Good day and welcome to the Daqo New Energy Fourth Quarter and Fiscal Year 2017 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’m 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 results of 2017, which can be found on our website at www.dqsolar.com. To facilitate today’s conference call, we have also prepared a PPT presentation for your reference. Today attending the conference call, we have our Chief Executive Officer, Mr. Longgen Zhang; and Mr. Ming Yang, our Chief Financial Officer. The call today will feature an update from Mr. Zhang on market and operations, and then Mr. Yang will discuss the company’s financial performance for the fourth quarter and the fiscal year of 2017. 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 provisions of the US 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 containing any forward-looking statement. 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 the preliminary views 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 US dollar terms. Please keep in mind that our functional currency is the Chinese RMB. We offer these translations into US dollars solely for the convenience of the audience. Without further ado, I’ll now turn the call to our CEO, Mr. Zhang, please.

Thank you, Kevin. Good evening and good morning, everyone. The fourth quarter of 2017 was an excellent quarter for Daqo New Energy in terms of both operational and financial performance, which concluded our fiscal year of 2017 as the best year in the company’s history. I would like to thank our entire team for their hard work and dedication for delivering such an outstanding performance. Despite the annual maintenance of our facilities and its impact on our operations during the quarter, we were able to produce 5,339 metric tons MT of polysilicon during the quarter, a new record for the company. This was a direct result of our continuing focus on improving operational efficiency and maximizing overall output. Demand for our high-quality polysilicon products remained strong, allowing us to sell a record high of 4,730 metric tons of polysilicon during the quarter to external customers, while generating total revenue of $103.7 million, an increase of 16% sequentially and 125% year-over-year. During the fourth quarter, the company generated $33.7 million in net income attributable to Daqo New Energy shareholders and 53.6 million in EBITDA with an EBITDA margin of 51.7%. The fourth quarter earnings per basic ADS were $3.16, an increase of 38.6% from $2.28 in the prior quarter, and up 710.3% from fourth quarter of 2016. 2017 was the strongest year in the company’s history. We produced 20,200 metric tons of polysilicon throughout the year, 12.2% more than our nameplate capacity of 18,000 metric tons. Our financial performance in 2017 was significantly better than in 2016, with revenues of $352.9 million, EBITDA of 167.5 million, net income attributable to Daqo New Energy shareholders of 92.8 million and net cash provided by operating activities of 142.7 million. While we are in a capital-intensive industry, our debt ratio improved to a healthy…

Thank you, Longgen and good day, everyone. We appreciate your interest in the company. Revenues were $103.7 million in the fourth quarter, compared to 89.4 million in the third quarter of 2017 and 46.1 million in the fourth quarter of 2016. Revenues from polysilicon sales to external customers were 89.8 million, compared to 72.9 million in the third quarter of 2017 and 32.8 million in the fourth quarter of 2016. External polysilicon sales volume was 4,730 metric tons, compared to 4,500 metric tons in the third quarter of 2017, and 2,209 metric tons in the fourth quarter of 2016. The sequential increase in polysilicon revenues was primarily due to higher polysilicon sales volume and higher ASPs. Revenues from wafer sales were 13.9 million, compared to 16.5 million in the third quarter of 2017. Wafer sales volume was 22.3 million pieces, compared to 26.4 million pieces in the third quarter of 2017. Wafer volume during the quarter was impacted by our upgrade of wafer slicing equipment as we upgraded our entire wafer facility from our history based wire saw cutting to now diamond wire saw cutting and we had experienced some initial ramp up issues. However, we’re seeing meaningful decline of wafer processing costs after the upgrade and announced silicon wafer processing cost is expected to decline by approximately 25% until the equipment upgrade is complete. Gross profit was approximately 46.9 million, compared to 36.4 million in the third quarter of 2017 and 14.2 million in the fourth quarter of 2016. Non-GAAP gross profit, which excludes costs related to the non-operational polysilicon assets in Chongqing, was approximately 47.3 million, compared to 36.9 million in the third quarter of 2017 and 15.8 million in the fourth quarter of 2016. Gross margin was 45.2%, compared to 40.8% in the third quarter of 2017.…

[Operator Instructions] The first question comes from Philip Shen of Roth Capital Partners.

Hi, Zhang, Ming, congrats on the great results. My first question is around guidance. You guys consistently produced well above your nameplate capacity, but I think this quarter, in Q4, was higher than normal at 25% above nameplate. On a go forward basis, from your 2018, well, I guess the question is, how are you operating so much above nameplate and when you bring on your Phase 3B capacity now, which is 30,000 metric tons, would you be able to continue to expect to operate at 25% greater than that nameplate as well?

Philip, I think -- good morning. Thank you for the question. It’s a good question. The nameplate, basically, the design, the full capacity is our 18,000 metric tons, because we are a chemistry company. So basically, the actual capacity is always larger than the nameplate. So as you can see that, this year, our guidance is around 22,000 to 23,000 metric tons. We think is very, I think is good. In terms of the question, the 3B, 13,000 metric tons, of course, I think that’s our planning right now. Actually, nameplate is 10,000. So, actually we maybe, conservatively speaking, 13,000, but actually we maybe can reach 15,000 metric tons. Basically, I think to answer your question, if we finish the 3B, theoretically, we can achieve too -- the annual output is above, I think 35,000 tons, maybe reach to 37,000 tons. It’s possible, but we cannot guarantee. Did that answer your question?

Yes. Thank you, Zhang. That helps a lot.

It’s always 30% more, even 60% more than the nameplate, the actual output.

Good. That’s very helpful. And then also for full year 2018, can you help us understand what the wafer volumes might me? I mean, you gave the poly side for production, but how much, we saw in the guidance for Q1, the wafer production stepped down lower than what we typically are used to by maybe 25%. So, do you think the poly consumption by wafer will be similarly lower for most of 2018, because you want to divert more of the shipments now, more of the production of poly externally? Is that the plan in general?

Okay. I think, Philip, I think since I took over the CEO position, I look at the whole industry, because Daqo, we forecast polysilicon manufacturing. If you look our Chongqing wafer production, basically, okay, I spend the whole week in Chongqing. We run now the capacity only 500 megawatts on the wafer capacity, but we have right now, at the beginning of this year, we have employees of 516 people. So I immediately cutting people, 168 people. So right now, we’re cutting people to 349. Because right now, if you look our last year, 2016, our wafer gross margin is only 4% compared -- not only compare the benchmark company, let’s say, Jinko, let’s say LONGi, their wafer capacity, their wafer gross margin maybe around LONGi, because it’s mono wafer, the high capacity, we are multi. So even apples-to-apples, we compare with, let’s say, Trina and Jinko, our gross margin is still lower. They may be around 12% to 15%. So that’s why come back, we need to consider that, even though, we right now are seeing Q4, we changed to the diamond wire cutting system, but we still have the quality issue. So basically right now, we are basically slowing down the wafer capacity, the production. We have to first to mature the quality is 100%, use the diamond wire saw cutting, the first. Second is, our non-silicon cost right now is higher basically. If you look our Q4, it’s almost $2. It’s not comparative to our $2 competitors. So we have to make sure our cash – non-silicon cash cost to within $1.15 plus our depreciation may be right now is $0.39. So even $0.39 plus $1.15 renminbi, add together is almost $1.60 renminbi per piece, still no competitive, the advantage compared to the competitors. So basically, we…

So shifting gears, you mentioned that you want to focus more on the high quality polysilicon for mono. I noticed the ASP in Q4 was higher than we had expected. It was very much in line with the spot domestic pricing in China. Typically, your ASP is maybe 10% lower than some of the domestic spot pricing that we see, should -- and this time, it was kind of in line. Should we expect this to continue, meaning, you're getting, it seems like a maybe a premium for your price, what's driving this premium. Or is it simply just the overall supply demand dynamics? Or are you able to actually command a bit more of a premium these days because of the greater mono demand by LONGi and [indiscernible] and some of these downstream customers. And as a result, that shift is causing the price premium to actually percolate through the overall blended ASP?

Okay. I think that’s a good question. Okay. First to answer your question, first of all, today, our production this year, especially, we’ve given guidance, 22,000 to 23,000, of which we think at least 60%, were mono crystalline products to sell to the markets. That's first. Secondly, if you look our clients, mostly it’s LONGi, [indiscernible] for the mono crystalline silicon. Then, also we have a small minority piece of the multi polysilicon. The ASP, if you look our Q4, I think it's around like $19.1 per kg. So just like we said, this time, we’re even a little above the spot price. I think, if you look at the whole year last year and the products trending always before the Chinese New Year, the price still keep a little higher, then during the Chinese New Year, because we are the chemical company, we will continue continuously in the production, to build the inventory. Then while those wafer manufacturer companies, they were stopped, they were vacation, in a holiday, so they were utilized in our -- to consume out the inventory. So after Chinese New Year, especially this year, because whilst the heaviest snow in China, postpone the installation of the downstream, the solid projects. Secondly is maybe 201 US anti-damping regulations to give the market, maybe it’s not very confident. But I think, that’s not the major issue, okay. Third issue, I think, China, if you look at last year, total consumption on the polysilicon is around 370,000 tons, of which 170,000 tons is import and the import majorly, because in term of US dollars, like OCI, like other, their cost is around $12 to $13. Then if you look at the manufacturer, 70% of the output produced by the Chinese, I think the producer, their cost also is…

One more if I may on -- more of a housekeeping question on CapEx. With your nameplate being -- and then your ability to operate above nameplate being a little bit higher for the Phase 3B expansion, can you just update us on the amount of CapEx required for Phase 3B. I recall the number of about 100 plus million and so just remind us what is the CapEx for Phase 3B if it's higher than what you had expected before or the same or lower? And then what the timing of those expenditures could be, especially since you’re pulling forward some of the Phase 3B starts?

Okay. So actually the most recent forecast, we've already placed order for the equipment and we will finalize the design and then we're also doing the bidding for the construction. So, the latest expectation is CapEx therefore, the entire 3B project will be about $140 million to 150 million. And so there is about $14 to $15 per kilogram of nameplate capacity. We expect, right now, to fully ramp up with some potential debottlenecking, we might squeeze more capacity out of that. So this is going to be the highest capital efficiency of the company’s history. And in terms of CapEx, we’ve already spent roughly $10 million, mostly on equipment in Q4. So mostly on the equipment prepayment and the initial foundation work for example. So this year, we expect probably around $80 million to $90 million of CapEx related to this particular project and if you compare to our cash flow for last year, we think that's still pretty healthy and then the remaining CapEx is expected to finish by next year. That’s the current planning.

Philip, I just had one comment. Okay. If you look right now, currently, you see the Asia company, I think, [indiscernible], they just announced the CapEx for two factory, each 25,000 tons. So if you look at the 2017 December ’17, I think the data announcement. So they are 25,000 tons, their total investment is around RMB3.3 billion. So you can calculate there per kg CapEx is around, our calculation is around like $25. But if you look our 13,000 tons, our total investment is $140 million. So it’s around, you can calculate, like $12. So we – the CapEx is very more efficiency.

And so for maintenance CapEx, how much do you expect in 2018, meaning, for the model and when do you plan on the maintenance? Last year, I think it was, you had a week in Q3 and one week in Q4, would it be a similar type of timing for 2018?

So at least in terms of maintenance, we’re still expecting -- currently as of today, we’re expecting it to come back in Q3 based on normal schedule. I think last year, we ran a little bit later than we normally would. And then, just to say, maintenance CapEx, we’re expecting roughly $10 million to $15 million for the year.

The next question comes from Gordon Johnson of Vertical Group.

Thanks for taking the question and congrats on a good quarter. I guess just with respect to polysilicon prices, we've noticed the numbers haven't updated at least for the source, if we look out for the past two weeks, but the prior two weeks before that, you had some pretty sharp declines, 4.5% two weeks ago and three weeks ago, 4.2%. So given the numbers you guys suggested, where prices are right now for multi and mono, at 120 to 125 and 130 to 135, do you guys think we've reached the low point in polysilicon as of right now or do you think they can go lower? And then the second question would be, the head of the PV, the China PV industry association [indiscernible] I don't know if I’m saying that name right, but nonetheless, you recently put out comment saying that the China installations in 2018 would come at around 33 gigawatts or 40% drop from 2017. And the reason given was excessive costs associated with the 130 gigawatts that have been installed, roughly 79 I think billion CMY per year of state subsidies required. So you guys – do you guys have a view on those comments? Have you heard those comments? Do you see them as accurate or not?

Okay. Let me first answer your question, then maybe Ming can add more comments. First of all, I think right now, after Chinese New Year, we've seen, I think, the demand and supply, the negotiation, I think the final we see right now, the price for the mono-silicon is around RMB130 to RMB135 per kg. Then, the multi is around 120 to 125. Yes. We see the price may be will continue to slightly go down. And we think it may be possible to go to like 115 to 120. It’s possible. It depends on how quickly the market, the installation will quickly pick up and also the market would come back. But the one thing I want to add is, why is the US market, everybody thinking the US market, because 201 regulations and we’ll reduce the market I think, the installation of PV. But that’s wrong. Because if you look at Jinko, other Asia company, as I know, at least the three companies right now, it’s going to US to build up the module or even sell manufacturing company. So if they're going to do that, the wafer still comes from China, the silicon still comes from, majority of the wafer manufacturing is still in China. So in terms of your second question about the Chinese market, as I said, I was making that, if you look at Chinese party, this term is five years. The three major tasks, why is to prevent the real financial risky. Secondly is the policy improvement in rural area. Thirdly is the environmental protection. The two major tasks is related to I think solar industry. So I do think the solar industry will be hurt. The reason is why, just like you said, the news. You have to look at that, as…

Yeah. It does answer my question. I guess one follow-up I would have is, are you guys concerned at all about the amount of polysilicon that was reported to be produced in China in January of, I think, it was a record of 24,000 tons by the non-ferrous metals association and when you add in the 16,300 tons of imports, which was the second highest ever, I mean, with the run rate to do, 115 gigawatts of the poly supply globally or specifically in China for the year. So does that concern you guys at all? That seems like a high level and clearly January isn’t the high mark for polysilicon production or imports in to China.

To answer your question, yes, this, we consent. Okay. I think, in, if you speak for the poly price, you have to consider two effects. Wires in China, because always, China, the production capacity will be increased dramatically. Look, new horizon, right. Three years ago, they're going to say, they're going to invest 80,000 tons capacity. Okay. We are already three years. How much is the manufacturing? Last year, maybe 5000 tons, maximum, the lower quality. But this year, they say, they go into around full capacity, 15,000 tons. So what I’m saying, starting from beginning to enter the new – the polysilicon investors like new horizon, it takes a long time. It's not easy, just like the middle, we will sell in a module, you can, to form the capacity, immediately like three months or six months, you can build up 1 gigawatts capacity immediately from wafer to module. But for polysilicon, it’s difficult. Okay. First of all. Secondly is, we have to differentiate ourselves from other people. One is, right now, 70% of our capacity right now is produced mono polysilicon. That’s the future of the module market. Last year, I think LONGi and other, I think of the mono module only accounted for maybe 27%. This year, we’re increased to maybe more than 50%. So if you look at, in China, the manufacturer only TBEA, [indiscernible] those two, plus maybe I think, Yichang also produced part of them, can produce the mono polysilicon. That’s the first advantage. Second advantage is, I'm just mentioning that. Our gross margin last year was around 45%. So we compare our industry average, what I say 80% of those produced or even imported, their gross margin may be around 20% to 25%. So yes, we still have the cushion there. Maybe, the newcomer will continue lower cost, yes, the same gross margin as us. So what I think, yes, we maybe cannot continue to keep such a high gross margin, 45%, but we still think this year, we can achieve 35% to 40% gross margin.

When you say 35% to 40% gross margin, given we’re already almost through, clearly, we’re through February and we’re into March, can you give us an indication of what that margin will look like in Q1? Would you say the Q1 margin will be lower than that 30% to 40% target and it will get higher through the year, as prices rebound or will Q1 be higher than that 30% to 40% and it will go lower through the year?

Okay. First of all, we don’t give guidance, any guidance for the future on the gross margin, because it's difficult to projection. Okay. But I can say the month of January, we are very well set. Okay. The ASP is very well. Yes. During the February, Chinese New Year, every year. So if you look over history, the Q1, you can’t look. So I cannot give you guidance, but I say I gave you something as for whole year, we believe, I think, we can keep -- I think I'm not giving guidance, but I’m just -- we think we can keep maybe that, even I’d say, and just for example, if that keep gross margin around 35%, then the industry, majority 80%, maybe they only let’s say 15% to 20%. I'm just assuming, okay, the lower cost to compare the higher cost.

Okay. So basically, you’re saying you’re not giving guidance, but your gross margin could fall 5% this year, but you’ll still keep it at around 35% range? That's the target.

I’m not giving the guidance. Okay. I’m just giving you.

I got you. That is helpful. This is very helpful. And again, congrats on the solid 2017 performance. Thanks a lot guys.

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

Thank you everyone again for participating in today’s conference call. Should you have any further question, please don't hesitate to contact us. Thank you and good bye.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.