overdue balance in the very near -- in the next few months. And in addition, we have made some progress with some other global customer. Although, current still sales in China, but we anticipate sales will materialize for them by the end of this year or next year. And for your second question, on the financing, let me turn to the management and get an answer for it. (foreign language)

--------------------------------------------------------------------------------

Jie Han, China XD Plastics Company Limited - Chairman, CEO & President [64]

--------------------------------------------------------------------------------

(foreign language)

--------------------------------------------------------------------------------

Zhang Dahe, China XD Plastics Company Limited - CFO, Secretary & Director [65]

--------------------------------------------------------------------------------

Glenn, for refinancing, obviously, we have been -- it's our goal to lower the balance over short term and increase our long-term debt to fund several projects we are undertaking, and we have been working on that. And I think, give us some time, we'll be able to change our capital structure and make sure the debt structure will be -- assemble our project time frame.

--------------------------------------------------------------------------------

Glenn Jeffrey Krevlin, Glenhill Capital Advisors, LLC - Managing Member & President [66]

--------------------------------------------------------------------------------

Taylor, I was a little bit confused in terms of your comments on the Korean customer. The best of my knowledge, in the last financial statement, you indicated you were -- they had owed you money, yet you continued to do business with them in the quarter. That's where I'm confused.

--------------------------------------------------------------------------------

Zhang Dahe, China XD Plastics Company Limited - CFO, Secretary & Director [67]

--------------------------------------------------------------------------------

So again, what happened is because the overdue situation is according to our -- extend their terms with our customer with such an overdue. We actually suspended additional sales to them, given the first quarter of 2018. So in other words, we'll not supply to them any products until they bring their balance overdue situation back.

--------------------------------------------------------------------------------

Glenn Jeffrey Krevlin, Glenhill Capital Advisors, LLC - Managing Member & President [68]

--------------------------------------------------------------------------------

So we should expect that sales from overseas customers in this current quarter will be substantially less than $55 million?

--------------------------------------------------------------------------------

Zhang Dahe, China XD Plastics Company Limited - CFO, Secretary & Director [69]

--------------------------------------------------------------------------------

You mean, for the second quarter?

--------------------------------------------------------------------------------

Glenn Jeffrey Krevlin, Glenhill Capital Advisors, LLC - Managing Member & President [70]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Zhang Dahe, China XD Plastics Company Limited - CFO, Secretary & Director [71]

--------------------------------------------------------------------------------

Let me check with our -- my Dubai colleague. (foreign language)

--------------------------------------------------------------------------------

Kenan Gong, [72]

--------------------------------------------------------------------------------

(foreign language)

--------------------------------------------------------------------------------

Zhang Dahe, China XD Plastics Company Limited - CFO, Secretary & Director [73]

--------------------------------------------------------------------------------

(foreign language)

--------------------------------------------------------------------------------

Kenan Gong, [74]

--------------------------------------------------------------------------------

(foreign language)

--------------------------------------------------------------------------------

Zhang Dahe, China XD Plastics Company Limited - CFO, Secretary & Director [75]

--------------------------------------------------------------------------------

So Glenn, we have been working with the customer to adopt the issue and we have got a commitment from them. We expect that they will bring their balance currents by the end of second quarter, and we will resume business with them under very close monitoring.

--------------------------------------------------------------------------------

Glenn Jeffrey Krevlin, Glenhill Capital Advisors, LLC - Managing Member & President [76]

--------------------------------------------------------------------------------

So there'll be little sales in the second quarter, but you hope to resume in the third quarter. Is that what I'm understanding in overseas sales?

--------------------------------------------------------------------------------

Zhang Dahe, China XD Plastics Company Limited - CFO, Secretary & Director [77]

--------------------------------------------------------------------------------

Yes. Yes.

--------------------------------------------------------------------------------

Glenn Jeffrey Krevlin, Glenhill Capital Advisors, LLC - Managing Member & President [78]

--------------------------------------------------------------------------------

And are you going to limit your sales to this customer, Taylor, since they've continued to be overdue several times? Are you going to put limits on the amount of sales because it seems to be a problem that's happened at least once or twice before?

--------------------------------------------------------------------------------

Zhang Dahe, China XD Plastics Company Limited - CFO, Secretary & Director [79]

--------------------------------------------------------------------------------

Okay. (foreign language)

--------------------------------------------------------------------------------

Kenan Gong, [80]

--------------------------------------------------------------------------------

(foreign language)

--------------------------------------------------------------------------------

Zhang Dahe, China XD Plastics Company Limited - CFO, Secretary & Director [81]

--------------------------------------------------------------------------------

Yes, Glenn. Definitely. As Chairman Han mentioned previously that on one hand, we care our customers but on the other hand, we also want to make sure that for this particular case, we have added additional terms and also restrictions and those terms are being discussed. Obviously, the goal is to make sure that this situation or scenario will not happen again in the future.

--------------------------------------------------------------------------------

Glenn Jeffrey Krevlin, Glenhill Capital Advisors, LLC - Managing Member & President [82]

--------------------------------------------------------------------------------

Right. And then, Taylor, can you -- last question, can you give us some sense, since you have Dubai coming online and its higher end product, how much of that capacity do you have spoken for in terms of potential customers, as you phase that in? I think, you said at the end of June and then throughout the year. How do we stand with customer potential there?

--------------------------------------------------------------------------------

Zhang Dahe, China XD Plastics Company Limited - CFO, Secretary & Director [83]

--------------------------------------------------------------------------------

Okay. Let me ask. (foreign language)

--------------------------------------------------------------------------------

Unidentified Company Representative, [84]

--------------------------------------------------------------------------------

(foreign language)

--------------------------------------------------------------------------------

Zhang Dahe, China XD Plastics Company Limited - CFO, Secretary & Director [85]

--------------------------------------------------------------------------------

Yes, Glenn. We have -- we are currently testing products with potential customer in Germany and also in Czech Republic.

--------------------------------------------------------------------------------

Glenn Jeffrey Krevlin, Glenhill Capital Advisors, LLC - Managing Member & President [86]

--------------------------------------------------------------------------------

So you're confident that, that capacity will get utilized in -- as it comes on stream?

--------------------------------------------------------------------------------

Zhang Dahe, China XD Plastics Company Limited - CFO, Secretary & Director [87]

--------------------------------------------------------------------------------

Okay. (foreign language)

--------------------------------------------------------------------------------

Unidentified Company Representative, [88]

--------------------------------------------------------------------------------

(foreign language)

--------------------------------------------------------------------------------

Zhang Dahe, China XD Plastics Company Limited - CFO, Secretary & Director [89]

--------------------------------------------------------------------------------

Yes. Correct, Glenn.

--------------------------------------------------------------------------------

Anna Bin, [90]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Operator [91]

--------------------------------------------------------------------------------

Thank you. Ladies and gentlemen, this does conclude the conference call for today. Thank you for your participation. You may all disconnect.

(foreign language)