大全新能源 (DQ) 2011 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Daqo New Energy Corp fourth quarter and fiscal year 2011 results conference call.

At this time, all participants are in a listen-only mode. There will be a presentation, followed by a question and answer session. (Operator Instructions). I must advise you that this conference is being recorded today, Wednesday, March 21, 2012.

I would now like to hand the conference over to your first speaker today, Mr. Bing Sun. Thank you, sir. Please go ahead.

Thank you, everyone, for joining us today for Daqo New Energy's fourth quarter and 2011 financial results conference call. Daqo New Energy issued its financial results for the fourth quarter of the fiscal year 2011 earlier today. To facilitate today's conference call, we've also put together a presentation, which can be found on the Company's website.

Today, attending the conference call, we have Dr. Yao, our CEO, and myself. The call today will feature remarks from Dr. Yao, covering business and operational developments. And then, I will take you through a discussion of the Company's financial performance for the fourth quarter of 2011. After that, we will open the floor to a Q&A session.

I would like to remind you that this announcement contains forward-looking statements which involve risks and uncertainties. Daqo New Energy does not undertake any obligation to update any forward-looking statements, except as required under applicable law.

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

Hello, everyone. In the fourth quarter of 2011, we continued to operate our polysilicon manufacturing smoothly. We achieved our targets for production and shipments. Polysilicon shipments for the fourth quarter ended 2011 were 834 metric tons, and 3,947 metric tons respectively.

For 2011, we achieved a year of growth in both shipments and revenue. In addition, we successfully conducted annual maintenance and, in turn, laid a concrete foundation for the operation in 2012.

Nevertheless, the weakening industrial environment resulted in even lower selling price for polysilicon, wafer and module, compared to the third quarter of 2011, which adversely affected our profitability.

As for the outlook for the first quarter of 2012, as usual, we only provide guidance for shipments. The Company expects to ship 800 to 900 metric tons of polysilicon. We also expect to ship approximately 16 to 17 megawatts of wafer, and 5.3 megawatts of modules. For the module shipments, 2.9 megawatts will come from our own brand name, and 2.4 megawatts will be OEMs for our customers.

Our Xinjiang polysilicon project is going very well. We achieved about 70% completion in March. And now, we have about [470] employees in place.

In order to best concentrate our financial and operational results on Xinjiang polysilicon project, which we believe is the first priority, given the current market situation, we implemented the project consolidation plan to [correspond] the hydrochlorination project Wanzhou for about one year. We will resume this project after Xinjiang project's successful ramp up.

Besides that, the module production planned for JNE Daqo Solar Corporation, which is joint venture between Daqo and JNE in Canada, has also been suspended indefinitely. The Company didn't incur any loss related to this project. We will reevaluate the project when market conditions improve.

As for the Xinjiang project, we will achieve the mechanical completion in the third quarter of 2012, and starting pilot production in the fourth quarter of 2012. We expect to fully ramp up the 3,000 metric ton capacity of the Xinjiang polysilicon project in the first quarter of 2013. Therefore, our total capacity of polysilicon will reach 7,300 metric tons annually, at that time.

We will continue our commitment to further improve operational efficiency and lower manufacturing cost. Today, our [all in] cost in Wanzhou site is around $30 per kilo. We are taking initiatives in Wanzhou site to further reduce the costs to a level below $30 per kilo in 2012.

In the first quarter of 2013, when our Xinjiang project fully ramps up, we expect the Xinjiang all-in cost to be at about $20 per kilo. Therefore, our average production cost for polysilicon will be reduced to around $25 per kilo.

In spite of the near-term uncertainties and challenges in the market, we are confident that solar PV is becoming one of the most feasible, affordable, and reliable alternative energies. We believe our Company, with its high quality and low cost polysilicon, will weather through the downturn and seize the opportunities for the next growth stage.

Now I would like to ask Mr. Bing Sun to announce financial results for the first quarter in 2011. Thank you.

Thank you, Dr. Yao. Let's walk through the financial performance. If you are looking at our presentation slides, please turn to page number 10.

As for the fourth quarter of 2011, the shipments for polysilicon, wafer, and the module were 834 metric tons, 7.8 megawatts and 9.6 megawatts respectively. Revenue was $38.2 million, among which $25.1 million is from 834 metric tons polysilicon sold.

The Company also generated a $0.4 million, $9.8 million, and $2.9 million for module processing service fee, the sales of PV modules, wafers respectively. Gross margin was negative 29.3%. Excluding the non-cash inventory charge of $10.6 million, the non-GAAP gross margin was negative 1.6%.

Operating loss was $49.8 million (sic - see slide 12), which represents an operating margin of negative 130%. Excluding the non-cash fixed asset impairment charge of $38.5 million, and the non-cash inventory charge of $10.6 million, the non-GAAP operating margin was negative 2.1%.

The overall diluted earnings per share for the fourth quarter was negative $1.12, while the non-GAAP diluted earning per share was positive $0.28.

As for the year 2011, the shipments for polysilicon, wafer, and module was 3,947 metric tons, 16.8 megawatts, and 20.2 megawatts respectively. Revenue was $255.8 million. On an annual basis, gross margin was 33.7% for 2011. Excluding the non-cash inventory provision, the non-GAAP gross margin was 39.2%.

Operating income for the year was $43.5 million (sic - see slide 12), which represented a operating margin of 17%. The overall diluted earning per share for the year 2011 was $0.94, while the non-GAAP diluted earning per share was $2.45.

The total inventory writedown for polysilicon, wafer, and modules in the fourth quarter of 2011, due to lower [of] cost on market valuation, amounted to $10.6 million.

Besides that, due to the challenging solar market conditions, the Company recognized an impairment of long-lived assets of wafer and modules of $38.5 million. The impairment of long-lived asset of wafer and modules was less than expected profit generating ability of assets for the production of wafer and modules, due to the decline in the market prices. Therefore, the total impact on our earning per share of 2011 was negative $1.51, due to these two non-cash charges.

The revenue in the fourth quarter of 2011 was $38.2 million. The cost of revenue was $38.9 million, therefore the gross margin, excluding non-cash inventory charge, was negative $0.7 million, which represented a non-GAAP gross margin of negative 1.6%. Including non-cash inventory charge, the gross margin was negative 29.3%.

Operating expense was $0.2 million as (inaudible) for other operating income of $3.6 million, which was composed of incentives received from local government authorities. Operating loss for fourth quarter was $49.9 million, which represented operating margin of negative 130%.

I'm not going to go through all the details in this table, as you can find the information in the published fourth quarter 2011 financial results. If you have any further questions in terms of P&L, we can discuss in the Q&A section.

On the balance sheet summary as of December 31, 2011 the Company had $104.3 million in cash, cash equivalent, and restricted cash, compared to the $66.8 million as of September 30, 2011. Accounts receivable balance was $22.7 million, compared to $29.1 million as of September 30.

In the fourth quarter of 2011, we incurred additional borrowing of $148.8 million, and repaid $28.5 million. As of December 31, total borrowing was $277.5 million, of which $165.6 million was long-term borrowings, compared to total borrowing of $157.8 million (sic - see press release), including $63.1 million long-term borrowings as of September 30, 2011. At the end of 2011, our debt ratio is 48%.

Our inventory balance has been reduced from $28.5 million, in the third quarter of 2011, to $24.2 million at the year end.

Operator, now I'd like to open the floor for questions.

Ladies and gentlemen, we will now begin the question and answer session. (Operator Instructions). Philip Shen, Roth Capital Partners.

As we near the end of Q1, what do you expect your poly ASPs to be in the first quarter? And can you give us a sense for where prices are today, and then, what your expectations are for spot poly pricing as we exit the year?

At the Q1, we see the poly price in the first half is [certainly] improved from December of last year. And as of today, due to Germany's fiscal cuts, continued cuts in the coming months, so we saw the ASPs getting softer from the first half of February.

So we expecting the Q1 average price will slightly below $3, and we see from now we expecting the whole year price will be flat at the market level.

Okay. And throughout 2012, can you give us a sense for who your key customers are? We know Yingli and Hanwha, Solargiga and Tianwei have been customers in the past. Who are your customers in 2012, and can you help us understand what the volumes might be for each key customer?

The volume is -- those customers you mentioned constantly take our [polys] from last year to this year. And we also see some new customers in this year; since the last year, of course, is a new name added.

So I think the very substantial shipment is going to the customer like you mentioned, is Tianwei, Yingli, and several customers we have been providing poly for long term.

We also see some private sectors which have also appeared in 2011 with substantial prepayment for polysilicon. They will continue buying polysilicon from us. There's a company in [Zhejiang Province] is also the major player for the PV industry for modules and wafers.

Okay. So not only do you have prepayments from the customers that I mentioned but, just to clarify, it sounds like you have prepayments from a private customer in Zhejiang as well.

Yes, our long-term customer still continues doing -- is we see Solargiga and Yingli and Tianwei New Energy is our major customer there. Also, we developed some new customers recently last year, and as well as this year. So I believe our polysilicon is still the preferred choice for customers. It's mainly due to the quality of the polysilicon we produce, and we're happy to see that it -- we didn't finish March yet, but as February it's about 50% of poly produced meets the [first] grade of electronic grade level quality.

So I think it's the choice of customers, especially for the [monocrystal] growth -- wafer growth customers; they prefer to use our poly at this moment.

Great. And can you give us a sense of the mix of volume, or the mix of customers by volume? So for instance, this private customer, or private sector customer in Zhejiang, how much volume do you think that customer is taking in 2012?

Typically, probably it's (inaudible) -- I mentioned the names that are all likely in the 40 to 50 metric tons per month about the volume. And then, there are many other small customers, they either not constantly take our poly, or in much less amount per month. We have more of those customers.

So we pretty much have balanced customer bases. As you know, the multi-wafers, the ASPs are so low at this moment, so most of those customers are holding back, trying to see the market recovering, and also maybe trying to resume production when the ASP of the multi-wafer ASPs are recovering. But some customers, especially for making the mono-wafers, the market's a little bit stronger than the multi-wafers. So we see strong demand from that sector.

Now for the multi-wafer customers, also if they link to the downstream for the module production, and they got projects going out, especially with China -- very strong at this moment, as you notice -- so they still buy polysilicon to make multi-wafer and all the way to the module to meet some project needs either in China or outside China. That's what we see at this moment.

Thanks. Let me ask one more, if I may, about your Xinjiang expansion. Can you help us understand what the current financing environment looks and feels like? Have you experienced any pull-back in your ability to access credit? It seems like there's a lot of activity through where we are now, and you've made substantial progress in developing your facility here.

So if you can comment on the current financing environment, and then what your expectations of CapEx are by quarter, going forward.

I would refer this to Bing. Maybe Bing can --

Yes, Phil, I'll take your question. First, if I talk about the credit environment, just to mention the status of our Xinjiang project. As you know, Xinjiang project is always on top of our priority list, and we don't anticipate any uncertainties.

Total CapEx for Xinjiang project is $347.8 million. About $125 million was spent in the first three quarters of 2011, and $57.1 million was spent in Q4 of 2011. We anticipate approximately $125 million to be spent in 2012, and the final payment of $40 million to be spent in 2013.

All funding for the Xinjiang project was fully secured by the Company's own operating cash flow, and a bank loan from Bank of China. Total project loan from Bank of China is RMB980 million. RMB250 million was received by the end of 2011. We received another RMB300 million in the first quarter of 2012, according to the loan schedule. And we don't really expect to see any delay in receiving the remaining balance of RMB430 million.

And to come back to your question, Phil, do we see any pull-back in our ability to access credit. We don't see any pull-back. Because according to China's 12th five-year plan, the target for solar PV installation by 2015 will achieve 15 gigawatts. Specifically, in the polysilicon industry by 2015 the target is to have one or two [50,000] metric ton PV manufacturers, (inaudible) are in the metric ton top tier players.

Last December, the Ministry of Industry and Information Technology announced their list of 20 polysilicon manufacturers who are qualified to meet the industry's entry requirements. And [DNE] ranks high in the list with best product quality, as Dr. Yao just mentioned, and with the leading cost structure in China.

So we are really confident that we are certainly among the companies that will largely contribute to help the Government to fulfill its 12th five-year target for the solar industry.

So to answer your question straight is, we don't really experience any pull-back in accessing credit lines.

Great. Thank you, Bing, and thank you, Gongda. I'll jump back in the queue.

Aaron Chew, Maxim Group.

Wondering if you can maybe expand a little further on the comments you were just making about the domestic polysilicon market. More specifically, there have been reports out there of maybe 50,000/60,000 metric tons having come off line, domestically. Wondering a, if you can just verify that number from your perspective, or, b, update it if you have any further information.

And maybe, more importantly, just offer a little insight into what the nature and characteristics of the players who have shut down capacity in the polysilicon market in China. How big are these players, and where do you think their costs were?

And finally, of the remaining domestic poly market, excluding Daqo and, obviously, GCL, where do you think the cash costs and total costs stand for the smaller polysilicon makers in China? Thanks.

Okay, Aaron, let me try to answer your question; it's very difficult to answer. In many senses, we have limited knowledge and data available.

I think first is to give you a general 2011 polysilicon manufactured amounts, as we just saw the data come from the government, is globally, they believe about 240,000 metric tons annually. And then China probably contributing about 25%; it's about maybe 60,000 metric tons last year.

Among them, the total manufacturers for polysilicon in China is about 38, from the largest, probably, GCL to the smallest probably like 1,000 metric tons or 2,000 metric tons, those players. As of today, we knew that, among the 38 polysilicon players, about 70% have shut down or reduced production utilization for the facility.

The major reason is probably, we guess, is the cash cost policy is not meeting the market standard. So especially for cost side, and cash costs can be much more than $30 at this moment [the late] market. It's very difficult for them to continue to operate. At the same time, I think that many players have quality issues, and so their products will probably not meet the requirements of the customers.

So that pretty much we knew. And, as you know, the largest poly maker like GCL, LDK and etc., they [tell] the market they are not reduced; they are not shut down their production, and they continue to produce the polysilicon.

Now as to pressure of our cash cost, its variation is huge according to the -- you probably see more material than we saw, based on the announcement. So in China is the cash costs anywhere from about $20 to anywhere to $30-something. It's a big variation.

When you say that, you're speaking about other players?

Yes. [Whole] other players.

How much capacity outside of Daqo, LDK and GCL do you think? I understand that I'm asking about other companies, so it's hard for you to say. But how many other players -- how much capacity, outside of you three, can produce with the cash costs below $30 in China? Do you have a rough idea?

You mean the cash costs below $30? I would say it's much less, but there's no -- especially most of the poly players in China is not public companies. So it's not very transparent for us to see. But, based on the shut down production in this environment, isn't far. Some of them already shut down during the third quarter of 2011, given that their cash costs should be more than $30 --

And when you say shut down, you mean permanently shut down, or do you mean they lowered utilization and they could switch that back on?

Well, they do shut down the production is by trying to -- basically it's stop to produce, and then you need do some process to make sure all the facilities have been treated, so no further damage for the facility while you stop production. And some of the companies they do some [core] improvements for the facility. So they maybe do some changing of the process, or do something else. But while they reduce the utilization for the facility, and (inaudible) for the silicon.

Okay. That's helpful. If I could have one quick follow up, more specific to Daqo. It seems like your first quarter guidance there's a shift -- the non-poly shipments, it looks like you're picking up your portion you're dedicating to wafers versus modules. What's going on there? Is that a strategic change? Or is that just the way it shakes out for first quarter?

Are you talking about shipment. No --

Yes, taking poly, looking at the module and wafer, you historically had much higher module than wafer shipments. And the guidance implies that you're shifting focus to wafers over modules. I'm just wondering what's going on there.

Yes, because, as Q4 actually we have, due to the market decline, the demand for the multi wafers, we have relatively high inventory level in Q4. And actually, Q1 we are not accelerating of the production, but we are trying to reduce the inventory level. And we are trying to [exclude] is the sales of more wafers than modules in Q1.

So, broadly speaking, that doesn't change your module strategy overall?

Quite right. You're correct.

Okay, Gongda, thanks so much for your help and insight. I appreciate it.

Ahmar Zaman, Piper Jaffray.

Karen Tai, Piper Jaffray. I want to ask more specifically about your polysilicon cost reduction roadmap. I understand that you're delaying your hydrochlorination upgrade in Wanzhou until 2013. Can you elaborate on why you're delaying this upgrade? And also, what is your expectation for the cost exiting 2012? Thank you.

As you see, in the beginning of last year actually we announced the Xinjiang project. We said the completion of the project will be in Q3 of 2012, and starting manufacture will be Q4, 2012, which is we're still doing that. And the middle of last year, we would have the project to further reduce the Wanzhou production cost, which we implemented hydrochlorination project you mentioned.

In the market, in Q4, we started to see very weak ASPs for polysilicon, so pretty much we see in Q1 same situation. So at this moment, the Company decide, because the Wanzhou current facility will not generating the positive cash flow as the first half of 2011. So all the capital and all the reserves, and that include from the bank, like Bing just mentioned, we will secure the Xinjiang project as our first priority, make sure the Xinjiang project is on time, and doing smoothly.

With the Xinjiang project, we see is much more impact for our cost structure, because overall the Xinjiang, when ramp up, the Xinjiang costs would be $20, according to our current process model. And in the facility of Wanzhou, we're using exactly same performance. But we believe Xinjiang project we still have some room to improve from $20. But even the $20 [giving], we greatly reduced overall cost structure for polysilicon manufacture. So that's why we want to focus that.

Now, once the Xinjiang project has successful ramp up, then we will [review], at that time, the market situation, and we will do the Wanzhou project. And we decide that we're going forward, but we will do that after Xinjiang project. So that's the explanation. I'd like to [grant] it to ask that, and we like to give you an explanation why we want to postpone that.

Okay, and you're expecting that your costs will go down below $30. Now previously, you've guided to anywhere in the low $20s, after both the hydrochlorination and the Xinjiang project is ramped up. Now are you looking at somewhere around mid-to-high $20s by end of 2012?

Mid $20s -- once Xinjiang project is finished, our cost structure will be about $25 overall, combined with Wanzhou. Now, if the Wanzhou project is finished, we just say if, Xinjiang finished and we continue to finish the Wanzhou project, given currently the cost structure, our overall polysilicon will be below $22. And so that will put the Company in a very competitive position.

Okay, so the implementation of the hydrochlorination upgrade, you're estimating will improve your poly costs by about $3 per kilogram. Can I assume that?

Yes, that overall; it's not for the Wanzhou only. So it's the average. Yes.

Average. What about just hydrochlorination portion? Do you have a break out for that?

Well, the project is not (inaudible). Wanzhou project, we do not only hydrochlorination, we also want to expand our capacity, double our capacity itself. So it's not only technology. Overall, the depreciation will be hugely reduced, because we will double our capacity. We're using new methods and, as we announced last time, the CapEx for that project is very low, compared with the new facility, new plant.

But, as you know, the Xinjiang project is already in the middle of -- we've finish about 70% in March. So we have to continue that until the finish. We will finish [maybe] in six months the full mechanic completion, and then we will go forward for the production ramp up. And once that ramp up, we can come back to working on the hydrochlorination project you mentioned.

So hydrochlorination project consists of two portions. One is the technology change from the [back end]. And secondly is we think, Karen, we also want to double our capacity with most of the current assets in the facility of Wanzhou. And that will hugely reduce our costs. So we admit that our costs, even with Wanzhou alone, will reduced at least maybe $6 or $7 per kilo. But overall, with Xinjiang (inaudible).

So you're expecting to double your Wanzhou plant by capacity to reach over 8,000 then? What is you project capacity?

Right now it's about 4,300 metric tons. Once the hydrochlorination project is finished, it will bring up the capacity to 9,000 metric tons.

Okay, after the completion?

Yes.

What was your CapEx investment with this on the capacity expansion for Wanzhou?

For Wanzhou, CapEx we announced, the last time in last year, actually it's about RMB800 million. So it's equivalent to approximately $130 million for additional 4,700 metric tons of capacity.

Okay, that's very helpful. I'll go back in the queue. Thank you.

(Operator Instructions). Karen Tai, Piper Jaffray.

I wanted to know what your expectation is for the fixed versus variable pricing for your contracts or your customers in 2012 and beyond?

Okay, you know the market changes so much from 2010 to 2011, and then continues for 2011 to 2012. So in the 2010, actually we're able to sign a different contract with customers, based on their willingness to sign a fixed price contract or variable price contract.

As we go into 2011, especially for second half of 2011, we see most people don't really need to sign any contract with fixed price, because they see more volatile ASPs ongoing. So at this moment, almost all contracts we are doing with customers is not fixed price, and it's varying with the market ASP. So at this moment, 100% is not fixed price contracts.

Karen, I hope I answer your question.

Yes, that's very helpful. And then one last question from me on the total debt increase in the quarter. What was your interest rate for your bank loans that you mentioned?

Karen, I would say average below 7%. The interest rate on the bank loan [channel] is mostly below 7%. Does that answer your question, Karen?

Yes. And then your cell purchasing for your modular manufacturing, will you be using mostly third-party cells, or cell [tolling], going forward?

It's about maybe half and half, and mono wafers we buy from the market and multi wafer, we're mostly going through tolling from the third party, yes.

You mean cell tolling, sorry, you said mono --?

Mono, because we don't produce any mono wafers at this moment. So we produce the multi wafer, multi crystal wafers, so we can, going in tolling, through third party. For mono wafers we don't generate any more wafers.

So for some modules, customer wants to buy module with mono silicon wafers ourselves, and we have to buy those cells from third parties.

Okay, got it. Thank you very much.

Karen, I just want to add one comment regarding your question on the bank loan. The increase you see in the loan balance, they are all related to Xinjiang project. So those increase are all project loans related to Xinjiang project.

Okay, that's very helpful, thank you.

Aaron Chew, Maxim Group.

Just wondering if you could maybe expand a little bit further on earlier comments discussing Premier Wen's targets for the 50,000 metric tons of capacity in China, and 5 gigawatt on the cell side for players.

How do you expect this target to actually play out? I know it's easy to sit there and throw out a large number on what you'd like to see happen in a perfect world. But exactly how does a 50,000 metric ton player emerge, is this going to be just their anticipation of consolidation and how it shakes out over the next few years? Is this something that's going to happen out of distress? Is this something that could be forced by the government? How do you guys interpret Premier Wen's comments and targets? Thanks.

Yes, Aaron, let me try to answer your questions -- again, it's a difficult question for us to answer, because probably you knew that, in China in the last five years, there are many, many polysilicon players. And very few, [I almost know] very successful [SOE] supported polysilicon manufacturers, or by private sectors. So I think the government has some influence, but have limited influence to control the consolidation, and most were [leaving for] market to play out in the past.

Now from today. it will be very difficult for me to predict what's going on. But the government is trying to do something. One of the things is that, Bing already just mentioned in the previous session, is the government's trying to [examine] those polysilicon manufacturers to see for quality, cost structure, technology side, so determining which are the qualified poly manufacturers.

Now, they publish the list of 20. It seems still that 20 is too much. So very recently they give a guidance about one or two companies with more than 10,000 metric ton and 50,000 metric ton, and then the other may be more than 10,000 metric ton for two or three players.

So in the government ideal case, [demand] is about four to five players in China; that's sufficient enough to support the Chinese industry, especially for the PV market demand.

Now, in reality, we have more than 20, so there's a big gap. And how you can consolidate or combined or let market play out, it's a question; I have no answer for that.

So I think the government is working out some methods to try to consolidate those poly makers. But as you know, every poly maker is using different technology, different equipment, and different locations, sites. And so it's quite a challenge for any of them to get emerged or combined (inaudible) and through the market player.

Right --

I hope I answered your question, but it's a very difficult question for us to answer, Aaron.

No, you have. Obviously, you can't read his mind, but it's just helpful to get what you guys are thinking about it. So thanks very much.

(Operator Instructions). We appear to have no further questions on the phone line at this time. I would like to hand the conference back to your presenters. Please continue.

Okay. We thank you very much for your attend the conference, and if you've any questions you can send also the email to Bing and myself. We will do our best to try to answer your question and discuss about this business, any matters related to that. Thank you very much.

Thank you, everybody.

That concludes our conference for today. Thank you for your participation, you may now disconnect your lines. Thank you.