Kevin He - IR Longgen Zhang - CEO Ming Yang - CFO.

Philip Shen - Roth Capital Partners Gary Zhou - Credit Suisse Wai Fung - Citadel.

Good day and welcome to the Daqo New Energy Third Quarter 2018 Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Kevin He, Investor Relations. Please go ahead..

Hello, everyone, I’m Kevin He, the Investor Relations of Daqo New Energy. Thank you for joining our conference call today. Daqo New Energy just issued its financial results for the third quarter of 2018 and also to facilitate today’s conference call, we have prepared a PPT presentation for your reference.

Those can be found on our website at www.dqsolar.com. Today, attending the conference call, we have Mr. Longgen Zhang, our Chief Executive Officer; and Mr. Ming Yang, our Chief Financial Officer. The call today will feature an update from Mr. Zhang on market and operations, and then Mr.

Yang will discuss the company’s financial performance for the third quarter of 2018. After that, we will open the floor to Q&A from the audience.

Before we begin the formal remarks, I would like to remind you that certain statements on today’s call including expected future operational and financial performance and industry growth are forward-looking statements that are made under the Safe Harbor provisions of the 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 the preliminary view as of today and may be subject to change. Our ability to achieve these projections is subject to risks and uncertainties. All information provided in today’s call is as of today and we undertake no duty to update such information, except as required under applicable law.

Also during the call, we will occasionally reference monetary amounts in US dollar terms. Please keep in mind that our functional currency is the Chinese RMB. We alter these translations into US dollars solely for the convenience of the audience. Without further ado, I now turn the call over to our CEO, Mr. Zhang please. .

Hello, everyone and thank you for joining us today for our earnings call. We are pleased to report another solid quarter. Due to the impact of China's new solar PV policy issued on May 31st, the solar end market demand in China weakened considerably.

In spite of weak market demand, we saw the 6199 metric ton of polysilicon during the third quarter, with the polysilicon inventory returning to lean levels, which demonstrates our product’s superior quality and our strong relationships with downstream customers.

We successfully completed our annual maintenance in September and resumed production earlier than originally scheduled to minimize this impact on production volume and our cost structure. In addition, we also began pilot production for our Phase 3b expansion project in October, ahead of schedule.

We are in the process of optimizing throughput efficiency and quality and expect to ramp up Phase 3b to full capacity early in the first quarter of 2019.

With lower electricity rates, higher manufacturing efficiency, greater economies of scale and enhanced equipment and processes, we expect the overall total cost of polysilicon production from our Xinjiang facilities to decrease to approximately $7.50 per kilogram when fully ramped up.

Moreover, Phase 3b will not only increase our capacity and reduce costs, but also allow us to improve production quality with approximately 80% of our production capacity devoted to mono-crystalline grade polysilicon, of which half will be applicable for use in N-type mono-crystalline solar cells.

With the successful pilot production of our Phase 3B expansion, preliminary manufacturing data from our Xinjiang polysilicon operation has been encouraging. We are on track to achieve record low levels in energy usage and in silicon utilization per unit of polysilicon production, which will help us to achieve our new lower cost targets.

Even with the impact of the new solar PV policy issued on May 31, 2018, China will still be the largest solar PV market this year with 34.5 GW already installed during the first three quarters of this year. Based on most industry forecasts, full year installation is expected to be approximately 4o gigawatts for China.

In late September, China’s National Development and Reform Commission released the second draft of renewable energy portfolio standard, which is expected to lay a solid foundation for the nation’s goals of increasing non-fossil energies as percentage of total primary energy to 15% in 2020 and 20% in 2030, respectively.

This bodes well for the continued growth of solar energy for China market to meet this goal. In addition, China National Energy Administration held a sole industry forum on November 2, in which it reaffirmed the government’s support and commitment to the solar PV industry.

During the forum, NEA officials indicated they expect the solar industry will continue to benefit from government subsidies through 2022 when grid parity is expected to be achieved. There will not be a one-time cutoff of solar subsidy in the interim.

NEA also expects an increase to China’s 13 five year plan cumulative solar installation target to at least 210 gigawatts or higher. NEA is also in the process of accelerating the release of the next solar policy to support the development of the domestic solar industry.

Based on these comments, we believe that the solar market is at or near bottom and it bodes well for increased solar project and improved demand for the China market for 2019 and beyond. The increased market activity can happen as soon as the first half of the 2019, which will bode well for polysilicon demand and the price.

In addition, several government agencies have started to evaluate opportunities to streamline and effectively reduce the non-system cost of solar PV projects such as permitting fee and a great connection so that an increased number of grid parity projects will become feasible in China as soon as possible.

As such, solar PV now is becoming one of the most cost effective and feasible forms of renewable energy generation in many global markets, including China. With cost reduction efforts continuing throughout the entire solar PV value chain, we believe the new era of grid parity in the global solar PV market is just around the corner.

Within the solar market, we believe pricing are at or near bottom and in recent weeks, we have seen encouraging signs of price stabilization, particularly for mono grade polysilicon, mono based high efficiency solar products are doing well in the market from volume perspective.

In particular, current polysilicon pricing has fallen to or below the cost level of the most tier 1 supplies and the below the cash cost of tier 2 supplies and forcing some suppliers to reduce utilization or shut down production altogether.

As witnessed by our inventory level, polysilicon inventory levels continue to be very lean in the market and at our clients. Once we begin to see demand recovery driven by China’s new solar policy, we believe there is a good chance that price can recover soon.

As one of the industry’s leading supplies, Daqo New Energy benefits from the strong cost structure advantage and the quality. We are continuously being improved upon with the addition of our Phase 3B and 4A projects.

Our Phase 4A capacity expansion project is currently under construction and is expected to begin pilot production in the fourth quarter of 2019.

We expect to ramp up Phase 4A to full production in the first quarter of 2020, which will expand our total production capacity to 70,000 metric tons and reduce overall total cost of polysilicon production for our Xinjiang facilities to approximately $6.80 per kilogram.

We believe the combination of our cost structure advantage, high quality products and increasing capacity will allow us to benefit from future sustainable growth in global solar PV markets.

In September 2018, the company made a strategic decision to discontinue its Chongqing business subsidiary, including its solar wafer manufacturing operations, to accommodate the increasingly challenging market conditions.

Accordingly, the company has incurred $6.8 million in fixed-asset impairment and $1.3 million in employee severance related to wafer sector in this quarter. For financial reporting purpose, the Chongqing subsidiary has been classified as discontinued operations.

Furthermore, the company recognized 11.4 million fixed assets impairment loss for its Chongqing polysilicon facilities in the quarter, which resulted from assets identified as non-transferrable and/or not able to be reutilized by its Xinjiang polysilicon manufacturing or expansion projects.

The company expects to produce approximately 7,000 metric ton to 7,100 metric tons of polysilicon and sell approximately 6,800 metric tons to 6,900 metric tons of polysilicon to external clients during the fourth quarter of 2018. For the full year 2018, the company expects to produce approximately 23,000 metric tons of polysilicon.

This outlook reflects Daqo New Energy’s current and preliminary view as of the date of this press release and may be subject to change. The company’s ability to achieve these projections is subject to risks and uncertainties. With that, I will return the call over to Ming, our CFO who will go over our financials for the quarter. Ming, please go ahead..

Thank you, Longgen and good day, everyone. Thank you for joining our call today.

First of all, I would like to remind the audience that since the company has discontinued its Chongqing business subsidiary in September 2018, the operational results of the Chongqing business have been excluded from the company’s financial results from continuing operations and have been separately presented under discontinued operations.

With respect to adjustments to the historical statements have also been made to provide a consistent basis of comparison for the financial results. Revenues from continuing operations were 67.4 million compared to 63 million in the second quarter of 2018, and 72.9 million in the third quarter of 2017.

The sequential increase in revenue was primarily due to higher polysilicon sales volume, offset by lower average selling prices. Gross profit was approximately 12.8 million compared to 25.2 million in the second quarter of 2018 and 26.8 million in the third quarter of 2017.

Gross margin was 19.1% compared to 40.1% in the second quarter of 2018 and 36.7% in the third quarter of 2017. The sequential decrease was primarily due to lower ASPs, partially offset by low average polysilicon production costs.

Selling, general and administrative expenses were 7.6 million compared to 7.5 million in the second quarter of 2018 and 4 million in the third quarter of 2017. The year-over-year increase in SG&A expenses was primarily due to an increase of non-cash share based compensation costs related to the company's 2018 share incentive plan.

R&D expenses were approximately 1.4 million compared to 0.2 million in the second quarter of 2018 and 0.1 million in the third quarter of 2017. R&D expenses can vary from period to period and reflect R&D activities that took place during each period.

Other operating income was 0.1 million compared to 0.5 million in the second quarter of 2018 and 0.1 million in the third quarter of 2017. Other operating income mainly consists of other restricted cash incentives that the company received from local government authorities, the amount of which vary from period to period.

As a result of the foregoing, operating income was 4 million compared to 18 million in the second quarter of 2018 and 22.8 million in the third quarter of 2017. Operating margin was 5.9% compared to 28.6% in the second quarter of 2018 and 31.3% in the third quarter of 2017.

Interest expense was 2.1 million compared to 3.1 million in the second quarter of 2018 and 4 million in the third quarter of 2017. Foreign exchange gain was 1.9 million compared to 0.1 million in the second quarter of 2018, a loss of 0.1 million in the third quarter of 2017.

The company realized exchange gain of $1.9 million occurred in the quarter due to depreciation of RMB against US dollar in relation to the exchange settlement of proceeds from the company's follow-on offering in the second quarter of 2018.

EBITDA from continuing operations was 14.8 million compared to 27.4 million in the second quarter of 2018 and 31.9 million in the third quarter of 2017. EBITDA margin was 22% compared to 43.6% in the second quarter of 2018 and 43.8% in the third quarter of 2017.

During the quarter, the company decided to discontinue its solo wafer manufacturing operation. Results of the discontinued operation of the previous quarter and comparative quarters were presented accordingly.

Loss on discontinued operations was 22.4 million compared to net income from discounting operation of 2.7 million in the second quarter of 2018 and 9.7 million in the third quarter of 2017.

As a result of foregoing, net loss attribute to Daqo New Energy shareholders was 18.3 million compared to net income attributable to Daqo New Energy shareholders of 13.4 million in the second quarter of 2018 and 24.1 million in the third quarter of 2017.

Loss per basic ADS was $1.39 compared to earnings per basic ADS of $1.06 in the second quarter of 2018 and $2.28 in the third quarter of 2017.

Excluding the impact of non-cash cost and expenses such as costs related to the Chongqing polysilicon operations, share based compensation costs and long-lived assets impairment, adjusted net income attributable to Daqo New Energy shareholders was 4.3 million, compared to 18.2 million in the second quarter of 2018 and 25.6 million in the third quarter of 2017.

Adjusted earnings per basic ADS was $0.33, compared to earnings per basic ADS of $1.44 in the second quarter of 2018 and $2.42 in the third quarter of 2017. As of September 30, 2018, the company had 110.3 million in cash, cash equivalents and restricted cash, compared to 155.3 million as of June 30, 2018.

As of September 30, 2018, the accounts receivable balance was 1000, compared to 8000 as of June 30, 2018. As of September 30, 2018, the notes receivable balance was 22.5 million, compared to 17 million as of June 30, 2018.

As of September 30, 2018, total borrowings were 165.2 million, of which 119.4 million were long-term borrowings, compared to total borrowings of 171.5 million, including 92.9 million of long-term borrowings, as of June 30, 2018.

For the nine months ended September 30, 2018, net cash provided by operating activities from continuing operations was 48.7 million, compared to 69.7 million in the same period of 2017.

For the nine months ended September 30, 2018, net cash used in investing activities from continuing operations was 90.1 million, compared to 19.9 million in the same period of 2018.

The net cash used in investing activities from continuing operations in the first nine months of 2018 and 2017 was primarily related to the capital expenditures on the Xinjiang polysilicon projects. In addition, the company also purchased $15 million in interest bearing short term investments during the third quarter of this year.

For the nine months ended September 30, 2018, net cash provided by financing activities from continuing operations was 96.5 million, compared to net cash used in financing activities of 21.3 million in the same period of 2017. The increase was primarily due to net proceeds from our recent follow-on offering. This concludes our prepared remarks.

We would now like to turn the call over to the operator to begin the Q&A session. Operator, please begin. Thank you..

[Operator Instructions] The first question comes from Philip Shen of Roth Capital Partners..

The first question is on the outlook for China. And the demand, I think, Longgen, you mentioned that you think we're at a bottom now.

And with the policy change that could be happening with the November 2nd announcement, when do you expect the government to provide more concrete details around what the actual new policy might be? Do you think we could get it by the end of this year or we've heard, could be before Chinese New Year as well?.

Good morning. I think, Philip, to answer your question, I think, as I just mentioned that, in Q1 to Q3 of this year, China has already installed 35 gigawatts. I believe full year of this year is expected to be around the 40 gigawatts.

And for next year, my expectation is around 40 to 50 gigawatts and it will be significantly increased from, I think the previous forecast, only 30 to 35 gigawatts. I think the number could be even higher, if the actual policy is more favorable.

And as you mentioned that on November 2, NEA, I think, have the forum and basically I think the government is very supportive for the solar wholesale industry and also the feed-in tariff will continue to be – will not be stopped until 2022. Basically, I think for the future, I think is subsidized.

The amount of the subsidized every year may be slowed down, cut down. But for total, subsidized is – per unit subsidized will continue to go down. So we’ll cover more projects and like a top around there, like other TG projects.

So that's why we believe I think the 13 five-plan, as everybody understand it, I think at least right now, the government's maybe increased to 210. [Technical Difficulty] So I believe the policy will come out maybe around the Chinese New Year before or after..

As it relates to the pricing outlook, pricing, it feels like in my, the declines might be slowing down.

How do you see pricing poly ASPs specifically evolving in this quarter as well as into Q1 and Q2 of next year?.

I think this quarter, our ASP, as you can see that, is around – over Q3, ASP is $10.79 without VAT. So basically, I think this is at or near bottom.

And with the new capacity coming online from China, the lowest cost producer and mostly I think every people right now claims, for example, like TCL, I'm not going to mention others’ supply, they also claim starting the tight production in the new expansion. So I believe maybe in the Q1 next year or Q2 next year, the new capacity come in.

So we expect to see the more and more high cost producers will have to shut down their capacity and exit the market. Due to the market we ship, processing all consolidation, I think it's possible to see temporary the polysilicon price go down to $10 per kg.

But when the market I think is back to normal, we expect, I think, the pricing will remain around 11 to 12 during, I think, this quarter or even next quarter. I think this quarter may be between 10 to 11, I think Q1 may be around 11 to 12. So Daqo, you know that, we were fully I think ramp up.

I think at December of this – this year of December, we will reach, I think, almost the 100% ramp up on 3B. So for the Q1, therefore, I think with all capacity, you can calculate maybe around annually around 36000 tons. So we will continue to reduce our cost to $7.50 from right now currently $9 level. So that will further to improve our gross margin..

You mentioned that capacity from the tier 2 more expensive producers will likely go offline.

Can you talk about how -- can you quantify how much capacity you think could be permanently shut down from this downturn? Are we talking about 20,000 metric tons, 50,000 metric tons, you don't have to name the names necessarily, but it would be great to understand how much you see going away permanently?.

I think based on the, you know, I think the statistic, I think China right now, let's say by the middle of this year, the capacity is around like 200,000 tons there, of which what I'm thinking around like 140,000 tons I think is high cost and it may be lower quality.

So that capacity finally will be wiped out of costs, maybe 13%, some of the producer is state owned company. So those company is difficult, it's difficult to shut down. The reason is because they have to run out of their cash. That's a question, maybe, they can continue to get the banking loans.

So what I believe, I think SOE company maybe, the capacity is around like 50,000 to 60,000 tons. Then the private sector or we call, the public – state owned company maybe 100,000 tons. That definitely I think is going to shut down..

And then as it relates to your capacity expansion, can you remind us kind of where things stand with the Phase 4A financing, update us on how much you might need and how you expect to fund the Phase 4A and is it definite that you will do Phase 4A or is there a chance that you might wait for the recovery to be healthier and stronger?.

The phase 4A currently is under construction and the construction is almost I think above the level and because the winter is coming, so basically we will finish the underground construction and the for the equipment procurement, we almost finished 70% of the contracts. We control the following investments is around RMB2.9 billion.

I think it's coming from original is 3.2 billion. So also, we've got to be careful of the industry slowdown, we've got a pretty good, I think, a negotiation with the supply and the payment term. Basically, I think I can tell you that 2.9 million, the payments. I think around 5.9 million, around like RMB590 million we will pay this year.

And around 1.4 billion, we will pay next year. The rest of them will go to 2020 and ’21. So basically we’re thinking now, use our own cash, the deposits and operating cash flow, I believe and we also have the banking facilities available.

Right now, we have 500 million banking loan facility from Bank of China, 5 milling banking loans from China Merchant Bank. So basically on what scenario, I think we still can support to continue to expansion. Of course, we also were evaluating the whole market of what's going on. But basically right now, yes, we are on the way to reach the target.

I think planning to starting part of the production in October 15 next year..

The next question comes from Gary Zhou of Credit Suisse..

I have three quick questions. So firstly, the management has talked about the near term pricing outlook for the polysilicon. So given that probably in the next few months, we have a lot of new low cost Chinese capacity to come online.

So given this kind of a change in the global poly cost structure, so has management have more longer-term price outlook for the polysilicon, probably for next year and also for 2020? And secondly, does management has an estimate for the mono wafers market share in 2019? And how does the management expect to be expanding of mono wafer market share to support our ASPs.

And last question, a quick one, does management has any estimate on the global solid demand for this year and also next year?.

Good evening, Gary. Gary is coming from CS from Hong Kong. The first question is about the ASP for the near term and the future.

Basically, I think without the Chinese new policy come out, what I think and believe, okay, this -- I think – today, the lower ASP and also not only consolidation in the China, I think the solar industry, but also I think we cut the imports from abroad and for those foreign producer, the cost is higher than $13, $12.

Definitely I think have to shut down. So basically what I'm thinking is even without the Chinese new policy, in Q4 right now, I think the ASP, of course Daqo is a little different, I would answer your second question, because mono and multi, the price is different. But I say average speaking, we are right now after 3B, our mono is 80%.

So basically what I think is for Q4 to Q1 next year, the price should be around $11 to $12. Unless the new policy maybe stimulates the production in China, then the price definitely will be back to 13. For the whole year of next year, I think the price should be second half of next year, should be around $12 to $13.

So beyond that 2019, I think for the grid parity, for the cost right now, the industry cost, I believe should be around $12 to $14, the range. That's to answer your first question. Secondly is for the mono and multi, right now for the mono price, is around RMB83 to RMB84 per kg, with the VAT. And for the multi is around 76.

So the difference between multi and mono is not too much right now. But we still forecast on the quality. So after finishing 3B, our mono account for 80%. So as far as finishing 4A, our monosilicon will be 90%. So that's why our ASP should be almost close to the mono silicon price.

I think for your third question about the global demand, what I think is if looks like the Chinese new poly has come out, doesn't matter this year or early next year, definitely next year, China, I think, total installation will be around 40 to 50 gigawatts. Even I think maybe a little higher.

And plus the 13th 5 year plan will increase -- dramatically increase, so China definitely is a key player in the solar industry. Plus I think Europe, I think, most of the tariff, then also the US, the South Africa and South America and India I think definitely.

Beside, I think, without China, even global market I think continue to – the demand continues to increase, because the price continues go down module. The installation price continues to go down. So grid parity, we can see, I think, globally we can see.

So basically, I think, next year, total global installation, what I think in maybe around 115 to 120 gigawatts. And year 2020, maybe reach 140 gigawatts. That’s maybe a little optimism. So the silicon demand, because of the monosilicon demand, percentages continue to go up, but cost of the silicon will continue go down.

So what I think and next year, the silicon will be around -- the consumption will be around like 370,000 tons to 380,000 tons. By 2020, I think we’ll reach around 420,000 tons. I think that's -- I think my figure, Gary..

The next question comes from Wai Fung of Citadel..

Just wondering can you comment on the inventory level in the supply chain and also when do you think the Chinese and you’re going to announce the new target for 2019 and 2020?.

Okay. Basically, first of all, only, I think for the inventory, for whole right now, the Chinese, I think supply right now, the inventory almost I think closing to zero. If you look our end of the quarter, essentially right now and all of the right now, the order, we still cannot see the order right now based on the right now the production.

And what I think right now almost either the, I think the wafer producer right now, just in time or zero inventory, the reason is because there is still expectation, the silicon price will go down. So that's why the inventory is lower.

Then I think even sale module, because continued price go down, so the whole industry in the middle stream, the inventory, I don't think too much there unless the Chinese new policy come out, then they're going to beat up inventory.

So to answer your second question, within the Chinese new products that come out, as I just mentioned there, because this time the NEA is very prudent and they have to do following to coordinate which other governments I think organizations together to issue new policy.

So that involves a lot of stuff, like I said, 13 5-year plan and you see the tax, the tax of cutting, all these I think together. So what I think new policy will come out, I'm not focused enough end of this year, maybe around the Chinese New Year, either, before or after..

And another question, import, can you tell me the monthly run rate on import poly and what do you expect the run rate if poly prices troughed next year, monthly run rate?.

I think right now, the import already slowed down.

I think if you look the figure, I think the data, I didn't look at carefully the figure, but basically I was told right now the three major foreign producers right now, only one right now still have capacity running on the late here and the rest of them, I think, they are almost I think shut down by the end of this month.

So I do not think further, right now, the current market situation, selling price around the $10 and $11, between $10 and $11 per kilograms. I think, the foreign producer will continue to export the silicon to China because there really is their cash cost.

So basically I think in this scenario right now, that's why I don't think the import -- the silicon will come back.

I don't think so, because that's why unless the price go back beyond the $13, it is possible on the condition I think the demand is so hot and quickly come back and for the middle stream to beat up inventory, then that will happen on the second half of next year. The silicon price may be back beyond the $13..

Also, can you talk about, maybe Ming, can you talk about operating expense next year quarter run rate, excluding stock compensation..

I think it should be in the maybe 5, $4.5 million to $5.5 million level excluding stock-based comp..

This concludes our question-and-answer session. I would like to turn the conference back over to Kevin He for any closing remarks..

Think you everyone again for participating in the conference call today. Should you have any further questions, please feel free to contact us. Thank you and bye-bye..

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect..