U.S. Markets closed

Edited Transcript of DQ earnings conference call or presentation 8-Aug-17 12:00pm GMT

Thomson Reuters StreetEvents

Q2 2017 Daqo New Energy Corp Earnings Call

Wanzhou, Chongqing Aug 12, 2017 (Thomson StreetEvents) -- Edited Transcript of Daqo New Energy Corp earnings conference call or presentation Tuesday, August 8, 2017 at 12:00:00pm GMT

TEXT version of Transcript

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

Corporate Participants

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

* Gongda Yao

Daqo New Energy Corp. - CEO and Director

* Kevin He

* Ming Yang

Daqo New Energy Corp. - CFO

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

Conference Call Participants

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

* John C. Fritch

* Luka Zhu

* Paul Strigler

* Philip Lee-Wei Shen

Roth Capital Partners, LLC, Research Division - Senior Research Analyst

* Sheng Zhong

Morgan Stanley, Research Division - Associate

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

Presentation

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

Operator [1]

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

Good day and welcome to the Daqo New Energy 2017 Second Quarter Results Conference Call. (Operator Instructions) Please note that today's event is being recorded. I would now like to turn the conference over to Mr. Kevin He of Investor Relations. Please go ahead.

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

Kevin He, [2]

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

Hello, everyone. I'm Kevin He, the Investor Relations of Daqo New Energy. Thank you for joining our conference call today. Daqo New Energy just issued its financial results for the second quarter of 2017, which can be found on our website at www.dqsolar.com. To facilitate today's conference call, we have also prepared a PPT presentation for your reference. Today, attending the conference call we have Dr. Gongda Yao, our Chief Executive Officer and Mr. Ming Yang, our Chief Financial Officer. The call today will feature an update from Dr. Yao, our market in operations and then Mr. Yang will discuss the company's financial performance for the second quarter of 2017. After that we will open the floor to Q&A from the audience. Before we begin the formal remarks, I would like to remind you that certain statements on today's call, including expected future operational and financial performance and industry growth, are forward-looking statements that are made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These statements involve inherent risks and uncertainties. A number of factors could cause actual results to differ materially from those contained in any forward-looking statement. Further information regarding these and other risks is included in the reports or documents we have filed with or furnished to the Securities and Exchange Commission. These statements only reflect our current and the preliminary view as of today and may be subject to change. Our ability to achieve these projections is subject to risks and uncertainties. All information provided in today's call is as of today and we undertake no duty to update such information, except as required under applicable law. Also during the call, we will occasionally reference monetary amounts in U.S. dollar terms. Please keep in mind that our functional currency is the Chinese RMB. We offer these translations into U.S. dollars solely for the convenience of the audience. Without further ado, I now turn the call over to our CEO, Dr. Yao.

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

Gongda Yao, Daqo New Energy Corp. - CEO and Director [3]

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

(technical difficulty) everyone and thank you for joining our call today. We are pleased to report that the second quarter of 2017 was a solid quarter with new records on both polysilicon production volume and the external sales volume. During the quarter, we produced 4,993 metric ton per second and sold 4,497 metric ton to external customers. During the quarter, we conducted various experiments to improve polysilicon quality particularly for the monocrystal grade polysilicon, which had a slight impact of overall production cost and volume in Q2. However, as a result of this experiment, we're seeing meaningful improvement in the polysilicon quality. We made a change to our production process and the parameters, added devices for contamination removal as well as implemented a improved process to reduce surface contamination. With the culmination of these efforts, production volume was whereas the shipment of monocrystalline quality of polysilicon hit the record high in June with strong demand for (inaudible) and the monocrystal P.V. products. We're seeing strong increase of monocrystal wafer capacity in China including those of our existing customers. Although we believe monocrystalline wafer capacity is expected to increase from approximately 30 gigawatts in 2017 to more than 50 gigawatts by 2019, an increasing of more than 60% over next 2 years. This bodes well for sustaining the strong demand and the pricing for monocrystal quality polysilicon and Daqo is well-positioned to be the leading supply to this market segment. At the end of the first quarter, due to the downstream customer inventory management, ASP fell in April but has started to recover in May. Market demand and pricing improved throughout the second quarter with the ASP in June approximately 15% higher than that in the April. In terms of P.V. end market, China installed a 24.4 gigawatts of solar P.V. in the first half of 2017, representing a new record and a 9% increasing from the first half of 2016. The full yield for 2017, China's annual P.V. installation forecast is currently expected to exceed 35 gigawatts. Based on discussions with our customers, we believe that China P.V. market demand continued to be strong driven by top-running projects, quality alleviation projects as well as distributed generation. Globally, the U.S. and India markets are also seeing strong P.V. product demand. With a much stronger than expected solar P.V. installations in China, globally, the annual total global solar installation in 2017 is likely to exceed 80 gigawatts with strong and better than expected anticipated a downstream market demand. Starting in later July, we began to see a significant polysilicon shortage in China market with polysilicon pricing continuing to rise. As of today, current export market for polysilicon price is approximately 25% to 30% high than Q2 average. And it appears to be going higher. Even at the current high pricing, we are seeing strong customer requests and orders that far exceed our ability to supply. In June, the Chinese government announced its investigating capacitive power plants in Xinjiang for violation of regulatory policy and the environmental standard. We believe the government investigation as well as technical and other issues is resulting in serious delay and the production problems at our competition. And the problem is likely persisting in the medium term and are further restricting available polysilicon. During the second quarter of 2017, the company generated $12.1 million in net income attributable to Daqo New Energy shareholders and $29.8 million in EBITDA with EBITDA margin of 39.2%. In particular, our operational cash flow remains strong. In the first half of 2017, we generated a $73.6 million in net cash provided by operation activities. Going forward, we will continue our efforts to improve policy and quality throughout the year. With our high product quality and a stable supply capability, we continue to be a supplier of choice with strong demand for our high quality polysilicon from our diverse customer bases. Now let me provide the outlook for the third quarter of 2017. Our annual maintenance for Xinjiang polysilicon facility is scheduled for the late September and October. The annual maintenance is anticipated to impact production volumes by approximately 2 weeks. As a result, we're expecting to produce 4,200 metric ton to 4,500 metric ton polysilicon and to sell approximately 3,700 metric ton to 4,000 metric ton to external customers during the third quarter of 2017. The above external basis sales guidance exclude the shipment of polysilicon to be used internally by our Chongqing solar wafer facility, which utilizes polysilicon for its own wafer manufacture operation. Wafer sales volume too is expected to be approximately 25 million to 25.5 million pieces in the third quarter of 2017. Now I will turn the call to our CFO Mr. Ming Yang for financial updates.

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

Ming Yang, Daqo New Energy Corp. - CFO [4]

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

Thank you, Dr. Yao, and good day everyone. Thank you for attending our call today. Now I will provide the financial updates for the second quarter of 2017. Revenues were $76 million compared to $83.8 million in the first quarter of 2017 and $71 million in the second quarter of 2016. Revenue from polysilicon sales to external customers was $61.1 million compared to $70.4 million in the first quarter of 2017 and $50.5 million in the second quarter of 2016. External polysilicon sales volume was 4,497 metric ton, increased from 4,223 metric ton in the first quarter of 2017 and 2,931 metric ton in the second quarter of 2016. The average selling price of polysilicon was $13.58 per kilogram in the second quarter of 2017 compared to $16.66 per kilogram in the first quarter of 2017. The decrease in polysilicon revenue as compared to the first quarter of 2017 was primarily due to lower ASPs partially offset by higher polysilicon sales volume. Revenue from wafer sales were $14.9 million compared to $13.4 million in the first quarter of 2017 and $20.5 million in the second quarter of 2016. Wafer sales volume was 27 million pieces compared to 22.4 million pieces in the first quarter of 2017 and 25 million pieces in the second quarter of 2016. Gross profit was approximately $24.2 million compared to $35.9 million in the first quarter of 2017 and $29.4 million in the second quarter of 2016. Non-GAAP gross profit, which excludes costs related to the non-operational polysilicon assets in Chongqing, was approximately $24.8 million compared to $36.9 million in the first quarter of 2017 and $31.2 million in the second quarter of 2016. Gross margin was 31.9% compared to 42.8% in the first quarter of 2017 and 41.4% in the second quarter of 2016. In the second quarter of 2017, total cost related to the non-operational Chongqing polysilicon assets including depreciation were $0.5 million, decreased from $1 million in the first quarter of 2017 and $1.8 million in the second quarter of 2016. Excluding costs related to the non-operational Chongqing polysilicon assets, the non-GAAP gross margin was approximately 32.6% compared to 44% in the first quarter of 2017 and 43.9% in the second quarter of 2016. Selling, general and administrative expenses were $4.5 million compared to $4.1 million in the first quarter of 2017 and $3.7 million in the second quarter of 2016. The increase in SG&A expenses compared to Q1 was primarily a result of higher selling expenses related to increased shipment volumes so as higher professional fees recorded for the quarter. Research and development expenses were approximately $0.3 million, compared to $0.4 million in the first quarter of 2017 and $0.1 million in the second quarter of 2016. The research and development expenses varied from period to period reflecting the R&D activities that occurred in such period. Other operating income was $0.8 million compared to $0.8 million in the first quarter of 2017 and $0.6 million in the second quarter of 2016. Other operating income was primarily composed of unrestricted cash incentives that the company received from the local government authorities, the amount of which varies from period to period. Operating income was $20.2 million compared to $32.2 million in the first quarter of 2017 and $26.1 million in the second quarter of 2016. Operating margin was 26.6% compared to 38.4% in the first quarter of 2017 and 36.8% in the second quarter of 2016. Interest expense was $5.3 million compared to $4.3 million in the first quarter of 2017 and $3.5 million in the second quarter of 2016. A sequential increase in interest expense was primarily due to higher bank fees interest charges recorded for the quarter. EBITDA was $29.8 million compared to $41.7 million in the first quarter of 2017 and $34.7 million in the second quarter of 2016. EBITDA margin was 39.2% compared to 49.8% in the first quarter of 2017 and 48.9% in the second quarter of 2016. Net income attributable to Daqo New Energy shareholders was $12.1 million in the second quarter of 2017 compared to $22.9 million in the first quarter of 2017 and $19.8 million in the second quarter of 2016. Earnings per basic ADS were $1.15 in the second quarter of 2017 compared to $2.18 in the first quarter of 2017 and $1.90 in the second quarter of 2016. As of June 30, 2017, the company had $49.8 million in cash and cash equivalents and restricted cash compared to $61.2 million as of March 31, 2017. As of June 30, 2017, the accounts receivable balance was $3.8 million compared to $13.1 million as of March 31, 2017. As of June 30, 2017, the notes receivable balance was $10.5 million, compared to $11.7 million as of March 31, 2017. As of June 30, 2017, total borrowings were $219.3 million, of which $123 million were long-term borrowings compared to total borrowing of $236 million, including $129.2 million of long-term borrowings as of March 31, 2017. And as of the end of the second quarter of 2017, our debt ratio decreased to 52.8% from 57.2% at the end of the first quarter of 2017 and 59.8% at the end of 2016. For the 6 months ended June 30, 2017, net cash provided by operating activities was $73.6 million, increased from $66.6 million in the same period of 2016. For the 6 months ended June 30, 2017, net cash used in investing activities was $36 million, compared to $37.6 million in the same period of 2016. The net cash used in investing activities in 2017 was primarily related to the capital expenditures of Xinjiang Phase 3A projects as well as our technology upgrade projects. For the 6 months ended June 30, 2017, net cash used in financing activities was $23.4 million compared to net cash used in financing activities of $13.5 million in the same period of 2016. The increase was primarily due to repayment of bank loans and related party loans. And that concludes the official part of our presentation. Now let's have the Q&A session.

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

Questions and Answers

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

Operator [1]

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

(Operator Instructions) And our first question comes from Philip Shen of Roth Capital Partners.

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

Philip Lee-Wei Shen, Roth Capital Partners, LLC, Research Division - Senior Research Analyst [2]

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

In terms of ASPs, I think you had said in your prepared remarks that the current pricing, let's say, spot pricing of all the ASPs in China are 25% to 30% higher than your Q2 average. So that suggests ASPs might be close to $17 per kilogram right now. And I think what we saw last week from some pricing sources was that spot pricing is closer to $16 per kilogram. Can you comment on whether the $17 per kilogram numbers make sense? And then what are your expectations as to what the blended average for Q3 could be and where pricing could go in Q4?

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

Gongda Yao, Daqo New Energy Corp. - CEO and Director [3]

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

I think we're talking about 30 high end is -- the percentage increasing is positioned for the monocrystal wafer polysilicon which should require much higher quality compared with average polysilicon for normal solar grades. As for the pricing going, we still see strong demanding for the market particularly in this season. So the quarter, lot of poly supply have maintenance -- scheduled maintenance in August and September. So we see stronger than we expect in the third quarter demanding driving the price up. We believe this trend will continue in the third quarter, although we still don't have a clear -- I can see the fourth quarter pricing but average wise we thinking second half, Q3 will be much stronger than Q2 like we said. And Q4 maybe will be a little bit weaker than Q3. That's the number people are seeing, but it's too far to see the fourth quarter pricing at this moment.

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

Philip Lee-Wei Shen, Roth Capital Partners, LLC, Research Division - Senior Research Analyst [4]

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

As it relates to the supply constraints, you talked about scheduled maintenance. But then I think there was a fire at one of your peers. How much impact do you think that fire ultimately had on supply, #1, and then also #2, how much supply may be constricting as a result of the environmental investigations that are ongoing in Xinjiang as well?

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

Gongda Yao, Daqo New Energy Corp. - CEO and Director [5]

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

So we cannot particularly comment on individual competitors, but generally speaking the new startup for polysilicon manufacture as we heard is they facing some environmental and regulatory policy issues. Regarding you mentioned the fire in particular at the competitor's, as a matter of fact the quantity restricted from that event is very limited. We heard several bigger supply polysilicon they have restricted some products due to some technical difficulties in China. That's given more actually impact for the supply side. So as a result, we will try to continue small production for August, but we also go do maintenance in September. So generally speaking for third quarter, there's more shutdown for maintenance and the expanded capacity in Xinjiang is not as high as people expected on the first half of this year. Also the demanding for the polysilicon is stronger than people expected after June 30. So all these things added together is driving the demand and supply imbalance driving the price is increasing for Q2. Yes, that's what we generally see. Although we do not have particular clear information regarding what's the problem some of the competitor are facing but we see much less polysilicon released from those suppliers.

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

Philip Lee-Wei Shen, Roth Capital Partners, LLC, Research Division - Senior Research Analyst [6]

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

One more here in terms of capacity expansion, can you share your latest view on capacity expansion? How much longer do you think you need to wait before you decide what new information do you need to help you make that decision? Now, I gather that it's not just an internal decision but rather you're also thinking about what is happening on the supply side overall. Can you provide us some color as to what are the key factors to help you decide if you will expand? And then also can you expand beyond Phase 3B, would you consider that if the market merits it?

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

Gongda Yao, Daqo New Energy Corp. - CEO and Director [7]

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

Our decision to future for expanding our capacity is based on 2 things, one is market is supply-demand balance; that's important. Secondly, also we mentioned that in Q2, actually in first half of this year, we did a lot of experiments trying to explore the high quality polysilicon, their quality. So if we want to expand in future, what we can say is one of the very key standard is that we are positioned for a high-end market, which means our position definitely is for monocrystal wafer polysilicon or even higher quality. If we have confidence for those technology is mature enough, we can make decision to expand. And so we are not competing with larger volume of capacity of, I would say, for standard polysilicon maker in China, we have positioned ourselves an leading supplier for high quality polysilicon manufacture and we are competing with those leading companies like international companies for the high-end market. So once we think that is technical viable, we can make a decision at that point. And the technically and for the projects we are doing study is very smooth. We think we can conclude our results very soon I would say. If not all completed at this moment, we will try to complete it very soon. So that's our key decision make condition we're consider for our future expansion. And at this moment, we are not considered a lot after Phase 3B and beyond that. So we're trying to maybe step-by-step. If we want to do next, we probably will complete 3B first.

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

Philip Lee-Wei Shen, Roth Capital Partners, LLC, Research Division - Senior Research Analyst [8]

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

One last question and then I will pass it on.

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

Gongda Yao, Daqo New Energy Corp. - CEO and Director [9]

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

Yes, that will give -- okay, that what we're agreeing…

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

Philip Lee-Wei Shen, Roth Capital Partners, LLC, Research Division - Senior Research Analyst [10]

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

Sorry Gongda, go ahead.

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

Gongda Yao, Daqo New Energy Corp. - CEO and Director [11]

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

Our first capacity is like 25,000 metric tons and beyond. Yes, that's the level.

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

Philip Lee-Wei Shen, Roth Capital Partners, LLC, Research Division - Senior Research Analyst [12]

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

One last one and I'll pass it on. In terms of you mentioned higher quality poly, can you give us some metrics to help us gauge where you stand today? So for example in Q2 -- I may have these terms wrong, so feel free to change the criteria if you need or want to, but I think there is different levels of electronic grade that you guys have talked about in the past. So what percentage of your production in Q2, for example, was the different levels of electronic grade and then how do you expect that to trend during Q4 and if you launch Phase 3B, how much more could it become?

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

Gongda Yao, Daqo New Energy Corp. - CEO and Director [13]

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

So in the polysilicon market in China's national standard, we have 6 different grades; 3 for electronic, 3 for solar. So the highest level is electronic grade 1, and the next one is grade 2, and the third one is electronic grade 3, and then solar grade I, solar grade II, and solar grade III. At current in China, most first year polysilicon manufacturer are coming all beyond like solar grade I, averagely speaking. And DQ right now, at Q2 our polysilicon quality above electronic grade 3 is about 80% of our total production. So we have some very small portions which like electronic grade 1 and there are significant portion is majority in the grade 3 and in between grades 3 and grade 2, and there are small portion is above grade 2, at this level. Now for the future expansion, we target our production at electronic grade 1 level which means we were using more advanced technology and equipment for our future expansion, if we were to do expansion in future for our Phase 3B. Phil, I hope this answer your question.

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

Operator [14]

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

Our next question comes Sheng Zhong of Morgan Stanley.

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

Sheng Zhong, Morgan Stanley, Research Division - Associate [15]

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

So a follow-up question on your maintenance schedule. You mentioned in September you will do the maintenance, but last year the maintenance was between very late September and early October. So is it possible that you will postpone your maintenance this year because of the strong demand and the strong price?

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

Gongda Yao, Daqo New Energy Corp. - CEO and Director [16]

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

So Sheng Zhong, last year's maintenance is a little bit to do with expansion projects. So we're doing one maintenance during 2 [purpose]. For this year, it's slightly different. So we were using innovative -- first time we're trying to shut down the half of the line and while maintaining the manufacturer on the other line. So that will maximalize our output. So the impact for the production, as we said maybe roughly about 2 weeks instead of more than 2 weeks. Last time we did that more than 3 weeks actually, so huge impact for production. So this time if you notice our guidance for Q3 is much higher compared with the last year. That's in 2 facts because we're dividing 1 maintenance by 2 different schedules in September and October, and each with much less impact compared with last year. So total output impact is include a (inaudible) for about 2 weeks. So we're expecting like roughly about one week for each. So that's the guidance. We probably will not change much unless really our customers driving us, say, so currently we got a lot of calls from our customer for supply. We do our best that we can to supply. And some customers say they're facing possible shutdown because of shortage of polysilicon; we don't like to see that happening, but although our ability to supply is limited. So we will try our best in August and in September we really need to do the maintenance because the maintenance is not only for the mandatory things and also for the safety guarantee our chemical plant for long-term running. So we definitely most likely will do in September according current schedule is. And of course we are waiting for other facts like a hardware delivery from our supply is ready, then we can immediately start our maintenance in September. So that's our only limitation is on the hardware availability [increment] and the hardware. If once we have those things, we will do in September. And most likely we'll not change even the -- we also -- in preparation for maintenance, we also informed our key customers about our schedule. So we asked them to do their plan accordingly and in third quarter and the fourth quarter.

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

Sheng Zhong, Morgan Stanley, Research Division - Associate [17]

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

And second question is about the currently there are still very huge inflow number to inflow policy come to China market. So wondering if you have any updates on the anti-dumping investigation on the Korean polysilicon and is there any timeline for China government to make some decision?

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

Gongda Yao, Daqo New Energy Corp. - CEO and Director [18]

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

We heard no decision made yet, but this is the Chinese government's decision. So I do not thinking we will know before even the like Korea company and we'll know before. According to the national schedule, most likely it will be in November, right. So November we'll know the results. So unfortunately, I think we know same as maybe, for example, like the Korea polysilicon manufacturer, they will know at the same time. So by November most likely they will announce it. But as you know, this is not really pure economic issue, it's political and depends on the country relationship and the changes could be happen. So it's not only the simple economic issue, so it's very complicated. So we think November will be done, probably.

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

Operator [19]

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

Our next question comes from [John C. Fritch] of [Luminous].

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

John C. Fritch, [20]

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

Just 2 questions if I could. First one, can you give us a sense if you haven't talked about it already of kind of where you think cash costs might be in the polysilicon segment by year end and what sort of scope is there to continue to bring those down? And then secondly, when I look at the ASP that was realized in the poly segment, it was a little bit lower than I would've thought typically because of your high purity. You guys seem to get a little bit of a premium above spot. So was there anything particular in the quarter that lead to a slightly lower ASP or has something changed a little bit more in the market and should we expect a premium to return as we look in the second half of the year?

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

Gongda Yao, Daqo New Energy Corp. - CEO and Director [21]

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

As you know, the Q2 the ASP is very weak in China and also we have some delay in the order and the shipment and so forth to the customer side. So during the Q2, almost like ASP stayed steady, steady, it's going up little bit, but not very high end of June compared with the current price. So we do see, you're right -- I don't know, if you look at the average price, why it's may be slightly below, but actually because of little bit of lagging in the price response to our shipments. So normally we -- for example, we normally fix the price at one month before. For example, our April price is most likely settled by the second half of March, which is a very low point of price so which give us the April price is a little bit lower than actual April price. Then same to the May and in June. So that's probably the reason why we -- yes, we do not sell our spot in the price immediately, we do work with our long-term customers with one month ahead of schedule. So that's probably the reason, yes.

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

John C. Fritch, [22]

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

And then on the cost side, where do you think cash cost…

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

Gongda Yao, Daqo New Energy Corp. - CEO and Director [23]

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

Cost side, yes. Cost side, right now cash cost is about $7, but that's the manufacturer cash cost, not include financial cost and interest cost in those sales, administrative cost. So how low we can go manufacturer cost? We believe eventually we can go to as low as $6, but it's long term, it's not like immediately; probably within 2 years. I think we can do with cash cost about $6 for the (inaudible), yes.

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

John C. Fritch, [24]

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

So by, let's say, the end of '18 $6 is a good target.

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

Gongda Yao, Daqo New Energy Corp. - CEO and Director [25]

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

Yes, end of '18 and beginning of '19, I think we can do that.

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

Ming Yang, Daqo New Energy Corp. - CFO [26]

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

I think even in Q4, you will start to see some opportunities for cost reduction. We're implementing new technology and new upgrades that should reduce electricity usage, energy usage in general, as well as raw material usage reduction. So you start to see some effect starting in Q4.

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

Operator [27]

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

(Operator Instructions) Luka Zhu of Deutsche Bank.

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

Luka Zhu, [28]

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

My first question is that can you please share with us about the poly shipment mix between mono and multi customers during the past quarter. If I remember correctly, first quarter you shipped around 20% to 30% something and what's your expectation in the next few quarter?

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

Gongda Yao, Daqo New Energy Corp. - CEO and Director [29]

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

So next 2 quarters, so currently we are targeting, our shipment is around 40%. So we're trying to set up a very high standard for mono wafer polysilicon. So on the 2 requirement, one is the purity wise, the electronic, the impurity level should meet electronic grade 3 or above, so that's the first requirement. Second requirement is that we want a very dense polysilicon raw material. So that's the combination of the 2 characteristics of the polysilicon, we will ship before as the mono wafer polysilicon. As a result, I think we ship to various of our customers and so far almost like 100% passed their quality control. So this we will continue to go ahead. And on the same side in our customer demand has been higher and they want to ship high percentage of product as mono wafer polysilicon. So we also do some experiments trying to a little bit of the testing, the other material can be using as well. So we have joint development with our key customers to see if we can expand the shipment. At this moment, we still target our potential roughly about 40% and until our new experiment like Ming mentioned, we do lot of experiments with our customers, if that's positive then we probably will continue expand our percentage. Otherwise we will still [within] that commitment as a 40%. As we say, right now in 2017 the mono wafer supply may be consuming still about 30% to 40% range. Right now in China, majority mono wafer -- the polysilicon is from China and also imports. But in future and maybe 2 years later, that would be improved more than about 50% in that 2-year period and probably require a lot of Chinese [quarry] as a bigger portion won't be suitable for the mono wafers. So that's our goal in that. So in next 2 years, we were expanding our percentage increasing from 40% to maybe 60%. But need to include a new capacity if we want to [enter] our technology improvement from our production.

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

Luka Zhu, [30]

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

And so what's the price difference between the poly for a mono versus nothing, any how much...

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

Gongda Yao, Daqo New Energy Corp. - CEO and Director [31]

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

There's several mono wafers segment. I think for N-type mono is the most high requirements for whole factors because those are for like, for example, in Q4, typically like for some powers [IBC] applications for N-type, mono is very, very high quality. So the quarry is a much carry -- in order to carry a lifetime. Lifetime is much longer than compared with our standard P-type. So those wafers require much better called second quality. Normally we're choosing the best material, and we're also asking for a higher price compared with normal ones. So that's definitely. For the standard P-type, right now the difference between the poly compared with the solar grade is very, very small and there's 2 factors. One is that we're just starting the shipping these things to our customer and normally, most customer they also receiving our polysilicon for mono and the multi wafer applications. So we combined those two together. So at this moment, difference is very limited at this moment. As we said in future, because demanding for the mono wafers polysilicon were increasing significantly as that also require higher standard for quality I think the price that we see difference in the second half of this year.

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

Luka Zhu, [32]

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

So you mean small premiums. So can I understand it as at below 10% something?

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

Gongda Yao, Daqo New Energy Corp. - CEO and Director [33]

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

Yes, you can say that.

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

Ming Yang, Daqo New Energy Corp. - CFO [34]

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

Around 3% to 5% currently, and we expect that to expand.

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

Luka Zhu, [35]

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

So is it possible to expand beyond 10% in second half, right?

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

Ming Yang, Daqo New Energy Corp. - CFO [36]

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

Maybe not 10%.

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

Gongda Yao, Daqo New Energy Corp. - CEO and Director [37]

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

Maybe not 10%. Because as you know the China polysilicon is just starting to using as a mono wafer seeing in last only a few quarters, maybe one year. Transitionally, this market is by imports polysilicon. So they are easily positioned for ask a premium. Right now, we're competing this field. So at this moment we enter this new market, we do not put a larger percentage of difference we are trying to competing as a qualified mono wafer polysilicon supplier and first. And once we can largely replace the imports, I think even with positioning lower than the imports price we still can position for high price compared with the multicrystal wafer market. Yes, so that's what we think expect especially as not every polysilicon manufacturer can provide us with a quality to qualify as a mono wafer supply. So there's a limited supply in the Chinese market especially if the anti-dumping decision is made, I think where a lot of imports probably maybe will face some difficult into Chinese market and that point we'll see some supply demand imbalance again.

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

Luka Zhu, [38]

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

And my second question is on the cost side. So I noticed that the second quarter the cash cost is a little bit higher versus first quarter. Is it due to like the currency movement or I'm wondering if any cost difference between the polymono and the multi...

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

Gongda Yao, Daqo New Energy Corp. - CEO and Director [39]

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

No, the second quarter subsidy cost is not significant. We will still consider it as flat, but there's 2 areas we mentioned. One is the second quarter we do a lot of experiments trying to improve the quality of polysilicon. We faced some problems and stability in the process, so causing some (inaudible) movement. Although the quality of the polysilicon generally increased, but is still like 80%. But as a manufacturer, we're using little bit of more electricity for example. And also second factor is the impact for the cost is a mythological grey silicon price is slightly increasing not significant. But we think we can maintain that. We can manage that in the Q3 and Q4 at this moment. If those factors not increased a lot, we proved in the Q3 is the preliminary results that we already see our cost that can maintain as low as in the first quarter. So this problem can be resolved by Q3 I think. If in Q3 we need looking the general cost, it's because of maintenance. Because of maintenance, we normally will impact some quantity of the production. So if you're disregarding that portion I think that we can improve our cost of structure for Q3 and Q4.

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

Luka Zhu, [40]

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

So can you remind us again your total cost target by end of this year and maybe for next year as well?

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

Gongda Yao, Daqo New Energy Corp. - CEO and Director [41]

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

So for this year, we will say we maintained it's about between $8 and $8.50. Yes, so it's like we targeted like $8.25 at the middle point at the end of this year, when exiting the 2017. Once we go into 2018, because during this current maintenance in the September and October we will improve some debottlenecking for our lines. So we were increasing, likely we're increasing roughly about addition of 1,000 metric ton output for 2018 compared with 2017, if we do not starting any new capacity expansion. So we're expecting 2018 the overall production volume, we're very close to about 20,000 metric ton, so which will give us further reduction, so most likely target to about $8 by 2018.

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

Luka Zhu, [42]

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

And my last question is again about the capacity expansion. Given maybe you have learned that the government has set a very encouraging solar target by next few years, which has beat the market expectation, so perhaps this may help raise the demand expectation. So given that, will you consider to expand your Phase 3B capacity any soon? So can you give us the specific timeline of this?

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

Gongda Yao, Daqo New Energy Corp. - CEO and Director [43]

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

No, as we said, we're not really consider -- we'll consider market environment. But, as you know, the market environment is not very important factor for our considering. Our capacity right now is only like 20,000 metric ton to the market, above 400,000 metric ton. And if you look at the market, there are many people who are expanding by 100,000 metric ton for one company, which is really crazy in the market right now. So we are looking into is not total capacity and total demand. We're looking for the area, the market lack of which is higher quality polysilicon. So once we have technology, I think we decided to expand immediately. So if we're busy with leading other competitors by 2 to 3 years or more and we were starting our expansion immediately, yes. But as you know at this moment we still have lot of research that need to done and a lot of experiments and results need to be find out and then we can make a decision very so.

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

Luka Zhu, [44]

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

You have internal target for breaking through the technology?

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

Gongda Yao, Daqo New Energy Corp. - CEO and Director [45]

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

That's true, yes. That's true, yes. We were looking into that and we also see overall our competition, startup like new companies in Xinjiang is much slower than we expected, and also they faced more problems, technical problems and environmental problems and governmental regulatory policy problems. So those factors, those problems threatening to our expansion is much less than before. But a major, major factor we will consider is our own capability point is can we make the polysilicon no other people can make in China in next 2 years and then we will do that. So we were competing in the high end with international players most likely instead of majority Chinese polysilicon makers. So we are positioned as the leader, top leader runner for quality point of view if not for quantity point of view. So that's our strategy would be.

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

Operator [46]

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

Our next question comes from Paul Strigler of Esplanade.

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

Paul Strigler, [47]

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

I'll try to ask 2 quick questions that hasn't already been asked. So in terms of your customers, good news for you in the poly side is probably bad news for them on the margin side. Do you happen to know what the current usage rates for poly are on wafers for mono and multi, sort of how much are they consuming per watt for each type of wafer?

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

Gongda Yao, Daqo New Energy Corp. - CEO and Director [48]

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

Multi is --

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

Paul Strigler, [49]

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

I know it's come down --

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

Gongda Yao, Daqo New Energy Corp. - CEO and Director [50]

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

Yes. Those numbers are changing and so actually multi -- for mono, they're using [diamond wire]. So each watt per gram is reduced a lot, I think very close to like 4 or something. But for multicrystal wafer, they are 2 different technologies. If we're using slowly cutting, I think they're very close to 5, but if you do diamond wire cut is also very close to 4 because we know that it's about 15% to 20% saving of silicon if you switch from one technology to another. So there's that point. As poly price higher -- actually for average people point of view, they're facing same problem. So if you have advanced technology, you have high efficiency, you're still leading their competition in the field. Most of the challenges right now in China is the mono versus multi. Still it's -- because the mono wafers selling price is much higher multi wafers. So they can absorb with more tolerance of the polysilicon price building price point. Yes, but --

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

Paul Strigler, [51]

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

Is that why we see strength in multi wafer pricing recently and a little bit of softness in mono wafer pricing it's just to -- it's based on poly supplier right now and that it's really hard to find any poly in that electronic grade given it's advantages?

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

Gongda Yao, Daqo New Energy Corp. - CEO and Director [52]

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

Yes, I think the gap between the mono wafer and the multicrystal wafer pricing is narrow right now a little bit and it used to be much wider more than CNY 1, pretty one because right now it's probably less. So which means that -- so it's dynamic because when the gap is more then multicrystal wafer will more attractive for the end market, because -- yes, so when the multicrystal wafer price increasing to some point of view then people will choosing to the mono wafers. So market is very flexible and actually if the market is where they're moving through the highest profit relative for the end market larger, yes.

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

Paul Strigler, [53]

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

One last quick one. So last time we saw a supply shortage I think [RAC] (inaudible) ended up shipping a lot of supply to Taiwan which ended up getting shipped into China, either a [St. Gibbs] versus raw poly, is that loophole been closed? Are you seeing any increase in Taiwanese imports in Gibbs standard poly and is the government keeping an eye on that?

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

Gongda Yao, Daqo New Energy Corp. - CEO and Director [54]

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

I think government will keep eye on that. So I think the import from Taiwan in fairliness, it's about 1,000 or maybe less.

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

Paul Strigler, [55]

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

700 millions metric tons?

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

Gongda Yao, Daqo New Energy Corp. - CEO and Director [56]

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

Yes. 700 metric tons so I think government still monitor that to some point they will take action. So it's very high risk. I think only small companies may be if you can say. And China has punished a lot of companies in last 2 years for smuggling any polysilicon into China. So I think the people are very careful about this. I really don't believe any big company will buy those products, only maybe very small companies, yes, at this moment.

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

Operator [57]

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

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Kevin He for any closing remarks.

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

Kevin He, [58]

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

Thank you everyone again for participating in today's conference call. Should you have any further question, please don't hesitate to contact us. Thank you and bye-bye.

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

Operator [59]

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

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.