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spk00: Good day, and welcome to the DocuNew Energy third quarter 2022 results conference call. All participants will be in 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 touchtone phone. To withdraw from the queue, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Kevin Ho, Investor Relations. Please go ahead.
spk02: Hello, everyone. This is Kevin, the Investor Relations of DaQ New Energy. Thank you for joining our conference call today. DaQ New Energy just issued its financial results for the third quarter of 2022, 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. Min Yang, our Chief Financial Officer, and myself. Our CEO, Mr. Long Gen Zhang, is on his way from the U.S. to China and is not able to attend today's meeting in person. So today I will read his comments on market and operations and then Mr. Yang will discuss the company's financial performance for the quarter and 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 Dedication Reform Act of 1995. These statements involve inherent risks and uncertainties, a number of facts A number of factors could cause actual results to differ materially from those contained in any forward-looking statement. Further information regarding these and other risks is included in reports or documents we have filed with or furnished to the Securities and Exchange Commission. These statements only reflect our current and a 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 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. And now I will read the commentary from our CEO, Mr. Longbin Zhang. We are pleased to announce that the company continued to deliver an excellent performance. In the third quarter of 2022, revenue reached $1.22 billion for the quarter, with gross profits of $979 million, net income attributable to Dark Union Energy shareholders of $323.4 million, and adjusted net income attributable to Dark Union Energy shareholders of $590 million. Operating cash flow was $1.7 billion for the first nine months of this year. We ended the quarter with a very strong balance sheet as our cash position, combined with bank note receivables, which are redeemable for cash, reached $4.6 billion at the end of Q3, and we had no financial debt or bank loans. We kept producing above our main plate capacity with polysilicon production volume of $3,300 33,401 metric tons despite our scheduled annual maintenance. Sales volume reached 33,126 metric tons. and we ended the quarter with a very low polysilicon inventory level. Driven by the rising global energy prices and the urgency to address climate change, both demand and pricing for solar PV products increased during the quarter, with particularly strong demand from markets such as China, Europe, Southeast Asia, and Brazil. As a result, market demand for polysilicon remained very strong throughout the quarter. and our ASP increased 14% in RMB terms compared to the previous quarter. With higher ASP and lower production costs, Q3 gross margin continued to improve and reached 80% as compared to 76% in Q2 this year. In particular, after further process improvements, our monograde polysilicon reached 99.9% of our production in September, which was record-breaking for the company. Furthermore, DaQ remains one of the most important producers of ultra-high-purity anti-polysilicon, which is positioned to become the fastest-growing product segment for next year. In June, our board of directors authorized the company to repurchase up to $120 million worth of its issued share on the open market We have completed the share repurchase program and spent $119.9 million to repurchase approximately 1.88 million ADRs. We will consider another share repurchase program when Xinjiang Daqiu determines its dividend plan for the fiscal year 2022, as we believe our current ADR price is seriously undervalued and not reflective with our position as a technology and cost leader with strong profitability and operating cash flow. Despite a more than 50% volume increase in polysilicon supply in the first three quarters of this year, compared to the same period of last year, the profitability of polysilicon continued to improve, which was driven by stronger than expected solar PV demand and relatively faster capacity expansions in downstream sectors, particularly in the wafer segment. According to China National Energy Administration, China installed 52.6 gigawatts of solar PV projects in the first three quarters of this year, a 106% increase as compared to the same period of last year. The fourth quarter is typically a busy season for China's solar PV market. Current Polysilicon ASPs remain high at approximately $36 to $38 USD per kg VAT excluded, and the inventory of Polysilicon is low across the value chain. We expect that module price will be well supported in the range of RMB 1.85 to 1.95 which will provide a very strong support for polycycline ASPs. Solar PV demand has been increasing significantly beyond market expectations for almost two years, and we believe that it is just the beginning of a new era in which renewable energy will eventually displace fossil fuels to become the biggest source of energy for the world. Solar PV has already reached greater parity in most of the important economies in the world, and this creates great value to address carbon emission, tackle climate change challenges, and further secure energy security and sustainability. We believe we will continue to greatly benefit from this long-term trend as one of the most competitive low-cost and high-quality polysilicon providers in the world. Now I will provide the outlook and the guidance. The company expects to produce approximately 30,000 metric tons to 32,000 metric tons of polysilicon in the fourth quarter of 2022, and approximately 130,000 metric tons to 132,000 metric tons of polysilicon in the full year of 2022, inclusive of the impact of the company's annual facility maintenance. This outlook only reflects our current and the preliminary view as of the date of this conference call and may be subject to change. The company's ability to achieve these projections is subject to risks and uncertainties. Now I would like to turn the call to our CFO, Mr. Min Yang, please.
spk05: Thank you, Kevin, and hello, everyone. Thank you for joining our call today. Now I will discuss our financial performance for the third quarter of 2022. Revenues were $1.22 billion compared to $1.24 billion in the second quarter of 2022 and $586 million in the third quarter of 2021. All silicon sils volume was 33,126 metric tons in Q3 2022. compared to 37,545 metric tons in Q2. Despite an 11.8% decline in Polysilicon sales volume as compared to the previous quarter, we achieved similar revenues supported by a 10% increase in Polysilicon ASP. Gross profit was $979 million compared to $947 million in the second quarter of 2022. and $435 million in the third quarter of 2021. Growth margin was 80.2% compared to 76.1% in the second quarter of 2022 and 74.3% in the third quarter of 2021. The increase in growth profit and growth margin compared to Q2 was primarily due to lower production costs and higher ASPs. We further reduced polysilicon production costs for Q3 to $6.82 per kilogram, a decline of 6% compared to $7.26 per kilogram in Q2 2022. SG&A expenses were $280 million compared to $14.4 million in the second quarter of 2022 and $11.4 million in the third quarter of 2021. SG&A expenses during the quarter included $263 million in non-cash share-based compensation costs related to the company's 2022 Share Incentive Plan. For future periods, the company expects to recognize approximately $7.3 million of non-cash share-based compensation expenses every month from October 2022 through September 2025. related to the company's 2022 sharing incentive plan. Research and development expenses were $2.5 million compared to $2.7 million in the second quarter of 2022 and $1.9 million in the third quarter of 2021. R&D expenses can vary from period to period and reflect R&D activities that take place during the quarter. Income from operations was $693 million compared to $928 million in the second quarter of 2022 and $421 million in the third quarter of 2021. Operating margin was 56.8% compared to 74.6% in the second quarter of 2022 and 72% in the third quarter of 2021. Net income attributable to DACO New Energy shareholders was $323 million compared to $628 million in the second quarter of 2022 and $2.92 million in the third quarter of 2021. Earnings per basic ADS was $4.28 compared to $8.36 in the second quarter of 2022 and $3.95 in the third quarter of 2021. Adjusted net income attributable to DACO New Energy shareholders excluding non-cash share-based compensation costs were $590.4 million compared to $630.3 million in the second quarter of 2022 and $294.7 million in the third quarter of 2021. Adjusted earnings per basic ADS was $7.81 compared to $8.39 in the second quarter of 2022 and $3.98 in the third quarter of 2021. EBITDA was $720 million compared to $955 million in the second quarter of 2022 and $442 million in the third quarter of 2021, even though margin was 59% compared to 76.8% in the second quarter of 2022 and 75.4% in the third quarter of 2021. And now on the company's financial condition. As of September 30th, 2022, the company had $3.05 billion in cash, cash equivalents, and restricted cash compared to $3.28 billion as of June 30, 2022. And as of September 30, 2022, the company's banknote receivable balance was $1.57 billion compared to $1.27 billion as of June 30, 2022. Banknote receivables are issued and guaranteed by domestic Chinese banks and can be redeemed for cash. Combined cash and bank note receivable balance was $4.62 billion at the end of Q3. Now on the company's cash flows. For the nine months ended September 30, 2022, net cash provided by operating activities was $1.7 billion compared to $653 million in the same period of 2021. The increase was primarily due to higher revenues and gross margins. For the nine months ended September 30, 2022, net cash used in investing activities was 605 million compared to 856 million in the same period of 2021. The net cash used in investing activities in the first nine months of 2022 was primarily related to the capital expenditures on the company's 100,000 metric ton polysilicon project in Balto City, Inner Mongolia, which was partially offset by $272.7 million in the redemption of short-term investments. And total capital expenditures in the first nine months of 2022 were $841 million, the majority of which was related to the company's Inner Mongolia Balto Polish Silicon Project. The company currently expects approximately $650 million million of additional capital expenditures related to the VALTO project, of which $250 million is expected to be in the fourth quarter of this year, and the remainder will be in 2023. For the nine months ended September 30, 2022, net cash provided by financing activities was $1.48 billion, compared to $742 million in the same period of 2021. The net cash provided by financing activities in the first nine months of 2022 was primarily related to the net proceeds of the company's $1.63 billion from Xinjiang Daco's private offering in China. And that concludes our prepared remarks. Now we will open the call to questions from the audience. Operator, please begin.
spk00: 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 are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question is from Philip Shen of Roth Capital Partners. Please go ahead.
spk01: Hi, everyone. Thanks for taking my questions. The first one is on your outlook for polysilicon pricing. with capacity coming online next year from some of your peers and also yourself. How do you expect the polysilicon price to trend here in this quarter for the last two months and then also by quarter as we get through 2023? And if you have a view for 2024, that'd be great. Thanks.
spk05: Okay. Thanks, Phil, for your question. This is Ming. the CFO. Currently, the policy and SP is staying at a fairly high level, around $36 to $38 per kilogram, and it has remained so for most of Q3 up until now. Q4 is typically a peak season here in China in terms of inflations. And we're tracking that Chinese installations for this year is expected to double in 2022 versus 2021. I think the range of estimate provided by the Chinese Photovoltaic Industry Association and National Energy Administration is expecting China to be 85 to 100 gigawatt this year. So we could see a lot of activity in Q4. And polyASP fundamentally is closely connected with module ASP, and we are seeing very strong module selling prices in terms of very good price support at around the 1.85 to 1.95 RMB per kilogram level, you know, which at the minimum support polyascan ASP in the range of 250 to 280 per kilogram. I think for Q4 this year, now that we're already at end of October, and actually in terms of our sales contracts and delivery schedule, we're practically sold out for the month of November as well. So as such, at this point, we do not believe polysilicon contracts pricing would drop or would drop much from the current level by the end of this year. Okay. And I would say in terms of our outlook for next year and beyond, I would say polished silicon is likely to remain in the bottleneck in the value chain. You know, if we look at what's happening in the downstream, one is the downstream expansion is much faster than polished silicon expansion. You know, between wafer and cell capacity, These can typically be expanded within a six-month to one-year timeframe, while polysilicon takes between 12 months to 18 months to expand and then also takes longer to ramp up and also to reach desired quality, even for existing incumbent experienced producers. And I would say a lot of the new producers lack experience in polysilicon. and it's likely to face a lot of problems, whether it's with their capacity utilization or with quality, you know, as experienced with a lot of startups in the past. And if we look at, you know, downstream expansions, right, I think historically these were mostly driven by profits in the value chain. Okay, so I think we did win a significant expansion in wafer capacity, as wafer capacity remained highly profitable. I think if you track the profits of Longyi or Shangji or Zhonghuan, they remain very healthy. In fact, I think even for most of the integrated manufacturers, most of their profits come from the wafer segments. So we believe you will continue to see healthy expansion in the monowafer capacity segment. And more interestingly, I think in the more downstream in the cell and module segment, so even though profit is relatively thin, I think we are still seeing large capacity expansion. So for example, for solar cell, there's more than 100 gigawatts of N-type solar cell capacity being built in China today. Interestingly, these are actually funded by the Chinese capital market in terms of very high valuation for these capacities. So you are seeing a very aggressive expansion as well. So from this perspective, at least I would say even through 2023, we do not believe we will see, you know, polysilicon stopping the bottleneck in the value chain. I would say 2024 is very much further out in terms of forecast, but we do not believe that you will see a significant overcapacity of polysilicon. I think one is the quality challenge and the utilization challenge, and particularly we believe starting next year, N-type will take significant market share and will become the fastest growth segment. And actually, the N-type cell technology requires N-type polysilicate, and very few Chinese producers have the capability to produce N-type poly. So, you know, DACA will be very well positioned to benefit from this trend as well. So that's our perspective.
spk01: Great. Thanks, Ming. I just have one other question here, and then I'll pass it on. Can you give us a little more color on the $260 million share-based compensation? I know you guys press released about it in August, but do you expect to do this every year, every Q3? If not, what do you think will dictate the timing? Do you think the magnitude next year could be as big as this year? And then can you talk about the perspective of this share-based compensation relative to the $120 million share buyback? Some investors feel that the share buyback is not necessarily enough to offset the dilution of the payment to the management team. Thanks.
spk05: I think Kevin will take this question. Kevin?
spk02: Hi Phil, this is Kevin. So first of all, this is a plan actually for at least three years. So it's not going to happen every year because the entire vesting schedule is for at least three years. So this is basically the timeframe. And regarding the buyback and the share compensation program, basically I prefer to view them separately because we can do buyback without a share compensation program and vice versa, the same thing. For example, in the history, sometimes we didn't really have a buyback program, but we did have a share compensation program. So I don't think it's necessary to be linked. But anyway, I think this year, because this year's buyback, relatively the amount is not very big. It comes from the dividend we received from our subsidiary, Xinjiang Daqiu. And this year, I mean, this year, very likely we will do, although we cannot guarantee today, but very likely we will do Another share, I mean, the cash dividend at the level of Xinjiang, because basically this is the requirement from the China SEC. And then as the majority shareholders, by nature, documenting energy will receive some cash, and very likely we will consider to do the same buyback program. But consider this year's net profit will be significantly higher than last year. So it's possible that we expect to receive significantly more, I mean, the cash dividend from Xinjiang level. But anyway, I need to emphasize this. The process is Xinjiang DACA will need to go through their process, for example, the board meeting, the shareholders meeting, And then they determine the dividend plan for the fiscal year of 2022, most likely in April next year. And then after that, after one or two months, the Cayman, I mean, the USDQ will receive the cash. And then we will, if at the Cayman level, if we decided to do the same thing, then very likely you will see a similar program like we have this year, yeah. Yeah.
spk01: Great. Thanks, guys. I'll pass it on. Very great. Thanks, Phil.
spk00: The next question is from Gary Vow of Credit Suisse. Please go ahead.
spk04: Hello, management. Thank you for taking my questions. So my first question is on our new capacity in Mongolia. So can management share with us the latest construction progress? And just wondering if the recent COVID measures would have any kind of impact on our construction? And secondly, earlier there were some talks that the electricity costs in Inner Mongolia may increase. So just wondering what's the latest update. Thank you.
spk05: Okay. Thanks, Gary, for your question. So our Inner Mongolia project started construction in March, and As of now, the construction is going very smoothly. I think we're making significant amounts of progress, even with the COVID restriction measures. I think we have done a lot of preparations and also a lot of work to mitigate any of the issues. and risks, for example, related to on-site construction and also related to equipment delivery, for example. So as of now, all of the design has been complete at the end of Q3 for the 100,000 ton facility, and this requires support from the design institute. I think this is actually very, very critical because there's been a significant lack of resource and of capacity from the Design Institute due to the large number of projects that are ongoing right now. So for us, this is a fairly significant achievement. And also, in terms of our procurement of both the equipment and also in terms of selecting the construction companies, So this is mostly complete as well. And in terms of construction and progress, more than 50% of the construction has been complete. I think if anyone has a chance to visit our site, I think it's quite an impressive site and there's a lot of construction going on. So for the month of October and November, We expect a lot of the buildings and structures to be complete, for example, for our reactors and also for our post-processing and for our distillation towers. And on November, most of the structures for our distillation and for the piping and tri-close styling and off-gas recovery is to finish by the year end. And we expect the installation to happen during this period to Q1. And by end of Q1, we expect in all of our units, including distillation, cyclosilane, and the crystal growth, and off-gas coverage to be complete by the end of Q1, which will allow us to start pilot production, initial production around the end of Q1. So, so far everything is going on schedule and on track. And quickly on the electricity cost, I think that the government did announce that it would adjust the utility pricing for the renewable energy industry that was receiving support in the past. The final amount hasn't been announced. we do have initial indication that it should remain one of the most competitive energy pricing for northwest China. So we are very optimistic and hopeful that it will continue to be very competitive. At least an indication is such that it should even be similar to Xinjiang. The current Xinjiang industrial market electricity pricing.
spk04: Thank you, management. And another question I will pass on. So I also noticed that in our guidance, the Q4 production volume, 30,000 to 32,000 tons, is kind of slightly lower than sub-quarter. So just wondering what's the reason behind that. Thank you.
spk05: Okay. I'll take that quickly and then see if Kevin has anything to add. You know, our four-year production is, you know, somewhere between 130,000 to 132,000 metric tons, right? And then if you split that in half, that's about 65,000 metric tons for the half. And just interestingly, so normally we do our maintenance between March or April through, say, July. We have what's called maintenance in phases across a large number of our facilities in different phases. But this year, because of the strong demand in the first half, we actually delayed maintenance to the second half of this year. And so most of the maintenance was supposed to kick off, say, starting in August. But because of the COVID restrictions that was happening in Xinjiang, right? So that actually... gave us significant challenges to conduct a maintenance schedule during this time frame. So some of our maintenance has been pushed out. Something that was originally scheduled from July to September has been pushed out to October or even November. So that's why you are seeing slightly higher production in Q3 and offset by slightly lower production in Q4 because of the shift in maintenance schedule. Overall, the four-year production should be consistent, yeah.
spk04: Okay, thank you. I have no further questions. Thank you.
spk05: Thank you, Gary.
spk00: The next question is from Alan Lau of Jefferies. Please go ahead.
spk03: Thank you for taking my question, and congratulations for the great results. So we'd like to ask, what is the n-type ratio and your understanding of the ramp-up of other peers, like of the new players or the progress of other new players? Do you see any problems or delays in the capacities from the new players?
spk05: I'll let Kevin take this question. Kevin, do you want to address this?
spk02: Yeah. Yeah, Alan, so first of all, if you look at the purity of our product, for example, last year, we have almost 90% of our product, you can categorize them as electricity grade number one, which is basically the highest national standard in China. Good enough for every application, P-type and N-type But currently, our end-type customers, their request is one, of course, is purity. The other thing is, at least for today, they still need us to ship them with the high-density polysilicon. In Chinese, we call it zhimiliang. We say it in English as high-density, which is a very polished surface. So, for example, this year, or for now, because the end-type market share is still very little, which means that the demand is not very strong, so you barely see the premium from selling end-type. So, for the company, we don't have much incentive to sell. switch our process to produce more high density polysilicon, because if you produce more high density polysilicon, as a result, your volume will decrease. So we need to see higher premium from n-type, so we will adjust our process to produce more high density. To summarize, we don't have any issue with the purity. The only thing we need to do is to produce more high density, maybe slow down a little bit of production and produce more high density polysilicon. This is for our existing facility. For example, for the new facility in Mongolia, because starting from day one, When we initially designed a new facility, we used an even higher standard as compared to our existing facilities in Xinjiang. So we are very confident that when we finish the construction in Inner Mongolia, easily we can produce at least 80% or more for M-type. And then I will... Give you another information for the internal communication. For example, we have a board meeting this morning and our manufacturing team within their reporting materials, there's actually a task for Q4. is to try to send a sample to our anti-bug customers with the cauliflower surface n-type so we try to convince our customers even our the cauliflower surface polysilicon will be good enough just to to serve the n-type application yeah so so this is basically the progress of n-type Other companies we don't really know because we don't have the firsthand information. But based on the message here, we hear from our customers and with some communication within the industry, we know we are kind of for sure we are basically the first class or top tier quality providers. in China without any problem. But we believe other first-tier players like Tongwei or maybe other one or two players, maybe they can also serve N-type application, but definitely not for the second-tier players. Because if we look at the second-tier, even third-tier, today they are still struggling in the traditional P-type, not to mention the N-type. And for the newcomer, I think that for them, I think that the first one or two years will be struggling to reach their main pay capacity. And then after maybe one year and one half a year, and then maybe if they are smart enough, they're able to gradually increase their quality to hit, firstly to hit the traditional P-type monograde, and then maybe another one or two years to potentially increase to the M-type. But the M-type application is growing very fast. So at least, I think, in the middle of next year, you will see at least 100 gigawatt M-type cell. production line will be in place and ramp up very quickly. So that means 25% market share. And then in the second half of next year, you will see more. If the industrialization of this new M-type technology becomes more and more mature, no matter it's Topcon or HIT or other technologies, I mean the the deployment of the new production line of scale will be very, very fast.
spk03: Thanks a lot, Kevin. A very comprehensive answer. And another question is about the progress on the eggshare listing. So what is the stage for now for the Hong Kong listing?
spk05: Okay, thank you, Alan. So the international capital market platform is very important for Falco New Energy. And what we are hearing is that currently the PCAOB staff is working in Hong Kong now, and they're making a lot of progress in terms of with their inspection of the Chinese auditors. We have not heard of any significant issues that they are being hindered. So we do believe that the listing risk is being reduced. However, we are exploring the possibility of dual listing in Hong Kong as a plan for investors to address any dual listing risk. so we actually have engaged with executives from the hong kong stock exchange to in you know via via calls and meetings you know to explore the listing and so we are working in with their staff also working with other people on the listening team as well. So, we'll continue to explore that and we will announce further when appropriate.
spk03: Thank you, Mike. So, my last question and I'll hand over. So, I wonder if the COVID situation in Xinjiang is hindering, first of all, poly production and is this affecting or is there any supply disruption of metal silicon in Houshai?
spk05: Okay. We don't have a lot of information related to Holstein specifically, other than that the COVID situation risk having an impact on their delivery of silicon metal overall. So for example, related to our orders, They have been making deliveries, but perhaps not as much as we had previously ordered. So I think most of the COVID challenge for Xinjiang, a lot of it is related to logistics and in terms of shipping externally and also delivery of raw materials to our facilities. So these are actually significant challenges that requires a lot of planning and efforts for it to execute smoothly. So I think we have done a lot of work to mitigate all the issues and have our operation running normally, I think, despite the significant COVID-related restrictions that are happening in the Xinjiang region. But overall, it's not impacting us, but I think there is a general impact, I think, for the industry.
spk03: Thanks a lot. Great. Thank you.
spk00: This concludes our question and answer session. I would like to turn the conference back over to Kevin Hull for closing remarks.
spk02: Thank you, everyone, again for joining us for the conference call today. Should you have any further questions, please don't hesitate to contact us either via email or via phone call. Thank you very much. Bye-bye.
spk00: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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