Daqo New Energy Corp ADR

Good day and welcome to the DocQ New Energy First Quarter 2024 Results Conference Call. All participants will be 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 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 Shang Su, CEO. Please go ahead.

Hello, everyone. I'm Anita, the investor relations of DACO New Energy. Thank you for joining our conference call today. So DACO New Energy just issued its financial results this quarter of 2024, which can be found on our website at www.dqsolar.com. So today, attending the conference call, we have our chairman and CEO, Mr. Xiang Xu, our CFO, Mr. Ming Yang, and myself. The call today will begin with an update from Mr. Xu, market conditions and company operations, and then Mr. Yang will discuss the company's financial performance for the quarter. After that, we'll 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 contained in 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 Securities and Exchange Commission. These statements only reflect our current and preliminary view as of today and may be subject to change. Our ability to achieve these projections is subject to risks and uncertainties. All information provided in today's call is as of today and we undertake no duty to update such information except as required under applicable law. Also during the call, we'll 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. Mr. Xu will make his remarks regarding current market conditions and company performance in Chinese, which I'll translate into English after he finishes. Now I'll turn the call to our CEO.

Thank you, Anita. I'm Xu Xiang, CEO of Dajiexin. Thank you for attending today's conference. In the first quarter, we continued to optimize production and operation. The efficiency and output of Xinjiang's two multi-border bases have been improved. The total output of this quarter is 62,278 tons, which is more than the output value of our first quarter. In the fourth quarter, it increased to 1,264 tons, We have contributed 46% of the total output of the 1st quarter of 2021. Through the improvement of the results of the two factories and the steady growth, we have further accelerated the pace of the N-type transformation. The N-type product increased from 62% in December last year to 72% in March last year. Compared to the end of last year, the cost of our production in this quarter has decreased. The second quarter of 2023 has fallen by 2%. In the first quarter of 2023, the average production cost of the first quarter was $6.37 per kilogram. This quarter, we achieved $77,000,000 in tax-exempt and cash-exempt benefits. Even in the first quarter of 2024, the company maintained an objective $27 billion cash balance. The cash balance and one-week ticket balance totaled $29 billion. We expect that in 2024, the total production of the second quarter will be about 60,000 to 60,300,000 tons. We maintain full-fledged production and produce basic food in the first quarter. In the second quarter of 2020, we plan to complete the construction of a 5G project in Inner Mongolia and start production. And it is expected to be full-fledged in the last three quarters. We expect the total annual production in 2024 to be 28-30 million tons per year, which is 40% to 50% of the total growth in 2022. With more than 15 years of multi-border production experience, We will further optimize the operation efficiency, apply N-type raw materials in the proportion of the product combination, and look back at the industry level for a quarter of a year. During the spring and summer holidays, the raw material demand in the whole of February is rising. Due to the expected future of electronic companies, the opening and opening will be greatly improved, and the level of high-performing people will be maintained. The back-up factor of the low-price period caused the overall demand for fuel for the fuel supply to rise and fall. As a result, the total price of fuel remained at 65.7 yuan per kilogram for the N type and 55 to 60 yuan per kilogram for the P type. However, as of March, the price of fuel production is lower than expected. Fuel companies generally have a higher stock market share and are still in a fast rally. In March, the market situation changed significantly. The price of the entire industry chain, especially the material environment, will drop. Under the pressure of the stock market, the stock market will begin to reduce the opening power to complete the stock market connection and delay the delivery time of orders and materials. In April, the stock market accumulation problem of the stock market will further deteriorate. Customer orders and delivery time will be further slowed, and the price of materials will go down. As of last week, the price of the nuclear refinery has dropped to 54 yuan per kilogram. Basically, it has reached the level of the cash return of the entire industry. Based on the current market price, we believe that the entire mining industry is in a state of cash loss. The mining industry has experienced many ups and downs in the past. Based on our past experience, we believe that the low price of the industry at that time will eventually create a healthier market environment. When the cost is too high and the quality is not up to the market standard, the company will go bankrupt. In the end, after the bankruptcy, the industry will face rational production capacity and supply shortage. The production capacity process we are facing will also be fully resolved. We expect that the demand will return to normal after the process of supply and demand consumption in the short term. The long-term renewable energy policy will also continue to promote the expansion of light and electricity, 我们坚信光复行业终将回归理性的盈利水平 并带来更好的利润率 工资层面 我们认为维持健康的库存水平至关重要 因此到一季度末 我们的成品库存水平为两周左右的产量 处于行业的最低水平 现在请Anita替我翻译一下 好的谢谢

Hello, everyone. This is Anita. Thank you for joining the call. So I'll now translate our CEO, Mr. Hsu's remarks. During the first quarter, we continued to optimize our manufacturing operations and made improvements in both yields and throughput at our two poly facilities. Total production volume for the quarter was 62,278 metric tons, which was above our expectations and represented an increase of 1,264 metric tons compared to the previous quarter. Our Inner Mongolia 5A facility contributed 46% of our total production volume for the first quarter. Through achievement in R&D and significant purity improvements at both facilities, we further increased our end-type product mix from 60% in December last year to 72% in March. Compared to the end of last year, production costs trended down over the quarter decreasing further by 2% from fourth quarter 2023 to an average of $6.37 per kilogram in the first quarter of 2024. For the quarter, we generated $77 million in EBITDA. By the end of first quarter 2024, the company maintained a strong cash balance of $2.7 billion and a combined cash and bank note receivable balance of $2.9 billion. We expect second quarter 2024 total poly production volume to be approximately 60,000 metric tons to 63,000 metric tons, similar to that of first quarter 2024 as the company maintains full production. We expect to finish construction and begin initial pilot production at our new Inner Mongolia Phase 5B facility in the second quarter of 2024 and expect to ramp up to full production level by the end of third quarter 2024. As a result, we anticipate full-year 2024 production volume to be in the range of 280,000 metric tons to 300,000 metric tons, approximately 40% to 50% higher than that of 2023. With more than 15 years of experience in poly production, as well as a fully digitalized and integrated production system that optimizes operational efficiency, we'll continue to increase our entire production in the product mix. During the first quarter, the solar market initially showed signs of strength as we headed into the Chinese New Year holiday in February. Despite the production cuts and downtime, as usual during the holidays, polysilicon demand had been strong pre-holiday as wafer manufacturers kept utilization rates unchanged or even higher, in anticipation of higher demand and better product pricing post-holidays. The general polysilicon price range was 65 to 70 RMB per kilogram for N-type and 55 to 60 RMB per kilogram for P-type during this period. However, with weaker than expected production plans downstream starting March, the wafer sector faced significant pressure from accumulated inventories and negative margins. Market sentiment shifted significantly in mid-March with widespread expectations of falling prices throughout the value chain, particularly for polysilicon. As a result, downstream manufacturers began to lower utilization, reduce inventory, and delay orders to minimize the impact of falling prices. In April, further pressure on polished silicon prices emerged as the issue of excess inventory among wafer manufacturers worsened and wafer customers further delayed orders and product delivery. Therefore, polished silicon prices dropped further by late April to 47 to 54 RMB per kilogram for Tier 1 producers. at the industry's cash break-even costs. At this level, we believe the entire solar value chain, including polysilicon, is likely to be loss-making in general, and that a large number of polysilicon producers are currently unprofitable. The solar industry has gone through multiple cycles in the past, and based on our previous experience, we believe that the current low prices and market downturn will eventually result in a healthier market, as poor profitability and losses as well as cash burn will lead to many market players exiting the business with some possible bankruptcies. This will bring the inevitable capacity rationalization and solve the overcapacity issue we're currently experiencing. And as demand growth resumes after excess inventories are depleted in the short term and on the backdrop of positive policies pushing renewable installations in the long run, the solar PV industry will return to normal profitability and achieve better margins. We believe that at the end of the quarter, we had one of the industry's lowest levels of finished goods inventory with approximately two weeks of production. Overall, 2023 marked a step change for renewable power growth, with China's newly installed solar PV capacity reaching a record high of 216.9 gigawatts, representing 148% year-over-year growth. We continue to see strong growth in solar PV installations in China during the first quarter of 2024, which reached an aggregate of 45.7 gigawatts, representing a 36% year-over-year growth rate. Solar has become one of the most competitive forms of power generation, and continuous cost reductions in solar PV products and associated reductions in solar energy generation costs are expected to create substantial additional demand for solar PV. With 2023 setting the stage for gradually phasing out P-type products, we believe that 2024 will mark the year when N-type products dominate the industry. We're optimistic that we'll capture the long-term benefits of the growing global solar PV market and maintain our competitive advantage by enhancing our higher efficiency N-type technology and optimizing our cost structure through digital transformation and AI adoption. As one of the world's lowest cost producers with the highest quality anti-product, a strong balance sheet, and no financial debt, we believe we're very well positioned to weather the current market down cycle and emerge as one of the leaders in the industry to capture the market's future growth. Now I'll turn the call to our CFO, Mr. Ming Yang, who will discuss the company's financial performance for the quarter. Ming, please go ahead.

Hello, everyone. This is Lin Yang, CFO of Dr. New Energy. We appreciate you joining our earnings conference call today. I will now go over the company's first quarter 2024 financial performance. Revenues were $415.3 million compared to $476.3 million in the fourth quarter of 2023 and $709 million in the first quarter of 2023. The decrease in revenue compared to the fourth quarter of 2023 was primarily due to a decrease in average selling prices and lower policy look and sales volume. Gross profit was $72 million compared to $87 million in the fourth quarter of 2023 and $506 million in the first quarter of 2023. Gross margin was 17.4%. compared to 18.3 percent in the fourth quarter of 2023 and 71.4 percent in the first quarter of 2023. The decrease in gross margin compared to the fourth quarter of 2023 was primarily due to lower average selling prices, which was partially mitigated by lower production costs. Selling, general, and administrative expenses were $38.4 million, compared to $39 million in the fourth quarter of 2023 and $41.3 million in the first quarter of 2023. SG&A expenses during the first quarter included $19.6 million in non-cashier-based compensation costs related to the company's shared incentive plan, compared to $19.6 million in the fourth quarter of 2023. R&D expenses were $1.5 million compared to $3.3 million in the fourth quarter of 2023 and $1.9 million in the first quarter of 2023. R&D expenses vary from period to period and reflect the R&D activities that take place during the quarter. Our R&D activities currently focus on process and technologies that improve purity for the polysilicon and remove contamination to increase our anti-polysilicon percentage. As a result of the foregoing, income from operations were $30.5 million compared to $83.3 million in the fourth quarter of 2023 and $463.8 million in the first quarter of 2023. Operating margin was 7.3 percent compared to 17.5 percent in the fourth quarter of 2023 and 65 percent in the first quarter of 2023. Foreign exchange loss was $0.3 million compared to a loss of $0.8 million in the fourth quarter of 2023, and this is attributed to the volatility and fluctuation of the U.S. dollar to RMB exchange rate during the quarter. Net income attributable to Dr. New Energy shareholders was $15.5 million compared to $53.3 million in the fourth quarter of 2023 and $278.8 million in the first quarter of 2023. Earnings per basic ADS was $0.24 compared to $0.76 in the fourth quarter of 2023 and $3.56 in the first quarter of 2023. Adjusted net income attributable to Dr. New Energy Corp shareholders, including non-cashier-based compensation costs, was $36 million compared to $74.3 million in the fourth quarter of 2023 and $310 million in the first quarter of 2023. Adjusted earnings per basic ADS was $0.55 compared to $1.06 in the fourth quarter of 2023 and $3.96 in the first quarter of 2023. EBITDA was $76.9 million compared to $128 million in the fourth quarter of 2023 and $490 million in the first quarter of 2023. EBITDA margin was 18.5 percent compared to 26.9 percent in the fourth quarter of 2023 and 69 percent in the first quarter of 2023. Now on the company's financial condition. As of March 31st, 2024, the company had $2.689 billion in cash and cash equivalents compared to $3.05 billion as of December 31st, 2023, and $4.1 billion as of March 31st, 2023. and as of March 31, 2024, the notes receivable balance was $194 million, compared to $116 million as of December 31, 2023, and $791 million as of March 31, 2023. No receivables or percent banknotes with maturity within six months. For the three months ended March 31, 2024, net cash used in operating activities was $115.9 million compared to net cash provided by operating activities of $807 million in the same period of 2023. Net cash used in operating activities for the quarter was the result of change in operating assets and liabilities, primarily related to the company's payment of approximately $75 million in tax payable as that is due during the first quarter, as well as an increase in no receivable balance of approximately $78 million. And other items that used cash include payments to suppliers in conjunction with the period related to the Chinese New Year holidays, as well as an increase in inventory. For the three months ended March 31, 2024, net cash used in investing activities was $190.5 million, compared to $268.9 million in the same period of 2023. Net cash used in investing activities in the first quarter of 2024 was primarily related to the capital expenditures on the company's Phase 5A and Phase 5B polysilicon expansion projects in Balto City, Inner Mongolia. Due to the recent changes in market condition, the company's board and management team have decided to temporarily postpone the company's non-polysilicon manufacturing capacity expansion plans to reserve capital. As such, the company's capital expenditure plan has been reduced to approximately $700 million for the year, which is related to the company's Inner Mongolia policy and project. And this represents a significant decrease from the previous capital expenditure plan for the year of approximately $1.1 to $1.2 billion. And for the three months ended March 31, 2024, Net cash used in finance activity was $6 million, compared to net cash provided by finance activities of $59.9 million in the same period of 2023. Net cash used in finance activities in the first quarter of 2024 was primarily related to approximately $5 million that was used for the company's share repurchase. And that concludes our prepared remarks. We will now open the call to Q&A from the audience. Operator, please begin.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. The first question today comes from Phil Shen with Roth MKM. Please go ahead. Phil, your line is open if you'd like to ask your question. We seem to be unable to connect to Phil Shen's audio. The next question comes from Alan Lowe with Jefferies. Please go ahead.

Thanks a lot for taking my question, management. So I think the first question that I've received after the announcement is about the buyback. So I wonder if there's any guidance from the management in regards to buyback or dividends planned in this year.

Okay, so the board actually had a discussion about a potential doing a share, continue to do the share purchase program. But I think in light of the current market condition where the industry overall is actually looking like it's going to be making losses and we're uncertain how long this might last. So the board does feel that it's more prudent to conserve capital for now to weather the market downturn. And then they would like to see how the market would perform. And if the market does improve, perhaps later in the year, I think the board would definitely consider a program at a later date as appropriate. Because of the market condition, I think the board does feel that we need to conserve capital, including that we significantly reduced our capacity expansion plans. Separately, I think the company is also strategically looking at potential expansions overseas, outside of China, including areas in the Middle East where we're actually looking at several locations pretty actively. and then also potentially in other areas in Southeast Asia as well. So that also represents a potential use of funds for the company. So the board is also making some considerations because of that as well.

I see. So, yeah, another question I have is on the sales volume. So in terms of in the production end, actually the company has actually – or have an upside surprise in the production volume, but the sales seems lower than the production volume. She would like to know how much is the inventory right now in the company, and also in regards to the sales volume in the first quarter, was it related to the cut in utilization rate in wafer segment?

Okay, yes. I think operationally the company actually was doing very well. This quarter, I think we exclude the impact of the market condition the second half of March. I think we produced more than 62,000 metric tons, an increase over the previous quarter. So this is a pretty good improvement, particularly on the quality side. We made very significant improvements in quality, particularly in Inner Mongolia facility. So end time as of March is now north of 70% of our mix. And at the same time, we also saw further reduction in production costs. I think just such that since mid-March, the industry conditions declined significantly. I think customers delayed their orders. They delayed delivery of products. of polysilicon for production to lower the utilization in anticipation of lower polysilicon pricing, but also because of the significant wafer inventory that was occurring at the time. So actually, this situation actually persisted more or less through mid to late April. I think now we're shipping normally, but at a much lower pricing. At the end of the quarter, we had approximately two weeks, slightly less than two weeks of production of finished goods inventory. So we think that's probably one of the lowest within the industry.

Two weeks of inventory is actually quite impressive. So another question I have is on the other operating income. The QOQ change is relatively significant. So I'd like to know, is it related to the change in the subsidies provided in terms of the power tariff?

So actually, I believe we had other... So it's actually an expense for the quarter rather than the income. And then it's related to... some of the older equipment that we've replaced. So the older equipment needs to be expensed. It's longer being used. Its amount is about $1.6 million. So it's not too significant. This happens, you know, like maybe once a year or something like that.

I see. So in the first quarter, there isn't any... subsidies coming in, right? Like in 4Q.

Yeah, so we would expect some subsidy potentially in the second quarter and then more subsidy likely in the fourth quarter. Well, usually it's in the second half of the year.

I see. So I think my last question is in regards to the industry, like how do you see the poly price going forward this year and then When do you see a turnaround in the industry?

Okay. So the most recent price decline we believe actually is more of a result than the inventory adjustment that's happening, right? So customers delaying orders and with the expectations. of lower pricing in future periods, right? So people then want to take a wait and see mode. And now at the lower price, we're starting to see orders returning also at a lower level, lower pricing level. We think the pricing level where the industry is at right now is actually Money losing probably for, I would call, 70%, 80% of the industry. So I think almost the majority of the players are losing money right now, and this certainly cannot be sustainable. I think if this price does persist, it's a matter of time that a number of players will likely need to shut down or some may even exit the business or go into bankruptcy. I think we're likely to see that price data at this low level. But then that will bring the eventual capacity rationalization, right, I think that people are expecting. And at the same time, you also have a lot of opportunity on demand. So we think China is likely to be very strong this year because of where the panel price is right now. So it's offering very high return for the solar projects here in China, I think globally as well. So we are optimistic that we could see a very significant end market this year. So I think it's the balance of these two. I think timing is hard to tell. I think we could see some improvements in the second half of this year.

I see. So I think another thing is the – So let's talk about a lot of players are actually losing money. So are you going to delay your, say, 5B, or what is the cap that is going to look like in this year, especially at current prices?

So we're delaying everything else, almost everything else except 5B, because 5B is already ready to go into production because it's been under construction for... a year, or over a year. So I think 5B, we're still, at least for now, as of today, it's still being planned, as originally scheduled, you know, to start production in Q2 in this quarter, actually, initial production, and then ramp up in Q3.

So thanks a lot. I'll pass on and, yeah, I'll pass on to other investors. Thanks a lot for taking my questions.

Thank you.

The next question comes from Leo Ho with Daiwa Capital Markets. Please go ahead.

Thanks, management, for your time today. My first question is regarding the FBR granular silicon. We noticed that there are several major module makers, including, for example, Longji and GKS, suggesting that the FBR dopamine ratio, now they can do around 50% for N-type wafers. I just wonder if we can share any update on this FBR USAID situation, what's our take, and why we're seeing such an increase in the doping ratio. Thank you.

I think on the FBR, at least based on feedback from our customers, is that it continues to have levels of contaminants. and a higher surface metal and a higher hydrogen and higher carbon. So I think the challenge with most of the wafer producer is that the higher carbon content actually leads to breaking of the water salt. And then also the contamination and also the hydrogen Jumping issue means that less amount of poly can be used per run. So if you use FVR, you have a slight reduction in production yield per run on the ingot. And that's the main reason why customers require a discount and currently primarily use it as a mix. In a previous understanding, the mix is between 10% to 30%. But I think every producer probably has a slightly different mix. I think some of the main players, these players are also our customer, but I think either they want to diversify their sourcing or maybe they want to lower their costs. So they're always looking for lower costs. sources to the extent that they can use, right? So we're not surprised that they are near some kind of agreement. And these agreements are always, at least in China, almost always these are kind of framework agreements, right? So the volume and pricing is adjusted on a monthly basis.

Understood. That's accurate. My next question is regarding the price gap for different types of policy. I can say, for example, M-type versus P-type. And then also for N-type high-quality polythene that we produce against FBL, what are those price gaps going to look like right now and also looking forward? Thank you.

I think consistently the N-type poly has had price premium in the range of maybe 5 to 10 RMB per kilogram. I think currently it's somewhere in the 7 to 8 RMB. per kilogram still, even at the current pricing. While FVR is generally priced at a discount to the P-type poly, generally. FVR has different grades. But within N-type and P-type, there is also different grades, generally related to the form factor of the surface structure. Yeah, so it's not like one single price. It's usually a range of price.

And my last question is regarding electricity tariffs for our Baotou and Shihezi capacities. Would there be any electricity tax changes that we expected for this year or for next year?

No, we expect any electricity tariff adjustments on the electricity rates.

Thanks so much. That's very clear. Thank you.

Okay. I think for Xinjiang, we're expecting the rate to be very stable. I think the rate has been fixed. The previous adjustment was mostly related to, I think, a policy issued by NDRC that kind of forbid, you know, single entity type of energy price structure. And at the same time, it also coincided at a time where the coal prices was at a higher price, so our utility company actually was losing money on the power sales to us, on the power they generate. So after the rate adjustment, that's no longer the case, and we continue to have the most favorable utility rate for that local utility, for the region. It's still competitive, but we don't expect that to change or the rate to change. I think similarly for Inner Mongolia, Inner Mongolia already had an adjustment, I think around in the first half of 2023, I believe, also based on the NDRC rule. Now the Inner Mongolia rate structure is actually a market-based structure where actually the rate is not fixed. It's actually floating based on market supply and demand for the utility market. But because we buy a significant portion of our power that comes from renewables and renewable pricing utility is lower than coal for the Inner Mongolia grid. And also, we have the most preferential pricing for the whole local grid there. So we do think we have a very, very competitive utility price there. And we don't expect that to change. It's already being adjusted.

Thank you so much for the additional color. These are all from my side.

Great. Thank you.

As a reminder, if you would like to ask a question, please press star then 1 to enter the question queue. The next question comes from Phil Shen with Roth MKM. Please go ahead.

Hi, everyone. Thanks for taking my questions. Sorry about the technical difficulties earlier. I'd like to explore price just a little bit more. Can you give us a sense of pricing beyond this year as well? Do you think there could be some recovery next year? We've seen price decline recently, and some of the experts that we've been consulting with suggest that prices will continue to decline as we go through the year. So I'm wondering if you can give us a view of 2025. Thanks. Okay.

We do think pricing is probably – At the bottom, well, it's not at the bottom, near the very bottom. It's already below cash break-even price for a lot of the producers. We think 70% to 80%. We think starting in the next two months or so, we will start to see shutdowns. We're already starting to see shutdowns, and we will see more shutdowns going forward. So if this, say, persists through Q3, We think some of the producers will run into a cash problem. And then if it goes into next year, I mean, we might see an OCI-like type of shutdown, right? I think some of the investors might remember OCI shutdown in 2020. I think that was – they kind of gave up. So I think if price stays low, we will see this kind of condition. I – We don't think price can stay this low until, say, through next year. Certainly, you will have much lower production of poly. Then it's probably not sufficient to service the market. And demand grows. And then some of it, the current market condition is due to inventory adjustments. So ultimately, the downstream customers will need to restart buying again. Because they bought. probably more than they need in, say, in the first half of the quarter. And then when their expected demand or price increase did not materialize in the second half of March, that's when they slowed down or stopped ordering. So it's kind of the market behavior that's creating kind of the volatility that we're seeing in the market right now.

Got it. Thanks, Ming. And can you talk about the amount of channel inventory that's in the market now? And then do you expect that to continue to grow for the near term? And then when do you think that peaks? Thanks.

We've heard various amounts of, you call it, statistics or We've heard it's somewhere in the range of 150,000 to 180,000 metric tons right now of channel inventory. And we're a very insignificant part of that. And some of our peers, our main peers actually have a lot of inventory currently. So we'll see how that works.

Okay. And then you talked about 70% to 80% are losing money. What's your guess as to what percentage of the industry could be shut down by the end of the year? I mean, do you think it could be as much as a quarter of the industry could be shut? Well, what percentage of the industry could go out of business and maybe go away? What are your thoughts on that? Thanks. This is very interesting. ballpark. I think about half would shut down.

Okay, so half can exit the industry.

Yeah, I mean, yeah, I think capacity that's kind of in Sichuan is definitely not competitive. Capacity in Yunnan is not competitive at the current market. And then some, even some capacity in Mongolia is incompatible with the current price.

Okay, last question.

Not produced sustainably, yeah.

Okay. Yeah. Thank you. What are your thoughts on the Chinese government stepping in to influence or regulate maybe setting price caps or something like that? We were reading and seeing some potential for that for the module industry. Do you think there could be something like that for poly where the government steps in to avoid this overcapacity in the future?

We haven't heard about that at all. We haven't seen any government actions related to that.

Okay. Thank you very much. I'll pass it on.

Okay. Thank you.

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

Hi. This is Alan from J.P. Morgan. I have a lot of questions on this. the amount of capacity in the system right now, and also like the outlook in the next one to two quarters, I mean, other than you, who else would be adding capacity? That would be my first question.

Understanding the capacity in the system is around maybe 1.8 to 2 million tons per year.

And my second question is, like, how do you, what do you expect the cost structure will be with the new prime commands in the second quarter? Or for the new prime, what do you expect the new prime's cost structure will be?

Okay, I think at least as of today, okay, so we are expecting our costs to continue to decline. So I think preliminarily, because we're ramping up in the Mongolia phase two, So cost for Q2 is probably similar to slightly less than Q1. And then we think cost will continue to trend down for Q3 and Q4.

Well, I guess, like, one driver of the cost down would be the commencement of the new plan in second quarter that will be fully wrapped up in Q3, right? So do you have, like, a target for the cost structure of the new plan?

Okay, right. So I don't think we've discussed this earlier. So, you know, for the first time, in the Mongolia cost is now below our Xinjiang cost, right? I don't know if you remember. So the Mongolia cost, design was to be below Xinjiang, but was higher than Xinjiang, I think, Q3, Q4, until this quarter. Okay, also, we had very significant improvements in quality as well. So, I think that gave us further confidence that once the Mogollon phase two starts, it should be able to see similar or even better trajectory in terms of cost reduction and quality improvement. Right, because now we've done this once already, so we know where all the issues are.

Got it. Thanks. And those are all the questions.

Very great. Thank you, Alan.

This concludes our question and answer session. I would like to turn the conference back over to Anita Hsu 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 have an awesome day. Goodbye.

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