大全新能源 (DQ) 2021 Q1 法說會逐字稿

Good morning. Welcome to Daqo New Energy First Quarter 2021 Results Conference Call. (Operator Instructions) Please note, this event is being recorded.

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

Hello, ladies and gentlemen, 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 first quarter of 2021, 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, 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 quarter. 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 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 preliminary view as of today and may be subject to change. Our ability to achieve these projects -- projections is subject to risks and uncertainties. All information provided in today's conference 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, Mr. Zhang, please.

Thank you, Kevin. Hello, everyone. Thank you for joining our conference call today.

During the quarter, we continued to see strong momentum in customer demand for high-purity polysilicon, which led to a significant shortage of polysilicon and higher polysilicon ASPs. Our ASP in the first quarter of 2021 was $11.90 per kg, approximately 10% higher than Q4 2020. Due to the elapsed time from contract signing, product shipment, to revenue recognition upon products arrival at customers' sites, it takes time for market prices to be fully reflected to our ASPs during the periods of rapid price change.

Based on current customer contracts and product deliveries, we expect our ASP in the second quarter of 2021 to be in the range of $19 to $20 per kg, a significant improvement compared to Q1 that better reflects recent market pricing trends. As of today, current market pricing for high-purity, mono-grade polysilicon has already reached the level of $23 to $25 per kg.

With strong end market demand driven by global carbon neutrality commitments by all major economies, major mono-wafer manufacturers continue their capacity expansion and new entrants build new wafer capacity. As of -- as a result, we believe that supply in the polysilicon market will remain tight until the middle of 2022 when the market will finally see some additional supply of polysilicon.

During the quarter, we produced 20,185 metric tons of polysilicon which lays a solid foundation for achieving our production target this year and also gives us the confidence to raise our guidance for annual production volume to the range of 81,000 to 83,000 metric tons from 80,000 to 81,000 metric tons. During the quarter, approximately 99% of our polysilicon products were sold to mono-wafer customers, and we already began commercial shipments of N-type polysilicon to our 4 major clients.

Our production cost was up by 4% in Renminbi terms in the quarter as compared to Q4 2020, primarily due to the rise in the cost of silicon raw material and the impact of lower production volumes. We expect production costs to stabilized -- to stabilize in the coming quarters as the cost of silicon raw material has stabilized for the time being. We will continue our efforts to reduce cost and improve quality as we expect to see the benefits from our newly implemented digital manufacturing system to stabilize production, maximize output and optimize efficiency.

On the business development front, we have already sold out our production volume of this year through the long-term supply agreements with customers that span all the major mono-wafer manufacturers as well as major integrated solar manufacturers. More importantly, in connection with these long-term supply contracts, we have received CNY 800 million of prepayments from customers this year to date, which will help us fund our future expansion plans and ensure our future market share. This shows the tightness of our polysilicon market and strong momentum in demand growth, as well as the fact that in our customers' mind, Daqo is the leading supplier of high-purity mono-grade and N-type polysilicon with high reliability, stability and consistency.

In middle March, we began construction for our new Phase 4B project, which will add 35,000 metric tons capacity for high-purity polysilicon. We expect to complete the project by the end of 2021 and ramp-up to full capacity by the end of Q1 2022. Our Phase 4B project and the potential IPO on China's STAR Market will bring us into a new phase of development and enable us to quickly expand capacity to address the fast-growing demand from the global solar PV market for ultra-high purity polysilicon.

In the present context of global carbon neutrality goals, major economies in the world, including China, are launching ambitious policies to mandate the use of clean energy and address climate change with the megatrend of the transformation to lower-carbon economy and decarbonization of the new -- of the energy sector. We are entering a new area of accelerated growth for the solar industry. We believe Daqo New Energy is very well positioned to benefit from this tremendous opportunity.

Now let's move to our outlook and guidance for our company. The company expects to produce approximately 20,000 to 21,000 metric tons of polysilicon and the sale of approximately 20,000 to 21,000 metric tons of polysilicon to external clients during the second quarter of 2021. For the full year of 2021, the company expects to produce approximately 81,000 to 83,000 metric tons of polysilicon, inclusive of the impact of the company's annual facility maintenance.

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

Thank you, Longgen, and hello, everyone. Thank you for joining our conference call today.

Now I will discuss our company's financial performance for the first quarter of 2021. Revenues were $256.1 million compared to $247.7 million in the fourth quarter of 2020 and $168.8 million in the first quarter of 2020. The increase in revenue was primarily due to higher ASPs, partially offset by slightly lower polysilicon sales volume. As Longgen indicated earlier, based on our current customer contracts and product deliveries, we expect our ASP in the second quarter of 2021 to be in the range of $19 to $20 per kilogram, a significant improvement compared to the Q1 average selling price of $11.90.

While we saw a rapid and significant rise in market ASP during the first quarter, due to GAAP accounting revenue recognition policies, there is a significant time lag from customer's order contracting based on market price to polysilicon production and scheduled shipments, to products finally arrive at customer's side for revenue recognition. Due to this impact, we believe our Q2 ASP will better reflect the recent market pricing trends.

Gross profit in Q1 was $118.9 million compared to $109.5 million in the fourth quarter of 2020 and $56.6 million in the first quarter of 2020. Gross margin was 46.4% compared to 44.2% in the fourth quarter of 2020 and 33.5% in the first quarter of 2020. The increase in gross margin was primarily due to higher ASPs.

Our polysilicon production cost in Q1 2021 was $6.29 per kilogram, an increase of 6.3% compared to $5.92 per kilogram in the fourth quarter of 2020. The sequential increase in cost was primarily due to an increase in the market price of metallurgical-grade silicon raw material and lower production volume in Q1 compared to the previous quarter, as well as exchange rate fluctuations which had a roughly 2% impact to cost in U.S. dollars. For the second quarter, we expect our production cost to be stable as compared to the first quarter.

Selling, general and administrative expenses were $9 million compared to $11.2 million in the fourth quarter of 2020 and $8.9 million in the first quarter of 2020. SG&A expenses during the quarter included $2.5 million in noncash share-based compensation costs related to the company's share incentive plan compared to $4.5 million in the fourth quarter and $4 million in the first quarter of 2020.

Research and development expenses were $1.2 million compared to $1.5 million in the fourth quarter of 2020 and $1.7 million in the first quarter of 2020. R&D expenses can vary from period to period and reflect R&D activities that take place during the quarter. As a result of the foregoing, income from operations was $109.2 million compared to $98 million in the fourth quarter of 2020 and $45.8 million in the first quarter of 2020.

Operating margin was 42.6% compared to 39.6% in the fourth quarter of 2020 and 27.1% in the first quarter of 2020. Interest expense was $7.8 million compared to $8.3 million in the fourth quarter of 2020 and $6.3 million in the first quarter of 2020.

Net income attributable to Daqo New Energy shareholders was $83.2 million compared to $72.8 million in the fourth quarter of 2020 and $33.2 million in the first quarter of 2020. Earnings per basic ADS was $1.13 compared to $1.01 in the fourth quarter of 2020 and $0.47 in the first quarter of 2020.

EBITDA was $128.1 million compared to $115.1 million in the fourth quarter of 2020 and $63.1 million in the first quarter of 2020. EBITDA margin was 50% compared to 46.5% in the fourth quarter of 2020 and 37.4% in the first quarter of 2020.

As of March 31, 2021, the company had $227.8 million in cash and cash equivalents and restricted cash compared to $118.4 million as of December 31, 2020, and $120.8 million as of March 31, 2020. The increase in cash balance of $109 million sequentially was primarily a result of positive operating cash flow, offset by capital expenditures related to our Phase 4B project.

As of March 31, 2021, the notes receivable balance was $38.5 million compared to $0.2 million as of December 31, 2020, and $4.4 million as of March 31, 2020.

As of March 31, 2021, total bank borrowings were $222 million, of which $100.4 million were long-term borrowings compared to total bank borrowings of $193.7 million, including $123 million of long-term borrowings, as of December 31, 2020; and total borrowings of $265.6 million, including $149 million of long-term borrowings, as of March 31, 2020.

For the 3 months ended March 31, 2021, net cash provided by operating activities was $159.2 million compared to $31.1 million in the same period of 2020. The strong increase in operating cash flow compared to last year was primarily due to higher net income as well as customer prepayments related to our long-term supply agreements.

For the 3 months ended March 31, 2021, net cash used in investing activity was $79.9 million compared to $12.9 million in the same period of 2020. The net cash used in investing activities in 2021 was primarily related to capital expenditures on the company's Phase 4B polysilicon expansion project.

For the 3 months ended March 31, 2021, net cash provided by financing activities was $31.7 million compared to net cash used in financing activities of $10 million in the same period of 2020.

And that concludes our prepared remarks. Operator, we will now open the floor to questions from the audience.

(Operator Instructions) Our first question is from Gary Zhou from Crédit Suisse.

First of all, congratulations on the record high quarterly earnings. So I have 3 questions from my side. So first is can management share with us your latest polysilicon ASP outlook for the second half of this year and also possibly for next year?

And secondly, I want to ask for the latest progress of our Xinjiang Daqo IPO. And if possible, what kind of valuation or market cap we expect to get from the Asian market?

And thirdly, so given the very likely kind of a record high profit and cash flow we are going to get this year, so how do we think of the further capacity expansion into the next few years?

Okay. Gary, to answer your first question, the ASP, I think currently, you see the polysilicon ASP, I think, go up very fast. And as you can see that, this week, our -- I think a small order reached to even more than $20 per kg. We believe the month of June, I think the selling price also will be higher. So that's why we've given, I think, second quarter, the average ASP is around $19 to $20. And that should be compared our Q1 is $11.90 cents, a bigger jump. And that will reflect our gross margin bottom line in second quarter. We got a big improve.

And the reason is because for the second half of this year, the ASP, what's the trend? Basically, the poly, it's very difficult to forecast, I think, the peak price. However, you see our wafer customers will continue to buy as their operating cash flow remains positive. That's what I say, the peak will go to until the wafer industry is -- the average -- the gross margin will go to breakeven. Right now, as you see there, last week, the wafer price continued to go up. So that's why it's difficult for me to give you a forecast of polysilicon price. But I think the polysilicon price will continue to go up in the second half of the year because we didn't have any additional polysilicon capacity in our new capacity add-in.

And for the next year, the first half of next year, maybe around 1,000 tons new capacity come in. But if you look, the -- I think the wafer capacity continue to expansion. I think by the end of this year, we will reach around, I think, 450 -- maybe 450 gigawatts on the wafer capacity. So we think -- I cannot give you the ASP for the next year. But I think the first half next year should be around, I think, more than CNY 150 per kg than second half of the year because the new capacity come in. What I think I talk to industry and other people, we think it should keep above -- ASP rate above like CNY 120 per kg.

Second question about our STAR Market listing. We cannot guarantee the timetable. The reason is a lot of uncertainty in China in capital market. But we have updated our Xinjiang Daqo Q1 financial data and also the first half of this year estimates to Shanghai Stock Exchange last week. We think maybe this week will be released to public very soon. And we are waiting to start the registration process with CSRC. The registration process is expected to be completed within 20 week -- working days after CSRC officially accepts our documents.

So after completion, I think the registration -- completion of the registration with the CSRC, we can starting to listing processing. That takes maybe around 1 month. So basically, if everything goes smooth, I think we can be listing maybe early July.

And for the valuation, it's difficult for me to tell you the valuation because the Chinese capital market, they have a special, I think, the price determining mechanism. And we think -- from our side, we hope the IPO, the shareholders can make money. But definitely, I think this year, the financial results plus net financial results can support our, I think, the future -- after IPO, the future, the price maybe continue to go up.

The third question about the cash flow. Because I think if you look this quarter, I think the earning cash right now and the cash equivalent, even restricted cash, almost $227 million in hand. And also, we continue to have some like CNY 400 million deposits -- long-term contract deposits we received by the rest of the year. And if you look our Q2 financial results plus second half of the year financial results, the cash flow -- operating cash flow, I think, is very high.

So we're very confident even without the STAR Market listing, we can, to support our 4B, continue expansion. So by today, our 4B, total investments is estimated around like CNY 3.6 billion. I think we already paid CNY 1 billion. So I think the CapEx for this year, we were paid, I think, 4B, more than, I think, CNY 3 billion we were paid this year. Maybe only CNY 600 million to CNY 700 million will leave to next year 2022 to 2023. So basically, I think everything so far is very -- I think, is very good business.

(Operator Instructions) This concludes our question-and-answer session. I would like to turn the conference back over to Kevin He for closing remarks. Wait, we have 2 more. I'm sorry.

The next question comes from (inaudible).

I missed your price guidance for the second half of 2022. Would you mind repeat it again? And I have a second question also.

Okay, the price guidance for 2022 -- okay, basically, I cannot give you the guidance, okay? But based on my personal knowledge and we talk to the industrial people, we believe even in the second half of next year, the reason is because wafer expansion -- capacity continued expansion and also the industry, the final ending products, the module -- I think the market is very prospectus. So we believe the ASPs still will be above CNY 120 per kg.

Okay. In the second half of 2022?

Yes.

Okay. My second question is the -- your realized price and the lag time between the realized price and the market price given the fact that right now, we're seeing market prices at maybe CNY 150, CNY 160 per kg, and our realized price for second quarter, you guided that maybe USD 19 to USD 20, which is probably like still below the current market price. Generally, how your realized price for the quarter represents a lag time normally of how many months from the market price?

Okay, I think -- yes, Kim, I think, first of all, if you look at the market price, okay, basically, we have to, I think, to clear -- to -- you have 2 prices. One is you call market price, and that is ASP. When we're talking about market price, okay, right now, let's say, CNY 190, CNY 200 per kg, that's for top, I think, mono silicon grade. That's the good price, okay? So when you're selling that, so bigger chunk maybe will be only like, let's say, CNY 190 is a small, I think, import, good mono, I think, perfect, I think, silicon materials.

So the second is a big chunk. The bigger chunk is you take CNY 2 away. So it's like CNY 188. Then you talked about the (inaudible) -- TOPCon. The TOPCon maybe CNY 4 per kg lower. So ASP, maybe around CNY 6 per kg down, okay? First of all, to answer your question. So basically, what we're talking today, if we're going to market contract, I think, June, next week, we got a contract. So basically, their price, it's not ASP, okay? Their price is within tax is a top price. So for example, if June, the price is CNY 190, so ASP only maybe is -- it takes CNY 6 away. So it's CNY 184 million is ASP, okay? First of all. Second, the price is 1-month lag behind.

So usually, if you see the Q2, we're giving you guidance. First of all, the ASP is $19 to $20. That means without tax, it's ASP, okay, period, to recognize revenue. But the market is the price when you talk in second quarter because in the -- the 1-month delay. So that's why in April, the shipments, the price is determined by March, okay? So the March price actually is the April shipment products. The revenue recognized also in April. So it's a 1-month delay. So that's why it's a little delay, okay?

Did I answer your question? So always, next month, we determine right now. So next month, maybe jumping another $20 -- CNY 20 per kg. Because price changes so quickly, it's difficult for us to tell you what's the ASP, what's the price. We have to -- based on whatever the actual contracts we signed and we deliver. But so far, I think the price is going to be stable, right now is around CNY 190 to CNY 195, I think, per kg.

This CNY 190 to CNY 195 includes VAT, right?

Yes, including the VAT?

Yes, yes. Kim, please always be aware that in the industry, when we talk about the price in RMB terms, it's always VAT included. When we say U.S. dollar terms, it's always VAT excluded. Yes. So it's a little...

I'm just wondering, when I look at TV info, the price that they quote there in RMB, they are normally ex VAT or with VAT?

With the VAT.

RMB always with VAT, yes.

Okay. How much do you think our cost would go up in the next quarter or two?

Okay. Basically, if you look at our Q2, our cost is going up 4%. The major reason is because the Q1 compared, I think, Q4 last year, go up 4%. The major, I think, is raw material, silicon powder. Secondly is the steel price, which increased, I think, from our price increase in Q1, and we signed with the supplier. So we think in the future, the price will be stable because we didn't see further -- the silicon powder has continued to go up. Basically, seasonally, they should be stable, even go down. So basically, I think the cost will stay, I think, the same. Only you have to consider the foreign exchange rate effect.

Our next question is from Philip Shen from ROTH Capital.

The first one is on pricing, but from a different angle. With the substantial rise in pricing for polysilicon, are you starting to see demand slowdown anywhere in the value chain, whether it's wafers or further down or even for polysilicon? Is there any talk at all that there's a slowdown in demand? And what's your latest outlook for China demand in 2021 in terms of gigawatts? What's the range? And perhaps, how does that compare versus what you were thinking back on the Q4 call? Has that changed either lower or higher?

Okay. First of all, I think, Philip, it's difficult for me to give you the forecast on the price today. But the mechanism, you have to know that. From now on to middle of next year, I think for the ending market, for this year, for example, maybe globally, I think forecast is around like 165, 170 gigawatts. So the total demand for silicon is around, I think, 55,000 tons. Then you need to place some inventory. So right now -- all supply right now is -- I'm sorry, 550,000 tons. But right now, all supply is 500,000 tons there. So the shortage is there.

Second is the polysilicon price is driven by the capacity of the wafer. The wafer prices continue to go up. So that's why silicon prices continue to go up. I think the peak should be wafer. I think gross margin go to breakeven. Then I think silicon price may be starting to turn around. So I can't tell you when it will happen. The reason is because the wafer producer -- the major wafer producer right now in the industry, they continue to increase price almost every month or several weeks.

So you ask me, then you should ask with wafer continue to increase price can selling or not. But I think the market is still there because high efficiency, high output watts, the panel, I think you can sell in high price. So that's why, today, China market is accepting the module, I think price CNY 1.8, CNY 1.9 per watt. So the polysilicon only account for maybe 13% to 15% of the module price. Only accounted for 7% to 8% right now, maybe 9% of total investments on the power -- the solar power station installation.

So basically, I think the market is continue -- can drive these prices go up. So I cannot tell you when and how, but I can tell you is by the middle of next year, the poly, I think, supply is still -- totally are still tight. So price still keep in the high, I think, range. That's I can answer to you.

Second question, you said about this year. China market, definitely, I think, right now, is starting too hot. So this year, I think China may be around 65 gigawatts, even to 70 gigawatts. And the global market, I'm not sure, maybe I think 120, 130. So our very optimism, I think globally, I think this year, maybe around 180, 190 gigawatts. Philip?

Okay. My next question is on your outlook for 2021. I think you said you're sold out. So actually, it's more about '22. Can you talk about how much of your expected production has been tied up with long-term customer agreements for '22, '23 and maybe even '24? And then when do you think you'll be able to lock up all of 2022 capacity? Do you think that might happen soon? Or do you think that you'll keep some production or capacity available for the spot market?

I think after we signed the long-term contract with Zhonghuan last week, I think we locked all our production output this year and next year. Basically, next year, based on -- we can -- starting 4B production -- trial production November this year and can reach the full capacity around in Q1. So basically, based on next year is 120,000 tons. So basically, the long-term contracts right now, this year is already over 80,000 tons. Next year, I think around like 120,000 to 130,000 tons. So basically, right now, we stopped signing any long-term contracts for this year and next year.

And for year 2023, we are right now locked, I think, 70,000 tons. For, I think, year '24, '25 and together is also around 80,000 tons. So that's what we now locked our long-term contracts. So especially, I think, for the contracts that we signed originally, we're collecting 6% based on market, I think, as deposits to guarantee, in the future, you see we can lock those amount.

Okay. And then back to the China listing. It seems like maybe the requirements for the listing have been tightened and there's been a slight delay in the process. I know you answered the question earlier, but can you talk about the timing you think now for the actual listing? Do you think it becomes complete by the end of Q2 or is there a chance that it goes into Q3? And we've seen that there might be some challenges maybe due to something about increased pricing or increased R&D spending. So just curious if you might be able to comment on that as well.

I think it's not -- I think the issue is not the -- what you mentioned, R&D or other stuff. I think we have to -- I think first we have to update right now the -- I think Q1 financial data. I think actually we updated last week. So we need waiting for Shanghai Exchange to review those figure, then public maybe within 1 week or soon. So basically right now, so far, I think, we believe, based on our knowledge, I think we can start registration definitely by end of this month, we can start to do that.

So we believe, I think we can listing -- finish the listing -- registration and listing by the end of July. So yes, some uncertainty because we are the first U.S. listing company to listing the subsidiaries in China. So we also face questions and concerns. So, so far, we [could solve] everything. So I think we believe we can finish, I think, early third quarter.

Okay. That's really helpful. And best of luck, obviously, with that process. As it relates to CapEx, with the rising input costs, not only in solar but just globally, do you expect that to impact your CapEx for Phase 2B? And what is your current expectation for CapEx for '21 and 2022?

Okay. I think our regular CapEx, I think, maintenance, I think, maybe Ming can tell you. But for 4B, total right now this year, we almost finished, I think total investment is around CNY 3.6 billion. So we almost finished everything in the contract. I think excluding, I think, around CNY 300 million, didn't sign the contract. So basically, I think we're pretty sure it's around CNY 3.6 billion, of which I think we will pay this year maybe around CNY 2.8 billion to CNY 2.9 billion will be paid by end of this year. So leave around CNY 600 million to CNY 700 million we'll pay next year or even the year after next year. That 10% is a guarantee. It's 1 year after our [small] round of production.

So basically, I think, I just said, without the STAR Market IPO, our inside cash generation can support 4B. So basically, if we can raise more money from IPO basically, the IPO money, we can continue to future expansion, the capacity. So the annual maintenance, maybe Ming can tell you how much CapEx every year, the regular.

The regular maintenance CapEx is only about $30 million or so per year.

Okay. Great. And I may have missed it, but what's your expected quarter for maintenance this year? Is it Q3 or Q4? Or what's your latest view?

I think we already finished, I think, one production line. So rest of -- I think, full product line will be started in June, July, August and September. So major will happen, I think in Q3.

Our next question is from Dora Liu from JPMorgan.

This is Dora. I have 2 questions. The first is regarding the inventory level. So could you share with us the current inventory level of Daqo? And how about the industry average level?

And the second question is regarding the N-type polysilicon. I think Mr. Zhang just mentioned that Daqo started the commercial shipments of N-type polysilicon to major customers. So I'm just wondering what is the current mix or percentage of N-type product of our polysilicon output?

Okay. First of all, I think maybe -- I'll just answer, Ming maybe you can add in more, okay? By the end of Q1, our inventory is around 1,295 tons and compare the Q4 is 2,491 tons. Actually, we dropped down 1,196 tons. So that's why we recognize revenue, the quantity is higher than our production. So basically, in the industry -- we don't know other people.

Basically, we always keep our inventory as low as possible, okay? So if you look at our history, our inventory usually is below, I think, 3,000 metric tons, never higher than that because we are chemical industry, continued production. We don't want to keep any inventory. So basically, we're also not going to go ahead to speculate the ASP, the selling price. So that's why whatever we produce, I think, we're going to sell, okay? That's first question.

Second question about N-type. Today, we have 4 major clients right now who use our N-type products. And the major customers may be taking around like 200 tons per month. So right now, I think every month, we're selling N-type, maybe less than 1,000 tons. So the Q1, the total quarter is, I think, around 2,000 tons is N-type. But the ASP of N-type actually is not higher, only CNY 2 higher than the regular, I think, P-type products. The reason is because right now, the use is still lower. We don't want to differentiate the price difference. So we just want to stimulate the clients to use our N-type products.

But for the future, as you can see that, our downstream clients, for example, like LONGi, like Jinko, they already, I think -- the N-type sale production line is already starting to commercial lining. So we think the N-type silicon, the demand will be more and more. Basically, besides Wacker, OCI, then I think domestic producer, I think, we are one of the, I think, the biggest one right now who provide N-type silicon today.

Our next question is from Tony Fei from Bank of China International.

This is Tony from BOCI. I just have 1 follow-up question on your -- on the competition landscape. So last week, we all noticed that East Hub announced they will build a 250,000 ton project in Ningxia province that's quite huge. So of course, we don't know when or even whether they will finish it. But let's assume for the time being that the project has materialized, how would it affect Daqo's future expansion plans, I mean, beyond Phase 4B?

Tony, first of all, we're not going to comment our competitors because competitors are also friends, okay? And yes, we also see the news. And basically, we very respect our competitors. New hopes, I think, they see in Xinyang, they're already starting, I think, silicon produce. They take 5 years and ramping up. So -- and I don't know how much they produced and what's the quality. Basically -- and our competitors definitely, I think the total, the market supply will affect our -- in the future, you see our continued expansion, we need it based on the market supply and demand. And the future, I think the market ending and the market -- the future, especially, I think, the module in the future, the selling situation.

So we see the market is so big. So some of our competitors, even some new, I think, comer maybe will invest money in this industry. But because silicon industry, the chemical industry is long-term investments, security and also the quality, technology and priority for selling technology, all these, I think, experience, and together, you see the quality is most important. Safety also is most important. So we are focused on our quality and try to reduce our cost. And we try to make ourselves to differentiate ourselves from other people, I think, to make, I think, high gross margin than the industry average, I think, to survive. I think that's our, I think, competitive edge.

So I cannot comment on other. But yes, I think currently right now, the expansion capacity maybe polysilicon is around 400,000 tons underway. But we don't know when they go to put into production and whether they can successful or not. So that's why we are focused on 4B. I think we want 4B, I think, to start full production by November of this year to full capacity running by Q1 next year to, I think, make sure next year, we can produce more than 120,000 tons.

The next question is from John Segrich from Clear Sky.

I wanted to see if we could talk a little bit about some of the issues that people are looking at in the Xinjiang province in terms of forced labor. I know that you guys recently did a tour, and the feedback has been positive. Unfortunately, there have been examples in the past of tours like Sino-Forest that frankly have gone wrong.

So in terms of what you're going to do to independently certify that there is no forced labor at Daqo or even in the entire supply chain? There's been a couple of reports in broad daylight citing that your raw material suppliers have direct ties to XPCC, that you buy your power from companies that are tied to XPCC. So how do we get through this? And how do you guys not get subjected to a potential ban of your products in the U.S. or the EU? What steps are you going to take?

Okay. I think, John, first of all, we will not let politicals in the way, and we are continuing to focus on our own business to continue to expansion and produce high-quality polysilicon to support the global, I think, the green energy solar industry. We did our, I think, the best -- the efforts. So we hosted a site tour with many Americans and the investors, also media from home and abroad from May 11 to May 13. We also posted -- I think, put the video on the Internet to let other investors to see that. I think it's just like you, gentlemen.

So we have reiterated many times of our zero tolerance gains from the forced labor. So basically, we want to take this opportunity to show our investors what is advanced polysilicon plant looks like and how we operate and manage it. So in the future, we don't know because we cannot involve any political issues. So even in the future, maybe we need a high third-party do the audit. So we can answer that question, okay? That's it.

But can you -- are your 2 main suppliers of silicon Hoshine and (inaudible)

Excuse me?

Who are your 2 main suppliers of raw silicon? (inaudible) and Hoshine?

You mean the silicon powder, right?

Yes. Yes.

The silicon powder is from -- mainly from, I think, (inaudible) another is from Hoshine.

Yes. Okay. And so if both of those were tied to XPCC, would you stop buying?

Listen, John. Those providers only provide us the silicon powder, but they also buy silicon metals from all around the world, okay? They mix together. They're going to produce powder -- silicon powder. For Hoshine, they do not only supply the silicon powder to us. They also supply silicon powder to Wacker, OCI. So that's the question answer to you.

So that doesn't change whether or not if they use forced labor, you would buy from them? I mean just because everyone buys doesn't mean that's...

First of all, I already said, we are zero tolerance for the forced labor, okay? I'm not commenting that. But also, I can tell you, they're also selling polysilicon powder to overseas. For example, OCI, Wacker also bought the silicon powder from them.

I understand that. That doesn't mean that they don't use forced labor. I'm just curious, you've seen Apple cut off suppliers. Will you cut off suppliers that are proven?

We don't see any clear evidence of our suppliers be involved into the forced labor issue, okay? So if we see any clear evidence, we definitely take the stance of zero tolerance.

So you would drop them as a supplier? Perfect. Okay. Look, it's an important issue that needs to be addressed.

Yes.

Yes.

Our next question is from Colin Yang from Daiwa Securities.

This is Colin. Just a 1 quick question about our future capacity expansion after 4B? Is the location has been decided? Whether it is in Xinjiang (inaudible) another process? And I'm curious about our future financing plans for our future expansion? (inaudible) continue for the future expansion. But what if it's not enough that we can say here now around equity financial?

Okay. Mr. Yang. I think basically, right now, if you look at Q1 financial statements, and we have enough, I think, inside the cash flow to continue to support our 4B to finish our 4B. Even by the end of this year, without STAR Market IPO proceeds, we can run very well by the end of this year, the cash flow. So basically, if we can successfully run the IPO and the IPO planning, I think, right now, the prospectus, I think will raise CNY 5 billion and maybe more, okay. We don't know, may be less.

I think basically, after we finish the IPO, yes, we will throw the board and to -- basically, we have to evaluate the market situation, demand and supply in the future. I think other competitive expansion. And we will look in some place. Yes, definitely, I think, besides Xinjiang, in China, other places, we have looked at 4 places, for example, like Mongolia, Inland, Guizhou, even Shanxi province. So even abroad. So yes, definitely, at that time, we will make decision, we will let you know.

Our next question is from Chao Ji from Goldman Sachs.

I hope to ask about -- regarding the N-type polysilicon that you mentioned that you released are commercial shipment, can you maybe share your production cost level for the N-type? And also, how much is our -- what is our kind of effective supply capacity for the N-type kind of poly? If the demand -- downstream demand pick up quickly, how much -- how can we kind of reshuffle our kind of supply mix? Do we need to do a little bit upgrade to our existing kind of facility in order to increase the mix of the N-type poly?

Okay. I think that's a good question. So far, right now, I think in China, the bigger major, I think, wafer producer, they're all starting, I think, maybe one production line, N-type production line. As you see, the announcements like LONGi, Jinko and also Zhonghuan and other player. So basically, right now, the quantity, I think, is lower. Their producer also is lower. So that's why they can use, I think, an import silicon poly, for example, from Wacker, OCI and also like the high-quality produced domestic like us.

So I mentioned that in Q1, we sold, I think, around less than 2,000 tons N-type polysilicon. But we can actually, I think, produce right now, around 20% to 30% of our poly is N-type. So it's no problem to us. Based on right now, the equipment and the technology, we even can increase N-type quickly, I think, to even 40%, 50%. So based on the market right now, we think in the future, the N-type will become more and more. But it's the transition period, it takes time. We still think it will take 3 to 5 years, maybe N-type will reach to 60%. But definitely, I think P-type still there. The reason is because of cost-effective, and also, I think, other coordination, I think.

So basically, I think the market will see the N-type in the future, they can increase the efficiency, and the sales efficiency, they can reach about 25% compared to (inaudible) '22, '23. Definitely, I think the bigger -- I think a jump also on the module side and to increase the output watts per panel, to reduce the total light cost per watt. So that's most important. I think that's the future. I think one of the future, I think the next revolution -- technology revolution. We are really, I think, prepared for it.

So the cost, I think, today, it's not -- we just selected the N-type actually basically classical N-type from the P-type. So it's cost us even the same, so not big difference.

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

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

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