Bing Sun - Chief Financial Officer Gongda Yao - Chief Executive Officer

Wei Feng - Luminus Management Paul Strigler - Esplanade Vincent Yu - SWS Research

Hello and welcome, everyone, to the Daqo New Energy third quarter financial results conference call. (Operator Instructions) I would now like to turn the conference over to Mr. Bing Sun, the CFO. Please go ahead.

Thanks, Amy. Thank you, everyone, for joining us today for Daqo New Energy's third quarter audited financial results conference call. Daqo Energy issued its financial results for third quarter earlier today. To facilitate today's conference call we also put together a PPT presentation. Today, attending the conference call we have Dr. Yao, our CEO; and myself. The call today will feature remarks from Dr. Yao, covering business and operational developments. And then I will discuss the company's financial performance for the third quarter. After that, we will open the floor to Q&A from the audience. With no further delay, I will turn the call over to Dr. Yao.

In the third quarter of 2013, due to strong demands from our downstream customers, the actual shipment of polysilicon exceeded our original guidance by 29%. The shipment in the third quarter included 191 metric ton decrease in our inventory balance. We have already booked out all of our remaining capacity through the end of the year. In September, we signed long-term agreements with three Chinese leading wafer manufacturers with the contracted volume accounted for over 70% of our current capacity from Xinjiang facilities. As for the global solar PV installation in 2014, most of the forecast lie in the range of 45 gigawatts to 50 gigawatts, which demands 250,000 to 275,000 metric tons of polysilicon. Meanwhile, the world wide polysilicon capacities with production cost around $20 per kilo are only 200,000 to 220,000 metric ton. We believe with solar PV market continues to grow in the long run, the demand for high quality and low cost polysilicon will keep increasing. In the third quarter of 2013, it was the first time for both of our Xinjiang polysilicon facilities and Wanzhou wafer facilities to achieve positive gross margin on standalone basis. It was first time since the first quarter of 2012 that we generated positive operating cash flow on quarterly basis at the company level. Our operating cash flow improved from negative $24 million in the first quarter to negative $1.3 million in the second quarter and further improved to positive $8.8 million in the third quarter of 2013. In the third quarter, our Xinjiang polysilicon facilities achieved positive gross margin of 11.9% on standalone basis. In October, our total production cost for polysilicon was reduced to $15.16 per kilo. We are currently in the final stage of 6,150 metric ton expansion project. We will start a trial production by end of November and our total production cost will be low to about $14 per kilo level when we complete the trail run. In the fourth quarter of 2013, we expected that our Xinjiang facility will breakeven and the gross margin will be further improved about to 15% level. To best leverage our technical expertise and our advantage for low utility cost in Xinjiang, the board has officially approved our plan to further expand our capacity in Xinjiang from 6,150 metric ton to 12,000 metric ton. We expect to complete the project and start pilot production by end of 2014. Our cost will be further reduced to level of the $12 per kilo when we fully ramp up the capacity. In the third quarter, our wafer facility achieved positive gross margin of 2.1% in standalone basis. We remain on target to increase the monthly capacity to 6 million pieces in December, and we expect our wafer facility to achieve high-single digit gross margin in the first quarter. As for the shipment outlook for the fourth quarter, we expect to ship about 12,000 metric ton of polysilicon and 13.5 million pieces of wafer. We do not expect to ship the multi-crystal silicon ingot and blocks, which instead will be used internally for wafer slicing. I will now turn the call to Mr. Sun Bing for the financial performance update.

Thank you, Dr. Yao. Let's go through the financial performance. Note that in order to enhance the transparency of the company's financial disclosure, starting from Q3, the company will provide a statement of cash flow and EBITDA data. We hope this could help the readers to get a better picture of our financial status. Revenue was $29.6 million compared to $27.8 million in the second quarter. The company generated revenue of $22.9 million from polysilicon sales compared to $16.4 million in the second quarter. The increase from the second quarter was primarily due to the high sales volume and higher average selling prices. The company also generated $6 million from sales of wafers, compared to $7.1 million in the second quarter of 2013. The decrease from the second quarter was primarily due to the slight lower sales volume. The company also generated $700,000 from other business. Gross loss was $3.9 million, compared to $10.2 million in the second quarter. Gross margin was negative 13.3%, compared to negative 36.7% in the second quarter. Gross margin improved from the second quarter primarily due to the increased sales volume, higher ASP and the reduced production cost for polysilicon. Excluding costs related to the polysilicon operations in Wanzhou, the non-GAAP gross margin was 9.8% in the third quarter, compared to negative 3.9% in the second quarter. On standalone basis, Xinjiang polysilicon facilities achieved positive gross margin of 11.9% and Wanzhou wafer facility achieved positive gross margin of over 2%. SG&A expenses were $3.8 million, compared to $6.2 million in the second quarter. The decrease in SG&A expenses from the second quarter was primarily due to the higher bad debt provision in the second quarter. As a result of that, operating loss was $5 million compared to $175 million in the second quarter. Operating margin was negative 16.8%. Excluding costs related to the polysilicon facilities in Wanzhou for both the second and third quarter, and excluding long-lived assets impairment charge in the second quarter, the company's non-GAAP operating income in the third quarter was positive $1.9 million, compared to non-GAAP operating loss of $7.4 million in the second quarter of 2013. The improvement in operating margin was due to the three factors: first, the improvement in gross margin as a result of the increase in ASP and the reduction in manufacturing costs; second, the decrease in SG&A expenses; and third, the increase in other income. Net loss attributable to Daqo New Energy shareholders was $10.3 million in the third quarter, compared to $34 million in the second quarter. Earnings per fully diluted ADS were negative $1.49 in the third quarter, compared to negative $4.91 in the second quarter. EBITDA for the third quarter is $6.8 million. Financial conditions. As of September 30, the company had $19.5 million in cash and cash equivalents and restricted cash, compared to $10.8 million as of June 30. Accounts receivable balance was $11.8 million, compared to $16.5 million as of June 30. As of September 30, total borrowings were $262.6 million, of which $137 million were long-term borrowings, compared to total borrowings of $266.1 million, including $144.4 million long-term borrowings as of June 30. Cash flows. For the nine months ended September 30, the year-to-date net cash used in operating activities is $16.8 million, compared to $9.5 million in the same period of 2012. In the third quarter of 2013, it was the first time since the 2012 that we achieved positive operating cash inflow on quarterly basis. The operating cash flows have improved consecutively from negative $24.3 million in the Q1 to negative $1.3 million in Q2 and further improved to positive $8.8 million in Q3. The improvement of $10.1 million in operating cash flow from Q2 to Q3 was mainly a reflection of the improvement in our bottomline, which was due to the lower production cost, higher sales volume and higher ASP. And now we will start our Q&A session.

(Operator Instructions) Our first question comes from Wei Feng, Luminus Management Wei Feng - Luminus Management: Just one question. To bring on the other 6,000 metric ton in the year 2014, what is the CapEx?

We were using from Wanzhou facility the equipment and plus the cash investments that will be around CNY600 million to CNY700 million. Wei Feng - Luminus Management: So roughly a $100 million.

Right. That's the additional investment to fund in addition to the equipments we are using from Wanzhou. Wei Feng - Luminus Management: So well, likely you should be able to fund this using your own operating cash flow, right. Is that a fair estimate?

It is from the current and largest shareholder, which is Daqo Group at this point. Wei Feng - Luminus Management: The CapEx funding will come from the mother company?

Yes. The parent company, yes. Wei Feng - Luminus Management: Basically it's a private placements for equity?

No. It's basically the shareholder loan. Wei Feng - Luminus Management: And then during the ramp up, what is your thought on the total production in 2014, between starting of the year 6,000 tons through end of the year 12,000 ton?

Actually, the 12,000 metric ton is the capacity we view that by the end of 2014. So there was no additional quantity we'll produce upon the expansion. So we're expecting that 2014, our total production will be around 6,100. That's the total capacity we have. Wei Feng - Luminus Management: And what is the depreciation per kilo cost in your $15 cost?

So it's around like $4 roughly. It's more than $4. Wei Feng - Luminus Management: And that will be similar to the new 6,000 ton that will be the similar level?

No, we want it to reduce. We're expecting to reduce from the $4 to like a $3 level. And because afterwards we need to evaluate the capital used from our older facility and plus new investment, so we're expecting the total spending from 6,000 it should be similar or lower, actually lower than the original 6,000 investment in Xinjiang facility. Overall, CapEx should be reduced as on current level. Wei Feng - Luminus Management: So you will move the facility, most of the equipment from Wanzhou, your old facility, old plants. And so looks like it really take one year to just move the equipment over or do you have to do some other construction and connect to the blade and everything?

Yes. We do expect some miner construction work, but it's much less when compared with others and original 6,000 metric ton construction and that's the greenfield. We do not need to do the additional office buildings, et cetera. So we are expecting on some area we need to build there some buildings in this plant. Wei Feng - Luminus Management: So I'm trying to figure out, if there is a possibility that you can actually accelerate the construction, if say next year the demand is fair and the price is going higher and you want catch the price?

Actually, that' the best we can do is really looking on the details. We just right now are just starting to, as the board approve today, and then we go ahead with design work with our design institute partners. The time schedule actually is quite tight. As we need to avoid also the Xinjiang extreme weather, during winter time. And we have like effectively only have, about seven to eight months forward to onsite construction. And that's the schedule we phase right now. Wei Feng - Luminus Management: And is there any other of your peers are extending capacity, say cost profile in Xinjiang province?

Not really. But we do know of course another manufacturer of polysilicon in Xinjiang is trying to ramp up their existing phases. We do expecting to we'll fully ramp up by this year, and we do not have any further expansion in next year. Wei Feng - Luminus Management: And we heard some of the newer capacity extension in Mongolia. Are those cost structure competitive to yours in Xinjiang province or they're probably higher than yours?

We do not know exact in our significant capacity of other areas. As we know major capacities for several companies well known, and we do not see much volume increasing compared with the first half of 2013. And we're expecting around maybe 40,000 metric ton produced in second half of 2013 from China, and first six months around 30,000 metric ton. I think the major increasing is from two manufactures in Xinjiang area. And therefore, I do not see any other significant increase in production in the Mongolia area. Wei Feng - Luminus Management: And last question from me. Can you give us some color on your thought on 2014 ASP trend seasonally? Like for example, 1Q, what do you expect 2Q, and 3Q and 4Q.

So long-term I think we do not see much increase in pricing for the polysilicon, because I believe every producer for polysilicon like us is trying to reduce their cost significantly compared with current level. And of course, every different producer has faced different difficulty or challenges. But at this moment we look at supply and demand and we see 2014 is tight in the supply side, first time in last two years. And as a forecast for installed solar, it's about 45 gigawatts, so that in terms of polysilicon is around 250,000 metric ton. And as we know that for [ph] semi SMG Group data is coming to level and the worldwide production is around 200,000 metric ton. So there is additional 50,000 metric ton increase than needed. There is only two ways to that is those existing producer polysilicon further reduce their production cost and the other way is to see the price maybe slightly increasing in next year somewhere maybe in the second quarter or first quarter to encourage some additional capacity needed to be released. As you know for Daqo New Energy, we do not have any new capacity that can be released in next year. So hopefully some other producer will release their capacity, when the ASP is favorable for their production cost. Wei Feng - Luminus Management: And so implying the price, it's close to $20?

So we do not exactly know, this is what we have to say, but I think as you see the most manufacturers worldwide is their overall cost is higher than the current ASP, which is about $19, that is [indiscernible]. In order for them to release more capacity, obviously, either they'll reduce the cost in next year or their ASP need to be higher, otherwise they will not produce more because they were losing more money, if they don't have key to see their cost down or ASP high. So it's hard to say for this moment, but we do maybe will see some the price pressure, because the supply is tightened. And especially for end of this year we see very tightened supply in China polysilicon.

And our next question comes from Paul Strigler of Esplanade. Paul Strigler - Esplanade: Couple of quick questions. One, just on the non-controlling interest it used to be a very large number, now it's obviously negative, because I'm assuming you've written down the assets that DQ Group, sort of partially own. Is that going to change in the future with the new polysilicon plant or is it fair to basically say the non-controlling interest shouldn't be sort of -- it's a non-issue, I guess going forward?

To answer your question, Paul, yes, it's a non-issue going forward. And you are absolutely right, because in Q2 we had fixed asset impairment and reduced significantly fixed assets under book of this non-controlling interest. So in future there will only be minor impact on the balance sheet, beside that there would be no impact on the P&L side, it's a non-issue. Paul Strigler - Esplanade: So if we were to evaluate DQ on an enterprise value to EBITDA basis, we should calculate the enterprise value just with your debt on the balance sheet, net the cash out, but don't include the non-controlling interest, because DQ Group, those assets are no longer economic or shouldn't be factored into your enterprise value?

I guess you are looking at VIE entity. It is VIE entity, which was consolidated in accordance with the U.S. GAAP. Paul Strigler - Esplanade: And then just on your expansion, the math you did, so it seems like you guys are going to -- obviously, you're moving some equipment from Chongqing over to Xinjiang, but it looks like its about $17 per kilogram to expand. And it looks like even at today's cost you could probably make about $4 per kilogram in operating profit. So is it fair to say that you expect at least the 25% return on capital for this new plant? Is there any math like that that you guys walk through during that sort of planning phases in terms of return on sort of your investment, what will you guys target?

So we target our operation cost or the manufacturing cost is below $12. And based on that, and of course, we still are in the design phase, so we will finalize our capital investment to probably within this year. And we have a much better looking picture of our -- and depreciation will be, and then we can give to the either [indiscernible], because we try to maximize using the effective equipment for our Wanzhou, Chongqing facility across that. Paul Strigler - Esplanade: So just following-up on Wei's question, if you guys are at a $12 production cost, and let's say, your depreciation is between $2 and $3 on the new plant, that means your cash cost will be well below $10. Is that a fair projection?

Yes, that's correct. Because if you noticed in our announcement earlier today, our utility cost were further reduced by 3%, as a new amended agreement with local government. Paul Strigler - Esplanade: So just trying to make sure I understand correctly. So if this is a 6,000 ton expansion, and if current prices hold at about $19, you guys will be making sort of more than $9 in EBITDA per kilogram produced at the facility. I guess, less net of your small OpEx, but you guys should be able to sort of generate between call it, $7 and $9 per kilogram in EBITDA from the new plant?

Yes, that's how we project it, yes.

Our next question comes from Vincent Yu of SWS Research. Vincent Yu - SWS Research: This is Vincent Yu calling from SWS Research. So first off, congratulations on seeing your operating cash flow return positive for the time. I have several questions here. The first question is that in terms of the shareholder loans, what is the financial cost currently from them, I mean from your capacity of 6,000 metric ton, is the first question? The second question is that I'm hearing some rumors here, seeing that the poly price will kind of surge for the next month because some major player in China is doing some kind of capacity restrictions to, maybe they're going to reduce their supply to the poly. So what is your view on this one? And further, what is your view on the price for the next year? Previously you all said that the poly price will maintain stable like $19, $20, but I'm trying to catch up in the kind of industry momentum, because everybody is seeing that the solar in year '14, is over 45 gigawatt globally. So what is your view on that? And another thing that I'm seeing is that you had another kind of new thing that our Vice Chairman, Li Yuanchao visited your company in Xinjiang, and then your electricity cost was reduced by 3%. Can we further expect in the favorable use from these and the government seeing, is there any further subsidies from governments and any further kind of support from the local governments? So this is my questions.

Vincent, I'll answer the first part of your question, which is short one. I'll kick the remainder of the question to Dr. Yao. Regarding your question on the interest charge from the loan from the DQ Group, now DQ Group will not charge any interest on those project loan.

So follow-up up to the pricing. Actually, in the first quarter what we can say right now is that we see a small increase in the polysilicon price in November compared with October and September. Although, we do not know exactly it looks like, December prices will be at least as same as November, if not increasing as we know. And our volume, as we said in the conference, our volume for December is booked out totally. And we maybe have like a shortage of the supply in order to meet all the orders in December. Looking forward again, in the 2014, we believe the t supply of polysilicon will be fairly shortage compared with demanding, if the demanding 45 gigawatts is true, by looking at global supply cost of structure of polysilicon, and assuming the price as keeping the $19 and then again the shortage is obvious. So this is a challenge for the whole industry. And regarding the government support, I think Chinese Vice President visited our plant and indicated that strategically the government is supporting the high utility consumption projects like a high polysilicon manufacture is favorable and preferred by government to encourage us to expand in Xinjiang area and that's the clear signal. Secondly, in China, there are many policies that will be encouraging company's consolidating, existing in the high utility cost area to Xinjiang area. So our expansion of 6,000 metric ton project, it will be fully supported by all levels of Chinese government at this moment. Therefore we believe we will continue gather support for this project as same as our initial project in the Xinjiang. And we also heard that next year Chinese installed PV solar panel would be usually increasing from 2013, especially from the eastern region areas. So in all I think that the outlook for 2014 is a very bright for the solar industry. So I wish I answered your question, Vince. Vincent Yu - SWS Research: In terms of the planned demand, what is your projection like 10 gigawatts or 12 gigawatts for '14? What is your projection for next year for China, I mean demand?

I think China's target is about 12 gigawatts or above. I think as of this moment, as a consensus for many sources from such as [ph] Solarbuzz and an internal China, the government indication next year is the target will be higher than 2013. Vincent Yu - SWS Research: I have an additional question, in terms of new capacity of the additional 6,000 metric ton, what are you customer base in terms of that? Are others products are being signed on some kind of additional contracts with the customers? So what do you cover in customer base in terms of that one?

So at this moment we do not rush to sign those contract yet. Typically we probably would do at middle of the next year, when our project is about to conclude and we will sign those volume contract with most likely with the Chinese customers. But good news is we do not have enough capacity as of today to answer our customers' requirements to sign additional contract. As you know, we published the announcement about our signed long-term contract with three key customers, wafer customers in China. And after that we have many customers who want to establish a long-term relationship in terms of polysilicon supply. However, we do not have more capacity to sign such agreement. Preferably, probably we will wait until middle of next year to sign additional volume contract for 2015 and afterwards with our key customers in China.

Our next question comes from [indiscernible].

I heard one of your major competitor is using a new technology named FBR. Do you think that this new technology will impose a threat to your business? And what's your forecast of the production cost of this new technology?

So this technology is well known. And just thinking [indiscernible] it's well-known that their cash cost for that technology is around $10 to maybe $13, it's a variation. However, the technology require significant experience and knowledge to building large FBR facilities. As you know, it's not ready to sell equipment that you can buy in the market, you have to design and optimize and operation by yourself. So without certain experience, it's hard to say, which kind of cost you can do. But in addition, I think more importantly this polysilicon is particularly from FBR is not highest quality polysilicon you can use in for our industry use, because of certain metal contamination it's being inevitable. And also the purity and any type of gas inside the solid, and et cetera, it not can be used purely for the downstream customer and also reduced the cost today. The mix, granular polysilicon for FBR with the polysilicon producer using modified Siemens method, so its a mixed in order to reduce cost. So that's all I can say about it, and I have no knowledge to judge any competitor using FBR and how they can do that or how low the cost they can achieve, because all my knowledge is for existing manufacture for IEC plant in the Moses Lake. I don't know if I answered your question.

So what is the current price of the FBR polysilicon?

It typically is $3 or $4 lower than the grade 1 of solar silicon we sell, and the consumer market is between $18 to $19 in domestic China market.

So $4 lower?

Yes, typically.

And the last question is that in a typical order from your client, what is the proportion of the prepayment?

Well, this year we've signed a contract, there is no prepayment. Actually, we do require to pay before we ship. So there is no prepayment. And if we sign the contract, like we signed a contract in 2008 and 2010, and even 2011, we do signed several contracts with certain prepayment. But at this moment I think as you know the environment is totally changed, so there is no contract we signed in 2013 with prepayment.

Our next question comes from [ph] Darrell Colbert, Private Investor.

I'm wondering, the price of your stock has gone from 12 something to in the 40s. And I understand that's probably because of the signing of your new contracts. Is that a fair projection in price for your stock? And why is the stock after it's reached its level right now, so volatile?

We do not comment on the stock price. So we'd love to answer any question regarding our operation and our company performance, and our business. And I'm sorry for that.

We have another question from Wei Feng of Luminus Management. Wei Feng - Luminus Management: Just one follow-up, I forgot to ask. What is your maintenance CapEx, once you've reached to 12,000 ton capacity?

Maximum CapEx? Wei Feng - Luminus Management: No maintenance sustaining CapEx.

Maintenance? Wei Feng - Luminus Management: Right.

Maintenance typically is around 1% in our total cost structure. And because it's the expansion phase, we use some used equipment for sale. I think I do expect to slightly increase, but I will not see more than 2% in our total cost of structure.

I just wanted to add a comment. Maintenance expense is already included as part of the manufacturing cost.

Yes, there is no additional category. It's our manufacturing cost. Wei Feng - Luminus Management: So I would expect then, in your cash flow, once you've reached 12,000 ton by the end of 2014, in 2015's cash flow there is no new CapEx, if you are not expanding?

Yes, you are right. I am sorry, maybe we misunderstood your question. So yes, CapEx for mainly 2014, we do not have additional one planned in today for 2015 and afterwards.

At this time, we show no further questions. I would like to turn the conference back over to Mr. Bing Sun for closing remarks.

Thank you all, again. And like always, if you have further questions, so you can always feel free to contact me directly or contact our Senior IR Manager, Kevin He. And we will be willing to answer any of the questions you may have. Thanks again for your participation today.

Thank you. Bye.

Bye.

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