Earnings Call: Q3 2018

Nov 13, 2018

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 third quarter of 2018. Also, to facilitate today's conference call, we have prepared a PPT presentation for your reference. Those can be found on our website at www.dqsolar.com. 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. Then Mr. Yang will discuss the company's financial performance for the third quarter of 2018. 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 containing 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 the 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, Mr. Zhang, please. Hello, everyone, and thank you for joining us today for our earnings call. We are pleased to report another solid quarter. Due to the impact of China's new solar PV policy issued on May 31st, the solar end market demand in China weakened considerably. In spite of weak market demand, we sold 6,199 metric tons of polysilicon during the third quarter. With the polysilicon inventory returning to lean levels, which demonstrates our product superior quality and our strong relationships with downstream customers. We successfully completed our annual maintenance in September and resumed production earlier than originally scheduled to minimize its impact on production volume and our cost structure. We also began pilot production for our Phase 3B expansion project in October, ahead of schedule. We are in the process of optimizing throughput efficiency and quality and expect to ramp up Phase 3B to full capacity early in the 1st quarter of 2019. With lower electric rates, higher manufacturing efficiency, great economies of scale, and enhanced equipment and processes, we expect the overall total cost of polysilicon production from our Xinjiang facilities to decrease to approximately $7.50 per kilogram when fully ramped up. Moreover, Phase 3B will not only increase our capacity and reduce costs, but also allow us to improve production quality with approximately 80% of our production capacity devoted to monocrystalline-grade polysilicon, of which half will be applicable for use in N-type monocrystalline solar cells. With the successful pilot production of our Phase 3B expansion, preliminary manufacturing data from our Xinjiang polysilicon operation has been encouraging. We are on track to achieve record low levels in energy usage and in silicon utilization per unit of polysilicon production, which will help us to achieve our new lower cost targets. Even with the impact of our new solar PV policy issued on May 31, 2018, China will still be the largest solar PV market this year, with 34.5 GW already installed during the first three quarters of this year. Based on most industry forecasts. Full year installation is expected to be approximately 40 GW for China. In late September, China's National Development and Reform Commission released the second draft of Renewable Portfolio Standard, which is expected to lay a solid foundation for the nation's goals of increasing non-fossil energies as a percentage of total primary energy to 15% in 2020, and 20% in 2030, respectively. This bodes well for the continued growth of solar energy for China market to meet this goal. In addition, National Energy Administration held a solar industry forum on November 2, in which it reaffirmed the government's support and commitment to the solar PV industry. During the forum, NEA officials indicated they expect the solar industry will continue to benefit from government subsidies through 2022, when grid parity is expected to be achieved. There will not be a one-time cutoff of solar subsidies in the interim. NEA also expects an increase to China's 13th Five-Year Plan cumulative solar installation target to at least 210 GW or higher. NEA is also in the process of accelerating the release of the next solar policy to support the development of the domestic solar industry. Based on these comments, we believe that the solar market is at or near bottom, and it bodes well for increased solar project installation and improved demand for the China market for 2019 and beyond. The increased market activity can happen as soon as the first half of 2019, which will bode well for polysilicon demand and price. In addition, several government agencies have started to evaluate opportunities to streamline and effectively reduce the non-system costs of solar PV projects, such as permitting fee and grid connections, so that an increased number of grid parity projects will become feasible in China as soon as possible. As such, solar PV now is becoming one of the most cost-effective and feasible forms of renewable energy generation in many growth markets, including China. With cost reduction efforts continuing throughout the entire solar PV value chain, we believe the new era of grid parity in the global solar PV market is just around the corner. Within the solar market, we believe pricing are at or near bottom, and in recent weeks, we have seen encouraging signs of price stabilization, particularly for monocrystalline-grade polysilicon. mono PERC-based high-efficiency solar products are doing well in the market from volume perspective. In particular, current polysilicon pricing has fallen to or below the cost level of the most tier 1 suppliers, and below the cash cost of tier 2 suppliers. Forcing some suppliers to reduce utilization or shut down production altogether. As witnessed by our inventory level, polysilicon inventory levels continue to be very lean in the market and at our clients. Once we begin to see demand recovery driven by China's new solar policy, we believe there is a good chance that price can recover soon. As one of the industry's leading suppliers, Daqo New Energy benefits from the strong cost structure advantage and quality. We are continuously being improved upon with the addition of our Phase 3B and 4A projects. Our Phase 4A capacity expansion project is currently under construction and is expected to begin polys production in the 4th quarter of 2019. We expect to ramp up Phase 4A to full production in the 1st quarter of 2020, which will expand our total production capacity to 70,000 metric tons and reduce the overall total cost of polysilicon production for our Xinjiang facilities to approximately $6.80 per kilogram. We believe the combination of our cost structure advantage, high-quality products, and increasing capacity will allow us to benefit from future sustainable growth in global solar PV markets. In September 2018, the company made a strategic decision to discontinue its Chongqing business subsidiary, including its solar wafer manufacturing operations to accommodate the increasingly challenging market conditions. Accordingly, the company has incurred $6.8 million in fixed asset impairment and $1.3 million in employee severance related to wafer sector in this quarter. For financial reporting purpose, the Chongqing subsidiary has been classified as discontinued operations. Furthermore, the company recognized $11.4 million fixed asset impairment loss for its Chongqing polysilicon facilities in the quarter, which resulted from assets identified as non-transferable and/or not able to be reutilized by its Xinjiang polysilicon manufacturing or expansion projects. The company expects to produce approximately 7,000 metric tons to 7,001 metric tons of polysilicon and sell approximately 6,800 metric tons to 6,900 metric tons of polysilicon to external clients during the fourth quarter of 2018. For the full year 2018, the company expects to produce approximately 23,000 metric tons of polysilicon. This outlook reflects Daqo New Energy's current and preliminary view as of the date of this press release and may be subject to change. The company's ability to achieve these projections is subject to risks and uncertainties. With that, I will return the call over to Min, our CFO, who will go over our financials for the quarter. Min, please go ahead. Thank you, Longgen, and good day, everyone. Thank you for joining our call today. First of all, I would like to remind the audience that since the company has discontinued its Chongqing business subsidiary in September 2018, the operational results of the Chongqing business have been excluded from the company's financial results from continuing operations and have been separately presented under discontinued operations. Retrospective adjustments to the historical statements have also been made to provide a consistent basis of comparison for the financial results. Revenues from continuing operations were CNY 67.4 million, compared to CNY 63 million in the second quarter of 2018 and CNY 72.9 million in the third quarter of 2017. The sequential increase in revenue was primarily due to higher polysilicon sales volume, offset by lower average selling prices. Gross profit was approximately CNY 12.8 million, compared to CNY 25.2 million in the second quarter of 2018 and CNY 26.8 million in the third quarter of 2017. Gross margin was 19.1%, compared to 40.1% in the second quarter of 2018 and 36.7% in the third quarter of 2017. The sequential decrease was primarily due to lower ASPs, partially offset by lower average polysilicon production costs. Selling, general, and administrative expenses were CNY 7.6 million, compared to CNY 7.5 million in the second quarter of 2018 and CNY 4 million in the third quarter of 2017. The year-over-year increase in SG&A expenses was primarily due to an increase of non-cash share-based compensation costs related to the company's 2018 Share Incentive Plan. R&D expenses were approximately CNY 1.4 million, compared to CNY 0.2 million in the second quarter of 2018 and CNY 0.1 million in the third quarter of 2017. R&D expenses can vary from period to period and reflect R&D activities that took place during each period. Other operating income was CNY 0.1 million, compared to CNY 0.5 million in the second quarter of 2018 and CNY 0.1 million in the third quarter of 2017. Other operating income mainly consists of unrestricted cash incentives that the company received from local government authorities, the amount of which vary from period to period. As a result of the foregoing, operating income was CNY 4 million, compared to CNY 18 million in the second quarter of 2018 and CNY 22.8 million in the third quarter of 2017. Operating margin was 5.9%, compared to 28.6% in the second quarter of 2018 and 31.3% in the third quarter of 2017. Interest expense was CNY 2.1 million, compared to CNY 3.1 million in the second quarter of 2018 and CNY 4 million in the third quarter of 2017. Foreign exchange gain was CNY 1.9 million, compared to CNY 0.1 million in the second quarter of 2018 and loss of CNY 0.1 million in the third quarter of 2017. The company realized exchange gain of $1.9 million occurred in the quarter due to depreciation of RMB against U.S. dollar in relation to the exchange settlement of proceeds from the company's follow-on offering in the second quarter of 2018. EBITDA from continuing operations was CNY 14.8 million, compared to CNY 27.4 million in the second quarter of 2018 and CNY 31.9 million in the third quarter of 2017. EBITDA margin was 22% compared to 43.6% in the second quarter of 2018 and 43.8% in the third quarter of 2017. During the quarter, the company decided to discontinue its solar wafer manufacturing operation. Results of the discontinued operation of the previous quarter and comparative quarters were presented accordingly. Loss on discontinued operations was CNY 22.4 million compared to net income from discontinued operation of CNY 2.7 million in the second quarter of 2018 and CNY 9.7 million in the third quarter of 2017. As a result of the foregoing, net loss attributable to Daqo New Energy shareholders was $18.3 million compared to net income attributable to Daqo New Energy shareholders of $13.4 million in the second quarter of 2018 and $24.1 million in the third quarter of 2017. Loss per basic ADS was $1.39 compared to earnings per basic ADS of $1.06 in the second quarter of 2018 and $2.28 in the third quarter of 2017. Excluding the impact of non-cash costs and expenses such as costs related to the Chongqing polysilicon operations, share-based compensation costs, and long-lived asset impairment, adjusted net income attributable to Daqo New Energy shareholders was CNY 4.3 million compared to CNY 18.2 million in the second quarter of 2018 and CNY 25.6 million in the third quarter of 2017. Adjusted earnings per basic ADS was $0.33 compared to earnings per basic ADS of $1.44 in the second quarter of 2018 and $2.42 in the third quarter of 2017. As of September 30, 2018, the company had CNY 110.3 million in cash equivalents, and restricted cash compared to CNY 155.3 million as of June 30, 2018. As of September 30th, 2018, the accounts receivable balance was CNY 1,000 compared to CNY 8,000 as of June 30th, 2018. As of September 30th, 2018, the notes receivable balance was CNY 22.5 million compared to CNY 17 million as of June 30th, 2018. As of September 30th, 2018, total borrowings were CNY 165.2 million, of which CNY 119.4 million were long-term borrowings compared to total borrowings of CNY 171.5 million, including CNY 92.9 million of long-term borrowings as of June 30th, 2018. For the nine months ended September 30th, 2018, net cash provided by operating activities from continuing operations was CNY 48.7 million compared to CNY 69.7 million in the same period of 2017. For the 9 months ended September 30th, 2018, net cash used in investing activities from continuing operations was CNY 90.1 million compared to CNY 19.9 million in the same period of 2018. The net cash used in investing activities from continuing operations in the first 9 months of 2018 and 2017 was primarily related to the capital expenditures on the Xinjiang polysilicon projects. In addition, the company also purchased $15 million in interest-bearing short-term investments during the 3rd quarter of this year. For the 9 months ended September 30th, 2018, net cash provided by financing activities from continuing operations was CNY 96.5 million compared to net cash used in financing activities of CNY 21.3 million in the same period of 2017. The increase was primarily due to net proceeds from our recent follow-on offering. This concludes our prepared remarks. We would now like to turn the call over to the operator to begin the Q&A session. Operator, please begin. Thank you. We will now begin the question and answer session. The first question comes from Philip Shen of Roth Capital Partners. Please go ahead. Hi, Longgen. Hi, Ming. Thanks for taking my questions. The first question is on the outlook for China and the demand. I think Longgen, you mentioned that, you know, you think we're at a bottom now, and with the policy change that could be happening, you know, with the November 2nd announcement. When do you expect the government to provide more concrete details around what the actual new policy might be? Do you think we could get it by the end of this year? We've heard, you know, it could be before Chinese New Year as well. Thanks. Good morning. I think, Philip, to answer your question, I think, as I just mentioned that, in Q1 to Q3 of this year, China has already installed 35 gigawatts. I believe full year of this year is expected to be around 40 gigawatts. For next year, my expectation is around 40-50 gigawatts, and it will be significantly increased from, I think, a previous, you know, forecast only 30-35 gigawatts. I think the number could be even higher if the actual policy is more favorable. As you mentioned that on November 2, NEA, I think, have the forum. Basically, I think the government is very support for the solar, whole solar industry. Also the feed-in tariff will continue to be, will not be stopped until 2022. Basically, I think for the future, I think subsidize. The amount of the subsidize every year maybe will, you know, slow down, cut down. For per watt subsidize, you see, per unit subsidize will continue to go down. We'll cover more projects and like a Top Runner, you know, like other DG projects. That's why we believe, I think, the 13th Five-Year Plan, as everybody understand it, I think at least right now the government may be increased to 210 GW. We believe maybe we're higher than that. That's why we do not think, you know, the new policy will come out, you know, within 1 month or 2 months. This new policy, I think NEA have to working together with other, you know, ministries, like financial ministries, like, you know, industry, co-commerce industry, ministries, you see, to along with other, I think, governments, organizations to issue the new policy. I believe the policy will come out maybe around Chinese New Year, before or after. Okay, great. That's really helpful. As it relates to the pricing outlook, you know, pricing, it feels like the declines might be slowing down. How do you see pricing, poly ASP specifically evolving, in this quarter as well as into Q1 and Q2 of next year? I think this quarter our ASP, as you can see that, is around, our Q3 ASP is $10.79 without, you know, VAT. Basically, I think this is at or near bottom. With the new capacity coming online from China, you know, the lowest cost producer, and mostly I think every people right now claims, for example, like GCL. I'm not gonna mention other supplier. They also claims, you know, starting, you know, the pilot production, the new expansion. I believe maybe in the Q1 next year or Q2 next year, the new capacity come in. We expect to see the more and more high-cost producers will have to shut down their capacity and exit the market. During the market reshaped proceeding or consolidation, I think it's possible to see temporary the polysilicon price go down to USD 10 per kg. When the market, I think back to normal, we expect, I think, the pricing will remain around USD 11-USD 12 during, I think, this quarter or even next quarter. I think this quarter may be between USD 10-USD 11. I think Q1 may be around USD 11-USD 12. Daqo, you know that we were fully, I think, ramped up. I think December of this year of December, we will reach, I think, the for almost 100% ramp up on Phase 3B. For Q1, definitely, I think with our capacity, you can calculate maybe annually, around 36,000 tons. We will continue to reduce our cost to $7.50 from right now currently $9 level. That will, you know, further to improve our gross margin. Okay, great. Thanks, Longgen. you know, you mentioned that capacity from the tier 2 more expensive producers will likely go offline. Can you quantify how much capacity you think could be permanently shut down from this downturn? you know, are we talking about 20,000 metric tons, 50,000 metric tons? You don't have to name the names necessarily, but it would be great to understand how much you see going away permanently. I think, based on the, I think the statistics, China right now, let's say by the middle of this year, the capacity is around like 200,000 tons there, of which what I'm thinking around like 140,000 tons, I think is high cost and maybe lower quality. That capacity finally will be wiped out. Of course, maybe in a certain percentage, some of the sub producer is state-owned company. Those company is difficult or it's difficult to shut down. The reason is because they have to run out of their cash. That's the question. Maybe they can continue get the banking loans. What I believe, I think, SOE company, maybe the capacity is around like 50,000-60,000 tons. The private sector, or we call, you see, the public, now state-owned company, maybe around 100,000 tons. They're definitely, I think, are going to shut down. Okay. That's very helpful. Thanks. Then, as it relates to your capacity expansion, can you remind us, you know, kind of where things stand with the Phase 4A financing? You know, update us on how much you might need and how you expect to fund the Phase 4A. Is it definite that you'll do Phase 4A or is there a chance that you might wait for the recovery to be healthier and stronger? Thanks. The Phase 4A currently is under construction. The ground construction is almost, I think, above the, you know, the level. Because the winter is coming. Basically, we will finish the underground oil construction. For the equipment procurement, we almost finished 70% the contracts. We control the total investments is around CNY 2.9 billion. I think it's cut from original is CNY 3.2 billion. Also, we got to Because of, you know, the industry slowdown, we got a pretty good, I think, negotiation with the supply and the payment term. Basically, I think I can tell you that CNY 2.9 billion, the payments, I think around CNY 590 million were paid this year, and around CNY 1.4 billion were paid next year. The rest of them will go to 2020 and 2021. Basically, we're thinking now use our own cash, the deposits and operating cash flow, I believe. You know, we also have the banking facilities available, where now we have CNY 500 million banking loan facilities from Bank of China, CNY 5 million banking loans from China Merchants Bank. Basically, our worst scenario, I think, we still can support to continue to expansion. Of course, we also will evaluate the whole market of what's going on. Basically right now we are on the way to reach the target. I think we are planning to start poly production in October 15th next year. Okay, great. Thank you, Longgen. I'll pass it on. Great. Thanks, Phil. Thank you, Phil. The next question comes from Gary Zhou of Credit Suisse. Please go ahead. Hi. Thanks for taking my questions. I have 3 quick questions. Firstly is on the management has talked about the near-term pricing outlook for the polysilicon. Given that, probably in the next few months is we have a lot of new low-cost Chinese capacity to come online. Given this kind of change in the global poly cost structure, what does management have an more longer-term price outlook for the polysilicon, probably in for next year and also for 2020? Secondly, is that, does management have an estimate for the mono wafers market share in 2019? How does the management expect the expanding of mono wafer market share to support our ASPs? Last question, a quick one, does management have any estimate on the global solar demand for this year and also next year? Thank you. Good evening, Gary. Gary Zhou from Credit Suisse from Hong Kong. The first question is about the ASP for the near term and the future. Basically, you know, without the Chinese new policy come out, what I believe, okay, these lower Today, the lower ASP and also will not only consolidation the China solar industry, but also will cut the import from abroad. For those foreign producer, the cost are higher than $13, $12, definitely have to shut down. Basically, what I'm thinking is even without the Chinese new policy in Q4 right now, the ASP. Of course, Daqo is a little different. I will ask you a second question because mono and multi, the price is different. I say average speaking, we are right now, after Phase 3B, our mono is 80%. Basically what I think is for Q4 to Q1 next year, the price should be around $11-$12. Unless the new policy maybe stimulates the production in China, then the price definitely will back to $13. For the whole year of next year, I think the price should be, second half of next year, should be around $12-$13. Beyond that, 2019, I think for the grid parity, for the cost right now, the industry cost, I believe should be around $12-$14, the range. That's to answer your first question. Second is for the mono and the multi. For the mono price is around CNY 83-84 per kg with the, you know, VAT. For the multi is around CNY 76. The difference between multi and mono is not too much right now. We still focus on the quality. After finish 3B, our mono has, you know, accounted for 80%. As soon as we finish 4A, our mono silicon will be 90%. That's why our ASP should be, you know, most close to the mono silicon price. I think, for the, for your third question about, you know, the demand, the global demand. What I think is if looks like, you know, the Chinese new policy has come out, it doesn't matter this year or early next year. Definitely next year, China, I think total installation will be around 40-50 gigawatts. Even I think maybe were higher. Their 13th Five-Year Plan will increase, dramatically increase. China definitely is the key player in the solar industry. Europe, more of the tariff. Also the U.S., South Africa, and South America, and India, without China, even global market, the demand continue to increase because the price continue go down module. The installation price continue go down. Grid parity we can see, globally we can see. Next year, total global installation, what I thinking maybe around 115-120 gigawatts. Year 2020 maybe reach to 140 gigawatts. That's maybe little optimism. The silicon demand, because of the mono silicon demand percentage is continue go up, but per watt cost, the silicon will continue to go down. What I think next year, the silicon will be around the consumption will be around like 370,000 tons to 380,000 tons. By 2020, I think we'll reach around 420,000 tons. I think that's my figure, you know, Gary. Okay. Yeah. Thanks very much. I have no further questions. Thank you. Great. Thank you. Thank you. The next question comes from Wei Fung of Citadel. Please go ahead. Hey, Sam. I think Philip Shen asked most of the question. Just wondering, can you comment on the inventory level in the supply chain? Also, when do you think the Chinese NEA gonna announce the new targets for 2019 and 2020? Okay. Basically, you know, first of all, Alan Lau, I think, for whole right now, the Chinese polysilicon, I think, supplier right now, the inventory almost, I think, closing to zero. If you look our end of the quarter, especially right now, all the right now the order, we still cannot fulfill, you know, the order right now, you know, based on the right now the production. What I think right now, almost, either the, I think, the wafer producer right now is just in time or zero inventory. The reason because there's still expectation, you know, the silicon price go down. That's why the inventory is lower. I think even cell module because continue price go down, so whole the industry in the middle stream, the inventory, I don't think, you know, too much there. Unless the Chinese new policy come out, then they're going to build up inventory. To answer your second question, when the, you know, the Chinese new policy come out? As I just mentioned that, because this time the NEA is very potent, and they have to do solidly to coordinate with other governments, you know, other governments, I think, organizations together to issue new policy. That involve a lot of stuff. Like I said, 13th Five-Year Plan. You see the tax, you know, the, the tax with cutting. All these I think together. What I think a new policy will come out, I'm not focused, you know, end of this year, maybe around, you know, Chinese New Year, either before or after. Another question on import. Can you tell me the monthly run rate on import poly, and what do you expect the run rate, if poly price is CNY 12 next year? Monthly run rate. I think right now the import already slowed down. I think if you look the figure, I think, the data, I didn't look the carefully the figure. Basically, I was told right now the three major foreign producer right now, I think only one right now still have capacity running on Malaysia. The rest of them, I think they are almost, I think, shut down by the end of this month. I do not think, you know, further on the right now the current, the market situation, selling price around CNY 10 and CNY 11, between CNY 10 and CNY 11 per kilograms. I think, you know, the foreign producer will continue to export the silicon to China because there really is their cash cost. Basically I think, in this scenario right now, that's why I don't think, you know, the import, the silicon will come back. I don't think so. Because that's why unless the price go back beyond, you know, $13, it's possible on the condition, I think the demand is so hot and quickly come back, and for the middle stream to build up inventory, then that will happen on the second half of next year. Got it. The silicon price maybe bounce back beyond CNY 13. Can you talk about maybe Ming, can you talk about operating expense next year, quarter run rate, excluding stock compensation? It should be in the maybe $4.5 million-$5.5 million level, excluding stock-based comp. Got it. All right. That's all my questions. Thanks. Great. Thank you. This concludes our question and answer session. I would like to turn the conference back over to Kevin He for any closing remarks. Thank you everyone again for participating the conference call today. Should you have any further question, please feel free to contact us. Thank you and bye-bye. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.