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DAQO New Energy Corp. (NYSE:DQ)

Q2 2013 Earnings Call

September 11, 2013 08:00 am ET

Executives

Gongda Yao – Chief Executive Officer

Bing Sun – Chief Financial Officer

Analysts

[Paul Shiggler] – Epsilon

Amy – Goldman Sachs

[Ray Gi] – CICC

Vincent Yu – SWS Research

Sebastien Ho – Barclays

Operator

Good day and welcome to the DAQO Energy Q2 2013 Financial Results Conference Call. (Operator instructions.) Please note this event is being recorded. I would now like to turn the conference over to Bing Sun, CFO. Please go ahead.

Bing Sun

Thanks, Emily. Thank you everyone for joining us today for DAQO Energy’s Q2 2013 financial results conference call. DAQO Energy issues its financial results for Q2 earlier today. To facilitate today’s conference call we’ve put together a PDF presentation.

Today, attending the conference call we have Gongda Yao, our CEO, and myself. The call today will feature a remark from Dr. Yao covering business and operational developments and then I will discuss the company’s financial performance for Q2. After that we will open the floor to Q&A from the audience.

With no further delay I will turn the call over to Dr. Yao.

Gongda Yao

Thank you, Bing. In the first half of 2013 we saw the average selling price of polysilicon stabilizing through the whole value chain. Recently the trade complex in the solar PV industry in China and the European Union has been settled with a solution that is acceptable for both parties.

The Ministry of Commerce of China also announced the preliminary ruling for the investigations on the polysilicon imported from the United States and Korea. With the resolution of various uncertainties becoming clearer we expect that the industry will start to recover in the second half of 2013, especially when the Chinese domestic market starts to take off.

In Q2 2013 our Xinjiang polysilicon facility continued to contribute positive cash flow. In April we successfully conducted several technical improvement projects which would reduce our polysilicon costs below $16 per kilo which is significantly lower than our original target of $20 per kilo. We expect our Xinjiang facility to generate positive operating income in Q3 2013.

We are also making great efforts to maximize our capacity in Xinjiang. We plan to expand our capacity in Xinjiang to 6150 metric tons by the end of 2013. By achieving that we expect that we can reduce our costs further to the level of $14 per kilo at that time.

As for our Wanzhou polysilicon facility, after evaluating the polysilicon market situation and the business environment both in Wanzhou and Xinjiang, in order to optimize the utilization of our resources and maximize the return on polysilicon assets the company made a strategic decision to move the polysilicon equipment which no longer creates value in Wanzhou under the current situation to our Xinjiang facilities.

As a result, we have incurred certain impairment charges related to the Wanzhou polysilicon assets which will not be relocated in the amount of $158 million. At the same time we plan to increase our Wanzhou wafer capacity to 6 million pieces per month in order to achieve economies of scale. We expect that our wafer facilities will achieve positive operating income by the end of 2013 when we fully ramp up the capacity.

In Q2 2013 we shipped 975 metric tons externally and around 102 metric tons internally to our wafer business. In addition we also shipped 6.1 million slices of wafer and 41 metric tons of multi-crystal silicon blocks to our customers.

As for the outlook for Q3 2013 we estimate the shipments of polysilicon to be around 1000 metric tons, wafer to be about 8.9 million pieces, and multi-crystal silicon blocks to be about 6.8 metric tons. I will now turn the call to Mr. Bing Sun for the financial performance update.

Bing Sun

Thank you, Dr. Yao. Now let’s go over the financial performance. Revenue was $27.8 million compared to $14.5 million in Q1. The company generated a revenue of $16.4 million from polysilicon sales compared to $11.3 million in Q1. The increase from the prior quarter was primarily due to the higher sales volume.

Total polysilicon sold in Q2 increased by 270 metric tons from 706 metric tons in Q1 to 975 metric tons in Q2. Note that we produced 962 metric tons of polysilicon in Q2, of which only 157 metric tons was produced in April because in April we halted our production for 17 days to conduct our annual maintenance and to carry out our technical improvement projects.

The company generated $7.1 million from sales of wafer compared to $1.7 million in Q1. The increase from Q1 was primarily due to the higher sales volume. Total wafers sold in Q2 increased by about 7 million pieces from 202 million pieces in Q1 to over 9 million pieces in Q2. The company also generated $4.3 million from other businesses such as sales of multi-crystal silicon blocks and etc.

Gross loss was $10.2 million compared to $12.9 million in Q1. Gross margin was negative 36.7% compared to negative 89.0% in Q1. Total costs associated with Wanzhou polysilicon facility including depreciation and maintenance was $9.7 million in Q1 and $9.1 million in Q2. Excluding these costs associated with the Wanzhou polysilicon facility the non-GAAP gross margin for Q2 was negative 3.9% and negative 22.3% for Q1.

Gross margin improvement from Q1 was a result of the increase in sales and the reduction in production costs in both the polysilicon and wafer businesses. Since we halted the production for 17 days to conduct annual maintenance and our technical improvements in April total production costs in April was much higher than normal and the output in April was low. We expect our overall gross margin will further improve in Q3. Our goal is to achieve positive operating income from the Xinjiang poly facility in Q3.

SG&A expenses were $6.2 million compared to $4.1 million in Q1. The increase in SG&A expenses from Q1 was primarily due to the $2.0 million increase in bad debt provision. In fixed assets impairment, the company recognized $158.4 million fixed assets impairment for its Wanzhou polysilicon facility in Q2 along with the assets that should be tested for recoverability whenever events or changes in circumstance indicate that its carrying amount may not be recoverable.

Based on the results of our analysis the sum of the undiscounted cash flow expected to result from the use and eventual disposition of the polysilicon assets from Wanzhou facility is less than the carrying amount. The difference was recorded as the fixed asset impairment charge.

Net interest expense was $4.9 million compared to $5.3 million in Q1. The decrease from Q1 was primarily due to the decrease of our outstanding loan balance. Net loss attributable to our shareholders and earnings per share: as a result of the net loss attributed to DAQO Energy shareholders was $34.0 million in Q2 compared to $18.7 million in Q1. Earnings per fully diluted ADS was negative $4.91 in Q2 compared to negative $2.70 in Q1.

Financial condition: as of June 30 the company had $10.8 million in cash, cash equivalents and restricted cash compared to $11.7 million as of March 31. As of June 30, the accounts receivable balance was $16.5 million compared to $19.3 million as of March 31. As of June 30, total borrowing was $266.1 million of which $144.4 million was long-term borrowings compared to total borrowing of $301.5 million including $178.7 million long-term borrowings as of March 31.

And that’s pretty much the overall introduction of our financial performance. Now let’s start the Q&A session. Thanks, Emily.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator instructions.) And the first question comes from [Paul Shiggler of Epsilon]. Please go ahead.

[Paul Shiggler] – Epsilon

Hey guys, a couple of quick questions. When you talk about $16 production costs and $14 production costs are those fully loaded with depreciation or are those cash costs?

Gongda Yao

This is Gongda Yao. Yes, it includes depreciation and also all cash costs related to the manufacturing costs.

[Paul Shiggler] – Epsilon

So if you’re selling polysilicon for $20 you can generate $4 in gross profit from that sale.

Gongda Yao

Yes, that’s correct.

[Paul Shiggler] – Epsilon

Okay, great. And then on the expansion in Xinjiang, is that just the relocation of your equipment from Wanzhou or are you actually buying new equipment and are going to expand there?

Gongda Yao

Okay, when it comes to (inaudible) we do a very preliminary estimation is moving costs of the other Wanzhou equipment to Xinjiang and get it installed. We only do necessary, we may add new equipment on an as-needed basis in this kind of (inaudible), yes.

[Paul Shiggler] – Epsilon

But those assets will be transferred at the impaired cost, right? So it’ll actually be pretty low-cost capacity because there won’t be a lot of depreciation, correct?

Bing Sun

Not really, Paul. To clarify and add a little bit: for all the assets in Xinjiang includes equipment that are movable and can be moved and utilized in Xinjiang, but there are also fixtures such as the fixture of the housing which cannot be moved and we have temporarily no other use which has to be put in trust and impaired. And for the equipment that can be moved to the Xinjiang facility we conducted a future cash flow analysis and so the result of the analysis will [propose] that no further charge shall be made out of equipment that can be moved to Xinjiang.

[Paul Shiggler] – Epsilon

Great. And then on the wafer expansion what’s the megawatt equivalent? You talked about it in terms of pieces – how many megawatts is that?

Bing Sun

Actually we are not talking about expanding our facilities – expanding our production, ramping up the wafer production because of the favorable market today, the price is more favorable today. So we ramp up to about 6 million pieces per month.

[Paul Shiggler] – Epsilon

And what’s that translate to in megawatts for your guys?

Gongda Yao

Paul, for megawatts that’s the annual capacity up to 250 megawatts. And it’s actually the equivalent of monthly production of 6 million pieces, and for annual that’s 72… I’m sorry.

Bing Sun

Yeah, it’s around 6 million pieces probably about 2.4 megawatts. So it’s more than 250 megawatts per annual production, so basically like a 4 is… One wafer generates more than 4 watts [peak hour].

[Paul Shiggler] – Epsilon

Great. And then just quickly, so it looks like from what I’m hearing some of your US competitors are having trouble importing polysilicon into China. Where is the spot market today for you guys and sort of where do you think it’s going for poly?

Gongda Yao

So currently, we can only speak for our country – it’s around $18 and slightly above $18 per the market. The whole market is variously priced because of some long-term contracts and special remnant opportunities in imported polys. We do expect to see the US import poly probably will have some reduction and the people probably will lose that import temporarily at least; but we do see still a lot of imports from Germany and from South Korea.

[Paul Shiggler] – Epsilon

So you’re not seeing any upward pressure on pricing right now? It’s pretty stable at $18? It’s not trending towards $19 or $20?

Gongda Yao

Yeah, we do see very small increases compared with its history, but we do see a lot of passion to want to buy polysilicon from us. We see a lot of our customers want to visit our Xinjiang location and we’ve secured several kind of long-timeframe contracts very recently. So that’s indicative of kind of a more balanced demand in the supply. So if anything we are looking for the second half of 2013 business to be very robust.

[Paul Shiggler] – Epsilon

Great. And then one last question: so are you seeing any of your peers in the polysilicon manufacturing space, now that the anti-dumping duties have been imposed on US and Korean polysilicon, are you seeing any capacity that was shut down coming back online? Or are prices still low enough where only you guys, ECL, TBEA and maybe a few others can still operate? Are you seeing some of that marginal capacity coming back?

Gongda Yao

Actually you pretty much know the situation in China. As the polysilicon is priced around $18 to $20 we are not thinking a lot of Chinese polysilicon will ramp to the production. It’s very difficult for them to restock. So in the space of China for polysilicon manufacturing there’s not much of a significant difference from the first half, right now compared to the first half of this year. We are expecting the second half to start to increase domestic and manufactured polysilicon.

We estimate probably first half is about 28,000 metric ton production from China. The second half of 2013 may be slightly higher but not significantly higher because probably the [main reason] is that through the manufacturers you mentioned will maybe ramp up a little bit of production. That’s all we see. We do not see the price moving up very quickly because a lot of imports are still as I said from South Korea and Germany and [Louacher] so the price is still slowing increasing but we don’t see a big jump at this moment.

[Paul Shiggler] – Epsilon

Great, thank you so much, guys.

Gongda Yao

Thank you, Paul.

Operator

The next question is from [Alex Blue] of Goldman Sachs. Please go ahead.

Amy – Goldman Sachs

Hi, this is Amy. Gongda, thanks for taking my question. I just had a few questions on your cost structure. How do you achieve a $2 reduction from now till the end? Can you break down piece-by-piece different components of it?

Gongda Yao

So in several areas. We continue to try to make our hydrogenation process more efficient. As Bing mentioned and I also mentioned briefly in the introduction we did have the April shutdown for about two weeks to make our facilities able to accommodate higher utilization rates. At the same time also, between now and the end of this year we will add an additional reactor furnace to our production line. That will make the total production rate 6150 metric tons compared with 5000 metric tons right now. That’s one area.

So when you add that kind of capacity you generally will reduce the depreciation and the labor costs and all the fixed costs. At the same time we also have several projects we will do to reduce the using of materials like hydrogen, the utilization and also some other applications to try and reuse some and get some other equipment and make the process more efficient. By doing that we will get to $14. That’s what we have detailed.

The breakdown has several areas: one is electricity utilization. The unit cost for electricity we’re decreasing and also depreciation. As I said when you increase the amount you reduce that. The third portion is the materials, the silicon and MSG utilization will be much higher compared with the Q2 we reported.

Amy – Goldman Sachs

Okay, so if (inaudible) absolutely ton what is your electricity cost for let’s say $14? Can you give me a dollar number or maybe how many kilowatts?

Gongda Yao

Well we do not have a breakdown of the polysilicon manufacture, Amy, because you know we have a totally different structure compared with peers. We do produce our coring gas ourselves and also we produce other things, the interactive material. We also sell those things out so there’s no breakdown. But our electricity rate is much lower compared with anyone in China and even including international players. So the percentage of the electricity contributing to the cost structure is much lower compared with our Wanzhou facility, and that’s all I can disclose at this moment.

Amy – Goldman Sachs

Okay. Can you maybe tell me what’s your electricity retail price rate?

Gongda Yao

About RMB 0.31.

Bing Sun

That’s the tax included rate.

Amy – Goldman Sachs

Okay. So maybe I missed it earlier. Do you have a further plan to increase your capacity in 2014 or ’15? As your cash flow situation gets improving going forward is anything in the pipeline that you’re thinking about?

Gongda Yao

Yeah, we do have some internal right now preparation, yes, but I do not have certainly fixed the plan. We are thinking that relocating the equipment from our Wanzhou facility can increase the capacity in Xinjiang and that’s our kind of plan.

Amy – Goldman Sachs

What about on the wafer side?

Gongda Yao

On the wafer side, no, we do not have any expansion plans at this moment.

Amy – Goldman Sachs

Okay. One last question: (inaudible) same location as you, what is the cost structure up there? Do you know anything about it?

Bing Sun

No. I would say it’s very similar because they are in the ramp up phase. Their success depends on how quickly they ramp up and fully utilize their line. And I noticed that their line went online the same time last year but they started to produce the polysilicon almost nine months behind us. Other areas are totally different. The electricity cost structure is different. In that area it’s higher than our location because when we made the decision to move to Xinjiang we chose it specifically because of particular reasons. So it’s a totally different structure and maybe they’re using different technologies, also a different depreciation policy. And so really it’s not an apples-to-apples comparison.

Amy – Goldman Sachs

Okay, thanks. If I can one last question is the transportation costs from Xinjiang to Jaingsu Province where a lot of [silicon] manufacturing is located. So what is the incremental costs on a per kilogram basis or perhaps it’s even too minor to calculate – can you tell us?

Gongda Yao

That’s not significant at all.

Bing Sun

Yeah, I think what I can tell you is that surprisingly enough the cost of shipment from Xinjiang to Jiangsu Province is about the same as a shipment from Chongqing to Jiangsu Province. The reason is that in Xinjiang they have a high demand for production, a producing jobs area moving to Xinjiang so when you arrange the transportation there’s a round way; and in Chongqing in most cases it’s one way only, so that’s overall the transportation costs are higher for a transporting company. So there’s no significant difference and that is what was actually surprising to me at the beginning.

Amy – Goldman Sachs

Okay. Do you have a figure of how much would that be per kilogram basis?

Bing Sun

It’s around $0.20 US or something like that.

Gongda Yao

Yeah, that’s about right [RMB 2] approximately.

Amy – Goldman Sachs

RMB 2, okay. Thank you very much for the help.

Operator

The next question comes from [Ray Gi] of CICC. Please go ahead.

[Ray Gi] – CICC

Hi guys. The first question is you just mentioned that demand is very good and probably you struck some new long-term contracts with domestic customers. Can you mention some of the notable names of your customers?

Gongda Yao

No. We have the contract but we’re still working on some details. In the proper time we will announce that. I’m pleased you’ll be understandable so we’ll get a neutral agreement and commission.

[Ray Gi] – CICC

Yeah.

Gongda Yao

I can tell you, Ray, that the amount, almost 50% of our capacity is being signed up with framework contracts for both 2013 and 2014.

[Ray Gi] – CICC

Okay. Another question is I see a big write down of the Wanzhou production facility. Should we expect a further write down in the near future or this is all for the write down?

Gongda Yao

This is all because we believe those kinds of assets can be used in Xinjiang, can be moved to Xinjiang. And you’ll also notice that this is not new equipment. Because most of the equipment already depreciated for almost five years in the Wanzhou facility so it’s not the original value. So I’ll just remind you of that link to the previous question about how the value (inaudible).

Bing Sun

And Ray, I just want to add on to Dr. Yao’s comment that at this point we certainly don’t expect to see further impairment in the future as the overall market trend is moving upwards. But of course if there is any sign of a significant downturn in the market appraising in the future then we will have to revisit the targeting in accordance with US GAAP requirements.

[Ray Gi] – CICC

Okay, got you. And the last question is about the split between wafer and poly. It looks like from the Q2 data 80% is poly and then 20% poly is made into wafers. Should we expect the split to be stable in the future?

Gongda Yao

The amount for the wafer is limited by our capacity – it’s about 250 megawatts. So every month we set a maximum; right now at this moment our facility can accommodate probably 6 million pieces per month production. However, I think we still have the future potential to improve the polysilicon manufacturing capacity in Xinjiang so that ratio we’re expecting the wafer portion used will be reduced potentially.

[Ray Gi] – CICC

Okay, got you. So maybe another question. You talk about adding capacity of poly in Xinjiang and then you must be expecting very good demand to fill all of the new capacity. Do you think this is highly convincing to the management for the time being, like maybe for next year do you think if you double your capacity it will still be fully utilized?

Gongda Yao

Yes, well we do a very careful evaluation and study about the market. As you know, the China import poly last year was 80,000 metric tons annually. Total worldwide demand is about 200,000 metric tons so China domestically last year only made about only less than half produced and most is imported. I think we produced last year probably around 60,000 metric tons. So there’s still a gap there. And secondly, you can maintain your cost structure well below average. I think our improved capacity is not very significant and [will impact ASP in the market] – that’s what we believe.

[Ray Gi] – CICC

Okay, got you. Thank you.

Operator

(Operator instructions.) Another question just came in from Vincent Yu at SWS Research. Please go ahead.

Vincent Yu – SWS Research

Hello. This is Vincent Yu calling from SWS Research. Hi Mr. Yao, Mr. Sun. First I have to say congratulations. You guys really had this very difficult time and now we are seeing hope in (inaudible). The first question is that based on your expectations what is your best scenario case for cost reductions? I mean the lowest cost in Xinjiang maybe by the end of next year is sort of how much (inaudible) – that’s one question. Another question is we are seeing that GCL Poly announced the total that (inaudible) account to reduce the poly costs to $14, and they’re also doing (inaudible) for further reduction of the costs? Do you guys plan on working on that one also in Xinjiang poly in the future? So these are two questions.

Gongda Yao

Okay, so let me firstly try to answer your questions and then Mr. Sun can maybe add on. So the first question is how do we further reduce our costs. As we’ve mentioned in our news release today is by the end of this year the Xinjiang manufacturing costs will be reduced to the $14 level per kilo. Our financial model indicates if we relocate our Chongqing facility to Xinjiang, by the time we finish installing production we believe our cost is probably like 10% to 20% further reduced on that base for $14.

So that’s our current plan. Of course this is a very conservative thing. There’s a lot of area we still can further reduce our manufacturing costs. Included and maybe possible is that even more other policies for local companies, encouraging further investment policies. At this moment we seem to have a lot of room to improve our cost of production.

Secondly, regarding the new technology and GCL’s statement, FBR is a pretty new technology in China and also it’s not a very new technology in worldwide polysilicon manufacture. As we all know IEC has been using that technology for quite a while. And the FBR-produced polysilicon cannot be used alone. They have been doing the polysilicon manufacture by a [modified treatment] process. FBR equipment and process is very difficult to say it’s easy or hard compared with the Siemens process because there’s some new attempts and equipment that need to be qualified for manufacturing scale.

So that’s an area I think that will be challenging for GCL and for any people trying to test their using for (inaudible) manufacturer. For the cost of the structure I’m not surprised. If they can make the technology working everything of the cash costs in the US, the best international company is about $13 per kilo not including depreciation. So that added depreciation is similar or even higher than current Chinese best polysilicon manufacturers. So that’s all I can say to try to answer your question, so maybe… I don’t know if I answered your question or not.

Vincent Yu – SWS Research

Yes, I understand. In terms of the quality, (inaudible) deliver the same quality yours did to the market?

Gongda Yao

No, that’s… Actually I said you cannot use only the silicon, like a powder kind of shape they’re using for the high quality solar cells because the other materials’ contamination inside FBR-produced silicon is much higher than the Siemens process. So that’s why in the best practice these people are using those mixed with the polysilicon through the Siemens process – mixing those together trying to reduce the cost. So the selling price for FBR-produced polysilicon will be lower than our method, and secondly I think quality-wise it will be lower as well. So that’s the fact.

Vincent Yu – SWS Research

I see. So particularly your (inaudible) quality for their low cost, thank you. Thanks a lot, thanks.

Operator

The next question is from Sebastien Ho of Barclays. Please go ahead.

Sebastien Ho – Barclays

Hi, thanks for taking my questions. I have a couple of questions here. The first one, can you give us some color about the utilization rate for your poly and wafer respectively in Q2 and Q3?

Gongda Yao

Okay, for Q2 we, because we are in the ramp up for the polysilicon in Xinjiang, so we transitioned fully but because we shut down for two weeks that’s what’s causing our production to be lower. And also we are in the adjustment period for the high yield. And I can say that in Q3 our, for example last month we already achieved the production rate higher than 5000 [annual]. So we fully utilize the polysilicon in other words. For the wafer, in Q2 about 50% utilization. In Q3 we will probably increase to like 75% and Q4 we’ll increase to 100% utilization for the wafer manufacture.

Sebastien Ho – Barclays

Okay thank you. And that leads to my second question which is I’m trying to understand the mismatch between the poly shipment and also the wafer shipment for the quarter, because based on your guidance you suggest that the poly shipment will grow 3% quarter-on-quarter from Q2 and wafer shipment is likely to grow 25% quarter-on-quarter from Q2. So that implies that your internal demand for your polysilicon is going to increase while the external poly demand actually is declining. Am I getting that right?

Gongda Yao

No, actually both are increasing. First, Sebastien, is that the baseline we will deliver to the public investors like anyone. So this is not the best we can do – it’s the minimum we should achieve. So definitely we said our polysilicon shipment is increasing and also our internal wafer utilization is also increasing.

Bing Sun

And then let me just help to clarify, Sebastien. In Q1 I mentioned that our shipment of polysilicon was 706 metric tons and for Q2 our external shipment was 975 metric tons. So those two figures are all external shipments. We do not include internal shipments in those two figures.

Sebastien Ho – Barclays

Okay, got it.

Gongda Yao

I will also mention that for the Q3 guidance that’s [set out] in the metric ton external shipment, so that’s an increase.

Sebastien Ho – Barclays

Okay, thank you. And then can you give us some… I think some people are [having] some discussion around the capacity expansion. So what’s your current plan for your capacity for poly and wafer by the end of this year and maybe some guidance around 2014?

Gongda Yao

Okay, so end of this year will be 6150 as I mentioned. That’s for sure because we have a very accurate number. We are in the middle of the process to get this in line and starting to contribute in 2014. By 2014 we probably will have a capacity about 12,000 metric tons basically total production capacity.

Sebastien Ho – Barclays

Okay, thank you. So what will be the implied capital expenditure for this year and next year based on this kind of expansion?

Gongda Yao

This year it’s very minimal, so it’s about $4 million US. But next year is our best estimation with the current knowledge is [constructing] the facility for shipment and installation is around RMB 400 million costs.

Sebastien Ho – Barclays

Okay, thank you. And my next question is around the pricing. I think earlier you mentioned that you see the moderate growth in the amount of poly price. And we heard from supply chain that a lot of the wafer makers, they also want to raise the wafer price. So I’m not sure if you are also seeing the wafer pricing going up in the next couple months?

Gongda Yao

We actually, it’s hard to say. We see wafer pricing going up in the last two months. Of course we do not have an ability to judge whether next month’s will be high or not, but we see sometimes it’s difficult getting wafers – that’s why the price is going up. So it seems for polysilicon it’s a similar thing – we right now see there’s a lot of demand for buying.

One thing I want to clarify is at this moment all the people, they pay for the polysilicon first before we ship the polysilicon to them so it’s totally different compared with 2012. So in some sense it’s to tell you about the high demand that’s there in China because a lot of manufacturing capacity is in China for the downstream process. So we see demand for polysilicon is very robust in the next six months at least I would say.

Bing Sun

And also I just wanted to add a comment. We do see it going up in wafer price but we don’t really see it going up in the processing costs. The going up in wafer price is basically, from what we can see is because of the increase in the raw material being used for making the wafers – that’s the polysilicon, the increase in polysilicon price. That’s what we see. But we see the processing cost remains about the same.

Gongda Yao

Yeah, an additional point I would end on for things to comment, is in the first half of 2013 we saw almost 100% shipped to we call them multi-crystal high-efficiency wafers. So the typical make on the sale of those efficiencies is increased to more than 17.0% - 17.4% to about 17.5%. So those wafers’ price is increased significantly compared with the end of last year.

Sebastien Ho – Barclays

Okay. My last question is on your margin size. So if the polysilicon price is slowly going up and then also you’re expanding your (inaudible) from Q3 and you have four quarters, so can we assume that your gross profit margin will likely improve in Q3 and Q4? And when do you expect to see the gross margin turning positive?

Bing Sun

Let me try to answer your question. To stand alone, to look at the polysilicon margin from the Xinjiang output we can definitely see positive gross margin from the poly produced in Xinjiang. And we are making every effort. On the wafer side we are still in the negative gross margin, in the lower negative gross margin right now. Our plan is to try to get to breakeven [we decided] in Q1 – I’m talking about the gross margin. But of course before the equipment associated with the Wanzhou facility we still have a huge number under depreciation – that’s a serious burden on us before we can further utilize them in Xinjiang’s operation.

So to change the overall gross margin into positive we still have a long way to go. That can be done only after we can fully utilize the facility, the equipment right now in Wanzhou and we are trying to move that right now to Xinjiang. But on a standalone basis we can definitely achieve positive gross margin on Xinjiang polysilicon production in Q3 and we will try to achieve positive gross margin and (inaudible) in Q4.

Sebastien Ho – Barclays

Okay, thank you. I think that’s all from me. Thanks a lot for your comments, thank you.

Gongda Yao

Thank you.

Operator

I’m showing no further questions. This concludes our question-and-answer session. I’d like to turn the conference back over to Mr. Sun for any closing remarks.

Bing Sun

Okay, thanks Emily and as always, if you guys have any questions at any time please feel free to contact me or Dr. Yao and also Kevin. We are happy to answer your questions any time. And if you guys don’t have any further questions we thank you very much.

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