大全新能源 (DQ) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2011 Daqo New Energy Corp. earnings conference call. My name is Erica, and I'll be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question and answer session towards the end of this conference. (Operator Instructions).

I would now like to turn the presentation over to your host for today's call, Mr. Jimmy Lai, Chief Financial Officer. Please proceed.

Thank you, Erica. Thanks, everyone, for joining us today for Daqo New Energy's second quarter 2011 financial result conference call. A couple of hours ago, Daqo New Energy issued its second quarter 2011 earnings release, which can be found on the Company's website at dqsolar.com.

On the call today from Daqo New Energy are Dr. Gongda Yao, our Chief Executive Officer, and myself. The call today will feature remarks from Dr. Yao covering the business and operational development, and then I will take you through a discussion of the Company's financial performance for the quarter. After that, we will open the floor for Q&A from the audience.

Before we begin, we would like to remind the audience that the presentation contains forward-looking statements within the meaning of section 21(e) of the Securities Exchange Act of 1934 as amended, and as defined in the US Private Securities Litigation Reform Act of 1995. Daqo New Energy does not undertake any obligation to update any forward-looking statements, except as required under the applicable law.

With no further due , I will now turn the call over to Dr. Gongda Yao.

Thank you, Jimmy. The weak market conditions in Q2 led to a substantial price decline for every sector of the solar industry supply chain. The scope of decline exceeded our original expectation. However, we still see strong customer demand for our quality polysilicon material. We were able to run a 100% utilization rate for our polysilicon operation during the quarter.

The wafer and the module price environment remains weak. However, we were still able to start our wafer operation in such a challenging environment to achieve a competitive cost structure, and we are still aiming to ramp up to 250 megawatts capacity by the end of this year as planned.

For the coming quarter in Q3, we still see strong demand for polysilicon material, and the price stabilized at the beginning of the quarter. For the module side, we also see more moderate demand in a very attractive pricing environment for the module buyers.

On the financial side, we're happy to announce that we have secured long-term project financing for RMB980 million, or $153 million, for our Xinjiang Phase II polysilicon expansion project from our new financial partner, Bank of China, and this loan should suffice our funding needs for the project. The expansion project is also progressing around where according to our original schedule.

I will now turn the call to Jimmy for financial performance update. Jimmy, please?

Thank you, Gongda. Let's walk through this financial performance.

Revenue. In Q2, our revenue was $70.7 million, a decrease of 19% from the Q1 of 2011, and an increase of 34.8% from the Q2 of 2010. The fluctuation was mainly due to the decrease in the revenue generated from the sales of polysilicon. We sold approximately 1,001 metric tons of polysilicon during the quarter, or $63 million, in the second quarter of 2011. That compared to $77.7 million for 1,089 metric tons of polysilicon sold in Q1 2011; and $47 million, or 896 metric tons of polysilicon sold in Q2 2010.

The decrease from the first quarter of 2011 in revenue was primarily due to the lower average selling price of polysilicon product. The increase from the second quarter of 2010 in revenue were primarily due to higher average selling price of polysilicon product combined with the higher sales volume.

In the second quarter of 2011, we also generated $6.8 million for the sales of PV modules, and $0.9 million for the sales of wafers respectively.

On the gross profit and margin side, our gross profit for the quarter was $33 million, a decrease of 25.9% from Q1 2011, and an increase of 69.8% from Q2 2010. Gross margin was 46.6% in Q2 2011 compared to 51.0% in Q1 2011, and 37.0% in Q2 of 2010. The decrease from the Q1 of 2011 in gross profit and gross margin was primarily due to a lower average selling price of the polysilicon product. The increase from the Q2 of 2010 in gross profit and gross margin were, on the other hand, mainly due to the higher average selling price of the polysilicon and higher shipment volume, combined with lower production cost per kg for the polysilicon product.

Selling, G&A expenses. Selling, general and administrative expenses increased slightly from $3.8 million in the first quarter of 2011 to $3.9 million in the second quarter of 2011. The increase of $1.4 million in this quarter from that of the second quarter 2010 was primarily due to the increase of share-based compensation and other operating expenses, which [are] in line with the Company's business expansion.

R&D expenses. Research and development expenses was $165,000 in the second quarter of 2011 compared to $128,000 in the first quarter of 2011, and $483,000 in the second quarter of 2010. The decrease in R&D expenses from the second quarter of 2010 was mainly related to the decrease of technical consulting charges.

Other operating income; other operating income $3.8 million in the second quarter of 2011 compared to $3.0 million in the first quarter of 2011, and $74,000 in the second quarter of 2010. Other operating income mainly composed of the financial incentives from the Company received from the local government authorities which contributed the fluctuation from period to period.

Operating income and margin. As a result of foregoing, our operating income in the second quarter of 2011 was $32.6 million compared to $43.5 million in Q1 2011, and $16.5 million in the Q2 of 2010. Operating margin was 46.2% compared to 49.8% in Q1 2011, and 31.4% in the Q2 of 2010.

Net interest expenses. Net interest expenses in the Q2 of 2011 was $1.7 million flat quarter over quarter, $2.6 million in the Q2 of 2010. The decrease from the Q2 2010 was primarily due to reduction in the Company's average short-term and long-term borrowings and interest capitalized in the second quarter of 2011.

Income tax expenses. Income tax expenses in the Q2 of 2011 was $4.5 million compared with $6.5 million in Q1 2011, and $2.1 million in the Q2 of 2010.

The decrease from the Q1 of 2011 was primarily due to the lower income before tax in the Q2 of 2011. The increase from the Q2 of 2010 was primarily due to the higher income before tax in the Q2 of 2011.

Net income attributable for the shareholder net margin and EPS. Net income attributable to the Daqo New Energy shareholder was $25.7 million, a decrease of 26.6% from the first quarter of 2011, an increase of 118.6% from the second quarter of 2010. Net margin was 36.3% for the quarter compared to 40.1% in Q1 of 2011, and 20.3% in Q2 of 2010. Earnings per fully diluted ADS was $0.73 compared to $0.99 in the first quarter of 2011, and $0.41 in the second quarter of 2010.

Some financial condition highlights; as of June 2011, Daqo New Energy had $147.5 million in cash and cash equivalent and restricted cash. That compared to $182.2 million as of March 2011.

As of June 30 2011, the accounts receivable balance was $31.8 million, compared to $22.8 million as of March 31 2011. And as of the June 30 2011, total borrowing was $162.7 million, of which $67.8 million were long-term borrowings, while total borrowings were $146.2 million, of which $75.3 million were long-term borrowings as of the March 31 2011.

Regarding the Q3 2011 outlook; due to the unpredictable pricing environment of the supply chain, we will only give guidance for the shipment quantity this quarter.

For the third quarter of 2011, the Company expects to ship between 975 metric tons to 990 metric tons of polysilicon. The Company also expects to ship 10 megawatts of wafer, as well as 20 megawatts of module.

For the module shipment, the Company further expects 10 megawatts comes from its own brand name module, and 10 megawatts will be outsourcing work for its customers.

I will now open the floor for questions. Operator?

(Operator Instructions). Ahmar Zaman, Piper Jaffray.

This is [Sean] for Ahmar. I wanted to ask you about your cost reduction roadmap and how we should think about that, and what you are looking to do specifically to take costs down; and how we can think about costs as we roll through 2012.

As you know, due to the raw material increase, the weakness in the US dollar, we do marginal cost reduction here but it is hard to fight against such force. So I think the meaningful cost reduction will come from two sources going forward. One is the Xinjiang project. Due to the lower electricity rate in Xinjiang, we expect the cost roadmap in that new expansion in Shihezi, our expectation is we want to be at $20 or below. That's our target. There are other cost reduction endeavors, but it takes a little bit more work, and we are evaluating those options very carefully right now.

Yes, I would add on some comments with modules and wafers. As the weaker environment, the supply consumable materials from the crucibles to the steel line and also the slurry, the cost has been reduced dramatically in the last two months.

So we see the conversion cost for the wafering and for the module, has been reduced significantly in the last two months. So we will continue to see the possibility of improvement in those areas.

Around the polysilicon production, our commitment to this year's target of reaching about $28 still is pretty firm, and we will continue to follow the cost roadmap in the next year, like Jimmy said, with a new phase polysilicon manufacture sites, we have confidence to position ourselves as a leading low-cost polysilicon supplier in the future.

Great, and if you could talk a little bit more about what you seeing in terms of pricing environment for poly. It sounds like we're hearing it stabilize a bit.

And then also for wafers and modules, I know that this quarter you were reluctant to give a revenue guidance because of pricing, but could you give us a sense of what you are seeing for module, wafer and poly pricing?

We think the price for polysilicon actually since the middle of May, one week after the last quarter's announcement, the ASP on the spot market has been declining and then stabilized around between $50 to $55. And we see small fluctuations in that range; and we believe so far we will see Q3 more or less in that range, but we really cannot predict the price in a fluctuating market, we cannot tell how much is next month's price. But so far, I think Q3's price is in that range.

That's all we can say. That's why we are trying to focus our 100% utilization and the shipment instead of revenue for the next quarter. Regarding wafer, I think still, as you know, the wafer price and the cell price has been recently going to the bottom and recovered a little bit in the July; and we see the price will be flat or start to decrease a little bit again. So it's a response to the end market. As for now, I would say the price is pretty stable for wafer side.

And module has been in very stressful environment, as you know. But fortunately, or unfortunately, the price for cell and other relevant components for making modules has been declining also, so we will see.

So in terms of the market, it's most likely we will see stable price in the polysilicon side. Butas for cell and module, the price is still changing right now.

Great, and just one more housekeeping question and then I'll hop back in the queue. Can you tell us what your operating cash flow and your CapEx was for the quarter?

Our CapEx for the quarter, it's approximately $55 million, and we are still aiming at $210 million for CapEx this year. That's still the target.

And your cash flow from operations?

We don't provide cash flow from operations statement, but I can tell you that it's a positive territory.

Okay, thank you.

Philip Shen, ROTH Capital Partners.

Let's start with your contract negotiations. I think in 2011, if I have my numbers right, approximately 40% of your production is contracted at fixed pricing. Given the demand and pricing uncertainty ahead, how much of your 2012 production have you contracted at fixed pricing?

At this moment, actually, we do have some -- I think that we will have around 20% to 30% contracted at fixed pricing for 2012 and 2013; but as you know, it depends -- a lot of customers may come back. We don't know yet. At this moment, we are still in line with the contract for 2011. We have some new contracts and also some new customers coming to us due to new environment right now. So we have much less fixed price contract in 2012 compared with 2011.

Okay, and just in terms of the Q2 period, can you give us a sense for what percent of your poly met electronic grade quality?

Yes, we have counted about 90%, nine zero, is about electronic grade; and we have over 97% passed the first grade of solar poly.

Great. And then you announced the loan that you secured from the Bank of China this morning. Can you give us a sense for what the interest rate is?

I can tell you that the rate is still being negotiated, but it will be somewhere around 7.5%, in that range, give or take.

And then I know in Q4 of last year, you guys talked about shutting down production in the last quarter for annual maintenance. Do you still anticipate that kind of shutdown this year? And also, do you anticipate any other shutdowns at all throughout the rest of this year?

Now we're still planning for Q4, because normally in Q4 the hydropower is low and electricity rate is relatively high. So we are still planning for a shutdown conservative estimate. So we probably will take a down shutdown with a shortened period of time, but we're still planning to do that for Q4 for a maintenance purpose.

Great. And one last question, and then I'll hop back into the queue here. In terms of poly pricing, where do you expect spot poly prices to end up by the end of this year; and then also, by the end of 2012?

Well, it's a tough question. We really cannot predict the spot market price because it's such a big market right now. Obviously, you see some big guys trying to expand very rapidly in the next two quarters, but people are using different strategies. Some will supply the wafers only, not poly. And we have been taking advantage of our high quality polysilicon, besides that we have a very firm relationship with key customers, as we announced last year.

So with almost no inventory at this moment, what we can do is to provide our customer quality polysilicon with a very competitive cost structure so their business can be a success.

So in long term we will still see poly price decline, but what we're trying to do is continuously build a very competitive cost structure to make sure we have a profitable business. That's what we can do, and we will do our best to achieve that.

Great. Thanks very much.

Dan Ries, Collins Stewart.

Maybe I could follow up on an earlier question. For the second half of 2011, roughly what percentage of your polysilicon output do you expect to sell under fixed price contracts? And then of the balance, how much is volume contracts versus just the spot market?

The makeup is about 40/60. Out of the poly we're going to sell to our end customer, 40% fixed price, 60% will be variable price.

Okay. And variable prices, are you adjusting monthly at this point?

Some monthly, some quarterly.

Okay. And the subsidy that you received this quarter, can you explain the drivers behind it and what -- some comments on what we might expect for third quarter on fourth quarter?

Well, we always tell investors that every year, we pretty much expect $5 million to $6 million subsidy from Government. That is a local program. Being in The three gorges economic development area, Government gives us a lot of incentives. Some come from various revenue sources from the Government.

What is hard for us to control is when the money comes in. As you know, the booking of the subsidy is almost like a cash basis. You have to receive the cash before you can book it as operating expenses.

So this year is pretty much in line with what we've seen. Government has given us so far a little bit more than $6 million in subsidy. And we continue to believe that we will receive that on an ongoing business in the near future.

Okay. One last word, if I could. I think you indicated you shipped about 12 megawatts of modules in the quarter, some 8 megawatts of which were OEM. The $6.8 million would imply relatively low revenue per --. So if I could ask, what are you doing for the OEM customers? Are they providing you with the cells?

Well, what we did is this. The OEM business, the outsourcing business, the customer provides the solar cell and we're just producing it for them. Maybe that's where the mis-link is.

Yes. If I were to use $0.30 for that and $1.30 for the regular modules, I would come up with a higher revenue than the $6.8 million, and I thought second quarter prices were above those levels.

Okay, thank you.

Okay.

Mark Bachman, Avian Securities.

First question. Are there any changes to your capacity expansion plans with regard to either phase II wafers or modules?

No.

So walk us through then on the wafering side of the business to get to your 250 megawatts. Is all of that equipment ordered and installed at this point?

No, not yet. For the second 125 megawatts, all equipments have arrived, and we're just starting install and tuning the equipment. It's not on line for the production yet at this moment.

And then, Gongda, what about the module side of the business? Is all of that equipment ordered and installed?

Yes, all installed. We don't have any new equipment order to be installed in this quarter.

And so what is the capacity right now on the module side of the business, and where do you expect to be at year end?

Well, we said we'd probably install like 150 megawatts to 250 megawatts capacity. We believe with the line we installed, we can achieve at least 150 megawatts to maybe 170 megawatts of the capacity.

And is your Module business profitable on the gross margin line right now?

Yes, We have positive gross margin now, but it's very, very thin, as you can tell probably. And it's a very tough business because of the unstable end market price and the cell price. We have experienced from a very hot business cycle to the current situation which I would call a downturn of the end market. So we - used to face challenge of supply shortage for the cell in the Q1 this year and Q4 last year. But now the end market is shrinking. So they are different challenges.

Okay. Jimmy, with regard to the $980 million -- RMB980 million loan that you announced today.

Mark, I wish it's $980 million.

Yes, exactly. But of the RMB loan, how much of your phase II CapEx is now covered by this loan?

I would say with that, and with the operating cash flow, together with cash on hand, our phase II expansion funding gap has been resolved.

So you're saying then, phase II, 100% of CapEx is now covered between the loan and operating cash flow?

Right.

Okay. And then last question from me. Your lowest electricity prices here are going to occur in Q3. So with your current production manufacturing profile, are you going to achieve at least $28 a kilogram; in other words, a minimum $28 a kilogram of production costs in Q3?

That's our target.

Okay, excellent. Thank you so much.

Edwin Mok, Needham & Co.

So, Gongda, first question is on the June quarter. If I looked at your shipment and I extrapolate your production levels, it's seems to be down sequentially. Can I ask why?

No, actually, the shipment is different from production. So we have to provide polysilicon, virgin silicon to our wafer sector. Our wafer uses some amount of our polysilicon. So deducting that amount, it's the pure shipment.

I see. (Multiple Speakers). You mean the wafer for the module shipment that you guys have?

Right, exactly. So that is counted as revenues, not shipment, or counted as internal inventory, until we ship the module. So we're not including this amount as shipment for the polysilicon side.

I see, that's fair. And then on the wafer and module shipment for the coming quarter, you guys are guiding for quite big increases. Is that just based on orders you guys have for the orders already received? In other words, how much of that 10 megawatts of wafer, 10 megawatts of module have you already reached? How much of that orders have you already received?

We're confident we'll be able to do that.

I see. Can I ask in terms of your module customers, is that mostly distributors? And is that mostly in China, versus -- or are they more in Europe? Can you just maybe give me some profile in terms of the customer you're seeing on the module side?

Yes. So, Edwin, so I think as for module, we have three types of customers briefly. One is OEM for some other brand name companies. And secondly, we sell some modules to distributors. We expect in Q3, we will probably ship some to Europe and other areas. And we also sell some modules with our brand name for their projects. So that's the three components.

Europe is still -- is the largest market for us right now.

Great, very helpful. And then lastly, Gongda, on one of the answers to one of your questions, you mentioned about your competitors, and about some of your competitors being quite aggressive in terms of capacity expansion in -- over the next maybe two or next few quarters. Do you see that potentially pressuring your business? I think historically, you guys have a leverage in the Chinese market, right? Do you believe -- are you worried that your competitors from non-Chinese production might actually increase shipments into China and [lead to] pressure in price in the coming quarters?

We pay a lot of attention to those competitors' situations. However, we think in last few years we have been focusing on two things.

One is our quality, and our quality has already reached the level of Tier 1 players who already have many, many years' production experience.

Secondly our cost structure will enable us with very competitive price. Compare with overseas polysilicon makers, I think we have advantage of being closer to customers, especially in this tough environment. Actually, some customers require two days or three days delivery time, and we can very quickly reach our customers all over China. So at this moment actually, we have more customers coming to us hoping to sign a long-term contract with us in the changing environment.

So we have confidence we are still competitive in this market, and some big players in this market have changed their strategy and don't sell polysilicon any more, which makes a lot of Chinese fully integrated module manufacturers, and some also wafer, and some big wafering companies turn to us asking for cooperation in the future.

So we are very confident that in such a difficult environment, Daqo New Energy is still very strong in the polysilicon supply side.

I see; very helpful. Then lastly just -- I've got a question on how strategically, since a wafer as a piece of business is getting really squeezed in terms of margin, and also you guys have the advantage because you produce own poly, but does it make sense to actually ship wafer rather than selling poly? Is it just because your customer is requesting that; that's why you're still going to ship more wafer? Or if you had the choice, do you prefer to just sell poly? Or can you talk a little bit about that?

Well, Edwin, actually our polysilicon capacity has been increased about 1,000 metric tons from last December's technology improvement. So our goal is to continuously improve the shipment for polysilicon, disregarding our Wafer business. So we calculate the total need of polysilicon for wafering consumption is around 600 to 700 metric tons per year.

So last year, we accomplished increasing about 1,000 metric tons polysilicon. And we were very happy with the wafering facilities up running, and we quickly reached a very competitive cost structures right now, compared with the seasoned wafering companies.

And the same time, our quality has reached the best of the breed in China. Above 90% of our wafer has reached high quality wafer level. We will continue to provide -wafer for internal high efficiency module production. We'll continue to do that.

And meanwhile, we will continue to increase the polysilicon volume while our wafer components is ramping up.

So as you see, our guidance for polysilicon shipment is about 975 metric tons with the increased consumption for our wafer sector.

Great, that's all I have. Thank you.

Sam Dubinsky, Wells Fargo Securities.

A couple of quick ones. Since a number of your Companies are struggling, could you just -- or your customers are struggling -- could you discuss if there's been a change in your customer mix? Could you disclose who your top five customers are, maybe what percentage of revenue, and if there's been a meaningful change over the past couple of quarters?

Well, Sam, as you know, we signed contract with five top customers this year, and those five customers are Yingli, MEMC, the Hanwha Solarone, Solargiga and Tianwei. They continue to take supply from us, and that relationship continues. We don't see much change from those people at all.

How about mix of cell and wafer companies? It seems like at $50 poly, wafer and cell companies can make money. And so I guess the question is [are we sure] the sustainability of either poly prices are going down or wafer and cell prices are going up; and have you seen any order pull-backs from the wafer and cell guys in Q3? Are they still shipping as planned?

Well, we still see some wafer-only guys taking poly on a spot market from us, given that it's relatively small amount. Looking at the papers, yes, they're probably going to be just running at break-even level, but they seem to continue to run the operation.

Okay, and then a follow-up. Could you provide an update on your panel and wafer processing costs?

Wafer, I think, last month, we - Gongda mentioned we achieved a very competitive level, around $0.25.

On the module side, we continue to believe that this quarter we'll be at low $0.30 level.

If you're running under-utilized, how are you achieving such low cost structures? Those are pretty low cost structures.

Well, I'm not saying they're under-utilized. In the month of July, the wafer is ramping up.

Okay. Where could the cost go once you're running 100%?

It will be low -- for wafer, it will probably be low $0.20.

Okay, thank you very much.

[Nick Su], Goldman Sachs.

I have two questions, asking on behalf of [Amy Song]. First off, what's your polysilicon electricity consumption per kilogram in both of the Sichuan and Xinjiang facility?

So for the -- I would say for the -- it's not for site. It's for different reactors. For the Xinjiang, we're using new type reactors. We do expecting about at least a 10% improvement of our current in the Wanzhou Chongqing site. With Chongqing site, I don't have specific number to give to you. I would say it's below 150 per kilo.

Okay. That's for Chongqing and 10% lower in Xingjian, right?

I would say at least 10% --

Yes, but it's not because of region.

It's different --

It's different. It's a newer furnace we are using.

Yes, I know. Okay, second question is about the big picture. We know China has just announced their very positive policy, the National Feed-in Tariff. What's your view about China and the demand in 2011 and the next year?

2011, still it's in the range of 500 megawatts to maybe 900 megawatts. I think it's not huge compared with worldwide. But we do expecting for 2012 on, the demand will continuously increase, because with the FiT, and the trend of price going down, the demand will increase from that point.

And national-wise by 2020, there will be a significant increase of installed solar panel for electricity generation. So we see this market will grow in the next five years.

Okay, thank you very much. Sorry, just a follow-up on the electricity. I'm sorry. What's electricity price, the difference in Chongqing and Xinjiang? Can you give me some color?

Chongqing average is about -- now it fluctuates. It depends on season, but average is about RMB0.54; and Xinjiang is at least half of that rate.

Okay, got you. Thank you. Thank you very much.

[Morgan Johnson, SPM Capital Management].

I was late to the call, so I'm sorry if some of these questions have been asked. I guess first and foremost, can you guys tell us again what your polysilicon costs per kilogram were this quarter and what you expect them to be it to be over the next few quarters?

Well, we just said this quarter just below $30, and for the Q2, our target is to reach $28.

Okay, and what would you expect to do -- what would you expect that cost to be exiting this year?

In Q4, because the electricity rate is high, the cost is going to be higher than the Q3. Q4 and Q1 traditionally are the highest cost quarters. But it's probably around $30/$31 even with the high electricity rate.

Okay, and I heard you say that your wafer costs at full utilization would be in the $0.20s. Where were they this quarter, and where will they be exiting the year?

Well, we're starting out this quarter at about $0.25, so that's a pretty good movement.

Okay, and they'll be below that exiting the year?

We believe so, yes.

Okay, so maybe in the low $0.20s or maybe even $0.20?

We're trying very hard, yes.

Okay, that's excellent. And then can just remind me again of what your year-end capacity is for polysilicon wafers and modules exiting this year?

For the polysilicon, it's 4,300 metric tons; for the wafer, it will be 200 megawatts; and for the module, it's between 150 megawatts to 200 megawatts.

Okay. And then lastly, there was an article written last week that suggested that some polysilicon contracts are effectively secured by lines of credit for which the polysilicon producers hold the -- effectively lines of credit or effectively the cash, and that's why a lot of the module manufacturers cannot get out of these contracts like they could before in 2009 where there wasn't LCEs which basically underpin the contracts. Would you say overall that the contracts that you sign, the long-term contracts are much stronger than those that were signed in 2009? And more importantly, would that suggest that it's going to be very hard if prices continue to fall for some of the cell and module guys to get out of these long-term contracts?

We do not have any contract with a customer where they hold the deposit by the form of line of credit. We simply just take a 5% to 10% deposit for the quantity they've committed. So that's probably as much enforcement power that we have is holding share of those deposits. So I'm not familiar with the financial arrangement you described.

We don't have such an arrangement so far.

Okay. Would you say that this is probably something that's more so prevalent among the European and US polysilicon producers and maybe not the Chinese guys? Or is it just specific to Daqo?

Yes, we don't hear from our customers or any outsiders --

This is the first time --

This is nothing we have knowledge about.

Okay, thanks a lot. Congratulations on the3 solid execution.

Thank you.

(Operator Instructions). Mark Bachman, Avian Securities.

Gongda and Jimmy, how many metric tons of poly production do you have under contract right now for 2012?

In 2012, first of all, we will have the Xinjiang phase in line. So it's about totally, we would say, around 5,000 metric tons. So in terms of long-term contracts right now with all the options, I would say, more than 50%.

Excellent. And it's my understanding, Gongda, that both you and Jimmy have been visiting new customer sites throughout China. Can you tell us, have you signed any new Tier 1 or Tier 2 Chinese customers here recently?

The contracts with tier 1 customers are normally significant order, larger than a few hundred megawatts. They are either integrated downstream customers or wafering manufacturers. We do -actually seek the possibility for long term contracts, for next year, or maybe three years to five years.

So the question these days is about what's the condition. It mostly focus on the prepayment terms and how to set up the price structure. That's the main negotiations from that.

So we do see that more customers are willing to sign contracts after Xinjiang is ready for significant shipment in 2013. So in this year and next year, our manufacture capacity will be pretty much flat until the Xinjiang program finishes .

Okay, let me see if I can ask this a different way. Next year, you expect to produce at least 5,000 metric tons. You're saying that 50% of that is already contracted. Not talking price, just talking volumes here; so 50% of that's already contracted. Is that 50% that's already contracted going to your current top flight customers, MEMC; Hanwha Solarone; Tienway; Solargiga; and Ying Lee? Or do you have new customers in that 50% mix as well?

Yes, we have new customers as well. And also, I just want to remind you that some customers, big ones you mentioned, have option to continue contracts for 2012. Some contracts were firstly signed for 2011, but most of them have option to renew for 2012 as well.

Of course, we will close the deals probably before Q4. We think we probably have more than 50%, much more than 50% fulfilled.

Excellent, thanks again. Appreciate it.

Thank you, Mark.

Morgan Johnson, SPM Capital Management.

One last question I had. Can you guys let us know what your module costs were this quarter and exiting the year?

Well, in this quarter because the utilization's not high, the module costs are probably at the mid-$0.30s. Our target is in this quarter to bring to low $0.30.

Sorry, so that's the cost to make the module. But I guess, including the internal poly, the wafer cell and --

Yes, because some of the cell, like the mono we had to buy from third party. Some of them are from our own wafer, tolling to our cell partner. So it's harder to give you that type of number.

Yes, okay.

We just manage the conversion cost from cells to modules. So that's about low to middle $0.30s. So it depends on volume, of course, and if we fully utilize the capacity with either OEM or our new brand modules, we were able to achieve low $0.30s. Otherwise, it will be like middle $0.30s.

Okay, so if I take your poly costs at $0.30, use 6 grams a watt; that's $0.18 a watt, what's your wafer costs?

Wafer conversion cost, again, as we said is about $0.25 right now.

$0.25. So if I use $0.18 and $0.25; and what's your cell cost?

It varies.

Okay.

It depends if you buy or you toll it.

As for the cell price, you can buy it these days, it's significant reduction from last year, so you can --

Should I assume it's below $0.30 a watt?

You mean for the tolling?

Just for you guys to manufacture the cell internally.

We don't have cell facilities.

Okay, so I guess when you're outsourcing the cell, what kind of costs are you guys paying for that?

It would definitely below $0.30.

It would be below $0.30.

Yes.

Okay, excellent. Thanks, guys.

We have no further questions at this time.

Right, well, I just want to thank you everyone again for joining us, and we are looking forward to talking to you again during our next quarter earnings release. And thank you and --

Also, meanwhile, if you have any other questions, please try to contact us and we will try to discuss them and like to answer any other questions as well. And thank you very much for your attending the conference.

Thank you for your participation in today's conference. This concludes the presentation. Everyone may now disconnect. So have a great day.