Daqo New Energy Corp. Q2 FY2021 Earnings Call

Hello, everyone. This is Kevin He from the Investor Relations of Daqo New Energy. Thank you for joining our conference call today. Daqo New Energy has just released its financial results for the second quarter of 2021, which are available on our website at www.dqsolar.com. We have also prepared a PPT presentation for your reference. Joining the call today are Mr. Longgen Zhang, our Chief Executive Officer, and Mr. Ming Yang, our Chief Financial Officer. Mr. Zhang will provide an update on the market and operations, followed by Mr. Yang discussing the company's financial performance for the quarter. After that, we'll open the floor for audience Q&A. Before we begin, I want to remind you that certain statements on today's call, particularly concerning future operational and financial performance and industry growth, are forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These statements come with risks and uncertainties that could result in actual outcomes differing materially. Further details on these risks can be found in the reports we've filed with the Securities and Exchange Commission. These statements represent our current and preliminary views and may change. Our ability to meet these projections is also subject to various risks. All information shared today reflects our situation as of now, and we are not obligated to update it unless required by law. Additionally, we will reference amounts in U.S. dollars, though our functional currency is Chinese RMB. These dollar translations are for your convenience. Now, I will turn the call over to our CEO, Mr. Zhang.

Thank you, Kevin. Hello, everyone. Thank you for joining our conference call today. We are very excited to report an excellent quarter with strong revenue growth and better-than-expected profitability, as the Company achieved record-high production volume, gross profit, and net income. With the global focus on addressing the climate challenge with plans to reach carbon neutrality, market conditions remain strong for the polysilicon sector. The strong increase in downstream demand has led to a shortage of polysilicon and caused our polysilicon ASP to rise significantly from $11.90 per kg in Q1 to $20.81 per kg in Q2. In July and August, the market price for mono-grade polysilicon has remained at approximately $26 to $28 per kg and we expect the strong price momentum to continue into the second half of this year. Despite the rise in solar module prices in the first half of this year, we continue to see stronger-than-expected market demand even at the new market prices. Recently the solar value chain has been stable at the new market prices and downstream manufacturers are currently able to pass through price increases to their customers. During the week of August 9, major solar wafer and solar cell manufacturers in China announced price increases for solar wafers and cells, further demonstrating the strong end-market demand. We saw an uptick in polysilicon pricing in the last two weeks with a surge in orders from our diverse customer base. We expect the constrained polysilicon supply to be the main limiting factor to the size of the global solar market this year. Polysilicon production is a complex chemical process and has the highest barrier to entry in the solar value chain. Based on our research, we expect to see approximately 180,000 to 220,000 metric tons of additional polysilicon supply in 2022 considering a potential 6 months ramp-up period for other polysilicon producers. This total global polysilicon supply can be used to produce approximately 240 to 250 gigawatts of solar modules which can support approximately 200 to 210 gigawatts of solar installations in 2022. So, the polysilicon sector will still be the one with most constrained supply across the main solar PV manufacturing value chain in 2022. On the demand side, more and more countries have set up timetables for peak carbon and carbon neutrality targets that will significantly increase demand for renewable energies including solar PV. In addition, there is still meaningful room for potential cost reduction across the value chain, which will effectively stimulate larger demand, especially given that solar PV has already reached grid parity in many countries and regions in the world. As a result, we believe polysilicon pricing will remain healthy in 2022 making our sector one of the most attractive sectors in the solar PV industry in the long run given its high entry barrier and operational complexity. On the policy front, during the Politburo Central Committee meeting on July 30 regarding economic activity in the second half of 2021, with China's President Mr. Xi Jinping presiding over the meeting, the central government reiterated the urgency for national coordination on carbon peak and carbon neutrality goals and the development of the peak carbon 2030 action plans and related policies as early as possible. In addition, China recently announced an ambitious program to massively deploy distributed generation solar projects at the local government level. We believe solar will continue to be a strong beneficiary of government policies and support. With regard to our ESG initiatives, we are in the process of incorporating environmental, social and governance factors in all of our major business decisions, and we published our inaugural ESG Sustainability Report in July. We are already making substantial progress on the sustainability front, including installing a new wastewater treatment facility in 2018 that reduced our wastewater discharge density by 60% in 2020 compared to 2018. Furthermore, by increasing energy efficiency and energy recycling as well as optimizing our production process, we reduced our comprehensive energy consumption density by 40% in 2020 compared to 2017. We will continue to work on our ESG efforts, including planning for greater renewable energy use as part of our energy sources in the future. We continue to focus on initiatives to strengthen the Company's long-term competitiveness. Our major operational subsidiary, Xinjiang Daqo New Energy, successfully completed its IPO listing on China's A-share market and started trading on the Shanghai Stock Exchange Sci-Tech Innovation Board, the ticker code is: 688303 on 22 July 2021. The total gross proceeds of the IPO are approximately RMB6.45 billion, which will fund Xinjiang Daqo's polysilicon expansion project and provide additional capital for our future growth plans. Following Xinjiang Daqo's IPO, Daqo New Energy directly holds approximately 79.6% of Xinjiang Daqo's shares and indirectly holds 1.1% of Xinjiang Daqo's shares through Daqo New Energy's wholly-owned subsidiary Chongqing Daqo, for a total ownership of 80.7% of the A-share listed subsidiary. There is no Variable Interest Entity (VIE) structure between Daqo New Energy and Xinjiang Daqo. The successful IPO will offer us an additional venue to access the attractive capital markets in China for future growth and expansion. With our advantages of competitive cost structure, quality and technology advancement, outstanding operational expertise and experienced management team, we have set up a roadmap to increase our capacity to 720,000 metric tons by the end of 2024, representing an approximately 50% annual average growth rate of our production capacity over the next 3 years to better serve the fast-growing global solar PV market. Now I will discuss outlook and guidance for the Company for this year. The Company produced 41,287 metric tons of polysilicon and sold approximately 42,531 metric tons of polysilicon in the first half of this year, representing full utilization level of the company's production facilities. For the second half of 2021, the Company expects to remain at full utilization with a sales volume similar to production volume. For the full year of 2021, the Company raises its production guidance from the previous level of 81,000 to 83,000 metric tons to the level of approximately 83,000 to 85,000 metric tons of polysilicon for the full year, inclusive of the impact of the Company's annual facility maintenance.

Thank you, Longgen, and good day everyone. Thank you for joining our conference call today. Now I will discuss our financial performance for the second quarter of 2021. We are pleased to report very strong financial performance for the second quarter with strong revenue growth and record profitability. Revenues were $441.4 million, compared to $256.1 million in the first quarter of 2021 and $133.5 million in the second quarter of 2020. With strong market demand for our products, ASP was $20.81 per kilogram in Q2 2021, compared to $11.90 per kilogram in the first quarter. As Longgen mentioned, for the months of July and August, the market price for mono-grade polysilicon has further increased to approximately $26 to $28 per kilogram. And we expect strong price momentum to continue into the second half of this year. Gross profit was $303.2 million, compared to $118.9 million in the first quarter of 2021 and $22.7 million in the second quarter of 2020. Gross margin was 68.7%, compared to 46.4% in the first quarter of 2021 and 17% in the second quarter of 2020. The increase in gross margin was primarily due to higher average selling prices. Selling, general and administrative expenses were $9.3 million, compared to $9 million in the first quarter of 2021 and $10.1 million in the second quarter of 2020. SG&A expenses during the quarter included $2.4 million in non-cash share-based compensation costs related to the Company's share incentive plan, and compared to $3 million in the first quarter of 2021 and $4.5 million in the second quarter of 2020. Research and development expenses were $2.1 million, compared to $1.2 million in the first quarter of 2021 and $2 million in the second quarter of 2020. Research and development expenses vary from period-to-period and reflect R&D activities that take place during the quarter. As a result of the foregoing, income from operations was $292.4 million, compared to $109.2 million in the first quarter of 2021 and $10.8 million in the second quarter of 2020. Operating margin was 66.3%, compared to 42.6% in the first quarter of 2021 and 8.1% in the second quarter of 2020. Interest expense was $7.2 million, compared to $7.8 million in the first quarter of 2021 and $6.7 million in the second quarter of 2020. Net income attributable to Daqo New Energy Corp. shareholders was $232.1 million, compared to $83.2 million in the first quarter of 2020 and $2.4 million in the second quarter of 2020. Earnings per basic ADS was $3.15, compared to $1.13 in the first quarter of 2020, and $0.03 in the second quarter of 2020. EBITDA was $311.7 million, compared to $128.1 million in the first quarter of 2021 and $26.8 million in the second quarter of 2020. EBITDA margin was 70.6%, compared to 50% in the first quarter of 2021 and 20% in the second quarter of 2020. As of June 30, 2021, the Company had $269.7 million in cash and cash equivalents and restricted cash, compared to $227.8 million as of March 31, 2021 and $115.8 million as of June 30, 2020. As of June 30, 2021, the notes receivable balance was $97 million, compared to $38.5 million as of March 31, 2021 and $8.2 million as of June 30, 2020. With the Company's strong earnings and operating cash flow, we took the opportunity to further reduce our interest bearing debt balance during the quarter. As of June 30, 2021, total bank borrowings were $156.6 million, of which $70.9 million were long-term bank borrowings, compared to total bank borrowings of $222.2 million, including $100.4 million of long-term bank borrowings, as of March 31, 2021 and total bank borrowings of $264.8 million, including $116.9 million long-term bank borrowings, as of June 30, 2020. With our strong cash balance and cash generation for this year, we expect that we would pay off all of our interest bearing bank borrowings before the end of the year. For the first half of 2021, net cash provided by operating activities was $442.3 million, compared to $47 million in the same period of 2020. And for the 6 months ended June 30, 2021, net cash used in investing activities was $255 million, compared to $60 million in the same period of 2020. The net cash used in investing activities in 2021 and 2020 was primarily related to the capital expenditures on the Company's polysilicon expansion projects. For the first half of 2021, despite the strong increase in capital expenditures related to our polysilicon expansion, the Company generated $186 million of free cash flow. For the 6 months ended June 30, 2021, net cash used in financing activities was $37 million, compared to net cash provided by financing activities of $16 million in the same period of 2020. The net cash used in financing activities in 2021 was primarily related to the repayment of bank loans. And that concludes our prepared remarks. Operator, we will now open the floor to questions from the audience.

And the first question comes from Phil Shen with ROTH Capital Partners. Please go ahead.

Hi, everyone. Thank you for taking my questions. You mentioned, Longgen, that the outlook for poly pricing remains healthy in 2022. I was wondering if you could talk through how you expect your pricing to trend in Q3 and Q4 and then also in 2022? Thanks.

By the end of this year, we do not anticipate any new capacity or supply entering the pipeline. Currently, the average price is around $26 to $28 per kg, which aligns with module prices that are selling between RMB1.75 and RMB1.99 per watt. We observe that the poly supply is currently very tight. Looking ahead, we expect prices to remain high in the second half of the year due to higher module prices driven by strong demand. Additionally, increases in the cell and wafer sectors demonstrate robust demand as well. In 2022, we anticipate an additional polysilicon supply of about 180,000 to 280,000 metric tons, which could produce approximately 240 to 250 kilowatts of solar modules. Overall cost reductions may lower module prices by approximately RMB0.05 to RMB0.10 per watt, potentially bringing them down to about RMB1.65 per watt. If poly prices decrease to around RMB22 to RMB23 per kg, module prices could further decline to RMB1.55 per watt. For the first half of next year, we expect the average ASP for single polysilicon to be around RMB150 per kg and around RMB130 for the second half, with potential variations. Additionally, with our 4B capacity going into production by the end of this year, we project a 50% increase in production next year, indicating continued growth.

Thank you, Longgen. That's really helpful. Regarding costs, we've noticed a slight increase, though not significant. What is the forecast for your cash cost structure this year, including Q3 and Q4, as well as for 2022?

In Q2, the cash cost was approximately $5.41, up from $5.37 in Q1. The cost of goods sold reached $6.31, compared to $6.29 in Q1. The overall total cost, including everything, was about $7.30, an increase from $7.15 in Q1. So, yes, there was a slight increase. The rise is due to the increase in sales price, which has also raised the average selling price, contributing to higher operational expenses. Looking ahead, particularly into Q3, we anticipate an increase in polysilicon and silicon powder prices. Therefore, in Q3 and Q4, our costs might remain roughly the same or see a slight uptick of around 1% because the policy shift to metal powder has caused prices to rise significantly. Currently, prices are around RMB20,000 per ton. However, for next year, with the additional 4B capacity coming online, we expect to achieve a 50% increase in production, which should lead to a cost reduction of about 2% to 5% next year.

Great. Okay, thanks. Congratulations on your successful IPO in China. Wanted to get your view on your thoughts on the U.S. ADR. Some investors are asking under what conditions would you consider taking the U.S shares private given the cash that you're generating through the cycle, and also future capital raises. You'll probably use the A share entity. So, your stock has performed well in China, while the New York Stock Exchange shares have trended lower. So, under what conditions would you also consider a buyback or dividend? So just curious on how you're thinking about the U.S. ADR.

That's a great question. Currently, our share price in the U.S. market is undervalued compared to Asia. Based on your calculations, Daqo New Energy's listing in the U.S. represents an ownership of 80.7% in our Asia-listed subsidiaries. However, they are currently discounted by more than 80%, making them underpriced. It's important to note that Daqo New Energy is not structured as a variable interest entity with Xinjiang Daqo. Xinjiang Daqo is expected to be tradeable in Asia two years after its IPO, which we anticipate to be on July 22, 2024. This allows us to sell shares. We aim to reward our U.S. shareholders in two years following the IPO. Additionally, Xinjiang Daqo has committed to paying cash dividends over the next three years, amounting to no less than 30% of its distributable profit during that time. In China, the average annual profit distribution is around 10%. Xinjiang Daqo’s dividend plan will need to be approved by its shareholders and announced with its 2021 annual report, typically in mid-April 2022. As the 80% shareholder of Xinjiang Daqo, we expect to receive cash dividends which could serve as financial resources for potential buybacks or dividend distributions in the U.S. market. We can continue to raise capital in Asia due to our high valuation. However, I want to emphasize that we cannot guarantee Xinjiang Daqo's dividend plan as it requires shareholder approval. While we have avenues for potential arbitration in the future, we see ourselves primarily as a manufacturer and management company focused on rewarding all of our shareholders, both in Asia and the U.S. Thank you, Philip.

Thank you very much for the detail. One last question. If the Daqo Board approves the dividend plan, how difficult is it to get the cash out of China to pay the U.S. shareholders? Is it straightforward or do you foresee any challenges in getting the cash out?

It's not an issue because when we list in Asia, the China SEC, known as the CSRC, has already approved it. Daqo New Energy serves as the foreign holders or shareholders. When we declare dividends, it’s straightforward to exchange to U.S. dollars, but we do have to pay a dividend tax. If we set up a middle company in Hong Kong, the tax is 10%. If we pay it directly to the holding company, we still face a 10% dividend tax. With that money, we have the option to either buy back shares or continue distributing dividends to U.S. shareholders.

Great. Really appreciate the color. Thank you again, Longgen, and I'll pass it on.

Thank you.

Thanks, Philip.

The next question comes from Gary Zhao with Credit Suisse. Please go ahead.

Hello, this is Garry from Credit Suisse. Congratulations on the strong second quarter results. I have three quick questions. The first is about the plans for the U.S. listing platform. Management mentioned a significant valuation gap between Asia and the U.S. ADR, indicating a big arbitrage opportunity. I'm curious about the thoughts of the company or the controlling shareholders regarding potential strategies to privatize the U.S. ADR, as this could lead to much higher valuations. Is this a possibility the company is considering?

Okay, Gary. First of all, from our board and the controlling shareholder, we’re not interested in privatization in the short term. We recognize there are numerous opportunities for arbitrage. It's easier to privatize U.S shares than to transfer to Asia. However, we believe the company is currently undervalued. Our goal is for U.S shareholders to benefit from returns. Therefore, our strategy is to keep raising capital in the Asian market and expand our future capacity by an average of 50% each year to ensure our bottom line continues to grow by 20% to 25% and to maintain market value for our shareholders. In the meantime, we will continue to distribute dividends to make the most of Chinese law, which allows at least 30% of distributable profit to be shared. We plan to declare dividends and convert the U.S currency to the holding company, either to buy back shares or continue to declare dividends to U.S shareholders. Ming, do you have any comments on this question? Gary, thank you.

Okay. Thank you. This is very helpful. And then my second question is on the expansion plan. So earlier you mentioned that by 2024 your target to achieve 270,000 polysilicon capacity. Just wondering if you have a more kind of a specific timeline for this expansion. And secondly, given that your current economy is very strong, and that's kind of a cash position and also the further kind of proceed already had to proceed from the Asia IPO. So is that possible, the expansion target can be even kind of raised higher if solar demand continue to pick?

I believe that if you review our balance sheet by the end of July 30, it demonstrates a strong position. We aim to maintain our market share while pursuing expansion. Following our successful IPO, we expect to reach 35,000 metric tons in phase 4 and plan to begin production by the end of this year, with full capacity expected next year. This should add about 40,000 to 50,000 metric tons in the following year. Detailed figures will be provided later this year. To sustain our market share, we anticipate that the solar market will continue to grow at an average compound rate of 20%. In Asia, we see potential for capital access and cash generation, and with our strong management team, we believe we can maintain our market share around 20%. We are exploring additional production locations besides Xinjiang, such as Yunnan, Qinghai, Mongolia, or Shanxi, with a plan to expand by 200,000 tons. We will break this into two phases, starting with a semiconductor production line of 1,500 metric tons, and will announce specifics once finalized. Thank you, Gary.

Okay. Thanks. Okay. Thank you. Yes, so my last question is, I know it might be too early to tell, but just wondering if you could share with us your view for the kind of the longer-term polysilicon price. So, for example, by 2023, when there may be more polysilicon capacity to be commissioned. So, where do you think is a kind of a more sustainable polysilicon price can achieve?

To respond to your question about the average selling price for this year and next year, we need to examine both demand and supply. On the supply side, many existing players in China are expanding, and there are also newcomers in the market. As technology improves, particularly in transitioning from P-type to N-type polysilicon, the focus will be on producing high-quality materials. Market share will be crucial in this regard. Additionally, chemical manufacturing controls are a significant barrier for new entrants and even for established players. Currently, about 50% of mono silicon has a quality structure, but we can aim for nearly 99.5% quality. Achieving this level takes time and effort. On the demand side, it's hard to predict precisely because of global carbon neutrality targets, but we estimate a compound growth rate of around 20%. In China, the distributed generation market has immense potential. Despite the ongoing trade tensions between the U.S. and China, renewable energy is undeniably the future and essential for meeting global carbon goals. Some experts suggest future demand, like 500 megawatts by 2025 or even 1,000 kilowatts by 2030, translating to a possibility of around 3 million tons of demand. We are not concerned about meeting this demand since we have the largest production capacity in Xinjiang, which is nearing completion. We aim for a capacity of approximately 120,000 to 130,000 tons, and we are also exploring additional sites to enhance our capacity further. Overall, we believe we have a competitive edge and a solid long-term strategic plan.

Okay, okay. Yes, this is very helpful. And this is all the questions from me.

Great. Thank you, Gary.

The next question comes from Tony Fei with BOCI. Please go ahead.

Hi. Good evening, management. This is Tony from BOCI. Three questions from my side. And the first one is still regarding the industry capacity expansion. So just yesterday, the NDRC had a conference to update on the energy consumption status in China, according to which there was nine provinces in China has been increased in the energy intensity in the first half of this year, including Xinjiang, Qinghai and Ming Sha. So we know these three provinces hosts most of the new capacity announced by your peers. So do you think this will slow down the pace in terms of new capacity expansion?

Yes, everyone should look at the NRDC report, which provides three levels of warning. Unfortunately, provinces like Qinghai and Yunnan have significant energy supply challenges, which I see as a primary issue. However, it's important to consider that in China, we prioritize polysilicon production as crucial for supporting the solar industry. The government is likely to prioritize new energy initiatives, particularly solar polysilicon projects. Even existing energy consumption patterns in some provinces will have to change to reduce carbon emissions and enhance green energy supply. I'm not particularly concerned about this because I believe the government is committed to achieving its targets, and they need the solar industry to continue growing, which definitely requires polysilicon.

Okay, great. Okay, great. So my second question is a follow-up on silicon powder supply. So you just mentioned the price has gone up the ladder recently. So it seems that the smaller producers troubled by the increasing power tariffs as well as the energy control measures. So, of course, the current prices won't be a big problem for your margins, given the poly prices right now. But longer term, do you think the silicon power supply will be a bottleneck to the future poly production with China does not allow you to build up in silicon powders capacities?

We believe that the current situation, where poly powder prices are rising, is short-term. This is mainly due to issues in China, where the majority of silicon metal is produced, particularly in certain provinces and Xinjiang, where water power plants have shut down. This has resulted in many polysilicon plants also closing. Additionally, some excellent silicon metal plants are temporarily closed, contributing to the rise in silicon metal prices. We expect prices to decline in the future. We are closely monitoring this situation and are considering investing in upstream projects for silicon metal. We may invest in or acquire existing plants to ensure a sustainable supply of poly powder, rather than relying on a single supplier. We plan to invest in this area over time, as the total investment needed is around RMB 3.5 billion for a 300,000-ton capacity, which is manageable, especially since technology is not the main hurdle. The crucial issue lies in accessing stone resources and supply.

But do you think the energy quota will be an issue for the powder supply?

I don't believe so. I think that it will also be part of the value chain for the solar industry. Additionally, polysilicon metal not only serves to provide the powders for our solar industry but also supplies silicon and serves various other uses, so there are many applications.

Okay, great. That's good to know. And my last question is on your incentive plan. So we all know that you had a very great incentive plan in place in the past for the U.S ADRs. Now that you have listed in Asia and moved most of your staff to the Asia entity. So is it fair to guess that in the future you will also have a new incentive plan at the Asia level and reduce your incentives share-based compensation in the U.S ADR levels?

We believe that a strong execution team is essential to align with an effective incentive policy. This is crucial for maintaining our cohesive team and ongoing expansion in the U.S. Our incentive plans have played a significant role in keeping our team intact, especially as there are many attractive opportunities in China. Currently, we do not have a new incentive plan for Asia, but we plan to develop one in the future. However, our valuation is substantial, nearly $120 billion. We are considering a second share plan that would allow us to issue shares to employees at half the market price, with a vesting period of three to five years. We are thinking about this for the second half of this year.

Okay. Great. Thank you very much, Longgen. I will pass it on.

Thank you, Tony. The next question comes from Lu Wang with Bernstein. Please go ahead.

Thank you for taking our questions. This is Lu Wang from Bernstein. I have two questions. Firstly, do you have a targeted market share in terms of solar grid polysilicon by 2024? Secondly, can you please share the progress and future plans of your semiconductor grade polysilicon production? Thank you.

Thank you, Lu. Looking at the first half of this year, our market share is around 18% to 20%. I don't have additional figures on the solar polysilicon side. Moving forward, we plan to maintain 50% capacity and average growth. However, we believe other players may expand faster than us. By 2024, we expect our capacity to reach 270,000, with our market share remaining around 18%. That is our target. Additionally, we are commencing work on semiconductor polysilicon. Initially, we aim to produce 1,500 metric tons along with a new project for a 1,000-ton production line. It will take at least 2 to 3 years to make this production line successful, which means not only producing semiconductor polysilicon but also qualifying with downstream users. The qualification process for semiconductor chips and wafers typically takes about 2 to 3 years. However, the good news is that the downstream semiconductor sector in China is expanding rapidly, which may reduce the qualification period to 1 to 2 years. I cannot predict our future market share in the semiconductor sector yet, but currently, we have around 50,000 tons of semiconductor polysilicon supply, while the current usage in China is about 20,000 tons. Our primary goal is to replace imports. Thank you, Lu.

Thank you. And to follow-up on the targeted market share, I think one potential problem is that the faster mover and the first mover is probably going to secure the areas or the provinces where they have the cheap electricity, and also the energy quota in terms of total energy consumption and energy intensity. So potentially, which makes Daqo left with provinces with higher electricity prices, and also some bottleneck in terms of securing this energy quota. Do you think that can be a potential problem? And even if we Daqo is able to expand capacity, will that be the case that the new capacities' cost will have to be higher than existing capacity in Xinjiang?

Lu, that's a valid question. Historically, Daqo has consistently exceeded expectations. We tend to be quite conservative in our approach. We've been exploring alternative locations for about two years now and have been gathering technology related to semiconductors for even longer. Currently, we are conducting feasibility studies for these new locations, which take more than a year and a half. You shouldn't be concerned about that. At present, local governments are prioritizing the solar industry, and the current power prices in four to five regions outside of Xinjiang range from $0.25 to $0.30 per gigawatt. Moving forward, we believe that power pricing will be a more significant competitive factor than polysilicon quality or control of costs and scalability. Additionally, labor and management are crucial considerations. Our cost structure and our cost reduction strategies have historically positioned us as a leader in China, so we are not worried. Even though some contracts have been signed at current prices of around $0.26, local governments are welcoming us, and prices remain similar. Although the stimulation policies may differ, we aim to contribute positively to the community. Despite the agreements, we're not concerned. Presently, our capacity in Xinjiang is primarily used to supply wafer manufacturing centers in places like Mongolia, Yunnan, or Guizhou, where shipping costs are around RMB2 per kg. Considering that polysilicon production consumes approximately 660 kWh per kg, this adds only about $0.03 to the cost due to shipping. If we relocate to regions like Mongolia or Yunnan, we could potentially save that $0.03 per kWh on local power costs, so I am not worried about this situation.

Thank you. That's really helpful.

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

Good evening, management. This is Colin from Daiwa. I got two questions. The first one, can you share the cost of difference between current P type and N type polysilicon? And do you have any expectations of the potential price difference between the P type and N type polysilicon price, because it's relevant to the ASP for 2023 and beyond?

Colin, that's a great question. Currently, we're beginning to provide N type silicon to our four major clients. However, the production line for N type sales in China isn't extensive yet; it's still mainly in the research phase and not at a high commercial level. For instance, we supply our major clients with about 200 tons per month, which translates to around 600 to 800 tons monthly. The price increase is minimal, at just about RMB2 per kg. Presently, we estimate that N type constitutes around 30% to 40% of our output. In the future, as N type cell production becomes more prevalent, we believe we can raise that to 70% to 80% with our current technology. The cost impact remains negligible, around RMB1 to RMB2 per kg. The main concern is the volume since the process requires more time in the furnaces, which could slightly reduce output by about 5% to 10%. However, this isn't a significant issue for us. Our advanced digital and AI technology in furnace operations allows us to manage this transition smoothly.

Thank you. Thank you, Longgen. Very clear. So my second question, we have been adding the uncertainty at least for almost 2 months. And just wondering what is the actual inspection from the U.S customers? So do we have any products, which contain the portions for the powder that was actually confirmed by the U.S customer? So I was wondering if any updates from that?

We didn't have the exact information. Essentially, we can only access some data from the U.S. regarding module producers and shipments to U.S. customers. Our U.S. customers are looking for traceability. Currently, we are manufacturing polysilicon, with most of our customers in China being wafer producers. Therefore, we are not shipping products outside, particularly to the U.S. At this time, there is no effect on us. However, we anticipate that exports to the U.S. may be on hold, and in the future, module manufacturers will need to demonstrate traceability. This is not an ideal situation as the impact on us will be temporary and limited. If this issue continues, the negative impact on the U.S. market will be much larger compared to Chinese solar players, given that approximately 85% of polysilicon and 98% of wafers are produced in China, with no alternative sources available for the U.S. Therefore, we believe it is in the common interest of both the U.S. market and Chinese solar producers to resolve this issue as soon as possible to meet carbon neutrality targets. I'm not worried about this situation.

Thank you. Thank you, everyone. So lastly, can I confirm one thing, because I think I heard you mention a bottom line growth of 20% to 25% year-on-year in the long run. So is this the Company's official guidance call like, at least a 20% to 25% a year-on-year growth of net profit for 2020 to 2023 and beyond?

I want to emphasize that we cannot provide specific forecasts about the future. However, if we assume that next year we can maintain a 50% expansion in capacity, we will be adding approximately 40,000 to 50,000 metric tons once we complete the 4B project. For next year, I believe the selling price in the first half will be similar to this year, and the second half will also be around a similar range. We anticipate that we can achieve a 20% to 25% increase in the bottom line. Moving forward, we will continue our efforts to expand capacity at an average rate of 50% annually. Nonetheless, we cannot guarantee the bottom line due to uncertainties in the future demand and supply of polysilicon. On the supply side, there are two main factors to consider: the actual polysilicon we can provide and how technological changes, like the shift from P-type to N-type, will impact our production capabilities. On the demand side, we are uncertain about the potential market growth. Therefore, I cannot definitively answer your question about the future, but we will certainly make our best efforts.

Thank you, Longgen. That's all my question.

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

Thank you, everyone for participating in today's conference call. Should you have any further questions, just feel free to send us an email or give us a call. Thank you. Bye, bye. Have a nice day.

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