GCL-Poly Energy Holdings' (GCPEF) CEO Zhu Gongshan on Q2 2014 Results - Earnings Call Transcript

Aug.28.14 | About: GCL Poly (GCPEF)

GCL-Poly Energy Holdings Ltd. (OTCPK:GCPEF) Q2 2014 Earnings Conference Call August 28, 2014 9:00 AM ET

Executives

Lu Yeung – Director-Investor Relations

Zhu Gongshan – Chairman and Chief Executive Officer

Shu Hua – Executive Director and President-Solar Business

Charles Yeung Man Chung – Chief Financial Officer

Amy Song – Vice President-Strategy

Analysts

Timothy Lam – Citigroup Global Markets Asia Ltd.

Frank He – Goldman Sachs LLC

Gloria Ho – The Hongkong & Shanghai Banking Corp. Ltd.

Eric Cheng – Deutsche Bank AG

Karl Liu – BOCI Research Ltd.

Operator

Welcome to GCL-Poly 2014 Interim Results Announcement Conference.

I am pleased to present Mr. Lu Yeung, Director of Investor Relations. Mr. Yeung, please.

Lu Yeung

Good day ladies and gentlemen, welcome to the GCL-Poly Energy Holdings Ltd. investor teleconference call. From GCL today, we have the following key management joining the call: Mr. Zhu Gongshan, Chairman and CEO; Mr. Shu Hua, Executive Director and President of the Solar Business; Charles Yeung, Chief Financial Officer; Ms. Amy Song, VP of Strategy.

Our first half of 2014 operating performance are as follows. polysilicon business. for the first half of 2014, the Group produced approximately 32,341 metric tons of polysilicon, representing an increase of approximately 47% over the same period of last year. External sales. external sales for polysilicon in the first half 2014 were approximately 7,463 metric tons representing a decrease of approximately 12% over the same period last year.

Average selling price of polysilicon, plus US$22.1 per kilo, compared to US$17 per kg in the first half of 2013. Production cost for the first half was US$15.7 per kilogram, compared to US$17.3 in the same period of last year.

Wafer business. for the first half 2014, the group produced approximately 5,903 megawatt of wafers, representing an increase of approximately 71% over the same period last year. Wafer sales. the group’s sold approximately 5,776 metric tons megawatt of wafers, representing an increase of approximately 50% over the same period last year. Average selling price for wafers in the first half of 2014 was US$0.23, compared to US$0.20 in the same period of last year.

Power business, the sales volume in respect to power and steam for the Group for the first half 2014 was approximately 3,254 megawatt hour and 4,218,000 metric tons, representing an increase about 17% and a decrease of 3% compared to the same period of last year.

This is a summary of the first half 2014 business performance. Now, I invite the key management to say the few words.

Zhu Gongshan

[Foreign Language]

Good day ladies and gentlemen, welcome to our interim results conference call. Thank you for your continuous support and interest in GCL-Poly. We have actually generated very fruitful results for the first half of 2014, and we have basically achieved everything we have targeted. And we – as you all see that we have had very fruitful results for the first half of 2014.

[Foreign Language]

As our tradition, R&D has always been our backbone of our company. so we’ve been stepping up our R&D efforts and also by relying on Ling and Ming management and by our continuous efforts to drive down our cost and by continuously diversifying our customer base, we’ve become more and more market oriented. And for the first half of 2014, we are very happy with what we have achieved and we think we have definitely significantly strengthened our comparativeness in this market.

[Foreign Language]

As the global solar market is gradually picking up and as the solar market globally is expanding further, we have very strong confidence that for second half of 2014, we would be able to generate more fruitful results and would be able to show more achievements.

[Foreign Language]

Now, we are open for questions.

Lu Yeung

Operator, please limit the question to one question and one follow-up.

Question-and-Answer Session

Operator

Okay, thank you. So we will now begin our question-and-answer session. (Operator Instructions) [Foreign Language]

Timothy Lam – Citigroup Global Markets Asia Ltd.

[Foreign Language]

There’s two questions coming from Timothy Lam of Citibank. First question he asked was about the current environmental GCL-Poly New Energy. The subsidiary regarding the solar farm investments and what is the outlook for our solar farm investment in the second half and any financial impact to 3800?

Unidentified Company Representative

[Foreign Language]

Thanks for your question. First, I’m going to answer your first question that is the outlook for GCL New Energy that we finished acquisition in April this year.

[Foreign Language]

Following the acquisition in April, we have been carrying our restructure of the company and everything is progressing very well and we see a very rosy picture going forward.

[Foreign Language]

And I believe along these days, you have seen a lot of projects announcements coming from 451. And of course, as of today, for ground-mounted solar farms plus distributed solar projects within 451 we have already accumulated pipeline over 1.2 gigawatt and we are very confident that by end of 2014, we would be able to connect at least 600 to 800 megawatt of projects to grid.

[Foreign Language]

451 that is GCL New Energy is going to continue to leverage comparative edges of 3800 and that is our core advantage really is on high performance, high efficiency wafers. So by using that kind of products at the end of the day, we would generate even more decent IRR for our solar farm project.

[Foreign Language]

So when we’re carrying out our solar farm development, we would be able to use our proprietary GCL technology and most effective solar systems. So that would result in a very good IRR and for your reference, our hurdle IRR for solar farm development is around 12%, usually we get about 12% to 15%.

[Foreign Language]

So they’re positive and confident about what we’re going to be able to achieve by the end of the year for 451 and that would definitely provide even stronger support for 3800 is profitable.

Timothy Lam – Citigroup Global Markets Asia Ltd.

[Foreign Language]

Second question from Timothy was regarding the progress of our captive power plant?

Unidentified Company Representative

[Foreign Language]

Now regarding our question about our captive power plant, I’d say our captive power plant launch has been progressing very well and I’ve already briefed you about the progress about our captive power plants during our conference call for the first quarter. and as of today, the relative authority is still undergoing the last round of assessment and review on our captive power plant and we are ready to go any moment. So I think upon the last round of review from the relative government authority, we would be able to really pull it off.

Timothy Lam – Citigroup Global Markets Asia Ltd.

[Foreign Language]

Unidentified Company Representative

[Foreign Language]

Operator

[Foreign Language] Frank He, Goldman Sachs.

Frank He – Goldman Sachs LLC

[Foreign Language]

The two questions from Frank He of Goldman Sachs. First, you point out that we have achieved very good cost reduction in the first half and he asked whether we will have any comment on regarding second half cost reduction target. Second question is regarding recent news from the Department of Commerce in China and what will be our outlook for the pricing and our pricing strategy for the second half of this year, regarding poly and wafers?

Unidentified Company Representative

[Foreign Language]

So regarding our question about our production cost, we have been continuously driving down our cost, both in terms of poly and wafer, and relying on technological innovations and also a lot of proprietary technologies that GCL has, we have been able to bring down the costs to a significant expense. Last year, we had a production cost for poly around US$17.3 per kilo and for the first half of this year, the average production cost for polysilicon has been successfully brought down to US$15.74 per kilo.

[Foreign Language]

That was a 9.2 year-over-year improvement.

[Foreign Language]

So the US$15.74 per kilo was the average level for the first half of 2014, actually the lowest point was US$15.25 per kilo.

[Foreign Language]

So now back to the wafer side, by stepping up our R&D efforts, we have also been very successful in terms of driving down our wafer production cost and processing cost wise we have achieved 16% year-over-year improvement.

[Foreign Language]

So just to give you the number from last year this time, last year our processing cost for wafer is about US$0.097 per watt, but for the average level for the first half of this year, actually has been brought down to US$0.0815 per watt.

[Foreign Language]

Of course, at some point, in the first half of 2014, we have achieved a record low in terms of processing cost and that was about US$0.0789 per watt.

[Foreign Language]

GCL-Poly has been proven; we have a proven record in terms of being the lowest cost producer in the industry.

[Foreign Language]

We’re stepping up our efforts in terms of further bring down the cost for our poly and also wafer. And we have been doing our best to improve our crystal growing techniques and wire saw techniques. And we would be continue to do debottlenecking and fine tuning of our equipment and we are very confident that for the second half of 2014, we would be able to drive down our production cost to even lower level.

[Foreign Language]

And I’m sure, all of you know that the GCL has been addressing our product offering from regular wafers to S2, S3, superfamily wafers that are of very high performance and very high conversion efficiency. And we think by launching to the markets that kind of products, we would be able to pave the way for high performance, high efficiencies solar modules.

[Foreign Language]

And for the second half of 2014, we would be able to strengthen sales of our S3 products. And we have completely shut off the production for regular multi-crystalline wafers.

[Foreign Language]

So GCL is not only the lowest cost producer in terms of poly and wafer in the world. Actually, we have successfully differentiated ourselves from the pack by giving our customers the best quality and efficiency.

[Foreign Language]

Thank you.

[Foreign Language]

Back to your second question, that the Chinese MOFCOM has actually closed the loophole for a polysilicon import as processing trade materials. And the Chinese MOFCOM and National General Customs Administration have announced that earlier.

[Foreign Language]

And China actually was biggest solar market in the world right now. We are leading the industry both in terms of cost and quality, and a fact of polysilicon capacity within China is more than enough to supply to the market demand right now.

[Foreign Language]

So first half of 2014, we still saw polysilicon import up to 46,000 metric tons and among these 46,000 metric tons, 60% was actually coming into China under the cover of processing trade.

[Foreign Language]

So given this dumping situation the Chinese government has actually decided to close the loophole for a polysilicon import and that would definitely help to stabilize the polysilicon pricing.

[Foreign Language]

So I think supply, demand wise I think by closing the loophole for a polysilicon import. That was really help to stabilize the polysilicon pricing within China and also given the strong demand coming from end market and inflation market in the second half of 2014. We really think that would also support the polysilicon pricing.

[Foreign Language]

So now comes to wafer pricing, relying on our quality and efficiency in terms of wafer, we would be able to see a very stable wafer pricing for the second half of 2014. And as I mentioned earlier that as a company we’re very much market oriented and we really want to support our customer along the way. So we would be able to price our products at a very rational range. So that we would be able to help the market to stay stable and also to help the industry to grow in a healthy way.

[Foreign Language]

Thank you.

Operator

Thank you. Our next question is from Gloria Ho, HSBC. Please begin.

Gloria Ho – The Hongkong & Shanghai Banking Corp. Ltd.

[Foreign Language]

There are two questions coming from Gloria Ho of HSBC. First one, she asked about that progress of the FBR technology. As she mentioned, we are currently undergoing installation of the first reactor and she asked about the progress and when we will start ploy production and what would be associate production cost with that? Second question is regarding, first half the wafer sales mix with the high performance products such as S2 and S3. And also regarding the earnings contribution from GCL New Energy?

Unidentified Company Representative

[Foreign Language]

Unidentified Company Representative

[Foreign Language]

Unidentified Company Representative

[Foreign Language]

We are continuously upgrading our FBR system, and this is already the second generation of the FBR system that we do. We expect to start partial commercial operation by end of September, and we will be able to ramp up our production by end of October. And we are very confident that by end of October, we will be able to drive down our production cost for FBR based capacity to about US$9 per kilo, and we also have very strong confidence that by next year. October, next year, we will be able to drive that down to even below US$9 per kilo for all-in cost.

[Foreign Language]

Now regarding your question about our product mix between S2 and S3, actually I mentioned earlier in this call that we have been launching to the market, our S2 and S3 products and those are very well received by our customers, because for those customers who want to produce models of a power effort up to 255 watts to 260 watts. They need our wafers to support their power efforts. So our products have been very popular in the market right now.

[Foreign Language]

For first half of this year, we produced about 5.9 gigawatt of wafers and amount, which 10% would be accounted to S3 products.

[Foreign Language]

So for the second half of 2014, we were continued to enhance our S3 products launch and we – our estimate for S3 products for second half of 2014 is about 25% to 30% for total product mix.

[Foreign Language]

Unidentified Company Representative

[Foreign Language]

we finished the acquisition of 451 by May 9, so we started to consolidate the process to 3800 from May 9 to June 30 that was about HK$270 billion in terms of revenue contribution. We didn’t consolidate the recent one, two months profit to our 3800 buck, but we believe that is also a very considerable number.

Unidentified Company Representative

[Foreign Language]

Sorry, sorry, I just want to clarify that. Sorry, I just want to clarify that as we’ve been consolidated the results, but the resulting number is not material. So I just want to clarify that, okay.

Gloria Ho – The Hongkong & Shanghai Banking Corp. Ltd.

[Foreign Language]

Gloria has a follow-up question regarding what is the outlook for the contribution from 451 in the second half.

Unidentified Company Representative

[Foreign Language]

We’re still in the block out period for that kind of number. So at this moment, we will not discuss that number.

Operator

[Foreign Language]

Unidentified Analyst

[Foreign Language]

There are two questions from JPMorgan. First, he noted we have been reducing our tier end ratio and he asked that whether we will have any plan for the financing. And second question is regarding the conditions of the sales activities in July and August.

Unidentified Company Representative

[Foreign Language]

For the first half of this year, the company has experienced a turnaround in terms of profitability. So we have actually significantly lowered our gearing. Our gearing last year by the end of last year was about 163.4% and by end of first half of 2014, we have successfully brought that down to 146.5%.

[Foreign Language]

So as the company is doing very well now, and we expect very healthy operating cash flow for the whole year, so we are very confident that we would have a very healthy balance sheet. So as of today, we do not have financing plans.

[Foreign Language]

The production and sales activities for both poly and wafer have been very robust in July and August timeframe. And we have been running close to 100% full utilization, both in terms of poly and wafer for June and August and especially as mentioned before for high performance, high efficiency wafers those that have been very well received by our customers and we’re seeing more and more orders coming in for S2 and S3 products and we’re running at a relatively low inventory level right now.

[Foreign Language]

Looking forward for the rest of 2014, we think we would be able to continue full utilization both in terms of poly and wafer.

[Foreign Language]

Thank you.

Operator

Thank you. [Foreign Language] Eric Cheng, Deutsche Bank.

Eric Cheng – Deutsche Bank AG

[Foreign Language]

Yes. Two questions from Eric Cheng of Deutsche Bank. The first one, regarding whether we have any comment on the timing of the row dollar fee, distributed energy policy in China. Second one was regarding the wafer capacity increase whether we are still looking into expanding wafer capacity to 13 gigawatt this year?

Unidentified Company Representative

[Foreign Language]

To your first question about distributed solar policy. And as of today, we are seeing recently a lot of favorable process for distributed solar projects development. and 3800 by acquisition of 451; we have been able to use 451 as the separate platform for future solar project development and we believe our strategy in terms of our 451 strategy is very different from what our competitors are doing right now.

[Foreign Language]

3800, if you look at our track records for the 300 megawatt projects that has already been connected to grid under the banner of 3800, we’ve successfully achieved about 10% to 12% year-over-year growth, and that is actually better than expected. And for our competitors in Hong Kong, what they’re doing, their performance is actually lower than what they – their guidance is about 30% to 40% behind, what they have gave to the investors.

So, and I think that would be attributable to GCL’s tradition and experience in the power plant maintenance and operation. I’m sure you know that GCL has the biggest IPP in – within China. We have a very good track record and we have our – a very high caliber R&D team, engineering team and also we have a lot of experience in operation and maintenance of power plants. So that really helped us to go to the next level.

[Foreign Language]

So for 451, we have very strong confidence that we would be able to achieve what we targeted earlier when we finished acquisition. and also for next year, we believe we would be able to do about 1 gigawatt of solar projects under the banner of 451 and we believe profitability wise, we would be a lot better than what our competitors would be doing. Our estimate is about 1.3 to 1.5 times of their profitability.

[Foreign Language]

So GCL-Poly is already a leader in terms of poly and wafer manufacturing in the world. We would be able to continue to step up our efforts in terms of R&D and optimization of our solar systems. So both in terms of distributed solar and ground-mounted solar projects, I think like our poly and wafer manufacturing, we would be able to continue the top industry by using our proprietary technology and also the most effective solar systems. And we would be focusing on operation and maintenance of solar projects for at least the next 25 years to come and we would be able to tap on very cheap funding and diversify our financing resources.

So at the end of the day, we would be the best solar projects developer and upgrader in the world.

[Foreign Language]

So by fine tuning and debottlenecking of our existing equipment, we have been successfully bring up our wafer capacity from 10 gigawatt last year to 12 gigawatt end of March this year.

[Foreign Language]

We’ll continue to improve our crystal-growing furnaces, continue to upgrade the furnaces and also the wire saw machines and we have seen very fruitful results. I’m sure you have to read from our statements that we have already produced 5.9 gigawatt of wafer by end of June this year.

[Foreign Language]

So by continuous upgrading and debottlenecking and fine tuning of our existing equipment and also by investing on diamond wire, wire saw equipment which would definitely increase our yield. We are very confident that by end of this year our named way capacity for wafer would achieve at least 13 gigawatt.

[Foreign Language]

Eric Cheng – Deutsche Bank AG

[Foreign Language]

Operator

[Foreign Language] (Indiscernible)

Unidentified Analyst

[Foreign Language]

There’s two questions is from CIBC. First one is regarding our outlook for CapEx this year and next year. And also the second question will be a follow-up on the captive power plant, so whether we’ll be looking to start operation before year-end?

Unidentified Company Representative

[Foreign Language]

Looking at our cash flow statements, you could see that CapEx for the first half of 2014 was about HK$2.5 billion.

Unidentified Analyst

[Foreign Language]

Unidentified Company Representative

[Foreign Language]

Just to clarify my earlier comments that HK$2.5 billion CapEx for first half of 2014 that actually include CapEx for solar project and that existing solar projects under the banner of 3800.

[Foreign Language]

We are very confident that we would be able to achieve COD of our captive power plant by end of this year.

[Foreign Language]

As I mentioned earlier that the relative authority is undergoing the last round of environmental assessment on our captive power plant. And right now the government actually required us to – for coal-fired power plant. The carbon emission coming from our coal-fired power plant should stay constant at the level of our gas-fired power plant. So we are actually right now purchasing a lot of equipments that are more environmentally friendly. So that would effectively reduce the carbon emissions coming from our captive power plant. We believe by doing all these, we would be able to meet the requirements at the relative authority very soon. So we are very confident that we would be able to do the COD by end of this year.

[Foreign Language]

So as probably everyone knows that the Chinese government has very serious of very rigid procedures before they gave the final approval on any thermal power plants. So we’re actually been cooperating very well with the authority. So we hope to activate the whole process and we hope the captive power plant would be able to grow out very soon. And as I mentioned earlier, the government right now actually undergoing the last round of assessment and review, and we believe it would be down in no time.

[Foreign Language]

Operator

[Foreign Language] Karl Liu, Bank of China.

Karl Liu – BOCI Research Ltd.

[Foreign Language]

The two questions coming from Karl Liu from BOCI. First one was he noticed from the presentation, we mentioned about the N-type wafers. He want to know about their progress. And second question is regarding, we had some previous sale of the U.S. solar power plant previously. He want to know whether we’ll have more in the future.

Unidentified Company Representative

[Foreign Language]

First of all regarding your first question about N-type monocrystalline wafers. As you know GCL is not only a leader in terms of multicrystalline wafer manufacturing. We also have monocrystalline wafer manufacturing base that is of a size of 500 megawatts, which is located in Langfang City of Hebei Province.

[Foreign Language]

We have been launching our mono products in response to the growing need from countries like Japan and Korea is actually a winning markets. Our strategy for monocrystalline wafer manufacturing is more tailor-made. So we want to become more market oriented, while our customers need that and we would be able to ramp up very soon.

[Foreign Language]

And actually as I mentioned before for monocrystalline wafers right now is still very niche market, but we have the capability to produce high performance, high efficiency mono products and also N-type monocrystalline wafers. So we’re ready and we can produce that at any moment. And the solar application is expanding within China. We have been able to try to use the high performance, high efficiency N-type products in our own solar project.

[Foreign Language]

We also lost pipelines storing up in the U.S. and we do not exclude the possibility for future sales of our solar projects in the U.S.

Karl Liu – BOCI Research Ltd.

[Foreign Language]

The follow-up question from BOCI was regarding the pipeline of the current U.S. solar projects.

Unidentified Company Representative

[Foreign Language]

The pipeline sales is about 100 megawatts.

Karl Liu – BOCI Research Ltd.

[Foreign Language]

Lu Yeung

This is the end of the Q&A session. We now invite our Chairman, Mr. Zhu Gongshan for closing remarks.

Unidentified Company Representative

[Foreign Language]

Zhu Gongshan

[Foreign Language]

Thanks for your continuous interest and support for GCL-Poly. Our management team are very, very grateful and we believe that under the leadership of Chairman Zhu, the company is going to go forward relying on our technological innovation and by continuously driving down our cost and by saying customer and market oriented. We believe by doing all that we would be able to differentiate ourselves from the pack and would be able to maximize shareholder value and be able to show even more fruitful results for our investors and friends who are interested in GCL-Poly.

Unidentified Company Representative

Thank you.

Operator

This is the end of the conference call. Thank you for dialing.

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