Earnings Call: Q2 2020

Aug 18, 2020

Good day, welcome to the Daqo New Energy 2nd quarter 2020 results conference call. All participants are in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by 0. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then 1 on your touch-tone phone. To withdraw your question, please press star then 2. Please note this event is being recorded. I would now like to turn the conference over to Kevin He, Investor Relations. 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 second quarter of 2020, 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 Mr. Longgen Zhang, our Chief Executive Officer, and Mr. Ming Yang, our Chief Financial Officer. The call today will feature an update from Mr. Zhang on market and operations, and then Mr. Yang will discuss the company's financial performance for the second quarter of 2020. 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 U.S. 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 statement. 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. 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, Mr. Zhang. Please. Thank you, Kevin. Hello, everyone. Thank you for joining our conference call today. The second quarter of 2020 was a particularly challenging time for the polysilicon industry. Beginning in the later March, the global spread of COVID-19 and the related lockdowns, particularly in the U.S., Europe, and certain emerging markets, resulted in significant disruptions to demand for solar PV products. End market customers delayed module orders and shipments due to uncertainties about the duration and economic impact of the pandemic, as well as logistically challenges. This led to short-term market uncertainty and volatility across the entire solar PV industry during the second quarter. As a result, our major wafer customers also delayed orders and product delivery in the month of April, creating a temporary oversupply in the market at the time. This abnormal market environment with its sharp and sudden drop in demand resulted in significant negative impact to polysilicon pricing for the quarter. Fortunately, the impact was temporary, and the market began to recover in May, with orders and demand normalizing in June, supported by a strong end market in China and abroad. We are pleased that despite such challenges faced by the industry during the period, Daqo New Energy was able to generate positive net income for the quarter, further demonstrating the strength and resilience of our business module and our proven lower cost structure. Towards the end of the second quarter, we began to see very positive momentum in solar PV demand in both domestic and overseas markets, supported by additional capacity expansions by downstream mono wafer customers. This has translated into meaningful demand improvement for polysilicon, which has driven a significant increase in polysilicon ASPs recently. From feedback from customers, their order book for the 3rd quarter is full, and the module order volumes look stronger through the year-end. This strong volume demand has led to a shortage within the polysilicon market. Current market ASPs for module-grade polysilicon are approximately $11-$12 per kg. A significant improvement from approximately $7.5 per kg in the 2nd quarter. Our latest signed customers' orders and contracts reflect these pricing trends. We expect the polysilicon market to be extremely tightly supplied over the coming months, as there will only be very limited additional supply of polysilicon coming online over the next 15 months. While the end market demand for PV solar continues to be strong and growing, and in particular, there continue to be significant new additions of monocrystalline wafer production capacity. In the second quarter, we produced and sold 18,097 metric tons and 18,881 metric tons of polysilicon respectively, exceeding our guidance. We conducted annual maintenance for our manufacturing facilities in the second quarter. However, some technology upgrade projects as well as equipment modification has been rescheduled to August due to delayed delivery of some key equipment and long lead time maintenance parts. This will have some impact on the third quarter production volume. As a result, we expect to produce approximately 17,500 metric tons-18,000 metric tons of polysilicon during the third quarter. We expect to resume to 100% utilization rate in September after the completion of such projects. Our expected annual production volume for 2020 remains unchanged at 73,000 metric tons-75,000 metric tons. During the quarter, we continued to make strong progress towards quality improvement and cost structure. Approximately 95% of our polysilicon production reached mono-grade quality during the quarter. At the same time, we continued to improve our cost structure with further reductions in outage and material usage per unit of production. Despite the impact of annual maintenance during the quarter, we achieved a historically lower cash cost of $4.87 per kg. In particular, we are making great progress in optimizing our process and manufacturing parameters for our new high-throughput polysilicon reactors, improving in production volume per run, and leading to lower unit energy usage. We expect costs to go even lower in Q4 as we ramp back up to full production level. We believe the solar PV market has entered a new phase of sustained growth as a grid parity has been achieved in many countries and regions around the world. Solar PV is one of the very few energy resources which are clean, sustainable, and cost-effective, even compared with traditional fossil fuel power generation methods. It is playing an increasingly important role in meeting the growing global energy demand and addressing critical environmental issues such as climate change and sustainable development. We will continue our commitment to provide high-quality polysilicon products to better serve the fast-growing demand for solar PV energy. Let's move into our outlook and guidance for the company. The company expects to produce approximately 17,500 metric tons to 18,000 metric tons of polysilicon, and sell approximately 7,000 metric tons to 7,500 metric tons of polysilicon to external customers during the third quarter of 2020. For the full year of 2020, the company expects to produce approximately 73,000 metric tons to 75,000 metric tons of polysilicon, inclusive of the impact of the company's annual facility maintenance. Now I will turn the call over to our CFO, Mr. Yang, who will discuss the company's financial performance for the second quarter of 2020. Please. Thank you, Longgen, hello, everyone. Thank you for joining our call today. Now I will discuss our financial performance for the second quarter of 2020. Revenues were $133.5 million, compared to $168.8 million in the first quarter of 2020 and $66 million in the second quarter of 2019. The sequential decrease in revenue was primarily due to lower ASP, combined with lower polysilicon sales volume. Gross profit was $22.7 million, compared to $56.6 million in the first quarter of 2020 and $8.6 million in the second quarter of 2019. Gross margin was 17%, compared to 33.5% in the first quarter of 2020 and 13% in the second quarter of 2019. The decrease in gross margin was primarily due to lower average selling prices for the quarter despite the improvement in production cost. Selling, General, and Administrative expenses were $10.1 million compared to $8.9 million in the first quarter of 2020 and $7.8 million in the second quarter of 2019. SG&A expenses during the quarter includes $4 million in non-cash share-based compensation costs related to the company's share incentive plan. Research and development expenses were $2 million compared to $1.7 million in the first quarter of 2020 and $1.5 million in the second quarter of 2019. R&D expenses vary from period to period and reflect the R&D activities that take place during the quarter. As a result of the foregoing, income from operations was $10.8 million compared to $45.8 million in the first quarter of 2020, and a loss of operations of $0.4 million in the second quarter of 2019. Operating margin was 8.1% compared to 27.1% in the first quarter of 2020. Interest expense was $6.7 million compared to $6.3 million in the first quarter of 2020 and $1.9 million in the second quarter of 2019. EBITDA from continuing operations was $26.8 million compared to $63.1 million in the first quarter of 2020 and $10.2 million in the second quarter of 2019. EBITDA margin was 20% compared to 37.4% in the first quarter of 2020 and 15.5% in the second quarter of 2019. Net income attributable to Daqo New Energy shareholders was CNY 2.4 million in the second quarter of 2020 compared to net income of CNY 33.2 million in the first quarter of 2020 and net loss of CNY 2.2 million in the second quarter of 2019. Earnings per basic ADS was $0.17 in the second quarter of 2020 compared to earnings per basic ADS of $2.37 in the first quarter of 2020 and loss per basic ADS of $0.16 in the second quarter of 2019. As of June 30th, 2020, the company had $115.8 million in cash and cash equivalents and restricted cash compared to $120.8 million as of March 31st, 2020. As of June 30th, 2020, the notes receivable balance was $8.2 million compared to $4.4 million as of March 31st, 2020. As of June 30th, 2020, total bank borrowings were $264.8 million, of which $116.9 million were long-term borrowings, compared to total borrowings of $265.6 million, including $149 million of long-term borrowings as of March 31st, 2020. For the 6 months ended June 30, 2020, net cash provided by operating activities was CNY 47 million compared to CNY 67.8 million in the same period of 2019. For the 6 months ended June 30, 2020, net cash used in investing activities was CNY 60.4 million compared to CNY 145 million in the same period of 2019. The net cash used in investing activities in 2020 and 2019 was primarily related to the capital expenditures of Xinjiang Phase 3B and Phase 4A polysilicon projects. For the 6 months ended June 30, 2020, net cash provided by financing activities was CNY 16.2 million compared to CNY 61.3 million in the same period of 2019. That concludes our prepared remarks. Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. The first question today comes from Philip Shen with ROTH Capital Partners. Please go ahead. Hi, everyone. This is Justin Claire on for Phil today. Thanks for taking our question. Hello, Justin. Hi. I guess first off, you indicated in the release that, you know, ASPs that you're seeing right now are $11-$12 a kilogram compared to $7.50 in Q2. I was wondering, you know, what are you expecting for your overall polysilicon ASP in Q3? Then, could you speak to you know, the demand increase that you're seeing as well as, you know, we've seen an issue with supply with one of your competitors. You know, given what's going on with that dynamic, you know, what are your expectations for ASPs in Q4? Then how long could ASPs actually be elevated? Justin, this is Longgen Zhang. You know, starting, I think, July, I think, basically demand and supply because of downstream, you know, demand is so high. I think as the wafer capacity also continued to increase, especially some company, you know, most of the company want to vertically integrate, including wafer, cell, and module, and to increase the gross margin. Plus, I think, you know, some company, the accidents and the supply should, I think it caused the silicon price dramatically, I think, bounce back. Basically, you can see, I think, the weekly, I think PVInsights price. For example, last week it's back to RMB 98 per kg. We see this situation maybe will continue. Today another news come out because the flood in Sichuan, so maybe another plant, you know, the major player, the plant were temporary stop supply. That's not a major reason. The major reason I think is if you look, you know, the next 15 months to 18 months, we do not think any capacity on the silicon side will come in, increase. The demand we see dramatically a lot of money, you know, jumping into is to push off the grid parity, and we see the wafer capacity expansion is continue going to increase. That's why I think cost supplies come back so quickly. We, for example, I think for this month, for this month, August, because July, definitely I think the price didn't that high, maybe around, you know, RMB 70-RMB 80. This month we're thinking will be around RMB 90-RMB 98. For this quarter, I think, I'm not gonna, you know, to give you the actual figure, but we see, I think maybe the polysilicon price in September will continue to little over RMB 100. I think, you know, for the fourth quarter, I think the price maybe were between RMB 85-RMB 100. Okay, great. That's, that's really helpful. Then I guess, turning to your production, if we just look at your Q3 guidance and then the full year production guidance, it implies Q4 production of, I think about 18.4 thousand metric tons, at the midpoint. In Q1, you were able to produce, you know, 19.8 thousand metric tons. Just wondering, you know, given the elevated level of pricing, do you have any ability to reach kind of Q1 levels of production in Q4, you know, and, you know, to take advantage of that pricing? Justin, we always try to make our efforts and to produce more products to meet the, you know, the demand of our downstream clients. In this moment, because for the forecast, we're always conservative. Basically, to answer your question, we will make efforts. Of course, you know, for this quarter, we've given the guidance. You can see that, right? Basically, we always do that in that manner. Okay. Just one last one for me on your cost structure. You know, Q2 cost structure did decrease about, I think 3% relative to Q1. This is despite your annual maintenance and the lower production volume in the quarter. I was wondering if you could just share a little bit about what enabled you to lower costs in the quarter despite the lower volume. Could you give kind of an outlook for costs in Q3 and Q4? You know, I know in Q4 you said you expect costs to be lower, so could you provide any more quantification in terms of how much lower? Thank you. Hello, Justin, this is Ming. Regarding our costs, I think certainly our Q2 costs came out to be lower than we anticipated. Even given the impact of our annual maintenance with the lower production volume, and you could see there's higher contribution from depreciation expense, for example. We were still able to lower our production cost. Really a lot of it come from a reduction in our energy usage. We're making progress in optimizing our process and also improving throughput from our manufacturing facilities so that in terms of energy usage, we're seeing very promising reductions and then that should continue, I think throughout the end of the year. Also a lot of our procurement, because of our scale and our efforts. For example, a lot of the use of other materials, for example, packaging materials and also silicon powder and the graphites that are being used, all those costs are coming down as well. That's also providing additional reductions. The other benefit is coming from our the scale of our facility. I would say Q3, we will look to have probably similar or maybe just slightly lower cost compared to Q2. Certainly, if we look at Q4, we think there's still another probably 3%-5% type of cost reduction even compared to our Q2 level. That's what our current outlook is right now. Okay, great. Thank you very much. I just want to, you know, give you a little more. The cost of goods sold, I think, also partially due to the foreign exchange rate. I think, you know, the RMB, I think, I think appreciate. Okay. Pressure is also come from there. Of course, you know, I think the cost, we will continue to cutting the cost map. You know, major from, one is from, you know, increase efficiency and scalability efficiency. Second is the raw materials continue go down. You also have to consider, you know, like MPS, you know, also maybe price will go up, you know. I think the cost, we will control around, I think, you know, CNY 5.80, you know, maybe CNY 5.60, you know, continue go down, maybe 2%-3% by the end of the year. Okay, thanks. Thanks very much, guys. Okay, thanks, Justin. The next question comes from Gary Zhu with Credit Suisse. Please go ahead. Hello, management for taking my questions. I have 3 quick questions. Firstly, can management share with us your view on the polysilicon price outlook for next year? Secondly, let's say if the polysilicon price stays at relatively high level, would you be concerned that even the low-tier producers may decide to expand their capacities? The last question is quickly on if the management can share with us any update on the on your subsidiary's stock listing. Thank you. Okay, Gary, to answer your question. First of all, and the poly price for 2020, we believe, in 2020, didn't have any new additional capacity come in. Meantime, we can see, especially this time, the polysilicon price, you know, jump up and back. A lot of company right now going to adopt a strategic, you know, policy of vertical integrated, including for example, like JinkoSolar, one of the U.S.-listing company right now, listing in China, A-share. They original didn't have any capacity on the wafer segments. They just announced this Monday. Actually they have some. Frankly speaking, they have like 5-7 GW wafer in Baotou and Tianjin. This time they're going in, I think invest another new project with 20 gigawatts wafer capacity in Tianjin. Okay. You can see, forecast a lot of company, for example, maybe Canadian Solar, maybe I think Trina Solar. All these company, they will touch the mono wafer capacity. Meantime, the major player like LONGi, Zhonghuan, and also Zhonghuan is going to downstream to the, you know, module. Also JinkoSolar also continue to expansion, I think on the wafer capacity. We see by the end of next year, we calculation maybe around wafer capacity maybe around like 270 GW. That's estimated need, you know, the silicon end of the year, around 800,000 tons. That's I think a demand and a supply is totally a lot of gap there. Basically, I cannot tell you the, I think, the exactly polysilicon price. I think next year, the polysilicon price range should be around CNY 85-CNY 95, to answer your first question. Second is, I don't think, you know, in this situation right now, any control any production to control demand, to control supply. Is that your question? You said, you maybe to reduce our capacity to? Expansion plan for the second tier, please. Yeah. I'm sorry. My question is, let's say if the polysilicon price stays high for longer, would you be concerned that even the 2nd tier, relatively low tier, polysilicon producers may seek to kind of further expand their capacities? Okay. Your question, I understand. Okay. As the polysilicon price come back, maybe it will stimulate some, you know, tier 2, tier 3 company continue to survive. I don't think so. The reason is because, you know, A is you still have to keep or continue keep the cost down. Secondly is also the quality of the products. That's the most important. Today, the industry, I think every monocrystalline silicon may be around 85%. The tier 2, tier 3 may be even lower their percentage. Even price come back there, they I don't think they will come back, you know, based on the small production line, will come back to that. They may be will stimulate some, you know, plant to continue to expansion, I think, on the polysilicon capacity. For example, I think Asia Silicon plants, right? They announced they're going to start a new project, I think 30,000 tons, metric tons production, I think to start up. Basically I think, you know, even today, we know the planning, Tongwei have two plants there. I think Yaokui is Asia Silicon maybe 30,000 tons on the way. All those capacity maybe I think around 1,000-10,000 tons or 100,000 tons, maybe I think will be put into production in 2022. Still, I think is not enough to meet the demand. Not meet the demand, I think. To answer your third question, that's why I think we are, you know, planning to do to put our Xinjiang Daqo New Energy as a subsidiary of our listing company of U.S., the Daqo New Energy listed in New York Stock Exchange, go to China stock market. Everything right now is on schedule. We believe, I think, you know, in today stock market valuation, If we can successfully, as we're planning to raise the money, we think, you know, yes, we were starting planning and study to also a certain time, and we will consider, you know, to expansion our capacity. Gary, does that- Uh, can- I answer your question? Yeah. Yes, thank you very much. That's all my questions. No question. Thank you. Great. Thank you. Thanks, Gary. The next question comes from Alan Hon with JPMorgan. Please go ahead. Hi. This is Alan from JPMorgan. My first questions is, I mean, with the recent price hike on the polysilicon side and also the price hike along the silicon value chain into module, how is the feedback by the ultimate customers? I mean, is there any hurdle in terms of, like, downstream PV demand because of the price hikes? Alan, basically, I think, you know, as the consolidation continue going on, yes, in some segments right now, there are some bigger player there. For example, like, wafer segments, I think, LONGi, Jinko, and Zhonghuan, even Shangji and, they are all bigger player right now, okay? In the module segments, I think, you can see that original, like Jinko, Trina, Canadian Solar, even LONGi also is a bigger player. Because we hope in the whole this industry should be, have industry, you know, average gross margin to make this industry very healthy, to continue to expansion, to meet the demand, you know, of the downstream clients' needs. Recently, you know, the fighting maybe between wafer, cell, and module. Yes. Today, I think, the wafer price continue increase, and it squeeze the module, I think, gross margin. I don't think right now today, like LONGi M6, you know, selling price CNY 3.25 per piece right now can make the module, I think, assembling plan player make money. Yes, we see module price also continue maybe back increase. Also, we see some projects with negotiation, even through, you know, I think the history, they already done the bidding system, especially in China. I don't think that will stop the, I think, the downstream installation and all the projects. Maybe will delay some projects. I think that problem is temporary. Finally, I think, the player will come down, I think, you know, to get some certain balance and to stimulate, I think, the demand. I think the problem will cool down in Q4. Gary, let me add a little bit to that. I think if you look at the real downstream market, especially on the project side, because of the current money printing and super low interest rate or even negative rates and where money is so available right now, that, you know, a project that maybe used to require 8%-10% project IRR or double-digit equity IRR now is probably happy with the mid to high single digit type of return to the project. Those projects will still move forward. I think some of the projects really are even not that price sensitive. I think you actually have significant amount of demand, you know, in the market, you know, at a lower yield that's required for these projects to happen. I think that's something that people may not have looked at. If you look at what's happening in California right now with the power outage and, you know, with, you know, the record heat, I mean, people are now probably likely want to put in place solar system even with storage, right. Without regard to the cost of the system 'cause you're now talking about, you know, record heat with no AC. I mean, that's not something that's even sustainable. I think there are definitely markets that would open up, you know, especially I think with the future trends towards climate change as well. I think, Alan Hon, I think, because of the gross margin right now, in each segment is different. Today, especially, I think, wafer segments, mono wafer segments with the high gross margin and module with a lower gross margin. We see some advantage for the bigger wafer player-If they also have some module business, I think they maybe, you know, can continue to vertically into module segments. Meantime, those module player, they also can be reversed back, you know, vertically integrated to touch the wafer segments. That's just, I said, you see like JinkoSolar, they just announced I think a 20 gigawatts wafer expansion. We will see a lot of company like, I think, Canadian Solar, Trina and other company, I think even JinkoSolar continue expansion on the wafer segments. At that time, as the wafer cell and the module segments continue to vertically integrated, I don't think, you know, the fighting will continue like this way. The situation, I just said, within the next 15 months to 18 months, we didn't see any polysilicon production were coming. Even let's say after 15 months, 18 months, I think, you know, Tongwei 2 plants plus, you know, Asia Silicon 1 plant's production line come in still cannot meet, you know, the demand. We, I think also that's why we want to go to stock market as soon as possible. We're working hard and, to certain time, I think, we would announce, you know, what we did. We definitely will in the future, we also will, you know, schedule continue our expansion plan. Thank you. This is clear. I have another question. This is related to what happened along the industry today. From a technical side of things, if we have to shut down poly prime for whatever reason, even with their damage, I understand that it may take some time to ramp back up the production to 100% and also to have the high mono yield output. Generally speaking, how long does it take for existing prime to ramp back up? I think, you know, we, I think, I just only can talk to myself, I think, Daqo, okay? I can't comment on other plant. Other plants, for example, you know, one of the plants in Xinjiang, they have, I think, you know, accidents. I hopeful they can back as soon as possible. I think they also, I think, announced and as some, you know, news they announced that they think it will come back 2 to 3 months. I'm not gonna judgment that, okay? If you look at our guidance, it's very pretty sure, this quarter our production, I think is 17,500, right, to 18,000 metric tons. For example, this month we are around 5,400 metric tons. Even though we are in the manual maintenance and we are, you know, install, update, upgrade some equipments, we still make efforts. We think, in September, we are full capacity running. We very confident and, you know, to back to full capacity running because we think the market demand so high. That's what I say. Even what I think, you know, even today, like Tongwei just announced, I think at Leshan, one of the plants, because of flood, I don't think that will take time. Maybe 2 weeks, 1 week will come back. Got you. Got you. Yep. Thanks. This is clear. Great. Thanks, Alan Hon. The next question comes from Colin Yang with China Securities. Please go ahead. Hi. Thank you, Ming Yang. This is Colin Yang from BOCI. I got 2 questions. The first one is similar to Alan Hon's questions. As you may know, as we may know, some SOEs has already start to renegotiating the module price for already signed competitive orders. As we can see, the polysilicon price has surged by over 50% over past months, but module price is only up by 5%. Do you worry about we're gonna see a extremely weak fourth Q demand in China? In other words, do you expect to see a severe drop in 2020 solar installation in China affected by the rising module price triggered by the polysilicon price? I think, you know, because of the, I think, pandemic situation in China in the first quarter, the second quarter, you know, the globally, I think, pandemic, you know, caused the downstream I think, especially the, you know, the downstream business demand is so weak. That's why I think, in the second quarter, in each segment, you know, I think, the price reduced so very sharply. Even let's say look at the polysilicon price. I think, really there's not too much company make a profit. We are because, you know, the quality, the polysilicon almost more than 95%, and also the cost advantage, scalability. We have some, you know, advantage on the gross margin, maybe 10%-15% better than, you know, the industry average. That's why we make a profit. Other people, even let's say, I think, module sale always go down, right? You can see even wafer also go down. Wafer historically, as a monocrystalline wafer, they have the high, with the high gross margin. I think just like you said, because of, I think, starting end of the July, the polysilicon price come back. Cost, I think, wafer price increased, sale price increased, and the module price definitely I think, you know, slightly increased. I think that's okay. I think the market still can absorb that, you know, slight increase. If the module price dramatically increase, then will cause a lot of problems. One is maybe delay the projects. Secondly is also I think, you know, will reduce the demand of the module. I don't think that's what happened. In the history, it's never happened. The module price go down to certain level, never come back in the history, okay. This time it happened. Why? The module price is too lower. The grid parity, you know, grid parity is there. Look at China, all the projects right now, the bidding. The government subsidy is only like, $0.03, $0.04 per kWh. The projects return still higher. As the interest rate, you know, continue to go down, I don't think, you know, some projects are still think they can absorb, you know, little higher module price. Think about that. Today, silicon cost on a module only around 15%. On the installation of the, you know, the station, solar station, only 7%. I don't think right now silicon is the major cost right now for the module, for the, you know, downstream solar projects. You know, I think, you know, glass, all these, you know, other materials maybe, you know, glass right now is number 1 cost, you know, for the module. I think the market will tell you demand and supply finally will, you know, bounce back. I don't think the market, you know, will be hurt. Temporary, yes. Long term, I think the market will come back. I don't think, you know, even some unreasonable, irrational price of cell or even wafer can sustainable. Understood. Understood. Thank you, Longgen. My second question is about the sustainable gross margin we are expecting, because as you mentioned, there was going to be no effective capacity addition over the next 15 months. Based on our expectation of $85-$95 polysilicon price, the gross margin in next year will be outpacing 50%. Do you think 50% is gonna be a sustainable gross margin for polysilicon? And do you have any updates for the capacity expansion plan? Thank you. Okay. For the polysilicon, I think polysilicon is the, I think, with the high technology and heavy capital investments and the long-term investment cycle. For example, any new entry come in, you know, you need to take at least, you know, maybe, I think right now the 1 year to construction the projects. It's very tough. Even let's say like New Horizon, right? They have the money, they invest polysilicon, but still not successful. What do we believe? I think, you know, because the chemistry industry, I think this industry, the average gross margin should be around 30%, 25%-30%. If the, you know, good player in the industry should be around 30%-35%. Daqo is the one of the, you know, the high quality, low cost player in China. We believe next year our gross margin should be around 35%-45%. Understood. Understood. Thank you, Longgen. That's another question. Great. Thank you. The next question comes from Tony Fei with BOCI. Please go ahead. Hi, management. Thanks for taking the questions. I actually have two questions. First, regarding your ASP side. In Q3, we see the poly price actually increased in a very fast fashion. How frequently do you adjust your sales price, your actual delivery prices to your wafer clients? Is it bi-weekly or half month, bi-weekly basis? That's the first question. Second, regarding your CapEx in Q3, so giving your ongoing maintenance, so what kind of CapEx are we looking, expecting in the third quarter? Thank you. Okay. I answer the first question. I'll let Ming to answer the CapEx next question. Okay? I think for the ASP, okay, original practice, practically right now, what we're doing is we based on the, you know, PVInsights. Usually we every month on the, you know, 20th, we negotiation with our client to determine next month deliver how much, and based on market price, we make the price. Okay? Starting, I think, the July, because the price go back so quickly, we right now almost, I think, 2 weeks to make, you know, to sign a contract. Some clients, they even 1 week, you know, clients to update the price. That's just like because the price changed so quickly, okay? We almost, you know, 1 week, 2 weeks to sign the contracts. I think, you know, when the price become more stable, we're back to 1 month, you know, to sign contract with one of major clients. Those clients may be, you know, in a different time. You know, all I think all our major clients, as you can see, we signed long-term contracts with LONGi, JinkoSolar, as you can see. It's very stable, and as soon as we sign contract, you know, we cannot, we usually we cannot easily to change the price. That's why in July, our ASP is not, you know, basically is not for little lag behind the market. In August, definitely, I think we catch the market. August and September, we were almost matched the, you know, the new price. We think, you know, this quarter, the ASP will higher. We give you current price is around $11 to $12 per kg. I think September the price may be even little higher. Maybe go to $13, $14. It's just I think, you know, should temporary time. In the fourth quarter, definitely come back to normal. I would believe, I think the price should be around CNY 85-CNY 95 is reasonable. Okay. Hello, Tony. Regarding your question for CapEx, new CapEx we will spend on technology upgrade and new equipment installation is only about $5 million for Q3. Total payments will be about $25 million for capital investments, and this would include about $20 million of payments related to our projects, Phase 4A, based on our payment schedule. Okay, great. That's very helpful. Thank you, management. Great. Thank you. The next question comes from Jun Liu with Citi. Please go ahead. Hey, management. Thanks for taking my question. I think most of the question has been asked by the previous analyst. I only have two questions. The first one is that can you guys give us some colors on the maybe the detailed timetables to see our resume production in Xinjiang, our older line, because they have a investigation team to come to Xinjiang to check the safety. I'm not sure whether you can give us maybe update or timeline on that. The second is that, considering the current price, polysilicon price is very high, so, do we think about the I know we didn't have the reply of the capacity expansion yet, but will we, do we think about to maybe not just expand our capacity in Xinjiang, were we seeking some other place or some other province to extend our capacity? That's all my question. Thanks. Okay. I think to answer your first question, I think, right now currently our older plant, there are four production line. Yeah three production line right now is working. Is right now in the production. Only one production line, that's the third production line, annual capacity is 5,000 tons. Yeah the lack of small incident, plus I think. Yeah The equipment is a little lag behind. We are planning. Yeah you know, put it back to production by end of this month, before end of this month. Why not? we give guidance for this quarter is 17,500 metric tons to 18,000 metric tons. This month we think we can manufacturing 5,400 tons. To answer your first question. Second questions is, it don't matter the price, you know, how high, temporary. We consider, we evaluation the whole picture for the next 3 to 5 years. We believe the solar industry is a rich grid parity. We think the, you know, the solar industry will continue to, I think, you know, if without, you know, the pandemic, without, you know, the trade war, I think, the solar industry should dramatically, I think, continue to increase in, you know, in the downstream, the market. That's why we are evaluation every day, okay? For example, in Xinjiang, we already approved Phase 4B. Yeah 35,000 tons projects. It's feasible, it's approved. We are looking other opportunities. Maybe in Zhejiang, near, you know, one of our bigger player, two bigger player right now, the wafer capacity there. We also do right now study. The opportunities and maybe Mongolia, also is the one of the large wafer production center there. We are doing study right now, and it's possible we are in the future, if we decide to extension our capacity, even, you know, abroad, not in China, possible, you know, somewhere abroad. Because we consider the U.S. market in the future, the anti-dumping, maybe including the silicon manufacturing is not, cannot be in China. That's why we do all the study right now. Meantime, we are making efforts right now, just letting you know, to let our Xinjiang plant, you know, go to A-share market, stock market, as soon as possible. To raise more money and to do that. To a certain time, you know, when the you know, all these, you know, is mature, we will announce that. Thanks, Dong. I have actually two follow-up questions. The first is that, yes, you have explained we will back to the production by end of this month. May I ask if we have to get some approval from local government to get the production or we can just assume our production by our own schedule? The second question, as you have mentioned that the solar industry has reached grid parity now, the growth will be very fast. Do we have some kind of strategy or long-term planning that we should have certain market share in the polysilicon, given we are the lower, lowest cost player in this industry? Okay. To the first question, you know, because of another plant in Xinjiang have the accident, the local governments actually asking us to do all the plant, the full production line. Yeah you know, even asking third party to come in to evaluation the safety. The government is already approved all the production meet the safety production criteria. Yeah allow us to start, you know, to continue running production, okay? It's already got approved. Okay the third production line, we're not ready because, you know, we still have to upgrade the equipment part, you know, the parts. That's why we are working on that. Today, actually, new parts has already come to the, you know, the plant. We think we will finish by the 25th of this month. We think we're back in a full capacity running by the end of this month. That's the first question, okay? Yeah. Yes, thank you. Second question. Yes, every company have their strategic. Yeah strategy. To us, we continue, we have to focus our, you know, experts on the silicon side, polysilicon side. We have good quality, we have. Yeah a lower cost. Yeah good people, okay? Yeah. Even we want to be to take advantage of stock market with the high valuation to get IPO proceeds to expansion our, you know, new plants. Yes, we're working very hard. Of course, we also have some planning there. If you look our first quarter market share, we think we are around 15%. We think we will continue the market share at least about 15%, even reach a little higher. We're not, you know, say we don't want to say we are number one, we are largest, you know. We don't want to do that promise and forecast. We do whatever we can, and we forecast our, you know, experts, and we forecast our planning, okay? We will announce soon, okay? Our strategical plan. Okay. Okay, thank you very much. That's all my question. Thanks. Great. Thank you. The next question comes from Jeffrey Campbell with Tuohy Brothers. Please go ahead. Thank you for taking my questions. My first one was, I didn't notice any announcement of any material headcount reductions, during second quarter. If not, is this due to the high automation in Daqo processes? Yeah. There's no headcount reduction at all for us. I think we just had maintenance, but everybody's We've been fully employed throughout this time. Thank you. I ask because. Jeffrey, you look our production. Actually, we In the second quarter, we actually Because we are original schedule annual maintenance, but because of the, you know, the equipment is not coming on time, we postpone our two production line, you know, to the August to maintenance. Basically, Q2, our output still is very high, you look there. Even Q3, when we're giving guidance also around 17,500 tons to 18,000 tons, okay? We're always very conservative. I think with that output, we don't think we want to cut headcounts. You see, actually we are increased because we have to save employee talents for our future, you know, expansion. Right. No, no. I asked that because that's much of the rest of the industry was really having to reduce headcount to maintain costs. You guys don't seem to have needed to do that. Earlier in the call, you mentioned variability in the ASP pricing. I was just wondering, can you maybe talk about on a percentage basis, you know, that portion of your sales that are longer-term contracts such as those with LONGi and JinkoSolar versus more market-sensitive contracts that adjust frequently? Okay. Basically right now, the contracts with LONGi and JinkoSolar is almost approximately accounts as right now, the current capacity, around 70% to 75%. Okay. We actually, you know, have little room right now open for, the other, you know, clients. Maybe we will sign, another 1 or 2 long-term contracts for the future, okay? Just to, you know, to cover another 3 years. Also to consider, you know, that's why we almost right now contract almost all our, you know, capacity right now. You have to consider, you know, everything is moving. We may be, in the future, we're extending our capacity. That's why we're doing that. The long-term contract with, you know, LONGi and JinkoSolar basically is based on the fixed and the quantity. It's not the price. The price still based on the market price. The only thing is we collect the deposits to lock the quantity and to keep, you know, the relationship with the, you know, our strategic customers. Okay, great. Thank you. Finally, as you talk about this 15 to 18-month period where you see significant demand growth and very low supply growth, do you have any sense of the extent to which this is being driven by residential markets versus demand for utility-type projects? If you look at China, you know, China, the majority in the history, is SOE, the company, working on the farm projects. distributed projects, actually is not too much. As in the last second half of last year, because of grid parity right now, China distributed projects right now more and more. Because those projects without any subsidies, the projects itself they can reach profitable and attract investments to invest money. For example, myself also invested in Beijing, southern, around 10 MW. because we think it's very profitable. The installments, you know, the cost for per watt install on the roof only cost like, CNY 3.2 per watt. You can generate every year, almost, you know, 1.6 kWh. Even let's say you're selling to the grid, CNY 0.37. You're very, very, very profitable. That's why we're seeing China, the distributed rooftop, the percentage continue to go up. I think globally, especially I think in U.S., the market, potential market is so big. The U.S., the problem right now is, I think it's trade war. The trade war, I think the anti-dumping and the Section 201, actually add the module price in the final consumers. Plus, the labor cost is higher. I think SolarCity right now, I think use the, I think, the, a standard package try to cutting the labor cost. They I think I was told they, let's say the rooftop, they have a standard, you know, products. Just put on there only three hours. I think those, I think, standard products, I think in China, we also working on that. For example, the roof. 5,000 megawatts, 5,000 watts, 8,000 watts, all the standard. Just come in, you know, put on within three hours, four hours. Uh- That way to max, continue to, you know, reduce the cost in a BOS scene. I think that's the, I think the potential in the future. Definitely, I think the distributed roof, rooftop segments will continue to increase the percentage. Okay, thanks. I'll just follow up real quickly on that. It sounds like that is 'Cause earlier you said that you're considering the possibility of building some capacity closer to the U.S. Based on what you just said, is it fair to say that the potential for distributed growth in the U.S. is a factor that's driving the possibility of getting that capacity closer to the U.S.? Is that fair? Yes. Maybe it's not exactly U.S., United States, but yes. Because we evaluation, you know, a lot of locations and because of pandemic situation. Otherwise, we will speed up, you know, these, I think, projects. Definitely, yes, we are working on that to In a certain time, we will announce it. Great. Thanks so much for your help. Great. Thank you. This concludes our question and answer session. I would now like to turn the conference back over to Kevin He for any closing remarks. Yeah. Thank you everyone again for participating in today's conference call. Should you have any further questions, please don't hesitate to contact us. Thank you and bye-bye. This conference is now concluded. Thank you for attending today's presentation.