大全新能源 (DQ) 2016 Q1 法說會逐字稿

Welcome to the Daqo New Energy Corporation first-quarter 2016 conference call. (Operator Instructions). Please note this conference is being recorded.

I would now like to turn the conference over to Kevin He, Investor Relations for the Company. Please go ahead.

Hello, everyone. I'm Kevin He, the Investor Relations of Daqo New Energy. Thank you for joining our conference call today.

Daqo New Energy just issued its financial results for the first quarter of 2016 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 markets and operations, and then Mr. Yang will discuss the Company's financial performance for the first quarter of 2016. 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 expected future operational and financial performance and industry growth, are forward-looking statements that are made under the safe harbor provisions of the US Private Securities 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 containing 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 law.

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 over to Dr. Yao. Please.

Hello, everyone, and thank you for joining our call today. I would like to thank our entire team for delivering strong operational and financial results for the first quarter of 2016.

During the quarter, we produced 3,405 metric tonnes of polysilicon, representing full utilization of our manufacture facilities, which surpassed our nameplate capacity of 12,150 metric tonnes per year.

The slight decrease in polysilicon production volume compared to Q4 2015 was primarily due to the smaller number of calendar days in Q1 and the impact of the Chinese New Year holidays.

We also implemented programs to further improve the quality of our polysilicon to meet the demand of monocrystalline solar customers. This had a slight impact to production volume during the quarter.

In Q1, we sold 2,905 metric tonnes of external customers compared to 3,092 metric tonnes in Q4 2015. The difference is primarily due to the greater shipment of polysilicon for use by our Chongqing wafer facilities, which was 520 metric tonnes in Q1 2016 compared to 415 metric tonnes in Q4 2015, as well as lower polysilicon production in volume.

As we ramp up our Chongqing wafer -- our solar wafer capacity and aim to increase our wafer production volume from 21 million pieces per quarter in Q4 2015 to about 25 million pieces per quarter by mid of 2016. it is necessary that we ship increasing volume of polysilicon to our wafer manufacturing subsidies in order to meet its raw material needs.

Our polysilicon average total production costs were $9.65 per kilo, and the cash costs were $7.62 per kilo during Q1 of 2016. As a result, despite the low ASP in Q1 this year versus Q4 last year, we were able to achieve better gross margin. Our adjusted EPS, which excludes costs related to non-operation in Chongqing polysilicon assets and non-cash share-based compensation, were about $1.12 in Q1 2016 compared with to $1.14 in Q4 2015.

We continue to make progress towards our goal to further reduce our production cost and improve quality, and further enhance our profitability and competitive positioning.

Since February 2016, polysilicon ASP have improved meaningfully due to the strong downstream demand. We saw a significant addition to new wafer capacities in the market which have increased in polysilicon consumption and created environment of relatively tight polysilicon supply.

While spot market polysilicon price improved substantially during the quarter, particularly during March, we believe the improvement was not fully reflected in our first-quarter ASP, as we are primarily engaging in the contracted sales with solar manufacture customers and there is typically a two to three-week delay from pricing and contracting to subsequent shipment and customer acceptance, which is when the revenues were recognized.

During April and May, we saw further improvements of polysilicon market prices which by now are up by approximately 40% to 45% from the January level, driven by low levels of channel inventory and an increase in downstream customer demand.

Demand from customers remains very strong with many customers request to purchasing 2 to 3 times the volume of polysilicon than we are able to provide them. To provide you with more color, recently-signed poly sales contracts for our products delivered in May have exceeded about $19 per kilo.

As we continue to expand our wafer capacity in Chongqing, our wafer sales volume increasing from 21 million pieces in Q4 of 2015 to about 22.1 million pieces in Q1 of 2016. As a result of the increase in wafer production capacity and sales volume, we also increased the shipment of polysilicon to Chongqing during the quarter.

Gross margin for our Chongqing wafer facility on a stand-alone basis improved to 28.3% in Q1 of 2016 compared to 27% in Q4 of 2015. Our Chongqing wafer operations continue to contribute meaningfully to the Company's profitability.

In April, we received approval to have the shares of Xinjiang Daqo listed on China's New Third Board. This is a very exciting event for us as we believe the listing will afford us more flexibility to fund our future growth as the global cost leader in the high-purity polysilicon manufacturing industry through access to capital markets in both Chinese and US capital markets. It's two of the most active in the world.

Outlook for the second quarter of 2016; now let us provide outlook for second quarter 2016.

Excluding shipments of polysilicon to be used internally by our Chongqing solar wafer facility, the Company expects to sell about 2,850 metric tonnes to 2,950 metric tonnes of polysilicon to external customers during the second quarter of 2016. The above guidance reflects the increased internal consumption of polysilicon by our own wafer subsidiary due to the increased wafer production and wafer capacity expansion. Wafer sales volume is expected to be about 23.5 million to 24 million pieces in the second quarter.

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

Thank you, Dr. Yao, and good day, everyone. Thank you for attending our conference call. Now I will provide the financial update for the first quarter of 2016.

Revenues were $57.7 million, compared to $59.3 million in the fourth quarter of 2015, and $41.9 million in the first quarter of 2015. Revenue from polysilicon sales to external customers were $39.8 million (sic - press release, "39.9 million"), compared to $42.9 million in the fourth quarter of 2015, and $27.2 million in the first quarter of 2015.

External sales volume was 2,905 metric tonnes in Q1 2016 compared to 3,092 metric tonnes in Q4 2015. Lower external sales volume relative to the fourth quarter was primarily result of the increase in polysilicon shipment to the Company's internal wafer facility, which increased by more than 100 metric tonnes in Q1, as well as lower production volume.

Average selling price of polysilicon was $13.72 per kilogram in Q1 of 2016 compared to $13.86 per kilogram in Q4 2015. The decrease in polysilicon revenue from the fourth quarter of 2015 was primarily due to lower external sales volume and slightly lower ASP.

As Dr. Yao discussed, in March, we started to see meaningful recovery of polysilicon ASP, and ASP moved up further in April and May. While this was not fully reflected in our Q1 ASP due to the time lag from contracting to revenue recognition, we believe our Q2 ASPs will better reflect this trend.

Revenue from wafer sales was $17.8 million compared to $16.4 million in the fourth quarter of 2015, and $14.6 million in the first quarter of 2015. Wafer sales volume was 22.1 million pieces compared to 21 million pieces in the fourth quarter of 2015 and 18.1 million pieces in the first quarter of 2015. The increase in wafer revenue from Q4 2015 was primarily due to higher sales volume.

Gross profit was approximately $16.7 million compared to $16.9 million in Q4 2015, and $8.5 million in Q1 2015. Non-GAAP gross profit, which excludes costs related to non-operational polysilicon operations in Chongqing, was approximately $18.8 million compared to $18.9 million in fourth quarter of 2015, and $11.7 million in the first quarter of 2015. Gross margin was 29% compared to 28.5% in Q4 2015, and 20.2% in Q1 2015.

In the first quarter of 2016, total costs related to our non-operational Chongqing polysilicon plant, including depreciation, were $2 million compared to $2 million in fourth quarter of 2015 and $3.3 million in the first quarter of 2015. Excluding such costs, the non-GAAP gross margin was approximately 32.6% compared to 31.9% in the fourth quarter of 2015 and 28% in the first quarter of 2015.

SG&A expenses were $4.1 million compared to $2.3 million in the fourth quarter of 2015 and $4.6 million in the first quarter of 2015. The increase in SG&A in the first quarter of 2016 compared to fourth quarter of 2015 was primarily due to higher non-cash share-based compensation expenses, which were approximately $1 million higher in Q1 2016 compared to Q4 2015, as well as higher staff costs related to Chinese New Year and expenses related to our New Third Board listing. R&D expenses were approximately $0.1 million compared to $0.5 million in Q4 2015 and $0.1 million in Q1 2015.

Other operating income was $0.7 million compared to $1.7 million in the fourth quarter of 2015 and other operating expenses of $0.3 million in Q1 2015. Other operating income mainly consists of unrestricted cash incentives that the Company received from the local government authorities, the amount of which varies from period to period.

Income from operations was $13.3 million compared to $14.3 million in Q4 2015 and $4.1 million in Q1 2015. Operating margin was 23.1% compared to 24.1% in Q4 2015 and 9.7% in Q1 2015. Interest expenses were $3.9 million compared to $4.3 million in Q4 2015 and $3.2 million in Q1 2015.

Earnings before interest, taxes, depreciation and amortization was $21.9 million compared to $23.4 million in Q1 2015 (sic - see press release, "Q4 2015") and $11.4 million in Q1 2015. EBITDA margin was 38% compared to 39.5% in Q4 2015 and 27.3% in Q1 2015.

Net income attributable to Daqo New Energy Corp shareholders was $8.3 million compared to $9.6 million in Q4 2015 and $1.2 million in Q1 2015. Earnings per basic ADS were $0.80 compared to $0.92 in the fourth quarter of 2015 and $0.12 in the first quarter of 2015.

Adjusted net income attributable to Daqo New Energy shareholders, which excludes costs related to our non-operational Chongqing polysilicon assets and non-cash share-based compensation, was $11.7 million in Q1 2016 compared to $11.9 million in Q4 2015 and $6.4 million in Q1 2015. Adjusted earnings per basic ADS were $1.12 in Q1 2016 compared to $1.14 in Q4 2015 and $0.66 in Q1 2015.

As of March 31, 2016, the Company had $35.7 million in cash and cash equivalents and restricted cash compared with $33.6 million as of December 31, 2015.

As of March 31, 2016, accounts receivable balance was $15.4 million compared to $19.9 million as of December 31, 2015.

Notes receivable balance was $25.3 million compared to $11.1 million as of December 31, 2015.

As of March 31, 2016, total borrowings were $241.3 million, of which $114.8 million were long-term borrowings compared to total borrowings of $242.5 million, including $118.5 million long-term borrowings as of December 31, 2015.

As of March 31, 2016, notes payable balance was $28.1 million compared to $20.2 million as of December 31, 2015.

Now for cash flow.

For the three months ended March 31, 2016, net cash provided by operating activities was $22.5 million compared to $1.3 million in the same period of 2015.

For the three months ended March 31, 2016, net cash used in investing activities was $17.5 million compared to $16.3 million in the same period of 2015. The net cash used in investing activities during the first quarter of 2016 was primarily related to capital expenditures of our Xinjiang polysilicon facilities.

For the three months ended March 31, 2016, net cash used in financing activities was $3.3 million compared to net cash provided by financing activities of $22.7 million in the same period of 2015.

That concludes the official part of our presentation. Now let's have the Q&A session.

We will now begin the question and answer session. (Operator Instructions). Philip Shen, ROTH Capital Partners.

Congrats on the nice results there. So let me ask you about ASPs for the quarter. Clearly, they've gone up meaningfully. We're averaging about $15.50 a kilogram so far for this quarter. What kind of ASP do you think we could see in Q2?

And then can you talk about how you expect ASPs to trend in the subsequent months? There's a lot of discussion potentially about module prices, and cell and wafer also may be coming down in the back half. How do you expect that to impact poly pricing going forward as well?

Thanks.

Okay. Thanks, Phil. So let us give you a little bit more color on what we're seeing in the market and what we're seeing that's driving the trend for upward pricing for polysilicon. And this really started in the beginning of the year around the February or March timeframe, which we believe is really driven by the supply and demand dynamics within China.

And on the demand front, demand for poly is very strong right now, with broad-based increase in volume from our customer base, as well as new customers. That's really driven by significant domestic wafer capacity expansions that start to ramp up starting in February and resulting in increased poly consumption and demand from these wafer manufacturers. And with the rising wafer pricing that we saw in the previous quarters, we also saw significant upstart of monocrystalline wafer capacity in addition to increase of the multi-crystalline wafer capacity.

And if you recall what happened in the second half of last year, the price decline that we saw was primarily the result of a shortage of wafer capacity in the market. That was the primary constraint. And the wafer capacity at that time could not process the poly inventory into wafer, which led to an increase in wafer pricing and the decline of poly pricing, and with a substantial margin increase for wafer manufacturers. So if you recall, our wafer margin was only around 11% in Q2 of last year, and that really improved to 28% now.

So what we're seeing right now is really this process being more normalized. But even if you look at the current higher poly pricing that we see in the market today, with today's wafer pricing, the wafer manufacturers are still making a very healthy high teens to even close to 20% gross margin, and that's what we're seeing with our own wafer manufacturing subsidiary.

So this is still very profitable for wafer manufacturers, and so this is really what's driving the fundamental increase in the demand for poly. And I think recently, I think what we're seeing right now is also that the Chinese customs is now cracking down on what we call -- what they say is smuggling of polysilicon imports into China. They're attempting to avoid the import tariff. And what we're seeing is the immediate impact that has reduced poly imports.

So -- and this is particularly significant for previously US manufactured polysilicon which what we saw in previous months have tried to reroute significant volumes from countries like Taiwan and Malaysia that are trying to avoid this import duty. And China customs related to that have made many arrests in connection with this poly smuggling investigation. So we believe the investigation into poly smuggling will have the long-term impact in enforcement and reduction of non-compliant poly imports.

And on the supply front, we're not seeing any new poly manufacturing capacity additions in 2016 other than poly that's made in the US. But with this recent strict enforcement of the anti-dumping tariff, we don't think these new poly can make its way into China.

So if you look at the Q2 pricing, so entering the quarter, we're already seeing pricing, let's say closer to the $16 and higher range. And now, as Dr. Yao has discussed, we're actually signing contracts in the $19 pricing range.

So that's what we're seeing in Q2 right now, and with the tight supply of polysilicon that we're seeing in the marketplace, that's really what's supporting and driving the higher poly pricing. We think this trend can basically continue through the remainder of the year. So that's our current perspective right now.

Okay. That's really helpful. So can you talk about the dynamics behind customers wanting 2 to 3 times the capacity you can provide? Are they building or rebuilding inventory, or is it a function primarily of the wafer capacity expansion?

Yes, Philip. I think it's the wafer capacity, and maybe it's also primarily due to they cannot get any import polysilicon. Originally they signed the contract through the -- buy this polysilicon from outside of China, and now because of investigations of all the imports, it has stopped. As we know, this will continue to June at least.

And then looking the second half of 2016, as Ming already has mentioned, we don't believe poly demand/supply issue will be resolved or any relaxed for the demanding because of two factors.

One is the China installation for 2016 will continue strong. Secondly, we saw in the downstream customer, the slightly changing happening right now is that there will be more increased mono capacity of the wafer in the industry.

This has never happened before because while the industry continues produce more multi-crystal wafers, and also they are increasing the mono-crystal wafer capacity in the market.

China, they already announced that this year alone increased about 7 gigawatts of the mono wafer cell manufacturing.

As for the -- you mentioned the module and [cell] price trending down a little bit. We noticed that, but by the -- we're looking at the industry. At current price, about $18 to $19 per kilo polysilicon, we still see the margin of wafers at around 15% to 20%, so which means we still have some room to go. And polysilicon price will be -- maybe will stop at about $20 per kilo, and I think they will continue at least past Q2 and perhaps most likely will go into Q3.

Okay. So in terms of demand, can you talk about how much demand there is at $19 a kilogram? Is it fair to say that there's still a substantial amount of demand for polysilicon at that higher pricing?

Yes. We cannot accept orders because our manufacture -- we are fully utilized and we produce as much as we can. And we think, as Ming already mentioned, we're already increasing from Q1 from last Q4 internal shipment by about more than 100 metric tonnes. And this trend will continue for the Q2.

So also, company trying to change some process, make more polysilicon suitable for mono-crystal wafer qualification purpose. So right now, we are working with many downstream customers trying to qualify high-end mono-crystal wafer, those applications, which may be will significant increase for next three years.

But right now as of this moment, still most customers using full multi-crystal wafers application using for polysilicon, but this is something changing maybe on the second half of this year. And certainly, more shifted to the mono wafers in compare with any time in the history in last two or three years.

So that's why we believe the internal in China high-purity and [good] polysilicon market still very tight, and in the long run maybe low-end, low-quality polysilicon, maybe demand will be more eased because of multi-crystal wafer side maybe [will not] increasing next three years. But seems like mono-crystal wafer demand will increasing significantly in next few years. That's why we're looking from the second half this year and further.

So we still believe this year's market in China for polysilicon is very good, and we believe the second half price definitely will be more strong than the first quarter we just reported.

So, Phil, let me just add to Dr. Yao's comments. So at $19, we don't have enough products to sell. Our customers want to buy a lot more products than what we're able to provide to them, and all of them are under allocation basis right now.

Okay. That's really helpful. I'll jump back in the queue. Thanks.

(Operator Instructions). Sheng Zhong, Morgan Stanley.

Congrats on the results. Actually, following your mention about the wafer, we also have wafer production and all the wafer is multi-crystalline products. Is that right?

Yes. That's correct.

Yes. So based on your view and also your order backlog, can you share with us your wafer price trend in the second quarter?

We're looking at roughly 3% to 4% decline in Q2 versus Q1 for ASP, wafer ASP.

You mean per piece?

Per piece or per watt. They're pretty much the same.

You mean 3% to 4%. Right?

Or Q2 versus Q1. Yes.

Okay.

Q1 always almost in the peak in last six or nine months. So from Q2, slightly eased. But still we think the wafer -- I just said, the margin will be very close to middle -- about 15% to 20% for whole industry. So, yes.

Yes. I understand. And also, we noticed that you have received the approval to listing in the New Third Board, so after your listing, what's the next step from this capital market the Company is planning?

As a factor, this is a very new market. The capital activity for raising capital in this Board is relatively very light at this moment. So according to Chinese Government, they will -- because right now, about 5,000 to 6,000 companies listed, plan to list in this market. So according to government plan where first they classify different companies, we believe our Company well deserved the first-class tier 1 kind of companies listing in this market. And from that moment, maybe any capital activity in this market will be followed up after the classification is done. So we believe we'll be done by second half of this year.

Okay. So that means you will issue shares in the market?

There are two -- actually, practically they're a different way, and the first listing has the price for the shares, and they maybe have no significant trading. And also, you can do, if you have -- it's more like you have if investor want to buy your shares, it's possible it can be done also by that time. Yes.

But at this moment, if you look at the Third Board, trading is not as heavy as Asia's or any other market yet. But we believe after they put a different company on the different classes, they probably will be more focused on their first-tier companies. Trading will be much heavier compared with the remaining companies.

Right now, it's every company treated same, at this moment, so hopefully after Q3, they will have done this according to the plans they announced, so then we will see significant trade volume increase for the first-tier companies.

So [that's for] Dr. Yao's comment. So I think we will look forward to optimistically raise capital within the Chinese market, which as of today I think you are seeing a much higher valuation for solar companies relative to the US market. And these companies arguably are of less quality relative to the US solar companies as well. So I think there's good opportunities for us to tap into this market at a more attractive valuation.

Yes. I understand. So let's take a look at what's happening in the next one to two quarters of this market. And that's from me. Thank you, Dr. Yao and Mr. Yang.

Wei Feng, Luminus Management.

First of all, I heard you said China added 7 gigawatts wafer capacity last year. Is that right?

No. The cell manufacturing -- for the -- the reason for the cell capacity add is the mono-crystal cell and high efficiency. So this is a new trend. It used to be China only focused on the multi-crystal wafer cell, so which means have more market for polysilicon. So that's why we are very optimistic compared with last year because last year, Chinese markets, they're 80% for cell manufacturing, but they are most focused on the multi-crystal wafers and the multi-crystal cells.

Right now, we have -- eventually this market is growing. We saw a lot of construction facilities in the [Xingzhou] base for customer like [Lonji] and other customers there. They are busy and [there are] several lines is already starting to -- studying or producing cells in China for the mono wafer.

So it's 7 gigawatts cell capacity. And what's your estimate on wafer capacity expansion last year?

Wafer, we have an announcement from several companies. As you know, Lonji is a heavy focus on expansion for mono wafers; and [GCL] even announced a week ago lots of wafer expanding.

We do not see any more other people for mono wafers, but we noticed some shipment for some other companies also starting to have small increasing of the mono wafer crystal.

So it's just starting from end of last year and this year, and we're expecting a meaningful volume will be coming maybe next year from second half of this year and also next year.

So this is something never happened before because normally, mono-crystal wafer cell and manufacturing is mainly in the outside China market: in Japan, in South Korea and Taiwan and the US. But this is happening in China too.

But by saying that, the multi-crystal wafer demand is very strong still, and our multi wafer cells is very strong and there's no, almost no inventory. And every month, close or every quarter, we basically have only one-day production inventory remaining for each quarter, so in the last three quarters. So it's very strong still.

That should fuel the mainstream of the shipment for the poly usage for 2016 [still], which is interesting as we are seeing more people focused on the mono wafers in future. For additional capacity, focusing will be about mono wafers.

That's interesting. And on the supply side, Ming mentioned that the Chinese customer is investigating on the poly smuggling activity. Just looking at the Bloomberg data from Taiwan and Malaysia, China has been importing less than 1,000 tonnes per month early 2015. The latest data shows roughly 2,500 tonnes in March from those two countries.

What's your best estimate on what's the impact from the investigation on the imports? Do you think it's going back to 1,000 tonnes per month, or it stay at maybe 2,000 to 2,500 per month run rate? Because we don't have any poly production plant in Taiwan. Right?

Yes. So I don't believe those are imported from our customers. Probably, it's imported from some trading company. So those kinds of poly we believe is still in customs. I don't think they're releasing to internal customer yet.

So actually, there's several things. One is there are some imports coming from Taiwan, which we knew, and the Chinese Government knew that's not true. So those will be in big trouble. I think they probably changed the original producer countries come to China.

Second, also there's -- remember in last two years there's some wafer processing trade, and those are still investigate some wrongdoing during that time because of take advantage of avoiding the tax by [claiming] less wafers from a certain amount of polysilicon they import.

Third one is more serious. I think there are only four, maybe a few cases, is they claim it's metallurgical silicon actually instead of polysilicon, so that will be more severe for the situation.

So as we know, still some people are in holding by the government and there's no release yet, and also, related to poly. And the filing -- and also, the filing for the -- they ask how many pay back some -- [unsay] the tax. Those things are not done yet.

So we believe this solution will at least maybe will be after Q2, and when they will solve this problem we don't know, but we know that all the imports through those companies will be stopping right now.

So the number maybe shows still going to China, but it's still in the customs; not released to the inside China market.

Yes. So our understanding is with the strict enforcement of polysilicon imports, we don't think US-made poly can re-route from some countries like Taiwan or Malaysia. In fact, we've heard of -- we've known of poly traders, importers in Taiwan that actually would not want to touch any US type of poly and try to get them into China because of the current situation right now.

Yes. So we believe US poly will not able to go into China for the second half of this year, and also, China's restarting another investigation for the [Walker] poly from European manufacturer. So the new investigation will cover [2016] whole year, so this will continue. So I think the pressure for the Walker imports to China also [still on], and this is the announcement we saw on Chinese news.

So situation will be imports from -- if we're assuming imports from Walker, OCI, those companies, will continue the same as last year, but the import from US will significantly lower compared with last year. That's what are our expectations.

So if margin import from Taiwan is 2,000 tonnes and Malaysia is roughly 600 tonnes, you would think those numbers should trend down in April and May?

It should be zero because --

Yes. We think by May it should be close to zero.

Even they say the imports, but I think those materials are still in the customs. They'll probably seize those polys. I don't think they will come to the market.

Yes.

You think those two countries imports go to zero in May?

Yes. I would believe so.

When May number come out, you'll be short of 2,500 tonnes imports?

Yes. But because even the people buying these polys, maybe shipping to China, but still right now in the customs. They've not released it. They probably were asking to pay the money for all the tariffs.

So I [don't] people will continue buying next two months because if they cannot sell it, so that's big trouble. So then in March, because the investigations started in April, so probably that's why -- probably we suppose not see anything in April, unless some trader company is very stupid, they continue buying and the silicon actually will be in the Chinese Government hands. I don't think that they can sell it.

I understand. So you believe that Chinese customs going forward will enforce the anti-dumping tax and enforce --?

Oh, yes. So I think that this is the first time actually in last three years, and the first time the Chinese Government are very seriously doing that.

It's actually surprisingly us. We knew that the fact is Taiwan is not making any polysilicon, but Taiwan continues shipping around 1,000 metric tonnes every month.

Almost 2,000 tonnes in March.

Yes. We also saw some -- it's not the verified news -- some companies even claim the granular polysilicon probably from US is coming as metallurgic silicon. So you pay much less or no tariff at all come to China as those companies, so which means that loophole is more than just Taiwan cases, and this is also classified as a different material totally.

So we heard a lot of people is right now still basically arrested by Chinese authority. So it's not -- no sign will be resolved very soon, so we don't know exactly when they will resolve it.

Probably some people will be sentenced and big penalty for smuggling will be done before they can open those goods, or any imports can be claimed by those companies.

I understand. Thank you. I appreciate it.

Manya Chen, PHOTON Consulting.

Congratulations to Daqo's good performance. So I guess the data that you have given us for the -- calculate polysilicon operating margin, and you can see it's almost up to nice 13%, which is very high, and it's an exciting performance.

And my question is, actually in February and March, polysilicon price has been increasing, and I saw Daqo has actually reported their prices [$13.72] which is lower than last quarter.

And for only the margins, could you share more about if you lower your price and your volume is also lower down because of Chinese New Year, and what other experts helped to make your Company have that high operating margin?

Yes. Okay. First, let me be clear. The volume for production was flat from Q4 to Q1. We explained because Q1 it has less calendar days. So it's all the same if you look at [that]number.

The pricing is Q1 -- okay. Q1 pricing, the average is shipment from January, February and March. So January shipment normally contracts signed in the last year, which means December, normally we have before, in the December, from December signed the contract. So then with shipment, the price is determined by previous months. So basically, the March price of the Q1 last month we believe is the high price compared with any month if you signed the contract in February, Chinese New Year time.

So real effect of the price is in the March and will reflect in the April. So that's why we have a high confidence of Q2 as to the big improvement from the Q1 performance.

So that's normally, and actually, if you notice the price downturn also is exactly same trend. So we have about a three-week delay for the pricing, contract and delivery and the revenue. So please remember that. So that's the reason.

So the volumes, there's not much change. It's about same. So we -- because we're shipping more high-quality polysilicon so we try to serve the market, new markets, which I already explained to you is mono wafer crystal market. So we are not aim in the high volume.

But in the Q2, we will try to expand those areas. There's high demand in multi-crystal wafer as well, so we're expecting the volume will come in as flat with Q4 and Q1 level and the price will be big improvement from the Q1.

Okay. Thank you for clarifying. And you have mentioned April the price, the polysilicon price, will be still up since you are already -- April is [process] your March orders.

Right. Yes.

And also -- go ahead. Please go ahead.

Yes. So it's the same thing. For today's market price, real shipments most likely will be end of May and also beginning of June. So that's why we believe Q2 pricing is we have a high confidence the whole quarter the price, ASP, will be much higher than Q1. Yes.

How much percentage of the price you think it will go up to?

Well, that's -- we are not very good at that, but we can guess. We'd say the price can go up to maybe around $20, and it's more than that is unlikely because wafer manufacture margin, maybe we're going to make 10% of the load, and that will indicate of pricing and price is too high because each sector needs some profitability to sustaining the business.

So we believe that's why it's $19 to $20 probably is -- this movement of price is to the high end. And unless there's something significant happening, I think the price will stay there for a while. And I don't think we see that going higher and the wafer will impact the downstream too much.

Yes. And, actually, Daqo has to also sell wafers and I see their operating margin is about 8% right now. And if Daqo --

No. It's 28%. Yes. Our margin is 28% for Q1.

Yes. That's for the whole Company. Right?

No. For wafers also. For wafers 28%, and for also --

For operating margin?

Gross margin.

Gross margin. Okay. Cool. Good to know. Thanks. And do you think --? Could you talk about [feed-in tariff excise] on polysilicon and wafer price to Daqo?

Tariff, import tariff?

Chinese feed-in tariff, yes.

That's for polysilicon only. That continues. Nothing changed. The only thing is that by the end of April, tariffs for Europe, especially for Walker and European companies, supposedly is stopped. The Chinese announced that they will continue investigation for the Walker.

And so as a status quo, I think that all the tariffs will continue. All the [measures] continue will be post on the -- for the Walker. But we don't know exactly what the results will be because an investigation takes time so most likely will be second half of this year. Hopefully Chinese will give the conclusion about how to deal with European companies.

For US companies, of course, it's the same as we discussed in last conversation. It's basically the US poly we don't believe will come to China for the second half of this year.

Great. Okay. Thank you. Thank you for answering my questions.

Paul Strigler, Esplanade.

Just a question on your decision to send poly to the wafer fab versus selling poly in the market. You don't break out your cost of goods for polysilicon. You break out the total cash cost which includes SG&A. So at what price is poly? Given where wafer prices are and where they're going, does it make sense just to ship that poly to a third party versus running it through your wafer facility?

Yes. Well, Paul, actually, it's the same. Internal shipments, the price is the same but not counted as revenue for polysilicon because as we are a US-listed company, the auditing is very fair. So we have to sell the internal sales shipment as not counted polysilicon revenue as we count it as wafer revenue. So it's about the same price.

The reason is we're increasing the polysilicon significantly. When our poly is running at about 6,000 metric tonnes capacity, sometimes we have to buy some polysilicon to meet our long-term customer -- long-term contract customer needs. But right now, in the second half last year, we doubled our capacity for the polysilicon so we're able to provide all polysilicon needs for our wafer facility.

So right now, we'll continue doing that, especially when the market is tight. So it's very difficult to buy polysilicon from outside sourcing. And Q2 at least we'll continue to do that, and the second half of this year we'll see the market.

So if, for example, our polysilicon is too tight for our customers, and in the market also other polysilicon is available, like we used to do, we also buy the polysilicon in the free market, outside market too.

But as of Q1/Q2, we decided we're shipping our polysilicon to internal customers because our long-term contracts only cover 80% of our output. Of course, at this moment, demand is very high for the second quarter but our wafer manufacture is not that big. First quarter, we shipped about 500 metric tonnes among the about 3,400 metric tonnes production (multiple speakers).

Maybe a better way to phrase the question. So if you're selling polysilicon or contracting out at $19 per kilogram in the second quarter, in May, what's your gross profit per kilogram for polysilicon? And then, when you equate 500 tonnes per quarter of wafer, how much gross profit per kilogram are you generating from a wafer set?

Well, okay. So the profit is still counted as polysilicon at $19. Okay? So we are not give them for free. They have still our contribution, the [part 2] margin.

So let me put it this way. So if we just sell polysilicon to outside customers, we shut down the wafer manufacturing, we still make less money because the wafer is still a part 2 margin. Let me put it this way.

So wait a second. So the 28.3% gross margin in Q1 for your wafer business you're flowing through polysilicon at your average selling price in that cost of goods?

Yes. That's right. So if you combine --

So what would the gross margin be if you were flowing through at your fully-loaded cost, not your selling price; so the [$9.65]?

We need to do some calculations so let's get back to you on that.

Okay. Thanks, guys. Good quarter. Good luck in future.

This concludes our question and answer session. I would like to turn the conference back over to Kevin He for any closing remarks.

Thank you, everyone, again for joining our conference call today. Should you have any further questions, please don't hesitate to contact the investor relations of the Company.

Thank you. Bye bye.

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