Good day, and welcome to the Daqo New Energy Third Quarter 2022 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. This is Kevin, the Investor Relations of Daqo New Energy. Thank you for joining our conference call today. Daqo New Energy just issued its financial results for the third quarter of 2022, which can be found on our website at www.dqsolar.com.

To facilitate today's conference call, we have also prepared a PPT presentation for your reference. Today, attending the conference call, we have Mr. Ming Yang, our Chief Financial Officer; and myself. Our CEO, Mr. Longgen Zhang, is on his way from the U.S. to China and is not able to attend today's meeting in person.

So today, I will read his comments on market and operations, and then Mr. Yang will discuss the company's financial performance for the quarter and - and 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 facts - a number of factors could cause actual results to differ materially from those contained in any forward-looking statements.

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 conference 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. And now I will read the commentary from our CEO, Mr. Longgen Zhang. We are pleased to announce that the company continued to deliver an excellent performance.

In the third quarter of 2022, revenue reached $1.22 billion for the quarter with gross profit of $979 million. Net income attributable to Daqo New Energy shareholders of $323.4 million and adjusted net income attributable to Daqo New Energy shareholders of $590 million. Operating cash flow was $1.7 billion for the first 9 months of this year.

We ended the quarter with a very strong balance sheet, as our cash position combined with bank note receivables, which are redeemable for cash reached $4.6 billion at the end of Q3, and we had no financial debts for bank loans.

We kept producing above our main play capacity with polysilicon production volume of 333,401 metric ton despite our scheduled annual maintenance. Sales volume reached 33,126 metric ton, and we ended the quarter with a very low polysilicon inventory level.

Driven by the rising global energy prices and the urgency to address climate change, both demand and pricing for solar PV products increased during the quarter with particularly strong demand from markets such as China, Europe, Southeast Asia and Brazil.

As a result, market demand for polysilicon remained very strong throughout the quarter, and our ASP increased 14% in RMB terms compared to the previous quarter. With higher ASP and lower production costs, Q3 gross margin continued to improve and reached 80% as compared to 76% in Q2 this year.

In particular, after further process improvement, our mono grade polysilicon reached 99.9% of our production in September, which was record-breaking for the company. Furthermore, Daqo remains one of the most important producers of ultra-high purity anti-polysilicon, which is positioned to become the fastest growing product segment for next year.

In June, our Board of Directors authorized the company to repurchase up to US$120 million worth of its issued share on the open market. We have completed the share repurchase program and spent $119.9 million to repurchase approximately 1.88 million ADRs.

We will consider another share repurchase program when Xinjiang Daqo determines its dividend plan for the fiscal year 2022, as we believe our current ADR price is seriously undervalued and not reflective of our position as a technology and cost leader with strong profitability and operating cash flow.

Despite a more than 50% volume increase in polysilicon supply in the first three quarters of this year compared to the same period of last year, the profitability of polysilicon continued to improve, which was driven by stronger-than-expected solar PV demand and relatively faster capacity expansions in downstream sectors, particularly in the wafer segment.

According to China National Energy Administration, China installed 52.6 gigawatts of solar PV projects in the first three quarters of this year, a 106% increase as compared to the same period of last year. The fourth quarter is typically a busy season for China’s solar PV market.

Current polysilicon ASPs remain high at approximately $36 to 38 via solar [ph] per kg VAT excluded and the inventory of polysilicon is low across the value chain. We expect that module prices will be well supported in the range of RMB 1.85 to 1.95 per watt, which will provide a very strong support for polysilicon ASPs.

Solar PV demand has been increasing significantly beyond market expectations for almost two years and we believe that it is just the beginning of a new era in which renewable energies will eventually displace fossil fuels to become the biggest source of energy for the world.

Solar PV has already reached grid parity in most of the important economies in the world and this creates great value to address carbon emission, tackle climate change challenge, and further secure energy security and sustainability.

We believe we will continue to greatly benefit from this long-term trend as one of the most competitive low-cost and high-quality polysilicon providers in the world. Now I’ll provide outlook and guidance.

The company expects to produce approximately 30,000 metric ton 32,000 metric ton of polysilicon in the fourth quarter of 2022 and approximately 130,000 metric ton to 132,000 of polysilicon in the full year of 2022, inclusive of the impact of the company’s annual facility maintenance.

This outlook only reflects our current and preliminary view as of the date of this conference call and may be subject to changes. The company’s ability to achieve these projections is subject to risks and uncertainties. Now I would like to turn the call to our CFO, Mr. Ming Yang, please..

Thank you, Kevin. And hello, everyone. Thank you for joining our call today. Now I will discuss our financial performance for the third quarter of 2022. Revenues were $1.22 billion compared to $1,24 billion in the second quarter of 2022 and $586 million in the third quarter of 2021.

Polysilicon sales volume was 33,126 metric ton in Q3 2022, compared to 37,545 metric ton in Q2 2022, despite a 11.8% decline in polysilicon sales volume when compared to the previous quarter, we achieved similar revenues supported by a 10% increase in polysilicon ASP.

Gross profit was $979 million compared to $947 million in the second quarter of 2022 and $435 million in the third quarter of 2021. Gross margin was 80.2%, compared to 76.1% in the second quarter of 2022 and 74.3% in the third quarter of 2021.

The increase in gross profit and gross margin compared to Q2 was primarily due to lower production costs and higher ASPs. We further reduced polysilicon production cost for Q3 to $6.82 per kilogram, a decline of 6% compared to $7.26 per kilogram in Q2 2022.

SG&A expenses were $280 million, compared to $14.4 million in the second quarter of 2022 and $11.4 million in the third quarter of 2021. SG&A expenses during the quarter included $263 million in non-cash share-based compensation cost related to the company’s 2022 share incentive plan.

For future period the company expects to recognize approximately $7.3 million of non-cash share-based compensation expenses every month from October 2022 through September 2025 related to the company’s 2022 share incentive practise.

Research and development expenses were $2.5 million, compared to $2.7 million in the second quarter of 2022 and $1.9 million in the third quarter of 2021. R&D expenses can vary from period to period and reflect R&D activities that take place during the quarter.

Income from operations was $693 million, compared to $928 million in the second quarter of 2022 and $421 million in the third quarter of 2021. Operating margin was 56.8%, compared to 74.6% in the second quarter of 2022 and 72% in the third quarter of 2021.

Net income attributable to Daqo New Energy shareholders was $323 million compared to $628 million in the second quarter of 2022 and $292 million in the third quarter of 2021. Earnings per basic ADS was $4.28, compared to $8.36 in the second quarter of 2022, and $3.95 in the third quarter of 2021.

Adjusted net income attributable to Daqo New Energy shareholders, excluding non-cash share based compensation cost was $590.4 million compared to $638.3 million in the second quarter of 2022 and $294.7 million in the third quarter of 2021.

Adjusted earnings per basic ADS was $7.81, compared to $8.39 in the second quarter of 2022, and $3.98 in the third quarter of 2021. EBITDA was $720 million, compared to $955 million in the second quarter of 2022 and $442 million in the third quarter of 2021.

EBITDA margin was 59%, compared to 76.8% in the second quarter of 2022 and 75.4% in the third quarter of 2021. Now on the company’s financial condition.

As of September 30, 2022, the company had $3.05 billion [ph] in cash, cash equivalents and restricted cash, compared to $3.28 billion as of June 30, 2022 and as of September 30, 2022, the company’s bank note receivables balance was $1.57 billion, compared to $1.27 billion as of June 30, 2022.

Bank not receivables are issued in guarantee by domestic Chinese banks and can be redeemed for cash. Combined cash and bank note receivable balance was $4.62 billion at the end of Q3. Now on the company's cash flows.

For the 9 months ended September 30, 2022, net cash provided by operating activities was $1.7 billion, compared to $653 million in the same period of 2021. The increase was primarily due to higher revenues and gross margin.

For the 9 months ended September 30, 2022, net cash used in investing activities was $605 million, compared to $856 million in the same period of 2021.

The net cash used in investing activities in the first 9 months of 2022 was primarily related to the capital expenditures on the company’s 100,000 metric ton polysilicon project in Baotou City, Inner Mongolia, which was partially offset by $272.7 million redemption of short-term investments And total capital expenditures in the first 9 months of 2022 were $841 million, the majority of which was related to the company's in a Mongolia Baotou polysilicon projects.

The company currently expects approximately $650 million of additional capital expenditures related to the Baotou project, of which $250 million is expected to be in the fourth quarter of this year and the remainder will be in 2023.

For the 9 months ended September 30, 2022, net cash provided by financing activities was $1.48 billion, compared to $742 million in the same period of 2021.

The net cash provided by financing activities in the first 9 months of 2022 was primarily related to the net proceeds of the company’s $1.63 billion [ph] from Xinjiang Daqo’s private offering in China. And that concludes our prepared remarks. Now we will open the call to questions from the audience. Operator, please begin..

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

Hi, everyone. Thanks for taking my questions. The first one is on your outlook for polysilicon pricing with capacity coming online next year from some of your peers and also yourself.

How do you expect the polysilicon price to trend here in this quarter for the last 2 months? And then also by quarter as we get through 2023 and if you have a view for 2024, that would be great. Thanks..

Okay. Thanks, Phil, for your question. This is Ming, the CFO. So currently, the polysilicon ASP [ph] is staying at a fairly high level, around $36 to $38 per kilogram, and it has remained so for most of Q3 up until now. Q4 is typically a peak season here in China in terms of installations.

And we're tracking the Chinese installations for this year is expected to double in 2022 versus 2021. I think the range of estimate provided by the Chinese Photovoltaic Industry Association and National Energy Administration is expecting China to be 85 to 100 gigawatts this year. So we could see a lot of activity in Q4.

And Poly ASP fundamentally is closely connected with module [ph] ASP. And we are seeing very strong module selling prices in terms of very good price support at around the RMB 1.85 to RMB 1.95 per kilogram level, which is a minimum support polysilicon ASP in the range of 250 to 280 per kilogram.

I think for Q4 this year, now that were the end of October. And actually, in terms of our sales contract delivery schedule, were practically sold out for the month of November as well. So as such, at this point, we do not believe polysilicon pricing would drop or would drop much from the current level by the end of this year? Okay.

And I would say in terms of our outlook for next year and beyond, I would say polysilicon is likely to remain in the bottleneck in the value chain. If we look at what's happening in the downstream.

One is the downstream expansion is much faster than polysilicon expansion between wafer and cell [ph] capacity but these can typically be expanded within a 6 months to 1-year time frame, while polysilicon takes between 12 months to 18 months to expand and then also takes longer to ramp up and also to reach desired quality even for existing incumbent experienced producers.

And I would say a lot of the new producers lack experience in polysilicon and production and is likely to face a lot of problems, whether it's with their capacity utilization or with quality you know, experienced with a lot of start-ups in the past.

And if we look at downstream expansions, right? I think historically, these were mostly driven by profits and the value chain. Okay. So I think we did win a significant expansion in wafer capacity, as wafer capacity remains highly profitable. I think if you track the profits of LONGi or Songi [ph] or [indiscernible] they remain very healthy.

And in fact, I think for most - even for most of the integrated manufacturers, most of their profits come from the wafer segment. So we believe we will continue to see healthy expansion in the mono wafer capacity segment. And more interestingly, I think in the more downstream in the cell and module segment.

So investor profit is relatively thin [ph] I think we are still seeing large capacity expansion. So for example, for solar cell, there's more than 100 gigawatts of n-type solar cell capacity being built in China today. And interestingly, these are actually funded by the Chinese capital market in terms of very high valuation for these capacity.

So you are seeing a very aggressive expansion as well. So from this perspective, at least, I would say not to 2023, we do not believe we will see a single polysilicon stop being a bottleneck in the value chain.

I would say, 2024 is very much further out in terms of forecast, but we do not believe that you will see a significant overcapacity of polysilicon. I think one is the - the quality challenge and the utilization challenge.

And particularly, we believe starting next year, and N-type will take significant market share and will become the fastest growth segment. And actually, the N-type cell technology requires anti polysilicon, very few Chinese producers have the capability to produce anti poly. So Daqo will be very well positioned to benefit from this trend as well.

So that's our perspective..

Thanks, Ming. I just have one other question here, and then I'll pass it on. Can you give us a little more color on the $260 million share-based compensation? I know you guys press released about it in August.

But can you - do you expect to do this every year, every Q3? If not, what do you think will dictate the timing? Do you think the magnitude next year could be as big as this year? And then can you talk about the perspective of this share-based compensation relative to the $120 million share buyback.

Some investors feel that the share buyback is not necessarily enough to offset the dilution of the payment to the management team? Thanks..

I think Kevin will take this question.

Kevin?.

This is Kevin. So - so first of all, this is a plan actually for at least 3 years. So it's not going to happen every year because the whole – the entire vesting schedule is for at least 3 years. So this is basically the time frame.

And regarding the buyback and the share compensation program, basically, I prefer to view them separately, because we can do buyback without a share composition program and vice versa is the same thing. Even for example, in the history, sometimes we don't really - we didn't really have a buyback program, but we did have a share compensation program.

So I don't think it's necessary to be linked. But anyway, I think this year because - this year's buyback, relatively, the amount is not very big. It comes from the dividend we received from our subsidiary, Xinjiang Daqo.

And this year, I mean, this year, very likely we will do - although we cannot guarantee today, but very likely we will do another share - I mean the cash dividend at the level of Xinjiang because basically this is the requirement from the China as you see.

And then as the majority shareholders by nature Daqo New Energy will receive some cash and very likely we will consider to do this with the same buyback program. But consider this year's net profit will be significantly higher than last year. So it's possible that we expect to receive significantly more, I mean, the cash dividend from Xinjiang level.

But anyway, I need to emphasize this. And the processed assay ph is that Xinjiang Daqo will need to go through their process, for example, the Board meeting, the shareholders meeting and then they determine the dividend plan for the fiscal of 2022, most likely in April next year.

And then after that, after one or two months, they came in - I mean the U.S. DQ [ph] will receive the cash and then we will - if - at the payment level, we - if we did decided to do the same thing, then we’ll very likely you will see a similar program like we have this year..

Great. Thanks, guys. I’ll pass it on..

Great. Thanks, Phil..

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

Hello, management. Thank you for taking our questions. So my first question is around our new capacity in Mongolia.

So can management share with us the latest construction progress? And just wondering if the recent COVID measures would have any kind of impact on construction? And secondly, earlier there was some talks that the electricity cost in Mongolia increased. So just wondering what's the latest update? Thank you..

Okay. Thanks, Gary, for your question. So Mongolia project started construction in March. And as of now, the construction is going very smoothly. I think we're making a significant amount of progress even with the tight COVID restriction measures.

I think we have a lot of preparations and also a lot of work to mitigate any of the issues and risk, for example, related to on-site construction and also related to equipment delivery, for example.

So as of now, all of the design has been complete at the end of Q3 for the 100,000 facility, and this requires support from a Design Institute and this is actually very, very critical because there has been a significant lack of resource and of capacity form the Design Institute due to a larger number of projects that are ongoing right now.

So for us, this is a significant achievement. And also in terms of our procurement of both the equipment and also in terms of selecting the construction company, so this is mostly complete as well. And in terms of construction and progress, more than 50% of the construction has been complete.

I think if anyone has a chance to visit our site, I think it's quite an impressive site, and there's a lot of construction going on. So for the month of October and November, we expect a lot of the buildings and structures and to be complete, for example, for our reactors and also for our post processing and product distillation towers.

On November, most of the structures for our distillation and for the piping and [indiscernible] and off-gas recovery is to finish by the year-end. And we expect the installation to happen during this period to Q1.

And by end of Q1, we expect in all our units, including distillation, co-selling [ph] and the crystal growth of gas recovery to be complete by the end of Q1, which will allow us to start a pilot production, initial production around the end of Q1. So, so far, everything is going on schedule and on track. And quickly on the electricity cost.

I think that the government did announce that it would adjust the utility pricing for the renewable energy industry that was receiving support in the past. The final amount hasn't been announced. We do have initial indication that it should remain one of the most competitive energy pricing for Northwest China.

So we are very optimistic and hopeful that it will continue to be very competitive. At least an indication is such that it should even be similar to Xinjiang, that the current Xinjiang industrial electricity pricing..

Thanks, management. And another question and I'll pass on. So I also noticed that in our guidance, Q4 [ph] production volume, 30,000 to 32,000 ton is kind of slightly lower than third quarter. So just wondering what's the reason behind that? Thank you..

Okay. I'll take that quickly and then see if Kevin has anything to add. So our full year production is somewhere between 130 to 132,000 metric tons, right? And then if you split that in half, that's about 65,000 metric tons for the half. And this interestingly, so normally, we do our maintenance between March or April through, say, say, July.

We have what's called managing phases across a large number of our facilities in different phases. But this year, because of the strong demand in the first half, we actually delayed maintenance to the second half of this year. And so most of the maintenance was supposed to kick off say starting in August.

But because of the COVID restrictions that was happening in Xinjiang, right. So that actually gave us significant challenges to conduct a maintenance schedule or during this time frame. So some of our maintenance has been pushed out.

Something that was rational [ph] lease scheduled from July to September has been pushed out to October or even November, okay. So that's why you are seeing slightly higher production in Q3 and offset by slightly lower production in Q4 because of the shipping maintenance schedule. The full year production should be consistent, yes..

Okay. Thank you. I have no further questions. Thank you. And I’ll pass on..

Very great. Thank you, Gary..

Next question is from Alan Lau of Jefferies. Please go ahead..

Thank you for taking my question and congratulations for the great results. So would like to ask what is the N-type ratio and your understanding of the ramp-up of other peers like of the new players or the progress of our new players.

Do you see any like problems or like delays in the capacities from the new players?.

I'll let Kevin take this question. Kevin, do you want to address this, the N-type.....

Yeah, Alan. So - so first of all, if you look at the purity of our products, for example, last year, okay? So for example, last year, we have almost 90% of our product, you can categorize them as electricity grade number one, which is basically the highest national standard in China, good enough for every application P-type and N-type.

But currently, our N-type customers their request is one, of course, is purity. The other thing is, at least for today, they still need us to ship them with the high-density polysilicon. In Chinese, we call it [indiscernible] we say it English is high density, we serve a very polished surface.

So for example, in - for example, this year or for now, because the N-type market share is still very little, which means that the demand is not very strong. So you barely see the premium from selling N-type.

So for the company, we don't have much incentive to switch our process to produce more high-density polysilicon because if you produce more high-density polysilicon, as a results, your volume will decrease. So we need to see higher premium from N-type, so we will adjust our process to produce more high density.

So to summarize, we don't have any issue with the purity. The only thing we need to do is to produce more high density, maybe slow down a little bit of production and produce more high-density polysilicon. So this is for our existing facility.

So for example, for the new facility in Mongolia because we - starting from day one, we initially designed a new facility we use even higher standard as compared to our existing facilities into Xinjiang. So we are very confident that when we finish the construction in Mongolia, easily, we can produce at least 80% or more for N-type.

And then I will let - I will give you another information for the internal communication. For example, we have a board meeting this morning and our manufacturing team within their reporting materials - there's actually a task for Q4 is to try to send a sample to our N-type focused customers with the cauliflower [ph] surface N-type.

So we try to convince our customers, even our – the cauliflower surface, polysilicon will be good enough just to serve the N-type application. So this is basically the progress of N-type.

Other companies, we don't really know because - we don't really - we don't have the first hand information, okay? So - but based on the - the message here, we hear from our customers and with some communication within the industry, we know - we are kind of for sure, we are basically the first class or top-tier quality providers in China without any problem.

And - but we believe other first-tier players like Tongwei or maybe other one or two players, maybe they can also - so N-type application, but definitely not for the second-tier players. Because if we look at the second tier, even third tier, today, they are still struggling in the tradition P-type, not to mention the N-type.

And for the newcomer, I think for them, I think that the first 1 or 2 years will be struggling to reach their main capacity and then after maybe 1 year and 1.5 year, and then they maybe if they are smart enough and then able to gradually increase their quality to hit, firstly, to hit the traditional P-type mono grade and then maybe another 1 or 2 years to potentially to increase to the N-type.

But N-type application is growing very fast. So at least, I think, in the middle of next year, you will see at least 100 gigawatt N-type cell production line will be in place in the ramp up very quickly. So that means 25% market share.

And then in the second half of next year, you will see more if the industrialization of this N-type technology becomes more mature, no matters to [indiscernible] or HIT or other technologies yet, I mean the deployment of the new production line of scale will be very, very fast..

Thanks a lot, Kevin. A very comprehensive answer. And another question is about the progress on the X share listing.

So what is the stage for now like for the Hong Kong listing?.

Okay. Alan. So the international capital market platform is very important for Daqo New Energy. And what we are hearing is that currently, the PCAOB staff is working in Hong Kong now, and they're making a lot of progress in terms of - with their inspection of the Chinese auditors. We have not heard of any significant issues that they are being hindered.

So we do believe that the listing risk is being reduced. However, we are exploring the possibility of dual listing in Hong Kong, as a plan for investors to address any delisting risk. So we actually have engaged with executives from the Hong Kong Stock Exchange to via call meetings to explore the listing.

And so we are working and in with their staff, also working with other people on the listing team as well. So we're continuing to exploring that, and we will announce further when appropriate..

Thanks. So my last question on I’ll handover. So wondering if the COVID situation in Xinjiang is hindering first of all, poly production. And is this affecting - or is there any supply disruption of metasilicon in Hoshi [ph].

Okay. We don't have a lot of information related to Hoshi specifically other than that the COVID situation is having impact on their delivery of silicon metal overall. And so for example, related to our orders, they have been making deliveries, but perhaps not as much as we had previously order.

So I think most of the COVID challenge for [indiscernible] is rated to logistics. And in terms of shipping externally and also delivery of raw materials to our facilities as well.

So these are actually significant challenges and that requires a lot of planning and efforts for to execute smoothly So I think we have done a lot of work to mitigate all the issues and have our operations running normally. I think despite the significant COVID-related restrictions, that's happening in the Xinjiang region. Yes.

But overall, it's not impacting us. But I think there is a general impact, I think, for the industry..

Understood. Thanks a lot..

Great. Thank you..

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

Thank you, everyone, again, for joining us for the conference call today. Should you have any further questions, please don't hesitate to contact us either from - either via e-mail or via phone call. Thank you very much. Bye-bye..

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