大全新能源 (DQ) 2012 Q2 法說會逐字稿

Good morning. My name is Ashley and I will be your conference operator today. At this time, I would like to welcome everyone to the Q2 2012 Daqo New Energy Corp. Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.

(Operator Instructions)

Thank you. Mr. Bing Sun, CFO at Daqo New Energy Corp., you may begin your conference.

Thank you. Thanks, everyone, for joining us today for Daqo New Energy's second quarter 2012 financial results conference call. Daqo New Energy issued its financial results for the second quarter earlier today. To facilitate today's conference call we put together a PPT 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 will feature a remark from Dr. Yao, covering business and operational developments. And then I will take you through a discussion of the Company's financial performance.

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

Thank you, Bing. In the second quarter of 2012, we were running our Wanzhou polysilicon plant smoothly at full capacity. We have also successfully reduced our production costs thanks to several technology improvements and the lower seasonal electric rate and electricity rate. We exceeded our shipment guidance for polysilicon. Nevertheless, for wafer and modules we have not met the up log target set in the last quarter.

However, the solar PV industry continued its downward motion and the average selling prices for polysilicon wafer and module continue to go down. The international trade conflicts also negatively impacted market demands. In Wanzhou, we have a successfully conducted several technology improvements in Q2.

For example, we have converted two reactors to hydrogenation furnaces to optimize the balance for the capacity of the reactors in the hydrogenation systems so as to minimize the raw material costs such as liquid chlorine and the metallurgical silicon powder, et cetera. Besides that, we also adopted some other technology improvements and process optimization in distillation system, hydrogen recovery system, and the condensation system and et cetera to further lower the cost of our production.

As for the Xinjiang Phase II project, we have already completed 97% of total construction by the end of July. Several units include liquid chlorine system, utility system and the TCS system. And the distillation system have already have been tested and ready for pilot production. Because of the improvement of technologies and equipment we will be able to achieve high efficiency and low cost in Xinjiang new plant than the facility in Wanzhou.

In Xinjiang, we will produce liquid chlorine by ourselves to lower the cost and secure the supply. The hydrogenation system we use in Xinjiang is three times more efficient in output than in Wanzhou. The new reactors are from domestic supplies with 24 pairs compared to the ones in Wanzhou with average is about 15 pairs.

As for now, we have recruited more than 700 employees in Xinjiang. We also have a team consisted of most experienced engineers from Wanzhou to support Xinjiang to make sure the pilot production is successful.

Additionally, the much low electricity rate will help us significantly further reduce our manufacture costs in Xinjiang. With our operational experience and process knowledge in Wanzhou we are confident to achieve our original plan to start the pilot production in September 2012. We expect to deliver over 500 metric tons polysilicon at a competitive cost in Xinjiang in the last four months of 2012.

As for wafer business, in the third quarter we expect to ship about eight megawatts to our OEM customers. We will work with them to improve our wafer manufacture technology so as to achieve better quality with lower cost. We plan to gradually increase the utilization rate of wafer plant progressively to deliver our full capacity so that we will able to minimize the loss, then breakeven and eventually obtain a positive cash flow in wafer business.

Recently our high quality electronic grade polysilicon has been qualified for semiconductor customers, and we have obtained the first order. In the second quarter 90% of polysilicon met the standards of electronic grades. Although the first order from our customer is not significant in terms of volume, but we think that this is new opportunity for the Company to expand our business to a new market with a higher margin.

For the third quarter of 2012, the Company expected to ship about 1,000 to 1,200 metric tons of polysilicon, approximately six megawatts of wafers, eight megawatts of wafers OEM and three megawatts of modules. In addition, the Company expected to provide 200 metric tons of ingot and block manufacturing outsourcing service to our customers. This outlook refers to our current and preliminary view and may be subject to change. Our ability to achieve this project is subject to risk and uncertainties of course.

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

Thank you Dr. Yao. Let's look through the financial performance. As you can see, we only have two pages of financial data in this Q2 PPT to the investors. For more detailed financial data and the related analysis you may look at our Q2 annual release and I'll be happy to answer your questions. I will first give you an overview of our Q2 financial performance. And then I will discuss areas management focuses most such as gross margin, working capital and CapEx.

Overview, revenue was $30.6 million compared to $34 million in the first quarter of 2012. Gross loss was $5.9 million compared to $11 million in the first quarter of 2012. Gross margin was negative 19.5% compared to negative 32.2% in the first quarter.

SG&A expenses were $4 million compared to $2.7 million in the first quarter. The increase from the first quarter was due to the reversal of bad debt provision totaling $1.2 million in the first quarter as a result of subsequent traction of accounts receivable. There was no such reversal in Q2.

Our nominal SG&A expense is about $4 million. Income tax benefit was $2.6 million compared to $1.6 million in the first quarter. The increase in tax benefits from the first quarter was due to the recognition by the tax bureau of our 2011 R&D related expense and the CapEx.

Loss per share was $0.20 compared to $0.39 in the first quarter. On the balance sheet slide, in summary our fixed asset increased by $49.3 million, which all related to our Xinjiang projects. Our bank loan, net of bank loan repayment, increased by $26.5 million and our cash decreased by $24.5 million accordingly.

That's the overview and I am now going to discuss some of the specific areas, first one gross margin. Our gross margin in Q2 improved compared to Q1 of 2012. Other than the seasonal decrease in electricity rate, as everyday knows, our cost control efforts have shown some results. As Dr. Yao mentioned just now in Q2 we converted two reactors to hydrogenation furnaces.

We adopted some technology improvements, process optimization and distillation system and so on. The decreasing electricity rate accounted for $2.25 per kilo decrease in manufacturing cost. Technological improvement accounted for about $2 per kilo decrease. And also the increase in total output, the decrease in raw material prices also attributed to the decrease in total manufacturing cost of for Q2.

Working capital, as of June 30, the Company had $90.1 million in cash, cash equivalents and the restricted cash. In the second quarter, we received another RMB200 million project loan from Bank of China. The total project loan from Bank of China is RMB980 million. So far we have received RMB750 million in aggregate. We expect to remain the remaining RMB230 million around the end of September according to the schedule.

We believe our working capital structure will improve after we receive the remaining of this project loan. Also we estimate that the Xinjiang Phase II project needs about RMB200 million for operating cash this year, operating capital this year. So far we have secured RMB66 million with a Xinjiang local bank. We're in discussion with a couple of Xinjiang local banks our need for operating capital. Our debt ratio is around 54%.

We believe we can manage Xinjiang cash flow even without additional operating capital injection. Meanwhile we will spend more resources of accounts receivable cash and the inventory reduction to further improve our working capital structure.

Summary of Xinjiang project's CapEx, the total CapEx budget for Xinjiang Phase II is RMB2.1 billion. We have already paid RMB1.15 billion before 2012 in aggregate. In 2012, we've already paid a total of RMB550 million as of July 31st. We plan to pay another RMB115 million in the rest of 2012. The remaining amount is RMB250 million, which will be paid in 2013.

Now, we open the call for Q&A. Hello?

(Operator Instructions) And your first question comes from Kunal Sharma with Daiwa Capital Markets.

Hi. Good afternoon. This is Pranab from Daiwa. I have a couple of questions. You have indicated like your all in production cost for a new plant will be $20 per kilo, and currently if I see the polysilicon prices in many cases are practically the same price. And some places could be lower than $20. How do you think it will be if the price remains at $20 level? Do you ever think that your Xinjiang plant will be able to make economic return to the investors?

And secondly the number of pairs, of course you have said about 24 pairs on Xinjiang, but I think that the industry do have a much higher reactors in competition now. So will your reactor be ever competitive in that cost structure with your peers in Korea or even in your peers in China?

Okay. So the question is if our target for Xinjiang is $20 per kilo and then with in price, counter price is already assured for very approach to the $20, how can we make any return from the Xinjiang project?

So internally we think the current situation we have confidence that we said, always said that we will control. The Xinjiang cost will be under $20 and that's the confidence we have by the analysis of the total cost within the cost structure as Xinjiang, and with CapEx, and electricity rate and plus the efficiency of the system we used.

Again I think the 24 pairs of the reactor is competitive because we basically on the calculation of the electricity usage from the reactor is more efficient than what we have, we are using in Wanzhou. So from the data we have confidence it's competitive.

Of course with $20 the cost and the price in market it's very, very tough for every manufacturer for polysilicon, but we are still working on the improvement from the Xinjiang, and from a design point of view to make use of all the resources and the advantages in Xinjiang. And we have confidence to achieve in the long run, which means after six months after try production, we will make -- we are trying to make cost is lower, much lower than the $20, but I cannot give you specific numbers at this moment yet.

I got your point. Can this -- and like me like for 24 pairs lot, how kilowatt hour you will be consuming for one kilogram of polysilicon production, assuming you are operating it at full utilization rate?

I think it will be much below the 20 kilowatt hour compared with in current the reactor with (inaudible).

20 kilowatt hour for the CBD, right. So for CBD plus hydrogenation put together how much it would be?

So it is not only that because whole plant we are also using, make the chlorine, liquid chlorine and also other things, the hydrogen. So overall we produce, we say the $20 or below is based on the assumption is that one, the total is 150 kilowatt hours electricity procured, which is very, very conservative, as you know, at this moment.

Okay. Got it. Thank you very much.

Okay. Thank you.

Your next question comes from Ahmar Zaman with Piper Jaffray.

Hi. Good morning. This is Sean for Ahmar. I was wondering if you could just update us a little bit on your poly cost targets for 2013, what your, what you believe you can get your cost down for your poly production. Thank you.

Ahmar, for the -- as Dr. Yao just mentioned, we targeted our output for -- you mean 2013 next year, right?

Sean.

Yes, your poly cost production targets.

Okay. And as Dr. Yao just mentioned our target for the poly from Xinjiang plant it will be definitely below $20. And our poly cost from our Wanzhou facility will be around $25.

Okay. Thank you very much. And could you also just give us an update on what your cash flow from operations for this quarter as well as your CapEx spend?

Yes. For the cash flow, as I just mentioned earlier, regarding our Xinjiang projects we have another RM150 million to pay according to our payment as scheduled for the rest of the year. And on the other hand, we expect to receive the last piece of the projects along from Bank of China 213 million around the end of September. And for Xinjiang operating capital, as I mentioned, we need about RMB200 million for this year.

So far we have already secured RMB66 million. So we need another RMB140 million at the most for the operating cash flow for Xinjiang. And we are in discussion with a couple of the Xinjiang local banks we need for operating capital. And also I mentioned our debt ratio is around 54%, not very high considering the industry average. And some banks have already showed an interest in our working capital needs in Xinjiang.

On the other hand, yes I just want to add one more point. On the other hand we're working very hard to track the accounts receivable and lower our inventory level. And that's our focus, one of our focused tasks for Q3 also. Yes that's my answer for that question.

Yes, okay. Thank you.

(Operator Instructions). And your next question is from Ahmar Zaman of Piper Jaffray. And that question has been withdrawn. (Operator Instructions). At this time there are no further questions. And you do have a follow-up from Pranab Sarma with Daiwa Capital Markets.

Yes. Thanks for taking my question. You have also mentioned about your business opportunity on the electronic grade polysilicon. Could you remind me like what is the electronic grade polysilicon price currently? And have you ever qualified any wafer maker for electronic grade polysilicon?

Yes. So we just started this project earlier this year after first quarter and we shipped the first time is about 100 kilo, 50 to 100 kilo. That's the first try.

And then we have in the Q2 we shipped about three to four metric tons of that test. So we passed that test. So very recently we shipped significant volume and then in the Q3, and just so within this month. So the project is related the semiconductor application, but we cannot read the specific name, and but this is the customer is in China. And I can say it's not related to like a 300 wafer customer. It's like a more it's is the small size wafer applications.

So and the material we shipped too is first grade electronic, which is typically is end type, so with 1,000 ohm and or above for [recitivity] qualification, and of course with very low oxygen and carbon the impurities within the materials. So far the feedback is very positive and we have confidence we -- we're studying ship this kind of position and we will have this kind of position from this year. And hopefully we can have a significant contract with at least one customer if this testing first the volume process is successful.

And I just want to add one point is the price for the electronic grade is I would say at least 28% higher than the solar grade.

Yes. At this moment that the price --

Yes. And how is the production cost of electronic grade because probably CBD deposit time would be slightly longer, right? So how do we see the cost?

Okay. So it's actually at this moment we are using same process because as maybe we mentioned not very clearly, but our total output is about 80% is electron -- 80% above is belong to the category of electronic grades. So it's not that particular.

So basically we're using the standard process. We don't have distinguished between electronic grade and solar grade. However, in the originally in the process, in the final product of process group, we don't put additional attention for how to separate them because we expand these qualifications.

So now we just implement to the new process procedures to treat the electronic level material is slightly different, but with almost no cost increase. Now you mentioned the other way maybe for like very high ends for electronic grade applications, such as frozen wafer furnace usage. That needs more cost because the growth is much slower using high electricity. And that's why our maybe next project well probably we are trying to do at the end of this year or next year. I hope I answered some of your questions.

Yes. That's a very good answer. So what I understand like you will be shipping probably 2,000 tonnes to 4,000 tonnes of electronic grade polysilicon on 3Q and your ASP is about 20% higher. And your production cost is quite comparable to about $20 per kilo. That's my understanding is correct or I am wrong? Just --

I am not sure. I didn't hear clearly about the volume, but the cost side is about the same and the margin is correct. And I didn't get the volume. We didn't understand.

Volume I think you said that 3,000 tonnes to 4,000 tonnes, which is quite substantial actually.

No, no,. We said that we made about 40% or at least can meet that, but at this moment the shipment is a very small volume. We of course we are trying to increase those volumes to the -- and we don't have target number yet for 2012. And then please understand this is just the initial shipment.

Okay. Got you. Thank you very much.

Yes, yes. Thank you.

(Operator Instructions). At this time there are no further questions.

Yes. So if there are no further questions we will conclude today's call and we will be happy to answer any questions you might have later on. So thanks to everybody for joining us today. Thank you.

Thank you.

That concludes today's conference. Thank you for your participation. You may now disconnect. Thanks.