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spk00: Good day and welcome to the DocuNew Energy third quarter 2021 results conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a 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. Please go ahead.
spk05: Kevin He 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 third quarter of 2021, 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. Longgeng Zhang, our Chief Executive Officer, and Mr. Min 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 quarter. After that, we will open the floor to Q&A from the audience. Before we begin the formal remarks, I would like to remind you that certain statements on today's call, including expected future operational and financial performance and industry growth are forward-looking statements that are made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These statements involve inherent risks and uncertainties. A number of factors could cause actual results to differ materially from those 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 conference call is also as of today and we undertake no duty to update such information except as required under applicable law. Also during the call, we will occasionally reference monetary amounts in U.S. dollar terms. Please keep in mind that our functional currency is the Chinese RMB. We offer these translations into U.S. dollars solely for the convenience of the audience. Without further ado, I now turn the call over to our CEO, Mr. Zhang.
spk04: Thank you, Kevin. Hello, everyone. Thank you for joining our conference call today. We are very excited to report an excellent quarter with a record high production volume and net profit in the company's history. The strong end market environmental supported by favorable global policies to address climate change and a rapidly increasing use of green energy resulted in strong then expected downstream demand that continued to push up polysilicon market prices. Our third quarter polysilicon ASP was $27.55 per kg, a significant sequential improvement of more than 30% from $20.81 per kg in the second quarter. The end market demand continues to be strong, even under today's high price module environmental, and this has further raised the polysilicon market prices to the current level of $33 to $35 per kg. Our production cost increased 8.4 percent quarter-over-quarter, primarily due to the increase in silicon powder's cost. Excluding this impact, our production cost actually decreased by approximately 1 percent quarter-over-quarter. The increasing silicon powder cost will continue to impact our cost structure in the fourth quarter. However, with the strong market demand, so far, we have been able to transfer the majority of such cost increase to our customers. Over the past three weeks, we have seen silicon powder prices stabilizing, and we expect they will gradually normalize in the first half of next year. as the energy and emission controls could be somewhat relaxed compared to the fourth quarter of this year. A new supply of silicon powder will start to enter the market. During the first three quarters of 2021, we generated $653 million in cash flow from operations. we repaid all our banking loans in the third quarter and reduced our debt-to-asset ratio to 18.2%. At the end of third quarter, we had $661 million in cash and cash equivalents, $440 million in short-term investments, which are lower-risk financial products, and $353.3 million in banking equivalents, notes receivables which were matured in the next three to six months. This total liquidation of $1.4 billion is a strong foundation to support our expansion projects and further plans to reward our investors. The construction of our Phase IV-B capacity expansion project is going smoothly according to schedule. We expect to complete the construction by the end of 2021 and ramp up the full capacity by the end of the first quarter of 2022. In the third and fourth quarter of this year, we have observed some volatility in the global energy market. Prices of almost all energy resources are going up quickly and significantly, including the prices of natural gas, oil, and coal. In many regions in China, many companies are required to shut down production from time to time due to the shortage of electricity supply and carbon emissions control. Fortunately, the Chinese government quickly responded to the challenging situation by accelerating cost of production and allowing electricity prices for industrial users to float according to markets. resulting in rising electricity prices. We expect these measures will further stimulate the solar end market for electricity generation in the near term. With solar already at a great parity broadly, higher fossil fuels market solar projects more competitive. In addition, According to the newly released policies, the usage of renewable energy will not be continued towards the energy usage quarter, which will further promote renewable energy in the future. This also explains why the demand from industry users for solid distributed generation is strong even in the current high-priced module environment. On the other hand, Because of the strong energy quarter and the carbon emission control, the overall expansion pace of the polysilicon industry will inevitably slow down. For example, as we are now in the process of identifying the location for the next expansion project, the energy quarter issues becomes more and more challenging. We will be committed to using more renewable energy in our new polysilicon project according to secure the energy quarter, which will allow us to gradually realize the idea of green poly and solar for solar, or solar for solar. This October, at the United Nations Biodiversity Conference in Kunming, Chinese President Xi Jinping announced that the first step had been taken towards the construction of a huge 400 gigawatts wind and solar pack. Construction on the first phase comprising 100 gigawatts of wind and solar in deserts in China is already underway. Four 400 gigawatts projects would be half finished by 2025. The Chinese government has also released the policies to promote energy shortage systems, especially for storage systems, especially for water reservoir storage in the new term. With all these plans and the policies in place, it's very clear that China has made a strong determination supported by initial and detailed plans to build a new national energy infrastructure in which renewable energy will play a critical role. The newly announced policies and evolving energy market environment amend illustrate a vast potential market for solar in China, which is much higher and much larger than previously anticipated. Therefore, we are very optimistic about solar PV's demand in the future. and expect the polysilicon sector will continue to be one of the most favorable sectors in the foreseeable future, as polysilicon availability will remain as the main constraint and determinant for the future size of solar in the markets. Let's move to outlook and guidance. The company produced 62,970 metric tons of polysilicon and sold approximately 63,714 metric tons of polysilicon in the first three quarters of 2021. Representing full utilization level of the company's production facilities for the full year of 2021, the company's guidance and annual policy production volume is at the level of approximately 83,000 to 85,000 metric tons inclusive of impact of company's annual facility maintenance. Now, let's move to our financial CFO, Min Yang, explain the financial results.
spk03: Thank you, Longyan, and good day, everyone. Thank you for joining our earnings conference call today. And this is Ming Yan. I'm the CFO of the company. We are very pleased to report an excellent financial performance for the third quarter of 2021. We had record high revenues of $585.8 million, an increase of 33% sequentially as compared to $441.4 million in the second quarter of 2021, and an increase of 366% year over year. as compared to $125.5 million in the third quarter of 2020. The increase in revenue as compared to the second quarter of 2021 as well as the third quarter of 2020 was primarily due to higher polysilicon average selling prices and higher polysilicon sales volume. During the third quarter, market conditions for solar remained robust with strong demand for monograde polysilicon that far exceeded supply. Our third quarter polysilicon ASP was $27.55 per kilogram, an increase of 32% sequentially as compared to ASP of $20.81 per kilogram in the second quarter. Gross profit was $435.2 million compared to $303.2 million in the second quarter of 2021 and $45.3 million in the third quarter of 2020. Gross margin was 74.3 percent compared to 68.7 percent in the second quarter of 2021 and 36 percent in the third quarter of 2020. The increase in gross margin was primarily due to higher average selling prices offset by slightly higher production costs. As Lange indicated, higher production costs during Q3 was the result of higher market price for silicon raw material. Selling general and administrative expenses were $11.4 million compared to $9.3 million in the second quarter of 2021 and $9.2 million in the third quarter of 2020. SG&A expenses during the quarter included $2 million in non-cash, share-based compensation costs related to the company's Share Incentive Plan. Compared to $2 million in the second quarter of 2021, at $4 million in the third quarter of 2020. The increase as compared to the second quarter of 2021 as well as the third quarter of 2020 was primarily due to expenses related to the IPO of our Xinjiang DACO subsidiary on China's A-share markets. R&D expenses were $1.9 million compared to $2.1 million in the second quarter of 2021 and $1.7 million in the third quarter of 2020. R&D expenses can vary from period to period and reflect R&D activities that take place during the quarter. As with all of the foregoing, income from operations was $421.7 million compared to $292.4 million in the second quarter of 2021 and $33.3 million in the third quarter of 2020. Operating margin was 72% compared to 66.3% in the second quarter of 2021. and 26.6 percent in the third quarter of 2020. Interest expense was $6.4 million compared to $7.2 million in the second quarter of 2021 and $5.4 million in the third quarter of 2020. Net income was $355.8 million compared to $242.9 million in the second quarter of 2021 and $21.9 million in the third quarter of 2020. Adjusted for minority interest, Net income attributable to DACA New Energy Corp shareholders was $292.3 million compared to $232.1 million in the second quarter of 2021 and $20.8 million in the third quarter of 2020. Earnings per basic ADS was $3.95 compared to $3.15 in the second quarter of 2021 and $0.29 in the third quarter of 2020. EBITDA was $441.8 million compared to $311.7 million in the second quarter of 2021 and $51.6 million in the third quarter of 2020. EBITDA margin was 75.4% compared to 70.6% in the second quarter of 2021 and 41.1% in the third quarter of 2020. Now on the company's balance sheet and financial conditions. As disclosed previously, the company successfully completed the IPO listing of its Xinjiang Dakou subsidiary on China's Asia market in July 2021. Net proceeds of the IPO minus listing-related expenses are approximately RMB $6.1 million, or approximately $935 million, which will fund Xinjiang Dakou's polished silicon expansion project and provide additional capital for the company's future growth plans. Following Xinjiang Darko's IPO, Darko New Energy, in aggregate, holds approximately 80.7% of the A share listed subsidiary. As of September 30, 2021, the company had $660.9 million in cash and cash equivalents and restricted cash, compared to $269.7 million as of June 30, 2021, and $109.8 million as of September 30, 2020. To better utilize the company's cash balance with improved capital efficiency, the company purchased short-term investments during the quarter, which are primarily principal-protected short-term interest-bearing bank deposits with three-month and six-month maturity duration. These term deposits have higher interest rates than the regular bank deposit accounts. As such, at the end of the quarter, the company had $414.2 million in short-term investments, compared to 10.4 million as of June 30th, 2021. And as of September 30th, 2021, bank notes receivable balance was 353.3 million compared to 97 million as of June 30th, 2021, and 1.9 million as of September 30th, 2020. Inclusive of our cash and cash equivalents, short-term investments, and bank note receivable balance, the company has totaled path of liquidity of approximately $1.43 billion as of September 30th, 2021. With our strong cash balance, we also took the opportunity to repay all of our bank borrowings at the end of the quarter. As of September 30th, 2021, we had no bank borrowings compared to total borrowings of $156.6 million as of June 30th, 2021, and total borrowings of $271 million as of September 30, 2020. The nine months ended September 30, 2021. With our strong earnings operating cash flow and cash balance, we repaid approximately $195 million of bank borrowings. And with our total capital liquidity of $1.43 billion and no interest-bearing bank loans, we now have what we believe to be one of the best balance sheets in the industry. And combined with the ability to access the attractive A-share capital markets in China, we're very well positioned competitively for our company's future growth and expansion plan. For the nine months ended September 30th, 2021, Net Cash provided operating activities with $653 million compared to $71 million in the same period of 2020. The increase was primarily due to higher ASPs and higher polysilicon sales volume, as well as prepayments of long-term contracts from customers. And for the nine months ended September 30th, 2021, net cash used in investing activities was $855 million, compared to $80.3 million in the same period of 2020. The net cash used in Investing activities in 2021 and 2020 was primarily related to the capital expenditures on the company's policy-making expansion projects. Purchase of property, plant, and equipment and land totaled approximately $444 million in the first nine months of the year, primarily related to our Phase IVb policy-making expansion project. The remaining balance was primarily related to the company's purchase of short-term investments. For the nine months ended September 30th, 2021, Net cash provided by financing activities was $741.6 million compared to $1.1 million in the same period of 2020. The net cash provided by financing activities in 2021 was primarily related to the net proceeds of $935 million contributed by Xinjiang Dacos IPO in China, offset by net repayments of bank borrowings. And that concludes our prepared remarks. Operator, now we would like to open the call for questions from the audience.
spk00: Thank you. We will now begin the question and answer session. If you would like to ask a question, press star then 1 to join the queue. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. And the first question comes from Phil Shen with Roth Capital Partners. Please go ahead.
spk07: Hi, everybody. Thank you for taking my questions. I'd like to ask about your outlook for polysilicon prices. You know, with the silicon metal pricing going up so high, you know, we've seen, as Longin, you mentioned in your prepared remarks, pricing as high as $35 per kilogram. So how do you expect the poly pricing to trend in Q1 and in Q2 and for the balance of 2022? Yeah.
spk04: I think the voice maybe is not clear. Okay. I think a little broken. We see right now the market prices continue to go up. The reason is because I think a high-efficiency module price also continue can be accepted by the markets. So in the fourth quarter, even though the silicon powder cost increased, dramatic increase, even more than 100%. So the selling price also go up. So today, current selling price is around $35 to $36 per kg. For the price for the future, we think based on our history research, we expect to see approximately, I think, around $180 to $220. that may be per 1,000 metric tons of additional polysilicon supply in which it can be used to produce, I think, approximately 250 gigawatts of solar module. We say, just based on the research, I think for next year, additional metric tons, only 180 to 220 metric tons available. So we believe there will be very strong support to poly price given solar has already reached in a great parity and high price module has already been accepted by the market, which means we expect to see high price, high than expected module price in 2022. Since the poly will still be the sector in shortest supply, we believe poly will continue to generate very healthy profit So basically, if the mental silicon price remains today's ASP, we think the polysilicon price will remain at around $30 to $36 per kg for the first half of next year, and around $30 maybe for the second half of next year.
spk07: Thank you, Logan. That's very clear. Yeah, really appreciate it. Can you hear me okay?
spk03: You'll break up a little bit, but I think so far it's fine.
spk07: Okay, all right. My team on my side says it's clear, so maybe it's the long-distance call. Okay, so thank you for that, Longin. Let's move on to the capacity expansion plan. So with the strong pricing, I can imagine you're more encouraged to pursue your capacity expansion. I think on the last call you talked about 180,000 metric tons by year end 23 and 270,000 metric tons by year end 24. Would you have any plans to accelerate that? What's the latest update on your capacity expansion plans? Thanks.
spk04: Okay. Basically, Philip, you know, the 4B, we are now under construction. The nameplate is 35,000 tons. So we were starting trial production by the end of the year. By the end of the first quarter of next year, we reached, I think, the capacity. So if we reach, because that project actually output maybe around 50,000 tons. So total next year, maybe we're thinking around 120,000 to 130,000 tons. We were given guidance next year. So for the further continued capacity increase, Basically, you know, for example, like 4B, the capex is from the proceeds of Chinese IPO. So we think, you know, in the future, the Chinese, because of the high valuation for the company, Xinjiang, the company in Asia, will continue to throw the capital market to raise more money and to support, you know, the future expansion. So, yes, we are looking for the next phase, you know, other places. I think maybe around the 2010s projects. But I think, you know, if finalized, we will announce that. So, basically, yes, we are looking for future capex, the money will come from the capital market.
spk07: Okay, great. Thanks. And then as it relates to your cost structure, I know pricing has gone up significantly. But your cost structure is also going up a little bit with the silicon powder increase. We saw a bit of an increase of your cash costs in Q3 versus Q2. As we go through next year, how do you expect that to trend as well? Thanks. Okay.
spk03: So, at least as of now, the cost structure for Q4 is a bit difficult to determine. So we are currently looking at silicon powder pricing of roughly in the range of $8 to $10 per kilogram. So this is up from approximately $2.50 to $3 per kilogram in the previous quarter. And it really depends on how the pricing trends, but so far what we are seeing is the pricing trend has stabilized for silicon powder. And in fact, for certain grades, the price has declined. And some of it has declined more meaningfully. So we do believe that over the next two months or so, the second powder pricing should be stable to down. And then with next year, I would say China the power shortage in China should abate a bit, which should allow more silicon powder production to revamp. So you look at what's really happening, the second half especially, I think since September, is the shortage of power and the lack of power that's really led to a forced production shutdown of some silicon powder producers, especially in the Yunnan province. So there's no shortage of silicon metal production capacity, but the ability for the producer to produce it is diminished. So we believe the situation should improve in the first half of next year. So we do look for pricing, silicon powder pricing to go down as a result.
spk04: So, Philipp, I just add a comment. You know, for the fourth quarter, we think, you know, The silicon powder price will go up, but we think almost we can transfer the increased part, you know, almost 100% transfer to the selling price. Yes. So that, you know, we can maybe continue to keep the gross profit, you know, remain the same as fourth quarter, remain the same as the third quarter. That's our, you know, planning. For next year, as just, you know, Min mentioned, you know, Because the capacity almost increased more than 50%, even though the selling price we think will be a little slowed down as the silicon powder also goes down. But the supply is still very tight. So really it's difficult to forecast finally how much money, cash flow, we can make it. But all we're planning is to keep at least 20%, 25% increase based on this year. Great. Thank you very much.
spk07: I'll pass it on.
spk03: Great. Thanks, Phil.
spk00: The next question comes from Gary Zhu with Credit Suisse. Please go ahead.
spk02: Hello, Benjamin. Thank you for taking my questions, and congrats again on the very strong results. So three quick questions from me. So firstly, I want to ask, do you see any kind of a risk for your company's production or your peers' kind of production into, let's say, November or December due to China's kind of energy control policy and the power shortage issues. And secondly, so based on my calculation, I think the current kind of polysilicon ASP hike actually more than kind of cover the silicon metal cost hikes. So basically, even a little bit of kind of margin expansion. So just wondering into November, December, do you see room that the polysilicon price can ease or come down a little bit to, let's say, to help the downstream demand? And lastly, I think you mentioned earlier, so basically we were talking about possible dividends in the next annual results. So just now we have seen very kind of strong results, earnings and cash flows. So just wondering if there's any guidance for the kind of dividends payout ratio or kind of absolute dividend amount. Thank you.
spk04: Gary, first of all, I think thank you very much. The first question about, you know, I think yesterday power control. emission control, you know, affect China, a lot of province. I think six province because of, you know, two red lights and put a very strict, I think, policy on the, you know, the electricity supply side. Because we went there, the country, you know, the production site is in Xinjiang, Shihezi. So we use the local, I think, electricity grids. At the beginning, I think September, yes, we got some government call and also remind maybe you need to cut the electricity supply. But later, because I think we are one of the important company, I think, producer in local city. Also, we are green energy, I think, to the upstream. industry. The government understands. In a word, so far we didn't feel any electricity cutting and also the government guarantees the further no cutting electricity supply and to guarantee us to continue to full capacity of running. That's why we're given guidance on the fourth quarter. We don't think that will affect our current production. Second question about the, I think, you know, the ASP, our products, and also silicon powder price continue to go up. You know, we find long-term contracts with one of the, you know, silicon powder supply. And we think, you know, majority of time the supply is compliance with the contract supply, the powder. So that's why you see our third quarter, our silicon powder price actually is lower than market. But for the fourth quarter, because of the new year beginning, you know, so our, right now, the cost of silicon is more close to the market. For the October, I think our silicon powder may be around, let me be around 80 to 85, you know, let me be per kg. And for the November, we see the price is stable. So we try to control on the 80. That's what we try, okay? So I think December definitely will be under $75. So overall, I think silicon powder costs that we're accounted for, for the fourth quarter, I now kind of estimated maybe around $70 to $75, plus other cash costs. So our fourth quarter cash costs will go up maybe around, I'll give you a little bigger range, around $90 to $105, let me be per kg. But I think at least right now, a selling module price in October is, I think, around, I think the average is about 265 per kg, average selling price. So then in November, we see the price continue to go up, maybe 3 to 5 per kg continue up. And that's why we think, you know, we can transfer the polysilicon price increased part to the selling price. The growth margin maybe will go down compared to the third quarter, but as a close profit, we try to keep remaining the same. I think that's the answer to your second question. For the third question, I think about the dividends. The dividends, because we're basically Xinjiang. Energy right now is listed in China, Asia company. So we need to follow the rules. So basically, I think after the annual report come out, I think right now the Asia company, the general rule is minimum 30% we have to declare dividends. So all the percentage is not sure because, you know, a certain time the government, they see the border will approve that. So we will announce that. So basically, you know, that's your three questions. I'll answer it.
spk02: Okay, yeah, this is very helpful, and thank you, and I'll pass on things.
spk00: The next question comes from Dennis Itt with Daiwa. Please go ahead.
spk06: Okay, congratulations for a very strong result. Basically, most of the questions have already been well answered. But I would like to know more about the long-term capacity growth. So we have a plan to achieve 250,000 tons by 2024. So do we have a more concrete, you know, plan, timeline, or, you know, when are we going to be able to have more details in terms of the site selections? and also the timetable, given that our competitor also aggressively adding capacity in 2022 and 2023 as well.
spk03: Okay, so just to be clear, so you're talking about a long-term capacity expansion plan, right?
spk06: Yes, after 4B, yes.
spk03: Okay. So right now these plans are quite preliminary, and we will make further announcements when they become more concrete, when we have more details. So it is very preliminary. So beyond Phase 4B, we do plan to continue to expand our capacity. As you can see, we have a very strong balance sheet to support that, and also the ability to access the A-share market with very attractive valuation. And we do expect to reach our plan of 270,000 metric tons by the end of 2024. And this represents approximately 50% average annual growth rate. And we are in the process of negotiating with various different localities for our next expansion project, including Mongolia as an example. And then right now, Getting the energy quota, it is a big challenge. And we are looking at potentially looking to source green energy to produce polysilicon in the future so that one is it would allow us to secure the energy quota. As you know, the coal quotas has now been pretty much over-allocated. And also this would also give us the ability to produce poly, to do what's called green poly, poly with green energy. And we are seeing that getting the energy quota is a challenge in China, and this will very much likely slow down the overall pace of expansion in the poly silicon sector. Going forward, as many of our competitors of the new projects will find it challenging to be able to secure the energy quota. And we will disclose more details upon finalizing the plan for our next project. Okay, thank you.
spk06: Okay, thank you.
spk00: Again, if you would like to ask a question, press star then 1 to join the queue. The next question comes from Alan Lau with Jefferies. Please go ahead.
spk01: Thanks a lot, and congratulations to the management for the performance of the results. I would like to know, first of all, what is your view on granular silicon, meaning FBR, as one of your competitors having aggressive plans ahead?
spk04: I think Ming may be able to answer the question.
spk03: Okay, okay. So about the FBR or granular poly, so based on our understanding of the current market situation, so including some of the production and quality data that the existing granular producers have provided, we do see that the quality and purity levels of granular poly compared to particularly DACOs, monograde, polysilicon, we do see that there are material differences in quality and purity. On the application level, different downstream manufacturers do have different perspectives on this, but basically over all the feedback that we have received is that uh there is a material quality difference of granular compared to chunk poly and most producers if they are using are only using as a mix as part of the mix right now understood and my last question thanks a lot ming and my last question is about
spk01: the power tariff. So to my understanding, one of the key modes of the company is the low power cost in Xinjiang. And we'd like to know, just to reconfirm, the Phase 4B will get the same Xinjiang low tariff for the next 10 years, along with 4A. Is that correct?
spk04: Basically, I think we signed with the local government and also actually the powder supply company and also the city distribution developing zone authority and also the city. The contract is including the 4A and 4B. That means the nameplate is 70,000 metric tons. I think the price was fixed I think in 15 years. So basically, it should be the same.
spk01: Thanks a lot. Thanks a lot.
spk03: Great. Thank you, Alan.
spk00: This concludes our question and answer session. I'll now turn the conference back over to .
spk05: Thank you, everyone. Thank you for participating in today's conference. If you have any other questions, please don't hesitate to write us emails or make a phone call. Thank you, everyone. Bye-bye.
spk00: Conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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