Emeren Group Ltd (SOL) 2018 Q1 法說會逐字稿

Hello, ladies and gentlemen. Thank you for standing by for ReneSola's First Quarter 2018 Earnings Conference Call. (Operator Instructions) Please note that we are recording today's conference call.

I will now turn over the call to Mr. Ralph Fong, Director of The Blueshirt Group Asia. Please go ahead, Mr. Fong.

Thank you, Carina, and hello, everyone. Thank you for joining us on ReneSola's conference call to discuss first quarter results.

We released first quarter 2018 results earlier this -- earlier today, and they're available on the company's website as well as from newswire services. You can also follow along with today's call by downloading a short presentation available on the company's website at renesolapower.com.

On the call with me today are Mr. Xianshou Li, Chief Executive Officer; Mr Xiaoliang Liang, Chief Financial Officer; Mr. Doran Hole, Group Vice President of Strategy; Mrs. [Jessie Jang], Director of Financial Reporting; and Mr. Johnny Pan, Director of Investor Relations.

Johnny will read Mr. Li's prepared remarks regarding ReneSola's operating highlights, and Mr. Liang will then review our first quarter 2018 financial results.

Before we continue, please note that today's discussion would contain forward-looking statements made under the safe harbor provisions of U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company's results may be materially different from the views expressed today. Further information regarding these and other risks and uncertainties is included in the company's annual report on Form 20-F and other documents filed with the U.S. Securities and Exchange Commission. ReneSola does not assume any obligation to update any forward-looking information.

Please note that, unless otherwise stated, all figures mentioned during the conference call are in U.S. dollars.

With that, let me now turn the call over to Johnny, who will translate Mr. Li's prepared remarks. Johnny?

Thank you, Ralph. So following Mr. Li's prepared remarks. Thank you, everyone, for joining our call this morning. We appreciate your interest in ReneSola.

To get started, I will provide the summary of our Q1 financial performance and then review our operating highlights. Then I will make some brief comments on the recent policy change in China solar market. I will then turn the call over to Xiaoliang Liang, our new CFO, who will cover financial results for the first quarter and provide guidance for 2018. We will then open the call to Q&A.

First, I'm very pleased to present our Q1 financial results. We reached our revenue guidance a couple of weeks ago to a range of USD 40 million to USD 45 million, up from original guidance range of USD 30 million to USD 35 million, Q1 revenue came in at USD 44.8 million. Operating income grew 20% sequentially, and the net income increased over 200% from Q4 2017. Overall, we are very pleased with our Q1 results.

Now let me turn your attention to our Q1 operating results. Our solar power project pipeline remained strong at around 1.1 gigawatts, of which 748 megawatts are late-stage projects. We continue to execute our downstream strategy to pursue opportunities in small-scale solar projects in diversified origins. In Q1, we installed 6.3 megawatts of rooftop projects in China and 6.8 megawatts of ground-mounted projects in North Carolina, and recognized revenue from the sales of utility projects of 18.5 megawatts in the U.K.

Following Q1, we announced today the closing of sale of our utility-scale projects located in North Carolina to New York-based Greenbacker Renewable Energy Company. Greenbacker is a publicly registered non-traded liability -- non-traded limited liability company that owns and operates a diversified portfolio of renewable energy power plants, energy efficiency projects and other sustainable investments. The North Carolina project has a capacity of 6.8 megawatts and represents ReneSola's second largest -- second project sale to Greenbacker. We completed the first project sale to Greenbacker in April of 2017.

ReneSola currently owns and operates 230 megawatts of solar assets. Our assets are geographically diversified, providing us with attractive risk profile. Of the 230 megawatts of assets, we operate 193.6 megawatts of rooftop projects in China, 15.4 megawatts in Romania and 4.3 megawatts of rooftop projects in the U.K. We now have approximately 28 megawatts of China rooftop projects under construction. We anticipate adding 100 to 150 megawatts of rooftop projects in China this year.

We have a robust pipeline of future projects across different geographic regions in various stages of developments. Our late-stage pipeline features 748 megawatts in the U.S., Canada, Poland, France, Hungary, Spain, Turkey, India and China. 156 megawatts of projects are under construction.

Our early total pipeline features power projects around the world, bringing total capacity to approximately 1.1 gigawatts. In addition, we are actively pursuing opportunities in new markets, including South Korea and India.

Now let me turn your attention to our downstream efforts in several key geographic regions. First, China. The rooftop market in China has been a solid and lucrative opportunities for us. Rooftop solar provide steady cash flow and attractive IRRs. We'll now have approximately 194 megawatts of rooftop projects under operation concentrated in a handful of Eastern provinces with attractive development environment, including Zhejiang, Shanghai and the Jiangsu province. Those are the most developed regions in China. The commercial and industrial electricity price in those provinces are very high. And the electricity off-takers are initially credible enterprises, making self-consumption/DG projects in those provinces attractive real [asset] investments.

In the first quarter of 2018, we installed 6.3 megawatts of rooftop projects in China. After the recent policy change in China solar markets, we still produced unsubsidized net metering and self-consumption projects, especially those commercial and industrial rooftop with a high PPA price where we are continuously attracted. As I mentioned earlier, we anticipate adding 100 to 150 megawatts of solar rooftop projects in China in 2018.

On the financial front, we have developed a solid relationship with a number of financial institutions to fund the projects. In May 2018, we closed an equity investment agreement with a strategic investor. The investor invested RMB 200 million in cash to acquire 14 -- 40.13% of ReneSola's China DG protocol, the company's subsidiary that holds the DG projects in China. Beyond this partnership, we are also actively engaging other potential strategic investors to fund our IPP business in the attractive China DG market. We would like to jointly own our attractive China DG assets with strategic investors, so that we can leverage our development expertise and continuously contribute as project developer and operation and maintenance service provider.

The U.S. remains a large and important market for us. We have approximately 189 megawatts of late-stage projects, of which approximately 45 megawatts is community solar in multiple stage, including Minnesota, Maryland and New York. On top of that, we are pushing -- pursuing small utility scale projects in Utah, Oregon, Washington, Texas and California. As we mentioned in today's press release, we recently sold our 6.75 megawatts North Carolina project to Greenbacker and expect to recognize revenue in Q2.

In addition, earlier this week, we entered into a third agreement with Nautilus to sell our 13.5 megawatts community solar projects in Minnesota. Our first project sale of 13.3 megawatts to Minnesota projects to Nautilus was in August 2017.

In Canada, we have 17.3 megawatts of late-stage projects, 7 megawatts of which are under construction and shall connect with the grid by the end of 2018. This 7 megawatts of projects are eligible for the FiT3 scheme in the country.

Next, let's talk about Poland. As we discussed in previous earnings call, last year, the government auction awarded us 55 megawatts of projects, each with (inaudible) to 1 megawatt. These projects are under construction and shall be connected to the grid later this year.

On the financial front, we have secured a [future] financing from Sequoia Economic Infrastructure Income Fund for 55 megawatts of projects, totaling EUR 36 million.

In Turkey, we currently hold 50% of proceeds generated from our pipeline of projects totaling approximately 110 megawatts. As of Q1 2018, the company had 10 megawatts of completed projects, which are currently in the sale process. We intend to sell the remaining interest in Turkish pipeline and exit Turkish market.

In France, in Q1, we formed a strategic partnership with Green City Energy in order to jointly develop 4 solar parks in the South of France with a total installed capacity of 69 megawatts, which will generate approximately 105 million kilowatt-hour of solar power per year. In addition, we were awarded 16 projects with a combined capacity of 4.65 megawatts in Q1, bringing the total project pipeline to 73.7 megawatts in France.

In Hungary, we continuously invest in small-scale DG projects. We secured a project pipeline of 42.6 megawatts, which are currently under construction. The project portfolio in Hungary comprises a number of microprojects, each with a size of 0.5 megawatt. This fits well with our overall downstream strategy to pursue opportunities in small-scale projects. In addition, we are working closely with investors and with local banks to secure future financing for those projects.

In recent months, we successfully entered the India solar market and secured a project pipeline of 22 megawatts, which are self-consumption projects with long-term PPA in place, backed by top-rating commercial and industrial off-takers. We are very excited about the large market potential in India commercial and industrial DG market. We are confident that we are able to replicate our success in China DG market in India.

Beyond those geographies I just mentioned, we are actively pursuing opportunities in other international markets, including Spain and South Korea. For instance, in Spain, we have a pipeline of 162 megawatts. As you can see, we have a geographically diversified project portfolio, and I'm very excited about the opportunities we are pursuing.

Before we move to next section, I would like to take a moment to comment on how the recent policy change in China solar market affect our business outlook. We believe the most severe impact will be to solar manufacturing [utilities] . And we believe our business in China is somewhat insulated from the most negative impact because our project portfolio is mostly net metering or self-consumption. We expect our existing projects to continue to receive subsidies to which they are entitled. We expect our future projects to benefit from a likely significant decline in prices for equipment and construction in second half of 2018. Lower equipment costs and a stable electrical rates will enable us to finance unsubsidized net metering and self-consumption projects at greater parity with reasonable rates [are working].

On the other hand, China DG is only one driver of our growth. Our China business complements our extensive pipeline of high-quality projects around the world. We currently have a global late-stage project pipeline of 748 megawatts, only 10% of which is China DG. More importantly, our pipeline in Europe represent almost [60] % and our U.S. pipeline represents more than 25%. We anticipate significant declines in the module prices that will benefit our overseas projects by increasing returns and, thus, projected values.

From a market opportunity standpoint, we also have tremendous growth in global solar project development, mainly derived from distributed generation, community solar and other small-scale solar projects. In 2017, new installed PV capacity in Europe grew by more than 20% on a year-over-year basis. 2/3 of the growth was contributed by small-scale private and commercial PV systems. There are several reasons why [distributed] generation are experiencing higher growth than large-scale utility projects.

First, small-scale DG projects are supported by the government in (inaudible) jurisdictions, including China, Poland, Turkey, Canada, Hungary and so on.

Second, compared to last year utility project, small-scale DG projects are usually secured with higher PPA price and, thus, bringing higher returns. So small-scale projects, especially rooftop projects, show more flexibility compared to ground-mounted projects, as the electricity generation from those projects can be sold to end-users directly in load centers with less transmission loss. ReneSola, as an experienced global project developer, can leverage its development expertise in this niche market.

Before I turn the call over to Xiaoliang, I would like to reiterate our business model and strategy.

In China, we'll implement an IPP model for DG projects to jointly own DG operating assets with strategic investors and to leverage our development expertise. We will focus on developing unsubsidized net metering and self-consumption projects with high-quality rooftop and a top-rating commercial and industrial electricity users in more developed Eastern provinces. Importantly, China DG is only one driver of our growth. Our China business complements our extensive pipeline and high-quality projects around the world.

Overseas, we'll implement an asset-light projects development model. We'll (inaudible) project rights at (inaudible) stage of build and transfer project after grid connection. We have achieved a very high gross margin in the project rights sale. We expect our overseas business to benefit significantly from decline in module prices, resulting from those policy change in China. ReneSola has steadily built business momentum since the divestiture of manufacturing business, and we are confident that growth can continue.

In summary, downstream projects represent a lot of opportunities globally, and I'm excited about the opportunities ahead of us. We believe that our talented team, diversified geographic coverage and a record of accomplishments will continue to position us for a profitable growth.

With that, let me now turn the call over to Xiaoliang for comments on our financial performance. Xiaoliang?

Thank you, Mr. Li and Johnny. And thank you, everyone, for joining us on the call today. This will be my first exposure to many of you, and I look forward to meeting and speaking with all of you in the near future. And we encourage you to reach out as appropriate. I'm very excited about joining ReneSola. I'm very familiar with the company, its leadership and the opportunities and (inaudible) before us.

As of January 1, 2018, we adopted the new revenue recognition policy, ASC 606, revenue from contracts with customers using the modified retrospective method in accordance with U.S. GAAP, ASC 606. As a result of adopting ASC 606, the company recognized that the cumulative effect of initially applying the revenue standard has an increase of approximately USD 0.87 million to the opening balances of retained earnings. The adjustment primarily arose from the timing of revenue recognition of: first, subscription service fee in the sale of project assets rights; and the second, the price of modules and the inverters and the cooperation arrangements with the counterparty. Under ASC 360, real estate sales and ASC 605 revenue recognition, subscription service fee in the sale of project asset rights and the revenue related to modules and inverters supplied under cooperation agreements -- arrangements are considered contingent and, therefore, the top portion of revenue is not recognized until the contingency has been removed. That is upon having the right to receive the subscription fee and the achievement of COD or upon the ultimate sale of the project assets under the cooperation arrangements. Upon adoption of ASC 606, subscription fee is recognized over time as a separate performance obligation, and the revenue of supplies of modules and the inverters is recognized upon the delivery with the control transferred and the company has right to payment. In addition, the company had a sale of project asset with a right of return if certain conditions are not meet -- met. Under the ASC 6 -- 360 real estate sales, revenue was not recognized because of the [contingency] consideration. Upon adoption of ASC 606, revenue was not recognized because of this substantive return rights, and the company was not able to assure return was not probable as of December 31, 2017. As such, deferred project revenue as of December 31, 2017, in the amount of USD 21 million would have been classified as a refund liability, and the corresponding deferred project costs would have been classified as the company's right to recover product from customers on settling the refund liability. Such refund liability is recognized as revenue totaling USD 22 million with an increase due to final price adjustment in the first quarter of 2018.

With that, I will now review our financial performance for the first quarter of 2018 and discuss our outlook. Let's first turn to our income statement. For the first quarter, revenue was USD 44.8 million compared to USD 64.8 million last quarter and USD 0.2 million in the same period last year. Q1 revenue also compares to the updated guidance range of USD 40 million to USD 45 million.

Now let me break down our Q1 revenue by segments. Revenue from the Project Development business during the quarter was USD 31.8 million as we recognize the revenue from sales of the utility projects of 18.5 megawatts in the U.K. Revenue from the EPC business was USD 8.7 million. We recognized the revenue from the provision of EPC services of 15.8 megawatts in China. Revenue from the sale of electricity was USD 4.2 million.

Gross profit was USD 8.4 million compared to a gross profit of USD 6.8 million in Q4 2017 and a loss of USD 0.2 million in Q1 2017. Gross margin was 18.7% compared to 10.5% last quarter, primarily due to improved margin from overseas Project Development business and EPC business in China.

First quarter EBITDA was USD 9 million, up 94% from Q4.

Now let's turn our attention to our operating income. For the first quarter 2018, operating income was USD 5.9 million compared to an operating income of USD 4.9 million in Q4 2017, and operating losses -- loss of USD 1.5 million in Q1 2017.

Operating margin was 13.1%, up from 7.6% from Q4 2017.

First quarter operating expenses were USD 2.5 million, up from USD 1.9 million last quarter and from USD 1.3 million in the same period last year.

Sales and marketing expenses in Q1 was USD 0.1 million, down from USD 0.6 million in Q4 2017. General and administrative expenses was USD 2.4 million, up from USD 1.7 million in Q4 2017 mainly due to the increased salary expenses associated with additional new hires.

Below the operating line, first quarter nonoperating expenses totaled USD 0.4 million. This includes interest expenses of USD 1.5 million and foreign exchange profit of USD 1.1 million. The ForEx gain was mainly driven by the appreciation of euro against the U.S. dollar and the South Korean won. Income before tax and noncontrolling interests for the first quarter was USD 5.4 million compared to an income of USD 2 million last quarter and a loss of USD 3.2 million in the same period -- same quarter last year.

Net income was USD 5.4 million compared to an income of USD 1.7 million in Q4 2017 and a loss of USD 3.2 million in Q1 2017.

Now the balance sheet. We had cash and cash equivalents of USD 10.9 million as of March 31, 2018, compared to USD 13.4 million as of December 31, 2017. Long-term borrowings were USD 32.7 million as of March 31, 2018, compared to USD 32.5 million as of December 31, 2017. Long-term [failed] sale-lease back and capital lease liabilities associated with the financial leasing payables for rooftop projects in China was USD 78.2 million as of March 31, 2018, compared to USD 67.5 million as of December 31, 2017. The increase were -- was mainly due to the [corresponding] growth of the company's DG operating assets.

Finally, let's conclude with guidance. For the second quarter of 2018, we expect our project business generate revenue in the range of USD 20 million to USD 30 million and overall gross margin in the range of 20% to 25%. We also expect to connect 15 megawatts to 20 megawatts in DG project in China and to monetize 6.8 megawatts projects in the international markets.

For 2018, we expect to generate revenue in the range of USD 130 million to USD 140 million with overall gross margin in the range of 20% to 25%. We intend to connect 100 megawatts to 150 megawatts of DG project in China and to monetize 80 to 100 megawatts project in the international markets.

With that, we would now like to open up the call for any questions that you may have for us.

(Operator Instructions) Our first question comes from the line of Justin Clare from Roth Capital Partners.

So first off, I wanted to start off with the recent policy changes in China. So it looks like only 10 gigawatts of DG projects will be able to access the national subsidy in 2018, and it looks like the 10 gigawatt limit has already been reached. I was just wondering how the policy changes have affected your pipeline because it looks like some projects may have fallen out. So if you could just give us a little bit more color on that.

(foreign language)

(foreign language)

Mr. Li just said, so new provision in China has really severe impact to the whole industry. But the reality is that the projects new -- with new permit would -- so projects with new permits after May 31 will not receive subsidies. But if the projects gets permits before May 31, they still have subsidies. So the benefits is that the DG industry will have great parity faster. So it's a good news for commercial and industrial rooftop projects. The second -- the price -- so module price will decline in the second half of 2018. And so commercial and industrial rooftop projects will reach good parity sooner.

Okay. So then considering that of the 100 to 150 megawatts you plan to connect in China in 2018, can you share how many of those projects you expect to receive the subsidies for? And how many of those won't be subsidized, at least, on a national level?

(foreign language)

(foreign language)

Justin, Mr. Li said that before May 31, we already connected DG projects around 20 to 30 megawatts. And we also have 30 megawatts under construction. Those around 50 to 60 megawatts will have the national subsidies. So for the remaining, we probably need to do unsubsidized net metering and self-consumption projects at greater parity.

Okay. Got it. And then if we could turn to the impact the policy has had on costs. Can you just talk through your -- how much have you seen module prices change and then other equipment costs? What is the impact then on your overall cost structure that you have seen so far? And then how much lower do you think cost could get in the second half of the year?

(foreign language)

(foreign language)

Justin, so system cost at May 31 was around RMB 5.5 per watt. So now, the system price is RMB 4.5. And by the end of the year, we're expecting RMB 4 per watt.

Okay. That's a pretty significant decline. So considering the decline in the cost structure that you expect, can you update us on what your expected project IRRs will be as we move through the year?

(foreign language)

(foreign language)

Justin, Mr. Li said if the system cost at RMB 5.5 per watt and the project with subsidies, the IRR shall be identical with the situation that if the system cost is at around 4 to 45 -- RMB 4 to RMB 4.5 per watt without subsidy.

Okay. Great. So next year, I wanted to shift to the -- to your guidance. So I was wondering if you could share the expected revenue mix between electricity sales, project sales and then the EP business for both Q2 and 2018.

(foreign language) So Q2 project development will take around 40% of the whole revenue and the IPP business will take around 30%. EPC business will take another 30%. And for 2018, project development will take around 65%, IPP business will be around 20% and EPC business will be around 15%.

Okay. That's very helpful. And then just one final question I had here. Given the changes in policy in China, has there been any change in the financing environment? Are you still able to access debt financing for your projects? And have the borrowing costs changed at all?

(foreign language)

(foreign language)

Okay. Justin, Mr. Li said, earlier this month, June, financial institutions, like financial leasing companies say they're evaluating the projects and they are being conservative in earlier this month. But since last week, they start to recover, and Mr. Li thinks they will recover more in first quarter.

Your next question comes from the line of [Bing Wang].

And my first question is, what is the company's strategy in U.S. market? And how do you differentiate yourself with other project developers in U.S.?

Okay. (foreign language)

So Mr. Li said, for U.S., because it's recently a lot of changing policy, such as 201 and 301, so he's a little bit conservative about U.S. So in the U.S., we intend to sell our project rights and is -- [to greater connected] projects. And Doran -- maybe Doran would like to provide any other comments. Doran is our CEO of North America. He's online.

So thank you, Johnny, and thanks for having me on the call. Just a couple of quick comments about the U.S. market and the way that we approach it versus other developers that are active in the U.S. market. Our approach in the U.S., we are quite a bit more calculated in terms of project acquisitions or greenfield opportunities when assessing whether to bring projects on a pipeline or pursue projects in a particular market. We are, as our slides show, very active in pursuing community markets in Minnesota. We have greenfield opportunities that we are working on in New York. And we are keeping our eyes very closely on other markets where community solar is popular and is emerging, like Illinois. These are strategic decisions of ours based on the level of project revenue and our own pedigree in terms of experience in developing small-scale projects at a low cost. The second point I would make actually does relate to cost. We are, I think, also differentiating ourselves by virtue of how we approach cost controls as it relates to spending money on vendors, on service providers, on even our own advisers where we do try to introduce some cost tension in the -- into the equation to keep our cost low. So I think, between those 2 elements, that's really the -- where the strength of our business in the U.S. comes from.

Okay. So can I ask my second question?

Yes.

Could you briefly introduce a little bit of the U.S. team setup?

Johnny, I'll take that. So I -- we have a staff, and we're currently adding a few additional folks in the U.S. to fill out the team on the finance and M&A side. We have a team of 3 people who manage the sales and financing of our assets. On the development side, we have a group of developers peppered around the country who work in their respective jurisdictions. Those are in California, Florida, the Northeast, Minnesota, Texas. And then in supporting that, we have a team of engineering staff as well as project management staff to actually do the nuts and bolts of project development to bring projects through to the NTP. The total staffing count is probably going to be close to -- in the high 20s by the time we finish filling the last few slots. That's the broad overview of the staffing that we have here in the U.S.

Okay. Great. My second -- sorry, my third question is, how do you anticipate the potential growth for community solar in U.S.? And do you see it will continue to grow? Or will it be affected by the 201 that would increase the price for modules and other solar equipment?

So my expectations are that the community solar market, overall, in the United States will continue to grow. There are conversations taking place at local political levels and multiple jurisdictions. When you read the news, you'll hear about local politicians talking about introducing community solar in places like North Carolina and Oregon and Michigan and Texas even. Even though those programs haven't taken off in a large scale like they have in, for example, Minnesota or New York, the expectation is that those formats will continue to emerge in other jurisdictions. And this is generally driven by local policy and local politics. And as that is the case, the incentives provided by those local jurisdictions will largely influence the overall economics. And frankly, I believe they'll influence the overall economics far more than the 201 petition results have impacted the economics. As Johnny and Mr. Li explained, with the change in the strategy for the Chinese incentive programs creating some overcapacity, and there's been quite a bit of publicity about this, the expectation is that module prices will again fall and that will create a -- an additional benefit on the development side for developers like ReneSola who are developing projects from the very early stage of acquiring site control through to when a project is [shoved already] , and we monetize or sell the projects at that point in time. But -- so the 2 issues that you mentioned are somewhat disconnected. One relates to overall cost per project applied, more or less, across our entire development portfolio. The other relating to the growth of community solar, which I do expect it to grow, in one way or another, in multiple markets in the U.S. over the next several years.

I just like to comment one point. The module price decline -- significant decline for module price will also offset [to align impact] , as Doran just mentioned.

(Operator Instructions) Your next question comes from the line of (inaudible).

And I just have 2 questions. And the first one is what's our [patent] model in Europe? And is it similar to the one in U.S?

It's very similar, but still some difference because in Europe, we are more straightforward. Because we don't need tax equity like we do in the U.S., the project structure will be much easier. This give us more flexibility. And the project financing terms in most European jurisdictions are also very attractive comparing to those of emerging market. We are able to finance higher percentage of CapEx through project financing. So we just need a very few amount of equity commitment to own grid-connected projects, which allow us to own partially grid-connected projects instead of selling whole projects at 100%. We are now talking with several potential investors to jointly own grid-connected projects that we would have sold to investors. In 2018, we have approximately 100 megawatts in Europe to be connected to the grid, mainly our projects in Poland and Hungary. By monetizing those projects, 100% or partially, we cannot only recycle [or try to invest] into more projects, but also retain some interest in grid-connected projects with our strategic investors. And also, the recent new provisions in China solar market, as I just mentioned a bit earlier, they have really significant impact on the module price that substantially improve our project return. For example, USD 0.05 decline in module prices would increase our project gross margin in Europe by 4% to 5%. More so, our Hungarian projects and Polish projects would directly enjoy such benefits.

[Okay. So do we have any range of the gross margin] for the quarter in Europe?

(foreign language)

(foreign language)

Okay. We're targeting more than 20% for gross margin for our European projects. That -- this includes our development margin and EPC margin. And importantly, we are a project developer. Our development expertise and experience allow us to invest in early project development stages, where it may be risky for other investors who are more comfortable in buying grid-connected projects, such as asset management firms, but we can systematically mitigate risk [as a way of how] we operate our business.

Your next question comes from the line of Paul Strigler from Esplanade.

Can you just share with us sort of broad brush sort of what your balance sheet will look like if you hit your 2018 guidance? I noticed that your sale-lease back liabilities increased quarter over quarter, I think, because of your China DG assets deployment. But also your short-term debt increased quite a bit. Just trying to figure out what your capital structure looks like if you do deploy the, call it, 125 megawatts of China DG and build and sell the 90 megawatts of IPP assets.

Okay. Do you want leverage ratio, something like this?

No. Just sort of how much -- I guess, looks like your cash is generally stable if you add up the restricted and unrestricted at about, call it, $13-ish million. So I guess, if you just look at the debt side, including the sale-lease back liabilities, what is -- what does that look like around year-end?

Okay. (foreign language)

(foreign language)

(foreign language)

(foreign language)

Mr. Li just said, in Q1, our leverage ratio is around -- slightly over 17%. But in Q2, because we have a strategic investor who invested in our China DG [holdco], so that bring our leverage ratio down to around [6% to 8%] in Q2 and that's what means...

(foreign language)

And Mr. Li also comments that in most of the major markets, like U.S. and Europe, develop -- the project financing is very easy to access. And we also secured the development loans and also construction loans. And we can also -- to get finance from the equity side in -- like what we do in our China DG markets. We can -- there are some interest of our projects to investors and the -- we're not -- we don't actually need financing from the [listed] entity level at the moment.

And then just one last question on the -- it looks like you guys plan to deploy about 70-or-so megawatts of unsubsidized grid parity China DG largely in the second half. Are you -- are those contracted? Or are you seeing increased competition in the China DG space now that the subsidies have been capped? Are you seeing other sort of DG developers coming in with aggressive bids to win new business, aggressive discounts to sort of retail electricity (inaudible) pricing? Or are those 70-or-so megawatts already contracted and you've already agreed on the sort of the PPA pricing, et cetera?

(foreign language)

(foreign language)

Mr. Li just commented that since there's no subsidy in the second half of 2018, so it's really a very large market with huge potential. So the electricity price -- commercial and industrial electricity price is relatively stable in the markets and...

(foreign language)

And since we don't need a subsidy, we have more select -- we have more choices for the off-takers.

Understood. Although actually -- isn't China scheduled -- or haven't they lowered the commercial and industrial electricity price this year? Wasn't that part of sort of stimulus of the economy that's actually decreasing? So the price that your potential customers on the DG side would pay, hasn't electricity price actually decreased a tiny bit this year if they were to buy from the grid?

(foreign language)

(foreign language)

Yes. This year, commercial and industrial electricity price reduced slightly a bit around RMB 0.02 or RMB 0.03 per watt -- per kilowatt hour, very minimum.

(Operator Instructions) There are no further questions at this time. Please continue.

Thank you, Carina. Let me make some closing remarks on behalf of Mr. Li. So fundamentals of our projects business has significantly improved over the last few quarters. And we will maintain our commitment to grow in profitability, managing our operations and strengthening our financial positions. We are very excited about the opportunity ahead of us and look forward to providing you with our business update in a few months. Thank you all again for your participation. This concludes our call today. You may all disconnect.

Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.