Earnings Call: Q3 2018

Nov 13, 2018

Good day, and welcome to the Daqo New Energy Third Quarter 2018 Results Conference Call. All participants will be in listen only mode. 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 Q3 of 2018. And also to facilitate today's conference call, we have prepared a PPT presentation for your reference. Both can be found on our website at www.dq 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, and then Mr. Yang will discuss the company's financial performance for the Q3 of 2018. After that, we will open the floor to Q and 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 statements. Further information regarding these and other risks is included in the reports or documents we have filed with or furnished to the Securities and Exchange Commission. These statements only reflect our current and preliminary view as of today and may be subject to change. Our ability to achieve these projections is subject to risks and uncertainties. All information provided in today's call is as of today, and we undertake no duty to update such information except as required under applicable law. Also during the call, we will occasionally reference monetary amounts in U. S. Dollar terms. Please keep in mind that our functional currency is the Chinese rmb. We offer these translations into U. S. 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 TV policy issued on May 31, 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 Q3, with the polysilicon inventory returning to lean levels, which demonstrates our product's 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. In addition, we also began pilot production for our Phase IIIB 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 Q1 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 kilowatt 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 mono crystalline grade polysilicon, of which a half will be applicable for use in n type mono crystalline solid 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 lower levels in energy usage and in silicon utilization per unit of polysilicon production, which will help us to achieve our new lower cost target. Even with the impact of our new solar PV policy issued on May 31, 2018, China will still be the large solar PV market this year, with 34.5 gigawatts already installed during the 1st 3 quarters of this year. Based on most industry forecasts, full year installation is expected to be approximately 40 gigawatts for China. In later September, China's National Development and Reform Commission released the 2nd draft of Renewable Energy 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 20% in 2,030 respectively. This bodes well for the continued growth of solid energy for China market to meet this goal. In addition, China National Energy Administration held a SO Industry Forum on November 2, in which it reaffirms 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 subsidy in the interim. NEA also expects an increase to China's 13th 5 year plan cumulative solar installation target to at least 2 10 gigawatts 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 the 2019, which were bought well for polysilicon demand and the 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 connection, 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 global 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 PE 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 mono 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 supplies and below the cash cost of Tier 2 supplies and folding some supplies 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 supplies, Daqo New Allerge 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 pilot production in the Q4 of 2019. We expect to ramp up Phase 4a to full production in the Q1 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 Q1. 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 TV 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 US6.8 million dollars in fixed asset impairment and US1.3 million dollars in employee severance related to waiver sector in this quarter. For financial reporting purpose, the Chongqing subsidiary has been classified as discontinued operations. Furthermore, the company recognized $11,400,000 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 7,100 metric tons of polysilicon and sell approximately 6,800 metric tons to 6,900 metric tons of polysilicon to external clients during the Q4 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 Ming, our CFO, who will go over our financials for the quarter. Ming, 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 also been made to provide a consistent basis of comparison for the financial results. Revenues from continuing operations were CAD67,400,000 compared to CAD 63,000,000 in the Q2 of 2018 and CAD72,900,000 in the Q3 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 $12,800,000 compared to $25,200,000 in the Q2 of 2018 26.8 $1,000,000 in the Q3 of 2017. Gross margin was 19.1% compared to 40.1% in the Q2 of 2018 and 36.7% in the Q3 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 CNY7.6 million compared to CNY 7,500,000 in the Q2 of 2018 and CNY 4,000,000 in the Q3 of 2017. The year over year increase in SG and A expenses was primarily due to an increase of noncash share based compensation costs related to the company's 2018 share incentive plan. R and D expenses were approximately RMB 1,400,000 compared to $200,000 in the Q2 of 2018 and $100,000 in the Q3 of 2017. R and D expenses can vary from period to period and reflect R and D activities that took place during each period. Other operating income was US0.1 million dollars compared to US0.5 million dollars in the Q2 of 2018 and US0.1 million dollars in the Q3 of 2017. Other operating income mainly consists of unrestricted cash incentives that the company received from local government authority, the amount of which vary from period to period. As a result of the foregoing, operating income was $4,000,000 compared to 1,000,000 in the Q2 of 2018 and RMB 22,800,000 in the Q3 of 2017. Operating margin was 5.9% compared to 28.6% in the Q2 of 2018 and 31.3% in the Q3 of 2017. Interest expense was $2,100,000 compared to $3,100,000 in the Q2 of 2018 and $4,000,000 in the Q3 of 2017. Foreign exchange gain was $1,900,000 compared to $100,000 in the Q2 of 2018 and loss of $100,000 in the Q3 of 2017. The company realized exchange gain of $1,900,000 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 Q2 of 2018. EBITDA from continuing operations was $14,800,000 compared to $27,400,000 in Q2 of 2018 $31,900,000 in the Q3 of 2017. EBITDA margin was 22% compared to 43.6 percent in the Q2 of 2018 and 43.8% in the Q3 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 $22,400,000 compared to net income from discontinued operation of $2,700,000 in the Q2 of 2018 RMB 9,700,000 in the Q3 of 2017. As a result, the foregoing net loss attributable to Daqo New Energy shareholders was RMB 18,300,000 compared to net income attributable to Daqo New Energy shareholders of $13,400,000 in the Q2 of 2018 and $24,100,000 in the Q3 of 2017. Loss per basic ADS was RMB1.39 compared to earnings per basic ADS of 1.06 dollars in the Q2 of 2018 and $2.28 in the Q3 of 2017. Excluding the impact of noncash costs and expenses such as costs related to the Chongqing Polyskin operations, share based compensation costs and long lived asset impairment. Adjusted net income attributable to Daqo New Energy shareholders was RMB 4,300,000 dollars compared to $18,200,000 in the Q2 of 2018 $25,600,000 in the Q3 of 2017. Adjusted earnings per basic ADS was $0.33 compared to earnings per basic ADS of $1.44 in the Q2 of 2018 and $2.42 in the Q3 of 2017. As of September 30, 2018, the company had $110,300,000 in cash, cash equivalents and restricted cash compared to 55,300,000 as of June 30, 2018. As of September 30, 2018, the accounts receivable balance was RMB 1,000 compared to 8,000 as of June 30, 2018. As of September 30, 2018, the notes receivable balance was 22,500,000 compared to $17,000,000 as of June 30, 2018. As of September 30, 2018, total borrowings were $165,200,000 of which $119,400,000 were long term borrowings compared to total borrowings of $131,500,000 including $92,900,000 of long term borrowings as of June 30, 2018. For the 9 months ended September 30, 2018, net cash provided by operating activities from continuing operations was RMB48,700,000 compared to RMB69,700,000 in the same period of 2017. For the 9 months ended September 30, 2018, net cash used in investing activities from continuing operations was RMB 90,100,000 compared to RMB 19,900,000 in the same period of 2018. The net cash used in investing activities from continuing operations in the 1st 9 months of 2018 2017 was primarily related to the capital expenditures on the Xinjiang Poly Silicon Projects. In addition, the company also purchased $15,000,000 in interest bearing short term investments during the Q3 of this year. For the 9 months ended September 30, 2018, net cash provided by financing activities from continuing operations was $96,500,000 compared to net cash used in financing activities of $21,300,000 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 and A session. Operator, please begin. Thank 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 think we're at a bottom now with the policy change that could be happening with the November 2 announcements. 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? Or we've heard 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. And for next year, my expectation is around 14 to 50 gigawatts and it will be significantly increased from, I think, previous forecast only 30 to 35 gigawatts. I think the number could be even higher if the actual policy is more favorable. And as you mentioned that on November 2, NEA, I think, have the forum. And basically, I think the government is very supportive for the whole solar industry. And also the feed in tariff will continue to be will not be stopped until 2022. Basically, I think for the future, I think subsidized the amount of the subsidized every year maybe will slow down, cut down. But for per watt subsidized, you see per unit subsidized will continue to go down. So we'll cover more projects and like a top runner, like other DG projects. So that's why we believe, I think, the 13th, 5 plan as everybody understands it, I think at least right now, the government may be increased to 210 gigawatts. We believe maybe we're higher than that. So that's why we do not think the new policy will come out within 1 month or 2 months, because this new policy, I think NDA have to working together with other ministries like financial ministries, like Commerce Industry Ministries, you see, to along with other, I think, government organizations to issue the new policy. So 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, 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 VAT. So basically, I think this is at or near button. And with the new capacity coming online from China, the lowest cost producer and mostly I think every people right now claims, for example, like GCL, I'm not going to mention other supply. They also claim starting the tire production, the new expansion. So I believe maybe in Q1 next year or Q2 next year, the new capacity come in. So 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 reshape processing or consolidation, I think it's possible to see temporary the polysilicon price go down to $10 per kg. But when the market is actually back to normal, we expect, I think, the pricing will remain around 11 to 12 during, I think, this quarter or even next quarter. I think this quarter maybe between 10 to 11. I think Q1 maybe around 11 to 12. So, Daqo, you know that we were fully ramp up. I think December of this year of December, we will reach I think the almost 100% run fab on 3B. So for Q1, definitely, I think, our capacity, you can calculate maybe around annually around 36,000 tons. So we will continue to reduce our cost to $7.50 from right now currently $9 level. So that will further to improve our gross margin. Okay, great. Thanks, Wang Hoon. You mentioned that capacity from the Tier 2 more expensive producers will likely go offline. Can you talk about how can you quantify how much capacity you think could be permanently shut down from this downturn? Are we talking about 20,000 metric tons, 50,000 metric tons? You don't have to name the names necessarily, it would be great to understand how much you see going away permanently? I think based on the I think the statistics, I think 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. So that capacity finally will be wiped out. Of course, maybe certain percentage, some of the producer is state owned company. So 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 to get the banking loans. So what I believe, I think SOE company maybe the capacity is around like 50,000 to 60,000 tons. Then the private sector or we call the public non state owned company maybe around 100,000 tons, that definitely I think is going to shut down. Okay. That's very helpful. Thanks. And then as it relates to your capacity expansion, can you remind us kind of where things stand with the Phase 4A financing, update us on how much you might need and how you expect to fund the Phase 4A? And is it definite that you will do Phase 4A or is there a chance that you might wait for the recovery to be healthier and stronger? Thanks. The Phase 4A country is under construction and the ground construction is almost, I think, above the level and because the winter is coming. So basically, we were finishing on the ground all the construction. And for the equipment procurement, we almost finished 70% of the contracts. We control the total investments is around RMB2.9 billion. I think as a cut from original is RMB3.2 billion. So then also we got to because of 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 $2,900,000 the payment, the payment, I think around RMB 5,900,000 around like RMB 590,000,000 will pay this year and around RMB1.4 billion will pay next year, the rest of them will go to 2020 2021. So basically, we're thinking now use our own cash, the deposits and operating cash flow, I believe, and we also have the banking facilities available. Right now, we have 500,000,000 banking loan facilities from Bank of China, 5,000,000 banking loans from China Merchant Bank. So basically on what scenario, I think we still can support to continue to expansion. Of course, we also were evaluating the whole market of what's going on. But basically right now, yes, we are on our way to reach the target. I think planning to starting pilot production in October 15 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. So firstly, the management has talked about the near term pricing outlook for the polysilicon. So given that probably in the next few months as we have a lot of new low cost to Chinese cost structure, so what does management have more longer term price outlook for the polysilicon probably for next year and also for 2020? And secondly, does management has an estimate for the mono wafers market share in 2019? And how does the management expect the expanding of mono wafer market share to support our ASPs? And last question, a quick one, does management have any estimate on the global solar demand for this year and also the next year? Thank you. Good evening, Gary. Gary comes from CS from Hong Kong. The first question is about the ASP for the near term and the future. Basically, I think without the Chinese new policy come out, what I think and believe, okay, these I think lower today the lower ASP and also we're not only consolidating the China, I think the solid industry, but also I think it will cut the import from abroad. And for those foreign producer, the cost higher than $13 $12 definitely I think have to shut down. So basically what I'm thinking is even without the Chinese New policy In Q4, right now, I think the ASP, of course, dark hue is a little different. I will answer your second question because mono and multi, the price is different. But I say average speaking, we are right now after 3B, our mono is 80%. So basically what I think is for Q4 to Q1 next year, the price should be around $11 to $12 Unless the new policy maybe stimulate the production in China, then the price definitely went 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 to $13 So beyond that 2019, I think for the grid parity for the cost right now, the industry cost, I believe should be around $12 to $14 range. That's to answer your first question. 2nd is for the mono and the multi. Right now for the mono price is around RMB83 to RMB84 per kg with VAT and for the multi is around 76. So the difference between multi and the mono is not too much right now, But we still focus on the quality. So after finish 3B, our mono accounted for 80%. So as soon as we finish 4A, our monosilicon will be 90%. So that's why our ASP should be mostly close to the monosilicon price. I think for your third question about the demand, the global demand, what I think is if looks like the Chinese new policies come out, doesn't matter this year or early next year. Definitely next year, China, I think total installation will be around 40 to 50 gigawatts, even I think maybe we're higher. And plus, the 13th 5 years plan will increase, dramatic increase. So China definitely is the key player in the solar industry. Plus, I think in Europe, I think more of the tariff then also the U. S, the South Africa and South America and India, I think definitely beside I think without China even global market I think continue to the demand continue to increase because the price continue to go down module, the installation price continue to go down. So grid parity, we can see I think globally we can see. So basically, I think next year total global installation, what I'm thinking maybe around 115 to 120 gigawatts. And year 2020 maybe reach to 140 gigawatts. That's maybe a little optimism. So the silicon demand, because of the monos silicon demand percentages continue to go up, but cost the silicon will continue to go down. So what I think next year, the silicon will be around the consumption will be around like 370 1,000 tons to 380,000 tons. By 2020, I think we'll reach around the 420 1,000 tons. I think that's my figure, Gary. Okay. Yes. Thanks very much. Yes, I have no further questions. Thank you. Great. Thank you. Thank you. The next question comes from Wei Fang of Citadel. Please go ahead. Hey, Sam. I think Phil asked most of the question. Just wondering, can you comment on the inventory level in the supply chain? And also when do you think the Chinese NDA is going to announce the new targets for 2019 2020? Okay. Basically, first of all, you've pressed Fengwei, I think for the inventory, for whole right now, the Chinese I think the supply right now, the inventory almost I think closing to 0. If you look our end of the quarter, especially right now and all the right now the order, we still cannot feed the order right now based on the right now the production. And what I think right now almost either the I think as the wafer producer right now is just in time or zero inventory. The reason is because this is still expectation, the silicon price go down. So that's why the inventory is lower. Then I think even sale module because continue price go down, so whole the industry in the middle stream, the inventory, I don't think too much there. Unless the Chinese new policy come out, then they're going to build up inventory. So to answer your second question, when the Chinese new policy come out, as I just mentioned that, because this time the NDA is very prudent and they have to do salary to coordinate which other governments, other governments, I think organizations together to issue new policy. So that's involved a lot of stuff like I said 13, 5 years plan and you see the tax the tax cutting, all these I think are together. So what I think a new policy will come out, not I'm not focused end of this year, maybe around Chinese New Year, either before or after. And 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 prices $12 next year, monthly run rate? I think right now the import already slowed down. I think if you look at the figure, I think the data, I didn't look at the carefully the figure. But basically, I was told right now, the 3 major foreign producer right now, I see only one right now still have capacity running on Malaysia. And the rest of them, I think they are almost, I think, shut down by the end of this month. So I do not think further on the right now the current market situation, selling price around $10 $11 between $10 $11 per kilogram. I think the foreign producer will continue to export the silicon to China because there really is their cash cost. So basically, I think in this scenario right now, that's why I don't think the imported, the silicon will come back. I don't think so, because that's why unless the price go back beyond $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. The silicon price may be on back beyond $13 Also, 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 $5,000,000 $4,500,000 to $5,500,000 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 in the conference call today. Should you have any further questions, please feel free to contact us. Thank you and bye bye. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.