大全新能源 (DQ) 2012 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to Q1 2012 Daqo New Energy Corp. earnings 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, Monday, May 21, 2012.

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

Thanks, everyone, for joining us today for Daqo New Energy's first quarter 2012 financial results conference call. Daqo New Energy issued its financial results for the first quarter earlier today. To facilitate today's conference call, we put together a PPP presentation, which can be found on the Company's website.

Today, attending the conference call we have Dr. Gongda Yao, our CEO, and myself. The call today will feature remarks from Dr. Yao, covering business and operational developments; and there, I will take you through a discussion of the Company's financial performance; after that, we will open the floor to Q&A from the audience.

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

Thank you, Bing. In the first quarter of 2012, we continued to operate our polysilicon manufacture smoothly in full utilization. We exceeded our targets for shipments; nevertheless, the solar PV market remains weak due to restrained -- the demand as a result of uncertainties, including government [policy] changing, tighter credit market, and the potential international trader confidence.

We will be focusing on the manufacture in our existing polysilicon site in Wanzhou, Chongqing, and the construction of a Phase II polysilicon plant in Xinjiang. We are confident that after our Phase II commences production we will be well positioned with a much lower cost structure and a larger capacity.

I will now turn the call to Mr. Bing Sun for the financial performance update. Bing, please.

Thank you, Dr. Yao. Let's walk through the financial performance. Please turn to page 8, if you have a copy of the PPP with you.

Revenue. Even though we exceeded our shipping guidance for polysilicon and the wafer, total revenue for the first quarter was down from $38.2 million in the fourth quarter of 2011 to $34 million in the first quarter of 2012. The decreasing revenue was primarily due to the lower average selling price.

The Company sold 964 metric tons polysilicon in Q1 of 2012, compared to 834 metric tons in the fourth quarter of 2011.

The Company sold 23.4 megawatts of wafers in Q1, compared to 7.8 megawatts of wafers in Q4 of last year.

The Company sold 2.3 megawatts of own brand module in Q1, compared to 9.6 megawatts in the fourth quarter of 2011.

The Company also provides 2.4 megawatts of module OEM service in Q1, compared to 5.9 megawatts in the Q4 of 2011.

Gross margin was negative 32.2%, compared to negative 29.3% in the Q4 of 2011. The decrease was mainly because of the following. First of all, ASP across the board from polysilicon, wafer to module continued to go down from the last quarter.

Secondly, cost of the polysilicon was higher in Q1 because of the higher hydroelectricity cost. As you know, the hydroelectricity rate in the region where our Wanzhou facilities are located fluctuates seasonally. The base rate from December to April is the highest, which is 20% higher than the standard rate in May and the November.

The base rate from June to October will be 10% lower than the standard rate; therefore, we expect our gross margin to improve in the next two quarters given the electricity costs represents a significant percentage of our total cost.

In addition, when our Xinjiang Phase II commences production in full capacity, we expect our margin to further improve.

Selling G&A expenses were $2.7 million in the first quarter of 2012, compared to $3.5 million in the fourth quarter of 2011. The decrease was primarily due to the decrease in bad debt provisioning as a result of the management's collection effort.

Interest expense in the first quarter was $4.1 million, compared to $2.6 million in the fourth quarter of 2011. The increase was primarily due to the following two reasons. Firstly, we no longer capitalize interest due to the completion of a wafer facility and the [postponement] of a hydrochlorination project; secondly, interest expense related to the net increase in bank loan of RMB250 million in Q1.

Diluted EPS. Earnings per fully diluted ADS were negative $0.39, compared to negative $1.12 in the fourth quarter of 2011.

Now let's turn to the balance sheet summary. Cash, cash equivalents, and restricted cash. As of March 31, 2012, the Company had $114.6 million in cash, cash equivalents, and restricted cash, compared to $104.3 million as of December 31, 2011.

Accounts receivable and inventory. As of March 31, our accounts receivable balance was $39.5 million, compared to $22.7 million as of December 31. The increase in accounts receivable is due to the changing payment terms to our polysilicon and wafer customers.

Our inventory balance decreased by $4.9 million, from $24.2 million as of December 31, 2011, to $19.3 million as of March 31, 2012. The decrease in inventory balance is mostly from the sale of wafer inventory.

In Q1 of 2012, the management made a great effort to reduce wafer inventory, and will continue to do so in Q2. We plan to reduce our wafer inventory to a minimum level by the end of second quarter.

As our margin for wafer is lower than polysilicon, we expect our overall gross margin to improve after the second quarter when most of our wafer inventory [were] to be sold.

Meanwhile, we have strict credit risk control procedure to minimize bad debt concerns. In Q1 of 2012, our bad debt provision actually decreased due to management's collection efforts.

Borrowings. As of March 31, 2012, total borrowings were $316.8 million; of which $212 million were long-term borrowings, compared to total borrowings of $277.5 million, including $165.6 million long-term borrowings as of December 31, 2011. The increase in long-term borrowing is primarily for Xinjiang Phase II project.

As for the RMB980 million [project] loan for Xinjiang Phase II project, the remainder of RMB430 million will be drawn on schedule.

Our investment fund for Xinjiang Phase II project has been secured. Our debt ratio at the end of first quarter 2012 was 52%.

Non-cash charges. In the fourth quarter of 2011, we had a non-cash charge including $38.5 million fixed asset impairment charge, and $10.6 million inventory write-down. In the first quarter of 2012, we only have $1.6 million inventory write-down and no fixed asset impairment charge.

Now, we open the floor for Q&A.

We'll now begin our question and answer session. (Operator Instructions). [Ahmar Zaman], Piper Jaffray.

This is Karen, calling on behalf of Ahmar. My first question is can you discuss the overall polysilicon supply demand situation? How much inventory do we have? And when do you expect it to normalize? What do you think about the recent announcement of some of your peers delaying their polysilicon expansion plans? And then I have a follow up. Thank you.

Okay, Karen, so let me try to answer your question. For the demand and the supply, China, right now, is not considered import of poly. I think still with import poly we have a certain demand in China. In fact, if you look at our inventory point of view, we do not have extra inventory because of it cannot be sold.

I think the demand is required that the price is very competitive, compared with the other source they can get polysilicon. And we heard a lot of low price driving sales for our competitors, especially from outside China even. So those phenomena have been -- we see even from Q1 to Q2, especially right now, and even is very aggressive selling

Now, in terms of inventory for ourselves, we maintain the same level as when we exited 2011. Most likely, those inventory is to do with some shipment requirements because, from the financial point of view, we have to consider the shipment only before the monthly close and the customer get the received polysilicon. Any shipment in the last few days we consider still in our inventory in the book.

So the amount we still think -- the amount of the demand still will be more than 2011; however, as polysilicon capacity worldwide is great increase from 2011 to 2010 so we're expecting weaker, probably, ASP will continue for remaining this year.

Okay. So to follow up --

I'm sorry, Karen, I just want to add that our poly finished goods inventory, together with the wafer inventory, actually decreased in Q1, and our raw material for polysilicon manufacturing increased a little bit; but overall, the inventory decreased by $4.9 million in total.

Go ahead, Karen.

Okay, thank you very much. So you mentioned that, overall, poly ASPs remain challenging, can you talk about what your ASP was for first quarter, and how you see it will trend throughout the year?

Karen, we normally don't disclose ASP information specifically. Sorry.

Okay, no problem. What about, you mentioned about the higher hydroelectricity cost in the first quarter, was that -- does that mean flattish to the fourth quarter? Or is that like a couple of dollars off? Can you give us some indication about how it's compared to the fourth quarter for your poly cost?

Karen, if you're asking about the hydroelectricity rate, there, as I mentioned previously, from December to April the rate is the highest so, from that perspective, the cost in Q1 is the worst compared to Q4 last year. But the situation will improve in Q2 and Q3 because the base rate from June to October will be 10% lower than the standard rate. And in May and in November, the rate is the standard rate, so. Does that make any sense?

Okay, thank you very much. Yes, I will jump back into the queue. Thank you.

Philip Shen, ROTH Capital.

My first question is related to AR. I notice that your AR jumped up substantially between Q4 and Q1, can you give us a sense for the conversations you're having with customers these days about payment terms? Just help us understand what's happening here and what your expectations are for receivables as regards with [AR].

As you can see, in the current market situation, like our customers are required to extend -- as like all the other polysilicon and wafer manufacturers, our customers require longer payment terms. In the past, for polysilicon, we normally don't give any creditor terms, but in the past quarter, and we normally will provide our poly customers with less than 60 days credit, based on the history of the customer with us.

And do you expect to continue extending the terms as we go through the year? Are you getting the sense that the situation is getting worse with your customers, or improving? What's your perspective these days?

I believe that, overall, the situation will be better. As I mentioned previously, we have significantly reduced our wafer inventory, and it will go down to a minimum level at the end of Q2 and we expect accounts receivable on wafer side will decrease significantly.

On the polysilicon side, we will try our best to maintain the current level payment terms, but it depends on the market situation. Right now, we are still targeting to control the account receivables situation within net 60 days overall.

Yes, I feel, just going -- I try to add on several points. The accounts receivable situation is slightly worse than last year due to two factors. One is, of course, you know this industry's getting very difficult for every segment, so -- which we see our customers' situation were not greatly improved from Q2 to Q1, and that's probably the phenomenon will be same.

In our business-wide, as Bing just mentioned, the wafer business is more difficult than polysilicon because polysilicon's well established; and plus, a lot of the term is secured by prepayment with lot of customers. So those AR is still not see the prepayment amount, so we do worry, but we don't have a concern of [failure to] pay towards those ARs from our customers.

Secondly is to do with the Chinese Bank and macroeconomic situation. You know that because the loans is very difficult get, especially for working capital loans. So situation is slightly improved in last few weeks because the Chinese Government are trying to have, I would not say easy, but more restricted to [allow have] (inaudible) loans for some other manufacturer companies.

So we do expect for second half of year those kind of restrictions will be more easier compared with the first half. But, however, for this industry, we're still expecting very difficult for some customers. So when we sign the contract and decide the shipments, we'd be very careful to checking the background of the customer and try to avoid the high risk payment terms.

Thanks, Gongda, that's helpful to have that color. In terms of your capacity expansion, when do you expect the next tranche of capital to come from the Bank of China, the next RMB430 million? I know you addressed in the prepared remarks, you said that you expect it to be received, do you know -- or what's your expectation as to when you will receive that?

I'm pretty confident that at least a significant portion of the remaining bank loan will be drawn in Q2.

Great. And then, Gongda, if you could just address how the capacity expansion is coming along that would be helpful as well.

Yes. As under PBT, and actually we put together some pictures show what the Xinjiang project look like in the recent, representing the standards, we have already finished about 85% in the progress to complete the project.

We already have about a little bit shy than 20% of units is already passed the initial test for unit test. So we're still targeting in August as we have some trial production started, and then we're expecting real production in the [fourth] quarter, trying to ramp up the capacity. Yes, that is --

Great. And one last question, if I may. Given the recent Department of Commerce announcement of import tariffs for Chinese sales modules, well, especially sales, how do you think the Chinese Government and the solar industry will react?

There's been a lot of discussion of the Chinese Government retaliating and putting import tariffs on imported polysilicon, can you help frame that conversation or that process out for us and give us a sense for how that might develop over the next six to 12 months?

So in terms of this [AD/CBD] tariffs will make China solar products almost impossible going to a US market; for sure, that's a huge impact for some of our customers, like Sontech, [EMI], etc. Although those tariffs have no direct impact for Daqo at this moment, but we believe our customers some business will be impact.

Regarding what Chinese Government will do, any retaliation, response, so far, we do not receive any information from Government yet. But there is some communication through Government or government agencies go through this industry and associations but at this moment we do not have any information to share with you.

Okay, thank you very much.

(Operator Instructions). Philip Shen, ROTH Capital.

One other quick question here. On the last call you mentioned that the Government may be working out a plan to try to consolidate the 20-plus polymer manufacturers in China, do you have an update on this at all? And what is your latest thinking as to how poly consolidation might occur in China?

Phil, yes, there are some conference meetings we called in the last time -- before the last time our conference call for fourth quarter 2011, but this kind of talking is still keeping going on. But they're -- right now, the only thing it's bigger talking is the talking about the merger/acquisition of some solar company potential targeted by China/Chinese oil companies.

But there's no confirmed rumor, so it's a lot of talking in the market. But there's no conclude -- we don't see much conclusive ourselves on the merger/acquisition yet. But definitely, from the Government point of view, consider this is [either] be consolidated, therefore, so many companies, especially for polysilicon. But we don't hear any significant the results from that time yet.

Phil, [at the end of] --

Just as a clarification, is that the idea of the Chinese oil companies buying solar companies? Would that be for cell and module, or would that be primarily targeted at polysilicon, or throughout the value chain?

I think it's the module cell, more the cell modular company. But it's a lot of talking in the industry, and some [population] inside China is also talking about that, but there's no polysilicon significant transaction, any rumors about that yet.

Great, thanks, Gongda.

[Ahmar Zaman], Piper Jaffray.

I just want to get a better understanding on your overall strategy on your wafer and module business, given that the current situation and your peers with your wafer business. How do you think about it going forward? And what was -- were you profitable currently making your wafers? Thank you.

Okay, so we probably discussed briefly in the last phone conference, the Company decided strategy is very focused on the polysilicon because the Company believes that's our strength, to make high quality polysilicon, although we have a lot of room to improve for the cost structures in this challenging time for the polysilicon market, as well as for solar market.

Now for in terms of how we reduce our costs, like Bing said, we have -- we expect in Q2/Q3 is the low electricity fee cost, the season for our current existing polysilicon maker. And when the fourth quarter starting rising electricity fees, but our Xinjiang site Phase II will be online and participate for capacity of -- as a Company. So by Q4, of the time, our Company will have a total is 7,000 metric tons -- more than 7,000 metric tons capacity. That's the one.

Second one is, as for the module and the wafers, at the current business cycles, we will reduce the inventory and it depends on sales and margin. And we will -- compared with the polysilicon margin, we decided to reduce the capacity for production on production for wafers. However, in Chinese today's market, there's some market for the OEM. And in the OEM business, we look at the module, actually, the -- it's possible getting much less loss than even small break-even kind of business.

So we're starting to do OEMs for other wafer manufacturers, I think that's our short-term strategy for the wafers, but and still focus on the polysilicon.

At wafer, we're trying to minimize loss by doing the OEM, and which has been showing some success in the recent trial. And if that's viable, we will continue expanding that to utilize the older wafer current capacity and to reduce the cost, or reduce the loss.

Thank you, that's very helpful.

(Operator Instructions). Sir, we have no further questions. Mr. Sun Bing, we have no further questions from the audio participants.

Okay. Thanks, everybody. If you have any other detailed information that you need, you can contact me directly and we can talk in other settings. Again, thanks, everybody, for joining us today for our Q1 conference call.

Thank you.

Thank you, everybody.

That does conclude our conference for today. Thank you for participating. You may now disconnect.