大全新能源 (DQ) 2011 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Q3 2011 Daqo New Energy Corp. earnings conference call. At this time, all participants are in listen-only mode. There will be a presentation following by a question and answer session. (Operator Instructions.) I must advise you that this conference is being recorded today, Monday November 14, 2011.

I'd now like to hand the conference over to your host today, Mr. Jimmy Lai. Thank you, sir. Please go ahead.

Thank you, Desmond, and thanks to everyone for joining us today for Daqo New Energy's third quarter 2011 financial results conference call. A couple of hours ago, Daqo New Energy issued its third 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 a remark from Dr. Yao covering business and operational development, and then I will take you through a discussion of the Company's financial performance for the quarter, and our outlook for the fourth quarter 2011. After that, we will open the floor for Q&A from the audience.

Before we begin, we would like to remind audience again that this presentation contains forward-looking statements within the meaning of section 21E 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 statement, except as required under the applicable law. All information provided in this press release and in the attachment is as of the date of the press release, and Daqo New Energy undertake no duty to update such information, except as required under the applicable law.

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

Thank you, Jimmy. The global solar PV market remained challenging in the third quarter due to the weak demand and industry over-supply. This was evidenced by the constantly declining average selling price throughout the whole supply chain continued to decline, which impacted our performance in the quarter. We expect the market continue to remain weak in the fourth quarter and the near term, and that the pricing environment for our core business, Polysilicon, could continue to weaken.

However, we believe our low cost and high quality polysilicon product is well positioned to weather through the stormy market, and we should come out stronger once the market environment improves.

Also, we believe that we have one of the best balanced structures among China solar companies, as well as unused bank facilities, which will help us to endure during the downturn. And we will continue to execute our Xinjiang expansion project and Wanzhou hydrochlorination project, which should further lower our production costs in the future.

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

Thank you, Gongda. Let's walk through the financial performance. On the revenue side, our revenue in the third quarter of 2011 was $59.6 million, compared with $70.7 million in the second quarter of 2011, and $63.2 million in the third quarter of 2010. The change was primarily due to revenues generated from sales of polysilicon.

In the third quarter, the Company generated revenues of $53.0 million from 1,022 metric tons of polysilicon sold. This compared to $63.0 million for sales of 1,001 metric tons of polysilicon in the second quarter of 2011, and $55.2 million for 973 metric tons of polysilicon in the third quarter of 2010.

The shipment volume of polysilicon in the third quarter of 2011 increased by 2.1% and 5.0% compared to that of the second quarter of 2010 --2011 and the third quarter of 2010 respectively. The difference in the revenues in polysilicon was primarily due to the relatively lower average selling price in the third quarter of 2011.

The Company also generated $0.7 million for module processing service fee, $2.8 million for sales of PV modules, and $3.0 million for the sales of wafers. On the gross profit and gross margin side, gross profit was $19.9 million, compared to $33.0 million in the second quarter of 2011, and $26.9 million in the third quarter of 2010.

Gross margin was 33.3%, compared to 46.6% in the second quarter of 2011 and 42.5% in the third quarter of 2010. The fluctuation in gross profit and gross margin was primarily due to the lower average selling price of the polysilicon product combined with the impact of inventory charge in the third quarter of 2011. The total inventory write-down was $3.7 million for wafer and modules in the third quarter of 2011. This was due to lower of cost or market valuation.

Selling and G&A expenses. Selling, general and administrative expenses were $4.3 million in the third quarter of 2011 compared to $3.9 million in second quarter of 2011, and $2.7 million in the third quarter of 2010. The increase of $0.4 million compared to that of the second quarter of 2011 was primarily due to the operating expenses associated with Xinjiang expansion project. The increase of $1.6 million compared to that of the third quarter of 2010 was also primarily due to the operating expense associated with Xinjiang expansion project.

Research and development expenses. R&D expenses was $152,000 and in the third quarter of 2011, compared to $165,000 in the second quarter of 2011, and $318,000 in the third quarter of 2010.

Other operating income. Other operating income was $1.8 million in the third quarter of 2011, compared to $3.8 million in the second quarter of 2011, and $131,000 in the third quarter of 2010. Other operating income mainly composed of unrestricted cash incentives that the Company received from local government authorities.

Operating income and margin. Operating income in the third quarter of 2011 was $17.1 million compared to $32.6 million in the second quarter of 2011 and $24.0 million in the third quarter of 2010. Operating margin was 28.8%, compared to 46.2% in the second quarter of 2011, and 38.0% in the third quarter of 2010.

Net Interest expenses. Net interest expenses in the third quarter of 2011 was $1.9 million compared to $1.7 million in the second quarter of 2011, and $2.3 million in the third quarter of 2010.

Income tax expenses. Income tax expenses in the third quarter of 2011 was $2.9 million compared to $4.5 million in the second quarter of 2011, and $3 million in the third quarter of 2010. The change was primarily due to the lower income tax before tax combined with the $970,000 valuation allowance of deferred tax assets of Modules business in the third quarter of 2011.

Net income attributable to our shareholders, net margin and earnings per share, EPS. As a result, net income attributable to Daqo shareholder was $12.1 million compared to $25.7 million in the second quarter 2011, and $17.7 million in the third quarter of 2010. Net margin was $20.3 million -- 20.3% in the third quarter 2011 compared to 36.3% in the second quarter of 2011, and 28% in the third quarter of 2010.

Earnings per fully diluted ADS were $0.34 compared with $0.73 in the second quarter of 2011, and $0.65 in the third quarter of 2010.

Financial conditions. As of the end of third quarter 2011, Daqo New Energy had $66.8 million in cash and cash equivalents and unrestricted cash compared to $147.5 million as of the end of second quarter 2011. The change in cash position was primarily due to the capital expenditure for business expansion in Xinjiang.

As of the end of third quarter 2011, the Company's accounts receivable balance was $29.1 million compared to $31.8 million as of end of second quarter 2011. As of the end of the third quarter 2011, total bank borrowings were $157.6 million, including a long-term borrowing of $63.1 million. This compared to total borrowing of $162.7 million, including $67.8 million long-term borrowings as of end of the second quarter 2011.

Fourth quarter outlook. For the fourth quarter of 2011, we plan to shut down the polysilicon production facility in Wanzhou for approximately two weeks in the December time period for periodic maintenance. In the fourth quarter 2011, we expect to ship between 800 to 850 metric tons of polysilicon, approximately 16 megawatts of wafer and 14 megawatts of module. For the module shipment, 8 megawatts will come from our own brand name module, and 6 megawatts will come from manufacturing outsourcing service to our customers.

With that, I'll now open the floor for Q&A. Operator?

Thank you, sir. Ladies and gentlemen, we will now begin the question and answer session. (Operator Instructions). Aaron Chu, Maxim Group.

Just a quick one, more broadly speaking. I'm wondering if you guys can maybe shed your thoughts on what you're hearing, what you're thinking regarding Chinese Government's reaction to the US solar trade complaint. Do you think any retaliatory actions could be implemented against US exports? And if so, how do you think that may impact the outlook for the China poly market?

So far, there is no official result from Chinese Government yet. But, yes, there are some discussion and inside closed door discussion about how to respond to if the US will have tax for the Chinese modules for future.

Yes, the possibility will be maybe a discussion, and an unofficial channel is talking about the PV related product and equipment, and also including polysilicon.

Okay. Thanks, Gongda. I appreciate it.

[Karen Tai], Piper Jaffray.

This is Karen on behalf of Ahmar. I would like to ask you about your cost reduction roadmap, and to what level will you be able to reduce your costs?

Also, an update on your capacity ramp up, including both your debottlenecking efforts in Wanzhou, and the poly project in Xinjiang.

Thank you.

Yes, Karen, first our cost reduction roadmap is what we combine with the extension plan. By end of next year, we -- overall, the average in costs will be around (inaudible), because Xinjiang will be targeted for $20 cost. So rental currently around $30 average for [around] year.

So this is combined with Xinjiang project. The Xinjiang project schedule is for [trial] production will be third quarter of next year, is 2012, and [it's not changed as we do]. And the fully ramp up for production would be normally six months after that. We're fully ramped to the capacity [of it].

For the Wanzhou project, we're trying to finish by -- all the installation for hydrochlorination is Q4 next year, and then we have ramp up of production another six months after that. That's our schedule, and so far it's not changing yet.

And also on the Wanzhou hydrochlorination, when it's up and running, we expect the costs will be in the low 20s, somewhere around $22.

Okay, so by Q4 next year, after hydrochlorination has been implemented, there will be low 20s for Wanzhou?

Right. It's a step-up in ramping for the expanded capacity. In existing capacity, the cost is below $30, as we've said before and the end of the (inaudible) is very low, is average [watt]. [It went average capacity], which 100% we should have about $22 average for Wanzhou. And at that time, the Xinjiang we planned for cost base about $20, so average for whole capacity will be around $20 to $22 range.

Okay, so by third quarter next year, what will your overall capacity by for both plants?

The capacity will be -- by third quarter, we will be about [7,500], because the [Xinjiang 3000] is on line, but Wanzhou expansion would be a couple of months later than that.

Okay, got it. Thank you. I'll jump bank into the queue. Thank you.

(Operator Instructions). Sam Dubinsky, Wells Fargo Securities.

Can you just give a pricing update on where poly, wafers and panels are [expected] in the spot market?

Also, where do you think pricing goes into early next year? And I have a follow-up question.

What we are seeing, Sam, right now is from the poly side, it's right around [30] or a little bit lower at this point. On the wafer, it's probably -- last time we checked was $0.34 to $0.35 per watt. And the -- for the cell it's around $0.40 a watt.

What about panel?

Module it's right around $0.95 to $1.

Okay, and in terms of your $30 spot poly pricing, in the past, you had long-term contracts with customers. Have all those contracts being renegotiated?

Yes. At current time period, we understand the hardship our customers going through, so it's very hard to force and to maintain that fixed price.

Understood, okay. And what is the gross margin profile of wafers and panels in 3Q and 4Q, and do you still feel like you need to be in this business?

Strategically, yes; and branded, at the current wafer price it's very difficult to be profitable, even at the gross margin level. We believe at the module level, yes, we do -- at the full production right now our profits and costs combined with our [cell outsourcing partner], we are up $0.17. So plus the polysilicon material, which is around $0.17, total production costs will be around $0.37/$0.38, and we still have room for profitability if we can have a full production at the module level.

Okay. My last question is could you just comment on capacity in China? Have you seen any capacity come off line in recent weeks or any shutdowns?

And also, could you comment on the M&A environment in China? Have there been any talks of mergers and acquisitions?

No.

We do not have a plant in the shutdown, except in December we have an annual maintenance, as Jimmy already stated a couple of minutes ago. It's planned for every year, so normally, this season electricity feeds are higher and the hydro power is lacking during the winter time. And M&A, we didn't hear much -- we heard a lot talking about that, but there's no real [cake in the shop] in our knowledge.

Okay, great. Thank you very much.

Mark Bachman, Avian Securities Llc.

It looks like you beat your [panel] shipment guidance for Q3, but it looks like you also materially missed your module and your wafer shipments. Can you explain what was going on here and also give the megawatt shipment levels for both modules, module processing and wafers?

Mark, the third quarter was smaller player. The Module business is very difficult. A lot of our orders that we think we're going to get, it turned out the customer did not get the financing that they needed. So it's more of an issue with the customer unable to get financing to carry out the project. And that was the reason why.

Can you give us the megawatt levels on each one of those for modules, module processing and wafers then for Q3?

You mean our output, or our sales?

Your sales.

I'm sorry?

The sales volumes.

The sales volume, which was in our press release, our own brand name on the module was a little less than 2 megawatts, and we also performed the outsourcing services for customers close to 10 megawatts, so a total of 12 megawatts. And our wafer, it's around 6.5 megawatts.

Okay, excellent. And, Jimmy, what's your average ASP assumption, then, headed into Q4?

Mark, it's so hard to predict, the price change so much. And that's why we give the shipment outlook. We don't give out the ASP any more.

Okay. So how about your cost assumption then? What do you think your average cost is going to be for Q4? You should have a better control on that, right?

Yes, the polysilicon, winter-time, December, the electricity rate it's a little bit higher, so probably about $30, or a little bit about $30.

On the wafer, they're encouraging our processing costs, it's already at $0.20 per megawatt. And our module at [peak[ production, can have $0.30 per watt in the module side.

Okay. And then last question for me. Jimmy, do you expect to be profitable in Q4?

I cannot respond to that question since we only give the shipment outlook.

Okay. Thank you so much.

[Aaron Chu], Maxim Group.

Following up on the 4Q ASP question, though I understand the lack of visibility makes it difficult to pinpoint an exact number, attacking it from a different perspective, how should we think about your 4Q ASPs relative to spot? Should we assume, just given that there's some resilience in pricing from longer-term contracts that haven't fully been negotiated, we should see your ASPs at a bit of a premium to spot, or should we just assume your ASPs are a [minor] spot?

Well, as we explained earlier, for the fixed price contracts, we [renegotiate] with the customer. So I think the ASP assumption's probably somewhere close to the spot, or probably [$1 or $2]; about that. That's probably it.

Yes, the reality is very close to full market price in China right now, because we are focusing on the local Chinese market as well.

Sorry, but just to clarify. If there was further deterioration in December, should we assume that your pricing will probably deteriorate further, or that you probably locked in volumes at October/early November levels?

It's hard to say, but we signed some new contracts in, for example, just recent, last few weeks, also which were covered in the December shipments. What's really happened is the [full] market price has steep decline, and customers probably will renegotiate the price again. So I cannot say they will follow the contract or not follow the contract. It's very difficult to say.

But I would say in last one or two weeks, actually, prices are quite stable and low. And it's for us to predict December is very quite difficult. As you know, typically, December is a kind of weak month for the PV product. So we will see, yes.

Okay, that's helpful. Thanks so much.

Karen Tai, Piper Jaffray.

I wanted to check with you, what is the mix between your cell tooling and third party cell purchases? Previously, you guided to majority will be from tooling. Is that still the case, given that the sale of ASPs has come down?

Thank you.

I would say, roughly, I don't have the certain number with me, because normally tooling, it's almost 100% for tooling or buying from the outside.

Now we have tooling; originally in the third quarter we did some tooling. Now come to fourth quarter, we just do buying because -- since the price is very favorable.

If you do the calculation, as Jimmy said, the sale price is about $0.40 for maybe something 1 watt. Actually, [JPY4] for 1 watt. And then it's plus the module cost. It's quite a [considerable] operation for the module. So the current sale price in the third quarter and coming to fourth quarter has continued to decline very fast.

So it's easier for us to just buy in the market instead of for tooling, because for tooling, you have some time delay between your orders and to receive the sales as well.

So we are more approaching to buying for the cell manufacture instead of tooling.

Okay. So you said that in third quarter it was 100% tooling, but you're moving towards buying in?

No, it's also not 100%. It's probably the majority. We find the tooling agreement with third party. But coming to fourth quarter, it's more we have to directly buy in the [binding sale] from our -- from the third party, instead of tooling.

Okay. And what is your cell tooling cost for the quarter, for third quarter?

Tooling cost is about -- around --. It's complicated. In China, you include VAT tax. So it pretty much is below $0.20 per watt.

It [ranges] from $0.20. In the third quarter, it's a little bit higher.

$0.20 per watt.

Okay, thank you.

Sam Dubinsky, Wells Fargo Securities.

Actually, thinking about the balance sheet next year, how much debt do you think is comfortable for [Daqo]? Exiting this year and into next year?

We definitely in the fourth quarter and early next year, we will definitely add our debt level, because we had a RMB980 million bank debt for the Xinjiang project.

We have not drawn from this debt as of September 30. We are starting to draw down on the debt during October, and we will continue to draw down on that debt.

So debt will increase, for sure. Right now, our debt to equity is about 32%/33%. So we think we have the capacity to increase that level.

It's hard for me to predict where we're going to be by the end of the year, but for sure, that debt will increase.

What's your CapEx for next year?

CapEx next year, we are evaluating that because the uncertainty in the regional plan was to have around $90 million. But we're evaluating that plan right now.

Sorry, what was your CapEx in Q3, and what you remodeled for Q4?

Q3 was around [$95 million] for the CapEx. In Q4, we'll probably add another $40 million.

Okay. And my last question. Can you comment on the financing environment in China? Is it much tighter today than it was, say, six months ago? Or is it still pretty easy to access debt markets in China?

It's getting tighter. China was implementing the macro control, so the bank facility is getting tougher to obtain.

Okay, great. Thank you.

Karen Tai, Piper Jaffray.

I have a question on your current poly costs. I know that your target is to reach down to the low 20s in Wanzhou plant next year, and the overall cost to be $25 by end of next year. But can you talk about near term or the current environment, the current poly costs?

Thank you.

Karen, until the Xinjiang expansion plan finish and we start ramping up, and until the Wanzhou hydrochlorination project completed, it's hard to move down from our current cost structure.

Okay. So last quarter you mentioned about $28. Is that how we should be modeling it?

There are several factors. The environment continues very small incremental debt than for cost for every small area. So bigger fact, as you know, the electricity it fluctuate through the season. So in the fourth quarter and also first quarter of the year and the fourth quarter, those are the hydro dry season. So the electricity is actually higher. So there was an impact of about $1 or $1.5 for cost.

Another thing is RMB against US dollar's marginally getting stronger, so any kind of marginal cost reduction pretty much is getting eaten up by the appreciation of RMB.

Okay, got it. Thank you.

Mark Bachman, Avian Securities Llc.

Just real quick on the balance sheet there. Notice that your inventory's almost doubled quarter over quarter. Can you walk us through why that happened and what you're holding there? Is that the modules that you weren't able to ship because your customers couldn't get funding, or are you holding poly in inventory right now?

Yes, Mark, that was part of it. Another part was we did have some wafer inventory at the end of the year, September. We intend to move this inventory in the first quarter. So when it comes to the year, fourth quarter, you will see -- you're most likely to see a smaller inventory.

Okay, so if I heard you correctly, it's in wafers and modules, not so much in poly. Can we assume that you're selling all the poly you can?

Yes. We don't keep any inventory in poly.

Okay, excellent. Thank you.

(Operator Instructions). Philip Shen, ROTH Capital Partners.

First question is, can you give us a sense for where your book from operations was in the quarter?

Our cash from operations will be about $20 million.

Great. And earlier this year in January, the MDRC issued a detailed set of poly regulations. I think recently in October, local news in China reported that a group of government officials visited UCL, and the results of their evaluation may be announced some time soon. Have some officials paid you guys a visit for an evaluation? And bigger picture-wise, what are your expectations of how these evaluations may impact poly competitive dynamics in China?

Yes, actually, you're talking about for the industry and the information ministry actually issued some studies for several -- a couple of [doubles] of companies for polysilicon, yes. They did take samples and looking at our operation data to -- trying to of course qualify the polysilicon manufacture in China, and they probably surveyed about 38 companies, and we are one of them.

And do you have a sense for how this might play out and over what kind of timeframe?

You mean the results or --? We don't know the results yet, because they just finished probably about two weeks ago and they probably needed to digest some data and do some statistic work and then they probably will announce the results later.

And if I recall correctly, were you guys involved as well with the development of these regulations?

Yes.

Okay, great. One other question here. I know on the last call you guys talked about 20% to 30% of your poly being contracted at fixed pricing for 2012. Given the degradation of poly pricing, have these prices been negotiated lower? And if so, can you quantify the degree of decline?

Yes, actually, this price decline is starting from module sales, wafer, and then last the poly. So our key customers face extremely challenge in the third quarter, but they still [see that] fourth quarter it will really come back. It [can now] accept original contract price.

And also amount of contractors, as you know, even with long-term contract we call it, there is still about 50% of customers with variable price which we will ship the poly according to market spot price.

For those fixed price contracts and the (inaudible), we adjusted the price to reflect the current market price. Yes, we did that, some of them.

Great, thanks very much.

(Operator Instructions). There are no further questions from the phone line. I would like to hand the conference back to your host. Mr. Lau, please.

Thank you. Thanks to everybody for participating in this conference call. I'm looking forward to talking to you next time in the next quarterly [announcement].

Thank you.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may all disconnect the lines.