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Edited Transcript of CXDC earnings conference call or presentation 14-Aug-19 1:00pm GMT

Q2 2019 China XD Plastics Company Ltd Earnings Call

Haerbin Heilongjiang Aug 24, 2019 (Thomson StreetEvents) -- Edited Transcript of China XD Plastics Company Ltd earnings conference call or presentation Wednesday, August 14, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jie Han

China XD Plastics Company Limited - Chairman, CEO & President

* Shaojie Wen

China XD Plastics Company Limited - IR Contact of New York, US

* Zhang Dahe

China XD Plastics Company Limited - CFO, Secretary & Director

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Conference Call Participants

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* Matthew Larson;National Securities;Analyst

* Peter J. Siris

Guerrilla Capital Management LLC - MD and Portfolio Manager

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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 the Second Quarter 2019 China XD Plastics Company Limited Earnings Conference Call. (Operator Instructions) Please be advised that this conference is being recorded today.

I would like now to hand the conference over to your host today, Mr. Wen, Shaojie. Thank you. Please go ahead.

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Shaojie Wen, China XD Plastics Company Limited - IR Contact of New York, US [2]

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Hi, everyone. Thank you all for joining us for the China XD Plastics Second Quarter 2019 Financial Results Conference Call.

Joining me on the call today are Mr. Jie Han, Chairman and CEO; Mr. Qingwei Ma, Chief Operating Officer; Mr. Taylor Zhang, Chief Financial Officer; Mr. Junjie Ma, Chief Technology Officer.

Earlier today, China XD Plastics issued a press release announcing the second quarter 2019 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 fact contain forward-looking statement including, but not limited to, the company's growth potential in international market, the effectiveness and profitability of the company's product diversification, the impact of the company's product mix shift to more advanced product and related pricing policies, the volatility of the company's operating results and financial condition, the company's projections of performance in 2019 and other risks detailed in the company's filings with the SEC and available on its website at www.sec.gov.

These forward-looking statements involve known and unknown risk 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 we refer you to a more detailed discussion for the risk 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 14, 2019. China XD Plastics assume no obligation to update these projections in the future as market condition change.

To supplement the financial results present in accordance with the U.S. GAAP, management will make reference to earnings before interest expense, income tax, depreciation and amortization, which will be referred to as EBITDA. EBITDA is a non-GAAP financial measure reconciled from net income, which the company believes to 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.

Now I will like to turn the call over to our Chairman and Chief Executive Officer, Mr. Han. Mr. Han will be speaking in Chinese, and I will translate his opening remarks into English.

(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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Shaojie Wen, China XD Plastics Company Limited - IR Contact of New York, US [4]

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[Interpreted] We are pleased with our quarterly results with significant top and bottom line growth. During the first half of this year, we have witnessed weakness in both production and sales of China's auto industry, trending low for 12 consecutive months. Amid the negative growth environment, the small- and medium-sized competitors of our industry in China have experienced difficulty to fulfill customers' orders due to reasons such as changing financial conditions and tougher environmental policies. As a result, customers have started redirecting their orders to larger suppliers such as China XD.

During the second quarter of 2019, the company was able to successfully leverage the increasing customer demand and upsell its higher-end products produced with higher-priced raw materials in China, evidenced by our stable sales growth in all domestic regions. This makes us well positioned to execute our strategic plan for 2019.

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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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Shaojie Wen, China XD Plastics Company Limited - IR Contact of New York, US [6]

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[Interpreted] We are particularly pleased to see more revenue contributions from our successful trial production at our production base in Dubai, a positive sign in our effort of penetrating international market with our high-end products. The growing sales overseas during the second quarter of 2019 broadened our geographical reach to customers in Europe, Middle East and other International regions. We will strive to work with global high-quality customers in automotive sector and other new fields.

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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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Shaojie Wen, China XD Plastics Company Limited - IR Contact of New York, US [8]

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[Interpreted] We take pride of our achievement in the past and remain confident in the long-term prospect of our business. Chinese government has recently issued supportive policies toward nonstate-owned enterprise. This will drive the success of our company's expansion strategy in multiple regions and sectors. We will be more fiscally vigilant and responsible and stabilize our capital structure by replacing more short-term debts with longer-term instruments among other means in order to maintain a stable and sound 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 [9]

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(foreign language)

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Shaojie Wen, China XD Plastics Company Limited - IR Contact of New York, US [10]

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[Interpreted] We are committed to completing our industrial project in Heilongjiang base for upgrading existing facilities of 100,000 metric tons capacity of engineering plastics in the fourth quarter of 2019. Together with the production capacity ramp-up in Dubai, we remain confident in our ability to make further inroads into more specialized, high-end products for various important new markets.

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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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Shaojie Wen, China XD Plastics Company Limited - IR Contact of New York, US [12]

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[Interpreted] We believe that our increased production capabilities in Heilongjiang and Dubai, geographical expansion and more diversified customer base both strengthen and augment our core automotive business. Further, our new development projects, which leverage our technical expertise could lead to additional new business. We view ourselves as the leader in the polymer composite sector, which will enable us to provide innovative technology solution for China's modernizing transportation, energy, health care and industrial sectors. We reiterate our financial guidance for fiscal 2019 and continue to be excited by our core market positioning and expanded platform for growth.

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

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(foreign language)

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Shaojie Wen, China XD Plastics Company Limited - IR Contact of New York, US [14]

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[Interpreted] With that, I would now turn the call over to Taylor Zhang, our CFO, to walk you through our financials. Taylor?

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

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Thank you, Mr. Han. Thank you, Shaojie. And thank you, everyone, for joining the call today.

Before I review the numbers, let me remind you that all figures that are discussed are for the reporting period, the second quarter of 2019, unless I state otherwise. Additionally, any year-over-year comparison is to the second quarter 2018. And any sequential comparison is to the first quarter of 2019.

So let's go over our second quarter results. Revenues were $463.1 million in the second quarter ended June 30, 2019, an increase of $145.8 million, or 46% compared to $317.3 million in the same period last year. This was due to approximately 51.4% increase in average RMB selling price and 2.8% increase in sales volume as compared with those of the same period last year and partially offset by 9.5% negative impact from exchange rates due to depreciation of RMB against U.S. dollars.

For the 3-months period ended June 30, 2019, revenue from domestic markets increased by $128.3 million due to an increase of 48.3% in the average RMB selling price of our products, an increase of 1.1% in sales volume as compared with those of last year and partially offset by a depreciation of RMB against US dollars by 9.5%.

Thanks to our positive efforts to expand our customer bases and to meet their new requirements, the company has increased overall growth in all parts of China. We have sales growth of 118.9% in Northeast China, 16.3% in Central China, 12.1% in Southern China, 11.9% in North China, 8.7% in Southwest China and 4.3%, East China.

As for the RMB selling price, the increase of 48.3% was mainly due to the increased sales of new categories of higher-end products of PA66 and PA6 produced with higher-priced raw materials with higher selling price in domestic market.

For the 3-months period ended June 30, 2019, revenues from overseas market was $17.5 million as compared to $53,353 of the same period of 2018. After the successful trial production at our production base in Dubai in November 2018, the company has established business relationships with new customers in UAE and India and shipped products to the end users in Europe. We are optimistic about the prospect of our business expansion overseas.

Gross profits was $65.3 million in the second quarter ended June 30, 2019, compared to $56.2 million in the same period last year, representing an increase of 16.2% or $9.1 million. Our gross margin decreased to 14.1% during the second quarter from 17.7% primarily due to the adopted discounted-priced strategy in domestic market in order to return capital as compared to that of prior year.

General (sic) [General and administrative] expenses were $5.8 million for the quarter ended June 30, 2019, compared to $11.3 million last year, a decrease of 48.7% or $5.5 million. The decrease was primarily due to our approach on optimizing management structure and enhancing efficiency, leading to the decrease of $2.5 million in share-based compensation; $2 million in salary and welfare; $1 million in traveling, transportation and miscellaneous expense.

R&D expenses were $9.6 million during the quarter ended June 30, 2019 compared to $5.3 million during the same period last year, representing an increase of $4.3 million or 81.1%. This significant increase was primarily due to elevated R&D activities to meet the new higher specification requirements from potential customers, especially overseas and increased efforts directed towards applications in new electrical equipments and electronics, alternative energy applications, power devices, aviation equipment and ocean engineering. As of June 30, 2019, the number of ongoing research & development projects was 371.

Operating income was $49.7 million for the second quarter of 2019 compared to $36 million for the same period last year, representing an increase of $13.7 million or 38.1%. This increase is primarily due to the higher gross profits, lower selling expenses and G&A expenses partially offset by a higher R&D expenses.

Income tax expense was $2.6 million for the second quarter of this year, representing an effective income tax rate of 6.2% compared to income tax expenses of $5.5 million in the same period last year, representing an effective tax rate of 16.8%. This significant decrease of effective income tax rate was primarily due to the increase of additional deduction in R&D expenses resulting from increased R&D expense incurred and the new policy issued by China's tax authority in September of 2018 to increase the R&D expenses additional deduction rates from 50% to 75% for PRC entities, the decrease of continuous operating losses occurred in overseas subsidiaries such as Dubai Xinda, Xinda Holding, Hong Kong. The effective tax income (sic) [income tax] rate for the 3-months period ended June 30, 2019 differs from PRC's statutory income tax rate of 25%, primarily due to Sichuan Xinda's preferential income tax rate, the reversal of unrecognized tax benefits accrued in 2013 and 75% additional deduction of R&D expenses of major PRC operating entities.

Net income was $40.1 million for the second quarter of 2019 compared to $27.2 million for the same period of 2018, representing an increase of $12.9 million or 47.4%. Basic and diluted earnings per share for the 3 months period ended June 30, 2019, was $0.60 compared to $0.41 per basic and diluted share 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 50.9 million compared to 50.3 million shares for basic and diluted earnings per share in the prior year period.

EBITDA was $70.1 million for the second quarter 2019 compared to $55.3 million for the same period last year, representing an increase of $14.8 million or 26.8%. For a detailed reconciliation of EBITDA, a non-GAAP measure, to its nearest GAAP equivalent, please see the financial table at the end of our press release.

Now let's turn to the balance sheet. As of June 30, 2019, the company had $506.9 million in the total amount of cash, cash equivalents and restricted cash, an increase of $139.9 million or 38.1% as compared to $367 million as of December 31, 2018. As of the end of second quarter this year, working capital was $35.2 million and current ratio was 1, as compared to the current ratio of 0.9% (sic) [0.9] as of December 31, 2018. Stockholder's equity as of June 30, 2019 was $798 million, an increase of $49.1 million or 6.6% as compared to $748.9 million as of December 31, 2018.

Cash, cash equivalents and restricted cash increased by 38.1% due to the increase of net cash provided by financing activities and operating activities. Inventory increased by 18.4% as a result of more purchases of the raw materials and the company's strategy to stock up the finished goods for upcoming orders. The aggregate short-term and long-term bank loans increased by 10.6% due to the use of a line of credit to support operating and investing activities in Heilongjiang Xinda Group and Sichuan Xinda.

Now before opening the call to question, I would like to note that for any question directed to the management in China, I will translate both the questions and their answers. If you want to ask a question in Chinese, please also ask in English for the benefit of our 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 able to respond to questions that are directed to the principles of the going private offer about a proposed transaction.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Matthew Larson from National Securities.

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Matthew Larson;National Securities;Analyst, [2]

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Congratulations, a very good quarter. In a difficult environment, you all came through with very strong numbers. I haven't read any of the -- I haven't read the Q or anything like that so if I have some questions that are in there, I apologize.

On the debt area, which has been a subject that we've talked about. You -- as a company, you've lined up a number of large banks that would refinance any of your short-term debt. And Mr. Han discussed that. In fact, some of the short-term debt had been converted to long term. Can you discuss that in greater detail because I know in the last Q, Mr. Han had lent the company quite a bit of money, $10 million and so did some other senior executives. As well as there was a loan from Standard Chartered that had just been extended. Have those been refinanced?

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

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Hey, Matthew, let me translate your question for the management in China to respond. (foreign language)

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Jie Han, China XD Plastics Company Limited - Chairman, CEO & President [4]

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(foreign language)

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

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[Interpreted] Matthew, so first of all, thanks to your coming support of private sector, especially in the form of more access to bank and other financings from the still sectors. We were able to make some preliminary success of our efforts to replace short-term debts with long term and midterm. We have -- we achieved some preliminary results, for example, Nanchong bank, they have provided us medium and long-term to replace the short-term notes. We believe with the letter of intent and the preliminary wins we have in place with the other banks, more banks will participate in our efforts to stabilize our balance sheet in terms of structure in the next 1 or 2 quarters. We will see some more results in that time frame.

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Matthew Larson;National Securities;Analyst, [6]

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The quarter, how do you see international sales for the balance of 2019? Is there numbers that you can give guidance on?

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

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Okay. Let me translate your question as well. (foreign language)

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Jie Han, China XD Plastics Company Limited - Chairman, CEO & President [8]

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(foreign language)

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

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[Interpreted] Matthew, so based on the current information we have the order from the customers booked overseas, we have -- for the remainder of this year, we have orders from customers, approximately $15 million. So this is based on our current information. It could be anywhere more than that. But we'll keep you updated as the quarter goes by.

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Matthew Larson;National Securities;Analyst, [10]

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All right. That's great. And then I had one last question and then I'll let somebody else call in. Your average selling price was up sharply and the reason in the news release was that you were focusing on higher-end plastic products. Can you just give me a little description of what the difference is between and lower-end and higher-end plastic product? Is it biodegradable? Is it just a higher quality and the car makers and your other customers just prefer that? Is it more durable? I don't know enough about your business to see how that sort of really attractive pricing would flow through.

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

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Okay. Matthew, so to give an example, and one particular product line in this quarter has been a very good seller, PA66 or PA6. These are engineering plastics. By definition, they are very high quality, very durable, mostly used in under-the-hood application where the working environments, for example, temperature is extremely high. And you can imagine, low-quality cannot sustain the heat or the chemical erosion, et cetera, et cetera. So there's a lot of engineering that goes into high-end products. That's why they command higher pricing and also higher margin. So this is just one examples of higher-quality, high-end products we make. And we are -- we have been working on that front for many years.

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Matthew Larson;National Securities;Analyst, [12]

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Okay. So it just sounds like in a tough environment because of the auto sales decline we've seen year-over-year, CXDC, China XD or Xinda has been able to pick up significant market share at the detriment to weaker or smaller competitors. And that going forward, we can expect and hope for continuation, particularly, if your balance sheet continues to improve. And if there's an upturn in the market, which one would expect at some point.

So again, great quarter. It's good to hear as a long-term shareholder. And we'll just wait to see how things are in the balance of the year. So I'll let somebody else make the call.

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

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Okay. Thank you, Matthew.

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Operator [14]

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(Operator Instructions) Our next question comes from line of Peter Siris.

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Peter J. Siris, Guerrilla Capital Management LLC - MD and Portfolio Manager [15]

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The -- couple of questions. First, in -- when you were answering Matthew's question about the refinancing of the debt, you said the next 1 to 2 quarters, is that correct?

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Zhang Dahe, China XD Plastics Company Limited - CFO, Secretary & Director [16]

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Yes. Peter. So management said in the next 1 or 2 quarters, we will see more results from other banks that we've been working with.

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Peter J. Siris, Guerrilla Capital Management LLC - MD and Portfolio Manager [17]

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Okay. So it's reasonable, I mean I know you can't say anything about the buyout, but it's reasonable to assume that the buyout is not going to occur until after the debt is refinanced. Is that a reasonable assumption?

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Zhang Dahe, China XD Plastics Company Limited - CFO, Secretary & Director [18]

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Let me ask the management in China. (foreign language)

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Jie Han, China XD Plastics Company Limited - Chairman, CEO & President [19]

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(foreign language)

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Zhang Dahe, China XD Plastics Company Limited - CFO, Secretary & Director [20]

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[Interpreted] Peter, so the answer comes from Mr. Han, Chairman. So as you remember because of the deleveraging efforts for the (inaudible), it has a profound impact on the private sector including us. But fortunately, as been recognized by major financial institutions who have been able to sustain and whether the turbulence. So...

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Peter J. Siris, Guerrilla Capital Management LLC - MD and Portfolio Manager [21]

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Taylor, I am having trouble hearing you.

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Zhang Dahe, China XD Plastics Company Limited - CFO, Secretary & Director [22]

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Okay. Can you hear me now?

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Peter J. Siris, Guerrilla Capital Management LLC - MD and Portfolio Manager [23]

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Yes. Little better.

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Zhang Dahe, China XD Plastics Company Limited - CFO, Secretary & Director [24]

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Okay. So with the help and recognition by major financial institutions and banks in China, we are able to make some progress this year. You are about right about the timing of the company's capital structure improvements, will probably happen preceding the potential funding for going private. Right now, we are facing a little bit of a hiccup because of the stricter currency restriction in China. But Chairman Han said, he's going -- is continuing to pursuing the transaction, and he still remain optimistic about the efforts.

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Peter J. Siris, Guerrilla Capital Management LLC - MD and Portfolio Manager [25]

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Okay. My next question is on inventories. You have $734 million of inventories at the end of the quarter. On an ongoing basis, what's the right amount of inventory?

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Jie Han, China XD Plastics Company Limited - Chairman, CEO & President [26]

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(foreign language)

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

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[Interpreted] The inventory, we have been actually -- bringing some changes. Peter?

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Peter J. Siris, Guerrilla Capital Management LLC - MD and Portfolio Manager [28]

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Taylor, I can't hear you.

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

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Okay. Can you hear me now, Peter?

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Peter J. Siris, Guerrilla Capital Management LLC - MD and Portfolio Manager [30]

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Can't hear you, Taylor.

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

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Is it better? Peter, is it better right now?

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Peter J. Siris, Guerrilla Capital Management LLC - MD and Portfolio Manager [32]

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Yes.

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

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Okay. So the inventory level has several factors right now. First of all is we're seeing the change of our product mix. We have more products that are in (inaudible) sectors, which is [the partial design]. And secondly, we also have success in the high-end and high-pricing, high-margin products moving faster. So definitely the inventory is turning to a good positive direction. We think in the next 1 or 2 quarters, we're going to see significant change of our inventory into the right direction trending down.

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Peter J. Siris, Guerrilla Capital Management LLC - MD and Portfolio Manager [34]

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Okay. My next question has to do with Dubai. You spent, I believe, like $550 million in building your factories in Dubai. When are we going to see sort of real revenues and earnings coming out of Dubai?

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

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Okay, let me translate your question about Dubai. Peter is saying (foreign language)

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

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(foreign language)

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

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[Interpreted] So Peter, we actually started producing and selling from Dubai production base since November 11, 2018, last year. And so far this year, we have for the first half, the revenue contribution from Dubai was approximately $23 million. And we have mentioned for the remainder of this year, we have received order in excess of $50 million. So you see we have started seeing the contribution, revenue contribution from Dubai. And we are, obviously, very pleased to see the results and also encouraged by the prospects of our Dubai business.

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Peter J. Siris, Guerrilla Capital Management LLC - MD and Portfolio Manager [38]

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Great. And finally, I want to ask about guidance. It says in the release that revenues for the year will range from $1.3 billion to $1.6 billion. And the -- if I look at the fact that you've done $765 million for the first 6 months, that basically says that revenues in the second half will be slower than in the first half. And I'm curious why that would be? Or is the guidance just conservative?

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

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Yes. Peter, there -- you have a been part of the company for a very, very long time. And thank you for your patience and loyalty to the company. So the management does -- I think there is certain amount of conservatism cooked in, in the guidance. And I think actually as we move to the next quarter or end of the year, we'll provide update when that is here.

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Operator [40]

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(Operator Instructions) There are no questions at this time. I'd like to hand the conference back to our presenters. Please continue.

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Shaojie Wen, China XD Plastics Company Limited - IR Contact of New York, US [41]

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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 number for all of us are listed at the end of the press release. Thank you.

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Operator [42]

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

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]