Bing Sun - CFO Gongda Yao - CEO

Good morning. My name is Ashley and I will be your conference operator today. At this time, I would like to welcome everyone to Q2 2012 Daqo New Energy Corp. earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions) Thank you. Mr. Bing Sun, CFO of Daqo New Energy Corp. you may begin your conference.

Thank you. Thanks everyone for joining us today for Daqo New Energy’s second quarter 2012 financial results conference call. Daqo New Energy issued its financial results for the second quarter earlier today. To facilitate today’s conference call we put together a PPT presentation which can be found on the company’s website. Today attending the conference call, we have Dr. Gongda Yao, our CEO and myself. The call will feature a remark from Dr. Yao, covering business and operational developments and then I will take you through a discussion of the company’s financial performance. With no further delay, I will turn the call over to Dr. Yao.

Thank you, Bing. In the second quarter of 2012, we were running our Wanzhou polysilicon plant smoothly at full capacity. We have also successfully reduced our production costs thanks to several technology improvements and the lower seasonal electricity rate. We exceeded our shipment guidance for polysilicon; nevertheless for wafer and modules we have not met the upward set in the last quarter. However, the solar PV industry continued its downward motion and the average selling prices for polysilicon wafer and module continue to go down. The international trade conflicts also negatively impacted market demands. In Wanzhou, we have a successfully conducted the several technology improvement in Q2. For example, we have Convert 2 reactors to hydrogenation furnaces to optimize the balance for the capacity of the reactors in hydrogenation systems so as to minimize the raw material costs such as liquid chlorine and the metallurgical silicon powder etcetera. Besides that we also adopted some other technology improvement and process optimization in distillation system, hydrogen recovery system and the condensation system and etcetera to further lower the cost of our production. As for the Xinjiang Phase II project, we have already completed 97% of total construction by the end of July, several units include liquid chlorine system, utility system and the TCS system and the distillation system have already have been tested and ready for pilot production; because of the improvement of technologies and equipment we will be able to achieve high efficiency and low cost in Xinjiang new plant than the facility Wanzhou. In Xinjiang, we will produce liquid chlorine by ourselves to lower the cost and secured supply. The hydrogenation system we use in Xinjiang is three times more efficient in output than Wanzhou. The new reactors are from domestic supplies with a 24 pairs compared to the ones in Wanzhou with average about 15 pairs. As for now, we have recruited more than 700 employees in Xinjiang. We also have a team consisted of most experienced engineers from Wanzhou to support Xinjiang to make sure the pilot production is successful. Additionally, the much low electricity rate will help us significantly reduce our manufacture cost in Xinjiang. With our operational experience and process knowledge in Wanzhou we are confident to achieve our original plan to start pilot production in September 2012. We expect to do our 500 metric ton polysilicon at a competitive cost in Xinjiang in the last four months of 2012. As for wafer business, in the third quarter, we expect to ship about 8 megawatts to our OEM customer. We will work with them to improve our wafer manufacture technology so as to achieve better quality with lower cost. We plan to gradually increase the utilization rate of wafer plant progressively to delever our full capacity, so that we will able to minimize the loss then breakeven and eventually obtain positive cash flow in wafer business. Recently our high quality electronic grade polysilicon has been qualified for semiconductor customer and we have obtained the first order in the second quarter, 90% of polysilicon met the standards of electronic grades. Although, the first order from our customer is not significant in terms of volume, but we think this is new opportunity for the company to expand our business to a new market with higher margin. For the third quarter of 2012, the company expected to ship about 1,000 to 1,200 metric ton polysilicon, approximately 6 megawatts of wafers, 8 megawatts of wafers OEM and 3 megawatts of modules. In addition, the company expected to provide 200 metric tons of ingot and block manufacturing outsourcing service to our customers. This outlook refers to our current and preliminary view and maybe subject to change. Our ability to achieve this project is subject to risk and uncertainties of course. I will now turn the call to Mr. Sun Bing for financial performance update.

Thank you Dr. Yao. Let’s look through the financial performance. As you can see, we only have two page of financial data in this Q2 PPT for investors. For more detailed financial data and the related analysis, you may look at our Q2 annual release and I'll be happy to answer your questions. I will first to give an overview of our Q2 financial performance and then I will discuss areas management focuses most such as gross margin, working capital and CapEx. Overview; revenue was $30.6 million compared to $34 million in the first quarter of 2012. Gross loss was $5.9 million compared to $11 million in the first quarter of 2012. Gross margin was negative 19.5% compared to negative 32.2% in the first quarter. SG&A expense were 4 million compared to $2.7 million in the first quarter, the increase from the first quarter was due to the reversal of bad debt provision totaling $1.2 million in the first quarter as a result of subsequent traction of accounts receivable. There was no such reversal in Q2. Our normal SG&A expense is about $4 million. Income tax benefit was $2.6 million compared to $1.6 million in the first quarter. The increase in tax benefits from the first quarter was due to the recognition by the tax bureau of our 2011 R&D related expense and the CapEx. Loss per share was $0.20 compared to $0.39 in the first quarter. On the balance sheet slide in summary our fixed asset increased by $9.3 million which all related to our Xinjiang projects. Our bank loan, net of bank loan repayment increased by $26.5 million and our cash decreased by $24.5 million accordingly. That’s the overview and I am now going to discuss to sum up the specific areas. First one gross margin. Our gross margin in Q2 improved compared to Q1 of 2012. Other than the seasonal decreasing, electricity rate as everyday knows our cost to increase efforts have shown some results. As Dr. Yao mentioned just now in Q2 we converted two reactors to hydrogenation furnaces. We adopted some technology improvements process optimization and distillation system and so on. The decreasing electricity rate accounted for $2.25 per kilo decrease in manufacturing cost. Technological improvement accounted for about $2 per kilo decrease. And also the increase in total output, the decrease in raw material prices also attributed to the decrease in total manufacturing cost of 42. Working capital, as of June 30, the company had $90.1 million in cash, cash equivalents and the restricted cash. In the second quarter, we received another $200 million IMB project loan from Bank of China. The total project loan from Bank of China is RMB 980 million. So far we have received 750 million in aggregate; we expect to get the remaining RMB 230 million around the end of September according to the schedule. We believe our working capital structure will improve after we receive the remaining of this project loan. Also we estimate that the Xinjiang Phase II project needs about RMB 200 million for operating capital this year. So far we have secured RMB 66 million with a Xinjiang local bank. When discussing with a couple of Xinjiang local banks, our need for operating capital, our debt reserve is under 54%. We believe we can manage Xinjiang cash flow even with large additional operating capital injection. Meanwhile we will spend more resources of accounts receivable cash and the inventory reduction to further improve our working capital structure. The summary of Xinjiang project's CapEx. The total CapEx budget for Xinjiang Phase II is RMB 2.1 billion. We've already paid RMB 1.15 billion before 2012 in aggregate. In 2012, we've already paid a total of RMB 550 million as of July 31. We plan to pay another RMB 115 million in rest of 2012. The remaining amount is 250 million which will be paid in 2013. Now, we open the call for Q&A.

(Operator Instructions) And your first question comes from Kunal Sharma with Daiwa Capital Markets.

This is [Pranav] from Daiwa. I have a couple of questions. You have indicated like your all in production cost for new plant will be $20 per kilo and currently if I see the polysilicon prices in many cases are practically the same price and some places could be lower than $20. How do you think it will be if the prices remains at $20 level, do you ever think that your Xinjiang plant will be able to make economic return to the investors? And secondly the number of pairs, of course you have said about 24 pairs on Xinjiang, but I think that the industry do have a much higher reactors in competition now, so will your reactor be ever competitive in the cost structure with your peers in Korea or even your peers in China?

Okay, so the question is if our target for Xinjiang is $20 per kilo and then the counter price is already assured for the approach to the $20, how can we make any return from the Xinjiang project? So internally we think the current situation, we have confidence that we always said we will control the Xinjiang cost will be under $20 and that’s the confidence we have by the analysis of the total cost within the cost structure as Xinjiang with CapEx and electricity rate and plus the efficiency of the system we used. Again I think the 24 pair of the reactor is competitive because basically on the calculation of the electricity usage from the reactor is more efficient than what we are using in Wanzhou. So from the data we have confidence that it’s competitive. Of course with $20 cost and the price in market is very, very tough for every manufacturer for polysilicon. But we are still working on the improvement from the Xinjiang from a design point of view to make use of all the resource and advantages in Xinjiang and we have confidence to achieve in the long run which means after six months after the production, we are trying to make cost phase lower, much lower than the $20 but I cannot give you specific numbers at this moment yet.

We got your point. Can you like enlighten me like for 24 pairs lot, how kilowatt hour you will be consuming for 1 kg of polysilicon production assuming you are operating it at full utilization rate?

I think will be much below the 20 kilowatt hour compared in current reactor with --

The 20 kilowatt hour for the CBD right, so for CBD plus hydrogenation put together how much it would be?

It is not only that because whole plant we are also using the liquid chlorine and also other things, the hydrogen. So overall we say the $20 or below is based on the assumption is, the total is 150 kilowatt hour electricity procured which is very, very conservative at this moment.

Your next question comes from Ahmar Zaman with Piper Jaffray.

This is [Sean] for Ahmar. I was wondering if you could just update us a little bit on your poly cost targets for 2013 or what you believe you can get again your cost down for your poly production.

As Dr. Yao just mentioned we target our output for [2013] next year right?

Your poly cost production targets?

Okay, and as Dr. Yao just mentioned our target for the poly from Xinjiang plant it will be definitely below $20 and our poly cost from our Wanzhou facility where we are around 25.

And could you also just give us an update on what your cash flow from operations for this quarter as well as your CapEx spent?

Yeah, for the cash flow. As I just mentioned earlier, regarding our Xinjiang projects, we have another 50 million [RMB] to-date according to our payment as scheduled for the rest of the year. And on the other hand, we expect to receive the larger piece of the projects along from Bank of China 213 million around the end of September and for Xinjiang operating capital as I mentioned, that we need about 200 million [RMB] for this year. So far we have already secured a 66 million. So we need another [RMB] of 140 million at the most for the operating cash flow for Xinjiang and we are in discussion with a couple of Xinjiang local banks we need for operating [capital] and also I mentioned our debt ratio is around 54% rather very high considering the industry average and some (inaudible) I have already showed interesting our working capital needs in Xinjiang. On the other hand, I just want to add one more point. On the other hand, we're working very hard to attract accounts receivable and lower our inventory level and is also our focus task for Q3 also. That’s my answer for that question.

(Operator Instructions) And your next question is from Ahmar Zaman of Piper Jaffray. And that question has been withdrawn. (Operator Instructions) At this time there are no further questions. And we do have a follow-up from [Pranav] with Daiwa Capital Markets.

Yeah thanks for taking my question. You have also mentioned about your business opportunity on the electronic grade polysilicon, could you remind me like what is the electronic grade polysilicon prices currently and have you ever qualified any wafer maker for electronic grade polysilicon?

Yes, so we just start this project earlier this year after first quarter and that we shipped, first time is about 100 kilo, 50 to 100 kilo that’s the first try. And then we have in the Q2, we shipped about three to four metric ton of that test. So we passed that test so very recently we ship significant volume in the Q3 and just so within this month. So the product is related to semiconductor application but we cannot reach the specific name but this is customer is big in China and I can say its not like a 300 new wafer customers it's like more is a small size wafer applications. So and the material we shift to is first grade electronic which is typical and end type so it is a 1000 ohm or above for (inaudible) qualification and of course with very low oxygen and carbon the impurities within the materials, so far the feedback is very positive and we have confidence we will stay ship this kind of position and we will have this kind of position from this year and hopefully we can have us significant contract with at least one customer if this testing first volumes process is successful.

And I just want to add one point is the price for the electronic grade I would have said at least 28% higher than the solar grade.

Yeah at this moment because the price is higher?

Yeah.

And how is the production cost of electronic grade because probably [CBD] deposition time is basically like longer right, so how do we see the cost?

Okay it's actually at this moment we are using same process because as may be we mentioned not very clearly but our total output is about 80% above is belong to the category of electronic grades. So it's not that particular. So basically we’re using the standard process. We don’t have a distinguished between electronic grade and solar grade. However, in the originally in the process, in the final product of process group, we don’t put additional attention for how to separate them because we [expand] these qualifications. So now we just increment to the new process, procedures to treat the data electronic level material is slightly different but we think almost no cost to increase. Now you mentioned the other way maybe for like for very high ends for electronic grade application such as frozen wafer furnace usage that need more cost because their gross is much slower using high electricity and that’s why our may be next project, we’re probably we are trying to do at the end of this year or next year. I hope I answered some of your questions.

That’s a very good answer. So what I understand like you will be shipping probably 2,000 tonnes to 4,000 tonnes of electronic grade polysilicon on 3Q and your ASPs is about 20% higher and your production cost is quite comparable to about $20 per kilo. That’s my understanding is correct or I am wrong?

I am not sure, I didn’t hear it's really about the volume but the cost of side is about the same and the margin is correct and I didn’t get the volume. We didn’t understand.

Volume I think is about 3,000 tonnes to 4,000 tonnes which is quite substantial actually.

No, no. We said that we made about 40% at least can [mean] to that but at this moment the shipment is very small volume, of course we are trying to increase those volumes and we don’t have target number yet for 2012 and then please understand this is just initial shipment.

(Operator Instructions) At this time there are no further questions.

Yeah if there are no further questions we will conclude today’s call and we will be happy to answer any questions you might have later on. So, thanks to everybody for joining us today. Thank you.

Thank you.

That concludes today’s conference, thank you for your participation. You may now disconnect. Thanks.