Daqo New Energy Corp. (DQ) Q1 2022 Earnings Report, Transcript and Summary

Good day, and welcome to the Daqo New Energy First Quarter 2022 Results Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Kevin He of Investor Relations. Please go ahead.

Hello, everyone. I'm Kevin He, Investor Relations of Daqo New Energy. Thank you for joining today's conference call. Daqo New Energy just issued its financial results for the first quarter of 2022, which can be found on our website at www.dqsolar.com. To facilitate today's conference call, we have also prepared 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 first quarter of 2022. 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 and a number of factors could cause actual results to differ materially from those containing 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 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 there are a functional currency is 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, Mr. Longgen Zhang. Longgen, please. Hello, Longgen?

Thank you, Kevin. Hello, everyone. Thank you for joining our conference call today. We are very pleased to report exceptional results for the first quarter of 2022, the best ever in the Company's history. I would like to thank our entire team for their hard work and dedication in delivering such excellent operational and financial performance. For the quarter, we achieved polysilicon sales volume of 38,839 metric tons, more than 3x our sales volume for the fourth quarter of last year. We recorded $1.3 billion in revenue, also more than 3x of the revenue for the fourth quarter of 2021, and we recorded operating income of $797 million, net income attributable to Daqo New Energy shareholders of $536 million, earnings per share of $7.17 per share and EBITDA of $827 million, all representing substantial sequential and year-over-year growth. At the end of the quarter, our combined cash, short-term investments and bank note receivable value reached $2.6 billion, an increase of $1.2 billion compared to the end of last year. This strong financial performance reflects not only the strength of the end market, but also the trust that our customers place in the quality and reliability of our high-purity mono-grade polysilicon products. Last December, we began production in our new Phase 4B polysilicon facility. Production ramp-up was successful throughout the first quarter. During the first quarter, we produced 31,383 metric tons of polysilicon, a 33% increase compared to the fourth quarter of last year, of which 97.2% was mono grade. In the first quarter, our production costs was $10.9 per kg, a significant decrease from $14.11 per kilogram in the fourth quarter of 2021, primarily due to the decrease in the cost of silicon powder as well as manufacturing efficiency improvements and better economics of scale. We continue to see very strong demand for our solar PV products both in China and overseas. In the first two months of this year, the new installations of solar PV in China were approximately 10.9 gigawatts. According to China PV Industry Association, new PV installations in China are expected to increase from 53 gigawatts in 2021 to 75 gigawatts to 90 gigawatts in this year. In the first two months of 2022 based on China's customers' data, China solar PV module exports volume was approximately 26 gigawatts, doubled from the same period of last year. As a result of the stronger than expected market demand, product pricing across the entire solar PV value chain, increased consistently during the first quarter. Based on statistics from the China Silicon Industry Association, the average market ASPs, including that of small chunk mono-grade polysilicon increased from RMB231.8 per kilo in the 1 week of January to RMB253.3 kilograms in the 3 week of April, reflecting healthy demand from our customers and continued tight supplies. We also see healthy gross margin in the downstream wafer sector, which indicates that the solid value chain is able to pass down the impact of strong polysilicon prices to the end market. Global trends continue to favor the solar industry, which particularly benefits the polysilicon sector. We are beginning to witness significant policy shifts to accelerate clean image adoption and decarbonization around the world. During the month of March 2022, the European Union announced its REPowerEU initiative, which calls for an acceleration of clean energy transition under the European Green Deal. Germany, in particular, has announced an ambitious program to significantly accelerate its clean energy transition with plans to deploy 22 gigawatts of solid installations per year starting in 2026, a four-fold increase from 2021 installations of 5.3 gigawatts. As solar energy has already achieved grid parity broadly in many regions globally, the recent spike in high and volatile energy prices will further drive solid average adoption with attractive economic results. All these factors lead to additional demand for our products, which cannot be met by the current market supply. We believe the polysilicon sector will remain one of the most profitable sectors in the solar PV value chain as polysilicon will continue to be in share supply and determine the actual pace and total volume of global installations. We will continue to focus on the efficient operation of our core business, increased our capacity based on market needs, enhance our competitiveness in quality and reliability and further optimize our cost structure to provide consistent returns to our shareholders. Now let me move to our outlook and guidance for the first quarter and whole year of 2022. The Company expects to produce approximately 32,000 metric tons to 34,000 metro tons of polysilicon in the second quarter of 2022, and approximately 120,000 metric tons to 125,000 metric tons of polysilicon in the full year of 2022 inclusive of the impact of the Company's annual facility maintenance. Now, I would like to turn the call to our CFO, Mr. Ming Yang. Ming, please.

Thank you, Longgen, and hello, everyone. Thank you for joining our call today. Now, I will discuss our financial performance for the first quarter of 2022. Revenues were $1.28 billion, compared to $395.5 million in the fourth quarter of 2021 and $256 million in the first quarter of 2021. The increase in revenue as compared to the fourth quarter of 2021 was primarily due to significantly higher polysilicon sales volume, as we saw very strong demand for our products from our customers during the quarter. Gross profit was $813.6 million compared to $239.8 million in the fourth quarter of 2021 and $118.9 million in the first quarter of 2021. Gross margin was 63.5%, an increase of 290 basis points compared to 60.6% in the fourth quarter of 2021 and 46.4% in the first quarter of 2021. The increase in gross profit compared to the fourth quarter was primarily due to higher sales volume. The increase in gross margin as compared to the fourth quarter was primarily due to lower polysilicon production costs due to lower purchasing prices for silicon raw material during the quarter. SG&A expenses were $15.5 million compared to $10.2 million in the fourth quarter of 2021 and $9 million in the first quarter of 2021. The increase in SG&A expenses compared to the fourth quarter of 2021 was primarily due to an increase in shipment expenses as a result of the increased sales volume. Expenses during the first quarter included in noncash share-based compensation costs related to the Company's share incentive plan. R&D expenses were $2.1 million compared to $1.3 million in the fourth quarter of 2021 and $1.2 million in the first quarter of 2021. R&D expenses converted from period to period and reflect R&D activities that take place during the quarter. The R&D activities this quarter include purity and process improvements and research related to N-type polysilicon and semiconductor polysilicon. Income from operations was $796.9 million compared to $228.1 million in the fourth quarter of 2021 and $109 million in the first quarter of 2021. Operating margin was 62.2% compared to 57.7% in the fourth quarter of 2021 and 42.6% in the first quarter of 2021. EBITDA was $826.8 compared to $251.1 million in the fourth quarter of 2021 and $128 million in the first quarter of 2021. EBITDA margin was 64.6% compared to 63.5% in the fourth quarter of 2021 and 50% in the first quarter of 2021. Net income attributable to Daqo New Energy shareholders was $535.8 million compared to $141.3 million in the fourth quarter of 2021 and $83 million in the first quarter of 2021. Earnings per basic ADS was $7.17 compared to $1.90 in the fourth quarter of 2020 and $1.13 in the first quarter of 2020. As of March 31, 2022, the Company had $1.13 billion in cash, cash equivalents and restricted cash compared to $724 million as of December 31, 2021. And as of March 31, 2022, bank notes receivable balance was $1.5 billion compared to $366 million as of December 31, 2021 and $38.5 million as of March 31, 2021. Total combined balance for cash, short-term investments and bank note receivables at the end of first quarter was $2.6 billion, an increase of $1.2 billion compared to a combined balance of $1.4 billion at the end of 2021. And as of March 31, 2022, the Company has no bank borrowings. Now on the Company's cash flow. For the three months ended March 31, 2022, net cash provided by operating activities was $235 million compared to $159 million in the same period of 2021. The increase was primarily due to higher revenues and higher gross margin. For the three months ended March 31, 2022, net cash provided by investing activities was $166 million compared to net cash used in investing activities of $80 million in the same period of 2021. The net cash used in investing activities in Q1 2021 was primarily related to capital expenditures on the Company's Phase 4B and Phase 4A polysilicon projects. Net cash provided by investing activities in Q1 2022 was primarily due to the redemption of short-term investments, offset by capital expenditures on the Company's Phase 4B project in the Mongolia polysilicon project. For the three months ended March 31, 2022, net cash provided by financing activities was zero compared to net cash used in financing activities of $31.7 million in the same period of 2021. And that concludes our prepared remarks. Now, we'll open the call for questions from the audience. Operator, please begin.

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

This is actually Justin Clare on for Phil today. So I guess, first off, I just wanted to start off on the construction time line for your 100,000 metric ton poly facility in Inner Mongolia. Just wondering, were you able to commence construction in March, which I think was the plan? And then, do you continue expect completion by the end of Q2 2023? And then if possible, could you share a bit of the detail on what the ramp-up could look like would you be able to share your volume expectations for that new capacity in 2023 by quarter?

Justin, I think for Mongolia project, the projects totally, I think, starting actually last year, October, starting design. So basically, last year, December, we already booked some contracts, some long-term equipment supply. So, basic project is starting the field work in April, last month. And we schedule all the equipment, I think, will be on the site maybe by the end of August of this year. So basically, this project, I think we're starting to try production in Q1 next year and then to ramp up in the second quarter. So next year, definitely, that 100,000 tons will help us adding the output, I think, maybe around, I think 70,000 to 80,000 tons. So plus Xinjiang, I think, the production site -- so next year, our schedule, I'm not giving guidance, okay? Just estimate next year for the whole output maybe around 20 to 21 -- 200,000 to 210,000 tons for next year.

Okay. Great. Go ahead.

Of course, we are right now, I think, you can see we are filing Chinese SEC and do the follow-on offering. And the total offering, I think, is RMB11 billion. If we can be successful waste their money by the end of June or July, then we were considering a second phase, another 100,000 tons maybe for some time -- certain time. But definitely, I think we're already starting, I think, the feasibility study and energy approval for the 200,000 silicon metal in Mongolia. So I think that project is where we use own money, I think, a certain time, second half of this year when we're starting there to reduce our silicon powder cost and vertically integrated to the silicon metal.

Right. Okay. And then -- so on that -- so when would that facility be available, the silicon metal facility?

It depends on -- I think it depends right now the approval. And basically, our planning is, I think we were starting seeing projects in the second -- third quarter of this year. Then hopefully, we can put a because silicon metal is more easier. So maybe end of this year or next year, first quarter of next year, we will have some product come out.

Okay. And then on the -- assuming you're successful in raising the capital in June or July here, what would be the potential timing for the next 100,000 metric tons of poly? And then would that also include -- I think you had planned on 20,000 metric tons of semiconductor capacity as well. So, any sense for potential timing for those facilities?

As you can see right now, we see all our cash, I think sitting in our balance sheet, it's almost $7 billion. So basically, yes, we are -- I think -- because Mongolia, first project, I think Phase 1, 100,000 tons, we just started to see we. To a certain time, and in the second half of the year, we will approve evaluating all the situation also the market. So, we maybe -- we announce in the second half of this year to starting the second plus they have 20,000 metric tons semiconductor silicon materials.

Okay. Great. And then maybe shifting over to poly pricing. Could you share your latest view on the outlook for poly pricing this year, given the new supply that you expect to come online? I think previously, you had talked about maybe 250,000 metric tons of capacity coming to market this year. Any change to that expectation, and then, yes, just an updated look on the poly pricing from here?

I think right now -- I think in the first quarter, I think the China manufacturing in total, I think, around like 160,000 tons. For the whole this year, I think it may be around -- what we estimated all this year, I think domestic manufacturing, maybe around 700,000 to 800,000 tons plus I think the import may be around 800,000 to 900,000 tons. The silicon -- the price -- the demand and the supply, the demand is based on not only the end market, you see the installation, but also the capacity continued expansion on the wafer segment. So basically, right now, the wafer segment is so quickly right now, the extension, especially the biggest size, I think the furnace is the machine, the plan. So basically, I think this year, the polysilicon looks like the prices continue to go up, and especially we see right now in May, the price, I think continue to go up. So basically, we don't think the price, I think, for this year, rest of the year will go down. Then for next year, if you look at some new coming -- comer, you have to be careful because even like Daqo, we are C5 actually. So, we're experiencing the projects also one project by one project, Phase 1 by Phase 1, right -- phase by phase. So the project is taking longer from design to equipment manufacturing to construction to put it all together and to put it into production. For newcomers, at least, I think, take 2 to 2.5 years to produce, I think, a valuable products or market demand products. Then plus, I think the technology continue to improve. In the sales segment, the period of polysilicon actually is from P to M the cell technology. So asking, I think, like the grade two we call e-grade silicon quality. So based on all of these, I think -- we think the next year, China, I think the meaningful supply, maybe around like -- I think 1.2 billion tons, I think that's next year. So we believe, I think because the market has continued to potentially grow so quickly. So we think for ship term two to three years, silicon steel in total, I think, a bottleneck for the whole industry.

Okay. Great. That's really helpful. Maybe just one more from me. We saw the cost of silicon powder decline in Q1. It helped the cost structure. But as you look into Q2, can you share what you've seen in regard to silicon powder pricing and what that might mean for your cost structure also considering potential improvements in efficiency in the quarter as well?

I think silicon powder right now is very stable right now. For Apple, we procured I think at the price of around like 23,000 per ton or you can say, let's say, RMB23 per kg. Then in April, I think, dropped down to RMB21. So we think it's stable, maybe around RMB20 to RMB21. So basically, that figure, I think can keep our cost, I think, cash cost may be around that because the investment cost right now also is because the coal go up. So I think our -- the future, the cost can be controlled. The cash cost can be controlled around the 46, 45.

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

So my first question is on the -- so I saw on the balance sheet at the end of first quarter. So we still have some kind of inventory there. So just wondering how much kind of -- is there some unsold polysilicon product? So, we recall by the end of last year, so we have some kind of inventory. Just wondering how is the situation by the end of the first quarter.

Gary, so I'll answer your question on the inventories. So I think if you look at our balance sheet, while our inventory position declined significantly from the end of 2021 from almost $330 million to now around $100 million. I think balance, I think, still higher than 2021, first quarter, mostly for a few reasons. One is we do have a significant portion of what we call products that are shipped to customers but not yet recognized as revenue or product in shipment to customer. And we can only recognize revenue when the products arrive at customer side. I think some of the recent logistical challenges with China's COVID-19 restriction has made the shipment period a little bit longer than normal than in the past. So, we do have more portion of this inventory right now. And also, naturally, with our increase in production, right, so both our production volume increased, say, 40% to 50% relative to Q1 last year. And so naturally, our work in process inventory and also our finished goods inventory will increase as well. So I would say the combined impact led to our current inventory level. But I would say it's still on a relatively low or our finished inventory is relatively healthy, and we do expect it to continue to go down for the second quarter as well.

Very clear. So my second question is on the -- our cash cost. So basically, if we compare the first quarter cash cost level in RMB terms, I think it's still kind of close to RMB15 or RMB20 higher than our earlier kind of level kind of compared to when the industrial silicon price is still low. So just wondering in terms of the average kind of industrial selling silicon cost, what is the average cost in the first quarter this year? And how do we expect the level to be into the second quarter?

Okay. Let me address that then. Okay. I think you're right about our Q1, both our production and cash costs. I think Q1 still had impact from higher-cost raw material at the end of last year, I think, primarily related to silicon and relative great silicon cost. I think some of the investors I remember, I think silicon metal cost as high as north of $10 per kilogram at Q4 last year. So since then it has declined, significantly. So like Longgen said, I would say, based on today's or really reflected by our March costs, really. So, we will expect based on today's silicon metal costs, our cash cost should be in the range of RMB45 to RMB46 per kilogram.

Our next question comes from Chao Ji from Goldman Sachs. Please go ahead.

Can I ask that you mentioned that actually we're very delighted to see a major cost reduction in the first quarter but was it possible for you to break into how much cost reduction actually came from the silicon powder price reduction and how much reduction comes from the efficiency improvement? And also, will it be possible for you to share some guidance in terms of how much more non-silicon power reduction we could be looking forward in the coming quarters? And also, as you mentioned earlier that we -- the current Shanghai lockdown probably would have some impact on the largest in transportation of the raw materials and poly? Will it be possible for you to share more color in terms of what kind of impact are we looking for, for our production and for the poly prices in the coming months?

Okay, Ji Chao. So I think because our facility for Phase 4B is still in a ramp-up period. So most of the cost reduction from Q4 to Q1 is coming from the silicon metal cost -- procurement cost reduction. And then a small portion of it is from the improvements in economies of scale. And for Q2, I would say, then we will continue to benefit from the reduction in silicon metal cost and also -- but also a greater benefit from economies of scale and manufacturing efficiency. I think right now, it's difficult to break the two, but I think the combined we should see a continuing cost reduction.

Okay. Understand. Can you also share a bit more color in terms of the impact on the current lockdown? And how do you think it will impact the poly prices in the coming weeks?

Okay. I think what we're seeing in terms of the lockdown because lock-on is mostly for Shanghai and for the Eastern regions. So, I think for our Xinjiang facility or for our customers in the Mongolia, I think we're not seeing any significant disruptions there. And our operations are operating very smoothly with no impact right now, although, we are making preparations for any potential impact on future COVID restrictions. And so right now, most of it is around logistical challenges. So maybe a longer time for product delivery to customers, and we are making preparations for those as well. But I think other than that, there's no significant impact for the supply chain. I think in fact, we continue to see very strong demand from our customers. I think for the month of April, we do have much more demand actually than what our production is or what we could sell to the market. And our customers continue to ask for more products as well. So I think that's reflective of the overall demand environment.

The next question comes from Alan Lau from Jefferies. Please go ahead.

And congratulations to management for achieving the highest best quarter historically. And I have a couple of questions. First of all, I would like to know what is the status of the human rights audit for now? And my second question is about what is your view on certain major players pursuing into polysilicon business like Zhonghuan and Shanxi? Would there be any contract of interest with the Company? And my last question is about what is your view on the U.S. ADR risk. So, I'm aware that the Company is confident that the issue will be resolved, but just to know if there's any actions that the Company is also taking impacting those challenges.

So your first question is about what? Is it related to human rights?

The Xinjiang related audit progress.

I think -- I mean you have the first question, please. Then I answer the second and third question.

Okay. So with regard to the human rights audit, so that's something that we continue to be working on and pursuing. We've finished our internal audit with the help of a consultant. So we're now in the process of updating our internal guidelines and policy to reflect fully the United Nations guiding principles including and things, not just for example, human rights and anti-force labor issues but anti-discrimination and promoting women's strikes, things like that and promoting labor rights. So we're in the process of doing those right now, and we're hoping that this could conclude maybe by the Q3 time frame. And then, we could move forward with the potential human rights audit by a third party auditor. And this would, of course, need to be subject to government approvals to engage such audit. I think that the current COVID restriction seems like it would make it a little bit challenging to do that, but we're still optimistic about doing it in the future. Yes. And I think Longgen, do you want to address the wafer player issue?

I think because of the high profitability, I think in the polysilicon, I think a lot of newcomers, I think, invest money in these segments. As I just mentioned that, because this is -- silicon production starting from newcomers, starting from design to investments, to procurement and equipment to constructing the plant take a long time, take at least, I think, two to three years. And besides that, you see today, we have happened almost filing more than 180 patents. And it's not very easy. It's not just like manufacturing wafer, you buy the machine, built the plant, you can do within four months or three, four months. So we're aware that. I think a couple of wafer special like Zhonghuan and Shanxi right now also try to step in to polysilicon. And we hope that they can be successful, but I think it takes time for them to, I think, finally produce high-quality polysilicon products. This industry anyway need more polysilicon and because the potential -- the end market right now demand is so hot if, let's say, by the year 2025, really, the market reach to 800 gigawatts, 500 gigawatts, we need -- 500 gigawatts, we need, I think, 1.5 million metric tons polysilicon. So it's not much clear right now. Even at Daqo, we still continue to expansion our capacity by 50% every year. So maybe a certain time, we're going to merge acquire some company, it's based on the market situation, also based on our balance sheet, enough strong balance sheet can do that. So we're aware of that. So -- but we think we do our own way. And polysilicon price is determined by demand and supply. But also, I think, is determined by the quality, the quality also, I think, must be improved as the downstream, the technology evolution, especially from P2M. So we're not worried about that. At least we think maybe two to three years still is the bottleneck. Especially some player, maybe they announced, they still strategically announced with the local governments. And actually, if they're going starting to do the projects, they have to do a lot of things to do now. So, we don't think like Zhonghuan really mean to do that. We're not sure because the contract is not signed by Zhonghuan to TCL, the parent company. So with the -- I think with another company. Then for the third question, I think, yes, we are listing in U.S., and the industry right now is in good circle, and we make a strong profitability. We're willing to reward to society and also shareholders. Unfortunately, right now, you see the FHCAA regulations. I think it's not against, I think, Daqo just one company. It's all Chinese, I think, company listed in the U.S. But we believe, I think China and the U.S. government will solve the issue. And we don't think -- I think we already see the design, basically TCL right now working with, I think, bigger four firms in China. And we also see China SEC -- Chinese SEC do some regulations and it looks like open, I think the auditing working paper, I think for rating. I think for certain industries, especially like us, I think we don't think any problem to open, I think, auditor paper. But it all depends on the government. I think governments will resolve the issue. I'm not worried about that. I think we solved the problem, I think, within the time -- within the deadline. Alan?

Understood. And just a quick follow-up question on the second question. So is there any like transaction ongoing with Zhonghuan and Shanxi? Is that going as usual?

As we know, I think at Shanxi right now have some real action. First of all, today, they announced, I think they're going to do follow-on offering, I think, RMB 6 billion. So stock price just to go down to the budget, right, 10%. So we don't know. So that's maybe a good sign. And -- but we see they are starting to sign contracts with local. Yes, we also do the -- I think the silicon metal in that place. I think they signed the contract. But I just would say it take time, okay? And actually, I also talk to Shanxi's Mr. Yang yesterday and today. So I'm not going to do any comments, but I see a lot of people watching. But finally, whether you can provide -- produce the final high qualified polysilicon materials for this industry, for the demand, we don't know really. We are also, I just say, as a major player, we are still step by step, phase by phase very careful, even as we Xinjiang did very successfully. This year, that place, I think, produce 120,000 to 125,000. We cannot like downstream testing. Can do -- let's say, we do another 300,000 tons project. So we cannot do that. 100,000 tons is already a big project for us. You see almost 800 people and experienced people. Then also a lot of investments is around like CapEx around like RMB8 billion. So, if you look at our strong financial statements, and I think we are really, I think, to challenge any, the industry cycle or even any newcomer.

So, I meant like Zhonghuan and Shanxi are buying poly from Daqo? And does that change or is there any change to that or?

No, they didn't change. They signed a long-term contract with us. Especially Shanxi right now the capacity is around like 100 gigawatts. Every year, they need 300,000 tons -- metric tons polysilicon. Even though they have the joint venture with, I think, another company in Xinjiang, but they're only like 60,000 tons. So even they're going to do, I think, 100,000 tons, still cannot solve their problem. So, there are continued expansion in Ningxia as you know that. So by the end of this year, Shanxi wafer capacity is around 150 gigawatts. They need, I think, 450,000 metric tons silicon.

The next question comes from Tony Fei from Bank of China International. Please go ahead.

I have two questions. First is kind of a cost question on your margin in the first quarter. So we see it up quarter-on-quarter a bit, but it could be higher without the high cost inventory in Q4, if you cumulate it. So I'm just wondering, do you have a breakdown of the margins for the materials you made and sold in the first quarter compared to those inventories sold in the quarter? And second question is regarding the dividend. I think your substation Xinjiang has approved its dividend plan -- so Daqo should be entitled to around over RMB900 million from the cash payment. So what is the Company plan for this cash do you trying to pass through it to the ADR holders or do you prepare to repurchase some of the ADRs?

I think Ming, you're going to answer the first question about the margin. I will take the second question.

Yes. So thank you for your question. I think you're right. The first quarter cost and gross margin was impacted by higher costs -- both higher cost inventories and higher cost raw materials from the end of last year. And basically, these have pretty much have been completely absorbed during Q1. And because we are using an average costing method to do our cost, so it's really difficult to break or split the difference, specifically, but I think just from analysis or color perspective, I think without these impacts, yes, gross margin would be higher, will be meaningfully higher than first quarter, yes. And maybe Longgen, do you want to address the next question?

Yes. I think gross margin, I just -- the first quarter, I think we are around like 63%, right? Since second quarter, we will continue to improve. The reason is because I think the polysilicon powder is continued to go down. The selling prices continue to go up. So we expect the gross margin continue to improve in the second quarter. For the dividends, I think Xinjiang Daqo will pay the cash dividend to its shareholders. In Asia, we announced, I think, in May 23. So total, I think dividend distributable, dividend is around like RMB1.155 billion. And the Daqo New Energy is benefit officially only 80.7% of the equity interest in Xinjiang budget. So expect to receive the payment from Xinjiang Daqo in later in June because we have to, I think, to foreign exchange to U.S. dollar, so then transfer money to overseas. So it takes time. But definitely, I think the money upon the Board continue to approve. I think maybe we can to redistributing the dividends or maybe we're going to buy back the shares. So, it's subject to the board to approve.

Our next question comes from Colin Yang from Daiwa Securities. Please go ahead.

It's Colin from Daiwa. A simple question. I understood we have guidance 32,000 to 34,000 tons production volume in the second quarter. Wondering, we have any guidance on the sales volume in the second quarter. And do we have concerns first quarter could be the peak season in 2022 because for the following quarters, it's very difficult to beat [indiscernible] sales volume in the first quarter.

Thank you, Mr. Yang. I think by the end of the Q1, we have the merchandise in the shipment is around 2,574 tons. We also have inventory 2,951 tons. So total together -- added together, it's like 5,591 tons. And the reason because we have some inventory because every day, we're manufacturing 400 tons, and for the last five days, anyway, you cannot shipments, even shipments still in the merchandise, keeping the merchandise. So in the Q2, we've given guidance, I think, 32,000 to 34,000 metric tons. Therefore, hopefully, the sales volume will be going up more than that if we can reduce any inventory down to a minimum. We see right now, the market is very hot. So definitely, yes, maybe the sales volumes were about the manufacturing production volume.

Do we have our estimate of the potential impact from the annual maintenance?

I didn't follow you.

I mean do we have any estimate numbers for the potential production volume affected by the annual maintenance?

The production maintenance, right, you're talking about?

Yes.

Yes. I think usually, the polysilicon plant in China we do the maintenance usually in the hot weather, especially starting June to end of the year. Some player because they have COVID issue, so then they have to do that. For example, like you know that because the second phase, they have issued design problem, they do the improvements. So that's why they shut down the first quarter. And I think in right now, they spend two weeks to connect I think the improved, I think Phase 2 in Xinjiang products. Then we know that new horizon, I think they're starting actually April to do the production and maintenance because they have to. So our planning is, I think, it started in July -- June to July 1 line by 1 line. We totally have six production lines. So basically, it will not affect our too much on the production volume because we signed long-term contracts with our clients. So we have to continue to provide silicon for our clients. So the whole year guidance we've given, I think, 120,000 tons to 125,000 tons. I think we're very confident we can provide considering the maintenance issues, Mr. Yang.

So can we say that in the third quarter, it could be the lowest quarter with production volume affected by the annual maintenance to be quite minimal?

I cannot follow. The question is not clear, voice.

I mean, will the third quarter this year going to be the probably the lowest production volume in 2022 affected maintenance?

You mean the whole China manufacturing for this year?

Just for because we have annual maintenance starting from June to July, right? And it probably affects the production volume in the third quarter and drop in the third quarter production volumes.

That we're not -- it's not affected too much. The reason we became part-by-part production line, even as say, if we're going to maintenance in 4A, 4B, that two production lines mostly annual output is almost 40,000 tons. So basically, we are not shut down all the product lines. So, we just one week by one week, even with one week, so basically, we're not affecting too much right now, monthly right now, the production is almost more than -- it's around like 10,000 tons to 12,000 tons. So basically, we keep that that pace.

The next question comes from Rajiv Chaudhri from Sunsara Capital. Please go ahead.

Can you talk about what you see in terms of both demand and supply for N-type polysilicon in 2022? And how much of your production would be anti ready in the current year?

I think it's a good question because we see that N-type sales because I think that the efficiency is higher than P-type. As you know that right now, N-type technology we have, I think, couple of technology. One is HGT, one is I think another is we call Daqo connected IBC or ADC, okay? And like Tongwei right now, right now, the focus. But also, we see right now N-type I think like a top com because top com just based on perk. I think production line do some innovation improvement. I think they can transfer even, let's say, the top com production line, the cost may be around 50% with perk. So the efficiency is not very high, maybe import 1%. But finally, I think finally, I think the HGT, IBC, ADC will be fine, I think, N-type technology. Right now, every month, we're shipping around like 11,000 tons to 12,000 tons. We see N-type is go up. And for example, like April right now, we shipped more than 1,000 metric tons N-type. We also see the N-type price -- the difference, I think, the price between N-type and P-type at the beginning of last year, we maybe RMB1, RMB2 per kg. Right now, April went to RMB3 per kg the difference. And in May, maybe RMB5 per kg because we see the demand for N-type is more and more. For China, the producer, I think, for recognized, I think, qualified Daqo, the N-type materials right now almost qualified for all N-type wafer producers. So all our clients now try to buy from us because otherwise, they have to buy from Walker. And Walker, I think the quantity supply almost is contracted by some player like Zhonghuan like other players. It is not too much right now available. So basically, we see N-type materials continue. Demand is continued hot. But we still see this year N-type capacity may be less than 10% of the whole market end market. Next year, you're talking about next year, maybe go to, I think, 15% to 20%. But majority, I think, around 2024, I think N-type will account for 40%, even 50%. But we still think N-type, P-type were parallel available in the market. But definitely, I think the high efficiency module N-type module right now, you have a premium and a module high module -- price in China right now is almost RMB2 per watt compare P-type is still like RMB1.85, RMB1.9. So you have like RMB0.20 premium there. So I think that, that maybe cover their cost, I think, difference. So definitely, yes, N-type is the tenancy of the future technology. Also, that technology -- tenancy will come back demand high quality of polysilicon. That means we have the manufacturing N-type polysilicon. So that's why in Mongolia, over 100,000 tons is 100% focused N-type. So we are right now is exactly doing the future market demand, even though some players, currently new player, we even they can produce P-type quality, I think, polysilicon. So, it's a challenge for them. So that's why we are focused on high-quality polysilicon, especially N-type. And in the future, to continue to, I think, to compete with other -- with our competitors.

So is it your view that the only N-type polysilicon suppliers this year are Daqo and Walker, the other Chinese companies are not able to supply N-type this year?

I'm not saying that, but the major supplier right now is still Daqo and Walker then we know that some Chinese producer like Tongwei, they also supply a small portion of N-type right now, still recognized. But we know the bigger player all buy from us. So that's why it's difficult for us. For example, yesterday, even some big wafer manufacturers call me asking us to adding more. We didn't. We're not -- not available right now. So basically, the reason why because manufacturing N-type of materials, we have to adjust our production line, some to increase the quantity and also to reduce the P-type then the output also changed. Today, you see N-type and P-type in China when the price difference is lower, only like RMB3, RMB5 compared with now even less than $1. Right now, our ASP is almost $33, $32, so that is not attractive as incentive as to manufacturing more N-type products to sacrifice our quality.

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

Thank you, everyone, again, for participating in today's conference call. Should you have any 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.