Daqo New Energy Corp. Q1 FY2020 Earnings Call

Good day. And welcome to the Daqo Energy First Quarter 2020 Results Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Kevin He, Investor Relations. Please go ahead.

Hello, everyone. I'm Kevin He, the Investor Relations of Daqo New Energy. Thank you for joining our conference call today. Daqo New Energy just issued its financial results for the first quarter of 2020, 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. Longgen Zhang, our Chief Executive Officer, and Mr. Ming Yang, our Chief Financial Officer. The call today will feature an update from Mr. Zhang on market and operations, and then Mr. Yang will discuss the company's financial performance for the first quarter of 2020. 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 the industry growth, are forward-looking statements that are made under the Safe Harbor provisions of the US 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 statements. Further information regarding these and other risks is included in the reports or documents we have filed with or furnished to the Securities and Exchange Commission. These statements only reflect our current and preliminary views 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 will occasionally reference monetary amounts in US dollar terms. Please keep in mind that our functional currency is the Chinese RMB. We offer these translations into US dollars solely for the convenience of the audience. Without further ado, I now turn the call over to our CEO, Mr. Zhang. Please, Longgen.

Thank you, Kevin. Hello, everyone. Thank you for joining our conference call today. We are pleased to report an outstanding quarter with excellent financial and operational results. I would like to thank our entire team for their hard work and dedication to make these outstanding results possible despite the outbreak of COVID-19 in China in January and the subsequent domestic lockdown and travel restrictions that created a particularly difficult environment for securing raw materials, managing onsite operations, and facilitating product shipments and logistics. We overcame these challenges successfully and operated at full capacity during the quarter. The company produced a record volume of 19,777 metric tonnes for the quarter and sold 19,101 metric tonnes of polysilicon. Thanks to growing economies of scale, significant savings on energy consumption, and improved operational efficiency, our total production cost decreased to $5.86/kg during the quarter, a decrease of 8% from $6.38/kg in Q4 2019. Our cash cost during the quarter also decreased to $5.01/kg, down from $5.47/kg in Q4 2019. In addition, we continued to make improvements in quality and were able to sell approximately 95% of our products to mono wafer customers. All in all, we are very proud of the achievements we made in expanding production volume, optimizing our cost structure, and enhancing quality within only two quarters following the start of Phase 4A pilot production. Our exceptional results this quarter reflect the strong capabilities of our Xinjiang facilities at full production following the completion of the Phase 4A expansion project. We believe this also demonstrates our extensive experience and expertise in polysilicon manufacturing and further solidifies our position as a global leader in the industry. Despite the challenging market environment, we successfully expanded our gross margin by further optimizing our cost structure during the quarter. Gross margin during the quarter was 33.5% compared to 29.5% in the fourth quarter of last year. An expanding gross margin and increasing sales volume resulted in $63.1 million in EBITDA, up 39% sequentially, and $37.7 million in adjusted net income, up 53.5% sequentially. Towards the end of this quarter, the spread of COVID-19 globally and related lockdowns, particularly in the US, Europe, and certain other emerging markets, resulted in significant disruptions to end market demand for solar PV products. This has created short-term market uncertainty and volatility across the solar PV industry during the second quarter, with significant impacts to our customers' orders and pricing. Fortunately, the spread of COVID-19 has begun to ease in May and things are gradually returning to normal across all walks of life, particularly in China. We expect to see some rush orders from solar PV developers in China for legacy projects delayed from last year in order to meet the grid connection deadline set for the end of June. However, a recovery of demand from markets outside of China is critical going forward as overseas markets currently account for approximately 75% of total global solar end market demand. With many economies beginning to reopen, we expect to see a gradual recovery of solar PV demand in the third quarter as the impact from COVID-19 fades over the next two to three months. We are optimistic that the long-term solar PV growth prospects remain intact despite the near-term challenging market environment as solar PV energy continues to attract investors seeking to benefit from lower costs and interest rates. We're also confident in our ability to navigate this challenging environment, leveraging our competitive advantages in product quality and cost structure. Now, I will discuss outlook and guidance for our company. We are currently conducting scheduled annual maintenance for part of our Xinjiang facility. Our facility has grown significantly over the years. For this year, we will be conducting annual maintenance by project phases on a rolling basis, starting with early phases of the Xinjiang facilities, which had conducted its previous scheduled maintenance in the second quarter of last year. As such, we expect to produce approximately 13,500 metric tonnes to 16,500 metric tonnes of polysilicon and to sell approximately 14,500 metric tonnes to 15,500 metric tonnes of polysilicon to external customers during the second quarter of 2020. For the full year of 2020, the company expects to produce approximately 73,000 metric tonnes to 75,000 metric tonnes of polysilicon, inclusive of the impact of the company's annual facility maintenance. This outlook reflects Daqo New Energy's current and preliminary view as of the date of this press release and may be subject to change. The company's ability to achieve these projections is subject to risks and uncertainties. Now, I'll turn the call over to our CFO, Mr. Yang, who will discuss the company's financial performance for the first quarter of 2020.

Thank you, Longgen. And hello, everyone. Thank you for joining our call today. I will now discuss the company's financial performance for the first quarter of 2020. Revenues were $168.8 million compared to $118.9 million in the fourth quarter of 2019 and $81.2 million in the first quarter of 2019. The increase in revenue was primarily due to higher polysilicon sales volume. Gross profit was $56.6 million compared to $35.1 million in the fourth quarter of 2019 and $18.3 million in the first quarter of 2019. Gross margin was 33.5% compared to 29.5% in the fourth quarter of 2019 and 22.6% in the first quarter of 2019. The increase in gross margin was primarily due to lower production costs. For the first quarter, our average total production cost was $5.86/kg, a decline of 8% as compared to the fourth quarter of 2019 production costs of $6.38/kg. With full production of the Phase 4A project and an optimized production process, we were able to achieve a cost structure that was better than our original plan. In particular, we achieved a per unit electricity usage reduction of approximately 7% compared to the previous quarter and a reduction of approximately 10% as compared to Q1 last year. Cost reduction also benefited significantly from economies of scale. Selling, general and administrative expenses were $8.9 million for the quarter compared to $8.5 million in the fourth quarter of 2019 and $7.9 million in the first quarter of 2019. SG&A expenses during the quarter included $4 million in non-cash share-based compensation costs related to the company's share incentive plan. R&D expenses were $1.7 million compared to $1.7 million in the fourth quarter of 2019 and $1.3 million in the first quarter of 2019. R&D expenses can vary from period to period and reflect R&D activities that take place during the quarter. R&D projects this quarter include new research projects for removal of both impurities from the production process, the reduction of metal contamination to enhance our products' quality. As a result of the foregoing, income from operations was $45.8 million compared to $30.1 million in the fourth quarter of 2019 and $9.1 million in the first quarter of 2019. Operating margin was 27.1% compared to 25.3% in the fourth quarter of 2019 and 11.3% in the first quarter of 2019. Interest expense was $6.3 million compared to $3.9 million in the fourth quarter of 2019 and $2 million in the first quarter of 2019. EBITDA from continuing operations was $63.1 million compared to $45.4 million in the fourth quarter of 2019 and $19.9 million in the first quarter of 2019. EBITDA margin was 37.4% compared to 38.2% in the fourth quarter of 2019 and 24.5% in the first quarter of 2019. The income attributable to Daqo New Energy shareholders was $33.2 million in the first quarter of 2020 compared to $20.1 million in the fourth quarter of 2019 and $6.6 million in the first quarter of 2019. Earnings per basic ADS was $2.37 in the first quarter of 2020 compared to $1.45 in the fourth quarter of 2019 and $0.50 in the first quarter of 2019. Now, I will discuss the company's financial condition. The company remains in solid financial condition and has ample liquidity to meet its operational requirements and financial obligations. As of March 31, 2020, the company had $120.8 million in cash and cash equivalents and restricted cash compared to $114.4 million as of December 31, 2019 and $113.7 million as of March 31, 2019. As of March 31, 2020, the notes receivable balance was $4.4 million, compared to $5.6 million as of December 31, 2019 and $0.7 million as of March 31, 2019. As of March 31, 2020, total bank borrowings were $265.6 million, of which $149 million were long-term bank borrowings compared to total borrowings of $280.1 million, including $151.5 million of long-term borrowings as of December 31, 2019. For the three months ended March 31, 2020, net cash provided by operating activities was $31.1 million compared to $48.5 million in the same period of 2019. For the three months ended March 31, 2020, net cash used in investing activities was $12.9 million compared to $38.6 million in the same period of 2019. The net cash used in investing activities in 2020 and 2019 was primarily related to the capital expenditures on Xinjiang Phase 2B and Phase 4A polysilicon projects. For the three months ended March 31, 2020, net cash used in financing activities was $10 million compared to net cash provided by financing activities of $7.2 million in the same period of 2019. And that concludes our prepared remarks. We will now open the call to questions from the audience. Operator, please begin.

Thank you. The first question today comes from Phil Shen of ROTH Capital Partners. Please go ahead.

Hi, everyone. Thanks for the questions. The first one is on pricing. I was wondering if you could comment on for monos poly pricing, what you see for Q2 and also Q3. Pricing has, obviously, come down this year due to COVID demand destruction. A couple of months ago, on the Q4 call, you suggested that pricing could dip in Q2 and then there could be a rebound in pricing, as high as $11 to $12 a kilogram, I believe, in Q3 and Q4. But what's your latest view? And do you see – what's your latest view by quarter in Q2, Q3, and Q4? Thank you.

Thank you, Philip from ROTH Capital. This is Longgen. I think if you look at our Q1 ASP, it's $8.79. Compared to Q4 last year's $8.70, it's slightly increased. The reason is because, you see, I think in Q1, even though China was hit by COVID-19 in January and February, most of the factories were still running. So, I think the orders to downstream clients, especially LONGi and Jinko, still kept our Singapore factory running. So, we overcame all the challenges and continued shipping goods to them. I think starting at the end of March, especially beginning in this month, I think the reason is because the US and Europe faced COVID-19 which caused market-wide restrictions, travel restrictions, and factory shutdowns. I think all the downstream market demand suddenly stopped. This pushed back demand for wafers, cells, and even silicon dramatically. Today, we also face a lot of challenges. However, we strategically signed long-term contracts with LONGi and Jinko, especially LONGi. During Q1's difficult time, we still supplied to our big clients. They were also very supportive in the second quarter. Looking ahead, we believe the prices we see in Q4 are around $7.20 to $7.50. In May, we see the price continue to decline to $7 to $7.20. We think that many polysilicon companies are losing money right now. All the competitors, even tier-one competitors, may have to shut down due to annual maintenance or reduce their capacities, running at a discount. Therefore, we believe that May and June are the lowest quarters for silicon prices. For Q3, we expect prices to rebound to $7.50 to $7.80. In Q4, we hope to return to normalcy at $8.50 to $9 because that's the industry average gross margin, which is around 25%. The ASP is around $9 to $8.50. It's worth noting that in Q1, our monosilicon accounted for almost 95%, which is why our ASP stands at $8.79. If you look in detail, the monosilicon price in Q1 is actually $8.97. Compared to last quarter, it’s slightly down from $8.99.

Great. Thank you, Longgen. I think on the Q4 call, you talked about being 72% booked for 2020 production and perhaps leaving 10% to 15% for the spot market. Where are you now after being done with Q1 and through much of May?

Okay. Our sales pipeline is still very good. Today, if I count our sales book, our inventory is a negative 3,000 tonnes. Basically, this month, the big clients like LONGi are exceeding our original long-term contract expectations. Sales, to us, are not a big issue. The big issue is the price. We’re also under annual maintenance one by one, rotating across the Production line. We have five production lines. Looking at our guidance, we are still running full capacity, aside from the maintenance production line. We're selling everything we produce, and making an effort to eliminate any ending inventory by Q4.

Okay, got it. And can you comment about the inventory downstream? How much polysilicon inventory is with your clients? I know it sounds like you're selling everything, but is there oversupply from or too much inventory in the channel or at your customers from other suppliers, for example?

Basically, Philip, I might have a different opinion from you. The reason is that the end market demand for modules suddenly stopped. LONGi took advantage, together with Jinko. They are using their inventory of silicon products as raw materials. So, let's say, suppose for April contracts, we were supposed to sign contracts on March 20. They delayed signing contracts to make zero inventory. This delay in contracts has affected our operating cash flow, as the advance cash from our clients, especially LONGi, was pushed back from March 20 to April 15. Therefore, right now, the downstream inventory of silicon materials is very low, almost only one or two days of inventory. For instance, Jinko has nearly three days' worth of orders from us. So, they are maintaining a low inventory because the silicon price continues to decline and the downstream demand is weak. When the market rebounds, it is uncertain. I think that the silicon price has been largely affected by the demand side. We are a chemical company that continues production. While we see some of our competitors have inventory, most of the surplus is in multisilicon, which is unsellable. For monosilicon, there is little excess inventory. We believe that silicon prices will recover in Q3.

Great, that's really helpful color. Thank you, Longgen. One other question if you don't mind. What's your outlook for your cost structure? You delivered a very strong Q1 cost structure. How much more can that come down in Q2? What do you expect it to be relative to Q1 and Q2 as well as Q3?

Okay. Basically, if you look at our Q1 cost of goods sold, it has almost dropped down by $0.50. The majority of the cost decline is due to utility and electricity savings of almost $0.31. Additionally, accessory materials and salaries accounted for $0.13/kg and $0.08/kg, respectively. Adding these up, Q1 was our full-capacity running quarter at nearly 19,777 tonnes. For Q2, because of maintenance, we don’t expect costs to continue declining. The only item that may decrease in Q2 is silicon metal powder. Thus, we believe that Q2 costs may remain similar or even increase slightly.

Great. Thank you very much. I'll pass it on. Thank you, Longgen.

Okay. Thanks, Phil.

The next question comes from Gary Zhou of Credit Suisse. Please go ahead.

Hello, management. Thank you for taking my questions. So, my first question is on the demand side. What does management expect for the China demand this year and how much for the ex-China demand and whether the management has any expectations for next year? Thank you.

Okay. I feel very optimistic about the Chinese market in the solar industry this year. The reason is that China may have been affected by COVID-19 in January, February, and March. By the end of March, almost all factories were back in operation. I think the grid connection rush will drive demand to around 40 to 45 gigawatts this year. Distributed solar power improvements will also contribute. For markets outside of China, there is some uncertainty related to how fast the US and European markets will recover. If they bounce back in May or June, then we can expect improvement in the third quarter. However, for the rest of the world excluding China, I forecast around 70 gigawatts this year. Therefore, globally, I project a total demand of around 105 to 115 gigawatts this year. Next year, I am confident that with lower module prices and further reductions, we could see global demand reach about 115 gigawatts.

Yeah. Thank you very much. My second question is on the finance cost. I noticed that in the first quarter, your company's interest expense was relatively higher on a quarterly basis. Is there any reason behind that and what is our expectation for the full year? Thank you.

There were two parts related to it. First is from a higher debt balance and also higher bank fees related to notes payables and notes receivables, specifically from Chinese bank notes. Also, in the fourth quarter, since we were at the end of our construction period, some interest costs for new construction projects were capitalized. However, in Q1, the project's been completed, leading to no capitalization. That’s the main difference. Looking forward, interest expense will be approximately $5.5 million to $6 million per quarterly run rate.

Okay, thank you. So, my last question is around the capacity expansion. Can management share with us whether there's any current plan for further expansion and when we can expect to have further clarity on that? Thank you.

Regarding Phase 4A, even now that we are running smoothly, we still have some unpaid CapEx for around RMB 600 million to RMB 700 million. We also face price declines in Q2. We want to maintain a healthy balance sheet, so we won't consider any expansion this year. However, as our financial statements continue to improve, we will reassess whether we should pursue expansion on the 4B project.

Okay, yeah. Thank you very much. That's all my questions. I will pass on. Thank you.

Great. Thank you, Gary.

The next question is from Jeffrey Campbell of Tuohy Brothers. Please go ahead.

Good morning. I guess good evening. At a high level, your forecast for 2020 volumes was 73,000 to 75,000 metric tonnes. I was just wondering, first, how does this compare to your pre-COVID expectations? And second, do you have any sense of preliminary 2021 outlook, again, relative to pre-COVID expectations and the world we're in now? Thanks.

Actually, the production forecast has not changed before or after COVID in terms of total volume. What we're doing is due to the impact of the market for polysilicon. We anticipate a recovery towards the end of this year, specifically in the second half. To accommodate this, we are conducting annual maintenance ahead of our original plan, which shifts production volume between quarters. In Q2, we will be producing slightly less and will produce more in the second half of this year. Our total sales volume is expected to remain similar to our production volume due to strong customer demand. For 2021, our outlook is that overall end market demand is likely to improve significantly compared to this year with market recovery.

Additionally, I want to add a comment. Currently, we aim to reduce inventory by the end of Q2. Even with declining ASPs, we don’t want to accumulate any inventory. That's why we decided to move the annual maintenance ahead. In Q3 and Q4, we expect our production capacity output to return to levels seen in Q1. Hence, we are maintaining our whole year guidance.

That's very helpful.

We believe Q3 and Q4 ASP will also recover.

No, that's helpful. And kind of thinking toward that recovery and demand, we're hearing both at the utility level and at the residential level that there has been some stress showing up in financing, particularly regarding the various safe harbor and tax benefits in the US. Are you seeing that? Is this something you're watching closely? And your view for solar coming back in the second half of the year does include the expectation that there won't be major financing problems?

I think the US market presents significant potential. However, we also need to consider last year where there was over 1 gigawatt across nearly 19 countries. Currently, this industry is facing disruptions due to COVID-19. We believe that if this virus is contained, the market will recover. Without COVID-19, we anticipate around 140 to 145 gigawatts this year. Therefore, we are very optimistic about the entire market as solar modules become cheaper and easier to install.

To follow up on your point, in end markets like Europe, Japan, or China, credit or interest rates for project debt financing are decreasing. Excess liquidity in the market is improving since the costs of solar modules and products are becoming more attractive. The issue you raised regarding tax credits in the US is specific to the market. Due to this year's economic downturn, many companies are seeing reductions in profits and taxes they need to pay, which further drives down the demand for tax credits, making them more expensive for solar projects. On the flip side, the monetary stimulus from the US Fed is keeping interest rates low, potentially offsetting some of this impact.

Okay, great. I appreciate the color. Thank you.

Thank you.

The next question comes from Alan Hon of J.P. Morgan. Please go ahead.

Hi. I have follow-up questions on costs. Firstly, congrats on very stellar cost control in the first quarter. I understand that Q2 production costs may go up a little bit as you're scaling down production. Assuming we ramp up to full capacity in the third and fourth quarters this year, how much more room do we have on cash costs going down relative to that in the first quarter?

To address your question, if you look at our Q1 cash cost, it was $5. For materials, particularly silicon metal powder, we are under long-term contracts, so we still have room to improve. However, we do not anticipate any more improvements with utilities. The only area we expect to further reduce is salaries and wages. If we maintain Q3 and Q4 operations, we might have a 5% improvement room as it primarily depends on silicon powder costs, which are currently significant contributors to our cash costs.

Got you. Thank you for the color.

Great. Thanks, Alan.

The next question comes from John Segrich of Luminus. Please go ahead.

Hey, guys. I want to ensure I've got the housekeeping things right. What is the total CapEx that you're expecting for 2020? And how much of that is maintenance CapEx? Is there any remaining CapEx for the expansion in 2021 that we should model? I have two more follow-ups if I can.

Due to COVID-19 and its market impacts, we are controlling our expenditures very carefully. We're extending the payment schedule for many of our suppliers related to CapEx. The total CapEx for this year is expected to be approximately $75 million to $85 million, with about $15 million to $20 million allocated for maintenance or project upgrades. The rest is mainly for Project 4A. For next year, there's roughly $50 million to $60 million of CapEx planned for Project 4A.

Okay. And is that on top of any amounts that are included as payables for PP&E, just to be clear?

This is inclusive. It's within the payables.

Within the payables. I appreciate that. I know you gave a lot of figures around percentages, but I think you said electricity usage per kilogram was down about 7%. What are you currently down to per kilogram now?

We're around 66 kilowatt hours per kilogram today.

Okay. Was there anything unique that allowed you to make that reduction? That's a significant improvement.

It’s really thanks to process optimization; we've optimized our processes, which has helped to reduce electricity usage relative to what we've done in the past. Additionally, our new capital equipment is designed to use electricity more efficiently compared to older reactors. That all contributes to our overall reductions.

Okay, where are those costs now?

We cannot disclose specific numbers. However, overall, it has declined approximately 10% quarter-over-quarter.

We can tell him the total per kilogram. Our average electricity consumption is 66 kWh, and our cost is RMB 11.75 per kg.

Okay. Last question, I know at the end of 2018, you acquired a subsidiary company, Daqo Investment. I think you had $18 million or so to pay for that. What does that company do, and what was the intention behind the acquisition?

To refresh your memory, Daqo Investment is owned by the group. The reason we acquired that company was to obtain land to construct employee dormitories for lodging. At that time, we needed investment for building. Therefore, Daqo Group invested the required funds into that investment company. In 2019, as we aimed to go public on the domestic exchange, we had to change the ownership structure slightly, selling 1% of our company to this investment firm. Later, we decided to buy back this company with the 1% ownership, alongside the building we constructed for our employees.

That helps. Thank you.

Thank you.

The next question comes from Colin Yang of Daiwa. Please go ahead.

Hi. Thank you, management. This is Colin from Daiwa. I've got a follow-up question on polysilicon price. Understood that Mr. Zhang expects a recovery in price in the third and fourth quarters this year due to the recovering global demand. However, our major clients, wafer producers, including LONGi, are still in the midst of a price war on wafers. They continue to keep prices suppressed in the second half despite any recovery in global demand. Do you think it's still likely to see polysilicon prices rise even with wafer prices still decreasing? Are there significant price cutting pressures from the wafer producers?

My concern is that LONGi and Jinko, the major downstream players, took advantage of the virus situation to drive their inventory to zero. Prices for silicon are still being negatively impacted by the demand and supply situation. We manufacture polysilicon as a chemical product. If LONGi was to sign an April contract with us, it would typically have been signed in March 20. Delays have severely altered the supply and demand scene. Thus, I think that the current polysilicon price is down, but if imported silicon continues to become scarce, domestic monosilicon supply won’t be too much, especially since most of the inventory is in multisilicon, which is being hard to sell. Once demand rebounds, we believe that polysilicon prices will surely rise. Currently, if the price is around $7.20, many silicon companies are at a loss.

Understood. My second follow-up question is that our current interest-bearing debt is up by 38% year-on-year from 1Q 2019 to 1Q 2020. However, our interest expenses have jumped over 200%. I understand that part of this is linked to higher banking fees. Can we get clarity on the exact interest rate from 1Q 2019 to 1Q 2020?

The interest rate is currently roughly 6% per annum on our debt balance, and for last year, it was about the same, though it might have increased slightly due to a higher amount of long-duration debt for capital projects.

The second banking loan's average cost is about 5.5%, while long-term fixed asset loans are around 5.6% annually.

Thank you, management. That's all my questions.

I would also like to note that our outstanding banking loans are approximately $265 million. Our interest expenses should stabilize at about $5.2 million to $5.5 million in Q1 moving forward.

I see. Thank you.

Great, thank you.

Thank you. The next question is from Satyan Shah, a private investor. Please go ahead.

Gentlemen, how are you? The question I have is due to the political tensions between the United States and China currently. I'm not sure if you're aware, but there is new legislation going into the Senate today that would require Chinese companies to establish that they're not owned or controlled by the government and submit to an audit by the Public Company Accounting Oversight Board. How would that – if that were to pass, affect US investors' ability to still invest with you, and what are your views on this?

First of all, I won't comment on PCAOB's actions. However, I think back to 2010, several Chinese companies were able to transition from OTC to main exchanges while providing PCAOB with their audit worksheets. The Chinese government opened certain companies for PCAOB review. For Daqo, we have been listed on the New York Stock Exchange for almost ten years now, and our books are thoroughly auditable and transparent. Thus, we are not fearful of this as we support any transparency requirement since we are a public company and must comply with the law.

Okay. That's fine. My larger question is, over the next one to two years, as the solar industry recovers, as you elaborated on, how do you envision Daqo looking a year from now?

Currently, we account for 15% of silicon supply in the PV industry segment. We are a key player in this industry. The overseas silicon imports are essentially minimized, and domestic silicon will potentially take their place. The future of the PV industry looks promising. We believe this industry will continue to grow, and with the major Asian companies expanding, we will monitor the market to determine our future expansion plans strategically. Besides developing polysilicon, we are looking into various other opportunities, such as special gases, to diversify revenue streams and make Daqo stronger to continue growing both revenue and cash flow.

Great, thank you, gentlemen.

The next question comes from Robin Chow of BMDI. Please go ahead.

Thank you, management, for taking my questions. My question is regarding the industry capacity. Many factories are achieving similar margins at the current price levels. We have not seen substantial maintenance occurrences from May. What do you see regarding your competitors’ maintenance schedules? Do you expect many will prioritize maintenance in July or April or August?

Currently, during Q2, many companies, including previous competitors, have faced price declines. The industry is consolidating into five major players right now. These are Daqo, Tongwei, TBEA, New Horizon, and GCL. Among these five, New Horizon has quality issues and their capacity is limited. I don't anticipate them as strong competitors in the polysilicon segment. GCL has a joint venture with Zhongneng, and I expect them to continue to operate near 40,000 tonnes capacity only. Thus, our primary competition will come from TBEA, Daqo, and Tongwei, who all have better quality standards, and we are currently hitting almost 95% monosilicon. We are very close to zero inventory levels. This year is an opportunity for consolidation, and in about Q2 or early Q3, we expect that the market will recover for those still standing.

Regarding maintenance, do you predict that most factories will schedule maintenance in July?

I believe some plants are seeing maintenance being scheduled for Q2 because selling prices are weak. Other companies may have maintenance in early Q4 for winter readiness.

Thank you. One final question: regarding monthly supply-demand balance for monosilicon products, can you share your insights on the market? If possible, please provide us with gigawatt figures.

As technology improves, you need to remember that per gigawatt, the amount of consumed silicon continues to decrease. For instance, in the past, around 4.5 grams of silicon were consumed per watt. The trend shows the current module cost is primarily attributed to gases used. We estimate this year around 135 gigawatts of installed module will require about 400,000 tonnes of silicon. Hence, monthly demand is around 35,000 to 36,000 tonnes average. At present, I believe it's approximately 30,000 to 32,000 tonnes monthly. On the supply side, following Q1, some smaller wafer plants may have shut down. Some polysilicon producers might find excess poly as they attempt to ramp up production. Hence, despite some existing poly, LONGi and Jinko have been encouraged to maintain zero inventory because wafer prices are dropping.

Regarding your downstream inventory strategy, you've mentioned how LONGi and Jinko are maintaining low inventory levels. At what point do you anticipate they might adjust their strategies?

I think by Q3, as module end market demand recovers, cell demand will also stabilize. Companies like LONGi and Jinko will also need to adjust their inventory levels. I don’t believe they can maintain their current strategy indefinitely. Currently, the supply from small players is diminishing, but when all capacity resumes normal operations, demand for wafer production will also rise and the inventory requirements will follow suit.

Okay, thank you. I will pass on.

Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Kevin He for any closing remarks.

Thank you, everyone, again for participating in today's conference call. Should you have any further questions, feel free to contact us. Thank you and goodbye.

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