Daqo New Energy Corp. (DQ) Q2 2017 Earnings Report, Transcript and Summary

Good day, and welcome to the Daqo New Energy 2017 Second Quarter 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 that today's event is being recorded. I would now like to turn the conference over to Mr. Kevin He of Investor Relations. Please go ahead.

Hello, everyone. I'm Kevin He, the Investor Relations of Daqo New Energy. Thank you for joining our conference call today. Daqo New Energy just issued its financial results for the second quarter of 2017, which can be found on our website at www.dqsolar.com. To facilitate today's conference call, we have also prepared a PPT presentation for your reference. Today, attending the conference call, we have Dr. Gongda Yao, our Chief Executive Officer; and Mr. Ming Yang, our Chief Financial Officer. The call today will feature an update from Dr. Yao on market and operations, and then Mr. Yang will discuss the company's financial performance for the second quarter of 2017. After that we will open the floor to Q&A from the audience. Before we begin the formal remarks, I would like to remind you that certain statements on today's call, including expected future 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 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 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 CEO, Dr. Yao.

Hello, everyone, and thank you for joining our call today. We are pleased to report the second quarter of 2017 was our solid quarter with records on both polysilicon production volume and external sales external sales volume. During the quarter, we produced 4.993 metric ton of polysilicon and sold 4,497 metric ton to external customers. During the quarter, we conducted a various experiments to improve polysilicon quality particularly for the mono-crystalline grade polysilicon, which had a slight impact to overall production cost and volume in Q2. However, as a result of this experiment, we are seeing meaningful in polysilicon quality. We made a change to our production process and permits added devices for continuation removal as well as incremented - improved process to reduce surface contamination. With combination of these efforts, production volume as well as shipment of mono-crystalline quality polysilicon hit a record high in June. With strong demand for mono-crystal PV product, we are seeing increase of mono-crystal wafer capacity in China included those of our existing customers. Overall, we believe mono-crystalline wafer capacity is expected to increase approximately 30 gigawatts in 2017 to more than 50 gigawatts by 2019, an increase of more than 60% over next two years. This board us well for substantially strong demand and the pricing for mono-crystal quality polysilicon and that too is well positioned to be the leading supply to this marketed segments. At the end of the first quarter due to the downstream costumer inventory management ASP fell in April, but started to recover in May, market demand and pricing improved throughout the second quarter with the ASP in June approximately 15% higher than that in the April. In terms of the PV end-market, China installed 24.4 gigawatts of solar PV in the first half of 2017, representing a new record and a 9% increase from the first half of 2016. For the full year of 2017, China's annual PV installation forecast is currently expect to exceed 35 gigawatts. Based on discussions with our customers, we believe that China PV market demand continue to be strong, driven by top-runner projects, quality products, as well as distributed generation. Globally, the U.S. and Indian markets are also seeing strong PV product demand with much stronger than expected solar PV installation in China, the annual total global solar installation in 2017 is likely to exceed 80 gigawatts with strong and better than expected, anticipated a downstream market demand. Starting in late of July, we began to see a significant polysilicon shortage in China market with a polysilicon pricing continue to rise. As of today, market for polysilicon price is approximately 25% to 30% higher than Q2 average and appears to be going higher. Even added account to higher pricing, we are seeing strong customer requests and orders that are far exceeded our ability to supply. In June, the Chinese government announced its investigate captive power plants in Xinjiang for violation of legacy to republish [ph] the environmental standard. We believe the government investigation as well technical and other issues is resulting in series delay and production problems at our competition. And the problem is likely persisting the medium term and are further restricting available poly supply. During the second quarter of 2017, the company generated 12.1 billion in net income attributable to Daqo New Energy shareholders and 29.8 million EBITDA with EBITDA margin of 39.2%. In particular, our operating cash flow remains strong in the first half of 2017. We generated 73.6 million in net cash provided by operational activities. Going forward, we will continue our efforts to improve polysilicon quality throughout the year. With our high product quality and the stable supply capabilities, we continue to be a supply of choice with strong demand of our high quality polysilicon from our diverse customer bases. Now let me provide outlook for the third quarter of 2017. Our annual maintenance for Xinjiang polysilicon facility is scheduled for late September and October. The annual maintenance is anticipated to impact production volume by approximately two weeks. As a result, we expects to produce 4,200 metric ton to 4,500 metric ton polysilicon and the sale approximately 3,700 metric ton to 4,000 metric ton external customers during the third quarter of 2017. Above external basis sales guidance excluded shipment of polysilicon to be used internally by our Chongqing solar wafer facility, which utilize a polysilicon for its own wafer manufacture operation. Wafer sales volume is expected to be approximately 25 million pieces to 25.5 million pieces in the third quarter of 2017. Now I will turn call to our CFO, Ming Yang for financial updates.

Thank you, Dr. Yao and good day everyone. Thank you for attending our call today. Now, I will provide the financial updates for the second quarter of 2017. Revenues were $76 million compared to $83.8 million in the first quarter of 2017 and $71 million in the second quarter of 2016. Revenues from polysilicon sales to external customers were $61.1 million, compared to $70.4 million in the first quarter of 2017 and $50.5 million in the second quarter of 2016. External polysilicon sales volume was 4,497 metric tons, increased from 4,223 metric ton in the first quarter of 2017 and 2,931 metric in the second quarter of 2016. The average selling price of polysilicon was $13.58 per kilogram in the second quarter of 2017, compared to $16.66 per kilogram in the first quarter of 2017. The decrease in polysilicon revenues as compared to the first quarter of 2017 was primarily due to lower ASPs, partially offset by higher polysilicon sales volume. Revenues from wafer sales were $14.9 million, compared to $13.4 million in the first quarter of 2017 and $20.5 million in the second quarter of 2016. Wafer sales volume was 27 million pieces, compared to 22.4 million pieces in the first quarter of 2017 and 25 million pieces in the second quarter of 2016. Gross profit was approximately $24.2 million, compared to $35.9 million in the first quarter of 2017 and $29.4 million in the second quarter of 2016. Non-GAAP gross profit, which excludes costs related to the non-operational polysilicon assets in Chongqing, was approximately $24.8 million, compared to $36.9 million in the first quarter of 2017 and $31.2 million in the second quarter of 2016. Gross margin was 31.9%, compared to 42.8% in the first quarter of 2017 and 41.4% in the second quarter of 2016. In the second quarter of 2017, total costs related to the non-operational Chongqing polysilicon assets including depreciation were $0.5million, decreased from $1 million in the first quarter of 2017 and $1.8 million in the second quarter of 2016. Excluding costs related to the non-operational Chongqing polysilicon assets, the non-GAAP gross margin was approximately 32.6%, compared to 44% in the first quarter of 2017 and 43.9%in the second quarter of 2016. Selling, general and administrative expenses were $4.5 million, compared to $4.1 million in the first quarter of 2017 and $3.7 million in the second quarter of 2016. The increase in SG&A expense compared to Q1 was primarily result higher selling expenses related to increase shipment volume as higher professional fees recorded for the quarter. Research and development expenses were approximately $0.3million, compared to $0.4 million in the first quarter of 2017 and $0.1 million in the second quarter of 2016. The research and development expenses vary from period to period reflecting the R&D activities that occur in such period. Other operating income was $0.8 million, compared to $0.8 million in the first quarter of 2017 and $0.6million in the second quarter of 2016. Other operating income was primarily composed of unrestricted cash incentives that the Company received from the local government authorities, the amount of which varies from period to period. Operating income was $20.2 million compared to a $32.2 million in the first quarter of 2017 and $26.1 million in the second quarter of 2016. Operating margin was twenty six point six percent to thirty eight point four percent in the first quarter twenty six point eight percent in the quarter point. Operating margin was 26.6%, compared to 38.4% in the first quarter of 2017 and 36.8% in the second quarter of 2016. Interest expense was $5.3million, compared to $4.3 million in the first quarter of 2017 and $3.5 million in the second quarter of 2016. The sequential increase in interest expense was primarily due to a higher bank fees interest charges recorded for the quarter. EBITDA was $29.8 million, compared to $41.7 million in the first quarter of 2017 and $34.7 million in the second quarter of 2016. EBITDA margin was 39.2%, compared to 49.8% in the first quarter of 2017 and 48.9% in the second quarter of 2016. Net income attributable to Daqo New Energy shareholders was $12.1 million in the second quarter of 2017, compared to $22.9 million in the first quarter of 2017 and $19.8 million in the second quarter of 2016. Earnings per basic ADS were $1.15 in the second quarter of 2017, compared to $2.18 in the first quarter of 2017 and $1.90 in the second quarter of 2016. As of June 30, 2017, the Company had $49.8 million in cash and cash equivalents and restricted cash, compared to $61.2 million as of March 31, 2017. As of June 30, 2017, the accounts receivable balance was $3.8 million, compared to $13.1 million as of March 31, 2017. As of June 30, 2017, the notes receivable balance was $10.5 million, compared to $11.7 million as of March 31, 2017. As of June 30, 2017, total borrowings were $219.3 million, of which $123.1 million were long-term borrowings, compared to total borrowings of $236 million, including $129.2 million of long-term borrowings, as of March 31, 2017. And as of the end of the second quarter of 2017 our debt ratio decreased to 52.8% from 57.2% at the end of the first quarter of 2017 and 59.8% at the end of 2016. For the six months ended June 30, 2017, net cash provided by operating activities was $73.6 million, increased from $66.6 million in the same period of 2016. For the six months ended June 30, 2017, net cash used in investing activities was $36 million, compared to $37.6 million in the same period of 2016. The net cash used in investing activities in 2017 was primarily related to the capital expenditures of Xinjiang Phase 3A projects as well our technology operate projects. For the six months ended June 30, 2017, net cash used in financing activities was $23.4 million, compared to net cash used in financing activities of $13.5 million in the same period of 2016. The increase was primarily due to repayment of bank loans in greater volumes And that concludes the official part of our presentation. Now let's have the Q&A session.

We'll now begin the question-and-answer session. [Operator Instructions] And our first question comes from Philip Shen of Roth Capital Partners. Please go ahead.

Thanks for the questions. In terms of ASPs I think you had said in your prepared remarks that the current pricing with a spot pricing of ASPs in China are 25% to 30% higher than your Q2 average, so that's just ASPs might be close to $17 per growth right now, I think what we saw last week from some pricing sources was that spot pricing is close to $16, can you comment on whether these $17 number is make sense and then what are your expectations as to what the blended average in Q3 could be where pricing could go in Q4?

Okay. So, Phil and thank you for question. And I think of the - we're talking about the very high and is the percentage of increasing is position for the monocrystalline wafer, polysilicon which should require much higher quality compared with the average of polysilicon for solar, normal solar grades. As of all, the pricing going, we still see as John demanding for the market particularly in this season. So the quarter lot of poly, a supply have maintenance, schedule maintenance in August and September. So we see stronger than we expect in the third quarter demanding driving the price up. Are we believe this stand we are continuing in the third quarter? Although we still don't have a clear, I can see the fourth quarter pricing, average-wise we are thinking second half, the Q3 will be stronger that much stronger than Q2 like we said and Q4 maybe little bit weaker than Q3. That's the normal people are seeing. But it's too far to see the fourth quarter pricing at this moment.

Okay. Thanks, Gongda. As it relates to the supply constraints, you talked about schedule maintenance, but then I think there was a fire at one of your peers. How much impact you think that fire ultimately had on supply number one? Also number two, how much supply may be constructed as a result of the environmental investigations that are ongoing and change on as well?

Okay. So we cannot particularly comment on individual competitors, but generally speaking, the new start-up for polysilicon manufacturer as we heard is the day facing some environment and regulatory policy issues. Regarding you mentioned the fire in particular the competitor manufacture, the quantity restricted from that event is very limited. We heard is several big supply polysilicon they have restricted some products due to some technical difficulties in China that's give more actually impact for the supply side. So as a result, we will try to continue small production for August but we also were to maintenance in the September. So generally speaking, for third quarter, there is more shutdowns for maintenance and the expected - expanded the capacity in Xinjiang is not at the high as the people expected on the first half of this year. So that's what the - also the demanding for the polysilicon is stronger than people expected after June 30. So this all - these things added together, driving the demand, the price imbalance driving the price as they are going, increasing for Q2. That's what we generally see. Although we do not have particular clear information regarding what's the problem some of our competitors facing, but we see much less polysilicon released from those price.

Great. Okay. One more here in terms of capacity expansion, can you share your latest view on capacity expansion, how much longer do you think you need to wait before you decide, what new information do you need to help you make that decision, I gather that it's not just an internal decision but rather you're also thinking about what is happening on the supply side overall. So why the - improvising color as to what are the key factors to help you decide if you will expand? And then also can you expand beyond phase 3b, would you consider that with the - if the market manages it?

Okay. Yeah. So Phil, thank you. So, we - okay our decision to future for expanding our capacity is based two things. One is market is supply balance and the supply demand balance that's important. Secondary also we mentioned that in Q2 actually in for first half of this year, we did a lot of experiments trying to explore the high quality polysilicon their quality. So if we want to expand in future, what we can say the one of the very key standard is that we're positioned for a high ender market which means our position definitely is for monocrystalline wafer, polysilicon or even higher quality. If we have a confidence for those technology mature enough, we can make decision to expand. And so we are not competing with larger volume of capacity of our, say for standard polysilicon make in China. We have positioned ourselves and the leading supply for high quality polysilicon manufacture. And we are competing with those leading companies like international companies for the high ender market. So once we think it actually is technical viable, we can make decision at that point. And technically and for the projects we are doing study is very smooth, we think we can conclude - we can conclude our results very soon I would say, if or not completed at this moment, we're trying to compete it very soon. So that's our key decision maker condition for considered for our future expansion. And at this moment, we are not consider a lot after phase 3b beyond that. So we're trying to maybe step by step, if we want to do next, we probably will complete the 3b first.

Okay. Very helpful. Thank you. One last one…

Okay, that's well, the best is like a 25,000 metric ton beyond, yeah, that's right level.

So, great. One last one I will pass it on. In terms of, you mentioned higher quality poly. Can you give us some metrics to help us gauge where stand today so for example in Q2, I may have these terms wrong, so feel changed the criteria if you need to or want to, I mean there is different levels of the electronic grade that you guys have taught you on the past. So what percentage of your production in Q2 for example was the different levels of electronic grade and then how do you expect that to trend through Q4 and then if you launch phase 3b how much more could it become? Thanks.

That's right. Okay, great. Thank you. So in the polysilicon market in China's National Standard, we have a six different grades, three for electronic, three for solar. So that the high level is electronic at grade 1 and the next one is the grade 2 and the third one is electronic grade 3. And then solar grade 1, solar grade 2 and solar grade 3 electronics. In China most first polysilicon manufacture come all beyond like a solar grade 1 averagely speaking. And 3Q right now, and the Q2, our polysilicon quality above electronic grade 3 is about 80% of our total production. So we have some very small portion reached like electronic grade 1. And there are significant portion is majority in the grade 3 and between grade 3 and grade 2. And there are small position above grade 2 at this level. Now for the future expansion, we target our production at electronic grade 1 level. So that is still have - so which means we were using more advanced technology and equipment of our future expansion, if we were to do expansion future for phase 3b. So I hope this answers your question.

Yes. Absolutely. Thank you. I'll pass it on.

Our next question comes from Sheng Zhong of Morgan Stanley. Please go ahead.

Hi management congratulations on your good results. Follow-up question on your maintenance schedule, you mentioned, in September you are through the maintenance, but last year the maintenance is being very late September and early October. So it is possible that you were postponed your maintenance this year because of the strong demand and strong price?

So last year's maintenance is a little bit to do with expansion project. So we're doing one maintenance during two propose, for this year is slightly different, so we were using innovative first time we're trying to shut down that the half of the line and while maintained and manufacture on underline so that one maximum based our outputs. So the impact for the production as we said maybe roughly about two weeks instead of more than two weeks, last time we did more than three weeks actually, so huge impact for production, so this time if you notice our guidance for Q3 it's much higher compared with the last year, that's in two facts, because we divide and one maintenance by two different schedules in September and October and each with much less impact compare with last year. So total output impact is included Q3, Q4 about two weeks, so we're expecting like loss rates about one week for each so that that's the guidance. We probably not change much and last February our customers driving us say, so currently we got a lot of course from a customer for supply, we do our best we can to surprise so in the some customers say they're facing a possible shutdown, because of shortage of polysilicon we don't like to see that happening, but as our ability to supply is limited, so we try our best in August and in September we really need to do the maintenance because, maintenance is not only for the mandatory things, and also for the safety guarantee our chemical plant for long term running, so we definitely most likely would do in September according calendar schedule is. And of course, we are waiting for other facts like the hardware delivery for our supply is ready and we can immediately studying our maintenance in September, so that's our only limitation is on the hardware average equipment and hardware if once we have those things, we will do in September and most likely we'll not change even the we also in preparation for maintenance, we're also informed our key customers about our schedule, so we ask them to do their plan accordingly and in the third quarter and the fourth quarter.

Understand, thank you very much. And second question is about the currencies there are still very huge in point number and come to China market. So wondering if you have any updates on the dumping investigation on the Korean policy come and is there are any timeline for China document to make some decision?

We could know decision made already yet, but this is the Chinese government's decision, so I do not thinking we were know before even like the Korea company and know before, according to the announced schedule most like to in mid-November. Right, so November we'll know that our results, so unfortunately as I think we know the same as maybe for example like the Korea polysilicon manufacture there were know the same time, so by November most likely they were not, but then as you know this is not really a pure economic issue is political and depends on the country relationship and changes could be happen. So it's not only the simple economic issues, so it's very complicated, so we think when November would be done properly.

Okay, yeah. That's great. That's it from me. So I jump to the queue. Thank you very much.

Our next question comes from John Seafritch of Luminous. Please go ahead.

Hi guys, just two questions if I could. First one, can you give us a sense if you haven't talked about it already of kind of where you think cash costs might be in the polysilicon segment by year end and what sort of scope is there to continue to bring those down? And then secondly, when I look at the ASP that was realized in the poly segment, it was a little bit lower than I would have thought typically because of your high purity you guys seemed to get a little bit of a premium above spot, so was there anything particular in the quarter that you know will lead to a slightly lower ASP or as something change a little bit more in the market and should we expect a premium to return as we look in the second half of the year?

So yeah, so as you know the Q2 had the ASPs very weak in China, and also we have some delay in the order and the shipment and the so for to the customer side, so during the Q2 almost like ASP steady, steady is going up a little bit, but that's not very high in the June compared with the current price. So we do see you're right if you - I don't know if you look at the average price wise maybe slightly below, but actually because of little bit of lagging in the price response to our shipments, so normally we - for example we normally fixed the price to at a one month before, so basically for example our April price is most likely settle by the second half from March which is a very low point to spot price, so which give us April prices little lower than actual April price and same to the May and June, so that's probably the reason, yeah, we do not sell our spot and price humidity, we do work with our long term customers with one months ahead of schedule, so that that's probably the reason, yeah.

Perfect, thank you. And on the cost side, where do you think cash cost?

Cost side, yeah. Cost side right now, cash costs about $7 and are better that's been manufacture cash cost not include our financial cost and interest cost and also sales and administrative cost. So how long we can go manufacture cost, we beliefs eventually, eventually we can to as well as the $6 whether it's long term, it's not like immediately probably within two years, I think we can do with cash cost about $6 for the devices.

You said end of 2018 $6 is a good target?

Yeah end of 2018 and the beginning of 2019 I think we can do that.

I think even in Q4 you will start to see some opportunities for cost reduction, you know we're into many technology and new upgrades that should be electricity research, energy research in general as well as grown to reduction. So you start to see some best in Q4.

Okay, great. Thanks guys.

Thank you.

[Operator Instructions] Our next question comes from Luca Zu of Deutsche Bank. Please go ahead.

Hello, Dr. Yao, can you hear me?

Yeah, yeah, please.

Very clearly, thank you.

My first question is that can you please share with us about the poly shipment mix between mono and multi customers during the past quarter, if I remember correctly, first quarter you shipped around 20% to 30% something and what your expectation in the next few quarters?

Okay, so next two quarters, so currently we are targeting our shipment is around 40%. So we're trying to set up a very high standard for mono wafer polysilicon, so on the two requirements when he is the purity wise you know the impurity level should need to electronic grade 3 or above, so that that's the first to come. Second the comment is that we want to very dense polysilicon raw material, so that's the combination of the two characteristics of the polysilicon we will ship before as the mono wafer polysilicon. As a result I think that we ship to various of our customers and so far almost like 100% in the past quality control, so this we will continue to do. And on the same side in our customer to manage the higher, they want to ship a higher percentage of our product as the mono wafer polysilicon, so we also do some experiments trying to little bit a testing the other material can be using as well, so we have a joint development with our key customers to see if we can expand the shipment. At this moment we still target our percentage roughly about 40% and until with our new experiment like them being mentioned we do a lot of experiment with our customers if that positive then we probably would continue expand our percentage, otherwise we still reaching that commitment as the 40%. As we say, right now is 2017 the mono wafer supply maybe consuming it still above 30% to 40% range right now in China, majority mono wafer the polysilicon is from China and also imports. But in future maybe three years later that would be improve to more than about 50% in the trade and then probably require a lot of Chinese poly is a bigger portion were be suitable to the mono wafers, so that's our goal. Son in next two years we were extending our percentage to increasing 40% to maybe 60%, but need to include a new capacity and our technology improvement of our production.

, :

Yes, there are several amount of wafers recommend, I think for end type mono is the most to high requirements for whole sectors, because those for like for example typically like for some powers IBC applications for end type of mono is very, very high quality is required, is the much carrier - in order to carry a lifetime, lifetime is much longer than compare with our standard of fee type. So that wafers waivers require much better our second quality normally we are - we choosing the best material and we also asking for higher price compare with normal ones, so that's definitely. For the standard of fee type right now the difference between that poly compare with solar grade is very small and there's the two factors we just starting shipping to same customer and normally most a customer also receiving our polysilicon for mono and module wafer applications, so we combined those together, so at this moment is the difference is very limited and this moment and as we said in future because demanding for the mono wafer parts you can increasing significantly as the fact also require higher standard for quality, I think the price was difference in the second half of this year.

Okay. You mean small premiums, so can I understand below 10% something?

Yeah, yeah, you can see that.

Around 3% to 5% currently and we expect that to extend.

So is it possible to expand beyond 10% in second half right?

Maybe not 10%.

Maybe not a 10%, because as you know the China polysilicon is just starting to using as a mono wafers in last only a few quarters going, transitionally it is markets by imports polysilicon, so they are easily position for ask premier, right now we're competing to see it, so at this moment are we entered this new market, we do not put a larger percentage of difference, we are trying to competing and as the qualified mono wafer polysilicon supply and the first and once we can largely replace the imports I think even with positioning lower than imports the price we still can position for higher price compared with multi crystal wafer market. Yeah, so that's what we think expect and especially as not every polysilicon manufacture can provide us with the quality to qualify as mono wafer supply, so there is no limit to the supply in the Chinese market, especially if the antidumping you know decisions made, I think with the lot of imports poly face difficult into China market and at that point we see some supply demand in balance again.

Okay, I see. So and my second question is on the cost side, I don't have a second quarter to cash cost is little bit higher versus first quarter, is it due to like the currency movement or I'm wondering if any cost difference between the poly mono and multi…

No, no, no the second quarter factory cost is not significant. We will still consider that's better, there are two areas we mention, one is the second quarter we do a lot of experiments trying to improve the quality of polysilicon, we face some problems and stability in the process so causing some parameter in movement although the quality of the polysilicon generally increase whether is still like 80% and so as a manufactory using little bit more electricity for example, and also second of fact is such the impact of the cost is a meta logic gray silicon prices slightly increase is not significant, but we think we can maintain that, we can we can manage that in the Q3 and Q4 at this moment if those factors now increased a lot. We can - we proved in the Q3 is the preliminary results we always see our cost can maintain as low as in the first quarter, so this problem can be solved by Q3 I think. If Q3 we need looking to general cost is because the maintenance, because maintenance be normally were impact some quantity of the production, so if disregarding that portion I think that we can improve our cost structure for Q3 and Q4.

Okay, thank you. So can remind us again your total cost target by end of this year and maybe for next year as well?

Okay Zu for this year we say we maintain is about the $8 and $8.50, yeah so it's like we kind like $8.25 at the middle point at the end of this year around $8.15 the 2017. If we once we're going to 2018 because we will - we do some during this comment and maintenance in the September, October we will improve some in acting for our line, so we were increasing likely we're increasing roughly about additional 1000 metric ton output for 2017 compared to 2017 if we do not study any new capacity expansion, so we're expecting 2018 the overall production volume were very close to 27 metric ton, so which you give us further reduction, so target most likely target to about $8 by 2018.

Okay. Thank you. And my last question is about again by the capacity expansion given maybe you have learned that the government has set a very encouraging the solar target by next few years, which has beat the market expectations. So perhaps this may help the demand expectation, so given that will you consider to expand your phase 3b capacity any soon, is okay you give us the specific timeline of this?

No, as we said, we are not really consider, we'll consider the market environment whether as you know the marking moment is not very important factor for our considering. Our capacity right now only like 20,000 metric ton. So the market is about 400,000 metric ton. So - and if you look at the market, there are many people who are expanding by 100,000 metric ton for one company so which is really crazy in the market right now. So we are looking into is not to the capacity and total demand. We're looking for the area of the market lack of which is high quality polysilicon. So once we have technology, I think we are decided to expand immediately. So if we are busy, we are leading other competitors by two to three years or more and we were starting our expansion. Yeah, but as you know in this moment, we still have a lot of research need to be done and a lot of experiments results need to be find out and then we can make decision very soon.

Okay. You have internal target for breaking through the technology?

That's true. Yeah, that true. Yeah, we were looking to that and we also see overall our competition start up like a new companies in Xinjiang is a much slower than we expected and also they faced more problems, technical problem and environmental problem and government regulatory policy problems. So those factories, problems threatening to our expansion much less than before but a major, major factor we will considering is our own capability point, is can we make the polysilicon and no other people can make in China in next three years and then we will do that. So we were competing in the high end with international players most likely instead of a majority Chinese polysilicon makers. So we have positioned our leader top leader run for quality point view is not for quantity point of view, so that's our strategy would be.

Okay. Very helpful. Thank you very much.

You're welcome.

Our next question comes from Paul Strigler of Esplanade. Please go ahead.

Good evening, guys. Great work this quarter. I will try to ask two quick question that haven't already been asked. So, in terms of your customers, good news for you and poly side as probably bad news for them on the margin side. You happen to know sort of what the current usage rates for poly or on wafer for mono and multi, like how much are they consuming per watt, which type of wafer?

Yeah, multi is - those numbers are changing and so multi - for mono you know they are using a diamond wire, so each watt for ground is reduced a lot. I think they are very close to like four or something. But for monocrystalline wafer, there are two different technologies. If we're using slowly cutting, I thing a very close to five, but if you do diamond wire cutting is also very close to four, because we know that it is about 15% to 16% saving of silicon if you switch on one technology to another. So there is - that's that point. As poly price high, actually for average of people point of view, they are facing same problem. So they are - you have advanced technology, you have a high efficiency, you still leading their competition in the field, the most challenge is right now in China is mono versus multi, still you know it's - yeah, because the mono wafers selling price is much higher. So they can adopt to their more covenants of the polysilicon price, building price point.

Why we are seeing strength in multi wafer pricing recently and a little bit of softness in mono wafer pricing, is it just a shift to, it's based on poly supplier right now and that it's really hard to find any poly electronically?

Yeah, I think the gap between the mono wafer and the multicrystalline wafer pricing is now down little bit and they used to be a much wider more than one right now. So it's dynamic because when the gap is more than multicrystalline wafer is more attractive for the end market because they can - yeah, so that the - so when the multicrystalline wafer price increasing to some point of view then people who are choosing to the mono wafers. So market is the very flexible and actually is the market is where we are moving through the five top end relative for the end market.

One last quick one. So last time we saw supply shortage, I think I see Wacker out of their Tennessee plantin Hemlock ended up shipping a lot of supply to Taiwan which ended up getting shift into China, to get toward raw poly, isthatlittle bit close, are you seeing any increase in Taiwan and get standard poly and is the government keeping an eye on that?

I think the government keep an eye on that. I think the import front Taiwan is very limit, it's about 1,000 maybe or less, yeah 700 metric tons. So I think government is still monitor that to some point, they will take actions. So it's very high risk. I think that only a small company may be if you can say in China and punished a lot of companies seen last two years for smuggling any polysilicon into China. So I think people are very careful about this, only maybe - I don't - we don't believe any big company will buy those polys only maybe very small companies at this movement.

Understood. Great work guys.

Thank you.

Okay. Thank you.

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

Thank you everyone again for participating today's conference call. Should you have any further question, please don't hesitate to contact us. Thank you and bye-bye.

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