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Edited Transcript of DQ earnings conference call or presentation 12-Nov-19 1:00pm GMT

Q3 2019 Daqo New Energy Corp Earnings Call

Wanzhou, Chongqing Nov 27, 2019 (Thomson StreetEvents) -- Edited Transcript of Daqo New Energy Corp earnings conference call or presentation Tuesday, November 12, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Kevin He

Daqo New Energy Corp. - Head of IR

* Longgen Zhang

Daqo New Energy Corp. - CEO & Director

* Ming Yang

Daqo New Energy Corp. - CFO

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Conference Call Participants

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* Gary Zhou

Crédit Suisse AG, Research Division - Research Analyst

* John Segrich;Luminus Management LLC

* Jun Liu

China International Capital Corporation Limited, Research Division - Analyst

* Philip Shen

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

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Presentation

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Operator [1]

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Good day, and welcome to the Daqo New Energy Third Quarter 2019 Conference Call and Webcast. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Mr. Kevin He of Investor Relations. Please go ahead.

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Kevin He, Daqo New Energy Corp. - Head of IR [2]

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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 third quarter of 2019, 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 Mr. Longgen Zhang, our Chief Executive Officer; and Mr. Ming Yang, our Chief Financial Officer. The call today will feature an update from Mr. Zhang on market and operations, and then Mr. Yang will discuss the company's financial performance for the third quarter of 2019. 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 the 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 statements. 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 Chinese RMB. We offer these translations into U.S. dollars solely for the convenience for the audience.

Without further ado, I now turn the call over to our CEO, Mr. Zhang, please.

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Longgen Zhang, Daqo New Energy Corp. - CEO & Director [3]

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Thank you, Kevin. Hello, everyone. Thank you for joining our conference call today. We had an outstanding quarter, in which we reached record-high production volume of 9,437 metric tons, while achieving the lowest production cost in the company's history of $6.97 per kg. Our results for the quarter reflect the full production capacity and cost structure of our original 35,000 metric tons facility. In mid-September, we successfully completed the construction and installation of our new Phase 4A expansion project and now are currently working to ramp up production of these additional 35,000 metric tons plan. We expect Phase 4A to reach full production capacity by the end of 2019, approximately 3 months ahead of schedule. With Phase 4A's additional capacity quickly coming online, we expect production volumes during the fourth quarter of 2019 to be approximately 14,000 to 15,000 metric tons. Once our Phase 4A reaches full capacity, we believe our production costs should be further reduced to approximately $6.50 per kg.

We continue to enhance mono-grade production quality and are optimizing our product portfolio towards it in order to maintain higher ASPs. We sold approximately 86% of our products to mono-wafer customers during the quarter. Once Phase 4A is fully ramped up, we expect mono-grade products to account for approximately 90% of our total production volumes. With our downstream mono-wafer customers expected to rapidly expand their capacities for next year, we believe this will lead to continued increase in mono-grade polysilicon demand, which should lead to improvement in the price of mono-grade polysilicon for next year.

During the first 3 quarters of 2019, China installed approximately 16 gigawatts of new solar PV projects, significantly below the market's expectations. We believe the primary reason is the long-delayed announcement of a subsidy policy, which has rippled downwards, forcing many project developers to postpone project completion dates and expand the time needed for planning, preparation, permit applications and procurement. It is possible that many of the 22.8 gigawatts of subsidized projects, which were originally expected to be installed in the fourth quarter of 2019 could be delayed to the first half of 2020.

Despite softening demand from China's downstream market, demand from overseas markets remains robust and could possibly reach 85 gigawatts this year, a significant increase from approximately 60 gigawatts in 2018. With the Chinese downstream market expected to robust -- rebound next year and overseas demand continuing to grow, we believe global solar PV demand could exceed 140 gigawatts in 2020, a significant acceleration when compared to 2019.

Solar energy is now one of the most competitive forms of energy generation, even when compared with traditional fossil fuel in many markets. When combined with efficiency methods to store power, solar energy has the potential to become a sustaining baseload power. As the economics improve and governments enact more policies to address climate change, we believe we are at the cusp of major change in the market, which will create enormous opportunities for us over the next several years. We are confident in our ability to navigate this temporary downturn in the market and are ready to take advantage of the recovery next year when the market will continue advancing towards grid parity.

As one of the lowest-cost polysilicon producers with the highest standards for quality, we are among the very few polysilicon producers, whoever -- who are able to generate profit in the current challenging market environment. For the first 3 quarters of this year, our net cash provided by operating activities was approximately USD 100 million. Once Phase 4A is operating at full capacity, we expect to make improvements in production quality and cost structure so as to further enhance our leadership position in the industry.

In the month of September, our Xinjiang Daqo subsidiary received certification from China's Ministry of Industry and Information Technology as a national technological innovation model enterprise. This certification brings national recognition that Xinjiang Daqo is a national leader in innovation and technological investment, application of new technology, innovative development strategies and a corporate culture that fosters innovation. We are very pleased to receive this certification. And it further demonstrates the government's recognition that Daqo New Energy is a national leader in the industry. In our strategy to enhance our industry leadership, we continue to engage in R&D initiatives that improve product purity in our manufacturing process. We are also working on cost reduction efforts, including energy efficiency projects as well as improvements in our supply chain and material procurement that would bring further cost reductions. We are also pleased to announce that during the third quarter, we have begun shipments of N-type polysilicon to our strategic customers for production of N-type wafers for trial, testing and qualification. N-type polysilicon carry additional premium over the mono-grade polysilicon and will be required to produce high-efficiency solar cell technologies, such as TOPCon and HJT, which are currently undergoing initial development in the industry. We believe that in the future, Daqo will be well positioned as a key material supply for these emerging technologies.

We are also planning digital transformation at Xinjiang Daqo and implementing a digital manufacturing system. We would become one of China's first specialty chemical companies to do the transformation that would be implemented throughout our entire manufacturing process and related management systems. This would include digital implementation, real-time automated manufacturing data collection, real-time monitoring and analysis of our manufacturing system and optimization. We believe that upon completion, this initiative would bring further enhancements in safety, product quality and cost structure.

Now let me discuss our outlook and guidance. We expect to produce approximately 14,000 to 15,000 metric tons of polysilicon during fourth quarter of 2019 and sell approximately 12,500 to 13,500 metric tons of polysilicon to external customers during the fourth quarter of 2019. For the full year of 2019, we expect to produce approximately 39,300 to 40,300 metric tons of polysilicon.

Now I will turn the call over to our CFO, Mr. Yang, who will discuss the company's financial performance for the third quarter of this year.

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

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Thank you, Longgen, and good day, everyone. Thank you for joining our conference call today. Revenues for the third quarter of 2019 were $83.9 million compared to $66 million in the second quarter of 2019 and $67.4 million in the third quarter of 2018. The increase in revenue was primarily due to higher polysilicon sales volume, which were offset by slightly lower ASPs. In RMB terms, the company's polysilicon ASP during the quarter were slightly higher than during the second quarter of 2019. In U.S. dollar terms, the company's polysilicon ASP fell as a result of the depreciation of the renminbi against the U.S. dollar.

Gross profit was $18.1 million compared to $8.6 million in the second quarter of 2019 and $12.8 million in the third quarter of 2018. Gross margin was 21.5% compared to 13% in the second quarter of 2019 and 19% in the third quarter of 2018. The increase in gross margin was primarily due to lower production costs, despite a slight decrease in ASP.

During the quarter, we achieved total production costs of $6.97 per kilogram and cash cost of $5.85 per kilogram. Successful cost reduction come from our efforts to reduce energy usage per unit of polysilicon production, which is the result of our enhanced manufacturing process, better equipment and energy efficiency efforts.

During the second quarter, we installed new energy efficiency systems for waste heat recovery and heat exchange. And during the third quarter, we're already seeing significant improvements in energy savings. Overall, when compared to a year ago, we estimate we're saving approximately 20% in energy usage per kilogram of polysilicon production.

Other factors benefiting our cost reduction include economies of scale and our enhanced manufacturing efficiencies. As an example, our annualized polysilicon unit production per employee will increase from last year's average of approximately 16 metric ton per employee to currently approximately 22 metric ton per employee to an anticipated 38 metric ton per employee for next year. Our successful efforts and continuous cost reduction will allow us to remain a cost leader in the polysilicon industry with sustained profitability.

SG&A expenses were $8.2 million compared to $7.8 million in the second quarter of 2019 and $7.6 million in the third quarter of 2018. This quarter's SG&A expense includes $4 million of noncash share-based compensation costs related to the company's share incentive plan. The increase in SG&A for the quarter was primarily due to an increase in shipping costs as a result of higher sales volume.

R&D expenses were $1.2 million compared to $1.5 million in the second quarter of 2019 and $1.4 million in the third quarter of 2018. R&D expenses could vary from period-to-period to reflect R&D activities that took place during the quarter.

Income from operations was $8.8 million compared to loss from operations of $0.4 million in the second quarter of 2019, and income from operations of $4 million in the third quarter of 2018.

Interest expense was $2.6 million compared to $1.9 million in the second quarter of 2019 and $2.1 million in the third quarter of 2018.

EBITDA from continuing operations was $19.7 million compared to $10.2 million in the second quarter of 2019 and $14.8 million in the third quarter of 2018. EBITDA margin was 23.5% compared to 15.5% in the second quarter of 2019 and 22% in the third quarter of 2018. Despite the market challenges, we continue to generate healthy EBITDA and EBITDA margins.

Net income attributable to Daqo New Energy Corp. shareholders was $5 million in the third quarter of 2019 compared to net loss attributable to Daqo New Energy shareholders of $2.2 million in the second quarter of 2019 and $18.3 million in the third quarter of 2018.

Earnings per basic ADS were $0.37 compared to loss per basic ADS of $0.16 in the second quarter of 2019 and $1.39 in the third quarter of 2018.

As of September 30, 2019, the company had $68.2 million in cash, cash equivalents and restricted cash compared to $79.6 million as of June 30, 2019. As of September 30, 2019, the accounts receivable balance was $0.1 million compared to $0.1 million as of June 30, 2019. As of September 30, 2019, the notes receivable balance was $4.3 million compared to $9.4 million as of June 30, 2019. As of September 30, 2019, total bank borrowings were $248.8 million, of which $163.5 million were long-term borrowings compared to total borrowing of $243.2 million, including $151.5 million of long-term borrowings as of June 30, 2019.

For the 9 months ended September 30, 2019, net cash provided by operating activities was $101.6 million compared to $63.6 million in the same period of 2018.

For the 9 months ended September 30, 2019, net cash used in investing activities was $202.3 million compared to $99.9 million in the same period of 2018. The net cash used in investing activities in 2019 and 2018 were primarily related to the capital expenditures on our Xinjiang Phase 3B and Phase 4A polysilicon projects.

For the 9 months ended September 30, 2019, net cash provided by financing activities were $76.6 million compared to net cash used in financing activities of $84.3 million in the same period of 2018.

This concludes our prepared remarks. We will now turn the call over to the operator to begin the Q&A session. Operator, please begin.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Philip Shen with Roth Capital Partners.

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Philip Shen, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [2]

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I'm in transit right now, so I may have missed some of your prepared remarks. But that said, I wanted to talk through what China's outlook is. It seems like the back half recovery in 2019 really hasn't happened and it doesn't seem like it will. And then we'll have this carryover of the 23 gigawatts into next year. I was wondering if you could talk through how you expect and what you expect China's demand to look like by quarter through 2020? And I think you -- in your press release had a 140 gigawatt in global demand for 2020. How much of that is China?

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Longgen Zhang, Daqo New Energy Corp. - CEO & Director [3]

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I think as I just in talking and the speak, China this year so far because of announcement is delayed, subsidiary policy is delayed. So we believe most of projects, because it's already national planning, so around 23 gigawatts, we believe, will extend to mostly in the first half of next year. So basically, this year, we don't believe in China, maybe, I think, around 25 gigawatts, maybe 30 gigawatts, that's the most. So next year, basically, I believe is China total maybe around 40 gigawatts to 50 gigawatts because some may be delay from this year, then also next year, we'll speed up. There's a lot of things happened because the subsidy policy delay due to -- because I think a lot of -- if you want trade war, then the government's policy delay, the adjustments in all those stuff. But anyway, we see the grid parity, then next year, China, besides, I think, the subsidized projects and also a lot of grid-parity projects is there. So basically, then foreign markets -- I think overseas market also continue to grow. This year is around 80 gigawatts. Next year, we think is -- 90 gigawatts to 100 gigawatts is possible. So that's why we come out right now is 140 gigawatts. But to us, I think, for silicon materials, the most of it right now, I think, should turn the silicon price why still is status quo, like still they increased too much, still like just around $9 per kg. The reason because I think the wafer capacity expansion is not faster as we expected or people claimed. If you look LONGi, they're claiming, I think, around 60 gigawatts. But actually, right now or by the end of next year -- but actual right now, only around 35 gigawatts to 30 gigawatts is actual capacity. Same as like Chongqing. I think right now, the actual capacity may be only 25 gigawatts. But from 25 gigawatts to 50 gigawatts, I think most will be there, I think, the next year, first half -- first 3 quarters. So that's why, I believe, I think silicon price right now is not temporary. Short term is not determined by the end of module price up and down or demand supply. It is dependent on the -- I think the wafer capacity expansion. I think right now, for example, the mono, I think, wafer ingots furnaces supply is short. You need like 3 months to 6 months for the order period. So basically, I believe we see like Jinko, like LONGi, like Chongqing, those are a lot bigger players for the next year, especially the first half of the year, the capacity is installed. I think silicon price will go up next year -- I think in the first quarter, end of first quarter, beginning of next quarter -- second quarter of next year. We're back to $10, even $11.

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Philip Shen, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [4]

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Okay. That's really helpful. So $10 to potentially $11 in Q1 and Q2. I was wondering if you could comment also on the outlook for supply. So you talked about the demand with mono wafer coming online. But can you talk through some of what you're seeing with your competitors and what they're ramping up in terms of polysilicon production or capacity? And how much of that do you think will be capable of producing mono-grade polysilicon?

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Longgen Zhang, Daqo New Energy Corp. - CEO & Director [5]

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Okay. Because since Daqo's most products right now is mono-grade. 86% of our products right now is mono grade. So I'm not (inaudible) on the multi because multi is not too much player there. So if you look at the third quarter, basically the major player will still import, I think, upon Wacker, OCI still around like 30,000 tons to China in the third quarter. Then the second player, maybe I think the major, I think, today, I think Daqo is the bigger player in China. Then also look at our competitors. I'm not going to mention their names because I think like TBEA, maybe, they also have the second -- they also have new project starting production. But they still not reached purity, I think, high percentage of mono silicon -- grade silicon quality product. Same as I think, Tongwei. So basically, I think Tongwei, TBEA, today, they may be around like 50%, the older plants maybe, okay, TBEA, frankly speaking, maybe around 60% to 70%. I'm talking about new plants. So they're still in the processing of ramping up. I think today, I think a major bigger player is Daqo, Tongwei and TBEA and plus maybe SunPower publishing is coming from New Hope because they actually -- basically power is almost -- basically, the power is free. Then the MGF, the silicon powder, the raw materials are also made by themselves. So even though the quality is poor, but their quantity, step-by-step, is improved and is coming to market. I think right now, New Hope's, I think, annual output may be around 50,000 tons. So basically, you can see what I can forecast by the end of this year, our capacity -- actual capacity maybe reach 78,000 tons. So next year, our majority 90% is mono grade. So I'm not comparing -- Tongwei, I'm not sure how much, but their claim, there may be around 80,000 tons come out. But I've doubt, the mono grade may be around -- below even 50%, overall, okay? TBEA, maybe around 60% to 70%. Their total output maybe around, I think, also 72,000 to 75,000 tons. That's the major players. So there's not really too much there. So basically, what I'm thinking right now, silicon price will not go up because of, I think, mono-grade wafer capacity is not there -- the expansion is not we expected right now. So by the end of -- by the middle of next year, all the capacity is catch up, for example, LONGi claim right now by the middle of next year, they will go to 45 gigawatts, then by the end of next year will go to 60 gigawatts. Then Chongqing by end of September will reach to 50 gigawatts. So all these capacity come out, they need a lot of mono-grade silicon. I don't think the foreign import silicon, the cost can be competitive with us. As you can see, we continue to reduce the cost. So we will continue -- even when now the price is in worse scenario, our gross margin still can reach around this quarter -- third quarter is around 21% to 23%. We think -- I already gave out our cost target is $60.5. So you can imagine the gross margin, how much we can improve.

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Philip Shen, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [6]

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Great. One more, if I may. As it relates to Phase 4B, can you talk through what factors and conditions need to be in place for you to launch the Phase 4B? And is there a sense of timing it? Or is that still unclear?

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Longgen Zhang, Daqo New Energy Corp. - CEO & Director [7]

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Basically, right now, we think we still forecast Phase 4A because we're almost 1 quarter ahead to complete the construction put into the production. So I think by the end of this month, we will ramp into 70% to 80% of our output -- of our capacity. So December, definitely will be 100% capacity running, even based on our guidance, you can see there in our projected. So basically, based on our, right now, the balance sheet status, we still have some 4A capital expenditures, need to pay out next year. Today, I think, as you can see, our debt-equity ratio is still reasonable and debt to total asset is 49%. So we will see, I think, at the next year first quarter and second quarter, we will see what the performance and continue to improve the balance sheet and then to make decision, also the market situation, whether we continue to do 4B or not.

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Operator [8]

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Our next question comes from Gary Zhou with Credit Suisse.

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Gary Zhou, Crédit Suisse AG, Research Division - Research Analyst [9]

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This is Gary from Credit Suisse. I have 3 questions. So firstly, I noticed that your unit production cost for early next year is now at USD 6.5. So I think this is probably lower than the $6.8 you previously guided in September. So may I ask what is the reason behind this kind of a better-than-expected cost outlook? And secondly, may I ask the latest capacity utilization of your Phase 4A project? And what -- how much of its current output is from the mono grade? And thirdly, so based on the current capacity expansion plans of your peers, we think that probably we won't see much kind of a new capacity from top-tier producers in the next 12 months or so, if not longer. So just wonder if management has an estimate, what kind of polysilicon price may be sustainable in the next 1 to 2 years?

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Longgen Zhang, Daqo New Energy Corp. - CEO & Director [10]

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I think, first of all, to answer your question, if you look at our third quarter, our cost, I think, of the goods sold is $6.97, that's just based on full capacity running on the existing capacity, 35,000 tons. And we think if we're fully running 4A and it's not only the scalability, but also, I think, in October, we successfully signed the supply, long-term contract. So compared last year, all the supply almost cut 5% from, for example, like silicon powder and the rods and the package, everything. So we think dramatically, there will be cost cutting around $0.20 per kg. Then also I think scalability, as you can see there, next year, we'll be around 8,000 metric tons. So we believe it's not only considerable right now that it actually maybe continue to go down. Based on the contract we signed with the government and also Asia company, the supply supposed to reduce to $0.24 to $0.20 per kWh. So we believe, I think, very confident $6.50, we -- can be achievable.

To your second question, I think, answer your question 4A, what's the status right now we're running. We're actually starting -- started production in September. And right now, currently almost 70%, furnace is running. For this quarter, I actually, too, I think until yesterday -- until 10th -- November 10, our 4A output is around 850 tons. So our planning for this month, the 4A, I think, total production maybe around 2000 tons. So to answer your question, I think, December, we will ramp up almost 100%. So then next year, you can see, I think, we will give guidance, I think, on the fourth quarter earnings release. So our 4A, right now, the ramping up the speed and also the quality is very good. For example, right now the product almost 70% to 80% is right now the mono grade. And our biggest supplier, I'm not going to name, always testing right now. So I think for this month and also next month, so we can be selling our 4A products -- mono-grade quality products.

To your third question, to answer your question, for next year, I just also answered, Philip, because I think if you look at today's silicon price most right now, the producer is losing money. Even though our gross margins are running at 21%, the Q4, maybe, gross margin is more improved, but our competitors, especially, I think, a small player, their gross margin may be below 12%. Industrial, maybe around 15%. So right now, majority producer is losing money. But I think as you see that, the major full company, I think TBEA, Tongwei and also New Hopes and us, I think that's the 4 major player. I think their capacity next year, I think we're almost, I think, we are 4A raw. The only thing is a quality. We believe 90% of our products is mono-grade products. Then also if you look at -- if we add together all these, I think, maybe mono-grade products, maybe around China producers, maybe around 25 -- I think 240,000 -- 250,000 tons to 300,000 tons next year. Then possible imports next year, what I think maybe around 80,000 tons. So I think on the supply side next year for the mono grade may be around 300,000 tons to 350,000 tons. But for the demand side, you should be -- I think I just mentioned that, majority, I think, most of the mono-wafer ingots, let's say, capacity expansion, right now, they will reach their high capacity. For example, LONGi by the next year will be 60 grades, by the middle of next year will be 45 gigawatts. Chongqing will be -- by the end of September will go to 50 gigawatts. Then (inaudible), so another Asia company, will go to 9 gigawatts, Jinko has claimed right now 25 gigawatts. All those kind of capacity is coming. What I will add up next year, the mono whole capacity average -- the whole year average is rather like 100 to 110 gigawatts. So that, I think at the mono side maybe around 350 gigawatts to 400 gigawatts also. So I think supply even -- supply and demand may be even. So then for the time period, I think it may be around -- I think the second quarter, I think the demand may be higher than supply, okay? So maybe cost of the silicon price go up. But right now, I think $9 for mono silicon price is our average. Of course, you see our -- some products are selling at higher because we're at 90% of mono grade. Our average selling price right now this quarter is $8.99. So I think mono grade maybe selling around $9.20, $9.10, then some multi-products we're now selling maybe only like $7.50, whatever. So we believe, I think, the mono-grade quality products, right now the selling price should not continue to go down. We already see this quarter -- almost fourth quarter, the price for the mono-grade polysilicon price status quo right now. So we believe, I think, the fourth quarter, the ASP should be the same as third quarter.

Gary, did I answer your question? Or Ming you have some comments to add?

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Gary Zhou, Crédit Suisse AG, Research Division - Research Analyst [11]

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Yes, thank you very much. I have no further questions.

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Operator [12]

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Our next question comes from Liu Jun with CICC.

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Jun Liu, China International Capital Corporation Limited, Research Division - Analyst [13]

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I have 3 question. The first that you have mentioned the electricity price, you purchased, next year will be going down. So could you please give us some color on the DPP you are signed with the local power station in Xinjiang next year? Because we have heard that some company in Xinjiang now have the pressure of electricity price increase. And the second is that, we have been given the guidance, where the cost will be at USD 6.5 per kilogram. So may I understand what's the assumption of the electricity price for that cost? Is it the current cost? Or we already accounted the electricity price decline? And third is that considering we have no further capacity ramp-up planning in 2020, we have, say, positive free cash flow. In the next year, will we have any plan to give dividend in the next year?

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Longgen Zhang, Daqo New Energy Corp. - CEO & Director [14]

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Okay. I think, first of all, Mr. Liu, to answer your question -- Mr. Liu from CICC, I think he knows China better than me. First of all, about electricity, I think our electricity supply and price are secured by specific trends in the investment account agreement signed with 4 parties, including one is (inaudible) company, it's a Asia company, is a supplier. They also serves the government. Then also serves the economic development zone administration committee. So I think on their contract, if you base (inaudible) finish 4A, our electricity should be from current price $0.24 per kWh down to $0.20 per kWh. According to them, the electricity supply and price are secured for at least 10 years after Phase 4A running at full capacity. We believe the local governments and our supply will continue to follow the agreements, and we're able to maintain our advantages in cost structure. In addition, if you know that, regulatory, the state council, the central government released regulations are optimizing the business environmental, in which it is clearly states, I think, on Item 31, local governments at all levels and their relevant departments should fulfill the policy -- promise in all kinds of contracts and should not commit any breach and entirely disregard the obligations due to adjustment of administration jurisdiction, government transition, adjustments of institutes or their responsibilities, all charges of relevant officials in charge. So you can see that's the government's regulations starting January 1, 2020.

To answer your second question, we right now forecast next year at full capacity Phase 4A, our cost -- manufacturing cost of $6.50. So we're not considering further to the current electricity cost, $0.24 per kWh. We'll not consider right now that electricity will continue to go down, maybe $0.04 per kWh. If that's the case, the cost maybe continue to go down to $6.30.

Then to your third question about the cash flow, yes, we see that year-to-date, to end of December, our operating cash is almost $100 million. And we believe, on the fourth quarter, the cash flow -- operating cash continue to come in. But also I want to remember -- remind you that 4A, our total investment is around CNY 2.95 billion. It's around USD 425 million. We still have some payments still going to pay, I think arrangement. So next year, we still have 4A. We still have around $120 million payout. Then in 2021, we still have $20 million payout. So we want to continue to run the business and to improve our balance sheet. Right now our total banking loans is around USD 248 million. Although we still have banking facilities around like [USD 500] million, but we still want to prudently make a decision whether we continue to expansion 4B or not by the middle of this year.

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Operator [15]

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Our next question comes from John Segrich with Luminus.

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John Segrich;Luminus Management LLC, [16]

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Just a quick housekeeping. Depreciation has kind of been fairly flat. I assume now that you're ramped with the expansion, that depreciation will start flowing through the P&L. So just remind us kind of how much incremental depreciation we should be thinking about for next year, Ming? And what's the period over which the new plant is depreciated versus the old plant?

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Longgen Zhang, Daqo New Energy Corp. - CEO & Director [17]

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Okay. I think, John, I think as you know that, for 4A because our total investment is around $420 million, so if we capitalize that, I think, basically, every month, right, is around USD 2 million were the depreciation, I think, into the P&L. So basically, we account that also under our cost of goods sold. So that $6.50, also including that. But if you look at our total output next year, I'm not giving guidance. Our main price is 70,000 tons, but we believe, okay, we can reach maybe around 75,000 to 78,000 tons.

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John Segrich;Luminus Management LLC, [18]

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Okay. And then just one more. When you look at the guidance for 4Q, as you're ramping here, it's kind of the first time where you're not projecting to sell everything that you produce. I'm just wondering kind of is that a timing issue? Or as you bring on this new capacity, do you still need to find a home for it, and we should expect to maybe build some inventory over the next couple of quarters?

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Longgen Zhang, Daqo New Energy Corp. - CEO & Director [19]

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No, no, no, no, John. Because of some products we produce, like this month, some maybe still is not good quality, still in the trial production. Still is not -- the production still not ramping to 70% of our criteria for capitalization. So some products, we still need a capitalization. That's partial maybe around like 110s. Then also I just remind you, some products we maybe use to our -- to making our rods, the silicon rods, so that's why we maybe use this month, it's around like [510], right? We're used to -- inside used to our silicon rods. We're going to continue -- we're going to use the silicon to outsourcing OEM, the ingots then asking for to cutting to the rods. So basically to reduce our cost. So our inventory is still we keep around 3 days production at the end of the quarter.

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Operator [20]

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

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Kevin He, Daqo New Energy Corp. - Head of IR [21]

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All Right. Thank you, again, everyone, for attending the conference call today. Should you have any further questions, please don't hesitate to contact us. Thank you, and bye-bye.

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Operator [22]

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