大全新能源 (DQ) 2015 Q2 法說會逐字稿

Hello and welcome to Daqo New Energy Corporation's second quarter 2015 earnings call. (Operator Instructions). Please note this event is being recorded.

Now I would like to turn the conference over to Kevin He, Investor Relations. Please go ahead, sir.

Hello, everyone. I'm Kevin He, the Investor Relations for the Company. Thank you for joining today for the conference call.

Daqo New Energy just issued its financial results for the second quarter of 2015, which can be found on our website at www.dqsolar.com. To facilitate today's conference call, we have also prepared a PPT presentation for your reference.

Today attending the conference call we have Dr. Gongda Yao, our Chief Executive Officer; and Mr. Ming Yang, our Chief Financial Officer. The call today will feature an update from Dr. Yao on market and operations, and then Mr. Yang will discuss the Company's financial performance for the second quarter. After that, we will open the floor to Q&A from the audience.

Before we begin the formal remarks, I would like to remind you that certain statements on today's call, including the expected future operational and financial performance and the industry growth, are forward-looking statements that are made under the Safe Harbor provision of the US Private Security Litigation Reform Act of 1995.

These statements involve inherent risks and uncertainties. A number of factors could cause actual results to differ materially from those contained in any forward-looking statements. Further information regarding these and other risks is included in the reports or documents we have filed with or furnished to the Securities and Exchange Commission.

These statements only reflect our current and preliminary view as of today, and may be subject to change. Our ability to achieve these projections is subject to risks and uncertainties.

All information provided in today's call is as of today and we undertake no duty to update such information, except as required under applicable laws.

Also, during the call, we will occasionally reference monetary amounts in US dollar terms. Please keep in mind that our functional currency is the Chinese RMB. We offer these translations into US dollars solely for the convenience of the audience.

Without further ado, I'll now turn the call to Dr. Yao. Please.

Thank you, everyone, for joining our conference call today. I would like to first provide some background on the recent industry developments.

Based on feedback from our customers, it appears that for the first half of this year, overall solar end market demand and installation activities were relatively subdued and below the levels that our customers saw during the second half of 2014.

As a result of weaker end market demand, industry price declined. This also leaded to the decline of polysilicon pricing during the first half of this year. That was a bit more than we had anticipated. The situation was exacerbated by escalating poly imports from outside of China where we saw an increase of 30% versus the first half of 2014.

In particular, customer data indicated Korea poly imports increased significantly high, by 70%, versus the first half of 2014. However, since June, we have seen encouraging signs of strong end market demand with the poly prices stabilized at the same time.

Since July, feedback from our customers indicates that they are seeing very strong end market demand, particularly here in China. Many are now running at full utilization, and some have already sold out their capacity for the second half of this year and are seeing demand and orders that exceed their capacity. Some are even resorting to outsourcing to meet the strong market demand. Demand in regions such as India and the US are also trending well.

End market pricing for solar cells and solar modules are trending up, in particular due to strong demand. Solar wafer pricing is up in July versus May and June. All indications point to better solar wafer pricing for the months of August and September due to strong industry demand.

For Daqo, we are not seeing a significant poly inventory in our solar customers. Our product delivery and sell-through remain strong and healthy, and we are able to sell out our production. For example, at the end of the second quarter, our finished goods polysilicon inventory is extremely low.

We believe poly pricing was [broadened] while pricing recovery has been delayed versus our original expectations. We believe as industry demand remains strong, we should start to see price recovery.

As a reminder, due to the better quality and the purity of Daqo polysilicon, our pricing is generally at a premium over our peers in China.

I would also like to provide a quick update of our poly industry environment.

Daqo is able to continue generating healthy cash from the operations due to our low production cost and cash cost. We are seeing encouraging signs of high cost poly capacity being taken out in the industry. One of our international competitors shut down one of their plants, and another has indicated its intention to reduce its production to 50%.

On the topics of processing trading, which is a loophole that allows foreign producers to import China -- import poly into China and avoid import custom duty and tariff, is on schedule to end by August 31. Poly imports into China subsequently are subject to 4% import tariff in addition to AD and CVD tariff in the range of 2.4% to 57%.

Combined, these represent a total tariff rate at the order of 6.4% to 61%. This will help to improve the supply and demand situation for poly within China.

Now let me also provide you with update of our Company's operations.

During May, we successfully completed our scheduled annual facility maintenance, which also help us to prepare for the planned pilot production for our Phase 2B expansion.

At the end of June, we successfully began pilot production of our new expanded project to bring total production capacity to 12,150 metric tons. As some of you may know, for this phase, we transition to the new technology of hydrochlorination as we begin to ramp up our expansion.

I believe we now have the world's most advanced fully closed loop technology for polysilicon production. By utilization, utilizing the world's most advanced technology in combination with very low electricity cost and better operation metrics, we are able to become one of the world's lowest cost producers of polysilicon and sustain that advantage.

Our hydrochlorination system is running very well, and better than we anticipated. It is now operating on metrics that's better than its design value in terms of production volume and output efficiency.

We took extra care during the installation phase to ensure the stable operation system with high product purity and free from the potential contamination. This new system has the benefit of significantly reducing energy consumption.

As electricity represents the highest segment of cost for poly production, the new system will help us to reduce our costs even further. Beyond reduction in electricity usage, this new system will also use less raw materials per unit of production to bring further cost savings.

Our new distribution system is also running well with better quality output versus design reference. Our new expansion also requires less labor than unit -- per unit production.

During the first half of this year when we running at the 6,150 metric ton capacity, we had approximately 570 plant operators. After expansion, we estimate that we will need to add approximately 50% more operators. This will bring further cost savings for us in terms of reducing labor cost per unit of production.

With the recent success of our expansion operation, we anticipate that when we are fully ramped up, we can achieve better than our previous cost targets to the level of below $12 per kilo for total production cost and below $10 for cash cost.

Now I will turn the call to our CFO, Ming Yang, for financial update.

Thank you, Dr. Yao; and good day, everyone. First, let me provide you with an update on our recently announced Phase 3A expansion plan which will increase our total polysilicon production capacity to 18,000 metric tons. Then I will provide a financial update for the second quarter of 2015.

As one of the world's lowest cost polysilicon producers, and with the success of our existing expansion, our Board has approved our Phase 3A expansion plan. Capital expenditure for the new expansion is expected to be approximately RMB620 million, which benefits from the reutilization of our idle equipment in Chongqing and shared facilities in Xinjiang.

Even based on the current market poly pricing, our internal calculation estimates are 30% plus return on investment. This compares to our current cost of debt of approximately 6%.

Our recently announced loan agreements with Chinese banks are anticipated to provide the capital and funding for our expansion. In particular, our RMB825 million loan agreement with Chongqing Rural Commercial Bank will help to fund the expansion.

Let me put the planned capital expenditures in perspective. The CapEx for our Phase 3A expansion is less than one-third of our original 6,150 ton capacity in Xinjiang, and is more than 35% lower than our Phase 2B expansion. The resulting CapEx efficiency in terms of production per unit of investment is much higher than our previous expansions, and should lead to very attractive shareholder returns.

Now I will provide a financial update for the second quarter of 2015.

Revenues for the second quarter were $34.3 million compared to $41.9 million in the first quarter of 2015. Polysilicon sales volumes in the second quarter were 1,363 metric tons, above our guidance of 1,320 metric tons. Compared to Q1, our Q2 sales volume was negatively impacted by lower polysilicon production volume as a result of our scheduled annual facility maintenance in May.

The Company generated revenue of $21.7 million from polysilicon sales compared to $27.2 million from 1,502 metric tons of polysilicon sold in the first quarter of 2015. The decrease in revenue was primarily due to the impact of lower average selling prices and lower sales volume.

The Company generated $12.6 million of revenue from 18.3 million pieces of solar wafers sold compared to $14.7 million from 18.1 million pieces of wafers sold in the first quarter of 2015. Decline in revenue was primarily the result of lower solar wafer ASP.

Gross profit was approximately $3.6 million compared to $8.5 million in the first quarter of 2015. Non-GAAP gross profit, which excludes costs related to the non-operational polysilicon facilities in Chongqing, was approximately $6.1 -- $6.7 million, compared to $11.7 million in the first quarter of 2015. Gross margin was 10.5% compared to 20.2% in the first quarter of 2015.

The decrease in gross profit and gross margin as compared to the first quarter was primarily the result of lower average selling prices, as well as the higher unit production cost due to lower production volumes related to the planned annual maintenance.

In the second quarter of 2015, total costs related to the non-operational Chongqing polysilicon plant, including depreciation, were $3.1 million compared to $3.3 million in the first quarter of 2015. [Excluding] such costs, the non-GAAP gross margin was approximately 19.6% compared to 28% in the first quarter of 2015.

Selling, general and administrative expenses were $2.8 million compared to $4.6 million in the first quarter of 2015. Approximately $0.5 million were non-cash share-based compensation expenses in the second quarter of 2015 compared to $1.8 million in the first quarter of 2015.

Research and development expenses were approximately $0.2 million compared to $0.1 million in the first quarter of 2015.

Operating income was $1.2 million compared to $4.1 million in the first quarter of 2015.

Operating margin was 3.6% compared to 9.7% in the first quarter of 2015.

Net interest expenses were $2.5 million compared to $3.2 million in the first quarter of 2015.

EBITDA was $8.4 million compared to $11.4 million in the first quarter of 2015. EBITDA margin was 24.6% compared to 27.3% in the first quarter.

Net loss attributable to Daqo New Energy shareholders was $0.9 million compared to net income of $1.2 million in the first quarter of 2015. Loss per basic ADS was $0.09 compared to earnings per basic ADS of $0.12 in the first quarter of 2015.

As of June 30, 2015, the Company had $95.1 million in cash and cash equivalents and restricted cash compared to $32.2 million as of March 31, 2015. The increase was primarily due to the drawdown of a RMB300 million long-term project loan from Chongqing Rural Commercial Bank.

As of June 30, 2015, the accounts receivable balance was $7 million compared to $8.8 million as of March 31, 2015.

As of June 30, the notes receivable balance was $38.3 million compared to $48.4 million as of March 31.

As of June 30, total borrowings were $266 million, of which $100 million were long-term borrowings, compared to total borrowings of $222 million, including $74 million of long-term borrowings as of March 31, 2015.

For the six months ended June 30, 2015, net cash provided by operating activities was $32.1 million compared to $29.1 million in the same period of 2014.

For the six months ended June 30, 2015, net cash used in investing activities was $56.2 million compared to $30.9 million in the same period of 2014. The increase was primarily related to the capital expenditure of the Xinjiang Phase 2B polysilicon project, partially offset by the subsequent receipt of $5.1 million of proceeds from disposition of Nanjing Daqo in 2012.

For the six months ended June 30, 2015, net cash provided by financing activities was $75.7 million compared to $52.8 million in the same period of 2014. The Company conducted follow-on offerings in February 2015 and May 2014, with net proceeds of approximately $28 million and $54.6 million respectively.

For the six months ended June 30, 2015, net proceeds from bank borrowing increased approximately $28.9 million as compared to the same period of 2014.

Now for the third quarter guidance.

For the third quarter of 2015, the Company expects to sell 2,100 to 2,200 metric tons of polysilicon to external customers. This excludes internal sale of polysilicon to our wafer facility in Chongqing. We expect to sell approximately 17.5 million to 18 million pieces of solar wafers in Q3.

This outlook reflects our current view and may be subject to change.

And with that, we conclude the official part of our presentation. Now let's have the Q&A session.

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

In your prepared remarks, you talked about how low inventory levels exist at your customers now. Do you think this is true across the industry, or do you think there may be excess inventory overall throughout the industry given the recent high level of imports into China?

Well, as we said, on our customers' side the inventory is low. Although we do not have verification from, for example, some poly brokers for sell the foreign poly import [to] China, we don't have a resource to check that. And of course, we don't know our competitors' situation if they have [real] inventories.

We do expecting very high cost producers may have [limited] inventories in their hands at this moment, but we do not expecting lots of inventories at the current level because the prices continue decline in last six months. Until we noticed (inaudible) starting to stabilize, so nobody will inventory the poly if the prices continue trending down.

Okay. Thanks, Gongda. As a follow-up on that thread, and I know it's always difficult, but if you can, how do you expect ASPs to trend by quarter for the next year?

As to [talking of price], it's very difficult to predict, but we believe we're just trading the average Chinese poly makers' cash cost level. That's the rational price; what I would call minimum. Because otherwise, people would take a loss to sell our polysilicon in the market. So we're still thinking this price, current price is the bottom, and we will see some recovery definitely in sometime Q4 at the latest, and maybe early next year.

But we believe this is not a rational price that can be holding for a long period of time because, as we mentioned, one of the factors is the [process trade supposed] by the Chinese Government will stop by August 31, will start to cut down. And the foreign import polysilicon will pay a much higher tariff, which is customs tax included; also tariffs that the Chinese Government will impose on the foreign importers. So that will be more balanced supply/demand.

And once the supply/demand is more balanced, we do expect the poly price should be slightly or equal above the average cash cost of producer in China. So that's why we're thinking will be at $17 -- around $17 should be the normal range.

Of course, you know the price prediction is always difficult for us to exactly when that will happen.

Great. That's helpful, Gongda. I was wondering if you could share how you're thinking about the potential of a Phase 3B expansion. Obviously, you've just announced details on Phase 3A, but under what conditions might you accelerate the 3B expansion forward, or may have to not think about it as much?

Yes. So for Company, intermediate goal is always to want to bring the capacity to 25,000 metric tons, about a 10% market share for worldwide, as a meaningful player in polysilicon. We are positioned right now in this moment as a low cost producer. I think we could say it's the most advanced in the low cost structure of the polysilicon manufacturing. However, our capacity is still much lower than other major players in the industry.

After we expanded into 12,000 metric tons, we have become a meaningful player. And when -- if we achieve the 10%, that will be a major milestone for the Company to achieve.

However, due to the market, and also due to the capital we have, so we decided to do two phases for Phase 3; so two stages. So first stage will reach 18,000 metric tons, as Ming just mentioned in the update. But after that, we [work], and it depends on the market situation, our capability in the financing, or the budget.

So most likely -- so once -- if the market recovered, our price or our task target for the cost achieved, then we will consider that. But at this moment, we will focus on the 18,000 metric ton target by some time -- it finish by end of next year, but starting production some time in first half of 2017. And we may consider that earlier, but at this moment, we want to finish the 3A first.

Okay. Great. Thanks, Gongda. Thank you Ming. I'll jump back in the queue.

(Operator Instructions). Sheng Zhong, Morgan Stanley.

A very quick one. It's about you mentioned that you are adding a price premium versus the peers after you improve your quality. And can you give a bit more color on this like how much premium?

Yes. So we said we typically noticed that our prices compared with PVinsights that published the price, and we also noticed that the first solar [grade 1] compared with the solar grade [2] have about 4% or 5% premium in the -- according to last few years' experience always.

So if you produce the off-grade of a poly, we call that is below the second grade of solar, you will pay like a 10% premium less -- more -- or less price, but 10% is counted for third grade.

So in the history of Daqo Xinjiang plant, we continue to produce about 97% to 99% of first grade solar, solar used polysilicon. So that's what we mean so we have premium sales. It's compared with second grade of solar polysilicon, about 4% to 5%.

Understood. Thanks. That's it from me.

(Operator Instructions). There are no more questions at the present time, so I would like to turn the call back over to management for any closing comments.

Thank you, everyone, for joining the conference call, and should you have any further questions, please feel free to contact me at IR, or the other members of the management. Thank you very much.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.