Earnings Call: Q2 2017

Aug 8, 2017

Good day, and welcome to the Daqo New Energy 2017 second quarter results conference call. I would now like to turn the conference over to Mr. Kevin He of Investor Relations. Please go ahead. Hello, everyone. I'm Kevin He, the investor relations of Daqo New Energy. Thank you for joining our conference call today. Daqo New Energy just issued its financial results for the second quarter of 2016, 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 who will discuss the company's financial performance for the second 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 operation and financial performance and industry growth, are forward-looking statements that are made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These statements involve inherent risks and uncertainties. A number of factors could cause actual results to differ materially from those contained in any forward-looking statement. Further information regarding these and other risks is included in the reports or documents we have filed with or furnished to the Securities and Exchange Commission. These statements only reflect our current and the preliminary view as of today and may not 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 US dollar terms. Please keep in mind that our functional currency is the Chinese RMB. We offer these translations into US dollar solely for the convenience of the audience. Without further ado, I now turn the call over to our CEO, Dr. Yao. Everyone, thank you for joining our call today. We are pleased to report that the second quarter of 2017 was a solid quarter with new records on both polysilicon production volume and external sales value. During the quarter, we produced 4,993 metric ton polysilicon and sold 4,497 metric ton to external customers. During the quarter, we conducted various experiments to improve polysilicon quality, particularly for the monocrystal-grade polysilicon, which had a slight impact of overall production cost and volume in Q2. As a result of this experiment, we are seeing meaningful improvements in the polysilicon quality. We made a change to our production process and parameters, added devices for contamination removal, as well as implemented improved the process to reduce surface contamination. With the combination of these efforts, production volume as well as the shipment of monocrystalline quality of polysilicon hit the record high in June. With strong demand for PERC and the monocrystalline PV products, we are seeing strong increase of monocrystalline wafer capacity in China, including those of our existing customers. Overall, we believe monocrystalline wafer capacity is expected to increase in from approximately 30 gigawatts in 2017 to more than 50 gigawatts by 2019, an increasing of more than 60% over the next two years. This bodes well for sustaining the strong demand and the pricing for monocrystalline quality polysilicon. Daqo is well-positioned to be the leading supplier to this market segment. At the end of the first quarter, due to the downstream customer inventory management, ASP fell in April, but it start to re-recover in May. Market demand and pricing improved throughout the second quarter, with ASP in June approximately 15% higher than the April. In terms of PV end market, China installed 24.4 gigawatts of solar PV in the first half of 2017, representing a new record and a 9% increasing from the first half of 2016. The full year of 2017, China's annual PV installation forecast is currently expected to exceed 35 gigawatts. Based on discussions with our customers, we believe that China PV market demand continue to be strong, driven by Top Runner Program projects, poverty alleviation projects, as well as distributed generation. Globally, the U.S. and India markets are also seeing strong PV product demand. With a much stronger than expected solar PV installations in China and globally, the annual total global solar installation in 2017 is likely exceed 80 gigawatts. With strong and better than expected anticipated downstream market demand. Starting in late July, we began to see a significant polysilicon shortage in China market, with polysilicon pricing continued to rise. As of today, current spot market for polysilicon price is approximately 25%-30% higher than in Q2 average and appears to be going higher. Even at the current high pricing, we are seeing strong customer requests and orders that far exceed our ability to supply. In June, the Chinese government announced it's investigating captive power plants in Xinjiang for violation of regulatory policy and environmental standards. We believe the government investigation, as well technical and other issues, is resulting in serious delay and production problems at our competition. The problem is likely persist in the medium term and are further restricting available poly supply. During the second quarter of 2017, the company generated CNY 12.1 million in net income attributable to Daqo New Energy shareholders and CNY 29.8 million in EBITDA, with EBITDA margin of 39.2%. In particular, our operation cash flow remained strong. In the first half of 2017, we generated CNY 73.6 million in net cash provided by operation activities. Going forward, we will continue our efforts to improve polysilicon quality throughout the year. With our high product quality and stable supply capabilities, we continue to be a supplier of choice with strong demand for our high-quality polysilicon from our diverse customer bases. Let me provide the outlook for the third quarter of 2017. Our annual maintenance for Xinjiang polysilicon facility is scheduled for late September and October. The annual maintenance is anticipated to impact production volume by approximately 2 weeks. We expect to produce 4,200 metric tons-4,500 metric tons of polysilicon and sell approximately 3,700 metric tons-4,000 metric tons to external customers during the third quarter of 2017. The above external basic sales guidance exclude shipment of polysilicon to be used internally by our Chongqing solar wafer facility, which utilize polysilicon for its own wafer manufacture operation. Wafer sales volume is expected to be approximately 25 million to 25.5 million pieces in the third quarter of 2017. I will turn the call to our CFO, Mr. Ming Yang, for financial updates. Thank you, Dr. Yao, and good day, everyone. Thank you for attending our call today. I will provide the financial updates for the second quarter of 2017. Revenues were $76 million compared to $83.8 million in the first quarter of 2017 and $71 million in the second quarter of 2016. Revenue from polysilicon sales to external customers were $61.1 million compared to $70.4 million in the first quarter of 2017 and $50.5 million in the second quarter of 2016. External polysilicon sales volume was 4,497 metric tons, increased from 4,223 metric tons in the first quarter of 2017 and 2,931 metric tons in the second quarter of 2016. The average selling price of polysilicon was $13.58 per kilogram in the second quarter of 2017 compared to $16.66 per kilogram in the first quarter of 2017. The decrease in polysilicon revenue as compared to the first quarter of 2017 was primarily due to lower ASPs, partially offset by higher polysilicon sales volume. Revenue from wafer sales were $14.9 million compared to $13.4 million in the first quarter of 2017 and $20.5 million in the second quarter of 2016. Wafer sales volume was 27 million pieces compared to 22.4 million pieces in the first quarter of 2017 and 25 million pieces in the second quarter of 2016. Gross profit was approximately CNY 24.2 million compared to CNY 35.9 million in the first quarter of 2017 and CNY 29.4 million in the second quarter of 2016. Non-GAAP gross profit, which excludes costs related to the non-operational polysilicon assets in Chongqing, was approximately CNY 24.8 million compared to CNY 36.9 million in the first quarter of 2017 and CNY 31.2 million in the second quarter of 2016. Gross margin was 31.9% compared to 42.8% in the first quarter of 2017 and 41.4% in the second quarter of 2016. In the second quarter of 2017, total costs related to the non-operational Chongqing polysilicon assets, including depreciation, were CNY 0.5 million, decreased from CNY 1 million in the first quarter of 2017 and CNY 1.8 million in the second quarter of 2016. Excluding costs related to the non-operational Chongqing polysilicon assets, the non-GAAP gross margin was approximately 32.6% compared to 44% in the first quarter of 2017 and 43.9% in the second quarter of 2016. Selling general administrative expenses were CNY 4.5 million compared to CNY 4.1 million in the first quarter of 2017 and CNY 3.7 million in the second quarter of 2016. The increase in SG&A expenses compared to Q1 was primarily result of higher selling expenses related to increased shipment volume as well as higher professional fees recorded for the quarter. Research and development expenses were approximately CNY 0.3 million compared to CNY 0.4 million in the first quarter of 2017 and CNY 0.1 million in the second quarter of 2016. The research and development expenses vary from period to period, reflecting the R&D activities that occur in such period. Other operating income was CNY 0.8 million compared to CNY 0.8 million in the first quarter of 2017 and CNY 0.6 million in the second quarter of 2016. Other operating income was primarily composed of unrestricted cash incentives that the company received from the local government authorities, the amount of which varies from period to period. Operating income was CNY 20.2 million compared to CNY 32.2 million in the first quarter of 2017 and CNY 26.1 million in the second quarter of 2016. Operating margin was 26.6% compared to 38.4% in the first quarter of 2017 and 36.8% in the same quarter of 2016. Interest expense was CNY 5.3 million compared to CNY 4.3 million in the first quarter of 2017 and CNY 3.5 million in the second quarter of 2016. The sequential increase in interest expense was primarily due to higher bank fees and interest charges recorded for the quarter. EBITDA was CNY 0.8 million compared to CNY 41.7 million in the first quarter of 2017 and CNY 34.7 million in the second quarter of 2016. EBITDA margin was 39.2% compared to 49.8% in the first quarter of 2017 and 48.9% in the second quarter of 2016. Net income attributable to Daqo New Energy shareholders was $12.1 million in the second quarter of 2017 compared to $22.9 million in the first quarter of 2017 and $19.8 million in the second quarter of 2016. Earnings per basic ADS were $1.15 in the second quarter of 2017 compared to $2.18 in the first quarter of 2017 and $1.90 in the second quarter of 2016. As of June 30th, 2017, the company had CNY 49.8 million in cash and cash equivalents and restricted cash compared to CNY 61.2 million as of March 31st, 2017. As of June 30th, 2017, the accounts receivable balance was CNY 3.8 million compared to CNY 13.1 million as of March 31st, 2017. As of June 30th, 2017, the notes receivable balance was CNY 10.5 million compared to CNY 11.7 million as of March 31st, 2017. As of June 30th, 2017, total borrowings were CNY 219.3 million, of which CNY 123 million were long-term borrowings compared to total borrowing of CNY 236 million, including CNY 129.2 million of long-term borrowings as of March 31st, 2017. As of the end of the second quarter of 2017, our debt ratio decreased to 52.8% from 57.2% at the end of the first quarter of 2017 and 59.8% at the end of 2016. For the six months ended June 30, 2017, net cash provided by operating activities was CNY 73.6 million, increased from CNY 66.6 million in the same period of 2016. For the six months ended June 30, 2017, net cash used in investing activities was CNY 36 million compared to CNY 37.6 million in the same period of 2016. The net cash used in investing activities in 2017 was primarily related to the capital expenditures of Xinjiang Phase 3A projects as well as our technology upgrade projects. For the 6 months ended June 30th, 2017, net cash used in financing activities was CNY 23.4 million compared to net cash used in financing activities of CNY 13.5 million in the same period of 2016. That concludes the official part of our presentation. Now let's have the Q&A session. Our first question comes from Philip Shen of Roth Capital Partners. Please go ahead. Hi, everyone. Thanks for the questions. In terms of ASPs, I think you had said in your prepared remarks that the current pricing, let's say spot pricing of poly ASPs in China are 25%-30% higher than your Q2 average. That suggests ASPs might be close to $17 per kilogram right now. I think what we saw last week from some pricing sources was that spot pricing is closer to $16. Can you comment on whether the $17 number makes sense? What are your expectations as to what the blended average in Q3 could be and where pricing could go into Q4? Philip Shen, thank you for your question. I think at the, we're talking about the 30% increase in its position for the monocrystalline wafer polysilicon, which require much higher quality compared with the average polysilicon for solar normal solar grade. As for the pricing going, we still see strong demanding for the market, particularly in this season. The quarter, a lot of poly supply have a maintenance, scheduled maintenance in August, end of September. We see stronger than we expecting the third quarter demanding, driving the price up. We believe this trend will continue in third quarter, although we still don't have a clear, can see the fourth quarter pricing. Average-wise, we thinking the second half of Q3 will be stronger than, much stronger than Q2, like we said. Q4 maybe will be a little bit weaker than Q3. That's the normal people seeing. It's too far to see the first quarter pricing at this moment. Okay. Thanks, Gongda Yao. You know, as it relates to the supply constraints, you know, you talked about the scheduled maintenance, I think there was a fire at one of your peers. How much impact do you think that fire ultimately had on supply, number 1? Number 2, how much supply may be constricted as a result of the environmental investigations that are ongoing in Xinjiang as well? Well, okay. We cannot particularly comment on individual competitors. Generally speaking, the new startup for polysilicon manufacturer, as we heard, is they facing some environment and regulatory policy issues. Regarding you mentioned the fire in particular, the competitor, as a matter of fact, the quantity restricted from that event is very limited. We heard is several big supply polysilicon, they have restricted some products due to some technical difficulties in China. That give a more actually impact for the supply side. As a result, we will try to continue small production for August, but we also will do maintenance in the September. Generally speaking, for third quarter, there's more, more shutdown for maintenance and, or, the expected the expanded capacity in Xinjiang is not as high as the people expected, on the first half of this year. Also, the demanding for the polysilicon is stronger than people expected after June 30th. These things add together, driving the demand, the supply imbalance driving the price is going increasing from Q2. Yeah, that's what we generally see. Although, you know, we do not have particular clear information regarding what's the problem some of the competitor are facing, but we see much less polysilicon releases from those suppliers. Great. Okay. one more here. In terms of capacity expansion, you know, can you share your latest view on capacity expansion? You know, how much longer do you think you need to wait before you decide? You know, what new information do you need to help you make that decision? You know, I gather that it's not just an internal decision, but rather you're also thinking about what is happening on the supply side overall. What, you know, can you provide some color as to what are the key factors to help you decide if you will expand? Also, can you expand beyond Phase 3B? Would you consider that, if the, you know, if the market merits it? Phil, thank you. We, okay, our decision to future for expanding our capacity is based on two things. One is, market is, supply balance, supply-demand balance. That's important. Secondly, also, we mentioned that in Q2, actually in for first half of this year, we did a lot of experiments trying to explore the high-quality polysilicon, their quality. If we want to expand in future, what we can say is one of the very key standard is that we're positioned for a high-end market, which means. You know, position definitely is for monocrystalline wafer polysilicon or even higher quality. If we have a confidence for those technologies mature enough, we can make a decision to expand. We are not competing with a larger volume of capacity of, I would say for standard polysilicon maker in China. We are positioning ourselves and the leading supply for high-quality polysilicon manufacturer. We are competing with those leading companies like international companies for the high-end market. Once we think that is technical viable, we can make a decision at that point. The technically and for the projects we are doing study is very smooth. We think we can conclude our results very soon, I would say. If not all completed at this moment, we will trying to complete it very soon. That's our key decision make condition, where for consider the, for our future expansion. At this moment, we are not consider a lot after, Phase 3B and beyond that. We trying to maybe step by step. If we want, we want to do next, we probably will complete, Phase 3B first. Okay. Very helpful. Thank you. Yeah. One last one. Yeah. I'll pass it on. Okay. Sorry, go ahead. The capacity is like 25,000 metric ton beyond. Yeah. That's level. Thank you, Phil. Great. One last one, I'll pass it on. In terms of, you mentioned higher quality poly, can you give us some metrics to help us gauge where you stand today? For example, in Q2, you know, I may have these terms wrong, so feel free to change the criteria if you need or want to. Oh, okay. You know, I think there's different levels of electronic grade that you guys have talked about in the past. What % of your production in Q2, for example, was the different levels of electronic grade? How do you expect that to trend through Q4? Okay, so- If you launch Phase 3B, how much more could it become? Thanks. That's right. Okay, great. Thank you. In the polysilicon market, in China's national standard, we have 6 different grades. 3 for electronic, for 3 for solar. The high level is Electronic Grade 1, and the next one is Grade 2, and the third one is Electronic Grade 3, and then Solar Grade 1, Solar Grade 2, and Solar Grade 3. At current, in China, most first-tier polysilicon manufacturer can all be on the, like a Solar Grade 1, averagely speaking. Daqo right now, at the Q2, our polysilicon quality above Electronic Grade 3 is about 80%, you know, of our total production. We have some very small portions, which like electronic grade 1. There are significant portion is a majority in the grade 3 and between grade 3 and grade 2. There are small portions above grade 2 at this level. For the future expansion, we target our production at electronic grade 1 level. Which means we're, we were using more advanced technology and equipment for our future expansion, if we will do expansion in future for Phase 3B. I hope this answers your question. Yes, absolutely. Thank you. I'll pass it on. Yeah. Good. Our next question comes from Sheng Zhong of Morgan Stanley. Please go ahead. Hi, management. Congratulations on your good results. A follow-up question on your maintenance schedule. You mentioned in September you will do the maintenance, but last year the maintenance is in very late September and early October. Is it possible that you will postpone your maintenance this year because of the strong demand and strong price? Sheng, we, last year's maintenance is a little bit to do with the expansion project. We're doing one maintenance doing two purpose. For this year is slightly different. We were using innovative First time we're trying to shut down the half of the line and while maintain the manufacture on the other line. That will maximize our output. The impact for the production as as we said, maybe roughly about two weeks instead of more than two weeks. Last time we did more than three weeks actually. Huge impact for production. This time, if you notice our our guidance for Q3 is much higher compared with the last year. That's in 2 facts because we will, we're divide the 1 maintenance by 2 different schedules in September and October, and each with much less impact compared with last year. Total output impact is include Q4 for about 2 weeks. We're expecting like roughly about 1 week for each. That's the guidance. We probably will not change much unless really our customer driving us, say. Currently, we got a lot of calls from our customer for supply. We do our best that we can to supply, so and some customers say they are facing possible shutdown because of shortage of polysilicon. We don't like to see that happening, but, you know, our ability to supply is limited. We try our best in August. In September, we really need to do the maintenance because the maintenance is not only for the mandatory things and also for the safety, guarantee our chemical plant for long-term running. We definitely most likely will do in September, according current schedule is. Of course, we are waiting for other factors, is like a hardware delivery from our supply is ready, then we can immediately starting our maintenance in September. That's our only limitation is on the hardware availability, the equipment and the hardware. If once we have those things, we will do in September. Most likely will not change. We also in preparation for maintenance, we also informed our key customers about our schedule. We ask them to do their plan accordingly and in third quarter and the fourth quarter. Understand. Thank you very much. Second question is about the currently still there are still very huge import number to import polysilicon to China market. Wondering if you have any updates on the antidumping investigation on the Korean polysilicon. Is there any timeline for China government to make some decision? We heard that no decision made already yet. The, you know, this is a Chinese government's its decision. I do not thinking we will know before even the, like, Korea company and will know before. According to the announcement schedule, most likely will be November, right? November we'll know the results. Unfortunately, I think we know same as maybe for example, like the Korea polysilicon manufacturer, they will know the same time. By November, most likely they will announce it. You know, as you know, this is not really pure economic issue. It's, it's political and depends on the country relationship and and the changes could be happen. It's not only the simple economic issue, so it's very complicated. We think around November will be done, probably. Okay. Yeah, that's great. That's from me. I jump to the queue. Thank you very much. Our next question comes from John Siefert of Luminus. Please go ahead. Hi, guys. Just two questions, if I could. First one, can you give us a sense, if you haven't talked about it already, of kinda where you think cash costs might be in the polysilicon segment by year-end? What sort of scope is there to continue to bring those down? Secondly, when I look at the ASP that was realized in the poly segment, it was a little bit lower than I would have thought. Typically, because of your high purity, you guys seem to get a little bit of a premium above spot. Was there anything particular in the quarter that, you know, led to a slightly lower ASP? Has something changed a little bit more in the market? Should we expect a premium to return as we look in the second half of the year? Yeah, we, as you know, the Q2 had the ASPs were very weak in China. Also, we have some delay in the order and the shipment and so forth to the customer side. During the Q2, almost like ASP stayed steady. It's going up a little bit, but not very high in the June, end of June compared with the current price. We do see, you're right. If you I don't know. If you look at the average price-wise, maybe slightly below, but actually, because of little bit of lagging in the price response to our shipments. Normally, we for example, we normally fix the price to at one month before. Basically, for example, our April price is most likely settled by the second half of March, which is a very low point of price, which give us April prices a little bit lower than actual April price. Same to the May and June. That's probably the reason why we Yeah, we do not just sell our spots and the price immediately. We do work with our long-term customers with 1 month ahead of schedule. That's probably the reason. Yeah. Perfect. Thank you. On the cost side, where do you think cash cost will go? Yeah, cost side right now, cash cost about CNY 7. That's the manufacturer cash cost, not include the financial cost and interest cost and those sales and administrative costs. How low we can go manufacturer cost, we believe eventually we can go to as low as CNY 6. It's long-term. It's not like immediately. Probably within 2 years, I think we can do with cash cost about CNY 6 for the polysilicon. By, let's say the end of 2018, 6 is a good target. Yeah. Yeah. End of 2018 and the beginning of 2019, I think we can do that. I think even in Q4 you will start to see some opportunities for cost reduction. You know, we're implementing new technology and new upgrades that should reduce electricity usage and energy usage in general, as well as raw material usage reduction. You start to see some effect starting in Q4. Okay, great. Thanks, guys. Great. Thank you. Again, if you have a question, please press star then 1. Our next question comes from Luka Zhu of Deutsche Bank. Please go ahead. hello, Dr. Yao. Can you hear me? Yeah. Yeah, yeah. Please. Very clearly. Thank you. Okay. My first question is that, can you please share with us about the poly shipment mix between mono and multi customers during the past quarter? If I remember correctly, in first quarter you shipped around 20%-30% something, and what's your expectation in the next few quarters? Okay. Next two quarters, currently we're targeting our shipment is around 40%. We trying to set up a very high standard for monocrystal-grade polysilicon. On the two requirement. One is the purity-wise you know, the electronic, the impurity level should meet electronic grade 3 or above. That's the first requirement. Second requirement is that we want to very dense polysilicon raw material. That's the combination of the two characteristics of the polysilicon we will ship for as a monocrystal-grade polysilicon. As a result, I think we ship to various of our customers, and so far almost like 100% in the past, their quality control. This we will continue to that. On the same side, you know, our customer demand is high, and they want to ship a high percentage of our product as a mono wafer polysilicon. We also do some experiments trying to little bit the testing the other material can be using as well. We have a joint development with our key customers to see if we can expand the shipment. At this moment, we still target our percentage roughly about 40%. You know, until our new experiment, like Ming mentioned, we'll do a lot of experiment with our customers. If that positive, we probably will continue expand our percentage. Otherwise, we will still within that commitment as a 40%. As, as we say, right now is 2017, the mono wafer supply may be consuming still about, you know, 30%-40% range right now in China. Majority mono wafer the polysilicon is from China and also imports. In future, maybe 2 years later, that would be improved to more than about 50% in the 2 years later and then probably require a lot of Chinese poly as a bigger portion will be suitable for the mono wafers. That's our goal in there. In next 2 years, we will expand our percentage increasing from 40% to maybe 60%. That needs a new include a new capacity if we wanna end our technology improvement for our production. Okay. Got it. Thanks. What's the price difference between the poly for mono versus multi? There's several mono wafer segment. I think, for n-type mono is the most high requirements for whole sectors. Those are for, like, for example, in for, typically like for SunPower's IBC applications, for n-type mono is very, very high quality. Require is much, you know, carrier, in order to carry a lifetime. Lifetime is much longer than compare with standard p-type. Those wafers require much better polysilicon quality. Normally, we choosing the best material and we also asking for higher price compared with normal ones. That's definitely. For the standard p-type, right now the difference between that poly compared with the solar grade is very, very small. There's two factors. 1 is we're just starting the shipping these things to our customer. Normally, most customer, they also receiving our polysilicon for monocrystalline and multi-wafer applications. We combine those two together. At this moment is the difference is very limited at this moment. As we said, in future, because demanding for the monocrystal-grade polysilicon were increasing significantly as a factor also require higher standard for quality, I think the price we will see difference in the second half of this year. Okay. just, you mean small premium. Can I understand it as like below 10% something? Yeah, yeah. You can say that. Around 3% to 5%. Yeah. -currently. We expect that to expand. Is it possible to expand beyond 10% in second half, right? Uh- May, maybe not 10. Maybe not 10%. Because as you know, the China polysilicon is just starting to using as a mono wafer seeing in last only a few quarters, maybe 1 year. Traditionally, this market is by imports polysilicon, so they are easier position for ask a premium. Right now, we're competing this field. At this moment, we enter this new market, we do not put a, you know, larger percentage of difference. We are trying to competing as a qualified mono wafer polysilicon supply at first. Once we can largely replace the imports, I think, you know, even with positioning lower than imports in a price, we still can position for higher prices compared with multi-crystal wafer market. Yeah. That's what we think expect. Especially, as not every polysilicon manufacturer can provide us good quality to qualify as mono wafer supply. There's a limit to the supply in the Chinese market. Especially if the anti-dumping, you know, you know, decision is made, I think, where a lot of imports probably may face some difficult to into Chinese market. That point we'll see some supply-demand imbalance again. Okay, I see. My second question is on the cost side. I noticed that the second quarter, the cash cost is a little bit higher versus first quarter. Is it due to like the currency movement? I'm wondering if any cost difference between the poly mono and the multi- The second quarter, slightly cost is not significant. We will still consider the flat. There's 2 areas we mentioned. One is the second quarter, we do a lot of experiments trying to improve the quality of polysilicon. We face some problems and stability in the process, causing some parameter movement. Although the quality of the polysilicon generally increased, it's still like 80%. As a manufacturer, we're using a little bit of more electricity, for example. Second factor is slightly the impact for the cost is a metallurgical grade silicon price is slightly increasing, not significant. We think we can maintain that. We can manage that in the Q3 and Q4 at this moment, if the, you know, those factors not increase a lot. We can prove the in the Q3 is preliminary results. We already see our costs that can maintain as low as in the first quarter. This problem can be resolved by Q3, I think. If Q3 we need look in the general cost is because maintenance. Maintenance normally will impact some in quantity of the production. If you disregarding that portion, I think we can improve our cost structure for Q3 and Q4. Okay. Thank you. Can you remind us again, your cost, total cost target by end of this year and maybe for next year as well? Okay. for this year, we will say we maintain is about between CNY 8 and CNY 8.50. Yeah. it's like, we target like CNY 8 to make CNY 0.25 as the middle point at the end of this year when exiting the 2017. Once we go into 2018, because we will do some during this coming to maintenance in the September, October, we will improve some debottlenecking for our line. we will increasing, likely we're increasing roughly about additional 1,000 metric ton output for 2018 compared to 2017, if we do not starting any new capacity expansion. We expecting 2018, the overall production volume were very close to about 20,000 metric ton. Which will give us further reduction. Target, most likely target to about $8 by 2018. Okay, thank you. My last question is about, again, about the capacity expansion, given, maybe you have learned that the government has set a very encouraging the solar target by next few years, which has beat the market expectation. Perhaps this may help lift the demand expectation. Given that, will you consider to expand your Phase 3B capacity any soon? Can you give us the specific timeline of this? No. As we said, we are not really. We'll consider market environment. You know, as you know, the market environment is not a very important factor for what we're considering. Our capacity right now are only like 20,000 metric tons. Total market is about 400,000 metric tons. If you look at the market, there are many people who are expanding by 100,000 metric tons for one company. Which is really crazy in the market right now. We are looking into is not total capacity and total demand. We're looking for the area that the market is lack of, which is high-quality polysilicon. Once we have technology, I think we'll decide to expand immediately. If we believe we're leading other competitors by 2-3 years or more, and we will starting our expansion immediately. Yeah. You know, as you know, as at this moment, we still have a lot of research need to be done, and a lot of experimental results need to be find out, and then we can make decision very soon. Okay. I see. You have an internal target for breaking through the technology? That's true. Yeah. We were looking into that, we also see overall our competition, startup, like new companies in Xinjiang is much slower than we expected. Also they face more problems, technical problem and environmental problem and government regulatory policy problems. Those problems threatening to our expansion is much less than before. The major factor we will consider is our own capability point of view. Can we make the polysilicon no other people can make in China in next 2 years? Then we will do that. We were competing in the high end with international players, most likely, instead of majority Chinese the polysilicon makers. We are positioning our as the leader, top leader runner, for quality point of view. It's not for quantity point of view. That's our strategy will be. Okay. Very helpful. Thank you very much. You're welcome. Thank you. Our next question comes from Paul Striegler of Espeland. Please go ahead. Good evening, guys. Great work this quarter. I'll try to ask two quick questions that haven't already been asked. In terms of your customers, good news for you on the poly side is probably bad news for them on the margin side. Do you happen to know sort of what the current usage rates for poly are on wafers for mono and multi? Sort of how much are they consuming per watt for each type of wafer? Uh, multi is the- I know it's gone down. Okay. Yeah. Those numbers are changing. As actually for mono, you know, they are using diamond wire. The each watt per gram is reduced a lot. I think a very close to like a 4 or something. For multi-crystal wafer, there are 2 different technologies. If we're using slowly cutting, I think, very close to 5. If you do diamond wire cut, is also very close to 4. Because we know that it's about 15%-20% saving of silicon if you switch from 1 technology to another. There's that point. As poly price high, actually for average people point of view, they are facing same problem. You know, if you have advanced technology, you have a high efficiency, you're still leading their competition in the field. The most challenges is right now in China is the mono versus multi. So- It's Yeah. Because the mono wafer selling price is much higher than multi wafers. They can absorb the more tolerance of the polysilicon price using price point. Yeah. Is that why we've seen strength in multi-wafer pricing recently and a little bit of softness in mono wafer pricing? It's just a shift to, it's based on poly supply right now and that, you know, it's really hard to find any poly, you know, in that electronic grade given supply issues. Actually, we I think the gap between the mono wafer and the multi-crystal wafer pricing is narrow right now a little bit. Yeah much wider, more than 100. Yeah. More than 100. Right now, it's probably less. Which means, it's a dynamic because when the gap is more and, then multi-crystal wafer will more attractive for the end market. Yeah. They can. Yeah. That's the once the multicrystal wafer price increasing to some point of view, then people were choosing to the mono wafers. Market is very flexible. Actually, the market will be moving through the high profit relative for the end market module. Yeah. Okay. One last quick one. Last time we saw a supply shortage, I think REC rocked her out of their Tennessee plant in Hemlock, ended up shipping a lot of supply to Taiwan, which ended up getting shipped into China, either as ingots or as just, you know, raw poly. Has that loophole been closed? Are you seeing any increase in Taiwanese imports of ingots and/or poly? Is the government keeping an eye on that? I think the government is keeping an eye on that. I think the importer from Taiwan is very limited. It's about 1,000 metric tons or maybe less. 7, 700. Yeah. 700 metric ton. I think, government will still monitor that to some point they will take action. It's a very high risk. I think those are only small companies. Maybe, if you can say, China has punished a lot of companies in last 2 years for smuggling any polysilicon into China. I think people are very careful about this. Only maybe I really don't believe any big company will buy those polys, only maybe very small companies. Understood. Great work, guys. Thank you. Okay, thank you. Bye. This concludes our question and answer session. I would like to turn the conference back over to Mr. Kevin He 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 has now concluded. Thank you for attending today's presentation. You may now disconnect.