Hello and welcome to the Daqo New Energy Fourth Quarter and Fiscal Year of 2016 Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Kevin He, Investor Relations. Please go ahead.

Hello, everyone. I am Kevin He, the Investor Relations of Daqo New Energy. Thank you for joining our conference call today. Daqo New Energy just issued its financial results for the fourth quarter and fiscal year of 2016, which can be found on our website at www.dqsolar.com. To facilitate today's conference call we also have prepared a PPT presentation for your reference. Today, attending the conference call, we have Dr. Gongda Yao, our Chief Executive Officer; and Mr. Ming Yang, our Chief Financial Officer. The call today will feature an update from Dr. Yao on market and operations, and then Mr. Yang will discuss the company's financial performance for the fourth quarter and fiscal year of 2016. After that we will open the floor to Q&A from the audience. Before we begin the formal remarks, I would like to remind you that certain statements on today's call, including expected future operational and financial performance and industry growth, are forward-looking statements that are made under the Safe Harbor provision of the U.S. Private Securities Litigation Reform Act of 1995. These statements involve inherent risks and uncertainties. A number of factors could cause actual results to differ materially from those contained in any forward-looking statements. Further information regarding these and other risks is included in the reports or documents we have filed with or furnished to the Securities and Exchange Commission. These statements only reflect our current and preliminary view as of today and maybe subject to change. Our ability to achieve these projections is subject to risks and uncertainties. All information provided in today’s call is as of today and we undertake no duty to update such 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 the Chinese RMB. We offer these translations into U.S. dollars solely for the convenience of the audience. Without further ado, I now turn the call over to our CEO, Dr. Yao. Please.

Hello, everyone, and thank you for joining our call today. The fourth quarter of 2016 was the important millstone for Daqo New Energy. During the quarter, we successfully completed our annual maintenance work and the interconnections between our new facilities and existing facility in Xinjiang at the same time. We also successfully completed all the construction and installation work related to Phase 3A polysilicon expansion. As maintenance, construction, installation of new equipment, and interconnection of facilities were conducted concurrently, our annual maintenance for 2016 took longer than usual to complete. However, the combination of these efforts allowed us to start initial production of our expanded production capacity in January 2017, months ahead of our original schedule. We have already reached full production throughput of 18,000 metric ton per annum by the end of February 2017. At our new production capacity of 18,000 metric ton a year, we are achieving significant economic scale, which we believe will allow us to achieve further manufacture efficiencies and cost of savings. For example when we were at 6,000 metric ton capacity, we had approximately 900 employees in Xinjiang. When we double our capacity to 12,000 metric ton a year we had approximately 1,100 employees. Now that we have reached about 18,000 metric ton capacity we only have approximately 1,300 employees in Xinjiang. So capacity per person more than doubled from 6.6 metric ton per person where we were at a 6,000 metric ton capacity to currently about 13.8 metric ton per person at 18,000 metric ton capacity, with significant operational leverage and the reduction in per unit labor cost. At the same time we implemented new technology upgrade and special project that further improved energy efficiency. Based on initial product results we are seeing encouraging savings in energy usage, as well as silicon and…

Thank you, Dr. Yao, and good day, everyone. Thank you for attending our call today. Now, I will provide the financial updates for the fourth quarter and fiscal year of 2016. Revenues were $46.1 million compared to $54.3 million in the third quarter of 2016 and $59.3 million in the fourth quarter of 2015. Revenue from polysilicon sales to external customers were $32.8 million compared to $44.4 million in the third quarter of 2016 and $42.9 million in the fourth quarter of 2015. External polysilicon sales volume were 2,209 metric ton compared to 2,838 metric ton in the third quarter of 2016 and 3,092 metric ton in the fourth quarter of 2015. The decrease in polysilicon revenues as compared to the third quarter of 2016 was primarily due to lower polysilicon sales volume and lower ASP. The company successfully completed annual maintenance in several efficiency improvement projects, which affected polysilicon production for approximately three weeks during the fourth quarter of 2016. As a result, both of our polysilicon production volume and sales volume were lower in the fourth quarter of 2016 as compared to the third quarter of 2016. However, we successfully resume production in November 2016. Revenues from wafer sales were $13.4 million compared to $9.9 million in the third quarter of 2016 and $16.4 million in the fourth quarter of 2015. Wafer sales volume was 21.3 million pieces compared to 14.4 million pieces in the third quarter of 2016 and 21 million pieces in the fourth quarter of 2015. The increase in wafer revenue from the third quarter was primarily due to higher sales volume offset by lower wafer ASP. Gross profit was approximately $14.2 million, compared to $20.1 million in the third quarter of 2016 and $16.9 million in the fourth quarter of 2015. Non-GAAP gross profits…

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Philip Shen of ROTH Capital. Please go ahead.

Hi, thanks for taking my questions. My first one is on prepayments you talked about them in your remarks. Can you talk about the magnitude of the prepayments and whether you expect them to continue ahead?

Hi, Phil this is Ming. So total prepayments were approximately $7.5 million as of December 31, 2016 and these are advanced payments that were made by customers so that they could take priority delivery of our polysilicon, particularly the higher quality semi-grade level polysilicon because those are really in shortage right now.

Okay. And do you expect that trend to continue, do you expect the prepayments to increase as we go through the first part of the year or decrease?

We think the trend should continue, and it may increase from this level or maybe not significantly.

Okay. And can you update us on what your customer list books right now. How much has it shifted, can you talk about what your customer concentration levels or just because customer concentration expectations for 2017.

So I think the main customers are primarily the largest solar module manufacturers within China. So I mean you can think of Jay Solar, Trina [ph], Jenco, Canadian Solar so was a number of leading solar wafer manufacturers within China as well. And in particular I think we're adding a number of the mono crystalline solar wafer and solar cell manufacturers within China for the higher efficiency type of solar products. So these are the new customers that we're getting right now.

Great. Would that include LONGi for example?

Yes.

Okay, great. From a cost standpoint, I think you’ve talked about hitting $8.50 all in cost in Q1. And I think historically you've talked about reaching less than $8.50 per kilogram for the full year all in cost in 2017. What's the latest view on how low that cost structure could go in 2017?

I think the average will be between $8 to $8.50 for whole year. But I think by end of 2017 we expecting is like something between $8 to $8.50. And because we have - still have significant project need to be finish we’ll be installed probably approximately by July, if that’s successful I think we have a chance to step functionally reduce the cost again. So with this - with that and also we have continuous programs to reduce our costs as usual we have high confidence. We will finally approach by Q4 - hopefully we’ll close to achieve the cost very close to $8.

Great, thanks Gongda. And then one from me, and I’ll jump in the queue. In terms of Korea, there are - there has been talk about potentially new tariffs or tariffs being increased on certain Korean companies, can you just update us on how much those tariff increases could be? And do you have a sense for what the timing might be of those actions?

We think that this will not happening in the first half most likely we’ll have second half. The amount definitely we cannot - we don’t know and this is by the fact that government will found the sales price with their cost of structures. So those are highly confidential. Normally government to require those company provide to the government. So we don’t see those materials. So therefore we don’t have the number in mind. But I think conclusion will be most likely we’ll delivery in the second half of 2017.

Okay great, thanks Gongda, thank you, Ming. I’ll jump back in the queue.

Thank you, Phil.

The next question comes from a Brad Meikle of Craig Hallum. Please go ahead.

Hey, good evening guys. So, what’s your view on pricing for the year for silicon pricing?

For the year, right?

First quarter and the year.

I think the first quarter is very - as Ming said is slightly higher than in Q4, 2016. We believe Q1 is best fit because we have pretty much have orders for March is done. So we can say that for sure almost. But the delivery is not done. So, still have some [indiscernible]. But for the second quarter we don’t see - as of today we don’t see significant reduction in prices yet. So I think we will continue and of course always we’re cautious as we put some if you want in the second half of the year, we see a some signal, lot of people saying the downstream demand delivery will be slower. So we expecting some price change at that point. But that’s forward-looking, so there has a lot of uncertainty with it.

To like $17 for the first quarter and then coming down to $15, $16 in the second half or…

Yes that’s right. Of course the forward-looking are always not accurate, so there the market changes so much.

And then how much silicon supply do you think is coming online from incumbents and new market entrants?

New added capacity is not much in the Q1 and Q2, we don’t believe any significant add-on new capacity, expecting we did above the 6,000 metric ton to drive Q1. And we’re expecting maybe some add-on new capacity will around the second half of 2017.

Great. What’s your broader view, I mean I guess you are estimating 10% demand growth globally from a stellar standpoint so what’s your view on supply growth overall for this year? How much do you think it grows versus last year and then also 2018?

We believe that growth is not match even we say it’s growing to 73 to about 79 gigawatts. But the major change right now we see the shift from multi-crystal wafer to mono-crystal wafers. And we starting program about in 2015 and trying to address that market and we have already shipped significant amount to those customers. And there are some qualifications still going out for some key customers. So we’re expecting those kind of shipments will increasing and because as we said those demand require high quality compared with multi-crystal wafer user polysilicon we normally say high-purity of polysilicon to meet those demand. So those demands will put - this demand, this portion of demand increasing we will strength the Daqo New Energy position in the polysilicon market. Because we can provide significant amount of our product to meet the market.

What portion of your output would be high enough purity that would be acceptable for mono-wafer? And what do you expect your CapEx to be for the year? And can you talk about how - what you have to do to from a CapEx and how long it takes in order to upgrade output to be of the purity acceptable for mono-wafer?

Yes we’re expecting 2017 we have more than 50% to do that to provide to the market. And CapEx Ming will give.

So CapEx for the full year is approximately $40 million to $45 million for 2017 a portion of that is going to projects that specifically designed to improve purity of our products. For example, we’re upgrading on distillation system, there are special devices that remove impurity from the distillation.

Can you get to 100% acceptable for purity for mono output?

Yes, I think - we think overtime as we implement additional projects.

So I think the CapEx is used for further improve our quality of polysilicon also and some area we need to add in more efficiency to production. So these are due to cost or maybe start to increase we saw some debottlenecking in the production line. So our output we expect improvement upon that. So we’re expecting those things will be done by in the middle of this year. So we will see some good results in the second half.

Thanks very much. Can I just ask one last high level question, what would be the company’s view, I mean, obviously there is still early in this silicon cycle and seems to be a lot of migration upstream in terms of investment. Is the company open to some type of merger with the downstream partner at some point or is it the view that the company would always be independent. Because it seems like strategically that that could make sense given where the cycle then?

Well company didn’t propose any of those kinds of things to answer and we also didn’t receive any of those proposals at this moment. But we are open mind to any good suggestions and of course those are subject to our board of members instead of our management team. So if we see such opportunity we’ll forward to the board members.

We will be open to discussions, yes.

The next question comes from Sheng Zhong of Morgan Stanley. Please go ahead.

Thank you for taking my questions. So the first one is you mentioned that you are relocating some equipment from Chongqing to Xinjiang. So should we expect some capacity increase in sometime in near-term?

So that’s actually related to our existing phase the 18,000 metric ton. As we move significant amount of equipment so part of that expansion we moved equipment from Chongqing to Xinjiang. And so when that started operation in manufacturing in Q1 so the related - the cost that related idle facility will come down.

Yes so depreciation from idle equipment facility and Chongqing were reduced by half from last Q4 to Q1 this year. So because those equipment already moved and also installed in Xinjiang and participate production right now.

Okay, yes I see. So do you have any further capacity expansion plan at current stage?

We do have a plan, but we are not immediately started that phase, we will see the silicon, polysilicon, the whole total demand. I think there is still lot of struggling up for just our competitors within China and we will see that probably we will see until middle of this year, we will decide to go for it or not. But at this moment we are not making any decision yet.

Understand. So yes I think you mentioned that we are still waiting to see the market dynamics actually back to our question or back to our discussion previously on the mono crystalline demand, I currently see a lot of mono wafer is being constructed this year.

Yes, correct.

Yes all need wafer from the module makers. So - and actually the high purity polysilicon is - I mean from the market especially from the Chinese makers is not that much. So how do you - and if we think about the import perspective I think the amount is still I don't expect a large increase from the import, but you can gradually. So…

You're right.

Good thanks. So how do you see the supply demand balance for the high in aiming high purity polysilicon in China market?

Well, it will be those facility you mentioned increased will take some time. We think probably will significant of volume increasing will be later this year. So we have - I have confidence by end of 2017 most of the product will meet the purity demand for mono-wafers usage. Now it's only up to certain other things like the morphology and also their condition when you harvest those polysilicon will meet or not. So - and we will become or we're trying to become leading provider for mono-wafer silicon for Chinese market. Well that’s probably is not enough, but even we decided expansion right now, so they normally take one and half year completion. So there will be slow transition, I think it would not be very quicker transition from multi-crystal wafer to mono-wafers. But it is happening like you mentioned before I think this trend is real, and I think will impact lot of not only wafer manufacturers also some polysilicon manufacturers in Chinese as well, if they cannot provide high purity polysilicon in future. Now how to balance that I cannot say, but I think what we can do or we think about doing is continue our improvement for high purity polysilicon and we're trying to increase that portion from right now it's like a half to 80%, 90%. So we’re positioning ourselves as well in this coming transition that's all we can do. Now if the market is still good after first half and very few people can - they cannot provide and we will closely work with our key customers for mono-crystal wafer manufacturers in China and maybe we can decide for - considered for future expansion. But again that will take almost line one and half year and it's longer than the wafer guys expansion.

And Sheng let me follow-up on Dr. Yao's comments. So if you just look at it from the supply side, I think the amount of product availability that you could see from overseas suppliers like Germany and Korea are pretty much fixed. And then you're looking at very high risk of Korean supply being significantly shut off because of the trade issues with China right now. And then at the same time there is very limited amount of poly, there will be semi grade poly available within China. I think we’re going to be the only major supplier right now. And if you look at from demand side, right now it’s already very, very tight, I think we have much more demand then we could supply for this type of polysilicon. And then going to the second half without these new capacities coming online that requires these type of semi grade poly, I think the supply could get much worse than the current situation right now. So that’s what we are looking at right now. Thanks

Okay. Thanks very much for the color. So, since there is very high demand except for the prepayment we current see do we think that this kind of demand will drive the price difference between the mono-weight polysilicon versus the common ones?

Yes, so let me try to answer. So, currency we don’t see much, the gap is very similar. But we think this phenomena we discussed just before with huge amount of mono-wafer manufacture capacity and compared with very limited Chinese polysilicon manufacture can make the products meet that, I'm expecting if this trend continue, I think mono-wafer price gap between mono-wafer and multi-crystal wafer gap will be increasing. And secondly, I think our polysilicon if can qualify for mono-wafer were slightly higher starting that trend the gap between that was increasing. Right now is almost nothing, because right now we are in position is qualify for those things in 2016. So the basic right now prices is the similar, but future there is possibility this gap will increasing. So, push the - that itself were driving more people interesting for moving to mono-crystal wafer provide as the silicon provider as in China as well. So, that's probably what happen in maybe second half, but not right now.

Okay, thank you. My last question is about the - do we have some - any updates on the new [indiscernible] financing?

So we’re still in discussions with several domestic investors, on new [indiscernible] financing, but there has been no new update on that right now, so we continue to be in discussion currently.

Okay. Thanks, Yao.

Thank you.

The next question comes from Paul Straggler of Xplanade [ph]. Please go ahead.

Good evening guys. So you just extended their import price agreements for 18 months on Chinese imports. Is there a chance that China changes the agreement with German polysilicon makers in terms of what - which minimum import price for them in China maybe restrictions on volume, just hearing some rumblings about that but could you guys comment anything about European polysilicon and show through limitations on imports to China?

Yes, we have no comments, because we are not aware any agreement between them even before the minimum price what exactly people guessing, but nobody knows. But so far, so I think they probably will continue I think because it’s European market to Chinese both governments and they trying together the agreement at the moment. So I think there is no reason, we don’t see much will change and that's all we can say about it. Yes, we don’t have much comments about that, but we think the trend is normal, I think probably most likely we’ll continue that kind of arrangement.

And just I guess, I know you can’t comment, but just to confirm the agreement between China and Europe on polysilicon that expires on April 30th of this year, is that correct?

Expire at April 30th I am not sure we can check that.

I will follow-up with Ming.

Yes, we can - Kevin can check that and get back to you.

Great. Thanks, guys.

Okay, thank you.

The next question is a follow up Brad Meikle of Craig-Hallum. Please go ahead.

Hi, it's Brad Meikle thanks. So can you just step back - I mean we had a decade where there were sort of incessant polysilicon expansion. Now it seems like the balance sheets of most of the players fairly tapped out and do you see also over the six months ago they don't really plan to add any more silicon capacity. I guess as a possible expansion there Greenfield by New Hope. Can you just talk about how much actual real capacity do you think is coming online over the next three years? And whether you agree with a view that we're moving to more of a balanced sellers type of market after really probably eight years of fairly aggressive expansion especially by GCL? Thanks. And what that does is sort of longer term balance and just pricing go back to $12 in 2018 if you feel like we're more sustainably in a realm when you can make consistent margins? Thank you.

Hi Brad thank you for the question. So I think if you look at the current market conditions right now. I think you're no longer seeing any significant capacity expansions by incumbents. So I think we are adding capacity which is added some and we're now taking a more prudent approach and looking at how the market might play out and before we are now to our next phase of expansion. And we think that's very similar condition for almost majority of our competitors. I think any new capacity that you see are being added or have been added say over the past 12 months probably was announced a long time ago. And the significant portion of capacity that are coming online right now some of them in the U.S. and it cannot even be imported into China. And I think some what people are talking about like you said New Hope. I think that's a completely new player with no experience in polysilicon. We checked out some of the equipment they're buying along some of our own proven equipment have never been actively used in polysilicon productions in the past. And without their type of experience we think they're going to have a significant amount of challenge trying to ramp up their facility. And there is also other players within China trying to ramp up new technology that's also completely improvement within polysilicon manufacturing. So we think it's very likely outcome is I think this is going to be lot less new production in the coming in to the market than people are thinking. So from that perspective I think definitely it's a more a lot more balanced market right now for especially the past say 18 months where we have seen a fairly tight supply on market for polysilicon. And then with much more prudent investment from the incumbents. The incumbents now know that it's a very challenging market for everybody wants to add capacity at the same time. And a lot of players I mean even at today's pricing they're not very profitable so it's not easy. And I think we're very uniquely positioned in this market because of our low cost structure.

Thanks. And I guess just last questions, I mean I guess you guys have over $100 million of free cash flow this year I mean would you ever pay dividend or return cash to stockholders or buy back stock?

So that’s something that we're actively considering. Right now I think last year we actually generated free cash flow and we decided to pay down some of our bank debt. So I think this year I think in the second half certainly I think we think our cash flow will most likely improve upon versus 2016. And then so certainly we think dividend and returning cash to shareholders something that we would actively consider and explore.

Excellent, thank you. We’d love to see more Chinese companies in the solar business taking that away. Appreciate your time.

Great. Thanks. Brad.

The next question is a follow-up from Philip Shen of ROTH Capital. Please go ahead.

Hey, thanks for the follow-ups. Just a few housekeeping questions, when you think about your wafer margins, how do you expect them to trends, like what were they in Q4 and how do you see them trending in Q1 and beyond?

Would be flat in Q4, we don’t see much change.

Roughly breakeven. So all the gross profit and gross margin is contributed by our polysilicon business.

Okay. And so you see that kind of breakeven scenario going forward as well?

Yes.

Right. We don’t see much change.

Okay. And then your R&D in the quarter was pretty high at $2.8 million, what do you see ahead in Q1 for R&D and beyond?

So we think for the full year 2017, maybe something between $3 million to $5 million full year 2017. And then I think you can just kind of divide that by four per quarter. There might be some period, it fluctuate by period-to-period, but we think for the full year it should remain to that range.

That’s pretty high - big change relatively to what you guys have spent historically on R&D, I read what you guys had in your release about R&D. But can you just comment on a bit more on the rationale for the spending and what your plans are or the goals of that spending? Thanks.

So the R&D expense for Q4 was a bit unique in terms of because we had concurrent maintenance. So it was kind of like a perfect timing to do the R&D activities as well as new projects equipment at that same time. And especially as we prepare for our new capacity expansion as well so these new R&D projects can be used for the entire the 18,000 ton capacity. So that was a little bit unique in terms of timing. So that’s how we decided to spent the R&D efforts within the core. And I think going forward it’s less likely we’re going to see a big one time event like that.

Okay. But I guess my question is historically your R&D has been about $1 million or $1.5 million a year and you are looking at $3 million to $5 million for 2017. So just curious the rationale for that increase for the full year 2017?

Well, I think for 2016 the full year is now $4 million. So it’s because we’re doing projects one is to improve the purity, to improve the quality and improve the amount of the percentage polysilicon we could do for semi-grade, so that requires R&D. And at the same time we’re also doing special projects for cost reductions and before doing improving throughput and debottlenecking and then we’re doing for example cost reduction efforts like that lowers energy usage.

Okay, great. Thanks Ming.

Okay, thank you.

This concludes our question-and-answer session. I would now like to turn the conference back over to Kevin He, for any closing remarks.

Thank you everyone again for joining the call today. Should you have any further questions, please feel free to contact us. Thank you and bye-bye.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines. Have a great day.