Good day, and welcome to the Daqo New Energy Second Quarter 2023 Results Conference Call. I would now like to hand the call over to the Investor Relations Director. Please proceed.

Hello, everyone. I am 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 second quarter of 2023, which can be found on our website at www.dqsolar.com. So today, attending the conference call, we have our new Chairman and CEO, Mr. Xiang Xu; our former CEO, Longgen Zhang; CFO, Mr. Ming Yang, and myself. So the call today will begin with an update from Mr. Zhang and our new Chairman and CEO, followed by his comments on market and operations, and then Mr. Yang will discuss the company's financial performance for the quarter and the year. And after that, we'll open the floor to Q&A from the audience. So before we begin the formal remarks, I would like to remind you that certain statements on today's call, including expected future operational and financial performance and industry growth are forward-looking statements that are made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These statements involve inherent risks and uncertainties. A number of factors could cause actual results to differ materially from those contained in any forward-looking 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 view as of today and may be subject to change. Our ability to achieve these projections is subject to risks and uncertainties. All information provided in today's call is as of today, and we undertake no duty to update such information, except as required under applicable law. Also during the call, we'll occasionally reference monetary amounts in U.S. dollar terms. Please keep in mind that our functional currency is the Chinese RMB. We offer these translations into U.S. dollars solely for the convenience of the audience. So now I'll pass it on to Mr. Zhang.

Thank you. Good morning, good evening. Efficient operation of our polysilicon facilities in the second quarter of 2023 resulted in the production volume of 45,306 metric tons, representing an increase of 11,458 metric tons as compared to the previous quarter. As our Phase 5A 100,000 metric tons polysilicon project in Inner Mongolia reached full production capacity in June, our production cost decreased by 8.3% from Q1 to $6.92 per kg, primarily due to improvements in manufacturing efficiency as well as a reduction in the cost of metallurgical grade silicon. For the quarter, we generated $230 million in EBITDA with strong operating cash flow and continued to maintain a strong balance sheet with no financial debt. At the end of the quarter, the company had a cash balance of $3.2 billion and a combined cash and banking notes receivable balance of $4 billion. With an addition of our new Inner Mongolia Phase 5A facility, our total annual polysilicon nameplate capacity has expanded to 205,000 metric tons. For the third quarter, we expect our total polysilicon production volume to be approximately 55,000 metric tons to 57,000 metric tons, representing an increase of 21% to 26% as compared to Q2 2023. Full year production is expected to be approximately 193,000 metric tons to 198,000 metric tons of polysilicon, representing an increase of 44% to 48% as compared to 2022. In addition, based on our Technical Difficulty figure, our new semiconductor grade polysilicon project with 1,000 metric tons annual capacity is expected to start pilot production by the end of September of this year. With our fully digitized and highly automated production system that optimizes operational efficiency, improves cost structure, and further enhances production product quality for the N-type polysilicon product, we are confident that our Inner Mongolia project will further enhance the company's competitive edge. The polysilicon industry experienced increased challenges and substantial price volatility during the second quarter. Several new polysilicon facilities and new entrants finally started production with some reaching full production capacity in the first half of this year. The shortage of polysilicon of the past 2 years came to an end. The increased supply ultimately led to oversupply and excess industry inventory. In an effort to gain market shares with inferior quality products, new entrants and some established industry players engaged in aggressive pricing. Expectations of lower future pricing in the market led to delays and reductions of downstream customer orders, as well as aggressive pricing required by customers. The situation worsened significantly in the second half of May, as inventory reduction efforts by leading producers led to a race to the bottom that saw polysilicon prices decline by approximately 70% at the end of the second quarter compared to Q1 levels. In the second half of June, polysilicon prices reached bottom and customers began ordering aggressively at the lower prices. By mid-July, we saw an approximately 15% to 20% price recovery compared to the bottom reached in June. Recently, we have also seen an increase in the average selling price premium for N-type polysilicon with a meaningful increase in demand volume. We expect that this trend will further benefit us as the industry transitions to next-generation N-type technology. We shipped 53,502 metric tons of polysilicon in Q2, meaningfully more than our production level and a substantial increase over Q1 shipments. Polysilicon inventory at our original Xinjiang facility decreased to less than a week's production volume, as our facility in Inner Mongolia is newly established; its products require customer qualification before we can ship meaningful volumes to customers, and the qualification process took longer than anticipated due to market volatility during the period. At the end of the quarter, with customer orders on hand that covered all our inventory, we had practically sold all shippable products. The customer qualification process for the products of our Inner Mongolia facility was completed successfully in July. By the end of July, with brisk customer orders and demand, we had further reduced our polysilicon inventory to a very healthy level of approximately 1 week's production across our two facilities. For the second quarter, we recorded approximately $19.7 million in foreign exchange loss, or approximately $0.26 per ADS. Near the end of April, the company received approximately RMB 4.96 billion in cash dividends from its subsidiary Xinjiang Daqo, which was approximately $716.7 million based on the exchange rate on the date the dividend funds were received. During the quarter, the company converted approximately RMB 1.85 billion to U.S. dollars to fund our share repurchase program, as the U.S. dollar to Renminbi exchange rate fluctuated significantly during May and June. As required by accounting standards, we recorded an unrealized foreign exchange loss, primarily related to our quarter-end cash balance of RMB 3.1 billion held by the company in offshore accounts. Regarding the company's share buyback program, at the end of July, the company had already repurchased 4.16 million ADS for approximately $188.7 million under the current program, with an average cost of approximately $45.32 per ADS. Combined with the program completed in 2022, the company has already repurchased 6 million ADS for approximately $308.6 million. The continuous cost reduction in solar PV products and the associated reduction in solar energy generation costs are expected to create substantial additional green energy demand, which is likely to exceed most analysts’ expectations. It is generally expected that solar PV will eventually become one of the most important sources of power in the world. In addition, as solar PV technology keeps evolving, we believe that the increasing needs for high-purity polysilicon, such as N-type polysilicon, will help differentiate us from our competitors, while most of our competitors will likely struggle with the current market environment. Daqo New Energy has one of the best balance sheets in the industry with no financial debt, and this will help us navigate the current market environment successfully. We are optimistic that as the solar end market continues to grow and our customers expand capacity, particularly for N-type solar products, prices will improve. We will continue to maintain solid growth and capture the long-term benefits of the growing global solar PV market. Moving to outlook and guidance. The company expects to produce approximately 55,000 metric tons to 57,000 metric tons of polysilicon during the third quarter of 2023. The company expects to produce approximately 193,000 metric tons to 198,000 metric tons of polysilicon for the full year of 2023, 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. See the safe harbor statement at the end of this press release.

Thank you, Longgen, and hello, everyone. Thank you for joining our earnings conference call today. Now I will discuss our financial results for the second quarter of 2023. Revenues were $636.7 million compared to $709.8 million in the first quarter of 2023 and $1.24 billion in the second quarter of 2022. The decrease in revenue compared to the first quarter of 2023 was primarily due to a decrease in average selling prices, mitigated by an increase in sold volume. Gross profit was $258.9 million compared to $506.7 million in the first quarter of 2023 and $947 million in the second quarter of 2022. Gross margin was 40.7% compared to 71.4% in the first quarter of 2023 and 76% in the second quarter of 2022. The decrease in gross margin compared to the first quarter of 2023 was primarily due to lower average selling prices, which was partially mitigated by lower production costs. Selling, general and administrative expenses were $43.3 million compared to $41.3 million in the first quarter of 2023 and $14.4 million in the second quarter of 2022. The slightly higher SG&A expenses compared to the previous quarter were due to higher shipment volume that resulted in higher shipping expenses. SG&A expenses during the second quarter also include $27.5 million in noncash share-based compensation costs related to the company's share incentive plans compared to $28 million in the first quarter of 2023. R&D expenses were $2.2 million compared to $1.9 million in the first quarter of 2023 and $2.7 million in the second quarter of 2022. R&D expenses vary from period to period and reflect R&D activities that take place during the quarter. Most of our R&D activities for the quarter related to product purity improvement-related activities. Foreign exchange losses were $19.7 million compared to zero in the first quarter of 2023 and also in the second quarter of 2022. The significant volatility and fluctuation in the U.S. dollar to Chinese Renminbi exchange rate during this quarter resulted in primarily an unrealized foreign exchange loss related to our quarter-end cash balance of RMB 3.1 billion held by the company in an offshore account. As a result of the above mentioned, income from operations was $214 million compared to $463.8 million in the first quarter of 2023 and $927.6 million in the second quarter of 2022. Operating margin was 33.6% compared to 65.3% in the first quarter of 2023 and 74.6% in the second quarter of 2022. Net income attributable to Daqo New Energy shareholders was $103.7 million compared to $278.8 million in the first quarter of 2023 and $627.8 million in the second quarter of 2022. Earnings per basic ADS was $1.35 compared to $3.56 in the first quarter of 2023 and $8.36 in the second quarter of 2022. Adjusted net income, non-GAAP attributable to the Daqo New Energy shareholders, including noncash share-based compensation costs, was $134.5 million compared to $310 million in the first quarter of 2023 and $630 million in the second quarter of 2022. Adjusted earnings per basic ADS was $1.75 compared to $3.96 in the first quarter of 2023 and $8.39 in the second quarter of 2022. EBITDA was $230 million for the quarter compared to $490 million in the first quarter of 2023 and $955 million in the second quarter of 2022. EBITDA margin was 36% compared to 69% in the first quarter of 2023 and 76.8% in the second quarter of 2022. Now on the company's financial condition. As of June 30, 2023, the company had $3.169 billion in cash, cash equivalents, and restricted cash compared to $4.1 billion as of March 31, 2023, and $3.3 billion as of June 30, 2022. As of June 30, 2023, the noticeable balance was $798.5 million compared to $791 million as of March 31, 2023, and $1.27 billion as of June 30, 2022. Notes receivable represents bank notes with maturity within 6 months. And now on the company's cash flow. For the six months ended June 30, 2023, net cash provided by operating activities was $786 million compared to $1.13 billion in the same period of last year. And for the six months ended June 30, 2023, net cash used in investing activities was $495.7 million compared to net cash used in investment activities of $80 million in the same period of 2022. Net cash used in investment activities in the first half of 2023 was primarily related to the capital expenditures on the company's polysilicon project in Baotou City, Inner Mongolia. For the six months ended June 30, 2023, net cash used in financing activities was $477.5 million compared to net cash provided by financing activities of $1.58 billion in the same period of 2022. The net cash used in financing activity in the first half of 2023 was primarily related to $174 million in the company's share repurchases and $306.6 million in dividend payments made by the company's Xinjiang Daqo subsidiary to its minority shareholders. And that concludes our prepared remarks. And operator, we will now open the floor for questions.

The first question will be from Philip Shen of ROTH MKM.

Longgen, sorry to see you leave. And I was wondering if you could touch on your personal situation and give us some color as to timing and detail around what you might do next? It sounds like from the release that you're leaving effective immediately, but you're on the call today. So just curious if there's anything you can share?

Thank you, Philip. I have been with the company for over 5 years and am familiar with everyone here. Additionally, our new CEO and Chairman has been with Daqo even longer than I have and is very knowledgeable about this industry. We have worked together during my time here. I am leaving for personal and family reasons, but I will be handing over control to Mr. Xu, and I trust he will lead the company to new heights. Did I answer your question, Philip?

Yes. Shifting over to pricing. You talked about the dynamics of how pricing fell in Q2, and then there was a bit of a recovery. Can you talk about what you see for polysilicon pricing in Q3, Q4 and also 2024? How much higher or lower could poly pricing go in 2024?

I think in last year Q4, during the seasonal period and also some downstream clients planning to stop demand, shut down the capacity. Almost all the five bigger polysilicon plants had inventory by the end of last year. As Q1 came, because Chinese New Year was in February, demand immediately picked up. So in Q1, the price continued to go up from almost RMB 80 per kg to 240, but really, new entrants had inventory that needed to be digested. In May and June, the price continued to go down, especially in June, where the price almost reached breakeven, around RMB 55 to RMB 60. For some reason, by the end of last month, I think two companies had significant production issues, one of the big players almost stopped Xinjiang production. So right now, besides the market coming back, orders are now coming in the pipeline, especially some orders in the pipeline, we see in Q3 and Q4 that demand is a little higher. As of now, the price for N-type is around RMB 83 to RMB 85 per kg, while the P-type is around RMB 63 to RMB 65 per kg. We expect Q3 to be very profitable. I think this situation will continue until October. Then in November and December, another seasonal period will come up, with winter arriving. Western countries may see a drop in demand with Christmas and then the Chinese New Year coming. This could lead to a drop in price again. If Daqo Mongolia continues to run at full capacity, as will TBEA, which had previously experienced issues ramping up production. So we see that supply will continue to rise. The next year, polysilicon pricing, even in the next two years, will see a difference between Chinese polysilicon and non-Chinese polysilicon. For example, like Wacker, OCI, because they can easily trace their silicon to export their final products to the U.S. Right now, I think in the next 2 years, Chinese polysilicon may stabilize between RMB 60 and RMB 75. This will push some Chinese producers to move operations outside of China to other locations. As you can see, the U.S. IRA is already attracting a lot of companies, such as Chinese companies making modules, even selling at waivers. So I think that tendency will continue forward. China is likely to become the major producer, with the potential to oversupply modules. This could lead to lower module prices from RMB 2 per watt to near RMB 1.4 per watt, significantly improving project returns while stimulating installations. However, the capacity to connect to the grid will face challenges, especially in China. But in two years, the European market is also expected to continue growing. The only thing to consider is the over-supply action in the European market starting in 2025 Q2, which gives time for Chinese producers to move operations outside of China. Daqo is currently the only Chinese producer known to be able to produce high-quality products that can compete with Wacker. As the N-type market continues to grow, we already see the price difference between N-type and P-type as RMB 8 to RMB 10 per kg. Our advantage is clear, and our gross margin remains strong, even above 30% in Q4, based on quality and cost effectiveness.

Great. That was a lot of color. You said something very interesting just now about how Chinese producers could launch and ramp capacity outside of China to serve the U.S. and maybe even Europe.

Could you discuss whether there are plans to increase facilities outside of China? How many metric tons do you anticipate, and are there any announcements regarding which entities could be ramping up capacity? Which countries are involved, and what is the expected timeline for these ramp-ups? Additionally, you mentioned the price difference between Chinese and non-Chinese polysilicon. Can you elaborate on the magnitude of that premium? A couple of months ago, it was around a $10 difference. What is the current price of non-China polysilicon, and do you expect that disparity to persist, or could it narrow over time? Basically, if you look at the figure today, outside of China, the majority of silicon is from Wacker, OCI, and Hemlock. Together, they produce around 80,000 tons. That cannot meet U.S. market demand for 50 GW, which I think needs at least 120,000 metric tons. The U.S. is not just polysilicon modules; there are many other components. We see that in both Europe and the U.S., the market demands for local materials will prompt producers to move to modules and cells gradually step by step. We see a lot of Chinese companies exploring opportunities in regions like the Middle East and Southeast Asia, where production costs remain competitive. While I can't specify names right now, we can expect concrete announcements soon as companies ramp up their production capacity.

Great. Just to clarify, I thought you mentioned that Chinese polysilicon producers are increasing their facilities outside of China. Are you aware of any such activities? Do you think you might increase polysilicon production facilities outside of China, and if so, where? Would that still be in the Middle East or Southeast Asia, or are there other locations you’re considering?

I think it definitely is a very economic stimulus to attract Chinese producers to move outside of China to produce silicon. However, silicon production is capital-intensive and also environmentally critical within the chemical industry sphere. The design, permits, and other aspects have high costs. Daqo also conducted a lot of research; for instance, if we consider a U.S. facility, it could take 5 years to finish construction with 10 times the total investment. Thus, it seems impossible for any Chinese producer to set such plants in the U.S. Other regions like the Middle East must be considered as well for their competitive advantage. The local costs must enable effective production, with traceability to Europe and the U.S. being essential for compliance. As of today, external silicon production quantities are limited, making it difficult to satisfy domestic demands without substantial hurdles.

Okay. That's really very good color. One last question for me. We recently wrote that LONGi's product was detained in the U.S. that used Tongwei poly from several months ago, and that was denied entry into the U.S. I know you're ramping your Inner Mongolia facilities now. What do you think your ability is to import your poly through Southeast Asia into the U.S. now? Are you a little bit more pessimistic given LONGi's situation? Or are you still optimistic because you have traceability to the port site?

Frankly speaking, I'm very pessimistic. The reason is that the situation with Tongwei is a little different. They have global operations, and they use Xinjiang silicon directly. The U.S. customer reliance on LONGi shows that it is difficult for any player to prove traceability. I believe all silicon produced in China will struggle to pass the traceability needed for U.S. exports. However, if we can demonstrate our ability to show traceability from manufacturing in Mongolia to the entire silicon production value chain, we may find some opportunities, but it remains uncertain.

Our next question will be from Alan Lau, Jefferies.

Happy to hear Longgen is moving on. And thanks for the contribution to the company as well in the past year. So my first question is what is the CapEx plan for the remainder of this year and next year?

Okay. So if you look at the CapEx plan, okay, I would say in the first half, approximately $495.7 million was used in investing activities, and that's primarily directed toward CapEx, mostly related to our Inner Mongolia Phase 2. Some of it is related to Inner Mongolia Phase 1. In the second half, we're currently planning an additional $750 million in CapEx. In aggregate, we are planning roughly $1.25 billion in CapEx for the full year.

So, another question is, since the average selling price of poly in Q2 is lower than the average market price, how is the company selling more in July and June instead of April? What is the split between the different months because the prices have been declining as well?

First of all, I don't know where you got the market ASP, then you can make a decision we are below ASP. I can tell you that because we as a company digested all the inventory. Basically, our pricing remains competitive, but comparing our quality, I still think we are strongly positioned. If you look at Tongwei, their profit in the second quarter was almost less than half. We still have more than 50% margin, so I believe we have a strong selling position.

Because they are guiding that they are selling at around RMB 120 per kilogram, so I saw our numbers around RMB 97 or 98, including tax. So that's why that's a question. Maybe there's some timing difference.

Yes. It may not be a direct comparison. We are not in a position to comment on another company, but that's the reality. We are tracking our figures realistically.

Understand. So how about the share buyback pace? The buyback in Q2 was not very aggressive. Can I assume the company will accelerate the buyback in Q3 because you have more than $500 million left?

Yes, we still have more than $500 million left on the company's balance sheet in the offshore account for the share buyback program. The share buyback program continues to be in place and has not changed. Certainly, we will look forward to supporting the share price, especially now with the new Chairman and CEO onboard. Subject to market conditions, our share price and other factors, we will continue to execute on our share buyback program.

But we assure you that we are going to finish the $700 million purchase program by the end of the year.

That's the current expectation.

So yes, that's quite positive. And my last question is what is the view on aggressive expansion by others? Some peers are actively undertaking due diligence in Saudi. So I wonder if we are also investigating expansion plans in Saudi or other locations.

We did investigate overseas expansion in the past, actually quite actively. We even sent our teams overseas to do due diligence. However, we see a lot of challenges in terms of higher production costs, sustainability of price premiums, and market opportunities. So while we continue to monitor various opportunities, the company has no plans for overseas expansion right now.

The next question will come from Ji Chao of Goldman Sachs.

Can I ask what's the portion of the N-type polysilicon for the first half of this year? And how do you expect for the full year? Also, we note that the second quarter operating cash flow is actually negative. Can you share why that is?

Okay. Ji Chao, thank you very much for your questions. Regarding N-type, the percentage keeps improving. In Q1, it was roughly in the range of 10% to 20%. For Q2, we've already increased it to the range of 20% to 30%. I think based on market conditions and demand from customers, the price premium is currently in the RMB 10 to RMB 15 per kg range for N-type relative to P-type. We expect N-type to constitute somewhere between 30% to 50% of our production in the second half. Regarding the second question about negative cash flow, let me follow up on that.

Sure. The second-quarter cash flow seems to be slightly negative compared to the first quarter, which was more than $800 million. Can you address that?

The negative is likely related to our bank note sales. Let me follow up on the topic soon.

Next question will be from indiscernible.

So I want to ask about changes in management. With our management changes, do we plan to launch new business or do new investments?

I think with the change in the management team, Mr. Xu is the new Chairman and CEO. He is also the biggest shareholder and the controller of Asia. Definitely, we are looking to conduct some study in the future. Our focus remains on our existing business. We will lay down a 3- to 5-year strategy on silicon metal, the polysilicon, and our 1,000 semiconductor products scheduled to begin production in Q3.

Okay. And my next question is do we consider going private, given we have substantial cash which might cover our market cap? Do you consider going private?

I think privatization is not a decision made by the management team; we must go through the shareholders. However, one clear point is that the valuation difference between Asia and U.S. shares is significant. So right now, we only have a way to declare dividends in Asia to buy back U.S. shares which is anti-dilutive. We believe this trend in U.S. market valuation will continue, and potential reselling of the Asia-held shares could be an option from June 2023 onwards, allowing us to buy back U.S. shares more effectively. But in terms of long-term privatization, we are keen on maintaining engagement with U.S. shareholders.

Our next question will be from Leo Ho.

This is Leo Ho from Daiwa Capital Markets. A couple of questions. I would like to ask one by one if I may. The first question is regarding share buyback. So I just would like to confirm that, our current plan is to spend the entirety of the USD 700 million within this year. Am I correct?

I would say the $700 million share buyback program is still in place. I think there have been no changes to that. The management team will continue to monitor the market and repurchase shares. Yes, under the current plan.

My second question is about the second quarter production number. I noticed that we have produced 45,000 tons eventually. But according to your first quarter guidance, we should be producing around 55,000 tons in the second quarter. May I ask what is the reason behind the 10,000-ton discrepancy? Are we doing any retrofit for our old or new capacity? What's the reason behind? And if we are doing retrofit, can you briefly tell us what capacity or which provinces that we are doing?

I think we guided to a range of 44,000 to 46,000 tons of production for Q2, so we actually produced in line with our previous guidance. In Q2, our Inner Mongolia facility ramp up was evident. The discrepancy lies not in producing below guidance, but in newly established targets for Q3 reflecting a full ramp-up of the Inner Mongolia facility.

So, are we doing any like retrofit in the second quarter?

At the end of Q1, we had inventory, and in Q2, we produced 45,000 tons while selling around 51,000 tons. We still had some inventory in Q2. So the 10,000-ton variance you mentioned is indeed correct.

Okay. Just a few more questions. Do we have any forecast for the N-type product on our total production mix for 2024? Also, I would like to know, aside from us, how many producers in the market do you see can manufacture N-type polysilicon at large scale?

For 2024, we expect more than 50% of our production to be N-type polysilicon. In fact, once we fully ramp-up our optimizations, it could reach the range of 70% to 90%. As for other producers, we consider ourselves to be amongst the largest of N-type suppliers. Other notable mentions include Wacker and a couple from Asia silicon but primarily Daqo leads the market.

My last question regards joint ventures. Among large polysilicon producers in China, we seem to be the only one without a joint venture with downstream customers. Are we planning to form any joint ventures or why didn't we in the past?

We haven't rolled this possibility out. In the past, we aimed to remain a pure supplier of polysilicon, which proved beneficial last year. Some of our peers with joint venture partners had to share their income. Recently, several customers have approached us indicating interest in minority investments or joint ventures, which we are currently discussing, but there's nothing concrete to report.

Our next question will come from an analyst with Nomura.

My question was previously raised about privatization. No further questions from me.

Great. Thank you for joining our call.

This concludes our question-and-answer session. I'd like to turn the conference back over for closing remarks.

Yes. Thank you, everyone, again for participating in today's conference call. Should you have any further questions, please don't hesitate to contact us. Thank you and have a great day. Goodbye.

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