Good day, and welcome to the Daqo New Energy 2017 third quarter result conference call. Our participants will be on listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. To withdraw your question, please press star then two. Please note this event is being recorded. At this time, I would like to turn the conference over to Kevin of Investor Relations. Please go ahead, sir.
Hello, everyone. I'm Kevin, 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 2017, 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 Dr. Gongda Yao, our Chief Executive Officer, and Mr. Ming Yang, our Chief Financial Officer. The call today will feature an update from Dr. Yao on market and operations, and then Mr. Yang will discuss the company's financial performance for the third quarter of 2017. 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 views 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. We undertake no duty to update such information except as required under applicable law. During the call, we will occasionally reference monetary amounts in USD terms. Please keep in mind that our functional currency is the Chinese RMB. We offer these translations into USD solely for the convenience of the audience. Without further ado, I now turn the call over to our CEO, Dr. Yao, please.
Hello, everyone, and thank you for joining our call today. We are pleased to report strong financial and operation results for the third quarter of 2017. I would like to thank our entire team for their great work and contribution to the solid profitability and earnings for the third quarter. Our excellent third quarter results demonstrate the robust customer demand for our high-quality polysilicon products. During the third quarter, we produced 4,940 metric ton of polysilicon and sold 4,500 metric ton to external customers. Revenues for the third quarter were $89.4 million, an increase of 17.6% from the previous quarter. Third quarter earnings per basic ADS were $2.28, an increasing of 98% compared with the $1.15 in the previous quarter.
During the third quarter of 2017, the company generated $ 24.1 million in net income attributable to the Daqo New Energy shareholders and $ 42.3 million in EBITDA with the EBITDA margin of 47.4%. In particular, our operation cash flow remained strong. In the first three quarters of 2017, we generated $ 98.4 million in net cash provided by operation activities. In late September and early October, we all conducted the annual maintenance for our Xinjiang polysilicon facilities. We are glad to report that annual maintenance have been completed successfully for this year, with less impact to production volume than anticipated by our original plan.
For this year, rather than shut down the entire facility for maintenance as we have done in previous years, we conducted the maintenance in two phases with partial shutdown of the facility. While this was the first time we made a partial shutdown for annual maintenance, through the hard work and the dedication of our team, maintenance was completed ahead of schedule and allowed for increased production during the same period. Furthermore, through the maintenance and the related technology upgrades, we have successfully extended our hydrochlorination capacity and the manufacture efficiency, which laid a solid ground for the potential production increasing and a cost reduction in the following quarters. Demand in China remains strong, driven by Top Runner and PV poverty alleviation projects as well as distributed generation projects, which have provided strong support for demand during the second half of the year.
According to industry sources, China added approximately 42 GW of solar PV installation in the first three quarters of 2017, which is much stronger than most forecasts. In particular, distributed generation PV growing strong in China. It is expected that total annual solar PV installation in China will likely reach 50 GW in 2017, which represents approximately 40% increase in compared to 2016. In addition, the U.S. is expecting to install approximately 12 GW in 2017, and India is expected to take over Japan to become the third largest solar PV installation market with approximately 10 GW installation in 2017. Based on the strong end market demand, we anticipate global annual solar PV installation will grow in the double digits rate in the 2017 as compared to 2016.
For the polysilicon market, the supply of polysilicon has not kept up with the strong end market demand. As a result, the polysilicon market remained short supplied. Polysilicon pricing increasing throughout the third quarter from approximately $ 15 per kilo in July to about $ 18 per kilo by the end of September. Our third quarter polysilicon ASP of $ 16.19 per kilo reflected this trend, representing a significant increasing from the second quarter ASP of $ 13.58 per kilo. As of today, we continue to see robust customer demand for our high-quality polysilicon with pricing in the approximate range of $ 18.50 per kilo. In particular, prepayments from customers reached $ 16.7 million at the end of the quarter, demonstrating the strong customer demand and the preference for our high-quality polysilicon product.
Polysilicon average to-total production cost was $8.95 per kilo in the third quarter compared to $8.53 per kilo in the previous quarter. The increase in production cost was primarily due to the cost related to our annual maintenance as well as the exchange rates related to impact and higher raw material cost. For the fourth quarter, due to the continued impact of annual maintenance during the quarter as well as the exchange rates impact and the raw material cost increasing, we expect the fourth quarter polysilicon production cost to remain at a relatively elevated level. For our wafer segment, with the improvement in wafer pricing during the quarter, gross margin on the standalone basis reached approximately 10%, up from low single digits percentage in the previous quarter.
With improvements in profitability, our wafer segment contributed positively to the company in the net profit for this quarter. In October, our board of directors officially approved the company's Phase 3B project, which is expecting to increase our polysilicon annual capacity from 18,000 metric tons to 25,000 metric tons. By adopting additional technology improvements and debottlenecking projects, we may be able to further increase our capacity to 30,000 metric tons per annual by the end of 2019. Once the Phase 3B project is ramped up to full production capacity, we anticipate the overall total production cost for our Xinjiang facility could potentially be decreasing to about $ 7.50 per kilo. Benefiting from better operation leverage, adopting new production process and equipment with high efficiencies and achieving great economies of scale.
For the Phase 3B project, we will adopt new designs, processes, technologies, and equipment that could further improve the purity of our polysilicon products. Polysilicon produced under the Phase 3B project are expecting to reach electronic grade and will be targeted for monocrystal wafer and semiconductor market. We may potentially enjoy high profit margin if we could successfully access this market with our differentiated electronic grade polysilicon products. In terms of guidance for the fourth quarter of 2017, we expecting produce 4,800 metric ton to 5,000 metric ton of polysilicon and sell approximately 44,300 metric ton to 4,500 metric ton to external customers. The above external sales guidance excludes the shipment of polysilicon to be used internally by our Chongqing solar wafer facility, which utilize polysilicon for its wafer manufacturing operation.
Wafer sale volume is expected to be approximately 25 million to 25.5 million pieces in the fourth quarter of 2017. I will turn the call to our CFO, Mr. Ming Yang for the financial update.
Thank you, Dr. Yao, good day, everyone. Thank you for attending our call today. I will provide the financial updates for the third quarter of 2017. Revenues were $ 89.4 million, increasing from $76 million in the second quarter of 2017 and $ 54.3 million in the third quarter of 2016. Revenues from polysilicon sales to external customers were $ 72.9 million, increasing from $ 61.1 million in the second quarter of 2017 and $ 44.4 million in the third quarter of 2016.
External polysilicon sales volume was 4,500 metric tons, increasing from 4,497 metric tons in the second quarter of 2017 and 2,838 metric tons in the third quarter of 2016. The average selling price of polysilicon was $16.19 per kilogram in the third quarter of 2017, increasing from $13.58 per kilogram in the second quarter of 2017. The increase in polysilicon revenue as compared to the second quarter of 2017 was primarily due to higher ASPs and slightly higher sales volume. Revenue from wafer sales were $16.5 million, increasing from $14.9 million in the second quarter of 2017 and $9.9 million in the third quarter of 2016.
Wafer sales volume was 26.4 million pieces, compared to 27 million pieces in the second quarter of 2017 and 14.4 million pieces in the third quarter of 2016. Gross profit was approximately $ 36.4 million, increasing from $ 24.2 million in the second quarter of 2017 and $ 20.1 million in the third quarter of 2016. Non-GAAP gross profit, which excludes costs related to the non-operational polysilicon assets in Chongqing, was approximately $ 36.9 million, increasing from $ 24.8 million in the second quarter of 2017 and $ 21.6 million in the third quarter of 2016. Gross margin was 40.8%, increasing from 31.9% in the second quarter of 2017 and 37.1% in the third quarter of 2016.
In the third quarter of 2017, total costs related to non-operational Chongqing polysilicon assets, including depreciation, were $ 0.5 million, compared to $ 0.5 million in the second quarter of 2017 and $ 1.5 million in the third quarter of 2016. Excluding costs related to the non-operational Chongqing polysilicon assets, the non-GAAP gross margin was approximately 41.3%, increasing from 32.6% in the second quarter of 2017 and 39.9% in the third quarter of 2016. For the fourth quarter of 2017, costs related to non-operational Chongqing polysilicon asset is anticipated to be approximately $ 0.5 million. Selling, general and administrative expenses were $ 4.4 million, compared to $ 4.5 million in the second quarter of 2017 and $ 4.9 million in the third quarter of 2016.
Research and development expenses were approximately $ 0.1 million, compared to $ 0.3 million in the second quarter of 2017 and $1 million in the third quarter of 2016. The research and development expenses vary from period to period, reflecting the R&D activities that occur in such periods. Operating income was $ 0.8 million, compared to $ 0.8 million in the second quarter of 2017 and $ 2.2 million in the third quarter of 2016. Other operating income was mainly composed of unrestricted cash incentives that the company received from local government authorities, the amount of which varies from period to period. Operating income was $ 32.8 million, increasing from $ 20.2 million in the second quarter of 2017 and $ 16.4 million in the third quarter of 2016.
Operating margin was 36.7%, increasing from 26.6% in the second quarter of 2017 and 30.3% in the third quarter of 2016. Interest expense was $ 4.3 million, compared to $ 5.3 million in the second quarter of 2017 and $ 3.1 million in the third quarter of 2016. EBITDA was $ 42.3 million, increasing from $ 29.8 million in the second quarter of 2017 and $25 million in the third quarter of 2016. EBITDA margin was 47.4%, increasing from 39.2% in the second quarter of 2017 and 46% in the third quarter of 2016.
Net income attributable to Daqo New Energy shareholders was $ 24.1 million in the thirrd quarter of 2017, increasing from $1 2.1 million in the second quarter of 2017 and $ 11.2 million in the third quarter of 2016. Earnings per basic ADS were $ 2.28 in the third quarter, increasing from $ 1.15 in the second quarter of 2017 and $ 1.07 in the third quarter of 2016. As of September 30th, 2017, the company had $ 61.6 million in cash and cash equivalents and restricted cash, compared to $ 49.8 million as of June 30th, 2017, and $ 29.2 million as of September 30th, 2016.
As of September 30th, 2017, the accounts receivable balance was $ 4.6 million, compared to $ 3.8 million as of June 30th, 2017. As of September 30th, 2017, the notes receivable balance was $ 25.3 million, compared to $1 0.5 million as of June 30th, 2017. As of September 30th, 2017, total borrowings were $ 216.8 million, of which $ 119.3 million were long-term borrowings, compared to total borrowings of $ 219.3 million, including $ 123.1 million of long-term borrowings as of June 30th, 2017. For the nine months ended September 30th, 2017, net cash provided by operating activities was $ 98.4 million, increasing from $ 70.9 million in the same period of 2016.
For the nine months ended September 30th, 2017, net cash used in investing activities was $45 million. Compared to $51.2 million in the same period of 2016. The net cash used in investing activities in 2017 was primarily related to the capital expenditure of the company's Xinjiang Phase 3A polysilicon projects. For the nine months ended September 30th, 2017, net cash used in financing activities was $29.6 million compared to $12.3 million in the same period of 2016. The increase was primarily due to repayment of related party loans and bank borrowings. That concludes the official part of our presentation. Now let's have the Q&A session.
We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you are using a speaker phone, please pick up your handset before pressing the keys. To withdraw your question, please press star and then two. At this time, we will pause for a moment to assemble our roster. Our first question will come from Philip Shen of Roth Capital Partners. Please go ahead.
Hey, guys. Congrats on the strong results.
Yeah. Thank you, Phil.
Great. Thank you.
I'd like to explore the effective capacity that you guys have now. You guys beat your guidance and our estimates nicely. Historically, I've always thought about your nameplate being 18,000 metric tons and the effective capacity being, I would call it 19,000 metric tons. You know, we're backing into numbers closer to 20,000 or even 21,000 metric tons, depending on how you take into account maintenance. Can you just talk about what the effective capacity is today? Then if you, or as you pursue your Phase 3B expansion, does that mean, which I believe adds about 7,000 metric tons? Hypothetically, if your effective capacity is 20,000 and you're adding 7,000, basically are you effectively at 27,000 metric tons, which is, you know, on your way to that 30,000 metric tons goal that you have?
Okay. Officially, today's nameplate capacity is still 18,000 metric tons. We are running at a rate probably right now, probably between 20,000 to 21,000 metric tons. It's not for 2017, okay? 2017 seems like total production will be around 19,500 to about 2,000 metric ton.
That's right.
Yeah. 20,000 metric ton that range. To answer your question, after Phase 3B is completed, our nameplate will be at 25,000 metric ton. There's potential about 10%-20% above the nameplate is normal through the technical debottlenecking improvement and the technical improvement, those projects. Now, the production real capacity have been further released through this just finished maintenance because we mentioned the efficiency of hydrochlorination is more effective and because we changed some equipment enhanced some capabilities. We have around maybe every day we have more TCS available for the production of polysilicon. I hope that answered your question. Nameplates still will be for Phase 3B will be 25,000 metric ton. We have potential to have a 10%-20% increasing through the debottlenecking. Currently, Actual production is exceeded our nameplate for 18,000 metric ton, but by maybe around 10% increase in.
Okay. Yeah. That, that's very helpful. Let's turn to ASPs. You know, we, I believe, started this quarter off with a $19 plus ASP per kilogram, y ou know, you had a pretty strong one for Q3 as well. Can you talk about what you see for November, the rest of November and December...
Yeah. Okay.
...we get into 2018? As you talk about ASPs, you know, obviously comment on the supply-demand dynamic that you see. Do you For example, in Q1, do you expect how much do you expect China to slow down, if at all, you know, more than the seasonal pattern...
Yeah.
...supply side, can you talk about, you know...
Okay.
...earlier in the year, there are a lot of announcements of supply coming online. Have you seen a delay of that supply, and what else is going on there? Thanks.
Okay. There are many questions, Phil, for you. Let me try to answer your question. For fourth quarter, we see the price is very stable, very strong. Like you said, it's between, like, $18.5 to around $19 per kilo, I think this price will last at least to end of November. There's no question. As we said, there's some prepayment, the money already customer pay us for the November contract, t hose prices are fixed. To the December, we do not see any clues from December, the price softening. You know, as you know, we cannot guarantee the December price yet. December price will be settled by the next two weeks, I think, before end of November, we will sign all the December contract with our customers, which means, price will be settled by the next two weeks.
Now to answer a question for next year. 2018, obviously, we do not have visibility, but we do have visibility on the mono wafer supply polysilicon side. I think there's a shortage for polysilicon for mono wafer usage in China. As you know, we just end up with all the mono wafer capacity by end of 2018 is more than 50 GW of wafer supply, which means actually need at least 200,000 metric tons polysilicon just for those usage. Of course, you know, I said, end of the next year is about 50 GW. Beginning maybe around 30-35 GW of wafer capacity, which requires a lot of polysilicon.
If you do some calculation, all the imports from international supply like OCI or Wacker, if 100% used, still cannot meet that requirement. Rely on very much the significant of domestic supply. Our company is positioned for mono wafer position very well. We supply not only P-type, we also supply the N-type wafer manufacture use the polysilicon. For us, we see very strong demand for throughout of 2018 for polysilicon. Now overall market for a multicrystalline wafer, those is the market that it's not very clear. Overall for mono at least, I think the supply-demand will still be tight on the supply side. This price will, I believe, will continue through to the Q1, t hat's my personal opinion. Of course, we do not see the clear the price yet for the Q1. Yeah.
Great. You talked about this divergence of, you know, mono, multi and potentially the poly supply that supplies the two end markets. For your, call it, nameplate capacities, you know, whether it's 18,000 or 25,000 metric tons, can you talk about the mix of production that you're able to deliver?
Okay.
That can serve the semi mono or multi-market?
Yeah.
Thanks.
For the N-type wafer capacity, we probably will control at less than 20%-30% because we want to control that, t hat market is not huge anyway in China. For the P-type wafers, right now we are in the 30%-40% our production. Next year we target for 50%, so it will be half of that can be used. This requires several things we have to done internally. We set up some program with our key customers to test some new products. Especially for mono wafer manufacturing, they require different requirement, is they want a small chunk those polysilicon. We still need to ramp up our production for those market, which is relatively new for us. We will serve a certain percent of small chunk polysilicon for mono crystal wafer manufacturers. At the same time, we also want to keep the quality, high quality.
We still need a testing different products for different markets. Overall saying, our internal target is about 50% of our total production should be going to that market for next year.
Okay, great. One more question from me, and then I'll pass it on. There's been a lot of discussion about the potential for tariffs on Korean imports. We've heard that OCI's new tariff could be 4.4% from a current of 2.4%. Then Hanwha and Hankook could each be about 9% or 10%. Have you heard the same? What do you expect from the Korean import tariffs? When do you expect the decision to be final? Thanks.
Yeah, we heard about similar things, there's no official saying. I think the most information we believe is come from South Korea, actually, t hey talking to their customer. Expecting if like a 5% is almost no-nothing to increasing. I think the several things that we see some changes as China and South Korea relation starting getting recovered. Secondly, as I mentioned, if you cut the OCI supply, actually there's a huge shortage for polysilicon for China's market. As you know, today China's installation this year will be 50 GW. If we take OCI out, polysilicon maybe is quantity is okay, but for mono wafer supply, there will be huge shortage, so impact. This may be reflected.
The reality is that China cannot really cutting down the OCI supply on this side. We with our channel checking, all the like Wacker supply is very tight. They don't have any polysilicon in China, the warehouse or any storage. They are feel also 2018 supply polysilicon will be very tight, especially for mono wafer supply. This all adds up is, as I said, if you look at just for 25 GW of LONGi capacity, if you put the, you know, OCI and the Wacker all the supply together, it just can meet that one customer. It's very tough situation for next year for all the mono wafer supply side.
Great.
We do not get any confirmation from government. We heard a lot of things from you side, you and also other people. I believe most likely this will happen. I don't know when we'll officially announce it. We were told is before November finishing, so by end of November maybe. That's what we know. Yeah.
Okay. Thanks, Gongda. I'll pass it on.
Thank you.
Great. Thanks, Philip.
Our next question will come from Brad Meikle of Coker Palmer. Please go ahead.
Hey, good morning. First question is, based on your model of the success of the new entrants into the market, from a supply standpoint, what do you think supply growth of polysilicon is in 2017 and 2018?
Okay. Brad, so we, so 17 this year, actually, there are several new entrant enters. Is East Hope and that's the largest, t heir, you know, production is not very successful. They have three phases to start, and the first phase even not ramp up yet. They face a lot of challenges for technical mainly, and plus some environmental government regulation forced them shut down some their other operations like electricity, power generators, et cetera. Especially with the mono wafers requirements recently China, we see like we should quickly reach 30% of the wafers. Wafer supply. The requirement for polysilicon is standard is higher, getting higher. The entry lab barrier actually getting higher. For those guys, for new entrants, you know, they cannot immediately apply their production to the mono wafer. That's very tough. We saw the 2017, the situation is different.
I think the East Hope, they cannot even supply good enough polysilicon for multicrystalline wafer usage. We do not see much capacity increasing for 2017. As for 2018, our expansion will be significantly increasing output only by 2019. We were expecting some small capacity increasing for like GCL, t hey maybe have 20,000 metric tons. Maybe they were in line by second half of 2018, but nothing will be in 2017. There's some other, Tongwei maybe have 20,000 metric ton, maybe by sometimes second half of next year as well. We will see around maybe 50,000 metric ton if they're all successful, by added to current capacity by next year. If you look at the downstream, everybody very aggressively, we heard that Jinko, you know, LONGi and TZS, they're all increasing significant wafer amount, their capacity by next year.
We're still thinking, especially for the mono wafer supply, side is still a shortage for polysilicon. The overall market depends on how much installation China, India, and those countries. Overall, I think the situation will continue from now to next year.
Interesting. Thank you. Would you agree with a 5%-7% supply growth number overall for next year? Do you think that's in the right neighborhood, or is it lower than that?
I personally believe, if you just look at the mono wafer capacity, actually supply-demand, the shortage of supply side will more severe next year than this year. You know, this year, because mono wafer just starting pick up, but next year is everybody announced a huge amount facilities expansion for the mono wafers. Actually, by the fact that they are already installed some equipment right now, they're ready for production. People is trying to secure the polysilicon supply for 2018, and people are seeking all the domestic and international supplies very actively right now, trying to secure their supply for next year's production.
Thank you. A couple quarters, I think I asked that if the second half of this year was solid, would you consider a stock buyback or a dividend? I just wanna ask what your thoughts are on that at this point.
You know, we are trying to, you know, Of course, company first priority right now is still using cash to support the Phase 3B project. Of course, if we have additional cash, we will consider that, t hat's always the option for the company. You know, as you know, we can discuss this. The buyback is a very limited amount because our trading volume is so low, and there are so many regulations. You really can buy a certain percentage and the certain price range and also the volume is not that significant. We tried several times before when the historical low price, but buyback is very limited.
Only maybe to a certain We happily to see recently the trading volume is increasing a lot significantly compared with the historical data. You know, that's always the company's option. At this moment, we didn't getting approval or action like that yet. As I said, the first priority is trying to make Phase 3B project successfully done by end of next year for construction. Yeah.
Thanks a lot. I guess just last question is, with the market possibly being tighter next year, and most of the market is sort of buying on rolling spot contracts, do you think that the market will move to more of a long-term contract or medium-term contract with deposit framework like, you know, existed five years ago?
Well, people are looking for long-term contracts for quantity. They want to secure the supply. We have seen everybody happy with the kind of locking the volume and then negotiate price every month. The prepayment kind of term is not very popular, and people hate that because they burned out all the relationship in last, in last, you know, five, six years ago. Actually, those prepayment is only working for mostly international poly makers. For Chinese poly makers, I think that's done firstly before 2008, a fter 2008, nobody really doing that anymore. I don't think that's feasible. We're talking about prepayment in the statements is, customer actually sign the next month's contract, immediately pay the money for us, ask us, ship us quicker as possible. That's like a one-month period, prepayment.
For long-term contract with prepayment, we don't see that, I personally don't believe that will happen next year. Unless there's a crazy shortage of polysilicon for like mono wafers, i t may be, but I don't think a reality next year will not likely will happen that way.
Thank you. I guess one last question. With President Trump meeting with President Xi last week, and, you know, Hemlock still really doesn't ship into the China market, and, you know, there's obviously still a possibility of a resolution of the Section 201 case. Do you think there's a chance that all of it gets wrapped together and that the polysilicon anti-dumping against the U.S. goes away and, just what would be your thoughts on I know it's speculation, but on that type of thought?
Yeah. Yeah, it's a very difficult task. We're talking here with different people, different group, interesting group. We were told by a lot of people trying to settle down the polysilicon thing. You know, the for module side, it's a lot of conflict interesting groups, i t's very difficult to work together. You know, I received email from, you know, you know, you know, basically Solar Association ask us to donation some money, so they're using the money for lobby for Presidency office to cut down those kind of tariff. I don't know whether that work or not. I personally believe in if the problem cannot be solved in last four years, it cannot be solved next six months. I mean, it's all politics. It's more difficult than the supply-demand issue, we're talking about the polysilicon. They will not solving, in my opinion, for next six months at least.
Thank you.
Great. Thank you.
Our next question will come from Kyle Liu of CICC. Please go ahead with your question.
Hi, management. Congratulations on the results. I got a three question. The first question is that, what's the percentage of our high-quality polysilicon which provide to the mono wafer market in third quarter, and what's our target percentage for those kind of product in the future of our total polysilicon sales? That's my first question.
Okay. Kyle, thank you. First off, for next year, I already told you, at least 50% of our product will be aimed at for the mono wafers at least. As a current status, we are still in a trial and error for the, for our standard to meet the downstream customers. We normally present like, six grades of polysilicon. Electronic grade 1, grade 2, grade 3, and the solar grade 1..
Yeah.
...grade 2, grade 3.
Yeah.
I can only tell you about in Q3, we have more than 80% meet the electronic grade 3. Basically, all this can be used, potentially used for mono wafers. You need to take carefully. We right now is, we bring those to 83%, but we only provide the best to our customers because we do not have experience to say everything can be used or not. We are carefully select the best morphology. We talking about the density of the polysilicon. Right now is only supply very dense, very smooth outside to supply to our customers. Our customer request us to try to lose some standards to, so that it can supply some like surface morphology as not as smooth or as not dense to supply them too.
We are still go through the experimental period. Initial data looks very good, very promising. We are not going to larger volume shipment for Q3 yet. If this is successful, I think it's a 50% of our production for mono wafer is very, very conservative estimate. If this have problem, we need to go back to look at the solution again. To answer your question, in third quarter we are shipping around 30%-40%, maybe like 35%, I don't have exact number yet, but around that range. We have potential to go to 50% if we can work with our customer for certain requirements. Yes.
Yes. Thank you. My second question is also about the polysilicon. In the Phase 3B phases, we'll also target for the semiconductor polysilicon business, and we know one of our competitor has recently announced some product to semiconductor in near term. It means we kind of be the follower. Which kind of strategy and could you please provide some color for us that...
Okay.
...how we will target this market?
Yeah.
Yeah.
Okay. Just to give you an example, currently, with our existing facility, we can produce about electronic grade 1, but it's about 30%.
Okay.
With our new Phase 3B, we expecting 100% will meet electronic grade 1 . Now our competitor, they're doing great job, t hey're using different approach. We approach is based on low cost facility and tightening our process to find a way to achieve the electronic grade 1 in the cheap way, very economical way. Why we control our cost and produce high quality. That's a tough job, this is the way we're choosing. Real, real, you know, product we aim is not semiconductor wafer users. We are aim in the mono wafer users...
I see.
...significant amount of wafers to our mono wafer manufacturer customers, from last year. We are gradually increasing every month. Our competitor choosing different approach. They never supply a significant amount for mono wafer usage...
Right
...to to the semiconductor, t hat's another approach. Of course, it's perfect if they can do immediately semiconductor. My lesson, experience is step by step is more solid than you jumping around. Again, they spend a lot of money. 5,000 metric ton capacity spend like $ 2 billion or something like that, which is the I cannot afford that. We, we cannot afford is 10,000 metric ton, we will spend probably half of them the money to make the capacity. Our goal is those 10,000 metric ton we added will be in 100% usable for the mono wafers for short period of time. Now, small amount maybe you can well achieve like a semiconductor, but we don't believe there's a market, huge market in China today.
Three years, five years later, semiconductor market will expand it in China, but not today. Now we're just using that as a objective to improve our quality, I hope this is clear for you. Short-term, we are really trying to improve quality to grab the market for mono wafer supply in China. Long-term, we will aim for semiconductor market, but not like within three to five years. In the short period of time, we are only aim in the mono wafers. I think, we think we can achieve this very easily with our current technology equipment without impact a lot of cost structure we already established in China. Yeah.
Yeah, yeah. Thank you. My last question asks about the cost guidance. We imagine you have the Phase 3B capacity, which also approaching the low cost. Do we have some cost roadmap to looking forward in 2019? Which kind of cost, average total cost we will achieve at that time? Do we have a guidance?
Yeah. Because the new process we're using will be more efficient to use the electricity, steam and the water, everything. We have a clear roadmap where by add on that, we actually in the opening remark, I said, with the new technology and the new process and with some new equipment, and also some, you know, benefits from scale of the facility, we will achieve like $7.50. We have like about $1 kind of cost saving from current to 2019. If you look at our announcement, b y 2019, end of 2019, we'll reach the capacity, potentially have a 30,000 metric tons. When that's reached, I think our cost structure will be around like $7.50 per kilo. Which is a cost, is a cash cost plus the depreciation. Yeah.
Okay. Yeah, o kay. Thank you. Thank you very much, I have no more question.
Thank you.
Thank you, Kyle.
To ask a question, please press star and then one. Ladies and gentlemen, showing no additional questions, this will conclude our question and answer session. I would like to turn the conference back over to Kevin for any closing remarks.
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.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines.