Earnings Call: Q4 2016

Mar 7, 2017

Hello, and welcome to the DocuNew Energy 4th Quarter and Fiscal Year of 2016 Results Conference Call. 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 Daqin New Energy. Thank you for joining our conference call today. Daqo New Energy just issued its financial results for the Q4 fiscal year of 2016, which can be found on our website at www.dqsolar.com. To facilitate today's conference call, we also have prepared a PPT presentation for your reference. Today, attending the conference call, we have Doctor. Gunna Yao, our Chief Executive Officer and Mr. Ming Yang, our Chief Financial Officer. The call today will feature an update from Doctor. Yang on market and operations, and then Mr. Yang will discuss the Company's financial performance for the Q4 fiscal year of 2016. 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 US Private Securities Litigation Reform Act of 1995. These statements involve inherent risks and uncertainties. A number of factors could cause actual results to differ materially from those contained in any forward looking statement. Further information regarding these and other risks is included in the reports or documents we have filed with or furnished to the Securities and Exchange Commission. These statements only reflect our current and preliminary view as of today and may be subject to change. Our ability to achieve these projections is subject to risks and uncertainties. All information provided in today's call is as of today, and we undertake no duty to update such information except as required under applicable law. 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'll now turn the call over to our CEO, Doctor. Yao. Please. Hello, everyone, and thank you for joining our call today. The Q4 of 2016 was an important milestone for Daqinu Energy. During the quarter, we successfully completed our annual maintenance work and the interconnections between our new facilities and existing facilities in Xinjiang at the same time. We also successfully completed all the construction installation work created to Phase 3a polysilicon expansion. As the maintenance, construction, installation of new equipment and interconnection of the facilities we are conducting concurrently, our annual maintenance for 2016 took longer than usual to complete. However, the combination of these efforts allowed us to start initial production of our expansion production capacity in January 2017, months ahead of our original schedule. We have already reached full production throughout throughput of 18,000 metric tons per annum by the end of February 2017. At our new production capacity of 18,000 metric tons a we are achieving significant economic scale, which we believe will allow us to achieve further manufacture efficiencies and cost savings. For example, when we were at 6,000 metric ton capacity, we had approximately 900 employees in Xinjiang. When we doubled that capacity to 12,000 metro tons a year, we had approximately 1100 employees. Now that we reached about 18 1,000 metric ton capacity, we only have approximately 1300 employees in Xinjiang. So capacity per person more than doubled from 6.6 metric ton per person when we were at a 6,000 metric ton capacity to currently about 13.8 metric ton per person at 18,000 metric ton capacity with significant operational leverage and the reduction in per unit labor costs. At the same time, we implemented new technology upgrades and a special project that further improved energy efficiency. Based on initial production results, we are seeing encouraging savings in energy usage as well as silicon and raw material utilization. With the combination of these efforts in cost savings, we believe we can achieve our new cost target of $8.50 per kilo in average total production costs in Q1 and reduced it further throughout the year as we further optimize our production process. During the Q4 of 2016, we saw robust demand for polysilicon products and the strong momentum continued into the Q1 of 2017. Based on the industry forecast, the size of solar market was about 70 gigawatts in 2016, with demand from China and India exceeding expectations. The PV market is expecting to continue its growth in 2017, with the market size expecting to the 73 to 79 gigawatts for this year. In particular, the Indian PV market is expecting to grow from about 5 to 6 10 gigawatts in 2017. With the growing PV market and major downstream PV, manufacturers continue to add capacity. This brought us well for continued strong demand for the high purity polysilicon products. In particular, we are seeing a shift to solar wafers and solar cells. This has translated to increased demand for high purity semiconductor grade polysilicon, which only very few Chinese domestic manufacturers are able to supply. At Daqinu Energy, we are currently upgrading our distillation process and adding special device in our distillation system, which will further remove impurities and improve the quality of our polysilicon product. With our upgraded process high purity products, Daqo New Energy is uniquely positioned to address the growing demand from the high efficiency mono crystallosolar market. In terms of market demand, based on the feedback from our customers, we believe that orders and shipments of downstream PV module products are currently healthy and strong. We have witnessed strong orders and robust pricing for our high quality polysilicon products for our customers. And despite our expanding capacities and product volume, customer demand is still exceeding our production volume. In fact, certain customers are now willing to pay prepayment so that they can take priority in product delivery. This is a testament for both strong market demand and the high quality of of our product. As a result, we expect deposit and ASP in the Q1 of 2017 will be higher as compared to the Q4 of quarter of 2016. We are also proud of the financial performance we achieved for the year of 2016. In 2016, we had revenue of $229,000,000 net income attributable to Daikoum Energy Corp. Shareholders of $43,500,000 and an earnings per basis of ADS of 4 point $5 or higher as compared to 2015. We generated non GAAP EBITDA of $99,300,000 and net cash provided by operation activities of 98.7 $1,000,000 in 2016. The strong cash flow has allowed us to found the complete the current phase of capacity expansion without significantly increasing bank borrowings. Now let me provide outlook for the Q1 of 20 17. With the successful initial production of Phase 3a capacity, the company expected polysilicon production volume will reach 4,300 metric tons to 4,500 metric tons in the Q1 of 2017. The company expects to sell about 3,800 metric tons to 404,000 metric ton of polysilicon to external customers during the Q1 of 2017, a record high for the company. The above external sales guidance excludes shipment of polysilicon to be used internally by our Chongqing Solar Wafer Facility, which utilized POS Xecon for its wafer manufacturing operation. Wafer sales volume is expected to be about 23,500,000 to 24,000,000 pieces for the Q1 of 2017. Now, I will turn the call to our CFO, Mr. Ming Yang, for the financial update. Thank you, Doctor. Yao, and good day, everyone. Thank you for attending our call today. Now I will provide the financial updates for the Q4 fiscal year of 2016. Revenues were $46,100,000 compared to $54,300,000 in the Q3 of 2016 and fifty $9,300,000 in the Q4 of 2015. Revenue from polysilicon sales to external customers were 32 $800,000 compared to $44,400,000 in the Q3 of 2016 $42,900,000 in the Q4 of 2015. External polysilicon sales volume were 2,209 metric tons compared to 2,000 838 metric tons in the Q3 of 2016 and 3,092 metric tons in the 4th quarter of 2015. The decrease in polysilicon revenue as compared to the Q3 of 2016 was primarily due to lower polysilicon sales volumes and lower ASPs. The company successfully completed annual maintenance and several efficiency improvement projects, which affected polysilicon production for approximately 3 weeks during the Q4 of 2016. As a result, both of our polysilicon production volume and cell volume were lower in the Q4 of 2016 as compared to the Q3 of 2016. However, we successfully resumed $9,900,000 in the Q3 of 2016 and $26,300,000 in the Q3 of 2016 and $16,400,000 in the Q4 of 2015. Wafer sales volume was 21,300,000 pieces compared to 14,400,000 pieces in the Q3 of 2016 and 21,000,000 pieces in the Q4 of 2015. The increase in wafer revenue from the 3rd quarter was primarily due to higher sales volume offset by lower wafer ASP. Gross profit was approximately 14,200,000 dollars compared to $20,100,000 in the Q3 of 2016 and $16,900,000 in the Q4 of 2015. Non GAAP gross profit, which excludes costs related to the non operational polysilicon assets in Chongqing, was approximately $15,800,000 compared to $21,600,000 in the Q3 of 2016 and $18,900,000 in the Q4 of 20 Gross margin was 30.7% compared to 37.1% in the Q3 of 20 16 and 28.5 percent in the Q4 of 2015. The decrease in gross margin as compared to the Q3 of 2016 was primarily due to slightly lower quarterly polysilicon average selling prices and higher polysilicon production costs affected by annual maintenance as well as lower quarterly wafer ASPs. In the Q4 of 2016, total costs related to non operational Chongqing Poly Silicon assets, including depreciation, were $1,600,000 compared to $1,500,000 in the Q3 of 2016 and 2,000,000 in the Q4 of 2015. Excluding such costs, the non GAAP gross margin was approximately 34.2 compared to 39.9% in the Q3 of 2016 and 31.9% in the Q4 of 2015. Starting in the Q1 of 2017, we expect costs related to the non operational Chongqing Polysecond assets, including be reduced to approximately $800,000 for the quarter, but a significant portion of the equipment has been reutilized in Xinjiang. Selling, general and administrative expenses were $33,500,000 compared to 4,900,000 in the Q3 of 2016 and $2,300,000 in the Q4 of 2015. Research and development expenses were approximately $2,800,000 for the quarter compared to $1,000,000 in the Q3 of 2016 and $500,000 in the Q4 of 2015. The increase in R and D expenses as compared to the Q3 of 2016 was primarily due to increased research and development activities and process upgrades for quality enhancement, increased manufacturing throughput, energy efficiency improvements and cost reduction. Other operating income was $1,900,000 compared to $2,200,000 in the Q3 of 2016 and $1,700,000 in the 4th quarter of 2015. 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. The company recognized 200,000 and 1,600,000 in fixed asset impairment loss for its Chongqing Polytechnic Facility in the Q4 of 2016 and 2015 respectively. The company is currently in the process of relocating the company's temporarily idled polysilicon machinery and equipment in Chongqing to the company's Xinjiang polysilicon manufacturing facility and repurposing such assets. The impairment loss incurred was attributable to the identified relocation assets in Chongqing that were not transferable and could not be reutilized by Xinyuan Polysilicon Expansion Project. Operating income was $9,600,000 compared to 16,400,000 in the Q3 of 2016 and 14,300,000 in the Q4 of 2015. Operating margin was 20.7% compared to 30.3% in the Q3 of 2016 and 24.1% in the Q4 of 2015. Interest expense was $4,100,000 compared to $3,100,000 in the Q3 of 2016 and $4,300,000 in the Q4 of 2015. EBITDA was 17 $600,000 compared to $25,000,000 in the Q3 of 2016 and $23,400,000 in the Q4 of 2015. EBITDA margin was 38.3 percent compared to 46% in the Q3 of 2016 and 39.5% in the Q4 of 20 16. Net income attributable to Daqo New Energy shareholders was $4,100,000 compared to 11.2 $1,000,000 in the Q3 of 2016 and $9,600,000 in the Q4 of 2015. Earnings per basic ADS were $0.39 compared to $1.07 in the Q3 of 2016 and $0.92 in the Q4 of 2015. As of December 31, 2016, the company had $31,900,000 in cash and cash equivalents and restricted cash compared to $29,200,000 as of September 30, 2016. As of December 31, 2016, the accounts receivable balance was 4,800,000 compared to 4,600,000 as of September 30, 2016. As of December 31, 2016, the notes receivable balance was $13,000,000 compared to $17,000,000 as of September 30, 2016. And as of December 30, 1, 2016, total borrowings were 217,900,000, of which 111,900,000 were long term borrowings compared to total borrowing of $227,600,000 including $129,000,000 of long term borrowings as of September 30, 2016. For the 12 months ended December 31, 2016, net cash provided by operating activities were $98,700,000 an increase of 48.6 percent from $66,400,000 in the same period of 2015. And for the 12 months ended December 31, 2016, net cash used in investing activities was 66 $100,000 compared to $74,100,000 in the same period of 2015. The net cash used in investing activities in 2015 2016 was primarily related to the capital expenditures of Xinjiang Phase 2b and Phase 3a polysilicon projects. For the 12 months ended December 31, 2015, net cash used in financing activities was $30,300,000 compared to net cash primarily consists primarily consists of repayment of related party loans and bank borrowings. The net cash provided by financing activities in 2015 was primarily contributed by the net proceeds from the company's follow on offering in February 2015 and net bank loan bonds. Now we will discuss full year 20 16 results. For the full year of 2016, revenues were $229,000,000 an increase of 26% from $182,000,000 in 2015. Revenue from polysilicon sales to external customers were $167,500,000 in 20 in 20 16, an increase of 33 percent from 125,900,000 in 2015. In the Q3 of 2015, we successfully ramped up our Phase 2b expansion projects, which increased our annual capacity from 6,150 metric tons to 12,100 50 metric ton. During the whole year of 2016, we were running our Xinyuan polysilicon facilities at full capacity. As a result, our annual polysilicon production volume increased by 33.7 percent from 9,771 metric tons in 2015 to 13,068 metric tons in 2016. Our external processing and sales volume increased by 32 point 2% from 8,234 metric ton in 2015 to 10,883 metric ton in 20 16. In addition, our annual polysilicon average selling prices also improved slightly from $15.29 per kilogram in 20 15 to $15.42 per kilogram in 2016. Revenues from wafer sales were $61,600,000 in 2016, an increase of 9.7 percent from $56,100,000 in 20.15. Breakfast sales volume was 82,800,000 pieces, increase of 8.3 percent from 76,400,000 pieces in 2015. The increase in wafer revenue as compared to 2015 was primarily due to higher sales volume. Gross profit was $80,400,000 in 2016, an increase of 114 percent from $37,600,000 in 2015. Gross margin was 35.1% in 2016, an increase of 20.6% in 2015. The improvement in gross profit and gross margin was primarily attributable to our polysilicon segment. In 2016, gross profit of our polysilicon segment excludes costs related to the Chongqing idle polysilicon facilities was $78,200,000 an increase of 100% from $38,900,000 in 2015. Gross margin of cement was 46.7%, an increase from 30.9% in 2015. Increase in polysilicon gross profit and gross margin was primarily due to higher sales volume and significant improvement in our polysilicon cost structure. We sold 10,883 metric ton of polysilicon in 2016, an increase of 32.2% from 8,234 metric ton in 2015. Our annual average polysilicon total production cost decreased by 18% from $11.23 per kilogram in 15 to $9.23 per kilogram in 2016. In 2016, gross profit of our wafer sector was $9,200,000 and decreased from 9 $400,000 in 2015. Gross margin of the overall wafer sector was 14.9% compared to 16.7% in 20 15. In 2016, total costs related to the non operational Chongqing project plan, including depreciation, were 6,900,000, a decrease from 10,700,000 in 2015. Excluding such costs, the non GAAP gross margin was approximately 38 point 1% in 2016, an increase from 26.5% in 2015. Selling, general and administrative expenses were $16,100,000 in 2016 compared to 12,600,000 in 2015. The increase in selling, general and administrative expenses was primarily due to increased shipping costs as a result of higher polysilicon shipping volume and higher as well as higher relocation and moving expenses related to relocating the company's idle polysilicon manufacturing machinery equipment from Chongqing to Xinjiang, which amounted to $2,600,000 in 2016. Research and development expenses were $4,000,000 in 2016 compared to $900,000 in 2015. The increase in research and development expenses primarily resulted from continuous R and D activities for improvement in manufacturing efficiency and cost reduction. Other operating income was $5,300,000 in 2016 compared to $3,800,000 in 2015, which mainly consists of unrestricted cash incentives that we received from local government authorities, which varies from period to period at the discretion of the government. Operating income was $65,400,000 in 20.16, an increase of 150% from $26,200,000 in 2015. Operating margin was 28.6% in 2016, increased from 14.4% in 2015. Interest expense was $14,600,000 in 2016 compared to $13,200,000 in 2015. Income tax expense were 7,400,000 in 2016 compared to 1,100,000 in 2015. Net income attributable to Daqo New Energy shareholders were 43,500,000 in 2016, an increase of 2 37% from 13,000,000 in 2015. Earnings per basic ADS were 4 $0.15 in 2016, an increase of 2.29 percent from 1 $0.26 in 20 15. And that concludes the official part of our presentation. Now let's have the Q and A session. We will now begin question and answer session. Our first question comes from Philip Shen of ROTH Capital. Please go ahead. Hi, thanks for taking my questions. My first one is on prepayments. You talked about them in your remarks. Can you talk about the magnitude of the prepayments and whether you expect them to continue ahead? Hi, Phil. This is Ming. So total prepayments were approximately $7,500,000 as of December 31, 2016, and these were advance payments that were made by customers so that they could take priority delivery of polysilicon, particularly the higher quality semi grade level polysilicon because those are really in shortage right now. Okay. And do you expect that trend to continue? Do you expect the prepayments to increase as we go through the 1st part of the year or decrease? We think the trend should continue and it may increase from this level, but maybe not significantly. Okay. And can you update us on what your customer list looks like now? How much has it shifted? Can you talk about what your customer concentration levels or the customer concentration expectations for 2017? So I think the main customers are primarily the largest solar module manufacturers within China. So I mean, you can think of like J Solar, Trina, Jinko, Canadian Solar. So there's a number of leading solar wafer manufacturers within China monocrystalline solar wafer and solar cell manufacturers within China for the higher efficiency type of solar products. So these are the new customers that we're getting right now. Great. Would that include Longxi, for example? Yes. Yes. Okay, great. From a cost standpoint, I think you've talked about hitting $8.50 all in cost in Q1. I think historically you've talked about reaching less than $8.50 per kilogram for the full year all in cost in 2017. What's the latest view on how low that cost structure could go in 2017? I think the average will be between $8 to $8.50 for whole year. But I think by end of 2017, we're expecting is like something between $8 to $8.50 And because we have still have a significant project needed to be finished, will be installed probably approximately by July. If that's successful, I think we have a chance to step functionally reduce the cost again. So, but with that and also we have a continuous program to reduce our costs as usual. We have high confidence that we will finally approach by Q4. Hopefully, we'll close the achieve the cost very close to $8 Great. Thanks, Gondan. And then one more for me and I'll jump in the queue. In terms of Korea, there's been talk about potentially new tariffs or tariffs being increased on certain Korean companies. Can you just update us on how much those tariff increases could be? And do you have a sense for what the timing might be of those actions? We think that this will not happening in the first half. Most likely, we have the second half. The amount definitely we cannot we don't know. And this is by the fact that government will fund the sales price versus their cost structures. So those are highly confidential. Normally, the government requires those company provide to the government. So we don't see those materials. So therefore, we don't have that number in mind. But I think conclusion would be most likely we'll deliver on the second half of this year. Okay, great. Thanks for that. Thank you, Ming. I'll jump back in the queue. Thank you, Phil. The next question comes from Brad Meckla of Craig Hallum. Please go ahead. Hey, good evening, guys. So what's your view on pricing for the year for silicon pricing? For the year, right? Yes. No, 1st quarter and the year. I think the Q4 is very, as Ming said, is slightly higher than in Q4 of 2016. We believe Q1 is that's it because we have pretty much have orders for March is done. So we can say that for sure almost, but delivery is not that. So still has some uncertainty there. But for the Q2, we don't see as of today, we don't see significant reduction in price yet. So, I think it will continue. And of course, always we need to be cautious as we put some if you want in the second half of the year, we see some signal, a lot of people saying the downstream demand delivery will be slower. So, we're expecting maybe some price change at that point. But that's forward looking. So, there's a lot of uncertainty with it. So, it's like $17 for the Q1 and then coming down to $15,000,000 $16,000,000 in the second half or Yes, yes, probably that's like that. Of course, those in the forward looking always not accurate. So, the market changes so much. And how much silicon supply do you think is coming online from incumbents and new market entrants? New add to the capacity is not much in the Q1 and Q2. We don't believe any significant add on new capacity. Expecting we did add about the 6,000 metric tons to the line of Q1 and we're expecting maybe some add on new capacity will come on the second half of twenty seventeen. Right. What's your broader view? I mean, I guess, you're estimating 10% demand growth globally from a solar standpoint. So what's your view on supply growth overall for this year? How much do you think it grows versus last year and then also 2018? Yes. We believe the growth is not much. Even we say it's going to 73 to about 79 gigawatts. But even the major change right now, we see the shift from multi crystal wafer to mono crystal wafers. And we're starting program about in 2015 and trying to address that market. And we have already shipped significant amount to those customers. And there are some qualifications still going out for some key customers. So, we're expecting those kind of shipment. We're increasing and because, as we said, those demand require is high quality compared with multi crystal wafer user polysilicon. We normally say high purity of polysilicon to meet those demands. So those demands will put this demand, this portion of demand increasing will strengthen the dark new energy position in the polysilicon market because we can provide a significant amount of our products to meet that market. What portion of your output would be high enough purity that would be acceptable for a mono wafer? And what do you expect your CapEx to be for the year? And can you talk about how what you have to do for the CapEx and how long it takes in order to upgrade output to be of the purity acceptable for a mono wafer? Yes. We are expecting 2017, we have more than 50% can do that to provide that market and CapEx mainly in Q2? So CapEx for the full year is approximately $40,000,000 to $45,000,000 for 2017. And a portion of that is going to projects that are specifically designed to improve purity of our product. For example, we're upgrading our distillation system. There are special devices that remove impurity from the distillation. And can you get to 100% acceptable purity for the amount of output? Yes. We think over time as we implement additional projects. Yes. I think the CapEx is used for improve the further improve our quality of polysilicon also and some area we need to add more efficiency to our production. So, the either reduced cost or maybe start to increase solve some de bottlenecking of in the production line. So, our output will start to improvement from that. So, we're expecting those things will be done by in the middle of this year. So, we will see some good results in the second half. Thanks very much. Can I just ask one last high level question? What would be the company's view? I mean, obviously, there's it's still early in this silicon cycle and there seems to be a lot of migration upstream in terms of investment. Is the company open to some type of up the merger with a downstream partner at some point? Or is it the view that the company would always be independent? Because it seems like strategically that could make sense given where the cycle is at. Well, the company didn't propose any of those kind of things to answer that. We also didn't receive any of those proposals at this moment. But we are open minded to any good suggestions. And of course, those are subjected to the our Board of members instead of our management team. So, if we see such The next question comes from Sheng Zhong of Morgan Stanley. Please go ahead. Thank you for taking my question. So the first one you mentioned that you are relocating some equipment from Chongqing to Xinjiang. So should we expect some capacity increase in sometime in near term? So that's actually related to our existing the 18,000 metric tons. So we moved a significant amount of equipment. So part of that expansion, we moved the equipment from Chongqing to Xinjiang. And so when that started operation in manufacturing in Q1, so the related the costs that relate to the idle facility will come down. Yes. So depreciation from idle equipment or facility in Chongqing will reduce by half from Q1 from last Q4 to Q1 this year. So, because those equipment already moved and also installed in Xinjiang and the production right now. Okay. Yes, I see. So, do you have any further capacity expansion plan at current stage? We do have a plan, but we are not whole total demand, I think there's still a lot of struggling for our competitors within China and we will see that probably we will see until like middle of this year, we will decide to go forward or not. But at this moment, we are not making any decision yet. Understand. So, yes, I just mentioned that we are still waiting to see the market dynamics. Actually back to our question back to our discussion previously on the mono crystallized demand. Actually we see a lot of mono wafer capacity is being constructed this year from all the leading wafer and module makers. So and actually the high purity polysilicon is, I mean from the market, especially from the Chinese makers, it's not that much. So how do you and if we think about the import perspective, I think that the amount is still I don't expect a large increase the import, but you can correct it. You are right. Good, thanks. So how do you see the supply demand balance for the high end, I mean high purity potassium in China market? Well, it will be those facilities that you mentioned increased will take some time. We think probably significant volume increasing will be later this year. So, we have I have confidence, so by end of 2017, most of the product will meet the impurity demand for mono wafers usage. Now, it's only up to certain other things like morphology and also the condition when you harvest in those polysilicon or meat or not. So and we will become we're trying to become a leading provider for mono wafer silicon for Chinese market. With that, probably it's not enough, but even we decided expansion right now, so they normally take 1.5 year completion. So, there will be slow transition. I think it would not be very quick transition from multi crystal wafer, full mono wafers. But it is happening like you mentioned before. I think this trend is real and I think will impact a lot of not only wafer manufacturers and other some polysilicon manufacturers in China as well if they cannot provide high purity polysilicon in future. Now, how to balance that, I cannot say, but I think what we can do or we think about to do is continue our improvement for high purity polysilicon and we're trying to increase that portion from right now is like half to 80%, 90%. So we're positioning ourselves as well in this kind of transition. That's all we can do. Now, if market is still good after first half and very few people can they cannot provide and we will closely work with our key customer for mono crystalline wafer manufacturers in China. And maybe we can decide for considered for future expansion. But again, that will take almost like 1.5 year and it's longer than the wafer guys' expansion. Actually, let me follow-up on Doctor. Yang's comments. So, if you just look at it from the supply side, I think the amount of product availability that you could see from overseas suppliers like Germany and Korea are pretty much fixed. And then you're looking at a very high risk of Korean supply being shut off because of the trade issues with China right now. And then at the same time, there is very limited amount of poly in some of these semi grade poly available within China. I think we're going to be the only major supplier right now. And if you look at it from the demand side, right now, it's already very, very tight. We have much more demand than we could supply for this type of polysilicon. And then going into the second half, with all these new situation right now. So that's what we're looking at. Okay, thanks. Yes, thanks very much for the color. So since there is a very high demand, except for the pre payment we currently see, do we think that this kind of demand will drive the price difference between the mono grade polysilicon versus the common ones? Yes. So, let me try to answer. So, currently, we don't see much. The gap is very small. But within this phenomena we discussed just before, with huge amount mono wafer manufacturer capacity and compared with very limited Chinese polysilicon manufacturer made the products meet that, I'm expecting if this trend continue, I think mono wafer price gap between mono wafer and multi crystal wafer gap will increasing. And secondly, I think polysilicon, if we can qualify for mono wafer, we're slightly higher, starting that trend with the gap between that was increasing. Right now, it's almost nothing because right now, we are in position is qualified for those things in 2016. So, basically, right now, prices are similar. But the future, as possible is GAAP will increasing. So, push the that ourselves, we're driving more people interesting for moving to mono crystalline with a silicon provider as China as well. So that's probably what's happening in the second half, but not right now. Okay. Thank you. My last question is about the do we have some any updates on the 3rd board financing? So we're still in discussions with several domestic investors on new 3rd board financing, but there's been no new updates on that right now. So we continue to be in discussion currently. Okay. Yes. Thanks. Thanks, Ms. Yao and Thank you. Thank you, Sharon. The next question comes from Paul Strickler of Esplanade. So the EU just extended their minimum import price agreement for 18 months on Chinese imports. Is there a chance that China changes the agreement with German polysilicon makers in terms of what's been an important price for them into China, maybe restrictions on volume. I just heard some rumblings about that, but could you guys comment on anything about European polysilicon and so sort of limitations on imports to China? Yes. We have no comments because we are not aware of any agreement between them. Even before the minimal price where they factory people are guessing, but nobody knows. But yes, but it did. So far, so I think that the probably will continue, I think, because it's European market to Chinese both governments and they're trying to get the agreement among them. So, I think there's no reason. We don't see much world change and that's all we can say about it. Yes, we don't have much comments about that. But we think the trend is normal. I think probably most likely we'll continue that kind of arrangement. And just I guess I know you can't comment, but just to confirm, the agreement between China and Europe on polysilicon, that expires on April 30 this year. Is that correct? Oh, the expires April 30, I'm not sure we can check that. I'll follow-up with you maybe. Yes, yes. We can Kevin can check that and get back to you. Great. Thanks guys. Great. Thank you. The next question is a follow-up from Brad Meckla of Craig Hallum. Please go ahead. Hi, it's Brad Meckle. Thanks. So can you just step back? I mean, we had a decade where there was sort of incessant polysilicon expansion. Now It seems like the balance sheets of most of the players are fairly tapped out and GCL told us 6 months ago they don't really plan to add any more silicon capacity. I guess there's a possible expansion or greenfield by New Hope. Can you just talk about how much actual rail capacity you think is coming online over the next 3 years and whether you agree with the view that we're moving to more of a balanced sellers type of market after really probably 8 years of fairly aggressive expansion especially by GCL? Thanks. And what that does to sort of the longer term balance and does pricing go back to $12 in 2018 or do you feel like we're more sustainably in a realm when you can make a consistent margin? Thank you. So I think if you look at the current market conditions right now, I think you're no longer seeing any significant capacity expansions by incumbents, right? So I think we are adding capacity. We just added some, but we're now taking a more prudent approach and looking at how the market might play out and before we announce our next phase of expansion. And we think that's very similar condition for almost majority of our competitors. I think any new capacity that you see are being added or have been added, say, over the past 12 months probably was announced a long time ago, right? And the significant portion of capacity that are coming online, right now, some of it in the U. S. Cannot even be imported into China. And I think some of what people are talking about, like you said, New Hope, I think that's a completely new player with no experience in polysilicon. We checked out some of the equipment they're buying. A lot of some of our unproven equipment have never been actively used in constant production in the past. And with that third type of experience within, they're going to have a significant amount of challenge in trying to ramp up their facility. And there's also other players within China trying to ramp up new technology that's also a complete improvement within for Polytechnic and Manufacturing. So, we think it's a very likely outcome is I think there's going to be a lot less new production coming into the market than people are thinking. So from that perspective, I think definitely it's a lot more balanced market right now. For essentially the past, say, 18 months, we have seen a fairly tidy supply market for polysilicon. And then we'll put much more prudent investment from the incumbents. The incumbents now know that it's a very challenging market for everybody wants to add capacity at the same time. I mean, a lot of players, I mean, even at today's pricing, they're not very profitable. So it's not easy. I think we're very uniquely positioned in this market because of our low cost structure. Thanks. And I guess just last question is, I mean, I get you guys having over $100,000,000 of free cash flow this year. I mean, would you ever pay a dividend or return cash to stockholders or buy back stock? So that's something that we're actively considering. I think last year, we actually generated free cash flow and we decided to repay some of our bank debt. So I think this year, I think in the second half, certainly, I think we think our cash flow will most likely improve upon versus 2016. And then so certainly, we think dividend or returning cash to the shareholders is something that we would actively consider and explore. Excellent. Thank you. We'd love to see more Chinese companies in the solar business thinking that way. Appreciate your time. Okay. Great. Thanks, Brad. The next question is a follow-up from Philip Shen of ROTH Capital. Please go ahead. Hey, thanks for the follow ups. Just a few housekeeping questions. When you think about your wafer margins, how do you expect them to trend? Like what were they in Q4? And how do you see them trending in Q1 and beyond? It will be flat as of Q4. It's roughly breakeven. So all the gross profit and gross margin is contributed by our polysilicon business. Okay. And so you see that kind of breakeven scenario going forward as well? Yes, yes. Right. We don't really see much change. Okay. And then your R and D in the quarter was pretty high at 2,800,000 dollars What do you see ahead for in Q1 for R and D and beyond? So we think for the full year 2017, maybe something between $3,000,000 to $5,000,000 full year 2017. And then I think you can just kind of divide that by 4 per quarter. There might be some period fluctuate from period to period, but we think for the full year, you should run into that range. That's pretty high and sort of big change relative to what you guys have spent historically on R and D. That's it. I read what you guys had in your release about R and D. But can you just comment a bit more on the rationale for the spending and what your plans are or the goals of that spending? Thanks. So the R and D expense for Q4 was a bit unique in terms of because we had concurrent maintenance. So it was kind of like a perfect timing to do the R and D activities and install new projects and equipment at that same time. And especially as we prepare for our new capacity expansion as well, so these new R and D projects can be used for the entire the 18,000 ton capacity. So that was a little bit unique in terms of timing. So that's how we decided to spend the R and D efforts within the quarter. I think going forward, it's less likely we're going to see a big one time event like that. Okay. But I guess my question is, historically, your R and D has been about $1,000,000 or 1,500,000 dollars a year and you're looking at $3,000,000 to $5,000,000 for 2017. So just curious what's the rationale for that increase for the full year '17? Well, I think for 2016, the full year is now $4,000,000 right? So it's because we're doing projects. One is to improve the purity, right, to improve the quality and improve the amount of the percentage of polysilicon we could do for semi grade. So that requires R and D. And at the same time, we're also doing special projects for cost reduction, right? And then we're doing improving throughput on debottlenecking. And then we're doing, for example, cost reduction efforts like that lowers energy usage. Okay, great. This concludes the question and answer session. I would now like to turn the conference back over to Kevin He for any closing remarks. Thank you, everyone, again for joining the 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 your lines. Have a great day.