Daqo New Energy Corp ADR

Good day and welcome to the DATO New Energy Second Quarter 2020 Results Conference Call. All participants are in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch-tone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Kevin He, Investor Relations. Please go ahead.

Hello, everyone. I'm Kevin He, the Investor Relations of DarkQ New Energy. Thank you for joining our conference call today. DarkQ New Energy just issued its financial results for the second quarter of 2020, 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 second quarter of 2020. 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 maturely from those containing any forward-looking statement. Further information regarding these and other risks is included in the reports or documents we have filed with or furnished to the Security 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 law, 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.

Thank you, Kevin. Hello, everyone. Thank you for joining our conference call today. The second quarter of 2020 was a particularly challenging time for the polysilicon industry. Beginning in the later March, the global spread of COVID-19 and related lockdowns particularly in the U.S., Europe, and certain emerging markets, resulted in significant disruptions to demand for solar PV products. End-of-market customers delayed module orders and shipments due to uncertainties about the duration and economic impact of the pandemic, as well as logistical challenges. This letter, too, should turn market uncertainty and volatility across the entire solar PV industry during the second quarter. As a result, our major waiver customers also delayed orders and product delivery in the month of April, creating a temporary oversupply in the market at the time. This abnormal market environment with its sharp and sudden drop in demand resulted in significant negative impact to policy comprising for the quarter. Fortunately, the impact was temporary, and the market began to recover in May with orders and demand normalizing in June, supported by a strong end market in China and abroad. We are pleased that despite such challenges, faced by the industry during the period, Dark Green New Energy was able to generate positive net income for the quarter, further demonstrating the strength and resilience of our business model and our proven lower cost structure. Towards the end of the second quarter, we began to see very positive momentum in solar PV demand in both domestic and overseas markets, supported by additional capacity expansions by downstream mono-weaver customers. This has translated into meaningful demand improvement for polysilicon, which has driven a significant increase in polysilicon SPs recently. From feedback from customers, their order book for the third quarter is four. And the module order volumes look stronger throughout the year end. This strong volume demand has led to a shortage within the polysilicon market. Current market ASPs for model grade polysilicon are approximately $11 to $12 per kg. A significant improvement from approximately 7.5 per kg in the second quarter. Our latest signed customers' orders and contracts reflect these pricing trends. We expect the polysilicon market to be extremely tightly supplied over the coming months, as there will only be very limited additional supply of polysilicon coming online over the next 15 months, while the end market demand for PV solar continues to be strong and growing. And in particular, there continue to be significant new additions of modern waiver production capacity. In the second quarter, we produced and sold 18,097 metric tons and 18,881 metric tons of polysilicon, respectively, exceeding our guidance. We conducted annual maintenance for our manufacturing facilities in the second quarter. However, some technology upgrade projects as well as equipment modification has been rescheduled to August due to delayed delivery of some key equipment and long lead time maintenance parts. This will have some impact on the third quarter production volume. As a result, we expect to produce approximately 17,500 metric tons to 18,000 metric tons of polysilicon during the third quarter. We expect to resume to 100% utilization rate in September after the completion of such projects. Our expected annual production volume for 2020 remains unchanged. at 73,000 metric tons to 75,000 metric tons. During the quarter, we continued to make strong progress towards quality improvement and cost structure. Approximately 95% of our polysilicon production reached the monograde quality during the quarter. At the same time, we continued to improve our cost structure with further reductions in allege and material usage per unit of production. Despite the impact of annual maintenance during the quarter, we achieved a historically lower cash cost of $4.87 per kg. In particular, we are making great progress in optimizing our process and manufacturing parameters for our new high-flowout polysilicon reactors, improving in production volume per round. and leading to lower unit energy usage. We expect cost to go even lower in Q4 as we ramp back up to full production level. We believe the solar PV market has entered a new phase of sustained growth as the grid parity has been achieved in many countries and regions around the world. Solar PV is one of the very few energy resources which are clean, sustainable, and cost-effective, even compared with traditional fossil fuel power generation methods. It is playing an increasingly important role in meeting the growing global energy demand and addressing critical environmental issues such as climate change and sustainable development. We will continue our commitment to provide high-quality polysilicon products to better save the fast-growing demand for solar PV energy. Let's move into our outlook and guidance for the company. The company expects to produce approximately 17,500 metric tons to 18,000 metric tons of polysilicon and sell approximately 7,000 metric tons to 7,500 metric tons of polysilicon to external customers during the third quarter of 2020. For the full year of 2020, the company expects to produce approximately 73,000 metric tons to 75,000 metric tons of polysilicon, inclusive of the impact of the company's annual facility maintenance. Now, I will turn the call over to our CFO, Mr. Yang. who will discuss the company's financial performance for the second quarter of 2020. Please.

Thank you, Longyan, and hello, everyone. Thank you for joining our call today. Now I will discuss our financial performance for the second quarter of 2020. Revenues were $133.5 million compared to $168.8 million in the first quarter of 2020 and 66 million in the second quarter of 2019. The sequential decrease in revenue was primarily due to lower ASP combined with lower policy with concealed volume. Growth profit was 22.7 million compared to 56.6 million in the first quarter of 2020 and 8.6 million in the second quarter of 2019. Growth margin was 17 percent compared to 33.5 percent in the first quarter of 2020 and 13 percent in the second quarter of 2019. The decrease in gross margin was primarily due to lower average selling prices for the quarter, despite the improvement in production costs. Selling general and administrative expenses were $10.1 million compared to $8.9 million in the first quarter of 2020 and $7.8 million in the second quarter of 2019. SG-8 expenses during the quarter includes $4 million in non-cashier-based compensation costs related to the company's shared incentive plan. Research and development expenses were $2 million compared to $1.7 million in the first quarter of 2020 and $1.5 million in the second quarter of 2019. R&D expenses vary from period to period and reflect the R&D activities that take place during the quarter. As a result of the foregoing income from operations, was $10.8 million compared to $45.8 million in the first quarter of 2020 and a loss of operations of $0.4 million in the second quarter of 2019. Operating margin was 8.1% compared to 27.1% in the first quarter of 2020. Interest expense was $6.7 million compared to $6.3 million in the first quarter of 2020 and $1.9 million in the second quarter of 2020. of 2019. EBITDA from continuing operations was 26.8 million compared to 63.1 million in the first quarter of 2020 and 10.2 million in the second quarter of 2019. EBITDA margin was 20% compared to 37.4% in the first quarter of 2020 and 15.5% in the second quarter of 2019. Net income attributable to DACA New Energy shareholders was $2.4 million in the second quarter of 2020 compared to net income of $33.2 million in the first quarter of 2020 and net loss of $2.2 million in the second quarter of 2019. Earnings per basic ADS was $0.17 in the second quarter of 2020 compared to earnings per basic ADS of $2.37 in the first quarter of 2020 and loss per basic 80 days of $0.16 in the second quarter of 2019. As of June 30, 2020, the company had $115.8 million in cash and cash equivalent and restricted cash compared to $120.8 million as of March 31, 2020. As of June 30, 2020, the noticeable balance was $8.2 million compared to $4.4 million as of March 31, 2020. And as of June 30, 2020, total bank borrowings were $264.8 million, of which $116.9 million were long-term borrowings, compared to total borrowings of $265.6 million, including $149 million of long-term borrowings as of March 31, 2020. And for the six months ended June 30th, 2020, net cash provided by operating activities was 47 million compared to 67.8 million in the same period of 2019. And for the six months ended June 30th, 2020, net cash used in investing activities was 60.4 million compared to 145 million in the same period of 2019. The net cash used in investing activities in 2020 and 2019 was primarily related to the capital expenditures of Xinjiang's Phase 3B and Phase 4A polysilicon projects. For the six months ended June 30, 2020, net cash provided by financing activities was $16.2 million compared to $61.3 million in the same period of 2019. And that concludes our prepared remarks.

Thank you. We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. The first question today comes from Philip Shen with Roth Capital Partners. Please go ahead.

Hi, everyone. This is Justin Clare on for Phil today. Thanks for taking our question. Hello, Justin. So I guess first off, you indicated in the release that, you know, ASPs that you're seeing right now are $11 to $12 a kilogram compared to 750 in Q2. So I was wondering, you know, what are you expecting for your overall polysilicon ASP in Q3? And then could you speak to the demand increase that you're seeing as well as we've seen an issue with supply with one of your competitors? Given what's going on with that dynamic, what are your expectations for ASPs in Q4? And then how long could ASPs actually be elevated?

Justin, this is Lange. You know, starting, I think, July, I think basically demand and supply, because of downstream, you know, demand is so high. So I think the waiver capacity also continued to increase, especially some company, you know, most of the company want to vertically integrate, including waiver, sale, and module, and to increase the growth margin. Then plus, I think, you know, some company, the accidents and... The supply should, I think, cause the silicon price dramatically, I think, bounce back. Basically, you can see, I think, the weekly PV link, the price. For example, last week, it's back to 98 per kg. We see this situation maybe will continue. And today, another news come out because the flood in Sichuan. So maybe another plant, the major player, the planter were temporary stop supply. So all these, but that's not a major reason. The major reason, I think, is if you look at the next 15 months to 18 months, we do not think any capacity on the silicon side will come in, increase. But the demand we see dramatically, a lot of money jumping into it to off the grid parity. And we see the wave capacity expansion is continue going to increase. So that's why I think cost applies come back so quickly. And we, for example, I think for this month, August, because July, Definitely, I think the price is very high, maybe around 70 to 80 SP. But this month, we're thinking it will be around 90 to 98. For this quarter, I'm not going to give you the actual figure, but we see, I think maybe the silicon price in September will continue to a little over 100. But I think, you know, for the fourth quarter, I think, okay, the price may be between 85 to 100.

Okay, great. That's really helpful. So I guess turning to your production, if we just look at your Q3 results, guidance and then the full year production guidance, it implies Q4 production of, I think, about 18.4 thousand metric tons at the midpoint. In Q1, you're able to produce 19.8 thousand metric tons. So just wondering, given the elevated level of pricing, do you have any ability to reach kind of Q1 levels of production in Q4? and to take advantage of that pricing.

Justin, we always try to make our efforts and to produce more products to meet the demand of our downstream clients. But in this moment, because for the forecast, we're always conservative. So basically, to answer your question, we will make efforts. Of course, for this quarter, we've given the guidance. You can see that, right? So basically we always do that in that manner.

Okay. And then just one last one for me on your cost structure. Q2 cost structure decreased about 3% relative to Q1. This is despite your annual maintenance and the lower production volume in the quarter. So I wonder if you could just share a little bit about what enabled you to lower costs in the quarter despite the lower volume And then could you give kind of an outlook for costs in Q3 and Q4? You know, I know in Q4 you said you expect costs to be lower. So could you provide any more quantification in terms of how much lower? Thank you.

Okay. Hello, Justin. This is Ming. So regarding our costs, I think certainly our Q2 cost came out to be lower than we anticipated. So, even given the impact of our annual maintenance with the lower production volume, you could see there's higher contribution from depreciation expense, for example. So, we were still able to lower our production cost. And really, a lot of it comes from a reduction in our energy usage. So, we're making progress in optimizing our process. and also improving throughput from our manufacturing facilities so that in terms of energy usage we're seeing very promising reductions and then that should continue I think throughout the end of the year. And also a lot of our procurement because of our scale and our efforts, so for example a lot of the use of other materials, for example, packaging materials and also silicon powder and the graphite that are being used. All those costs are coming down as well, so that's also providing additional reductions. And the other benefit is coming from the scale of our facility. So, I would say Q3 We would look to have probably similar or maybe just slightly lower cost compared to Q2. And certainly, if we look at Q4, we think there's still another probably 3% to 5% type of cost reduction even compared to our Q2 level. So, that's what our current outlook is right now.

Okay, great. Thank you very much. I just want to give you a little more. The cost of goods sold, I think, also partially due to the foreign exchange rate. I think, you know, let me be, I think, appreciation. Okay? Partial also come from there. But, of course, you know, I think the cost, we will continue to cutting the cost map, you know, major from, one is from, you know, increased efficiency and scalability efficiency. Second is the raw materials continue to go down. But you also have to consider, you know, like MGS, you know, also maybe price will go up, you know. But we were, I think the cost, we were controlled around, I think, you know, $5.80, you know, maybe $5.60, you know, continue to go down, maybe 2% to 3% by the end of the year.

Okay. Thanks. Thanks very much, guys. Okay, thanks, Justin.

The next question comes from Gary Zhu with Credit Suisse.

Please go ahead. Hello, management, for taking my questions. So I have three quick questions. So first, can management share with us your view on the polysilicon price outlook for next year? And secondly, so let's say if the polysilicon price stays at a relatively high level, would we be concerned that even the low-tier producers may decide to expand their capacities? And the last question is quickly on if the management can share with us any update on your subsidiaries' stock border listing. Thank you.

Okay, Gary, to answer your question, first of all, and the pilot price for 2020, we believe, okay, in 2020, didn't have any new additional, I think, capacity come in. Meantime, we can see, especially this time, I think the policy can price, you know, jump up and back. A lot of company right now going to adopt strategic, you know, policy of vertically integrated, including the, I think, for example, like Jingao, one of the U.S. listing company right now listing in China, Asia. And the original didn't have any capacity on the waiver segment. They just announced this Monday and it's going to increase. Actually, they have some. I think, frankly speaking, they have like five to seven gigawatts waiver in Baotou and Qijin. But this time, they're going to invest another new project with 20 gigawatts waiver capacity in Qijin, in Anshua. So you can see, we can see forecast a lot of companies, for example, maybe Canadian Solar, maybe, I think, Trina. All these companies, they will touch the modern waiver capacity. Meantime, the major player, like China, Longgi, Zhonghuang, and also Zhonghuang is going to downstream to the module. Then also Jinkou also continue to expansion, I think, on the weaver capacity. So we see by the end of next year, we're calculating maybe around a weaver capacity, maybe around like 270 gigawatts. That's estimated need, you know, the silicon end of the year, around 800,000 tons. So, that's, I think, a demand and a supply is totally a lot of gaps there. So, basically, I cannot tell you, I think, the exact price, but I think next year the price, the range should be around 85 to 95, to answer your first question. Second is, I don't think, you know, in this situation right now, we will do any, I think, the production, control any production to control supply. If that's your question, you said maybe to reduce our capacity to... Expansion plan for the second tier, please.

My question is, let's say if the polysilicon price stays high for longer, would you be concerned that Even the second tier, relatively low tier polysilicon producers may think to kind of further expand their capacities.

Okay, so you quite understand. Okay, as the polysilicon price come back, maybe it will stimulate some tier two, tier three company continue to survive. I don't think so. The reason is because, you know, A is you still have to keep, continue to keep the cost Second is also the quality of the products. That's the most important. Today, the industry, I think average monosilicon maybe around 85%. The tier two, tier three, maybe even lower their percentage. Even price come back there. I don't think they will come back. Basically, on the small production line, we'll come back to that. But they maybe will stimulate some plants to continue to expansion, I think, on the polysilicon capacity. For example, I think Asian silicon plants, right? They announced today they're going to start a new project, I think, 30,000 tons production, I think, to start at. So basically, I think even today, we know the planning. Tongwei have two plants there. I think Yaqui is Asian silicon maybe 30,000 tons on the way. All those capacity maybe I think around 110,000 tons or 100,000 tons maybe I think will be put into production in 2022. Steel I think is not enough to meet the demand. That meets the demand, I think. Then, to answer your third question, that's why I think we are planning to put our Xinjiang New Energy as a sub of our listing company of the Dark New Energy listed in New York Stock Exchange, go to China stock market. Everything right now is on the schedule. We believe, I think, in today's stock market evaluation, if we can successfully as a planning to raise the money, we think, yes, we were starting planning and study to also a certain time, and we will consider to expansion our capacity.

Gary, can I answer your question? Yes, thank you very much. That's all my questions. I have a question. Thank you.

Great. Thank you. Thanks, Gary.

The next question comes from Alan Han with J.P. Morgan. Please go ahead.

Hi. This is Alan from J.P. Morgan. My first question is, I mean, with the recent price hike on the policy-making side and also the price hike along the circular value chain into module, How is the feedback by the ultimate customers? I mean, is there any hurdle in terms of downstream PV demand because of the price hike?

Alan, basically, I think as the consolidation continues going on, yes, in some segments right now, there are some big players there. For example, like Weber segments, I think Longi, Jinko, and , even Shang-Chi, and they are all big player right now. In the module segments, I think you can see that the original, like , , , Canadian Solar, even also is a bigger player. Because each player forecast different segments, and they may be, because we hope the whole of this industry should have an industry every gross margin to make this industry very healthy to continue to expansion to meet the demand of the downstream client's needs. So, recently I think the fighting between waiver, sale, and module. Yes, today I think the waiver price continue increase and squeeze the module, I think, gross margin. I don't think right now today, like Lungi M6, selling price 3.25 lemminbi per piece right now can make the module, I think, assembling player make money. So, yes, we see module price also continue maybe back increase. Also, we see some projects renegotiation. Even through the, I think, the history, they already done the bidding system. especially in China. But I don't think that will stop the downstream installation and all the projects. Maybe it will delay some projects. I think that problem is temporary. Finally, I think the player will come down, I think, to get some certain balance and to stimulate, I think, the demand. So I think the problem will cool down in Q4.

Gary, let me add a little bit to that. So I think if you look at the real downstream market, especially on the project side, so because of the current money printing and super low interest rate or even negative rates, and where money is still available right now, so that a project that maybe used to require 8% to 10% project IRR or double-digit equity IRR now is probably happy with the mid to high single digit type of return to the project and those projects would still move forward. So that, I think some of the projects really are even not that price sensitive. So I think you actually have significant amount of demand in the market at a lower yield that's required for these projects to happen. I think that's something that people may not have looked at. And if you look at what's happening in California right now with the power outage and You know, with the record heat, I mean, people are now probably likely want to put in place solar system, even with storage, right, without regard to the cost of the system, because you're now talking about, you know, record heat with no AC. I mean, that's not something that's even sustainable. So I think there are definitely markets that would open up, you know, especially, I think, with the future trends towards climate change.

I think, Alan, I think because of the growth margin right now in each segment is different. Today, especially, I think weaver segments, mono-weaver segments with a high growth margin and module with a low growth margin. So we see some advantage for the bigger weaver player if they also have some module business. I think they maybe can continue to vertically into module segments. But in the meantime, those module players, they also can be reversed back, you know, vertically integrated to touch the waiver segments. That's just a set. You see, like, Jingo, they just announced, I think, a 20 gigawatts waiver, I think, expansion. We will see a lot of companies, like, I think, Canadian Solar Trainer and other companies, I think even Jinko, continue expansion on the waiver segments. So at that time, as the weaver cell and the module segments continue to vertically integrate it, I don't think the fighting will continue like this way. But the situation, I just said, within the next 15 months to 18 months, we didn't see any polysilicon production were coming. Even, let's say, after 15 months, 18 months, I think two plants plus the silicon one plant production line come in, still cannot meet the demand. So we, I think also, that's why we want to go to start market as soon as possible. We're working hard, and to certain time, I think we would announce what we did. So we definitely will work in the future. We also will schedule, continue our expansion plan.

Thank you, Adil's career. And I have another question. This is related to what happened along the industry today. Just like from a technical side of things, if like we have to shut down polyprime for whatever reason, even without damage, I understand that it may take some time to ramp back up the production to 100% and also to have the high mono yield output. So generally speaking, how long does it take for the plant, for existing plant to run back up?

Okay, I think, you know, we, I think I just only can talk to myself. I think, okay, I can comment on other plants. Other plants, for example, you know, one of the plants in Xinjiang, yes, they have, I think, you know, accidents. I hope they can back as soon as possible. I think they also, I think, announced and some news they announced they think it will come back two to three months. I'm not going to judgment that, but if you look at our guidance, it's very pretty sure this quarter our production I think is 17,500 to 18,000 metric tons. For example, this month we are around 5,400 metric tons. Even though we are in the manual maintenance and we upgrade some equipment. We still make efforts. We think in September we have full capacity of running. We're very confident and to back to full capacity of running because we think of the market demand so high. That's what I say. Even what I think, you know, even today, like Tongwei just announced, I think, Lishan, one of the plants, because of flood, I don't think that would take time. Maybe two weeks, one week, we'll come back.

Got you. Got you. Yep. Thanks. This is Korea.

Great. Thanks, Alan.

The next question comes from Colin Yang with China Securities. Please go ahead.

Hi, thank you very much. This is Colin from Bayoua. I've got two questions. The first one is similar to Eileen's question. As you may know, some SOUs have already started to renegotiate the module price for already signed competitive orders. So, as we can see, the percentage price has surged by over 50% over the past few months, but the module price is only up by 5%. So do you worry about we're going to see an extremely weak 4Q demand in China? In other words, do you expect to see a severe drop in 2020 solar installation in China affected by the rising module price triggered by the Palestinian price?

I think, you know, because of the pandemic situation in China, In the first quarter, the second quarter, you know, the global, I think, pandemic, you know, caused the downstream, I think, especially the, you know, I think the downstream business demand is so weak. So that's why I think in the second quarter, in each segment, you know, I think the price reduced so very sharply. Even let's say, look at the polysilicon price. I think really it's not too much company to make a profit. We are because the quality, the monolithic almost more than 95%, and also the cost advantage, scalability. So we have some advantage on the gross margin, maybe 10% to 15% better than the industry average. So that's why we make a profit. But other people, even let's say, I think module, sale, always go down, right? You can see even weaver also go down. But weaver, historically, the mono weaver, they have with the high growth margin. So I think just like you said, because of, I think, starting end of the July, the polysilicon price come back. Then cost, I think, weaver price increased, sale price increased, and the module price definitely, I think, you know, slightly increased, I think that's okay. I think the market still can absorb that, you know, slight increase. If the module price dramatically increase, then we'll cause a lot of problem. One is maybe delay the project. Second is also I think, you know, we'll reduce the demand of the module. So I don't think that's what happened. In the history, it's not happened because the module price go down to certain level, never come back in the history. But this time, it happened. Why? Because the module price is too lower, the grid parity is there. Look at China, all the projects right now, the bidding, the government subsidy is only like $0.03, $0.04 per kWh. The projects return still is higher. As the interest rate continue to go down, I don't think some projects still think they can absorb little higher module price. Thinking about that, today silicon cost on a module only around 15%. On the installation of the solid station, only 7%. I don't think right now silicon is the major cost right now for the module for the downstream solar projects. I think glass, all these other materials, maybe glass right now is number one cost for the module. So I think the market will tell you demand and supply, fire will bounce back. I don't think the market will be hurt. Temporary, yes. But long term, I think the market will come back. I don't think even some unreasonable, irrationable price of sale or even waiver can be sustainable.

Thank you. Thank you, Yongjun. So my second question is about the sustainable gross margin we are expecting because, as you mentioned, there is going to be no effective capacity addition over the next 15 months. So based on our expectation of 85 to 95 per second price, the gross margin in next year will be or to place in 50%? So do you think 50% is going to be a sustainable gross margin for Pakistan? And do you have any updates for the capacity expansion plan? Thank you.

Okay, for the polysilicon, I think the segment, polysilicon is the, I think, with the high technology and heavy capital investments and long-term investment circle. And, for example, any new entry come in, You need to take at least maybe, I think right now, the one year to construction the projects. So it's very tough. Even let's say like New Horizon, right? They have the money, they invest in polysilicon, but still not successful. So what we believe, I think, because the chemistry industry, I think this industry, every growth margin should be around 30%, 25% to 30%. But if the good player in the industry should be around 30% to 35%. So Daku is, I think, one of the high-quality, low-cost player in China. So we believe next year our growth margin should be around 35% to 45%. Thank you.

Thank you, London. What's the other question?

Great. Thank you. The next question comes from Tony Faye with BOCI. Please go ahead.

Hi, my friend. Thanks for taking the questions. I actually have two questions. First, regarding your ASP side, so in Q3, we see the poly price actually increased in a very fast fashion. So how frequently do you adjust your sales price, your actual delivery prices to your waiver clients? Is it biweekly or biweekly basis? That's the first question. Secondly, regarding your capex in Q3, so given your ongoing maintenance, so what kind of capex are we expecting in the third quarter? Thank you.

Okay, I answered the first question. I'll let Ming to answer the capex next question, okay? I think for the ASP, okay, original practice, practically right now, what we're doing is we're based on the PV link. Usually, every month on the 20th, We're negotiating with our clients to determine next month, deliver how much based on market price we'll make the price. But starting, I think, July, because the price go back so quickly, so we were now almost, I think, two weeks to sign a contract. Some clients, they even one week to sign clients. to update the price. But that's just because the price changed so quickly. We almost one week, two week to sign the contracts. But I think when the price become more stable, we'll work back to one month to sign contract with one of the major clients. But those clients may be in a different time. But I think all our major clients, as you can see, we sign long-term contracts with LoanKey, Jinko, as you can see. It's very stable. As soon as we sign a contract, we cannot easily change the price. That's why in July, OSP is not basically a little lag behind the market. In August, definitely, I think we catch the market. August and September, we will almost match the new price. So we think this quarter, the SP will be higher. And we give you current price is around $11 to $12 per kg. And I think September, the price may be even a little higher. Maybe go to $13, $14. It's just, I think, should temporary time. And in the fourth quarter, definitely will come back to normal. I would believe I think the price should be around 85 to 95 is reasonable.

Okay. Hello, Tony. And regarding your question for CapEx, so new CapEx we will spend on technology upgrade and new equipment installation is only about $5 million for Q3. But total payments will be about $25 million. for capital investment, and this would include about $20 million of payments related to our project based on our payment schedule.

Okay, great. That's very helpful. Thank you, management.

Great. Thank you.

The next question comes from Jun Lu with Citi. Please go ahead.

Hey, management. Thanks for taking my question. Most of the questions have been asked by the previous NS. So I only have two questions. The first one is that can you guys give us some colors on maybe the detailed timetable to see our resume production in Xinjiang, our old line, because they have an investigation team to come to Xinjiang to check the safety. I'm not sure whether you can give us maybe update or timeline on that. And the second is that considering the current price, policy and price is very high, so do we think about the, I know we didn't have the real plan of the capacity expansion yet, but do we think about to maybe not just expand our capacity in Xinjiang? Will we be seeking some other place or some other province to extend our capacity? That's all my questions. Thanks.

Okay, I think to answer your first question, I think right now, currently, all the plants, there are four production lines, and three production lines right now is working, is right now in the production. Only one production line, that's the third production line, any capacity is 5,000 plants. That's because the lack of small incidents plus, I think, the equipment is lagging behind. So we are planning to put it back to production by end of this month, before end of this month. So that's why we give guidance for this quarter is 17,500 metric tons to 18,000 metric tons. And this month, we think we can manufacture 5,400 tons. To answer your first question, Second question is, it doesn't matter the price, you know, how high temporary. We consider evaluation the whole picture for the next three to five years. We believe the solar industry is a rich, great parity. We think, you know, the solar industry will continue to, I think, you know, if without, you know, the pandemic, without, you know, the trade war, I think the solar industry should dramatically continue to increase in the downstream, the market. That's why we are evaluating every day. For example, in Xinjiang, we already approved 4B. That's the 35,000 projects. It's feasible. It's approved. Also, we are looking at other opportunities. Maybe in , near one of our bigger player, two bigger player right now, the waiver capacity there. We also do right now do study. Then also the opportunities and maybe Mongolia I think also is one of the large waiver production center there. Yes, we are doing study right now and it's possible We are, in the future, if we decide to expand our capacity, even abroad, not in China, possibly somewhere abroad, because we consider the U.S. market in the future, the anti-dumping, maybe including the silicon manufacturing, cannot be in China. That's why we do all the study right now. We are making efforts right now, just letting you know, to let our Xinjiang plant go to Asia market, star market, as soon as possible to raise more money and to do that. So to a certain time, when all this is mature, we will announce that.

Thanks, Dongge. I have actually two follow-up questions. The first is that yes, you have explained we will back to the production by end of this month. So may I ask if we have to get some approval from local government to get the production or we can just resume our production by our own schedule? And the second question is you have mentioned the the solar industry has reached the group parity now, so the growth will be very fast. So do we have some kind of strategy or long-term planning that we should have certain market share in the polysilicon, given we are the lowest cost player in this industry?

Okay, to the first question, because of another plant in Xinjiang has an accident, so the local government's actually asking us to do all the plant, the full production line, you know, even asking third party to come in to evaluation the safety. And the government has already approved all the production, meet the safety production criteria, allow us to start, you know, to continue running production. Okay, it's already got approved. Only the third production line, we're not ready because, you know, we still have to upgrade the equipment, you know, the parts. So that's why we are working on that. Today, actually, new parties have already come to the plant. So we think we will finish by the 25th of this month. So we think we're back in full capacity of running by the end of this month. So that's the first question, OK? Second question, yes, every company have their strategic, I think, strategy. To us, we continue. We think we have to focus our experts On the polysilicon side, we have good quality, we have lower cost, and we have good people. Even we want to take advantage of star market with the high valuation to get IPO proceeds to expansion our new plants. Yes, we're working very hard. Of course, we also have some planning there. If you look at our first quarter market share, we think we are around 15%. And we think we will continue the market share at least about 15%, even reach a little higher. But we don't want to say we are number one, we are largest. We don't want to do that promise and forecast. We do whatever we can, and we forecast our experts, and we forecast our planning. We will announce. Okay. Our strategic plan.

Okay. Okay. Thank you very much. That's all my question. Thanks. Great. Thank you.

The next question comes from Jeffrey Campbell with Tuohy Brothers. Please go ahead.

Thank you for taking my questions. My first one was I didn't notice any announcement of any material headcount reductions during second quarter. And if not, is this due to the high automation in DQ processes?

Yeah, so there's no headcount reduction at all for us. I think we just had maintenance, but everybody, we've been fully employed throughout this time.

Thank you. And I ask because... You can look at our production. Actually, in the second quarter, we actually... Because we have already scheduled annual maintenance, but because of the, you know, the equipment is not coming on time, so we postponed our two production line, you know, to the August to maintenance. So basically, Q2, our output is still very high, you look at that. Then even Q3, when we're given guidance also around 17,500 tons to 18,000 tons, okay, we're always very conservative. So I think with that output, we don't think we want to cut health costs. Actually, we are increased because we have to save employee tenants for our future, you know, expansion.

Right. I ask that because that's much of the rest of the industry. It was really having to reduce that cost to maintain costs, but you guys don't seem to have needed to do that. Earlier in the call, you mentioned variability in the ASP pricing. I was just wondering, can you maybe talk about, on a percentage basis, that portion of your sales that are longer-term contracts, such as those with Longi and Janko, versus more market-sensitive contracts that adjust frequently?

Okay. Basically, right now, the contract we have with Longi and Janko is almost approximately, as far as I know, the contract capacity is around 70% to 75%. We actually have little room right now open for the other clients. Maybe we will sign another one or two long-term contracts for the future, just to cover another three years. Then also to consider, that's why we almost right now contract most of our capacity right now. But you have to consider everything is moving. We may be, in the future, we're extension our capacity. So that's why we're doing that. So the long-term contract with LongKey and Jinko basically is based on the fixed on the quantity. It's not the price. The price is still based on the market price. And the only thing is we collect the deposits to lock the quantity and to keep the relationship with our strategic customers.

Okay, great. Thank you. And finally, as you talk about this 15 to 18-month period where you see significant demand growth and very low supply growth, do you have any sense of the extent to which this is being driven by residential markets versus demand for utility-type projects?

If you look at China, I think China – The majority in the history, I think, is SOE, the company working on the farm projects. I think the distributed projects actually is not too much. But as the second half of last year, I think because of Great Parry right now, China distributed projects right now more and more because those projects without any subsidized, Basically, the project itself can reach profitable and attract investments to invest money. For example, myself also invested in Beijing, I think, Southern, around 10 megawatts, because we think it's very profitable. The cost for per watt installed on the roof only cost like 3.2 lemming bees per watt. You can generate every year almost 1.6 KWH. Even let's say you're selling to the Greece, 37 cents. You're very, very, very profitable. So that's why we see in China the distributed rooftop, the percentage continue to go up. Even I think globally, especially I think in U.S., the potential market is so big. The U.S., the problem right now I think is trade war. The trade war, I think the anti-dumping and the 201 actually add the module price in the final consumers. Then plus, the labor cost is higher. But I think at SolarCity right now, I think the standard package try to cut in the labor cost. So I think I was told, let's say the rooftop, they have a standard product. just put on there only three hours. So I think those, I think, standard products, I think in China, we also work on that. For example, the roof, 5,000 megawatts, 5,000 watts, 8,000 watts, all the standard, just come in, you know, put on, within three hours, four hours. So that way to continue to, you know, reduce the cost, you know, BOSC. So I think that's the potential in the future. Definitely, I think the distributed or rooftop, the assignments will continue to increase the percentage.

Okay, thanks. And I'll just follow up real quickly on that. So it sounds like, because earlier you said that you're considering the possibility of building some capacity closer to the United States. So based on what you just said, is it fair to say that the distributed capacity the potential for distributed growth in the United States is a factor that's driving the possibility of getting that capacity closer to the United States. Is that fair?

Yes. Maybe it's not exactly the United States, but yes, because we evaluate a lot of locations. And because of pandemic situation, otherwise we would speed up these, I think, projects. But definitely, yes. We are working on that. In a certain time, we will announce it.

Great. Thanks so much for your help.

Great. Thank you.

This concludes our question and answer session. I would now 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.

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