China XD Plastics' (CXDC) CEO Jie Han on Q2 2018 Results - Earnings Call Transcript

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About: China XD Plastics Company Limited (CXDC)
by: SA Transcripts

China XD Plastics Company Ltd. (NASDAQ:CXDC) Q2 2018 Earnings Conference Call August 9, 2018 9:00 AM ET

Executives

Anna Bin – Investor Relations

Jie Han – Chairman and Chief Executive Officer

Taylor Zhang – Chief Financial Officer

Analysts

Matthew Larson – Wells Fargo

Owen Libby – Wells Fargo

Operator

Ladies and gentlemen, thank you for standing by and welcome to Second Quarter 2018 China XD Plastics Co. Limited Earnings Conference Call. At this time, all participants are in a listen-only mode. There will be a presentation followed by the question-and-answer session. [Operator Instructions] This conference is recorded today.

I would now like to hand the conference over to your host today, Ms. Anna Bin. Please go ahead.

Anna Bin

Thank you, all, for joining us for China XD Plastics second quarter 2018 financial results conference call. Joining me on the call today are Mr. Jie Han, Chairman and the Chief Executive Officer; Mr. Qingwei Ma, Chief Operating Officer; Mr. Taylor Zhang, Chief Financial Officer; Mr. Junjie Ma, Chief Technology Officer; Dr. Kenan Gong, General Manager of the Dubai subsidiary.

Earlier today, China XD Plastics issued a press release announcing the second quarter 2018 results. Before management’s presentation, I would like to refer to the Safe Harbor statements in connection with today’s conference call and remind our listeners that the management’s prepared remarks during the 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.

All statements other than statements of historical facts contained are forward-looking statements, including, but not limited to, the Company’s growth potential in the international markets; the effectiveness and the profitability of the Company’s product diversification; the impact of the Company’s product mix shift to more advanced products and the related pricing policies; the volatility of the Company’s operating results and the financial conditions; the Company’s projections of performance in 2018; and other risks detailed in the Company’s filings with the Securities and Exchange Commission are available on its website.

These forward-looking statements involve known and unknown risks and uncertainties and are based on current expectations, assumptions, estimates and then projections about the company and the industry. 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 I will refer you to our more detailed discussion for the risks and uncertainties in the Company’s filings with the Securities and Exchange Commission. In addition, any projection as to the Company’s future performance represents management’s estimates as of today, August 9, 2018. 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 will make reference to earnings before interest expenses, income taxes, depreciation and amortization, which we refer to as EBITDA. EBITDA is a non-GAAP financial measure reconciled from net income, which the company believes to provide a 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 earlier today.

I would now like to turn the call over to our Chairman and the Chief Executive Officer, Mr. Han. Mr. Han will be speaking in Chinese, and I will translate his opening remarks into English. Mr. Han, please go ahead. [Foreign Language]

Jie Han

[Foreign Language]

We are pleased with our quarterly results with continuing top line growth, and an improvement in macroeconomic environment has improved business conditions, and we are well positioned to execute our strategical plans.

[Foreign Language]

We are particularly pleased that you see major revenue contributions from major new growth projects fostered in large part by the gradual ramp-up of our Sichuan manufacturing facility, it is factor that as the contraction of Sichuan facility with 300,000 metric tons of annual production will be completed by the end of September 2018. A key milestone in our Corporate Development. The new facility also further extends our geographical reach and accelerates our market penetrations beyond our established Northeast base, evidenced by our strong and consistent growth from Southwest, Central, North and the South China.

[Foreign Language]

Our new facility in Dubai also extends our specialized high-end products into an important new market. We are planning to complete installing 45 production lines with 12,000 metric tons of annual production capacity by the end of August 2018, and an additional 50 production lines with 13,000 metric tons of annual production capacity by the end of 2018. This will bring the total installed production capacity in our Dubai facility to 25,000 metric tons. The Dubai facility will target high-end products for the overseas market and will ultimately enable more active inroads into the markets of Europe, the Middle East, Russia and other international regions with several global top customers in automotive sector.

[Foreign Language]

We take pride of our achievement in the past and remain confident in the long-term prospect of our business. The recent nationwide deleveraging efforts in China, however, has significant impact on activities of many companies in China, including merger and acquisition as well as privatization. To ensure the success of the Company’s expansion strategy in multiple regions and sectors, we will be more fiscally vigilant and responsible and improving our capital structure by swapping more short term debts with longer term instruments among other means in order to maintain a stable and sound balance sheet and weather potential and unexpected turbulence in the future.

[Foreign Language]

With that, I will now turn the call over to Mr. Taylor Zhang, our Chief Financial Officer, to walk you through our financials.

Taylor Zhang

Thank you, Anna. Thank you, Mr. Han. And thank you everyone for joining the call today. Before I review the numbers, let me remind you that all figures I discuss are for this reporting period, the second quarter of 2018, unless I state otherwise. Additionally, any year-over-year comparison is to the second quarter of 2017 and any sequential comparison is to the first quarter of 2018.

So let’s go over our third quarter results. Revenues were $317.3 million for the second quarter of this year, compared to $313.6 million for the same period last year, representing an increase of $3.7 million, or 1.2%. The year-over-year increase was primarily due to a depreciation of U.S. dollar against RMB by 7%; partially offset by a decrease of 5% in the average RMB selling price of our products; and a decrease of 0.9% in sales volume, as compared with those of last year.

PRC domestic revenues increased by $37 million in the second quarter of 2018, compared to the same period of 2017, as a result of, increase of 2.2% in sales volume. A depreciation of U.S. dollar against RMB by 7%, and increase of 2.8% in the average RMB selling price of our products, as compared with those of last year. According to the China Association of Automobile Manufacturers, automobile production and sales in China increased by 4.15% and 5.57%, respectively, for the first half year of 2018 as compared to the same period of 2017.

Improvement in macroeconomic conditions since 2017 has improved business conditions. Driven by accelerating growth of 1.5% in Northeast China, 120.8% in Central China, 111% in South China, 52.1% in Southwest China, 1% in North China, and 1.7% in East China, our domestic sales during the three months ended June 30, 2018 increased by 13%, as compared to the same period of last year. As for the RMB selling price, the increase was mainly due to more sales of higher end product of modified PA66, PLA and PPO in China.

For the three months ended June 30, 2018, revenues from overseas market was US$53,353 as compared to US$33 million of that in 2017. The Company has tried to develop new customers overseas besides the existing oversea customer. The sales with this customer was suspended due to account receivable balance overdue situation. As of June 30, 2018, the customer has an outstanding balance of US$46.6 million, among which balance of US$10.2 million was less than three months, US$32.4 million was three to six months past due, US$4 million was overdue for 7 to 12 month past due. The customer expected to pay off the outstanding balance by September 2018. As the account receivable balance was overdue, the Company suspended sales to this customer.

Premium products in total accounted for 82.5% of revenues in the second quarter of this year, compared to 81.5% for the same period last year. During the second quarter of 2018, the Company continued to shift production mix from traditional lower-end products to higher-end products such as PA66,PA6, Plastic Alloy, and PLA, primarily due to greater growth potential of advanced modified plastics in luxury automobile models in China, stronger demand as a result of promotion by Chinese government for clean energy vehicles and better quality demand from end consumer recognition of high-end cars made by automotive manufacturers from Chinese and Germany joint ventures, Sino-U.S. and Sino-Japanese joint ventures, which manufacturers tend to use more and higher-end modified plastics in quantity per vehicle in China.

Gross profit was $56.2 million in the second quarter ended June 30, 2018, compared to $63.1 million in the same period of last year, representing a decrease of $6.9 million, or 10.9% during the same period last year, primarily due to there was very little overseas sales in the second quarter ended this year, which you to contains high profits products sales.

G&A expenses were US$ 11.3 million for the quarter ended June 30, 2018 compared to US$8.8 million in the same period of 2017, representing an increase of 28.4%, or US$2.5 million. The increase was primarily due to the increase of US$2.4 million in stock based compensation and US$0.1 million in salary and welfare resulting from the increase in the number of management and general staff from supporting departments.

Research and development expenses were US$5.3 million for the second quarter of 2018, compared to US$9.5 million for the same period last year, representing a decrease of $4.2 million, or 44.2%. The decrease was mainly due to the decrease of raw materials used for R&D purposes. As of June 30, 2018, the number of ongoing research and development projects was 401.

Operating income was $36 million for the second quarter of 2018, compared to $44 million for the same period of 2017, representing a decrease of $8 million, or 18.2%. This increase is primarily due to lower gross profit, higher selling expenses and G&A expenses, partially offset by lower R&D expenses.

Net interest expense was $10.3 million for the second quarter of 2018, compared to net interest expense of $11 million for the same period of last year, representing a decrease of $0.7 million, or 6.4%. This decrease is mainly due to decrease of interest expense resulting from the weighted average loan interest rate decreased to 4.6% for the second quarter compared to 4.9% of the same period last year; and partially offset by the increase of average short-term and long-term loan balance in the amount of US$925 million for the three-month period ended June 30, 2018 compared to US$849 million for the same period last year.

Income tax expense was $5.5 million for the second quarter of 2018, representing an effective income tax rate of 16.8%, compared to income tax expense of $4.1 million in the same period of last year, representing an effective income tax rate of 12.8%. The increase of effective income tax rate was primarily due to increase of continuous operating losses [Audio Dip] subsidiaries such as Dubai Xinda and Xinda Holding (NYSE:HK), the decrease of 50% of additional deduction of R&D expense and partially offset by the increase of Sichuan Xinda’s PBT percentage within the consolidating entities. The effective income tax rate for the three-month ended June 30, 2018 differs from the PRC statutory income tax rate of 25% primarily due to Sichuan Xinda’s preferential income tax rate, the reversal of unrecognized tax benefits in year 2012 and 50% additional deduction of R&D expenses of major PRC operating entities.

Net income was $27.2 million for the second quarter of 2018, compared to $28.1 million for the same period last year, representing a decrease of $0.9 million, or 3.2%. Basic and diluted earnings per share for the three-month period ended June 30, 2018 was $0.41, compared to $0.43 per basic and diluted share for the same period of last year. The average number of shares used in the computation of basic and diluted earnings per share in the current quarter was 50.3 million compared to 49.5 million shares.

Earnings before interest, tax, depreciation and amortization was $55.3 million for the second quarter of 2018, compared to $54.7 million for the same period of last year, representing an increase of $0.6 million, or 1.1%. For a detailed reconciliation of EBITDA, a non-GAAP measure, to its nearest GAAP equivalent, please see our – please see the financial tables at our press release issued today.

Now let’s turn on to the balance sheet. As of June 30, 2018, the company had $449.4 million in the total amount of cash and cash equivalents, restricted cash and time deposits, a decrease of $158.7 million or 26.1% as compared to $608.1 million as of December 31, 2017. As of the June 30, 2018, working capital was minus $174.3 million and the current ratio was at 0.9, as compared to the current ratio of 1 as of December 31, 2017. Stockholders’ equity as of June 30, 2018 was $752.1 million, an increase of $39.3 million or 5.5% as compared to $712.8 million as of December 31, 2017.

Inventory increased by 30.4% as compared to the end of fiscal year 2017 as a result of more purchases of the raw materials and the Company’s strategy to stock up the finished goods for the upcoming order. Prepaid expenses and other current assets decreased by 41% or $59.1 million as compared to the end of last year as Sichuan received the refund of prepayment from equipment suppliers.

Now the company reiterates it’s financial guidance for fiscal 2018 to range between $1.2 billion and $1.4 in revenues. Gross margin in fiscal 2018 is expected to remain stable as compared to that of fiscal 2017. The Company project net income to range between $90 to $110 million. This is based on the anticipation of a steady recovery throughout the Chinese automotive supply chain and a stabilization of crude oil pricing and its impact on polymer composite materials in 2018.

This forecast also assumes contributions from the Sichuan plant and the Dubai second phase project, which will be completed by the end of September of 2018 and the end of August of 2018, respectively. It also assumes the average exchange rate of the U.S. dollar to RMB at 6.8. This financial guidance reflects the Company’s preliminary view of its business outlook for fiscal 2018 and is subject to revision based on changing market conditions at any time.

Now before we open to the call to your questions, I would like to note that for any question directed to management to China, I’ll translate both their questions and their answers. If you want to ask a question in Chinese, please also ask it in English for the benefit of our other listeners. Please also note that we’ll only be able to respond to questions about financial and operating results. For other matters, including the going-private offer, we refer you to our already issued press releases. We will not be able to respond to questions that are directed to the principle or to the going-private offer about the proposed transaction.

With that, we’ll now open the call to your questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] We have the first question comes from the line of Matthew Larson from Wells Fargo. Please ask the question.

Matthew Larson

Okay. Thank you for taking the call. Got a question for you. The most recent transaction that was announced on July 14 in reference to the sale of 25% of HLJ Xinda. It took about – it took till August 8, to come up with evaluation that essentially values the $75 million values the company at least $300 million. How can it only took three weeks to get that valuation and we’re still waiting on some sort of assessment or evaluation on the whole company, which is important for the overall going private transaction, which is now 18 months in? I guess how is that arrived at so quickly?

Taylor Zhang

Okay. Hi, Matthew. Thank you for your question. So basically the – so currently the evaluation for the investments from Chairman Han, party is still an estimate is only for this reporting period. However, like we stated subject to final evaluation the number, subject to change, as for the going private although there was nothing we can talk about but you know it’s not only we are waiting for the valuation but also there’s some other conditions, for example, getting financing decisions, so it’s not necessarily waiting for the evaluation.

Matthew Larson

All right. I know you said you can’t speak about the particulars of the going private transaction but that is paramount to any shareholder that is in part of the control group, which would be Mr. Han and Morgan Stanley. Because everything else doesn’t really have any impact on the long-suffering shareholders that hold your stock, and we’ve been very loyal shareholders, the shareholders that represent about 25% of the company. And yet it’s been over 1.5 years since the going private acquisition has been stated.

And one would have thought that with Morgan Stanley’s involvement, with the largest investment from globally that transaction of the size, which is very small for them, very small, okay, we’re talking about taking out maybe $50 million worth of the remaining shareholders. Since your company is valued at less than $200 million and 75% is owned by Mr. Han as well as Morgan Stanley then 25% of the remaining is a value of less than $50 million, I mean, that is something that Morgan Stanley can either finance or deals with on a daily basis. So with that in mind can you at least explain why it is taking so long because that is paramount to any shareholder who has been involved in the company for the last few years?

Taylor Zhang

Okay. So Matthew, let me answer your question first, and then I will translate that so Chairman Han will be also able to respond. So like we stated in the press release, right now in China there’s a nationwide de-leverage in efforts, so the banking sector is holding liquidity out of the system. That’s why not only for our company but for many company in China, small or large are facing this new unexpected situation. So it have been pretty – it’s not too long ago.

So like we stated in the press release, it affects company secure financing like they used to and also affect the M&A transaction, including privatization, so not a single-company situation. So like – I mean the point is the transaction is you can have the evaluation down but eventually you going to need a financing to be – to close it. So with that let me translate your question again to Chairman, Han.

Matthew Larson

One last thing if you’re going to – Taylor, if you can add into the translation. It’s a very small transaction in the scheme of things. Is there anything all cash buyers available that would be interested in a company that is still valuable like your company? I mean the valuation of your company is a fraction of what it’s worth. And it would seem to me in a world of wash with capital, I mean to wash with that. All right, there is $1.3 trillion on a the sideline amongst private equity firms globally.

So I would think that one would not need financing, okay, in fact all cash buyers must be very, very much available. So can you ask why an all-cash buyer hasn’t been able to help in this transaction?

[Foreign Language]

Jie Han

[Foreign Language]

Taylor Zhang

Matthew, so here's where Chairman Han responded. So first of all, I would now repeat what Taylor has said. So for – secondly for the financing it is mostly showed by – obviously most than it is part of the our construction. But the majority of the responsibility was showed by Chairman Han and mostly he has discussed with the large still banks in China but – yes now reached out to other investors such as private equity is that you have mentioned. But that could be a direction for him to is for, he will do that.

Matthew Larson

And I mean, give me that would've been something I would've considered a year ago, I mean there's plenty of capital out there and with evaluation of your company, there must be many, many, many interested parties to supply that financing. And you wouldn't have to go to the Chinese banks, you just go to any of the international private banks that are – again, they're all wash in capital. One last question, I'll let somebody else get in and ask some questions here. Clearly, you have an assessment of what the evaluation appraises are from Duff & Phelps by now as well as anybody else you hired, it's been 1.5 years, okay? And it doesn't take that long because it just doesn't, all right. So that if indeed you're not in a position to make a transaction for the reasons that you outlined because of the current environment in China, you could at least say that if a transaction that can done, it will be done at this new price or above, which would then set a higher bar for the company, because since the transaction was announced 1.5 years ago, the stock actually went down, I've never seen that happen. Usually it goes up, up and near where the transaction offer is, instead it's lower if there was never a transaction announced. So you can understand the frustration of shareholders to be in a very great company, this thing is your company has done very well, it's well positioned in China, you've been expanding and yet the stock goes down. Can you explain that?

Taylor Zhang

Let me translate your question. [Foreign Language]

Jie Han

[Foreign Language]

Taylor Zhang

So here is the answer from Chairman Han, Matthew. So I'm also puzzled by the way the stock has been treated, given the company's fundamental performance on its operation. So I've been trying to secure financing for the transaction, I'm working very hard on that. So but however, the lending condition in China has become more and more challenging compared to the past. And that's why my son's investment company has put in RMB500 million injected that amount to the company to bolster our Chinese subs balance sheets in order for the company to get a better financing to support its operation and also it's expansion strategy. So we'll – I'll continue to look on the financing, I cannot guarantee when that will happen but I will be working on that.

Matthew Larson

All right, I'll just close with this. If his son's investment values the company over a RMB300 million, all right, because you invested $75 million of 25% one of the operating subsidiaries it values the company certainly north of RMB300 million, which is well the north of $6 a share. If you could just put something out saying that we're working on financing, it's difficult but clearly a revised offer for the going private transaction when completed will certainly be north of whatever number you want to break down. It would give confidence to investors here that you are working on it and that if it does – if it when it happens, it'll be at a higher price because the latest investment is proof of that. So I leave, I've used too much of the time, I'll let somebody else jump in there but hopefully we can see some more news coming out of your company is to highlight the value that company better than you have already. Thanks very much for your time.

Taylor Zhang

Thank you, Matthew. I will translate that offline for Han.

Operator

Thank you. [Operator Instructions] Next question comes from the line of Owen Libby from Wells Fargo. Please ask the question.

Owen Libby

Taylor, I hope your summer is going well. Hopefully I'm going to ask questions that require translation and give everyone some time back. But I wanted to confirm a comment that you just made in response to one of Matt's questions. The evaluation that you provided on August 8 for the subsidiary investment, you're suggesting that's just an estimate? Correct?

Taylor Zhang

Yes.

Owen Libby

Okay. So when is that – when do you expect that evaluation to be finalized? And what is – what are you waiting for in order to finalize that? What is – what's the variable that you're waiting to conform to apply that valuation?

Taylor Zhang

Yes, so first of all, the estimate is basically it's for the bookkeeping and financial records purpose because we need to file the second quarter financial results. So we think this should be relatively soon, I would be surprised to be more than a month from now.

Owen Libby

Okay, so it's more – you intent to use book value, we're just waiting until the finalization of book value, is that what I'm hearing?

Taylor Zhang

I'm waiting for the final independent evaluation.

Owen Libby

Got it. But it's not – my point is, it's going to be relatively close, you're not going to see a wild swing in valuation from that estimate?

Taylor Zhang

I believe so, yes. Because, everybody uses a similar methods either this current cash flow or by looking for peers in the marketplace or a blended approach. So methodologically…

Owen Libby

You've already used some sort of methodology, you're just waiting for the finalization of the quarter's numbers, right? So are you using book value or you DCF-ing it, what methodology have you guys used?

Taylor Zhang

DCF. So we still need to get the final evaluation by independent advisor to do it and also approval by the special committee and board.

Owen Libby

Got it. And you expect that was within month and you're going to file an 8-K or there will be some sort press release?

Taylor Zhang

If that happens, yes.

Owen Libby

If that happens? This is happening, right?

Taylor Zhang

Yes.

Owen Libby

You’re going to finalize it within in a month? Okay, great. And then the other thing I just want to make sure you guys still intent to take a company private, correct? That still the intent?

Taylor Zhang

Yes, the better assumption is to intent to.

Owen Libby

Because I just want to highlight something to you all that the initial 8-K that was filed with the non-binding proposal over a year ago, February of 2016 or whenever it was. There was a six-month term on that buyer’s consortium that has obviously, expired. So technically, the term of the buyer’s consortium is not valid. Are you going to renew the buyer’s consortium agreement? If it is your intent to take – still take the company private?

Taylor Zhang

Yes, we have informed the parties of that and I think that we already – will take action accordingly.

Owen Libby

I'm sorry, I don't follow. Technically, with the form that you filed with the SEC, the buyer’s consortium is expired. So one of the problems that I think the market is having as I'm talking your stock is down another 5.5%. You guys use vague sweeping circumspect language, and we need certainty. It's just – you're not giving us certainty with the evaluation, with the buyer, with take private, you're not addressing any of the issues that would help lift the stock price.

Taylor Zhang

Owen, so let me clarify. The 13G was now filed by the company or any – so basically they are filed by the major shareholders, by the buyer consortium. So as company we have informed the 13G filer that agreement is filed. So it's not within the company's control. So we get your points, and we did what we need to do. And we believe the buyer’s consortium they will figure it out and also take action accordingly.

Owen Libby

Okay. So there's no valid buyers consortium because that the terms of that have expired. Although, you’re suggesting that it is still on this recorded call that you are still intent to take the company private once you line up proper financing?

Taylor Zhang

It’s not the company intent. It’s the buyer’s consortium intent.

Owen Libby

The buyer’s consortium attempt, exactly. Can you maybe can translate that to Chairman, Han. Can we please – is it still his intent to take the company private?

Taylor Zhang

Let me translate. Okay.

[Foreign Language]

Owen Libby

Thank you.

Taylor Zhang

You’re welcome.

[Foreign Language]

Jie Han

[Foreign Language]

So Chairman said I have studied in the past that I’m committed to the going private transaction. So I recently learned about the labs of the agreement. And we are – I’m actively working on that to assume that. So it’s probably a – just a oversight.

Owen Libby

Well, it’s been 18 months so I hope that a lot of these things are actively working on, we could finally get over the hill. And then one final question on in terms of the actual company performance. Revenue – prior guidance has suggested that device facility and the additional capacity would ramp up by the second quarter. Revenue was up slightly year-over-year, are you guys surprised by that, were you’re expecting a higher-listed revenue and when do you expect the capacity ramp-up in Dubai and some of the other expansion facilities to really hit the top line?

Taylor Zhang

Owen, so this year for the guidance, we feel we have more visibility on our Sichuan contribution as of September basically less than two months away. Sichuan will be able to contribute pretty much close to first rent. As for Dubai, that we will come to a later stage by the end of this year. So even though we have our revenue pretty much in line with what the level last year we still believe second quarter we’ll be able to step up, and also achieve the guidance.

Owen Libby

Okay, so if I’m hearing Sichuan in Q3 should provide a list in revenue but Dubai a little bit later in the year?

Taylor Zhang

That’s correct, yes.

Owen Libby

Okay. Thanks so much. I could out of the way.

Taylor Zhang

Thank you, Owen.

Operator

Thank you. The next question comes from the line of [indiscernible] Please ask a question.

Unidentified Analyst

Taylor, I want to just make sure I understand the transaction with Han’s some. He has purchased 25% at the moment. I understand subject to valuation of the Harbin subsidiary, is that correct?

Taylor Zhang

Yes, Peter.

Unidentified Analyst

And based on your projections for this year, what percent of the earnings would come from the Harbin subsidiary?

Taylor Zhang

The Harbin subsidiary is also the parents of our Sichuan sub, so basically that’s all domestic.

Unidentified Analyst

Okay. So in other words, what he has purchased is 25% of the domestic operations. So excluding Dubai, he now owns 25% of the entire company. Is that correct?

Taylor Zhang

Yes. And also excluding some other non-revenue or profit generating subs.

Unidentified Analyst

Okay, okay. But in essence, all of the operating subs or what he is purchased. Is that correct?

Taylor Zhang

Majority of [indiscernible] in China.

Unidentified Analyst

Okay. And in terms of approval of this, Morgan Stanley, I think paid $6.25 for their preferred is convertible into common at $6.24 something like that. Is that correct?

Taylor Zhang

Yes, $6.25, yes.

Unidentified Analyst

And – $6.25, yes. And so my question is, if the valuation comes out at less than $6.25. Will Morgan Stanley still approve that?

Taylor Zhang

This question…

Unidentified Analyst

Most of that discussions with them about…

Taylor Zhang

Most of the question we cannot answer, I think Morgan Stanley has their view and but those were the also have due to the on a board. So I don’t think this two things are necessary related, because this if we follow your logic there’s so many other investor invest the company at different price, up and down, higher or lower. So basically, I think the real – the best way is what we’re doing is to get a independent valuation and then presented to the special committee and the board for their consideration and approval.

Unidentified Analyst

I understand that, but Morgan Stanley unlike the rest of us. Morgan Stanley has two seats on the board. So you must have had discussion with them as the weather they would approve a price of less than $6.25. And you’ll not have any discussions with them.

Taylor Zhang

Discussion is basically based on the procedure and also the paper work, basically the agreement, they have reviewed it. So everything is about the board. So we cannot speak on behalf of Morgan Stanley.

Unidentified Analyst

No. I understand that. And my next question is, if you were facing this liquidity issue from the banks and everything. What – I understand all companies in China are facing. Why is the inventory going up so much?

Taylor Zhang

The inventory goes up because in Sichuan, the bulk of the capacity will be coming online in the expected from the end of September. And we want to be ready for that and on time delivery to the customers.

Unidentified Analyst

Well, based on the new capacity…

Taylor Zhang

So we can probably slow down or fund some savings for example slow down our CapEx to believe it the liquidity issue, but for our expansion, our operation, I think that’s the top priority, we were not bunch as the last resource.

Unidentified Analyst

But based on the amount of inventory you have and the Sichuan capacity coming on board and the fact that the first quarter is normally the weakest quarter, it looks to me like you revenue projections for the year are highly conservative.

Taylor Zhang

I think, right now we have different situations for example, there is a lot of well cars in place. For example the currency, which has been depreciated dramatically. So we don’t know where the levels are going to be at the end of the year, because almost 10% of already in the second quarter. So that’s something really we cannot control.

Unidentified Analyst

But you would tend to do – but based on where your inventory is an the new capacity coming on board, why aren’t your sales projections higher, I guess is my question.

Taylor Zhang

I think if the guidance deserve to be revised at a later stage when we feel more comfortable, will do that. But right now I think of this couple of certain key factors that we want be conservative.

Unidentified Analyst

Okay, thank you.

Taylor Zhang

You’re welcome.

Operator

There are no further questions for now. We will now hand the call back to Anna for closing remarks.

Anna Bin

On behalf of China XD Plastics, we want to thank you for your interest and your participation in this call. If you would like to speak with us further, please call either myself or Taylor in China XD’s New York office. The contact numbers for all of us are listed at the end of the press release. Thank you.

Operator

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