China XD Plastics' (CXDC) CEO Jie Han on Q2 2014 Results - Earnings Call Transcript

Aug.12.14 | About: China XD (CXDC)

China XD Plastics Company Limited (NASDAQ:CXDC)

Q2 2014 Earnings Conference Call

August 12 2014 8:30 AM ET

Executives

Sandy Qin - IR

Jie Han - Chairman and CEO

Qingwei Ma - Chief Operating Officer

Taylor Zhang - CFO

Junjie Ma - CTO

[Shi Young] - Director of Operation

[Lou Jintai] - Director of Technology.

Analysts

Graham Tanaka - Tanaka Capital

Operator

Welcome to the China XD Plastics' Second Quarter 2014 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Following management's prepared remarks there will be a Q&A session. As a reminder, this conference is being recorded and a replay is going to be available shortly after the call.

I would now like to hand the call over to your host for today's call, Sandy Qin. Please go ahead.

Sandy Qin

Thank you, operator. And welcome everyone to call. Thank you for joining us for the China XD Plastics' second quarter 2014 financial results conference call. Joining me on a call today are Mr. Jie Han, Chairman and CEO; Mr. Qingwei Ma, Chief Operating Officer; Mr. Taylor Zhang, Chief Financial Officer and Mr. Junjie Ma, Chief Technology Officer. Mr. [Shi Young], Director of Operation and Mr. [Lou Jintai] Director of Technology. Earlier today, China XD Plastics issued a press release announcing its second quarter results.

Before management's presentation I would like to refer to the Safe Harbor statement in connection with today's conference call and remind our listeners that management's prepared remarks during this call may contain forward-looking statements, which are subject to risks and uncertainties and that management may make additional forward-looking statements in response to your questions.

The company therefore claims the protection of the Safe Harbor for forward-looking statements that is contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ from those discussed today and we refer you to a more detailed discussion for the risks and uncertainties in the company's filings with the Securities and Exchange Commission. A more comprehensive description of the company's forward-looking statement is contained in the company's filings with the SEC.

In addition, any projection as to the company's future performance represents management's estimate as of today, August 12, 2014. China XD Plastics assumes no obligation to update those projections in the future as market conditions change. To supplement the financial results presented in accordance with the U.S. GAAP management we'll make reference to earnings before interest, taxes, depreciation and amortization which we will call by its abbreviated named EBITDA. EBITDA is a non-GAAP financial measure reconciled from net income, which the company believes to provide meaningful additional information to better understand its operating performance. A table reconciling net income to EBITDA can be found on the earnings press release issued today.

I would now like to turn the call over to Mr. Han. Mr. Han will be speaking Chinese and I will translate his presentation into English. Mr. Han, please go ahead.

Jie Han

Thank you, Sandy. And thank you all for joining us today. This quarter China XD extended its track record of executing against a broad growth strategy resulting in outstanding revenue growth and profitability.

We have another level to drive to growth. With our work in concert it results in great numbers such as those we are reporting today. First of all, the auto industry is experiencing rapid growth which we believe will continue for years. More importantly of China's economy advances, the mix of automobile produced is shipping to more middle class and luxury models. Those models have more contain of power, speed with one of the polymer composite materials. In contrast to lower quality plastic parts that populates low end cars. Finally, advance to polymers were historically important but now domestic suppliers such as XD can produce excellent product that meets the existing standard of the higher end car market. Domestic suppliers including XD are aggressively taking market share from importers by offering equal or superior quality at better prices.

Our growth has also been driven by two additional factors. First is geographic expansion. We are broadening our wish across China and we see very good growth in important market for in East and North East of China. Those regions grew 45.4% and 19% respectively as we noted in our release. The second growth driver is high-end standardized products we noted in the release. Our $20 million of sales to Korean customers is the beginning of what we hoped to be strong growth in that market.

As we look at these growth opportunities, we never forget our key element of our corporate culture which considerable growth. Our margins this quarter was solid. And increased to gross profit enabled us to step up our research and development spending. We recognized that directing more money into new product development can help us accelerate growth in years to come.

Based on our strong performance in the first half of the year and exciting growth opportunities we see coming, we remain very optimistic about good prospects for China XD Plastics. Accordingly, we will reiterate our guidance for 2014. The company expects full year sales to range between $950 million and $1.05 billion. And net income to range between $100 million to $120 million.

I now want to address another issue related to tough market perceptions of our company. Our focus is first and foremost to building a great business and earning a high level of profits for our constituent. However, when misinformation is circulated in the market that impacts our stock price and thus our shareholders, I feel compel to address it.

Most of the recent questions are simply a rehash arguments first presented nearly four years ago. We quickly released rebutter on July 14; in that press release we refuted the acquisitions with facts about the rate we paid to raise capital in the senior note offering. We pointed out to flaws in a gross margin comparison with Xinda and we explained the differences in interpretation regarding appropriate levels of R&D and DSO.

SAIC filings highlighted in the Seeking Alpha article are for CXDC's subsidiary Harbin Xinda Macromolecule Material Co., Ltd only which is not CXDC's only subsidiary. The article fail to take into account the financial information of all subsidiaries of China XD.

We understand the concerns that arise sometimes among U.S. based investors who invest in Chinese companies. We are working with extra effort to ensure that our shareholders can have full confidence in our financial reporting. Keep in mind that one of the big four auditors KPMG is our auditor and issued their opinions on our annual financial statements for the year ended December 31, 2011, 2012 and 2013 with no qualification. We further emphasized that one of the world's leading investment bank Morgan Stanley is a large shareholder in XD with whom we have close collaborative relationships which should help comfort investors that XD is managed professionally and honestly for the benefit of its shareholders.

Now I'll turn the call over to Taylor Zhang, our CFO to walk you through our financials. Taylor?

Taylor Zhang

Thank you, Ms Qin and thank you everyone for joining the call today. Before I review the numbers, let me remind you that all figures I discussed are for the reporting periods the second quarter of 2014 unless as stated otherwise. Additionally, any year-over-year comparison is to the second quarter of 2013. And any sequential comparison is to the first quarter of this year.

So let's review the start with solid numbers, revenue of $264.2 million was up 30.7% year-over-year and 18.2% sequentially. Our gross was balanced between volume and price. In particular, volume grew 16.3% while ASP was up 15.6%. Higher value products continue to grow in our product mix enabling a higher ASP reflected in a fact the revenue grew faster than tonnage volume. Gross also reflected our leading market share in North East China, accelerating penetration of the market in East China. And a gross of sales outside China such as in Korea.

Turning to margins. Gross margin improved to 19.8% from 18.4% in a year ago quarter and was down a touch sequentially. This resulted in gross margin, gross profit growing 40.6% year-over-year to $52.3 million. Similar to help better pricing, job revenue gross also enabled the gross margin improvement. It is important to note that this positive ASP trend was a due to better mix as opposed to a simple price hike. We are sending more weight added polymers was better performance characteristics and premium pricing is justified by the much better value offered to our customer for the price. The sales of our premium plastics accounted to three quarters of our revenues compared to two thirds a year ago. In addition, our SP on low end plastics also saw better effective ASPs, thus we reduced the amount of discount we offer to customers here. With better gross profits we'll able to invest in our future with substantially higher R&D spending. R&D was $13.4 million or 5.1% of sales. This is a healthy level of research investments. And it is in line if not better than our peers. Their spending was well over the $8.6 million we spent in a first quarter this year. We now have up to 151 active research products compared to 128 in a first quarter.

G&A expenses of $4.5 million were invested in building our corporate infrastructure to support growth. Our spending in this strategy is still reasonable at less than 2% of revenues. Even this higher R&D and corporate investments, we are still as carried our discipline of growing profitability. And generating operating income of $34.3 million or 13% of sales. Operating income was up 20.4% year-over-year. Net interest expense was up meaningfully year-over-year as we continue to borrow to fund growth.

The senior notes we issued in Q1 had their first full quarter of interest. And we had additional bank borrowing to fund capacity expansion in Southwest and Dubai funds. Net interest expense was $8.2 million, up from $1.9 million a year ago. Our debt burden is still extremely manageable with very high coverage ratios. That $8.2 million net interest expense was only 23.4% of our operating cash flow in a quarter. Taxes were $4.9 million equating to an effective income taxes of 19.8%. This was somewhat below our effective income taxes of 24.7% in the first quarter due to more income generated by Sichuan Xinda Group which has preferential income taxes of 15% and to the assumption of tax on income earned by all composite in Dubai. All this resulted in net income of $19.8 million or $0.30 per share, EPS was down 6.3% year-over-year. However, as most of you know, other income or expenses includes gain and losses on revalidation of our warrant liability and fair value change for contract. This gains and losses are non cash entries that where its quality depends on the movements of our stock price because this is not directly related to the results of our business. We also present an adjusted net income number that speaks of this effect. This is a standard presentation procedure followed by almost all companies with similar warrants and liability. Removing the effect o fair value change of warrant liability and for contracts, our adjusted net income was $20.6 million and adjusted EPS was $0.32.

Moving to more careful R&D and metrics, during the quarter our operating cash flow was $35.1 million, investing cash out flow was $136.5 million; financing cash inflow was $53.1 million. EBITDA was $41.8 million, an increase of 14.2% from EBITDA of 36.6 million in the same period of last year.

Now let's turn to balance sheet. Our balance sheet remains solid even as we fund for growth. Obviously we are borrowing to fund our growth with a proceed from borrowing going into earmarked, for capital spending as of June 30, 2014, our working capital condition has improved. Day sales outstanding DSO was down to 63 days from 91 days at end of Q1. Although the debt is now 57.2% of our total assets as a mission that is so expert and is very manageable. We remain cash flow positive and plan to further reduce our offered debt to 15% of total assets before the end of this year. I know we are funding very rapid growth.

So before we open the call to your questions, I would like to note for any questions direct to management in China, I'll translate both the questions and the answers. If you want to ask your question in Chinese, please ask it in English for the benefit of our listener. In addition, as Sandy introduced earlier, in addition to senior management in the call, we also have mid level manager on a call who are available to answer questions for the benefit of better communication with the company and also better transparency.

So with that we will now open the call to your question. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Graham Tanaka from Tanaka Capital. Your line is open. Please go ahead.

Graham Tanaka - Tanaka Capital

Good, just wanted to ask the new element of the source of sale you commented on Korea. That was new to us. How larger that opportunity, how are you able to enter that market? And our standing was the -- the company was ramping up close to full capacity so I just wanted to know what's your capacity utilization rate was in the quarter and how you are able to give, provide a supply for that new market? Thanks.

Taylor Zhang

Hi, Graham, your question was answered by Mr. Shi Young [ph]. The Director of Operations in Harbin.

Shi Young

So it is a pretty long explanation and I'll go through the answer. So probably it is very important to note our overall strategy. So in China we've been building a very strong business in China. For overseas, we do have plan to cover initially from Asia and later on to Europe, Russia and Middle East. So for China the strategy is basically our Harbin plant recovers Northeast, East China and North China. Then the upcoming Southwest plant, we will cover obviously southwest. And also partially to East China, North China, Southern China as well as along the East Coast of China. So for we are planning to build a plant in Dubai. This will cover not only Asia but also Europe and also Middle East. So Korean market is the first one that we have achieved to supply high-end standardized products. So there are two major products we have been working with the customers for almost two years. And now we are into a formal supplying stage. The two products are mainly Polyamid66 and the long chain Polyamid12. And the product, the quality and also standard are achieved at the same level as similar international products with better pricing about 10% to 30% lower compared to comparable international products offered. So now the products have been very stable and the customer has been accepting with very good results. In addition, we are also developing relationship between other customers in Asia markets. And probably according to differentiate the product strategy we have in China versus overseas. It is basically because there is very different eco system for industry. So in China as we know the interest in modern companies, quite a more than international because it is a very fragmented and of course relatively small size and the low capacity. And their stage of modern machine is number one less advanced and also tends to be less frequently updated. So that's why our product strategy in China is to offer customized product solution to customer to meet their requirement of their machinery as they are modern equate over time, we can adjust our formulation to make sure their production we will meet the product requirement by OEM. However, this is very different situation for overseas market. The standardized product is pretty much populates in international market. So in addition to the two products we have developed to offer into overseas market, we are also developing some other products for example PPS, PI, PLA, PEEK. So for the two major product category we offer to Korea markets, we have actually 10 series different products within those two categories. And eventually we will be able to leverage the platform in Dubai so we can cover Asia, Middle East, Russia and EU.

Taylor Zhang

Graham, I think you have another question is how big this opportunity? Let me also ask Shi Young.

Jie Han

So number one. As we know the industrial motor industry in Korea is pretty mature market. And they have various end application including automobile. And some high end electronics devices. So we have reached our customers through the following ways in a past including the industry compensate so we have attended meeting with potential customers and also with recommendation or referral from industry association. So through the past two years we have past back of possibly seven to eight potential customers in Korea. So this was all done by ourselves by our direct efforts. There are no distributors here. In addition, in some other region for example in Germany and Russia, we also have -- we are also working with potential customer, they are testing and evaluating our products. So in terms of the sizeable opportunity I believe the oversea market represent somewhere between 20% to 30% annual growth in the near future.

Graham Tanaka - Tanaka Capital

I wonder that 20% to 30% growth is off from what space, another words is that offer potential to grow for the total company for the --

Taylor Zhang

Okay. So Graham, you probably want to get some color like the size of the business for this year and so because we know the growth for the future already, right.

Graham Tanaka - Tanaka Capital

Well, we know we have an idea about the growth from the southwest plant now you have introduced -- give it another plant, so I was hoping to try to understand the various moving parts. Thank you.

Taylor Zhang

So, hi, Graham, so based on the orders we have and also indication from potential customer as well as our projections. So we believe in terms of volume this supporting business represents about 9,000 to 10,000 metric tons of products. In terms of our revenue approximately 600 million Renminbi which is approximately $100 million for this year.

Graham Tanaka - Tanaka Capital

That would be $100 million of sales from which from the overseas markets?

Taylor Zhang

Yes. So this close to 10% of our total revenue of 2014.

Graham Tanaka - Tanaka Capital

Margins that will be similar margins for the company or they dilute margins because you are entering new market.

Taylor Zhang

This actually appears better margin as the -- for the whole year appears better margin as these are high-end products goes into more high end applications.

Operator

Your next question comes from the line of [Glen Caveline The Venue Capital]. Your line is open. Please go ahead.

Glen Caveline - The Venue Capital

Good morning and congratulations on continued progress on the margin front and some new opportunities. I was wondering if you could may be explain to us in some more detail exactly where you are in Dubai in terms of the project, the cost? When do you expect to be producing locally? I think you have given us some idea what the end markets might be served from Dubai, but maybe you could just give us some bid of more detailed in terms of your decision to open and the timing etcetera. That's my first question. I'll stop there.

Jie Han

So first of all, I want to give you some color on the position of our Dubai operation. So this is actually fitting to our long-term strategy to expand into international market as Mr. Han mentioned including Asia, EU, Russia and Middle East. So the benefits from Dubai and also the decision for us to invest in Dubai is number one. There are sufficient and ample availability of raw material in the region. And secondly, we do have lot of international supplier that has subsidiary operation in the region. And number three, there is also tax benefits for our Dubai operation. There is zero taxation. So right now I'll give you some color where we at for Dubai operation. We are currently registering the plant and also in a process of ordering equipments, so we expect sometime in early 2015 or possibly later this year we can start producing locally. The total size of investments in Dubai including infrastructure and equipments is approximately $80 million, Mr. Ma have more to follow.

Qingwei Ma

We have some additional consideration that shows Dubai for our international production plant. So in addition to the other benefits we mentioned earlier, there is also Dubai has also very convenient, logistics. In addition, trading with customers and they offer also very flexible currency. There is no currency restriction and also very state-of-art custom facility in Dubai. In addition, we also have access to global talents from Dubai to be operated.

Jie Han

So first of all even though we started locally in China but we have eye to the world. So right now we have made a very good progress in East Asia market. And in terms of our consideration for our global strategy, we have evaluated in addition to Dubai we have chosen and we also evaluate some other locations. For example, Europe but given all the overall consideration for example including labor, logistics and some other key consideration we think Dubai offers a very compelling option. In addition, so as I mentioned Dubai, we'll cover Asia, EU and Middle East as well as Russia. So another piece of our global strategy is North America. So we do have plans something in future even though it is still planning but we do have intention to expand into North America ideally in the United States sometime in the future. And I want to reemphasize our global strategy is different from than in China. So we are offering the high-end standardized products in the global markets. In addition to just some additional thoughts is when you evaluating our global strategy we also consider some factors for example anti trust issue and also the difference between China markets and global markets for example-- as we mentioned earlier in China, the markets, the customers are mostly very small and fragmented versus much more mature and large size customers outside China. So in addition to Germany, Dubai, we also have evaluated some other places for example -- we are still evaluating some other locations for example in Singapore, in India.

Glen Caveline - The Venue Capital

So just a follow up. Just a quick follow up. Just can you update us then on the total capital spending plan for the company this year and just as your sales projections include any revenue from Dubai in this calendar year?

Taylor Zhang

Glen, let's go to the CapEx planning. So basically -- let's start from Harbin, we had approximately $50 million which was supposed to pay last year because of the timing of the title transfer, we did not make the payments until this year. So there was the same number but the same $50 million. The last CapEx for Harbin and was incurred this year. So that was for Harbin. And for Dubai, we've mentioned the CapEx is $80 million, this is update from last quarter. For Sichuan, we do have some update as well. Because in our original CapEx budgeting planning we did not taking to the consideration for different environments and time and conditions used to drive because in Sichuan the temperature, the condition is pretty humid for --that will affect the quality of our raw material and also the finish products. So that was not considered in the beginning of our plant planning. So to address the issue we have considered several options. One is to build warehouse. Another option is more used by international manufacture is to build the steel cylinder storage which is we are currently using in Harbin but not sufficient. That's why we are still having raw material piled on a ground in our Harbin factory. So in Sichuan that cannot be accepted because of the humid condition. So that's why are going to build additional steel cylinder storage in Sichuan considering the space we have. So that will be additional approximately $80 million on top of $190 million we have earmarked for this year. And the next year for Sichuan is pretty much the same as we mentioned is going to about $120 million. So for the size of overseas market this year, we expect to be about 10% of our total sales.

Glen Caveline - The Venue Capital

So Taylor you re going to spend the $50 million which is timing issue $270 million in South -- its $270 million in Southwest and all of $80 million in Dubai this year?

Taylor Zhang

Yes.

Glen Caveline - The Venue Capital

So that's total CapEx of almost $400 million.

Taylor Zhang

Yes, and there maybe some also timing factor here. So for example equipments depends on the delivery ordering so there maybe some variation but this is currently we have budgeted.

Glen Caveline - The Venue Capital

And then just lastly and I'll let someone else in. You mentioned in Dubai was a retrofit. So you are taking an existing plant if I understand part of the answer from management.

Taylor Zhang

Exactly. In Dubai they have many manufacturing chemical industries so they have very suitable plant available so we can retrofit, make some change based on our requirements. So it is not normal [ground up].

Glen Caveline - The Venue Capital

Okay. That explains why you are able to get to market so quickly.

Taylor Zhang

Yes.

Glen Caveline - The Venue Capital

And what did you pay for this plant in addition to the $80 million of retrofit?

Taylor Zhang

So Glen, so possibly US $600,000

Glen Caveline - The Venue Capital

Okay, so nominal amount. All right, I'll let someone else jump in.

Taylor Zhang

And for Dubai obviously that are gone just comments the majority of the CapEx is for equipments. The infrastructure retrofit is a faction of the total.

Operator

Your next question comes from the line of Peter Houseworth from Highland Investments [ph]. Your line is open. Please go ahead.

Peter Houseworth- Highland Investments

Thank you. All gentlemen, just wanted to ask very quickly, we've seen recently from government policies some reductions in the price of auto parts, some by your customers. I am jus wondering should we anticipate knockdown effect and pressure on your pricing as a result of this? And then I have a follow up.

Jie Han

So basically these two angles I want to share with you. So first of all based on his over 30 years experience in the industry, there is always a cycle, whenever a new auto model comes out, it always bears very good or better margin, so as the volumes goes up and the margin will gradually decline. So this is pretty much universal pattern in the past. And we believe this will also occur in the future. So it's very important for a company like us to make products in timely fashion goes into -- more goes into new model. And that's where we are spending our R&D. In addition, for the action by the China governments on auto parts, the interpretation by Mr. Han is the government is change a faster a healthy and more fairly competitive industry in China. So obviously the price they believe is actually a healthy development for domestic player. That's also the intention by the government is to increase domestic content. So we believe this will be an opportunity for company like XD so we can promote quality products with better pricing. This was in line with intention of government's satisfaction.

Peter Houseworth- Highland Investments

Okay, thanks. And just a quick follow. I think we are all aware the short seller attack, that credibility of a company and I applaud the Chairman for addressing this from the start. Just as a shareholder and other shareholders I spoken with, it resulted in hundred and millions of dollars of loss in market value and just to make an appeal for some leadership to try to correct the situation, publication of the SAIC and SEC filings, possibly authorizing a buyback of shares to demonstrate the commitment to shareholders and also a more robust commitment to the IR strategy in the U.S. but I think first and foremost, we have to give the market a chance to be efficient and with the cloud hanging over the stock warranted or not, it's going to be difficult for the stock to re-raised or something that everyone believes maybe more justified. But I would like to just hear from the chairman on that please.

Jie Han

So this is the first part. He has more to follow. First I wanted to thank you for your suggestions, those are very good suggestions. And secondly, I am equally if not more angry and outraged by this irresponsible attacks. So this is not something new, pretty much copy past of another article like approximately three years ago. So our --we have listed all of our subsidiaries in our 10-K filing. So any rational investor can see through this and make the right call. And I believe the investors confidence will be restored just a matter of time. As a CEO I believe it is my duty to build a better and reputable company with great transparency and trust from investors. And Peter for your second question about the stock repurchase. I had always been very interested in this option. So obviously this must be a decision by the Board. And we need -- we are going back considerable timing and also good opportunity. But right now it represents a very good opportunity and tells us in the path that never let good opportunity like this to go by. And secondly, thirdly, regarding your recommendation for IR efforts. As you have probably noticed we have updated our website. In addition we have engaged ICR as our firm. And lastly in a past we have our IR efforts has room to improve. But pleased be assured our commitment to IR. So we are building our Chinese website as well which will be up and running shortly. And in addition we will conduct a more road show to meeting with investors both in China and also abroad. And number three, we always welcome the investors to visit our facility including you.

Peter Houseworth- Highland Investments

Appreciate that, I'll go back in the queue and thank you very much for your attention and look forward to working together to resolve the issues in the market. Thank you.

Operator

Your next question comes from the line of Peter Sirus from Moukhami Investment [ph].Your line is open. Please go ahead

Peter Sirus - Moukhami Investments

I have a couple of questions. The first question is can you help us understand when Dubai is open? And when Sichuan is finished in a couple of years? And so looking out say three four years, what's the total capacity -- I am not asking for an estimate, what's the total capacity and earnings power in this company because you are spending a lot of CapEx now so we are looking three-four years from now. The capacity is how much and the earnings power is how much?

Taylor Zhang

Hi, Peter, this is Taylor. I will answer the question and here and take my team for additional comments. So Dubai we expect to be to start producing early 2015. There is a possibility depending our progress of registering and also equipment installation that we can start producing late of this year. So for Sichuan, we expect to have production in early 2016 and then in 2017. Our Sichuan plant will be up running at a very high capacity, let say close to our optimal or normal utilization 80% to 85%. So we can probably look at from the capacity expansion, so southwest together with Dubai which will give us additional slightly higher than 300,000 metric tons. So which is about 80% of what we currently have.

Peter Sirus - Moukhami Investments

So theoretically if you go into -- let me just rounding number of billion dollars in sales this year and make -- you should be -- in three years you should be 80% larger than you are this year and similarly in profit, is that a reasonable?

Taylor Zhang

I think that is reasonable and also keep in mind we are constantly working on improving product mix, offering higher end and better products into the market place. So we have look at from the volume angle but we think in terms of product mix, we are pretty optimistic about our prospect in future.

Peter Sirus - Moukhami Investments

So that an estimate -- by 2018 estimate of $4 a share, that wouldn't be unreasonable?

Taylor Zhang

Yes.

Peter Sirus - Moukhami Investments

Okay. The next question is, I see that you are doing a lot of R&D. Can you tell us the expanded R&D is that for something specific or is that a whole lot of separate projects? What should extra R&D?

Taylor Zhang

Hi, Peter, the answer comes from Lou Jintai [ph]. The Director of R&D in Harbin.

Lou Jintai

So basically we have -- in this quarter we have -- have been continue undertaking some other nodal but high end fields including high speed train, aerospace. As you probably noticed, we've extended our product category from 6 last year to 11 this year. And now we have invested significantly amount of our resource into high-end product category. For example, PPS and PEEK. So these are high-end products. Number one, they have a very high performance. In addition, we also have started some research and development in 3D printing material. And also biopolymers which can be -- which also has a very good potential and prospects in the future. So this R&D products number one is very high tech in nature and cutting edge given that international arena. So the material needed for conducting this test also more expensive compared to the experiments we have done on test. Mr. Han has more to follow.

Taylor Zhang

Hi, Peter. We got answer from --additional answer from Mr. Ma as well comments from Chairman, Han. I will start with Mr. Ma answer.

Qingwei Ma

So as you can see most of the R&D activities, initiatives are advanced. So because of the nature of the new products we are conduction experiments and testing to cover more aspect and metrics to conduct. So that was from the material part of the R&D investments. In addition, we have beefed up our R&D department. We have now 20 development departments and 80 product group, pretty much doubled from previous level. So also I wanted to give some color on how we see our R&D division. We basically have two big divisions, one is development. And so we basically split R&D into developments and research. So developments for its namesake pretty much focused on products that either already commercialized or can be commercialized very soon. And research is focused on longer-term products. For example, the PLA which is bio plastics printing materials and PEEK. So in terms of developments we are shifting from low end to high end products as we have constraining capacity. So this is better allocation of our resources into more profitable R&D investments. And secondly, and not only I also share some good positive results from our customers. The PLA which is plastic or polymer, we have received very positive and good results from our customer. So I think very likely in Q3 we can have some more commercialized success from PLA. And also very good positive testing from PEEK even though this probably will behind PRA in terms of commercialization. But we have completed test in automobile application. So lastly Jie Han made some additional comments.

Jie Han

We have expanded our product category from 6 to 11 as we mentioned. So this expansion is not only limited to auto, we have cover some other application or fields including printing material which can use our products by modifying our existing products. We can offer 3D printing material in the future. We also are researching the carbon fiber material which is very high end and high technology in nature. We also allocate resource to focus on engineering polymers, which also offer better margin and also better application compared to low end products we have. So overall we are strengthening our R&D commitments. Right now we have 400 R&D staff. So aside from material of the R&D investments, we also have more staff to work on the R&D products. And also take in-- we also providing R&D in technical support to customer not only in North East part but also in East China and Southwest China.

Operator

Your next question comes from the line of Peter Houseworth from Highland Investments. Your line is open. Please go ahead.

Peter Houseworth- Highland Investments

Hi, Taylor, just a quick follow up for my previous question regarding the reconciliation of the SEC and SAIC filings. Is there a plan to release and publicize? I understand this is overlooked by the short seller research; the fall is the subsidiary but for the benefit of shareholders and to put the market at ease and put the question to rest. Is there a plan to publicize that to make it easy for all in the market to digest?

Taylor Zhang

Hi, Peter. Mr. Han answered.

Jie Han

We have discussed in number one in our 10-K filing we have list out all of our subsidiary and KPMG has reviewed already all the financial. So I am not quite clear as how this from what angle can we provide benefit to investors or the market. One thing I doesn't want the company to do is to engage to make unnecessary engagement with pointless allegation. So obviously I actually welcome to a more comprehensive due diligence, so instead of focus on this comparison so we -- I actually believe a more comprehensive due diligence always recommend by company.

Peter Houseworth- Highland Investments

And I would say that if it is a pretty simple fix and is resulted in severe loss and market value. It's just difficult for shareholders to understand why it can't be corrected. I think that's what the --this type of stewardship will demand.

Taylor Zhang

Hi, Peter. So Mr. Han agrees so this is very easy fix, it's not even going off. But I believe, number one I want to reemphasize my commitment and promise to all shareholders. I am responsible for building a reputable and turn a parent public company. And I am committed to do whatever it takes to get there. And probably we need to look at a bigger picture instead of one item. I doesn't believe in why we don't fix -- we should go back to what we have discussed earlier of the strategy including our strategy of increasing transparency, all this will come into play to take us to the next level. So I notice the stock has recovered even though not to the level we wanted but it is recovering. So that to me is recognition of our efforts at least in the beginning to control the damage and restore investors' confidence. So I am a believer in long-term prosperity and I believe everything will clear as soon as we do right things.

Operator

Your next question comes from the line of Robert Linka from Vertex Group [ph]. Your line is open. Please go ahead.

Robert Linka - Vertex Groupon

Thank you very much. I was just wondering if you could give us what you think the gross margins and revenues are running in full capacity in Dubai?

Taylor Zhang

Hi, Bob, so in terms of Dubai operation, we actually -- and because of the location, culture and other different environment compared to where we are familiar, so we actually started with American executive staff so the capacity we are planning to build is between 5,000 to 10,000 metric tons. So it's not a big operation. The focus is the high end and high end products cater to international markets. So if we look at the comparable products offered by our international player, so the margin is somewhere at 50%. So we are looking at somewhere between 30% to 50% for our Dubai operation. So this is for this year and next year. But once we have secured solid swing in Dubai operation, we will consider additional of expansion in Dubai. So longer term let say two to three years if everything goes smoothly as we expected, we can also make additional expansion let say double capacity in Dubai and the margin for longer term. As we expand probably we can see somewhere between 30% to 35%.

Robert Linka - Vertex Groupon

Thank you. Second question. I noticed that the first two quarter revenues were up 30%. And I was just curious as to why you give revenue guidance of no change in average for the year versus last year? So that implies to me that the second half will be down in terms of revenues. Is that possible or are you not really giving us an accurate picture?

Taylor Zhang

Bob, I think the revenue guidance is now we have with a whole year. As we did in the past we typically revisit our guidance in Q3. So I think very likely we are going to adjust our revenue guidance in Q3 as we have better visibility of the whole year. And could handle for other operation metrics as well. So it's not we expecting downtrends in second half. It's just we think probably in Q3 is going to be a better time for us to revisit and revised the guidance.

Robert Linka - Vertex Groupon

Okay. I was just also wondering you mentioned that you had a 151 products now in R&D. Could you just share with us what percentage of those are non automotive?

Taylor Zhang

Okay. So Bob your answer come from Mr. (inaudible) Director of our R&D. So of the 151 R&D projects is split between research and development, as 17 for research which is longer term products. The remaining 134 is for development which means can be commercialized or already commercialized in a market place. So the 17 research products, these are all for nodal application. Of the 134, development products about 90% of RO. So which means about 13 is in RO. So taking together we have about 30 in nodal R&D products.

Robert Linka - Vertex Groupon

Okay. Just one or two real quick questions and then I'll jump out. What was the plant capacity utilization in this quarter? I didn't see it listed in your Q-- not your Q but your replacement.

Taylor Zhang

The utilization for the quarter is 84%.

Robert Linka - Vertex Groupon

84% thank you. And lastly at this time, could you update us on the status of the new plant both in terms of plant time and budget?

Taylor Zhang

Okay, sure. I think first of all I'll talk about the timetable of this second project. And the first of all and we have to admit that the progress of the Sichuan plant is late a bit later, little bit later than we expected the original plan. The reason there are three faults. The first of all because the government (inaudible) fund and hand over the land is later done the date they promised. The second, the quality of the land is little bit below the profit so we have to do some additional work such like the consolidation of the soil and so and due to the reasons above mentioned, so we have to adjust the design, supply to make our sequential and the progress is actually the fate and our adjusted design so above all the reasons, due to all the reasons and this what I cite in the first beginning of the progress, it's a little bit late than we expected. But now I am glad to inform that interest in that life has that we are catching up. And because we are now engaged in the right negotiation and like the pricing that related and package such like the design company, like still structured company etcetera, etcetera try to catch up within its progress, so we are feel very confident and that we can en-cash the plant to cut construction and begin on September of 2014 this year and we feel that deliver our promise and try different product and this front launch way to commission in the beginning of 2016.

Operator

We will now move on to our next question from the line of Graham Tanaka from Tanaka Capital. Your line is open. Please go ahead.

Graham Tanaka - Tanaka Capital

Thank you for your time today. You mentioned 30% ASP increase. Which percent of that is mix and what percent is inflation? Thank you.

Taylor Zhang

Hi, Graham. The inflation is roughly about 2% to 3%. So mostly due to the mix improvement.

Operator

It appears to us no more questions. I'll now turn the call back over to Sandy Qin for closing comment.

Sandy Qin

On the behalf of the China XD Plastics, we want to thank you for your interest and participation in this call. If you would like to speak to us to ask more questions or offer comments, please call either myself or Taylor in XD's New York office or our IR firm ICR. The contact numbers for all of us are listed at the end of the press release.

Operator

That concludes our conference for today. Thank you for participating. You may all disconnect.

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China XD Plastics (NASDAQ:CXDC): Q2 EPS of $0.30. Revenue of $264.2M (+30.7% Y/Y)