大全新能源 (DQ) 2016 Q3 法說會逐字稿

Good morning and welcome to the Daqo New Energy third-quarter 2016 results conference call. (Operator Instructions).

Please note this event is being recorded.

I would now like to turn the conference over to Kevin He, Investor Relations for Daqo New Energy. 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 third quarter of 2016 which can be found on our website, 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 third 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 the 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 contained in any forward-looking statements.

Further information regarding these and other risks is included in the report or document 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 now turn the call over to our CEO. Dr. Yao, please.

Hello, everyone, and thank you for joining our conference call today.

During the third quarter of 2016, we successfully set new records in terms of polysilicon production volume and cost. I would like to thank our entire team for their hard work and dedication for the excellent results.

Our polysilicon production for the third quarter reached a record high of 3,636 metric tonnes, which has surpassed our annual nameplate capacity of 12,150 metric tonnes. Through technical and processing improvements, we also made a significant progress in reduce our production costs even further, achieving our lowest cost -- ever cost structure, with $8.66 per kilo, a production -- a reduction of 8% from $9.43 per kilo in the second quarter.

Cash costs reached $6.88 per kilo, a reduction of 7% from $7.42 in the second quarter. At the same time, we were able to improve our production in quality [silver] and produced more semiconductor grade polysilicon geared towards the high-efficiency mono-crystal solar segment.

In the third quarter of 2016, downstream solar end market and polysilicon market experienced significant volatility, and due to the slowdown in China end market demand and installation activities after Chinese FIT adjustment at the end of June 2016, the market saw a slow level of demand towards end of the third quarter of 2016.

Our third quarter ASP was $15.64 per kilo compared to second-quarter ASP of $17.24 per kilo. As a result, several polysilicon manufacturers, both within China and abroad, partially shut down their capacities due to weak polysilicon pricing. The resulting reduction in polysilicon supply has helped to stabilize the market and pave the way for price recovery.

Due the delay in the delivery of the critical specialty components, the starting date of annual maintenance of our Xinjiang polysilicon facility was postponed to October 3 from the second half of September, as originally planned. We continued -- we conducted more than 500 maintenance items, including special projects that are expected to improve our manufacturing efficiency even further. The maintenance was completed successfully, and we initiated gradual restart of production on October 24.

In early November, production resumed successfully, and we reached the full capacity utilization. Overall, we estimated that annual maintenance has impacted approximately 800 metric tonnes to 900 metric tonnes our first-quarter polysilicon production volume.

In the third quarter of 2016, due to the market volatility and the declining conditions for the solar wafer segment, reduced our wafer production utilization rate. As a result, the Company sold 14.4 million pieces of wafer in the third quarter compared to 25 million pieces in the second quarter of 2016.

Market condition improved significantly in the middle of October with the increasing customer demand and market wafer pricing. In response to improved market conditions, the Company ramped up wafer production utilization during that time and reached full production in November.

The solar market began to recover in early October with recovery in customer demand and the strong order momentum due to limited channel inventories. Polysilicon pricing has recovered particularly well with increasing orders from our broad-based customers. By November, pricing has recovered back to previous levels seen in July of this year.

We continue to see a tight supply polysilicon environment within China, and a much higher demand and a strong order of our high-quality polysilicon than we were able to supply.

For the solar wafer segment, wafer pricing also recovered significantly during the same time period, with strong order across multiple customers. During early November, we are also seeing downstream product pricing for solar cell and the solar module going up as a result of strong end-market demand, which bodes well to stable -- to rising polysilicon and wafer pricing for the coming months.

Now let me provide outlook for the fourth quarter of 2016.

As a result of our annual maintenance, the Company expects to sell approximately 2,200 metric tonnes to 2,300 metric tonnes polysilicon to external customers during the fourth quarter of 2016. The external sales guidance excludes shipment of polysilicon to be used internally by our Chongqing solar wafer facility which utilizes polysilicon for its wafer manufacturing operation. Wafer cells volume is expected to approximately 20 million to 21 million pieces for the fourth quarter of 2016.

Now I will turn the call to our CFO Mr. Ming Yang for financial updates.

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

Revenues were $54.3 million compared to $71 million in the second quarter of 2016, and $46.6 million in the third quarter of 2015. Revenues from polysilicon sales to external customers were $44.4 million compared to $50.5 million in the second quarter of 2016, and $34.1 million in the third quarter of 2015.

External sales volume was 2,838 metric tonnes in the third quarter compared to 2,931 metric tonnes in the second quarter of 2016.

ASP of polysilicon was $15.64 per kilogram in the third quarter of 2016 compared to $17.24 per kilogram in the second quarter of 2016. The decrease in polysilicon revenue from the second quarter was primarily due to lower polysilicon ASP and lower external sales volume.

Revenues from wafer cells were $9.9 million compared to $20.5 million in the second quarter, and $12.5 million in the third quarter of 2015. Sales volume was 14.4 million pieces compared to 25 million pieces in the second quarter of 2016. The decrease in wafer revenue from the second quarter of 2016 was primarily due to lower wafer ASP and lower sales volume.

Gross profit was $20.1 million compared to $29.4 million in the second quarter of 2016, and $8.6 million in the third quarter of 2015. Non-GAAP gross profit, which excludes costs related to the non-operational polysilicon operation in Chongqing, was approximately $21.6 million compared to $31.2 million in the second quarter of 2016, and $10.9 million in the third quarter of 2015.

Gross margin was 37.1% compared to 41.4% in the second quarter of 2016, and 18.4% in the third quarter of 2015.

In the third quarter of 2016, total costs related to the non-operational Chongqing polysilicon plant, including depreciation, were $1.5 million compared to $1.8 million in the second quarter of 2016, and $2.3 million in the third quarter of 2015. Excluding such costs, the non-GAAP gross margin was approximately 39.9% compared to 43.9% in the second quarter of 2016, and 23.4% in the third quarter of 2015.

Selling, general and administrative expenses were $4.9 million compared to $3.7 million in the second quarter of 2016, and $2.9 million in the third quarter of 2015. The increase in selling, general and administrative expenses as compared to the second quarter of 2016 was primarily due to higher relocation and moving expenses related to the Company's relocation of its idle polysilicon manufacturing equipment from Chongqing to Xinjiang, which were $1.7 million during the third quarter of 2016 compared to $0.6 million during the second quarter of 2016, as well as higher non-cash shared-based compensation expenses.

We conducted the majority of our equipment relocation during the third quarter, and we expect such costs to normalize in the fourth quarter.

Research and development expenses were approximately $1 million compared to $0.1 million in the second quarter of 2016, and $0.1 million in the third quarter of 2015. During the quarter, we conducted R&D and technology upgrade projects related to silicon crystal growth and [off-gas] recovery, which we expect to both further improve product quality and reduce production costs over the coming months.

Other operating income was $2.2 million compared to $0.6 million in the second quarter of 2016, and $1.1 million in the third quarter of 2015. Other operating income mainly consists of unrestricted cash incentives that the Company received from local government authorities, the amount of which varies from period to period.

Income from operations was $16.4 million compared to $26.1 million in the second quarter of 2016, and $6.7 million in the third quarter of 2015. Operating margin was 30.3% compared to 36.8% in the second quarter of 2016, and 14.3% in the third quarter of 2015.

Interest expenses were $3.1 million compared to $3.5 million in the second quarter of 2016, and $3.1 million in the third quarter of 2015.

EBITDA was $25 million, compared to $34.7 million in the second quarter of 2016, and $15 million in the third quarter of 2015. EBITDA margin was 46% compared to 48.9% in the second quarter of 2016, and 32.1% in the third quarter of 2015.

Net income attributable to Daqo New Energy shareholders was $11.2 million compared to $19.8 million in the second quarter of 2016, and $3.1 million in the third quarter of 2015.

Earnings per basic ADS were $1.07 compared to $1.90 in the second quarter of 2016, and $0.29 in the third quarter of 2015.

As of September 30, 2016, the Company had $29.2 million in cash and cash equivalents and restricted cash compared to $42.9 million as of June 30, 2016, and $68.7 million as of September 30, 2015.

As of September 30, 2016, the accounts receivable balance was $4.6 million compared to $10.1 million as of June 30, 2016, and $15.4 million as of September 30, 2015.

As of September 30, 2016, the note receivables balance was $17 million, compared to $14.8 million as of June 30, 2016, and $16.5 million as of September 30, 2015.

As of September 30, 2016, total bank borrowings were $227.6 million, of which $129 million were long-term borrowings compared to total borrowings of $227.9 million, including $118.4 million long-term borrowings as of June 30, 2016, and total borrowings of $259.1 million, including $144 million long-term borrowings as of September 30, 2015.

As of September 30, 2016, the note payables balance was $14.4 million compared to $26.1 million as of June 30, 2016, and $52.2 million as of September 30, 2015.

For the nine months ended September 30, 2016, net cash provided by operating activities was $70.9 million compared to $65.6 million in the same period of 2015.

For the nine months ended September 30, 2016, net cash used in investing activities was $51 million compared to $82.7 million in the same period of 2015.

For the nine months ended September 30, 2016, net cash used in financing activities was $12.3 million compared to net cash provided by financing activities of $38.1 million in the same period of 2015.

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

Thank you. We will now begin the question and answer session. (Operator Instructions).

Philip Shen, ROTH Capital Partners.

Great job on your cost structure. It seems like in terms of maintenance that your polysilicon facilities, typically from what I recall, has about five to 15 days of maintenance, but it looks like this quarter, or this time around, it seems it may have been as much as 20 days given the volume impact of 800 or 900 metric tonnes. Could you help us understand why maintenance may be longer, or may have been longer this time around versus in prior years?

Yes. So we do have, Phil, we have two things. One is the maintenance content. The first time for hydrochlorination facilities have been running for about -- around 18 months, 15 months to 18 months since installed about 15 months or so ago. That's the one thing.

So it's a maintenance even looking just [stay] exactly the same compared it used to be last time maintenance for 6,000 metric tonnes facility. This time, it's 12,000 metric tonnes plus, the new facility for hydrochlorination.

In addition to that, we also did all the preparation for the Phase 3A, which is additional 6,000 metric tonnes. We will put in -- according our original schedules, we will fully ramp up by middle of next year, and we're trying to do our best, we're trying to put in. So this maintenance period of time we already did the foundation for that purpose.

So you're right. Originally, we tried to manage it for 6,000 metric tonnes time our maintenance never be more than two weeks, like 15 days.

This time it's been longer. There are some complicated inform -- the situation is the [sizes] are getting bigger, and we also because the maintenance also shift from typically we are doing the April, right now doing the September, so the content of the maintenance is much more -- actual items are much more. We mentioned briefly in the presentation, we said about 500 items have been maintained for that period of time.

We also want to reduce that because this is the first time since we running 12,000 metric tonnes with hydrochlorination. So I'm pretty sure next time we would do a little bit earlier, so probably [with] the summer time in around like third quarter; and we try to manage it like 15 days to 20 days' period. It should be less next time. This is the first time again.

So I don't know if I answered your question, but that's roughly the idea.

Yes, Gongda. You definitely answered the question and gave us lots of color on that. Can you help us understand how much more you may have spent on maintenance in Q3 versus what --? I mean did you spend what you had expected to spend? And if you can give a rough number as to what it was.

Yes. So for financial side, major impact is we lost a metric tonne during the shutdown time, so we said it's around 800 to 900 metric tonnes polysilicon impact.

The financial money side is not much compared with the timing we lost. It's probably it's more important at this moment. And we also -- I want to put color on that. We also installed some new facilities to further improve our quality. We're expecting our quality of the polysilicon will be improved after this fully stabilized running. We'll probably see results in the Q4/Q1 next -- whole year, actually, after some installation, some improvement, technical improvement from this maintenance. So it's a little bit more complicated compared with in the history of the other maintenance we've done annually.

So same time, as I said, we also learn a lot and we try to do -- even next time we're expecting the maintenance content is similarly complicated because our plants are getting bigger and bigger but we have confidence that next time we can reduce the time compared with this one.

Great. Shifting to your cost structure, you guys before your maintenance activity achieved really attractive levels. Given that success, can you update us on what you expect your cash costs and all-in costs to be for 2017?

Previously, you talked about a range between $9.00/$9.50 per kilogram for the year, but you're already below that level, so what is the updated range we should expect for 2017?

So for 2017, we have confidence with the result of third quarter we can achieve the cost like $8.50 per kilogram or below. That's no problem.

Also, as you know, the Q4 costs were slightly higher because we have maintenance downtime for October, but 2017 we have confidence that we can achieve $8.50 per kilogram below.

So [that's why we're in] full production on our new capacity. We think we can hit that target.

And also, we have lot of room to improve that because of volume, and also, the new equipment we put in and the new -- this quality improvement, as I say, will be starting running by now.

So it's better quality polysilicon as well.

Okay. Shifting to the wafer side of the business, you had reduced utilization, or at least certainly shipments in Q3 given the slowdown in general. Can you share what the margin was on wafers in Q3 and then what you expect for margins in Q4?

So margin for Q3 for the wafer business was in the low single-digit percentage, so like maybe the low 5%.

And then for Q4, we're looking at -- based on the current pricing for polysilicon. So we're doing product transfer based on market pricing for poly and for wafer. It's around 5% or so, so slightly profitable.

Okay. Good. So, Gongda and Ming, you guys often have a great view on what's going on in the marketplace. You're at the end of the value chain here -- sorry; at the beginning of the value chain. And so can you talk to us about fundamentally what happened with the drop in demand in Q3? And then is the Q4 recovery simply just a return of normalized demand, or can you just talk about in general the market conditions that you see for Q4 and then in Q1? And then talk about what you expect ASPs to be like for polysilicon in those periods as well.

Thanks.

Okay. So let me start and maybe Ming can add on.

So the Q3, as you know, even the first half of the Q3 is very successful. Before we -- at the time we announced the Q2 result, the polysilicon price is very solid and the second half polysilicon become weaker, although the wafer pricing is -- seems like ahead of -- weakening is actually ahead of polysilicon.

So the wafer business normally, like Ming mentioned, the Q3/Q4 is more challenged actually, because Q4, when the pricing recovering, wafer pricing recovering is slower than polysilicon also, so there's lagging ahead of decline and the lagging and recovering, so the wafer business is much challenged than polysilicon.

On the polysilicon side, we have high confidence because the current pricing we see in China is already $16.50. So its current price, the pricing for polysilicon is already higher than average of our Q3 number.

So we expecting this pricing probably will stable. Maybe we review that, this price. It probably will stabilize through the remaining of this year as we have confidence to deliver that because we looked at our major customers. We are in the middle of processing to do some contracts for 2017 and even 2018, and demanding and ordering for remaining of this year very strong. We don't see any problem.

And as we mentioned in the presentation also, we check that some pricing in China for cell and module also started recovering. So fortunately, [or unfortunately], but polysilicon pricing recovery is much faster than anything else in the order chain so we're in the right business and also in the relatively shortage.

Also, we get a channel check that imports from some other region like Taiwan has been cracked down due to the efforts of Chinese Government for the -- this is a longstanding problem. Usually, we see every month's import more than 1,000 metric tonnes; sometimes 2,000 metric tonnes. But very recently, go down to 100 metric tonnes or those levels. So shows that effect of imports has been down and internal demanding pick up. That's what driving the polysilicon prices back to $16 to $17 level, which is relatively high compared even with Q3 average.

Okay. Great. Go ahead, Ming.

Okay. So I think you remember in terms of demand, so we had very strong orders, a rush demand for downstream solar products like cell and modules all the way through the end of June to meet China FIT cut-off date.

And really, the market, particularly for China, had a more or less break in terms of these activities after that time, so we did see a slowdown of orders for China. And that actually had an impact in terms of global demand, because as pricing came down and actually a lot of what we think are orders for the second half of the year actually, customers pushed out or delayed their orders until maybe September or even later just to see where pricing would stabilize. And we did see pricing bottom really in the second half of September, and that's when really for the entire value chain the demand was really weak at that time.

But I think what's fortunate for the polysilicon sector is that when pricing went down, we did see a lot of plant shutdowns within China and globally, and even some of the very large manufacturers voluntarily reduced utilization to maybe one-half of their production volume. So we actually didn't see any inventory buildup. There's actually still very low levels of inventory in the market for polysilicon.

And then when the orders came back really in the early October and came back really strongly in the second half of October, then we saw a very significant V-shaped price recovery, polysilicon pricing, where today in [Daqo partner] we're looking at $16 or higher polysilicon costs. We're really back to where pricing was, say, in the early Q3/late Q2 time period. So I think there is this self-correcting mechanism in the polysilicon sector.

And by even supporting that, I think is the way we are just in the recent weeks, maybe two weeks, seeing module pricing also is going up in terms of timing with our customers. So that is really supporting solar wafer and polysilicon pricing recovery. So that's what we're seeing right now.

Okay. That's really interesting that module pricing might be going up. We haven't seen that yet and haven't heard that yet, but we'll certainly keep an eye out for that.

Sorry. I cut you off. Did you have something else you wanted to say?

Yes. So I think it's really -- so one is the China market really came back pretty strongly. And also, we think that the Indian market also is really starting off because the Indian installation is really in the Q4 and Q1 timeframe normally due to their seasonality. So we're also seeing a lot of orders from India for Chinese modules as well; for Chinese solar products in general.

Okay. I'll ask one more, but it's a two-part question, and then I'll jump back in the queue.

So can you update us on the timing of the Phase 3b expansion, the potential timing there? And how does the reduction of China's five-year plan target from 150 to 110 gigawatts or more impact your decision to expand potentially your capacity to 25,000 metric tonnes? And then in addition, how does the Trump win potentially impact that thinking?

And then shifting to another point on that, to what degree would you consider not expanding and then focusing your efforts to -- what could you do with that cash regeneration in other words in 2017? Would you consider a share repurchase, or debt reduction, or special dividend?

And then finally, if there's an update on the third board, that would be helpful.

Thanks.

Okay, so the position for Phase 3b depends on several things. One is the macro economy for the solar industry, like you said. The [fitting] of five-year plan since the total installation remaining is a reduction of forecast for last few years. That's the one consideration.

That give you overall picture of demanding by China. Demanding is the most important country for the installation, so we'll see that. So probably, we are waiting for probably Q1 of next year. We have -- we see the China market, what's going on, especially for industry response to government.

As you know, Phil, Chinese Government planning and actually happening, there's a gap. Sometimes could be crazy. So we will see. That's the first effect.

Second effect is, as you know, even the demanding may be modest or even reduced, but in polysilicon industry, we still -- we believe that a lot of capacity is not effective because if the future the pricing maintained in the $14/$15/$16 range, so we still believe we are very competitive if we can continue to reduce our cost, so the [sum] capacity we're shifting from high-cost area to the low-cost companies.

So we believe we still have some chance if we will favor us to expanding because we expanding in the very low-cost in future. If we -- even based on whatever we're talking about, $8.50, if we add more capacity, well, we will have the economy and reducing maybe -- there's potential for reduce our costs even further. So that's the positive side.

But overall, as you also mentioned, macro situation as China, we can see probably clearly because China is representing about -- downstream about 80% manufacturing capacity in worldwide. So we were able to see what's going on and for how the industry responds to Chinese Government's planning forecast.

So we will not make a decision probably most likely in this year. We probably will look at in the first quarter.

Now if we decide not going to expanding of Phase 3b, most likely priority, like you mentioned several things. One thing is obviously the debt percentage of our Company is still relatively high, and although it's not very high within the industry, but it's still we want to be lower. So probably that's the first priority. And the other option is we also did consider, but reduced debt is probably the first priority compared with others.

Great. And what's the update on the third board, if there is one?

So third board is we still are waiting to China. There's a lot of the intentions for investors to invest in the Company. There are several reasons. One is the very attractive value for the Company because we achieve the low cost; and very stable, very committed to the operation excellence; and also, very stable expansion so far, and also significantly.

Last year, we have 100% capacity increasing, and currently now, we have additional 50% increasing capacity without debt percentage hugely increasing. So that's amazing.

So cash flow for the Company for next few years, if we do not have additional products that would be significant improve on last year even the year before that, so in very good position.

Secondly, the Xinjiang location is very favorable for government to encourage to develop further industry and also attract investment. So those things for investor point of view.

Now, as you said, so this is linked to our expansion project so we will probably -- right now, we have a lot of meetings with those investors. Probably the Company will make a decision by Q1 of 2017 regarding Phase 3b. And those things are connected each other, so we will consider this as a whole.

Great. I'll pass it on. Thank you very much.

(Operator Instructions). Sheng Zhong, Morgan Stanley.

Just a few follow-ups. So on the polysilicon business, you mentioned that you are shifting your supply to more mono-wafer makers. So last quarter, your percentage is around 15%, so any update on this?

So Q3, we -- actually, we increased number of customers for mono-wafer application. So we ship around 20%. So we have a plan in 2017 we will probably increase to 30% at least for next year.

So part of the project, maintenance project we done in the October is related to this wafer quality improvement and so we've done that. We need some time to check the results. Probably we will have -- need additional one month's running. So by end of this month probably we're be able to see. And we have confidence we can ship that; is more than 30% of polysilicon should be able to utilize by mono-wafer customers in future.

Yes, that's great. So another follow-up is on the wafer. Actually, with your -- we know that the third quarter could be a low demand quarter so that your sales volume is not so high, but in the fourth quarter, it looks like it's still not in full utilization. So can you please add more color on what the demand of the market is now on the wafer side?

Yes. So fourth quarter, the demand on the wafer is pretty good, actually. The reason our shipment guidance is lower than Q2 is because we restarted our manufacture -- because we reduced our utilization until middle of October with starting. So fourth quarter, we only count 2.5 months' production because the -- at the one moment the wafer pricing going to -- unbelievably low is not rational pricing. So we are not participate in this kind of pushing the pricing down so we stop production wafers. We do some casting ingots instead in the end of Q3. And so we're restarting the manufacture by second half of October.

That's accounting for the total shipment of wafer for Q4 will be reduced compared with Q2. but our shipment, as you can tell, our shipment in Q4 wafer numbers, they are higher than Q3.

Yes, we see the recovery. And actually, I'm trying to understand more about the demand side because actually in the industry, I think there is a lot of inventory on -- I think on most of the value chain, including poly, wafer cell and the module. And I think from your balance sheet, I think your third-quarter inventory level also higher than second quarter. So can you maybe share with us what your inventory for poly and the wafer at the end of the quarter?

So right now, the inventory for poly was probably 2 to 3 times more than what we would like it to be, let me put it that way. But then what it is normal low level that we were used to having. But now, that inventory level has returned to, for example, the level that we were seeing in the Q2 of 2016. So they have completely normalized. And same for wafer.

So I think in the second half of September, the volume movement in the entire market was very low, actually, so there actually wasn't an impact to this.

(technical difficulty).

No. It only represents maybe 1.5 weeks' of inventory, something like that.

So 1.5 weeks for poly?

Yes. In term of finished goods, no more than [two weeks].

So in Q3, you see the inventory of poly is slightly higher. There are several reasons. One of the reasons is because in October, we know that we were shut down at least about three weeks for maintenance. And so during that time, we need to continue provide some of our poly to our key customers and so we keep the shipment. It's not sell immediately to some wafers because as you know, our poly would divide by several categories, especially for basically a (inaudible) as a mono wafer versus multi wafers.

So we [kept] some inventory for -- especially for mono-wafer customers. They are taking the material according to schedule. They don't buy that time because that time, remember, the prices are going unreasonably lower so people don't want to buy until they will -- they hope like October price even lower.

So we keep that material for those customers. As a result, actually in October, we sell those materials; actually price is high.

Higher price because price came back.

So it's not like we cannot sell. If we want to sell low price to multi-wafer customers, I think we can sell in the September. So that's the situation, I tell you. It's not like we cannot sell to our demand.

And as you know, demand and pricing is linked. If you sell very low price, you always can sell it, but we didn't choosing that way so for our point of view.

And secondly, some (inaudible) is the mono wafer. We need a shipping according to schedule. They took the -- a certain amount every few weeks. So that's what we're doing also.

So it's a little bit more complicated than one product like multi-wafer customers you can ship to anywhere, any time. So the inventory control is little bit easier. Right now it's slightly complicated. But if once we stabilize with a percentage of mono-wafer application raising our total polysilicon production, I think that would be stabilized to future, yes.

That's very helpful. Thank you.

Wangyang, CICC.

I just have two questions. One is about the cost. I see (inaudible) third Q, and I want to know how much is due to exchange rate. On (inaudible) depreciation, how much is due to maybe a power tariff cut? Or what is the reason behind the cost reduction for third Q?

Okay. A very good question.

If we could just talk about full year, three quarters from Q1 to Q3, we did a -- Ming did a basic calculation around 10% reduction for costs in dollar basis, in US dollar basis, if you count RMB is about 8%, so roughly like only 2% for a currency basis.

Now I'm saying is as September 30, after September 30, the actual exchange rate further change, so we expect in Q4 more maybe the US dollar basic cost impact [will be even more]. Obviously we don't know that yet until December.

But in the three quarters, the majority cost structure reduction is based on RMB-based reduction. Is about 8%, which is very significant, because during that time our hydrochlorination process is getting more stable, and efficiency gets maximized. So that's not the surprising so from our point of view.

If you look that even in Q3 we put a number there is we -- the majority is because the volume increasing. We achieved more than our nameplate capacity. So the depreciation cost is ahead of cash cost; reduction is like 8% to 7%. That's like so -- that's the basic --

To answer your question, is the majority -- 2% is from -- reduction is from the exchange rate change, and 8% is the real -- the structure, cost structure reduction for RMB basis.

So just to follow up on Dr. Yao's comments, so for example, in terms of electricity usage, so our power tariff rate didn't change, but in terms of utilization of electricity, the amount of electricity per kilogram, that's reduced by more than 7% in terms of kilowatt hour that's being used. So I think that's a significant saving that we achieved just on the cost, the production cost for the electricity usage.

And also, we reduced amount of -- that we use for silicon metal as well.

Thank you. Very impressive cost reduction. And I want, just want to be sure that in 3Q you produce more than you assume and I want to know whether you increase your inventory to have a better delivery 4Q.

Two things. One, so you're talking about produced and shipment is a -- because the -- I think that the shipment is -- we still have the internal use of polysilicon so (multiple speakers).

Yes. [I get it] increased a lot.

You mean inventory, or talking about --?

No. I mean that because the -- in a tough time, and if I divide that internal usage by wafer, (inaudible) maintain a stable level, but (inaudible) a number (inaudible) become much larger, because as you lower your wafer shipments, which means that you lower your internal use, but actually, you produce more than your shipments.

So, yes. So, right. So from previous question mentioned by [Shen], also we answered that. The inventory in the Q3 is slightly higher than Q2, and also, I'm answering you is the shipment is not only the inventory, it's also reflected some internal usage.

So internal usage of past inventory by end of Q3 and plus the shipment should be equal to production.

So that's my answer is, yes, you're right is the inventory by Q3 is slightly higher, and some of it is because the market conditions. We don't want to sell in the very low price because in the very short period of time, the prices hit the very low position.

So we believe that's very temporary, which is true, and proving we are right. So we sold all this inventory in October during our shut down for maintenance time. And right now, our maintenance has become normal --inventory, I mean. Inventory has become normal, yes.

Okay. So the inventory is polysilicon or wafer?

Both.

That time it's both, and the wafer price, as you know that the [highest] is, including the VAT tax, is about RMB6/RMB6.5, and the low point is below RMB4. So basically, a lot of people sell under the cost so we are not competing with those suppliers.

So we kept some wafers, and actually, we sell in October time when the price is much higher than in September, so which, again, which is the right thing to do. And we are not competing irrationally with other competitors for low price bidding for the contract. And so you will see the normal -- we're expecting the Q4 inventory will return normal.

Yes. So, if we see a normal inventory level in 4Q, which means that we should see higher delivery in terms of poly or wafer? Because actually, you sold more inventory in 3Q and you said that inventories are recovered and so the 4Q inventory should [revert] to maybe Q2. So we should expect more I assume in Q4 does that mean?

Yes, you're right. So relatively, if we want to back the inventory for wafer and the polysilicon normal, we will ship more than we produce in Q4. Yes, you're right.

Okay. So which part do you sell more? Polysilicon or wafer? You sell more wafer or you sell more polysilicon?

Both. Okay. So it's polysilicon volume is much bigger compared with wafer manufacture capacity-wise in watts. But both will sell more, because if you are achieving low inventory, we have to sell more materials than we produce then in Q4, yes; both for wafer and polysilicon. That's our target for Q4, our planning.

Okay. So under these conditions, so we still guide about 2,200/2,300 poly shipment under this condition because, actually, we inventory more? We have more inventories, so assuming in 4Q should be higher than production, so in this case.

You mean the range of our shipment, right?

Yes.

So because we're counting, for example, about 2,000 -- because we still include our internal polysilicon usage for wafer manufacturing.

And then Q4 is impacted by our annual maintenance. So we have --

Yes, I know. So maybe, in other words, so how much in terms of polysilicon tonnes, how much you have across the inventory? Enough for tender? How much in terms of tonnes in the poly you store?

We say poly to draw down between 100 to 200 metric tonnes of polysilicon inventory.

Between 100 to 200 metric tonnes.

200 metric tonnes, yes.

200 metric tonnes. Okay?

On the higher end, yes.

Okay. Thank you.

Yes. Around the four days, that's four days' production because we only count in last few days as it's maybe we cannot accurate to like -- minimum would be two days because we cannot always shipping out quick enough, but we try to maintain minimum inventory by Q4.

Okay. Thank you. That's all my questions.

And this concludes our question and answer session. I'd like to turn the call back over to the management team for any closing remarks.

Thank you again for joining the call today. Should you have any further queries, please feel free to contact us.

Thank you and bye bye.

And thank you, sir. The conference has now concluded and we thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.