Good day and welcome to the Daqo New Energy Fourth Quarter and Fiscal Year 2018 Results Conference Call. All participants will be in listen-only mode. [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 am 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 fourth quarter and fiscal year of 2018 which can be found on our website at www.dqsolar.com.

To facilitate this conference call, we have also prepared a few PPT presentation for your reference. 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 fourth quarter and fiscal year 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 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 maybe subject to change. Our ability to achieve these projections is subject to risks and uncertainties. All information provided in today’s call is as of today and we undertake no duty to update such information, except as required under applicable law.

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

Hello, everyone and thank you for joining us today for our earnings call. I would like to thank our entire team for their hard work and dedication for delivering another outstanding quarter in which we successfully completed the Phase 3b project and ramped production up to full capacity by the end of November 2018 3 months ahead of schedule.

During the quarter, we achieved new record both in production volume and sales volume which were 7,301 metric tons and 7,030 metric tons respectively. With the successful ramp up of our new Phase 3b facility and efforts of our operating team, both production volume and cost reduction targets were achieved with excellent results.

During the fourth quarter of 2018, we successfully reduced our total production cost to $7.94/kg and our cash cost was lowered to $6.64/kg, representing our lowest cost structure in history.

With our Xinjiang production facilities now running at full capacity, we expect to produce approximately 8,500 to 8,700 metric tons of polysilicon during the first quarter of 2019.

Furthermore, with reduction in unit utility usage, operating leverage and other cost savings, we expect to further reduce our total production cost of approximately $7.50/kg.

In addition, we plan to conduct a capacity de-bottlenecking project to gradually upgrade several old CVD furnaces with improved technology, allowing us to increase production capacity by additional 5,000 metric tons. We plan to start this project in the mid-March and complete it by the end of June.

The de-bottlenecking project will have limited impact on production volume. Therefore, we expect to produce 7,600 metric tons to 7,800 metric tons of polysilicon during the second quarter of this year. Subsequent to completion of the de-bottlenecking project, we anticipate the company will reach total annual production capacity of 35,000 metric tons.

The Phase 4a capacity expansion project is progressing smoothly and will increase our production capacity to 70,000 metric tons by the end of the first quarter of 2020 with an even lower cost structure once fully ramped up.

In February 2019, we received approval from Bank of China for a RMB400 million 5-year fixed asset capital project loan and a RMB50 million working capital loan.

The company has obtained a total of RMB830 million additional banking loans, including the loans from the Bank of China and credit facilities from other domestic Chinese banks to support our capacity expansion and working capital needs. These loans will support capital expenditure for our Phase 4a project and enable us to complete it on schedule.

2018 was a challenging, but also promising year for solar PV industry. The policies issued by the Chinese government on May 31, 2018 immediately impacted the market and resulted in a significant price decline across the entire value chain.

However, this fall in price significantly stimulated demands from markets outside of China, especially when grid parity has already been reached. The global solar PV market recovered rapidly in the following months and has since achieved equilibrium again even with very limited contribution from China, the world’s largest individual solar PV market.

A draft of China’s solar policy for 2019 has already been released with the final version yet to be confirmed. The draft indicates a new incentive program based on a fixed subsidy amount rather than a fixed quota system as was previously done.

The fixed subsidy amount is expected to be in the range of approximately RMB3 billion and could cover approximately 30 to 35 gigawatts of installations. Poverty alleviation projects will be subsidized and funded separately. In addition, the market anticipates some grid parity projects which will not require central government subsidies.

Based on industry research, China’s installation target for 2019 is anticipated to be approximately 40 to 45 gigawatts, but there could be some variations in the final version of China’s policy in 2019. Grid parity and cost reduction will continue to play a key role in driving global demand from developed markets such as Europe and the U.S.

to developing markets like India, South Asia, Africa and South America. We expect global solar installations in 2019 to be approximately 120 to 140 gigawatts.

We believe demand for polysilicon, which is the key ultra pure raw material for crystalline-silicon solar PV module will keep growing as solar PV becomes more and more competitive compared to other energy sources.

We believe the current market challenges are temporary and should be resolved during the second half of 2019, especially when demand and installation from China recovers.

Looking forward, we believe the solar PV industry has become much stronger and increasingly independent of policies and is expected to grow sustainably over the long-term with better stability. The pace of new capacity expansion within the polysilicon industry will smooth out going forward.

As a leading polysilicon manufacturer, we believe Daqo New Energy is ideally positioned to benefit from this fast growing market and will continue to outperform its peers with lower cost and better quality.

Outlook and guidance for this year, the company expects to produce approximately 8,500 metric tons to 8,700 metric tons of polysilicon and sell approximately 8,400 metric tons to 8,600 metric tons of polysilicon to external customers during the first quarter of 2019.

For the full year of 2019, the company expects to produce approximately 37,000 tons to 40,000 metric tons of polysilicon, inclusive of the impact of the company’s annual facility maintenance. This outlook reflects Daqo New Energy’s current and preliminary view as of the date of this press release and maybe subject to change.

The company’s ability to achieve these projections is subject to risks and uncertainties. With that, I will turn 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. Before I begin, I would like to remind everyone that the company discontinued its Chongqing business subsidiary in the third quarter of 2018.

The operational results of the Chongqing business have been excluded from the company’s financial results from continuing operations and have been separately presented under discontinued operations. Retrospective adjustments to the historical statements have also been made to provide a consistent basis of comparison for the financial results.

Going forward, the company will focus all of its resources and expertise on its core polysilicon manufacturing business. For the fourth quarter of 2018, revenues from continuing operations were $75.6 million compared to $67.4 million in the third quarter of 2018.

The sequential increase in revenue was primarily due to higher polysilicon sales volumes partially offset by lower ASPs. Gross profit was $16.9 million compared to $12.8 million in the third quarter of 2018. Gross margin was 22.4% compared to 19.1% in the third quarter of 2018.

The sequential increase was primarily due to lower average polysilicon production cost partially offset by lower ASPs. Selling, general and administrative expenses were $8.2 million for the quarter compared to $7.6 million in the third quarter of 2018.

R&D expenses were approximately $1 million for the quarter compared to $1.4 million in the third quarter of 2018. R&D expenses could vary from period to period and reflect R&D activities that took place during the quarter. Other operating income was $12.5 million for the quarter compared to $0.1 million in the third quarter of 2018.

Other operating income was mainly composed of unrestricted cash incentives that the company received from local government authorities, the amount of which vary from period to period.

During the fourth quarter of 2018, the company received national innovation and technology development brands related to PV silicon materials as well as other government subsidies and incentives. Income from operations was $20.3 million compared to $4 million in the third quarter of 2018.

Operating margin was 26.8% compared to 5.9% in the third quarter of 2018. Interest expense was $1.9 million compared to $2.1 million in the third quarter of 2018. EBITDA from continuing operations for the quarter was $29.5 million compared to $14.8 million in the third quarter of 2018.

EBITDA margin was 39.1% compared to 22% in the third quarter of 2018. During the third quarter of 2018, the company decided to discontinue its solar wafer manufacturing operations. Results of the discontinued operations of the previous quarter and comparative quarters were represented accordingly.

Loss on discontinued operations was $5.7 million in the fourth quarter of 2018 compared to $22.4 million in the third quarter of 2018. Net income attributable to Daqo New Energy shareholders was $11.4 million in the fourth quarter of 2018 compared to net loss attributable to Daqo New Energy shareholders of $18.3 million in the third quarter of 2018.

Earnings per basic ADS was $0.86 in the fourth quarter of 2018 compared to loss per basic ADS of $1.39 in the third quarter of 2018. Now, I will discuss the balance sheet. As of December 31, 2018, the company had $94 million in cash and cash equivalents and restricted cash compared to $113.2 million as of September 30, 2018.

As of December 31, 2018, the accounts receivable balance was $1.2 million compared to $1,000 as of September 30, 2018. Most of our polysilicon sales were made with customer payments prior to product deliveries and without payment terms. We continue to manage our accounts receivables prudently.

As of December 31, 2018, the notes receivable balance was $8.1 million compared to $22.5 million as of September 30, 2018.

As of December 31, 2018, total bank borrowings were $171.5 million, of which $133.3 million were long-term borrowings compared to total borrowings of $165.3 million, including $119.4 million of long-term borrowings as of September 30, 2018. Our bank loan to asset ratio stood at a low of 0.20.

For the 12 months ended December 31, 2018, net cash provided by operating activities was $95.6 million compared to $142.7 million in the same period of 2017. For the 12 months ended December 31, 2018, net cash used in investing activities was $164.7 million compared to $67.9 million in the same period of 2017.

The net cash used in investing activities in 2018 and 2017 was primarily related to the capital expenditure on Xinjiang Phase 3b and 4a polysilicon expansion projects.

For the 12 months ended December 31, 2018, net cash provided by financing activities was $86.7 million compared to net cash used by financing activities of $37.4 million in the same period of 2017. The company completed a follow-on offering of over $110 million in April of 2018. Now, I will discuss full year 2018 results.

For the year of 2018, revenue from continuing operations, were $301.6 million compared to $323.2 million in 2017. The decrease in revenue was primarily due to lower average selling prices partially offset by higher polysilicon sales volumes. Gross profit for the full year of 2018 was $98.1 million in compared to $144 million in 2017.

Gross margin was 32.5% in 2018 compared to 44.6% in 2017. The decrease in gross profit and gross margin was primarily due to lower polysilicon ASPs. SG&A expenses were $27.1 million in 2018 compared to $16 million in 2017.

The 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 $2.7 million in 2018 compared to $0.7 million in 2017. R&D expenses vary from period to period to reflect the R&D activities that took place during each period.

Operating income was $13.2 million in 2018 compared to $3.8 million in 2017 which mainly consists of unrestricted cash incentives that the company receives from local government authorities which vary from period to period at the discretion of the government. Income from operations were $81.5 million in 2018 compared to $131.1 million in 2017.

Operating margin was 27% in 2018 compared to 40.6% in 2017. Interest expense was $10.8 million in 2018 compared to $16.3 million in 2017. Net income attributable to Daqo New Energy shareholders were $31.1 million in 2018 compared to $92.8 million in 2017. Earnings per basic ADS were $3.06 in 2018 compared to $8.76 in 2017.

Adjusted net income non-GAAP attributable to Daqo New Energy shareholders was $71.6 million in 2018 compared to $99.5 million in 2017. Adjusted earnings per basic ADS non-GAAP were $5.74 in 2018 compared to $9.38 in 2017. 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..

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Philip Shen of ROTH Capital. Please go ahead..

Hi everyone. Thanks for taking my questions.

The first one I would like to express is for Q4 you reported $75.6 million of revenue, but if you take the volume of shipments times the average ASP for the quarter I think we get $68 million, so can you help us understand the difference in that revenue because I think wafer you guys recognized its discontinuing operation now, so the wafer revenue I am guessing is not upon on that revenue number?.

Hi, Phil, good to hear from you and thanks for joining our call. So as we have said before so in the third quarter we discontinued operations in business subsidiary and then the operational results of Chongqing is now excluded.

And so some of the revenue that we have recognized in Q4 has to do with revenue and financial adjustments related to the continuing and discontinuing operations and including some of the progress – revenue recognition and profit allocation.

So for example when we shutdown our Chongqing subsidiary still had for example polysilicon ingots and polysilicon blocks.

These were sold [indiscernible] but without revenue recognized, but lot of the profit and revenue should have gone to Chongqing went after the wind down then we sold some of these ingots and blocks then the revenue and the profitability would go to the Chongqing and that happened in the fourth quarter.

So that’s where you are seeing the difference between the sales volume and the ASPs primarily. It’s got….

The difference is around $7 million….

Okay. Thanks for that. That’s helpful.

So on a go forward basis we probably will not see that, is this a fair thing to say I am guessing [indiscernible] that inventory?.

Yes. We would not expect that starting in 2019..

Okay.

And what kind of margin did you get on the ingots and blocks?.

I don’t have that, if we exclude that $7 million, you can use the calculation the gross margin like 17%, our extra gross margin. 18%..

Yes. We can calculate using your numbers. Thanks. And then also on Q4, you guys had other income about $12.5 million, which is bigger than I think you guys have had in the past..

Yes..

So, can you talk to us about what – how did you guys get that for the quarter? And then I know you said in your prepared remarks that, that can vary, but do you expect to get that kind of benefit in Q – anytime in 2019? Is that something we should actually factor into our models or was this more of a one-time $12.5 million benefit for Q4?.

Philip, let me answer that question. Basically, if you look at the history, every I think Q4, we got some the subsidy – I think payback – the governments payback some tax refund, okay.

Basically, in October, we’ve received around $11 million from local governments, which is we paid the tax, income tax, value-add tax in 2017, that tax belongs to local governments and they’re supposed to back to us that we have contract signed with local government in 2015, so basically that will occur every year until 2020..

Okay..

Is that clear? Yes..

I think yes. I think this is the biggest – I’m looking through the Q4 past since 2015, it’s definitely the biggest one..

Yes, 2017 we paid – yes, 2017, we paid I think big amount of tax, value – VAT, all those, so refund in 2018, then this year, we’ll get a refund from 2018 figure and the figure is not decided..

And let me follow up on what Longgen says, so because of the local government budget and fiscal year and planning, so most likely most of the government incentives that we receive from government will generally occur in Q4, will generally occur in Q4. And then we also apply for, for example, technology grants and technology incentives.

For example, this time we happen to receive pretty significant amount related to R&D for PV Silicon Materials from a National Technology Innovation grant. So, we continue to apply for these projects from time-to-time, and when these awards are given to us, then we will recognize those as well..

Okay, great. Both of those responses are very helpful. Thanks. Shifting gears to kind of some more big picture perspective.

Can you talk about how you guys see the polysilicon capacity ramping up on a – from – for the industry and competitors, in Q1, Q2, we believe that it could be – capacity in Q1 or production in Q1 could be up, 40% year-over-year relative to the last year given all the expansions that we’re seeing.

Can you comment on kind of that expansion that you see ahead and then also how much at this current pricing level capacity could possibly exit the landscape and then we’ll – after that maybe we’ll shift to demand? Thanks..

Okay, Philip, I think it’s a good question. Basically, I think it’s a lot of information data you see flies. And if you look the new capacity, I think we are the first one I think 3B ramp up the production – for – production.

Then other people most I think starting production like Tongwei, I’m not going specific, okay, they’re going to ramping up maybe on the Q2 of this year, then other maybe ramping up in Q3.

So basically, first of all, it’s not all capacity will – fully expected to run in this year, but definitely I think for next year, yes, a lot of new capacity will come in. But total, add together, if you can see that I think even this year I think the good quality, the better quality and the lower cost maybe is around like 270,000 tons for this year.

So basically, I’m not saying demand side, just say production side, I think the domestic high good quality products is not too much there. For example, I can say an example, in Q4, our monosilicon supply is around 61%. So, if you look our gross margin, our monosilicon price ASP is around like $10 and the multi is around $6.30 or whatever.

Our ASP is around like renminbi is around like – US dollar maybe around like $9.50.

So, we see in Q1, we will get more improved our gross margin, the reason because first of all, the monosilicon percentage will increase to around 77%, 78%, then we didn’t see the monosilicon price go down, because we think it’s already lower, right now $10, because a lot of people actually the cost is probably above that even the foreign producer.

So then on the other side, yes, I think on the multi-silicon side, oversupply situation is coming, okay, we got the pressure and we still can because of quality today we’re still selling above $9 per kg.

So, basically, from our side, we’re still very optimistic, the reason because we see the Chinese new policy is going to installation in more detail and in the second half of this year, we see the good picture there.

Secondly, the global market is there and right now the downstream if you look at the module price right now, renminbi, the foreign currency maybe around like $0.25, $0.26 on the mono you see is very lower, actually grid-parity is there.

So, basically, I’m not worried about that because basically, right now the ASP is already a lot of producer in China is consolidation. Even in foreign producer as they applies, we may be making gross margin 20%, our competitors right now I think is bleeding..

Yes, on that point, Longgen, how many – how much capacity do you think could go offline current pricing in the industry 20,000 [ph] metric tons –.

I’ll give that. This year around – in China maybe around 250,000 tons, 270,000 tons..

Okay. I just want to clarify. So, you think 250,000 tons could go away. Okay, great. And then in terms of ASPs looking ahead, our checks suggest that there could be some upside to pricing near-term, let’s say by 5% to 10%.

Do you think that could be true? And if so why, and then how do you expect poly ASPs to trend by quarter through 2019?.

Okay, basically, we right now – is two forecasts, one is for the monosilicon to focus on the quality, to increase the monosilicon percentage go up. So Q1, we’re around 77% to 78%. So, we see right now the monosilicon price is around renminbi is around like RMB81 to RMB83, in March it already increased one gram per kg, okay.

Then for the multi-silicon right now, we’re selling around RMB70 to RMB72, but we – yes, we got the pressure, because too much we supply especially some new capacity right now, majority of the new products, [indiscernible] products is multi-silicon, okay.

So, in Q2, we don’t think the price will go up dramatically, maybe monosilicon is go up a little slightly, but not like you said 10% or 5% I don’t think so.

And we hope Q2 can continue to keep the price stable and then all of a sudden it continue – monosilicon percentage continue to go up, so we can keep the ASP stable or slightly go up, but definitely we think second half of this year the ASP will go up. I’m not sure because I cannot project whether it’s 5% or 10%, it all depend on demand and supply..

Okay. So, and a lot of that I think is the demand part of the picture is something I think is not well understood. You mentioned in your prepared remarks that global demand is very strong and that number of countries are seeing that grid-parity and that China demand should support that.

Can you talk to us about which specific countries perhaps your customers are highlighting as sources of strength, certain countries in Europe or Latin America, Southeast Asia, which countries in particular are you guys seeing as place – places of surprise, if you will, of that upside of demand?.

Okay. First of all, Philip, I’m not selling module, okay, I’m selling silicon. So, only I can tell is very strong demand from all clients downstream. Today every I think as you see that, LONGi, Zongwan, [ph], Jinko, Canadian Solar, all these company right now.

But to answer your question I think in the script, I already say right now globally almost everywhere you see from developed countries to developing countries, especially, developing countries like India, South Africa, I think even South America we see that, then the developing country especially in Europe we see strong demand is there.

I think you maybe can see Canadian Solar, I think in Jinko Solar, they are early release, I think they may be running it later, I think the market is there. So, the only thing I can tell you right now, LONGi, Jinko, as I know I think Canadian Solar they’re right now at full capacity running it right now..

Okay. Thank you, Longgen, and thank you, Ming. I’ll pass it on..

Okay. Thank you, Philip..

The next question comes from Gary Zhou of Credit Suisse. Please go ahead..

Hello, thank you management for talking my questions. It’s Gary from Credit Suisse. So firstly, on the – I have three questions. So firstly, on the policy side, so the management mentioned that you expect around 40 gigawatts to 45 gigawatts China solar demand this year.

So, does management has a rough estimate and so how much of this demand may come out in this first half and how much in the second half? And secondly, so given the likely stronger demand into the second half of this year, so does the management can give us some color on the what kind of polysilicon price can shoot up into the second half this year? And lastly, so just of the company’s electricity tariff cut at the end of last year, so what is the company’s latest cash cost currently? Thank you..

Okay, Gary, I think first of all, to answer your question, I think China right now – we estimated around 40 to 45.

Basically, the new policy is fixed to the subsidiaries amount, 3 – I think RMB3 billion as you know that, right, we’ll stay off – if the old system is fixed quarter, so we believe that will support around the 30 gigawatts, I think pioneer projects or whatever. I think that – those I think the majority we’ll do second half of this year.

And then plus I think the poverty alleviation we believe should be around like 5 gigawatts to 8 gigawatts, then plus grid-parity I think around maybe I think another 5 gigawatts to 8 gigawatts. So, basically to answer your question we are based on that I think basis we’re projecting that.

Then to answer your question, I think first of the year maybe around 10 gigawatts to 15 gigawatts, majority I think will be second half of this year. So, I think second half maybe go to the 30 to 35, even 40, because first half this year it’s not too much there, only the last year’s projects going to finish, that’s to your first question.

To answer your second question is, how about the polysilicon price, as I just said, you see because as we – I think the monosilicon especially, I think the module, module took high efficiency, module demand is hot. We believe this year the mono module will account around 60% to 70% even, so the monosilicon demand is hot.

So basically, in the history, there’s not too much Chinese producer can provide the monosilicon, majority is import as you can see there. Last year, the total consumption in polysilicon is around 41 metric tons, of which 140,000 [ph] tons is import, last year, it’s 400,000 tons, okay. So, this year I think the import should be below 100,000 tons.

So, but the mono silicon total demand, I think it should be around like 250,000 tons to 300,000 tons. So, basically, I think monosilicon price should go up.

I think right now current is around 80 to 82, but I think reasonable second half of this year maybe go to about 85 to 90, but I don’t think go beyond too much because it’s not good for the whole industry.

And for the multi-silicon because of the supply and demand situation and still a lot of small producers in China, especially state-owned companies is still running – even they are bleeding they are still running the money from governments.

So, I think they have suffered right now from last year Q4, Q1, Q2, hopefully some company should stop, should shutdown. So hopefully we can send you that.

So, I don’t think the multi-silicon price will import in Q2, but maybe in second half of this year, the price maybe will come back I think back to 75, around 75, so I think it will answer your second question. The third question I only can answer is Daqo last year we are successfully ramping up the 3b projects.

So all of the electricity cost right now last year since the November 20 our oil cost is around $0.24 per kWH. And so right now Q1 we think oil cost will continue to go down, because of the, I think the electricity costs continue to come down. So, the cash cost per Kg will control maybe below RMB41 per Kg.

And by October 15 for the 4a, we are starting production if we can ramp up then we can enjoy electricity cost around $0.20 per kWH.

So, I think by the end of this year if we can successfully reach or even ramping up for the first quarter of next year, 70,000 capacity, so oil costs will dramatically go down, so you can’t see our cash cost is around like $6.50 even $6.

Did I answer your question, Gary?.

Yes. Thank you very much. Just a very quick follow-on question, so can management share with us the latest progress of your first – sorry Phase 4A expansion and so and also is that any kind of guidance on when we can have an estimate on when the Phase 4B – the possible Phase 4B expansion will start? Thank you..

Well, for Phase A, I think it basically right now because Chongqing right now is in battle with that. So, our construction right now almost finished 18% and for the old design approval all finished. I think for the equipment, I think procurement, the contracts that we have signed, total today, we have signed around RMB2.6 billion.

The total project cost – total cost is around below RMB2.9 billion. So basically our schedule starting to trial production is October 15. Up to to-date we are still thinking we are on the schedule and ramping production in the Q1 2020. And for the 4B we need to tell on the market see what’s going on and also to see our future cash flow.

So basically we are not determining when or whether we will go to starting 4B..

Okay, that’s helpful. Thank you..

Thank you, Gary..

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

Thank you everyone again for participating in today’s conference call. Should you have any query please don’t hesitate to contact us. Thank you very much. Bye-bye..

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect..