Good day, and welcome to the Daqo New Energy Third Quarter 2019 Conference Call and Webcast. All participants will be in listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to 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 third quarter of 2019, 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. Longgen Zhang, our Chief Executive Officer; and Mr. Ming Yang, our Chief Financial Officer. The call today will feature an update from Mr. Zhang on market and operations, and then Mr. Yang will discuss the company's financial performance for the third quarter of 2019. 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 the 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 may be subject to change. Our ability to achieve these projections is subject to risks and uncertainties. All information provided in today's call is as of today, and we undertake no duty to update such information, except as required under applicable law. Also during the call, we will occasionally reference monetary amounts in U.S. dollar terms. Please keep in mind that our functional currency is Chinese RMB. We offer these translations into U.S. dollars solely for the convenience for the audience. Without further ado, I now turn the call over to our CEO, Mr. Zhang, please.

Thank you, Kevin. Hello, everyone. Thank you for joining our conference call today. We had an outstanding quarter, in which we reached record-high production volume of 9,437 metric tons, while achieving the lowest production cost in the company's history of $6.97 per kg. Our results for the quarter reflect the full production capacity and cost structure of our original 35,000 metric tons facility. In mid-September, we successfully completed the construction and installation of our new Phase 4A expansion project and now are currently working to ramp up production of these additional 35,000 metric tons plan. We expect Phase 4A to reach full production capacity by the end of 2019, approximately 3 months ahead of schedule. With Phase 4A's additional capacity quickly coming online, we expect production volumes during the fourth quarter of 2019 to be approximately 14,000 to 15,000 metric tons. Once our Phase 4A reaches full capacity, we believe our production costs should be further reduced to approximately $6.50 per kg. We continue to enhance mono-grade production quality and are optimizing our product portfolio towards it in order to maintain higher ASPs. We sold approximately 86% of our products to mono-wafer customers during the quarter. Once Phase 4A is fully ramped up, we expect mono-grade products to account for approximately 90% of our total production volumes. With our downstream mono-wafer customers expected to rapidly expand their capacities for next year, we believe this will lead to continued increase in mono-grade polysilicon demand, which should lead to improvement in the price of mono-grade polysilicon for next year. During the first 3 quarters of 2019, China installed approximately 16 gigawatts of new solar PV projects, significantly below the market's expectations. We believe the primary reason is the long-delayed announcement of a subsidy policy, which has rippled downwards, forcing many project developers…

Thank you, Longgen, and good day, everyone. Thank you for joining our conference call today. Revenues for the third quarter of 2019 were $83.9 million compared to $66 million in the second quarter of 2019 and $67.4 million in the third quarter of 2018. The increase in revenue was primarily due to higher polysilicon sales volume, which were offset by slightly lower ASPs. In RMB terms, the company's polysilicon ASP during the quarter were slightly higher than during the second quarter of 2019. In U.S. dollar terms, the company's polysilicon ASP fell as a result of the depreciation of the renminbi against the U.S. dollar. Gross profit was $18.1 million compared to $8.6 million in the second quarter of 2019 and $12.8 million in the third quarter of 2018. Gross margin was 21.5% compared to 13% in the second quarter of 2019 and 19% in the third quarter of 2018. The increase in gross margin was primarily due to lower production costs, despite a slight decrease in ASP. During the quarter, we achieved total production costs of $6.97 per kilogram and cash cost of $5.85 per kilogram. Successful cost reduction come from our efforts to reduce energy usage per unit of polysilicon production, which is the result of our enhanced manufacturing process, better equipment and energy efficiency efforts. During the second quarter, we installed new energy efficiency systems for waste heat recovery and heat exchange. And during the third quarter, we're already seeing significant improvements in energy savings. Overall, when compared to a year ago, we estimate we're saving approximately 20% in energy usage per kilogram of polysilicon production. Other factors benefiting our cost reduction include economies of scale and our enhanced manufacturing efficiencies. As an example, our annualized polysilicon unit production per employee will increase from last year's average…

[Operator Instructions] Our first question comes from Philip Shen with Roth Capital Partners.

I'm in transit right now, so I may have missed some of your prepared remarks. But that said, I wanted to talk through what China's outlook is. It seems like the back half recovery in 2019 really hasn't happened and it doesn't seem like it will. And then we'll have this carryover of the 23 gigawatts into next year. I was wondering if you could talk through how you expect and what you expect China's demand to look like by quarter through 2020? And I think you, in your press release had a 140 gigawatt in global demand for 2020. How much of that is China?

I think as I just in talking and the speak, China this year so far because of announcement is delayed, subsidiary policy is delayed. So we believe most of projects, because it's already national planning, so around 23 gigawatts, we believe, will extend to mostly in the first half of next year. So basically, this year, we don't believe in China, maybe, I think, around 25 gigawatts, maybe 30 gigawatts, that's the most. So next year, basically, I believe is China total maybe around 40 gigawatts to 50 gigawatts because some may be delay from this year, then also next year, we'll speed up. There's a lot of things happened because the subsidy policy delay due to, because I think a lot of, if you want trade war, then the government's policy delay, the adjustments in all those stuff. But anyway, we see the grid parity, then next year, China, besides, I think, the subsidized projects and also a lot of grid-parity projects is there. So basically, then foreign markets, I think overseas market also continue to grow. This year is around 80 gigawatts. Next year, we think is, 90 gigawatts to 100 gigawatts is possible. So that's why we come out right now is 140 gigawatts. But to us, I think, for silicon materials, the most of it right now, I think, should turn the silicon price why still is status quo, like still they increased too much, still like just around $9 per kg. The reason because I think the wafer capacity expansion is not faster as we expected or people claimed. If you look LONGi, they're claiming, I think, around 60 gigawatts. But actually, right now or by the end of next year -- but actual right now, only around 35 gigawatts to 30 gigawatts is actual capacity. Same as like Chongqing. I think right now, the actual capacity may be only 25 gigawatts. But from 25 gigawatts to 50 gigawatts, I think most will be there, I think, the next year, first half -- first 3 quarters. So that's why, I believe, I think silicon price right now is not temporary. Short term is not determined by the end of module price up and down or demand supply. It is dependent on the -- I think the wafer capacity expansion. I think right now, for example, the mono, I think, wafer ingots furnaces supply is short. You need like 3 months to 6 months for the order period. So basically, I believe we see like Jinko, like LONGi, like Chongqing, those are a lot bigger players for the next year, especially the first half of the year, the capacity is installed. I think silicon price will go up next year -- I think in the first quarter, end of first quarter, beginning of next quarter -- second quarter of next year.We're back to $10, even $11.

Okay. That's really helpful. Thank you. So $10 to potentially $11 in Q1 and Q2. I was wondering if you could comment also on the outlook for supply. So you talked about the demand with mono wafer coming online. But can you talk through some of what you're seeing with your competitors and what they're ramping up in terms of polysilicon production or capacity? And how much of that do you think will be capable of producing mono-grade polysilicon?

Okay. Because since Daqo's most products right now is mono grade. 86% of our products right now is mono grade. So I'm not puttingemphasis on the multi because multi is not too much player there. So if you look at the third quarter, basically the major player will still import, I think, upon Wacker, OCI still around like 30,000 tons to China in the third quarter. Then the second player, maybe I think the major, I think, today, I think Daqo is the bigger player in China. Then also look at our competitors. I'm not going to mention their names because I think like TBEA, maybe, they also have the second -- they also have new project starting production. But they still not reached purity, I think, high percentage of mono silicon -- grade silicon quality product. Same as I think, Tongwei. So basically, I think Tongwei, TBEA, today, they may be around like 50%, the older plants maybe, okay, TBEA, frankly speaking, maybe around 60% to 70%. I'm talking about new plants. So they're still in the processing of ramping up. I think today, I think a major bigger player is Daqo, Tongwei and TBEA and plus maybe SunPower publishing is coming from New Hope because they actually, basically power is almost, basically, the power is free. Then the MGF, the silicon powder, the raw materials are also made by themselves. So even though the quality is poor, but their quantity, step-by-step, is improved and is coming to market. I think right now, New Hope's, I think, annual output may be around 50,000 tons. So basically, you can see what I can forecast by the end of this year, our capacity, actual capacity maybe reach 78,000 tons. So next year, our majority 90% is mono grade. So I'm not…

Great. One more, if I may. As it relates to Phase 4B, can you talk through what factors and conditions need to be in place for you to launch the Phase 4B? And is there a sense of timing is? Or is that still unclear?

Basically, right now, we think we still forecast Phase 4A because we're almost 1 quarter ahead to complete the construction put into the production. So I think by the end of this month, we will ramp into 70% to 80% of our output, of our capacity. So December, definitely will be 100% capacity running, even based on our guidance, you can see there in our projected. So basically, based on our, right now, the balance sheet status, we still have some 4A capital expenditures, need to pay out next year. Today, I think, as you can see, our debt-equity ratio is still reasonable and debt to total asset is 49%. So we will see, I think, at the next year first quarter and second quarter, we will see what the performance and continue to improve the balance sheet and then to make decision, also the market situation, whether we continue to do 4B or not.

Our next question comes from Gary Zhou with Credit Suisse.

This is Gary from Credit Suisse. I have three questions. So firstly, I noticed that your unit production cost for early next year is now at US$6.5. So I think this is probably lower than the $6.8 you previously guided in September. So I'm going to ask you what is the reason behind this kind of a better-than-expected cost outlook? And secondly, I ask the latest capacity utilization of your Phase 4A project? And what, how much of its current output is from the mono grade? And thirdly, so based on the current capacity expansion plans of your peers, we think that probably we won't see much kind of a new capacity from top-tier producers in the next 12 months or so, if not longer. So just wonder if management has an estimate, what kind of polysilicon price may be sustainable in the next one to two years?

I think, first of all, to answer your question, if you look at our third quarter, our cost, I think, of the goods sold is $6.97, that's just based on full capacity running on the existing capacity, 35,000 tons. And we think if we're fully running 4A and it's not only the scalability, but also, I think, in October, we successfully signed the supply, long-term contract. So compared last year, all the supply almost cut 5% from, for example, like silicon powder and the rods and the package, everything. So we think dramatically, there will be cost cutting around $0.20 per kg. Then also I think scalability, as you can see there, next year, we'll be around 8,000 metric tons. So we believe it's not only considerable right now that it actually maybe continue to go down. Based on the contract we signed with the government and also Asia company, the supply supposed to reduce to $0.24 to $0.20 per kWh. So we believe, I think, very confident $6.50, we, can be achievable. To your second question, I think, answer your question 4A, what's the status right now we're running. We're actually starting, started production in September. And right now, currently almost 70% furnace is running. For this quarter, I actually, too, I think until yesterday, until 10th, November 10, our 4A output is around 850 tons. So our planning for this month, the 4A, I think, total production maybe around 2000 tons. So to answer your question, I think, December, we will ramp up almost 100%. So then next year, you can see, I think, we will give guidance, I think, on the fourth quarter earnings release. So our 4A, right now, the ramping up the speed and also the quality is very good. For example, right now the…

Yes, thank you very much. I have no further questions.

Our next question comes from Liu Jun with CICC.

I have 3 question. The first that you have mentioned the electricity price, you purchased, next year will be going down. So could you please give us some color on the PPP you are signed with the local power station in Xinjiang next year? Because we have heard that some company in Xinjiang now have the pressure of electricity price increase. And the second is that, we have been given the guidance, where the cost will be at US$6.5 per kilogram. So may I understand what's the assumption of the electricity price for that cost? Is it the current cost? Or we already accounted the electricity price decline? And third is that considering we have no further capacity ramp-up planning in 2020, we have, say, positive free cash flow. In the next year, will we have any plan to give dividend in the next year?

Okay. I think, first of all, Mr. Liu, to answer your question, Mr. Liu from CICC, I think he knows China better than me. First of all, about electricity, I think our electricity supply and price are secured by specific trends in the investment account agreement signed with 4 parties, including one is [indiscernible] company, it's a Asia company, is a supplier. They also serves the government. Then also serves the economic development zone administration committee. So I think on their contract, if you base [indiscernible] finish 4A, our electricity should be from current price $0.24 per kWh down to $0.20 per kWh. According to them, the electricity supply and price are secured for at least 10 years after Phase 4A running at full capacity. We believe the local governments and our supply will continue to follow the agreements, and we're able to maintain our advantages in cost structure. In addition, if you know that, regulatory, the state counsel, the central government released regulations are optimizing the business environmental, in which it is clearly states, I think, on Item 31, local governments at all levels and their relevant departments should fulfill the policy, promise in all kinds of contracts and should not commit any breach and entirely disregard the obligations due to adjustment of administration jurisdiction, government transition, adjustments of institutes or their responsibilities, all charges of relevant officials in charge. So you can see that's the government's regulations starting January 1, 2020.

Yes.

To answer your second question, we right now forecast next year at full capacity Phase 4A, our cost, manufacturing cost of $6.50. So we're not considering further to the current electricity cost, $0.24 per kWh. We'll not consider right now that electricity will continue to go down, maybe $0.04 per kWh. If that's the case, the cost maybe continue to go down to $6.30.

Yes.

Then to your third question about the cash flow, yes, we see that year-to-date, to end of December, our operating cash is almost $100 million. And we believe, on the fourth quarter, the cash flow, operating cash continue to come in. But also I want to remember, remind you that 4A, our total investment is around CNY 2.95 billion. It's around US$425 million. We still have some payments still going to pay, I think arrangement. So next year, we still have 4A. We still have around $120 million payout. Then in 2021, we still have $20 million payout. So we want to continue to run the business and to improve our balance sheet when our total banking loans is around US$248 million. Although we still have banking facilities run like US$500 million, but we still want to prudently make a decision whether we continue to expansion 4B or not by the middle of this year.

Our next question comes from John Segrich with Luminus.

Just a quick housekeeping. Depreciation has kind of been fairly flat. I assume now that you're ramped with the expansion, that depreciation will start flowing through the P&L. So just remind us kind of how much incremental depreciation we should be thinking about for next year, Ming? And what's the period over which the new plant is depreciated versus the old plant?

Okay. I think, John, I think as you know that, for 4A because our total investment is around $420 million, so if we capitalize that, I think, basically, every month, right, is around US$2 million were the depreciation, I think, into the P&L. So basically, we account that also under our cost of goods sold. So that $6.50, also including that. But if you look at our total output next year, I'm not giving guidance. Our main price is 70,000 tons, but we believe, okay, we can reach maybe around 75,000 to 78,000 tons.

Okay. And then just 1 more. When you look at the guidance for 4Q, as you're ramping here, it's kind of the first time where you're not projecting to sell everything that you produce. I'm just wondering kind of is that a timing issue? Or as you bring on this new capacity, do you still need to find a home for it, and we should expect to maybe build some inventory over the next couple of quarters?

No, no, no, no, John. Because of some products we produce, like this month, some maybe still is not good quality, still in the trial production. Still is not, the production still not ramping to 70% of our criteria for capitalization. So some products, we still need a capitalization. That's partial maybe around like 110s. Then also I just remind you, some products we maybe use to our -- to making our rods, the silicon rods, so that's why we maybe use this month, it's around like 510, right? We're used to -- inside used to our silicon rods. We're going to continue -- we're going to use the silicon to outsourcing OEM, the ingots then asking people to cutting to the rods. So basically to reduce our cost. So our inventory is still we keep around 3 days production at the end of the quarter.

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

All Right. Thank you, again, everyone, for attending the conference call today. Should you have any further questions, 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.