JA Solar Holdings' (JASO) CEO Management on Q2 2014 Results - Earnings Call Transcript

Aug.20.14 | About: JA Solar (JASO)

JA Solar Holdings Company Ltd. (NASDAQ:JASO)

Q2 2014 Earnings Conference Call

August 20, 2014 8:00 AM ET

Executives

Victor Yang - Director, IR

Jian Xie - President

Herman Zhao - CFO

Yong Liu - COO

Analysts

Edwin Mok - Needham

Philip Shen - ROTH Capital Partners

Maheep Mandloi - Credit Suisse

Mahesh Sanganeria - RBC Capital Markets

Gordon Johnson - Axiom Capital

Colin Rusch - Northland Capital Markets

Wei Feng - Luminus Asset Management

Emily Liu - Arete Research

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Second Quarter 2014 JA Solar Holdings Co. Ltd. Earnings Conference Call. At this time, all participants are in a listen-only mode. There will be a presentation, followed by a question-and-answer session. (Operator Instructions). I must advise, that this call is being recorded today, Wednesday, 20th of August, 2014.

I would now like to hand the conference over to your speaker today, Mr. Victor Yang, the Director of Investor Relations. Thank you, sir. Please go ahead.

Victor Yang

Thank you and welcome to JA Solar's second quarter 2014 earnings conference call. Joining us on the call today from the company are JA Solar's President, Mr. Jian Xie; and Chief Financial Officer, Mr. Herman Zhao.

Before we begin the formal remarks, I would like to remind you that certain statements on today's call, including statements regarding expected future financial and industry growth, are forward-looking statements that involve a number of risks and uncertainties that could cause actual results to differ materially. These statements are made under the Safe Harbor Provisions of the U.S. Private Securities Litigation Reform Act of 1995. Although the company believes that the expectations reflected in the forward-looking statements are reasonable, it cannot guarantee future results. Actual results may differ from management's current expectations. Therefore, we refer to you to a more detailed discussion of the risks and uncertainties in the company's Annual Report of Form 20-F filed with the Securities and Exchange Commission. All information provided on today's conference call speaks as of today's date unless otherwise stated. The company undertakes no duty to update any information, except as required under applicable law.

Also, during the call, we will occasionally reference monetary amounts in U.S. dollar terms. Please keep in mind that our functional currency is Chinese renminbi. We offer these translations into U.S. dollars solely for the convenience of the audience.

Now, I'd like to turn the call over to Mr. Jian Xie.

Jian Xie

Thank you everyone for joining our conference call today. Our second quarter results were in line with our expectations, and we saw strong revenue growth, a continuing shift of our product mix towards modules, and sustained bottom line profitability.

We achieved solid results across our key markets, despite regulatory uncertainties. As anticipated, we experienced some margin pressure mainly due to slight decline in ASPs in China, and the changing MIP in Europe.

In the second half of the year, we expect demand to improve in China, that combined with our favorable product and geographic mix sustains our confidence in our full year outlook, which we are raising at this time.

In the second quarter, shipments were 682 megawatts, a 47% increase year-over-year, and a 6.8% increase sequentially. Modules represented 65% of total shipments. Our geographic mix in modules remains very favorable due to our focus on countries, with the best growth and pricing prospects.

Japan represented approximately 40% of our module shipments, and remains our largest module market, which is a result of our strategy of developing relationships with top developers in that country.

ASPs in Japan remained stable for our high-efficiency mono products. Despite increased market competition among (inaudible) products, module shipments to China and to Europe was stable representing 30% and 12% of volume respectively. The Americas saw a surge sequentially and represented 9% of our module volume in the quarter. The rest of Asia Pacific accounted for 6% of module shipments.

ASP in China was lower this quarter because as expected demand improvement did not yet materialize. We believe demand in China will improve in the second half of -- as many planned utility-scale projects begin construction. Furthermore, recent favorable changes to the government incentive policies for distributed generation should also boost activity.

Shipments to Europe were 14% of total in Q2, versus 15% in Q1. We saw a sale in the module sales stabilize following the adjustment of minimum import prices at the beginning of Q2. Thanks to the premium performance of our high efficiency mono products.

We are optimistic about module shipments in the second half, as we see accelerating installation activity in the U.K., which is the largest market in Europe. Shipments to the North American market increased sequentially to account for 11% of total, up from 4% in the first quarter. Despite the trade difficulties in the U.S. market, we remain committed to serve our clients and the business partners there and are working diligently to establish a sustainable long-term supply arrangement for the region.

The U.S. market remains one of the most robust in the world, and we intend to actively participate in this market in order to retain our position among the leading companies in our industry.

Regarding our technology, the introduction of our new PERCIUM and RIECIUM cells is on schedule. During the quarter, we began to ramp mass production on both cells and modules. We are optimistic that these products will gain market share. For instance, our regular PERCIUM modules can achieve output of 290 watts, which is 20 watts higher than commercial modules from our competitors. Furthermore, we also developed a light module especially suitable for distributed generation business, which we will be launching in the third quarter.

Let me now turn to our downstream projects; as we discussed earlier this year, our target is to complete [indiscernible] megawatts of projects in 2014 and we are on track to reach this goal.

Let me elaborate on some specific projects; first, we expect to complete and connect 100 megawatt project in Gansu by the end of Q3. Additionally, we completed acquisition of 30% share in a separate 13 megawatt project in Gansu, which is expandable to 15 megawatts, subject to governmental approval.

Finally, we entered into an agreement with a state-owned enterprise to transfer to them 80% share in our 100 megawatt project in Lincheng Hebei. Besides these projects, we are proactively building our project pipeline and now have approximately 500 megawatts of new projects at different stages of development in China.

Overseas, we are working with a number of local partners to originate new projects, including some government bidding projects. Naturally, we will provide updates, as we finalize details.

Now, let's discuss our outlook for next quarter and the remainder of the year. Improving conditions in certain markets combined with our confidence in our ability to execute these to lead us to optimistic outlook for the second half of 2014. For the full year, we are raising our shipment guidance to 2.9 gigawatts to 3.1 gigawatts from the previous 2.7 gigawatts to 2.9 gigawatts. Consistent with earlier guidance, this range includes 200 megawatts of shipments into our downstream project portfolio.

For the third quarter, we expect solid sequential growth. Our outlook for volume in the range of 730 megawatts to 760 megawatts.

Now I will turn the call over to our CFO, Herman Zhao, for a detailed outlook and our financial performance. Herman?

Herman Zhao

Thank you, Mr. Xie, and good day everyone. Let's turn to our second quarter financial results. As mentioned, in the second quarter, we shipped 681.8 megawatts of solar power products, representing an increase of 47% year-over-year and 6.8% sequentially, and the module total represented 65% of total volume, up from approximately 55% in the second quarter of 2013, and 61% from the fourth quarter of 2014.

Cells and cell tolling represented the balance of shipment. Module shipments grew 14.9% sequentially and 75.6% year-over-year. Shipments to Japan were 26.5% of total volume, while China was 25.9%, and the rest of Asia Pacific was 20.6%. Shipments to Europe were 13.9%, while North America surged to 11.2% from 4.1% in the last quarter. Other emerging markets were de minimis at 1.8%.

Net revenue was $390.5 million, an increase of 6.5% sequentially, and 52.9% year-over-year. Revenue growth was driven by the ongoing shift in sales to module, as well as penetration of our key geographies, most notably, China and Japan.

Gross profit was $59.3 million, which translates into a gross margin of 15.2% that compares to 16.7% in Q1 of 2014, and 8.1% in the year earlier quarter. The sequential decline in margin, was primarily due to a higher percentage of module shipments to China, where module ASP declined slightly, and adjustment of minimum import price in Europe.

Total operating expenses were $44.8 million or 11.5% of revenue, that compares to 9.7% in Q1 of 2014 and 10.2% in the year ago quarter. The sequential increase in operating expense, was primarily due to increased freight and insurance expenses associated with increased module shipments, especially to the Americas.

Operating profit was $14.5 million or 3.7% of net revenue, compared to$7.1% in Q1, and a negative 2.1% in the year ago quarter. Interest expense was $8.8 million, down 31% year-over-year and down 4% sequentially. Non-operating income and expense lines include our provision for the change in fair value, resulting from the revaluation of our warrants.

In Q2, we booked a non-cash expense of approximately $2.6 million from our increase in the estimated fair value of the warrants. This compares with $5.4 million expense booked in the fourth quarter of 2014. The value of these warrants will change regularly, so you should expect to see valuation adjustments, both positively and negatively in future quarters. Therefore, we encourage investors to look at our non-GAAP measures provided in earnings release for a better sense of the underlying trends in our business.

Other income in Q2 was $5.1 million compared to other income of $4.7 million in Q1. Net income for the second quarter was $6.5 million or earnings per diluted ADS of $0.10, which compares to earnings per diluted ADS of $0.23 the fourth quarter of 2014 and a loss of $0.58 per diluted ADS in the year ago quarter.

Non-GAAP net earnings attributable to the company's ordinary shareholder was $8.3 million, which compares with $18.7 million in the fourth quarter of 2014. Non-GAAP earnings per diluted ADS in the second quarter of 2014 was $0.14 compared to a non-GAAP earnings per diluted ADS of $0.32 in the fourth quarter of 2014.

Our balance sheet remains strong, which prepares us to fund our continued business growth. At the end of the quarter, cash and equivalents were $326.9 million, we were able to grow our cash balance, despite the need to increase our working capital in anticipation of a strong second half growth. Our receivable days were up to 58 from 46 at the end of Q1, and the inventory was up to 87 days from 72 at the end of Q1. Both numbers were in the range we consider normal, and with cash up, you can see our balance sheet is not being stressed.

As of June 30, we had a total working capital of $275.7 million; total short term borrowings were $309.2 million, while total long term borrowing was $305.5 million. $43.8 million of the long term borrowings will become due within one year. Operating cash flow was a negative $13.5 million in the quarter, due to the increase in working capital.

Looking at capacity, at the end of last quarter, we announced that we completed expansion in module capacity from 1.8 gigawatts to 2.8 gigawatts, and cell capacity from 2.5 gigawatts to 2.8 gigawatts.

Now, I would like to turn the call over to the operator, for the question-and-answer segment of our call. Operator?

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Edwin Mok from Needham. Please go ahead.

Edwin Mok - Needham

Hi, thanks for taking my question. Sorry about that. So my first question is on the guidance, you mentioned that improved condition, it sounds like China was a big driver there. Can you maybe just start off by just giving some color on China, how do you think about the market overall demand in China, a split between utility and DG there, and how you guys positioned those in China?

Jian Xie

Yes. We are seeing increased speed in installation activity in Q3 as expected. The demand already surpassed our supplier capability. That being said, we will selectively accept orders with best commercial terms. In turn, the DG and the utility still, I don't think the government really split between these two datas. Couple of years ago, I think the government really reinforced the total number for this year, which is 13 gigawatt. But in terms of how much from DG and utility, I don't know if -- Mr. Zhao, you have any update on that?

Herman Zhao

It’s quite difficult to give detailed number, but I believe in total, the target of this year is 13 gigawatt. So maybe like DG, maybe [32.5] gigawatt.

Edwin Mok - Needham

That's helpful. Beyond, call it the strong demand in China, any other reason why you raised your guidance; because if I look at the numbers implied are really pretty big jump in the fourth quarter. Any other region that is driving that growth in the fourth quarter?

Herman Zhao

Yeah. I think the big driver is really China market, and the rest of the market for us is relatively healthy like Europe and Japan is relatively healthy, and most of that is China market really.

Edwin Mok - Needham

I see. That's helpful. And then a question on the project business, I guess a two-part question, first is when should we expect you to actually recognize revenue for the project business, kind of timing of that? And you mentioned that you have a pipeline of around 500 megawatt of new projects. Should we assume that a good portion of that will be -- is targeted to be completed next year in 2015, or any kind of timing/color you can provide on that pipeline would be helpful?

Jian Xie

For these questions, be prepared for a long time to answer, at least three to five minutes. Let me go through the details. I think people are interested to listen to this part.

We expect to sell some, but not necessarily all of this project in 2014. When we talk about a 20-megawatt project, we are referring to a project in some stage of development. At the current moment t, the pipeline for this year to complete looks like this. Number one, we have a 100 megawatt project in Gansu-Dunhuang that should be complete and connected before the end of this year. We have a potential buyer for this project and may be able to recognize revenue in 2014, the reason being is really we are confident a sale will go through, but the exact timing of the revenue recognition depends on some details led to the finance of the project. We can really discuss offline with you, if you want to know more information for this 100 megawatt.

The second one we have, a 40 megawatt project in Hebei, for which we signed a deal to sell 80% of ownership to a state-owned energy company. Due to this agreement, we recognized the module sale of two projects when they are delivered; because we will remain a minority owner until we sell that 20% stake, we will recognize the investment income, that 40-megawatt project status.

Then we have a 30-megawatt in Ningxia, and another 30 megawatt in Gansu-Baiyin, that we plan to complete and connect this year. We are confident that we will complete and connect the Ningxia project this year. With the Gansu-Baiyin project, we hope to complete and connect this year, but not sure of the timing at the moment. These are the build and transfer projects. The last one, in addition to this 200 megawatts, we have another 50 megawatts in Hebei, that could be completed this year. Obviously, there are risks to the timing of our completion of completion of any project. So with 200 megawatts in progress, we feel confident that at least 200, we will complete in this year.

Edwin Mok - Needham

I see. Okay. So the 200 number is the project completion in terms of revenue recognitions, and I understand the timing of that could be dependent on when that falls basically within this year or not. That's helpful. And the last question on the OpEx, I think you mentioned increased freight costs on OpEx was a big driver in OpEx, are those kind of one-time just timing of the freight costs, or is this something that we should expect to see because these high level freight costs should stick around as we get into the second half and beyond?

Jian Xie

Okay. Let me explain why? The main reason of the increase in operating expense was really increased freight and insurance expenses, associated with the increase in module shipment. In Q1, shipping expense was lower, because last quarter of the module sales to Europe was shipped in December. But the revenue was recognized in Q1, and associated shipping expenses were booked in Q4 of 2014, when the expense occurred.

In Q2, the [indiscernible] decision applied to the U.S. market, while we shipped 40 megawatt to the U.S., but revenue of this 40 megawatt shipping had not been recognized in Q2, that's another reason why Q2 is higher than Q1. Really hitting on quarter revenue size and geographic mix of our product shipment, we expect operating expense to be in the range of 9% to 11% of net revenue in future quarters. Does that answer your question?

Operator

Your next question comes from the line of Philip Shen from ROTH Capital Partners. Please go ahead.

Philip Shen - ROTH Capital Partners

Hi, thank you for taking my questions. The first one is a follow-up on the project pipeline, can you expand on what you're seeing for your projects outside of China, what's the size of the pipeline, which countries you're targeting and perhaps, any timing of projects coming to a close? Thanks.

Jian Xie

For overseas projects, our strategy is to really work with local partners. Currently, for our South Africa market, there was a run for bidding process going on. So we work with local partners at least in that market; and [indiscernible] market is really, there are two ways to look at that. For smaller project anything below 3 megawatt, we tried to do the development ourselves. Anything over 10 megawatts, we try to work with local experienced partners to do the project together.

Besides these two areas, in America, we tried to work with a local partner, who has a downstream business experience with a financial background and really -- relying on local partners to do the downstream business.

In South America, we participated with some project in Mexico and Panama. Anything mature enough, we will really share with you guys.

In Europe, really, we worked with our [indiscernible] on downstream business as well.

Philip Shen - ROTH Capital Partners

Great. And in terms of the U.S. market, can you update us on what your latest strategy is for the U.S. market?

Jian Xie

Sure. For U.S. market, U.S. market is one of the most robust in the world, and we see sustainable growth in the years ahead. We built some model inventory in the U.S., so that we could serve that market at competitive price, in case tariffs were imposed. Obviously, that inventory won't last forever, so we are -- in many alternatives, we have to serve the U.S. market in the longer term. We announced specifically after the decision was made.

In the near term, we have 40 to 50 megawatts to sell for the near term. But in long term, we are really running all kind of alternatives.

Philip Shen - ROTH Capital Partners

Okay. Thanks guys.

Operator

Thank you. Your next question comes from the line of Patrick Jobin from Credit Suisse. Please go ahead.

Maheep Mandloi - Credit Suisse

Hi, this is Maheep on behalf of Patrick Jobin. Question on the gross margins, can you just update on your expectations for Q3, specially given the dim [ph] receptions to the U.S. and your mix expectations in second half?

Jian Xie

Yeah. Q3 gross margin will be flat sequentially, because the module cells in China continue to see a soft ASP. But they will be offset by better product mix, more modules in general.

Maheep Mandloi - Credit Suisse

Thanks. And what do you --

Jian Xie

Yes, go ahead.

Maheep Mandloi - Credit Suisse

I was saying, what are you seeing on pricing for Japan, in particular for Q3 and Q4?

Jian Xie

Japan, we do see a market price for multi, in the range of low 60s or in the high 50s higher -- our focus on quality, value creation, and a partnership lead to stable ASP for our mono product in the high 60s. So our ASP in Japan really -- won't impact that much. We feel pretty comfortable with our current ASP in Japanese market, which is in high 60s for our mono modules.

Maheep Mandloi - Credit Suisse

Okay. And lastly, can you just update us on your capacity expansion plans, you have already achieved 2.8 gigawatts of selling modules this quarter. How do you see them going forward?

Jian Xie

For this year, in China, we don't have a further expansion plan. For next year, we are currently [indiscernible] our overseas production options, factory options including setup of factories in North America and in Southeast Asia for new capacity addition for 2015. For this year, I think there is no further expansion plan in China.

Maheep Mandloi - Credit Suisse

Thank you.

Operator

Thank you. Your next question comes from the line of Mahesh Sanganeria from RBC Capital Markets. Please ask your question.

Unidentified Analyst

Hi, this is [indiscernible] for Mahesh, thanks for taking my questions. First, I wanted to follow-up on the China ASP question. You mentioned that you see a little bit pressure in Q3, but it seems a little bit counterintuitive, because it seems you guys are anticipating strong demand in second half. Should we expect more improvement in the ASP? I mean, can you help us to reconcile that?

Jian Xie

ASP currently is still pretty fast in the region of $0.55. For China, Q4, we do expect that ASP will stabilize, may have to go up to $0.56 to $0.57 range, that's China. For the rest of the market, Japan, we do not expect ASP will change much. for U.S., currently, roughly around $0.75 and Q4 may go up to $0.78. For European country, around in the mid-70s, we don't need to expect anything for European market. That's the four major markets we are keeping our products too.

Unidentified Analyst

Great. One question on the project, economics for China project; because you guys -- the pipeline looks pretty strong, and you guys mentioned several interested buyers for certain projects. Can you share with us the project economics in China?

Jian Xie

Project economics in China; basically, I think final uptick and leverage the -- they are looking for 8% above. For the pricing, downstream price, the range is really wide. Anywhere between RMB9 to RMB11 in that region. It depends on where the project resides.

Unidentified Analyst

So I am sorry, the RMB9 to RMB11 range is for the whole project, project per watt?

Jian Xie

Yes, that's right. Your total costs are around RMB8 per watt, yes.

Unidentified Analyst

Got it. and then one last question about Japanese markets. Can you guys talk about the current mix in the Japanese market? I mean, overall, in terms of mono versus multi-panels, and for your shipment to Japan market, what's your mix for mono and multi?

Jian Xie

Currently, I think majority is mono. But in second half, especially in Q4, we may have little increase in multi, maybe 30 multi and 70% mono, in that range.

Unidentified Analyst

Okay, great. Thank you very much.

Jian Xie

Thank you.

Operator

Thank you. Your next question comes from the line of Gordon Johnson from Axiom Capital Management. Please ask your question.

Gordon Johnson - Axiom Capital

Thanks for taking my question guys. I guess, first on the ASP in Q2, can you guys give us a number there, was it around $0.66, that's what we are coming up with in our model, or we went wrong there?

Herman Zhao

Actually, ASP in Q2, China is roughly $0.58. Japan is from mono-based, $0.67 to $0.68; USA, roughly $0.68; Europe, mid-70s for Q2.

Gordon Johnson - Axiom Capital

Okay. So for Japan, mono is $0.67 and $0.68 multi, I think if I heard right, is around $0.60?

Herman Zhao

Multi is -- is low 50 to high 50s, yes

Gordon Johnson - Axiom Capital

Okay. And then you said, your mix in Q2 in Japan was 30 mono, 70% multi?

Herman Zhao

No, actually that's Q4. I think in Q2, we have probably 90% flat is mono.

Gordon Johnson - Axiom Capital

Okay. And then can you -- I don't see a presentation on the web site, maybe I am missing it, but did you guys provide a geographical mix for Q3 guidance, or for the full year?

Herman Zhao

Okay, I can give you now. For the --

Gordon Johnson - Axiom Capital

Hello.

Herman Zhao

We did not really give it publicly. So I think probably, not proper to really do it for now.

Gordon Johnson - Axiom Capital

Okay, no problem. And then on your projects --

Herman Zhao

For the whole year I think -- I think the whole year's guidance, we did provide publicly. If you want us to refresh you, I can do that for you.

Gordon Johnson - Axiom Capital

No problem. I will just look at the prior presentation. Then just two more; on the project sales, it sounds like you guys are definitely going to have some completions this year. But for modeling purposes, for being conservative, should we be modeling zero project sales this year, or is there a number we should be including on our model, just to be conservative?

Herman Zhao

That's a good question. So of course, we tried to -- there was no doubt we can't compete and connect, and the reason we see the revenue recognition may be delayed, that's really for some of the project, we get a bridge loan, right. Bridge loan, the company has to provide guarantee. I mean, unless the guarantee expires -- in revenue recognition, if the [indiscernible] did not expire this year, it tends to somehow [ph] next year, that means that we cannot recognize the revenue. That's the part where we are a little hesitant.

Gordon Johnson - Axiom Capital

Okay, that's helpful. Then lastly your cost per watt, we are calculating roughly around $0.52 for cost per watt, is that accurate and what should we be thinking about in that number for Q3?

Herman Zhao

Cost per watt; okay. So on a blended base, right? On a blended base, that really depends on the -- the blended base. Blended base I would say, using -- I think you can expect it to be slightly decline compared to Q2, if you have a Q2 number. So if you're using slightly declined, that will be good as a reference.

Gordon Johnson - Axiom Capital

Okay. Excellent. Thanks a lot guys.

Jian Xie

Thank you, Gordon.

Operator

Thank you. Your next question comes from the line of Colin Rusch from Northland Capital Markets. Please go ahead.

Colin Rusch - Northland Capital Markets

Thanks guys. Can you talk a little bit about, what you're seeing in terms of input prices, both on polysilicon, as well as on wafers, as you enter the third quarter, and then into the balance of the year?

Jian Xie

Okay. I think for poly price, we don't really expect to go anywhere either way. At Q1, it was roughly $22 per kilogram, and Q2, up to $23, then late July and early August, it went down to $22 per kilogram. Currently, we don't expect the poly prices will go either way.

For wafer price, beginning of the year, on [indiscernible] we were talking about $0.24 per watt. But currently, the wafer is really -- went down to roughly $0.21 per watt.

Colin Rusch - Northland Capital Markets

And have you seen those wafer prices flow through into the Q, or should we expect some of those wafer price improvements begin to impact margin in the third quarter?

Herman Zhao

We certainly don't expect the wafer price going up. With kind of softer ASP for sure, there won't be -- in the near term, the wafer price won't go up. In the long run, Q4, it might go up a little bit. It really depends on how strong the market is. But currently wafer ASP, we don't expect the wafer price going up, at least for Q3.

Jian Xie

This is Xie Jian, the average wafer costs in the second half this year maybe in between $0.21 to $0.422 per watt.

Colin Rusch - Northland Capital Markets

And where was it in Q2?

Jian Xie

In Q3 and Q4?

Colin Rusch - Northland Capital Markets

But where was it in 2Q?

Herman Zhao

Q2 was $0.22 to $0.23.

Colin Rusch - Northland Capital Markets

Okay. So it shows a little bit of an improvement there. And then the last question; obviously you guys have one of the best balance sheets in the industry. Can you talk a little bit about your decision-making process for allocating capital into the project business versus manufacturing capacity? Certainly, it looks there is an opportunity to pick up some distressed assets in North America and a couple of other markets, where you guys could potentially see some compelling economics, as well as growing your pipeline, and potentially pursuing something like a [indiscernible] strategy in China? Can you just talk about, how you're thinking about those decisions and laying those options for the company?

Jian Xie

Yeah for the year, we probably talked about several overseas factories. You know with some -- for these [indiscernible] right? Those kind of option is still under evaluation, so anything maturing up, definitely.

For downstream, ELCO [ph] business really, I think at this moment, I don't think we have a position to see ourselves qualify that. I think to qualify that -- to talk about ELCO, that business should have a 200 to 300 megawatt Dunhuang business on your balance sheet. Besides that, you should have 400 megawatts plant, late stage plant. So I don't think we have done that yet, but down the road of course, we will be actually moving to the downstream business. As we said, this year we tried to complete 200 megawatt; besides the 200 megawatt, we have another 500 megawatts in different states in China, and overseas still, there is some project going on.

So really, that's the direction we like to move to. But at this moment, I don't think we are qualified to talk about EFCO [ph] yet. We have nothing to give at this moment.

Colin Rusch - Northland Capital Markets

Okay guys. I will follow-up after the call. Thank you.

Jian Xie

Thank you, Colin.

Operator

Thank you. Your next question comes from the line of [indiscernible] from AM Capital. Please ask your question.

Unidentified Analyst

Thank you for taking my question. I have a couple of questions. First of all, I think you said you have 100 megawatt project, which is -- you have a ready buyer. If you sell that project, what type of margins you can expect from that 100 megawatt?

Jian Xie

I would say, roughly plus or minus 15%.

Unidentified Analyst

Okay, got it. Second thing is, could you elaborate a bit on your development on the high efficiency sales? Say, you do have any plan to produce N types any time soon, given you have lot of high extension module requirement for Japan?

Jian Xie

Our focus right now is on P-TYPE, PERCIUM and RIECIUM, and N-TYPE< I don't think in the near term, we have any plan to getting to the N-TYPE.

Yong Liu

Actually, we have something working in our lab to like, reaching high efficiency N-TYPE, but low cost. And so, we are in the process, but just in pre-pay order. So we need more time to have like good equipment to deploy N-TYPE production.

Jian Xie

I think to answer your questions, maybe I can share with you our current high efficiency, proxy mono bit products. We already reached 20.4%, and this year, we expect to add -- have four line for PERCIUM and two lines for RIECIUM, with each line having 40 megawatt capacity.

Unidentified Analyst

Got it. And my last question is on the margin side, on the second half, probably by 4Q, we have lot of -- the segment will be for China market, where margins could be again spread. So do you expect any recovery on the margins on second half of this year, or it will remain as difficult?

Jian Xie

I think margins, as we said, Q3, we expect it flat sequentially. But Q4, I think with a strong demand, we may have chance for margin improvement, we may have chance.

Unidentified Analyst

What we are observing now, like your competitor’s margins have been improving from first to second through probably then guidance on third quarter is moving up. But your margin has come down a bit on second quarter, and likely to remain stable. Are we missing something out here?

Jian Xie

I think it really depends on, where your product is shipped to. If we have a higher percentage in China, as you know, current China ASP is kind of soft. So that’s why the reason, our margin did not have any improvement in Q3, and our peers – really depends on where their product is shipped to. They ship to higher margin areas, of course they have room to improve. But that's just the reality for ourselves.

But I think, as we said, we have confidence, we can maintain healthy volume in our Japanese market and European market.

Unidentified Analyst

Thank you. Have a good quarter ahead.

Jian Xie

Thank you.

Operator

Next question comes from the line of Wei Feng from Luminus Management. Please ask your question.

Wei Feng - Luminus Asset Management

Hi guys. First of all, did you recognize any [indiscernible] revenue this quarter?

Herman Zhao

No, nothing. Nothing for this quarter.

Wei Feng - Luminus Asset Management

And do you have -- what is your [indiscernible] balance that you have not recognized?

Herman Zhao

Roughly, we have 17 million.

Wei Feng - Luminus Asset Management

That's in U.S. dollars, right?

Herman Zhao

That's right.

Wei Feng - Luminus Asset Management

And what is the depreciation and CapEx for this quarter?

Herman Zhao

Depreciation for this quarter is $27 million. Actually for Q2 its $30 million, I am sorry -- no, for Q2 its $30 million.

Wei Feng - Luminus Asset Management

And CapEx?

Herman Zhao

CapEx is $27.2 million. And Q3, we expect to have -- I think you asked this on why we just give you Q3 and Q4 expectation. Q3, we expect to have depreciation move up to $32 million, and Q4 probably move up to $33 million.

Wei Feng - Luminus Asset Management

The reason that depreciation is going up is because you have more products on your balance sheet, or because of your capacity expansion?

Jian Xie

That's because of the capacity expansion.

Wei Feng - Luminus Asset Management

Then what's your CapEx plan for the rest of the year?

Herman Zhao

For CapEx for rest of the year, I think we finished our expansion already, unless there are something or the other comes up we have to do urgently, other than that, we don't expect adding any more CapEx.

Wei Feng - Luminus Asset Management

Do you have maintenance CapEx for 3Q and 4Q?

Herman Zhao

Maintenance is relatively low. Maintenance is roughly $10 million. Very low.

Wei Feng - Luminus Asset Management

$10 million per quarter?

Herman Zhao

$10 million for whole year.

Wei Feng - Luminus Asset Management

All right. Thank you. Appreciate it.

Operator

Thank you. Your next question comes from the line of [indiscernible] from UBS Hong Kong. Please ask your question.

Unidentified Analyst

Hello, sorry. Thank you for taking my question. I am just wondering, whether the great curtailment [ph] issue is going to impact China solar, if that's the additional target and expansion plan in the future? And for your project development in Gansu, as you seeing the risk of weak [ph] curtailment? I know that you're going to transfer the project, but just in case that you have future projects in that region, that could be at risk? Thank you.

Jian Xie

Yeah first question, if there is any risk of a [indiscernible] connection, is that right?

Unidentified Analyst

Great curtailment, like the same issue --

Jian Xie

Curtailment, okay yeah. I think the project on Gansu province, there is a curtailment issue, yes. So that's why in that province you probably have to sell it at a discount.

Unidentified Analyst

Okay. And what's your upside in terms of that distributed generation in China versus [indiscernible]?

Jian Xie

DG projects really, this year we plan to do 10 to 20 megawatts, a very small scale, until we see a mature business model, then we will be very aggressive with getting to the DG. For now, we just tried to do some pilot projects, in areas up to 10 to 20 megawatts basically. Besides that, for DG parts, we like to participate in EPC and solution provider business part as well.

Unidentified Analyst

Okay, thank you.

Jian Xie

Thank you.

Operator

Thank you. Your next question comes from the line of Gordon Johnson from Axiom Capital Management. Please ask your question.

Gordon Johnson - Axiom Capital

Hey guys, thanks for taking my follow-up. We have just been doing a couple of checks in China, and to the last question, we have been hearing comments around cash collection issues on projects, due to things like curtailment, and just the lack of overall financing and ability to get things done is due to some of the fraud investigations. Have you guys seen some of those issues, with respect to projects you actually own, actually being able to collect the cash, once they are connected to the grid?

Jian Xie

Are you talking about SIT execution part?

Gordon Johnson - Axiom Capital

Yes.

Jian Xie

Yeah. I think the process really, the local development, what is the cost? The local development reform department will submit the application to the financial administration part. Really, the process that comes from the financial administration part [indiscernible] longer term, based on what we know.

Yong Liu

Three to six months.

Jian Xie

Three to six months. Once you get that approval, basically whatever they pay behind for the SIT, they will pay -- catch-up all the behind payment at one time. So based on what learned, each quarter, they were supposed to lift up the quota, for which project they will provide SIT. That's the processing time. It were [ph] longer in the finance and administration part.

Gordon Johnson - Axiom Capital

Okay. Excellent. Thanks guys.

Jian Xie

Thank you.

Operator

Thank you. (Operator Instructions). Your next question comes from the line of Emily Liu from Arete Research. Please ask your question.

Emily Liu - Arete Research

Hi. Thanks for taking the question. I have a question regarding the suspension of process trade for the import from Korea and USA. Just wondering, how much your exposure to Korean or U.S. currently, and what's your strength after that is supposed to be restricted -- end of this year -- starting next year basically?

Jian Xie

Well the regional revenues have no impact on ourselves, as current, we saw [indiscernible] from U.S. polysilicon makers, and pricing will be determined by supply and demand in the long term, and impact will be temporary, if there are any.

Emily Liu - Arete Research

Okay. So you don't have any exposure to the U.S. or Korean poly, not much?

Yong Liu

No we have an exposure to Korea. But as you know, the late, the duty for Korean companies is very low. So if we cannot do by the custom [indiscernible], we can import laterally. So that means, we need to pay like 3% more duty.

Emily Liu - Arete Research

And you don't have any other exposure to the U.S. poly? IC or Hemlock?

Yong Liu

No. You can check with our 20-F.

Emily Liu - Arete Research

Okay, thank you. Thanks.

Operator

Thank you. (Operator Instructions). There are no further questions at this time. I would now like to hand the conference back to Mr. Xie. Thank you. Please go ahead.

Jian Xie

Thank you, operator, and thank you all for participating on today's call and for your continued support. We appreciate your interest and look forward to reporting to you again next quarter on our progress. Before we conclude, Victor is going to mention some upcoming conference appearance for JA Solar. Victor?

Victor Yang

Thank you, Mr. Xie. On September 16, JA Solar will present and host meetings at the Credit Suisse Annual U.S. Small and Midcap Conference in New York. That conference is by invitation only. So [indiscernible] representative for information. In addition, in October, we will be hosting a number of meetings with the investment community at the Solar Power International Trade Show in Las Vegas. Please contact either me or Investor Relations from ICR for more information.

Operator

Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.

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JA Solar Holdings (NASDAQ:JASO): Q2 EPS of $0.14 misses by $0.07. Revenue of $390.5M (+52.9% Y/Y) misses by $2.88M.