Daqo New Energy Corp. (DQ) Earnings Call Transcript & Summary

Good day, and welcome to the Daqo New Energy Fourth Quarter and Fiscal Year 2020 Results Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Alex (sic) [ 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 of fiscal year 2020, 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 Mr. Longgen Zhang, our Chief Executive Officer; 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 fiscal year of 2020. 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 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 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 preliminary view as of today and is 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 for the audience. Without further ado, I now turn the call over to our CEO, Mr. Zhang.

Thank you, Kevin. Hello, everyone. Thank you for joining our conference call today. We are very pleased to report a strong quarter in terms of operational and financial results to bring a successful close of the year 2020. I would like to thank our entire team for their hard work, commitment and dedication in achieving these excellent results. During the quarter, we produced 21,008 metric tons of polysilicon, a record high in our company's history. Our production cost was reduced by 2.7% in renminbi terms, primarily due to our efforts in additional energy savings, offset by a higher-than-expected rise in the cost of silicon raw materials in the fourth quarter. The increase in our cost in U.S. dollar terms compared to the third quarter was a result of exchange rate fluctuations due to renminbi appreciation. In 2021, we will continue our efforts to reduce cost as we begin to benefit from our newly implemented digital manufacturing system to maximize our output, optimize our production process and further improve our operational stability and product quality. During the months of November and December 2020, we saw a significant pickup in polysilicon demand from our customers to meet their increasing production needs to serve the growing solar end market. During the fourth quarter, we sold 23,186 metric tons of polysilicon, which is the highest quarterly sales volume the company ever achieved. Since the beginning of 2021, we continue to see rising polysilicon market prices, and most recently market poly ASP has reached a range of $15 per kg to $16 per kg. As our mono wafer customers continue their capacity expansion plans, supported by a robust downstream market demand, we believe that the supply of polysilicon will continue to be very tight throughout the year, given very limited additional polysilicon supply this year. Regarding the status of proposed initial public offering of our Xinjiang Daqo subsidiary in China's STAR Market, the stock listing committee of China (sic) [ Shanghai ] Stock Exchange Star Market reviewed Xinjiang Daqo's application in February 2, 2021, and determined that Xinjiang Daqo has already met the offering, listing and disclosure requirements related to its potential STAR Market IPO. As the next step, Xinjiang Daqo will need to be -- to go through the registration process with China Securities Regulatory Commission before the STAR Market IPO can take place. The proceeds of its potential IPO will be used to fund our Phase 4B polysilicon project with an annual capacity of 35,000 metric tons. We have already started the preparation work for Phase 4B, including the design and procurement process. We plan to start the construction in middle March and expect to complete the project by the end of 2021 and ramp it up to full capacity by the end of Q1 2022. I have been in the solar industry for over a decade, and the prospects for the solar industry have never been bright. Driven by the dual trends of solar grid parity and the urgent need to address climate change, the industry is on the cusp of undergoing tremendous growth over the next few years without the need for government subsidies. Solar energy is now one of the most competitive form of power generation ever -- even compared to fossil fuel, and we are beginning to see real-world applications where solar is the optimal choice to meet growing energy needs and to replace legacy carbon-based generation. Major economies around the world have also begun to implement ambitious policies and initiatives to support and mandate the use of renewable energy for power generation. The European Union has announced its Green Deal to fight climate change through progressive policies for climate neutral and sustainable EU with the goal of no net emissions of greenhouse gases by 2050 and to decarbonize the energy sector. Over the next few years, the European Climate Law is expected to turn this political commitment into a legal obligation. In China, President Xi Jinping has announced China will aim to hit peak emissions before 2030 and reach carbon neutrality by 2060, and we expect various government agencies, including the NEA and the NDRC, to introduce and implement policies to mandate and support the use of renewable energy. For 2021, the NEA has indicated its intention to accelerate the development of wind and solar energy with a goal of adding a combined 120-gigawatt of wind and solar in 2021. In the U.S., with the Biden administration commitment to fight climate change and plan for clean energy revolution with a goal of achieving a 100% clean energy economy and reaching net zero emissions no later than 2050, we believe favorable policies are forthcoming to support renewable energy's growth in the U.S. We are standing at the beginning of a new era that will demand more and more clean, renewable and cost-effective energy resources, among which solar PV is one of the most competitive. We will focus on our core business, continue to expand capacity and further improve quality to better serve the fast-growing solar PV market. Now let me discuss our outlook and guidance for our future. The company expects to produce approximately 19,500 metric tons to 20,500 metric tons of polysilicon and sell approximately 20,000 metric tons to 21,000 metric tons of polysilicon to external customers during the first quarter of 2021. For the full year of 2021, the company expects to produce approximately 80,000 to 81,000 metric tons of polysilicon, inclusive of the impact of the company's annual facility maintenance. Now I will turn the call over to our CFO, Mr. Yang, who will discuss the company's financial performance for the fourth quarter and fiscal year 2020.

Thank you, Longgen, and hello, everyone. Thank you for joining our call today. Now I will discuss our company's financial performance for the fourth quarter of 2020. Revenues were $247.7 million compared to $125.5 million in the third quarter of 2020 and $118.9 million in the fourth quarter of 2019. The 97% increase in revenue in the fourth quarter compared to the third quarter was primarily due to higher polysilicon sales volumes and higher polysilicon average selling prices. Gross profit for the fourth quarter was $109.5 million compared to $45.3 million in the third quarter of 2020 and $35.1 million in the fourth quarter of 2019. Gross margin was 44.2% compared to 36% in the third quarter of 2020 and 29.5% in the fourth quarter of 2019. The increase in gross margin was primarily due to higher ASPs. Our polysilicon average production cost was $5.92 per kilogram in the fourth quarter compared to $5.82 per kilogram in the third quarter. The slight increase in ASP was primarily the result of RMB appreciation versus the U.S. dollar during the quarter. In RMB terms, our production costs in Q4 was reduced by 2.7% as compared to Q3, primarily as a result of improvements in energy and operational efficiencies, despite a higher-than-expected rise in silicon metal raw material costs in the fourth quarter. Selling, general and administrative expenses were $11.2 million compared to $9.2 million in the third quarter of 2020 and $9 million in the fourth quarter of 2019. The increase in SG&A costs was primarily due to an increase in shipping costs as a result of higher sales volume for the fourth quarter as well as an increase in personnel costs. SG&A expenses during the quarter included $4.5 million in noncash share-based compensation costs related to the company's share incentive plan. R&D expenses for the quarter was $1.5 million compared to $1.7 million in the third quarter of 2020 and $1.2 million in the fourth quarter of 2019. R&D expenses for the quarter included projects related to quality and purity improvements for N-type polysilicon as well as other technology upgrade project and can vary from period to period, reflecting R&D activities that take place during the quarter. Income from operations was $98 million compared to $33.3 million in the third quarter of 2020 and $30.1 million in the fourth quarter of 2019. Operating margin was 39.6% compared to 26.6% in the third quarter of 2020 and 25.3% in the fourth quarter of 2019. Interest expense was $8.3 million compared to $5.4 million in the third quarter of 2020 and $3.9 million in the fourth quarter of 2019. The increase was primarily due to an increase in bank interest charges as well as bank fees related to Chinese bank notes. EBITDA was $115.1 million compared to $51.6 million in the third quarter 2020 and $45.4 million in the fourth quarter of 2019. EBITDA margin was 46.5% compared to 41.1% in the third quarter of 2020 and 38.2% in the fourth quarter of 2019. Net income attributable to Daqo New Energy shareholder was $72.8 million compared to $20.8 million in the third quarter of 2020 and $20.1 million in the fourth quarter of 2019. Earnings per basic ADS was $1.01 compared to $0.29 in the fourth quarter of 2020 and $0.29 in the fourth quarter of 2019. Now on the company's financial condition. As of December 31, 2020, the company had $118.4 million in cash and cash equivalents and restricted cash compared to $109.8 million as of September 30, 2020. And as of December 31, 2020, the notes receivable balance was $0.2 million compared to $1.9 million as of September 30, 2020. As of December 31, 2020, total bank borrowings were $193.7 million, of which $123.2 million were long-term borrowings compared to total bank borrowings of $271 million, including $140 million of long-term bank borrowings as of September 30, 2020. For the 12 months ended December 31, 2020, net cash provided by operating activities was $209.7 million compared to $181 million in the same period of 2019. And for the full year of 2020, net cash used in investing activities was $118.5 million compared to $261.8 million in the same period of 2019. Net cash used in investing activities in 2020 and 2019 was primarily related to the capital expenditures on the company's Phase 4A polysilicon project. And for the 12 months ended December 31, 2020, net cash used in financing activities was $95.5 million compared to net cash provided by financing activities of $102.3 million in the same period of 2019. Now on the company's full year 2020 results. Revenues were $675.6 million compared to $350 million in 2019. The increase in revenue was primarily due to higher polysilicon sales volume, as 2020 polysilicon sales volume increased to 74,812 tons as compared to 38,110 tons in 2019. Gross profit was $234 million compared to $80.1 million in 2019. Gross margin was 34.6% compared to 22.9% in 2019. The increase in gross margin was primarily due to lower polysilicon production costs. Selling, general and administrative expenses for 2020 was $39.5 million compared to $32.9 million in 2019. The increase in SG&A expense was primarily due to an increase in shipping costs as a result of higher sales volume as well as increase in personnel costs. R&D expenses were $6.9 million compared to $5.3 million in 2019. Income from operations was $187.9 million compared to $47.5 million in 2019. Operating margin was 27.8% compared to 13.6% in 2019. Net income attributable to Daqo New Energy shareholders was $129.2 million compared to $29.5 million in 2019. Earnings per basic ADS was $1.82 compared to $0.43 in 2019. Adjusted net income attributable to Daqo New Energy shareholders was $147.1 million compared to $47.4 million in 2019. Adjusted earnings per basic ADS was $2.07 compared to $0.70 in 2019. And that concludes our prepared remarks. Operator, now we would like to open the call to questions from the audience.

[Operator Instructions] The first question is from Gary Zhou with Crédit Suisse.

Congratulations on the strong results. I have 2 questions. So firstly is on the polysilicon price outlook. So we noticed that there has been a significant polysilicon price hike after Chinese New Year, so from around RMB 90 to around RMB 110 last week. So can management share with us your latest view on the near-term polysilicon price outlook for the next few weeks? And if you can also share your estimate for the second quarter this year and also the second half of this year. And the second question is on the inventory. So wondering if management can share with us the company's latest polysilicon inventory. And if you have also some information on the inventory level to your competitors and also to the wafer companies.

Gary, I think, first of all, I think the price. Basically, I think January, our average, including the value-adding tax, I think our selling ASP is around RMB 80 per kg. February around RMB 81. Right now, I think -- in March, I think we're selling around the -- higher than RMB 100, okay? Basically, I think we see the selling price go up. And especially this week, we think we're selling our products around RMB 120 per kg. So equivalent, I think, if you view without value-adding tax is more than higher than $16 per kg. We see the reasons because we see this year didn't have any capacity adding to the polysilicon supply side. But the demand side, really, we see a lot of, I think, the wafer expansion projects is under -- on the road. As you see that, recently, we just announced 2 long-term contracts. One is with Zhonghuan. Another one is with Wuxi Shangji. Basically, those 2 long-term contracts is most -- I think, majority, 90% quantity is focused on 2022, 2023, 2024. This year actually is not too much. So you can see right now, people is more even in a concern even to next year -- middle of next year, possible demand is still higher than the supply. So as we see the polysilicon price continue every week go up. And we believe, I think, second quarter, the ASP should be around RMB 120 to RMB 130 per kg. It's possible. And for second half of the year, I think, definitely, we believe, should be above RMB 120 per kg. And I can't project how far away. But as we say today, polysilicon cost account for in module -- okay, for in module only around 15% to 16%. Accounted for total, I think, projects cost may be around 7% to 8% is total lower glasses cost. Glass today costs accounted for almost 18%, 19% of the module. So we do not believe, I think, polysilicon price go up little will affect, I think, the ending product module price too much. And today, I think -- the major problem, I think, maybe -- the major price come back is around like RMB 1.7. We still think it's salable. The market is still there, especially in China. So we believe -- I think the polysilicon price will continue maybe first half of next year still came above, I think, between above -- around like RMB 100 per kg. And after the middle of next year, I cannot project. It's dependent on the ending market and also how fast, I think, the wafer expansion and how fast the polysilicon can be adding -- supply chain adding there. As we see that, next year, LONGi capacity can ending, I think why is over 35,000 tons, then Tongwei maybe around 80,000 tons. And we also see Asian Silicon and the Xinte, based upon their IPO, they also planning expansion. So their capacity maybe were adding by the end of next year. So really, we do not think too much capacity supply even next year. Maybe the year 2023, I think the capacity come back a little more. So I'm not giving the year beyond the next year. So basically, what I think is the silicon supply and demand very tight this year. The situation will continue to middle of next year. The inventory, let Ming answer the second question.

Okay. Gary, so let me discuss quickly about our inventory level. So I think you remember at the end of Q3 because of a delay of order from a particular customer, I think, our inventory was a bit higher than normal. So it was running more than 3 weeks inventory at that time. I think during Q4, as demand improved and orders normalized, especially in December with very strong orders from our customers, so inventory has reduced to less than 2 weeks, approximately 10 days or so. So that's already a normalized level of inventory. And then by now, our inventory is running at very lean levels. So it's less than a week of inventory right now, which is really the minimum level that we need to prepare products for the different grades and to ship to different customers. So we're running at basically our minimum level of inventory right now of less than a week. And I think across the industry and also our customers, we're also seeing very lean inventory levels currently.

The next question is from Karl Liu of CICC.

I've only got 2 questions. First, yes, I think we have no doubt about the potential price uptrend this year. But we are seeing some current change on the demand weakness, especially in March. I think we have some channel checks showing the modules company has already cut their capacity utilization originally. So could you please give us some colors on the current market dynamic? And do we think the current price growth trend will be slowed down? Or do we expect the price to stabilize recently? I mean, we have no doubt about the whole price trend this year, but how about recently? So do we expect that change in the modules will have some pressures on us? And the second question is about the prepayment. So we know we have some prepayment we signed with customer. So could you please share that prepayment percentage we have signed with the customer or maybe just some colors that we can -- for example, how much money we can -- a down payment we can receive when we sign a contract with our customers? That's all my question.

Karl, I think -- first question, I think, today, basically, okay, the module market, I think the European -- Europe and the U.S. market is still is very hot. Like I was telling, I think, you -- obviously, we're still selling around $0.25, I think, per watt still is good. The only thing so right now in China, I think, right now, is increased to 1.65, 1.7, and look like a little slide. The reason is because everybody waiting for NEA, the 2 conference meeting, the new policy. But definitely, I think after middle of April, definitely, I think China demand will be quickly come back. That's, I think, for certain. But to answer your question, yes, I think the module selling maybe will slow down in China within 1 month. But if you look at the inventory, maybe some inventories pipe sale. And the reason why, because I think right now, wafer today almost -- mono wafer, no inventory, as we told. I think then also some -- I think some company, okay, I think keep -- in order to keep a high gross margin, basically, they continue to increase the wafer prices. I'm not sure how long they can continue doing that. Okay. Basically, what I say in some segments because on balanced gross margin and kind of pass-through through the middle industry, what I say is the wafer sale and the module, and, of course, maybe temporary, the module, I think, selling maybe a little slowdown. But for further -- for the future, you see, I think a module just like the building, as you build up, you always can sellable, okay, only is the price. So finally, you will selling the module maybe at a lower price, right? The only thing is who is going to lose money or not say lose money, maybe adjust their gross margin in certain area, you see, to lower down their gross margin. So what I think is, in the future, wafer gross margin should be go down and should be -- the module should be -- gross margin should be reasonable to reach a reasonable margin to push the module, continue to sell it. So I'm not worried about -- just I said, you see, even polysilicon price continue to go up CNY 10, CNY 20 per kg, but that affect the final product only little. If we increase RMB 10 per kg, maybe only increase the module price 0.5%, 3% -- 0.3%. It's not affect too much. The effect is less than the glasses prices right now affects the module. So what I think is because of demand-supply, the market mechanism, for us, because we are chemistry industry, it's hard long-term investments. It's an intensive capital investment. So it's hard to, in time -- one time to increase the capacity. So as you know that, the demand-supply is there. So even this year, all the polysilicon produce only maybe can support, I think, around 150 gigawatts. So -- but as you can see, the wafer capacity continue expansion by the end of this year, in China, maybe reach to more than 400 gigawatts. So we don't know basically. But I can tell you is the market is there. China will continue to go up. Even NEA today -- the Head of the NEA just said, we will detail lay down the policy and to encourage, I think, wind, solar industry and encourage each provincial level to continue to develop. The adding together should be more than our original planning, the national wide, maybe 60, 80 gigawatts. So I think that's -- I think I'm very confident, I think, of China market. Secondly is the prepayments. We signed, I think, 2 long-term contracts. One is with Zhonghuan. And Zhonghuan has a contract signed -- actually the Zhonghuan has signed before Chinese New Year. So -- we based on that time, I think we collect 5% of the current price -- total contract value. And for Shangji, basically, we -- based on right now, I think the week before last week, the average selling price, we collect 6%, I think, the down payment. So we are going to sign another contract, also continue to keep in the 6%. So as you can see that, we -- the only things we signed with the contract, majority is for the next 3 years. It's not for this year, okay? This year, we're just going to squeeze maybe beginning inventory. Maybe at the end of the year, you see our 4B or even December, maybe we'll book some next year, January quantity. There are some contracts, we have the adjustments, 10% up and down. So we still can, I think, do something, I think, to help some company, especially, like I think some company they are sizable in the future. And our strategy is in the future, 1 client cannot account for more than 20% of our sales.

Yes. I actually have a follow-up question on your outlook. So it's interesting. We have noticed that the wafer price has always like banding with the polysilicon price. When the polysilicon price go up, the wafer price always follow up and go up. And -- but if we look at the capacity, should see some, like, yes the overcapacity or the competition on the wafer side. But actually, in the price level, we didn't see that. And so could you give us some color on that? Do you think it's just something will definitely happen, but it just not happened? Or do you think it's because currently the sales diversity is not big enough? So we still have -- I mean, the whole industry, the polysilicon industry do have the sales contract with the leading player. So actually, the second-tier players cannot get enough the polysilicon. So even they have planning to build up more capacity, but actually, they cannot produce more wafer. What do you think about it?

I think as the module assembling gross margin right now is lower, so it's not discouraged, I think, the module sales in China, temporary. But if you look at the sale, I think, inventory is there. I think some company, maybe the big -- in the history, they almost monopulate -- monopoly the wafer capacity. But in the future, right now, they're vertically integrated. If they can selling their wafer all in the module, I think it's okay. But if they continue to increase the price of the wafer, if they kind of selling the module, what's the next step? They have to reduce the module -- wafer price, right? So I think that the time -- only the time can tell you. So I'm not like to do any comments. I think the stock price will tell everybody, right?

Next question is from Philip Shen with ROTH Capital Partners.

The first one is just a follow-up on the outlook for China's demand. Can you share what you think the overall demand will be this year? Do you think it will be 60 gigawatts? Or do you think it's 80 gigawatts, for example? And perhaps talk about what that split might be by quarter?

Philip, I think I'm very optimistic about China, even though the -- I think the dropped didn't say any target for national level, but I think it's encouraged, I think, the -- each provincial to develop, I think, their own targets. Then today, in the 2 conferences in Beijing today, the Head of the NEA basically sets the target there, I think around -- I think, 1,200 gigawatts in next 10 years. So as you can see that, I'm pretty sure, especially the distributed -- the rooftop and the distributed, I think, power -- solar power plants in China is continue to develop. I think this year, definitely, should be above 60, even above 80 gigawatts.

Great. And I think you guys are very -- I mean, fully booked for 2021. For 2022, I believe, with the new contracts, you might be fully booked as well. So would love to get some additional color on how you're thinking about capacity expansion? And clearly, with the channel listing, you're going to raise money for the Phase 4B expansion. Can you talk about the expectations for CapEx for Phase 4B? I believe it's maybe $13,000 -- or sorry, $13,500 per metric ton.

RMB 3.5 billion.

Yes. Feel free to give in renminbi, but do you expect the Phase 4B to be similar? Or do you -- or do we have the unit CapEx right for Phase 4b? And then beyond 4B, what are you thinking about now? Where do you think the location could be for the expansion? And what kind of CapEx could that be?

Okay. I think, Philip, the only thing I can tell you is we are continuing to expansion. As you see right now, the information, even right now, we're still not listing IPO, but we use our own money already starting 4B. 4B design capacity is 35,000 tons, but that is integrated to our existing, I think, plants. So we think the actual output should be 40,000 tons. Basically, this year, we've already given guidance, 80,000 to 81,000 metric tons. So next year, I think -- it's not the final. I think we can see if we can climb -- ramp the 4B capacity quickly, I think next year our plan, okay, is going to increase capacity 50%, reach to 120,000 tons for next year. So that's, I think, 2 years plan. For the -- beyond the 2 years, we also -- as you see there, we are planning right now the IPO in China STAR Market. We -- so far, we don't know the valuation. But we're very optimistic, and we can raise -- I think, right now, the estimate is RMB 5 billion. I think if we can reach more than that, definitely, I think, use our own current free cash, then this year, I think, the net profit plus, I think, the depreciation or EBITDA, whatever, we think we can continue to planning expansion. That we cannot tell you how much and where. We are looking -- I said, beyond Xinjiang, we are looking at other places right now. And maybe we are looking another 40 or even 80 or even 1,010 new plant. So I think that -- we're waiting for, basically, based on the proceeds of the IPO, the timing and also the market situation.

Great. Can you give us a little bit more color on the China listing in terms of timing? When do you expect that to be -- the CSRC to give you the final approval? And then one last question. As it relates to your cost structure, I think you mentioned that it went up a little bit in Q4 because of currency. What's your expectation for cost per watt in Q1? And then what is that -- how does that trend in 2021?

Okay. I'll leave the cost, I think, to our CFO, Ming. Basically, the IPO processing status in the -- maybe already mentioned that. So far, we already go through the February 2 -- the STAR Market Review Committee already approved. We are -- meet all the requirements for the listing and all the requirements. Right now, we are doing the registration. I think we are the first one, the U.S. company, right now listing the subsidiaries in China. So we believe we maybe can quickly registration by the end of this month. Then, hopefully, we can -- listing in China STAR Market by the end of April or beginning of May. That's right now the status. Then also, I think I forget your first question about the 4B total investments. The 4B total investments because we are integrated to existing plants, so total investment is around RMB 3.5 billion. Our 4A total investment is around RMB 2.9 billion. So it's almost, I think, RMB 500 million, RMB 600 million increase. The increase because the capacity in some area, we are -- the capacity is higher than 35,000 tons, okay? So basically, while we are integrating the existing system, so we were syndicated, I think, after 4B down ensure the plant should be more than 120,000 tons of capacity, the actual output. Ming?

Okay. Phil, in terms of our cost structure, so for Q1, we're expecting our costs in terms of RMB to be roughly similar to our cost in Q4 and maybe just slightly higher because of higher silicon metal costs. And I think in terms of movements in U.S. dollar, I think, because of the current continued appreciation of RMB, I think there's -- we could see maybe a 3% to 4% increase in cost in U.S. dollar terms in Q1 relative to Q4 of last year. So that's what we're seeing right now.

Maybe because the U.S. government continues to issue like USD 1.9 trillion, so caused renminbi continue appreciation.

Right. So that's for Q1. And Ming, what do you think about Q2, 3 and 4? What is the trend of the cost structure?

Okay. We think costs for the remaining of the year should be similar. At least for Q2 and Q3 should be similar to Q1. And then costs should come down by Q4, assuming constant U.S. currency exchange rate.

But if the 4B totally ramp up, our costs will continue to at least cutting 5%.

Yes, 5% plus type of reduction on current cost.

Next question is from Colin Yang with Daiwa Securities.

This is Colin from Daiwa. My first question is a bit similar to Philip's because The Street, I think, has no concerns for another stellar earnings in 2021 because very limited capacity additions from the industry wide, but people start to worry about the post 2022, especially for the major competitors, including Tongwei and Xinte. They both announced a very aggressive capacity expansion plan. So do we worry about losing market share if we didn't expand in trending manner? So if we expected to announce another expansion plan, do we plan to aid it by another share placement by equity or so debt financing? So this is my first question. My second question is regarding the FBR method because as you may noticed, that there is quite different reviews on FBR from Tongwei and Sichuan Poly. So what is our view on FBR, including security cost extra?

Colin, I think, for the first question, I'm not going to compare to Tongwei. I know Tongwei right now currently have, I think, at least 2 places expansion, around 80,000 tons. But you have to consider Tongwei also, I think, closed equity investments with, I think, other companies. For example, LONGi, I think Trina Solar. So basically, even by the year 2023, just like they claimed, their capacity is 290,000 tons. How much is sellable? We don't know. Because I think of which maybe more than 100,000 tons, they will use their own vertically integrated because they are going to do the wafer cell and even module, right? So we, I think, right now, focus our expansion. We think it's reasonable. And based on our capital, I think, status, our cash flow status, and I think we're going to do the 4B expansion. So by the end of this year, we are going to, I think, put it into production. Hopefully, it can ramp up production by the end of this year. So I think next year, our capacity, almost 50% increase to 120,000 tons. We think is big, I think, increase to meet our clients' needs. As you can see right now, today, almost all big wafer producer signed long-term contracts with us. For example, LONGi, Jinko, Trina, Canadian Solar, I think [ Chingo ], even Shangji, Zhonghuan. I think we will announce another company pretty soon. So we right now almost signed those big clients next 2 to 3 years. So I think the relation -- strong relationship with the clients is not only the quantity, how much you can produce, but also the quality of the products. So as you can see, our quality, our service, I think we're very confident in the future our expansion -- continued expansion and our clients' relationship. Secondly is for the, I think, FBR, we're not -- for us, I'm not going to go into comments another company, a Hong Kong listing company. They're doing FBR. But as you know that we are one of the most transparent company in terms of disclosing cost structure, products yield rate. However, we didn't see right now FBR, their cost structure, how much their cost? What's the yield rate? As we know that they have currently so already have like 10,000 metric tons production line. How much they produced? 200 tons 300 tons? We don't know. Second is we are not users of FBR polysilicon. However, we very pay attention to this issue with communication -- regular communication with our clients to share with our clients. It's very clear that as of today, the quality of FBR polysilicon still has, I think, much room to improvement and to match the polysilicon made by our modified silicon Siemens technology. So I have no more comments on our competitor or even they say, substitute technology, revolutionary technology. So basically, as you can see that one of our clients -- most of our clients -- one of our clients, they claim they will invest FBR. They just signed long-term contracts with us, pay 6% of the down payments. So I think that's strong to improve 2 methods, which one is best.

The next question is from Alan Hon with JPMorgan.

I guess, like I have 2 minor questions here as most of the question is already answered. I noticed that in the fourth quarter last year, I mean, the realized price is around USD 10.8. If we are to like take the average from, say, PV InfoLink or Silicon China, it seems to us -- it seems to me that the average price would be slightly higher. Just wanted to understand why. Is it due to like we have a slightly higher sales volume in December when price was relatively lower?

I think, Alan, I think most important, if you look our -- the structure of our product sale in Q4, we're selling -- I think our product is around 23,186 metric tons. Almost 100% were mono products. If we compare our Q3, we -- our product -- see, the mono product still is 98%. So basically, we're selling most is right now, I think, monosilicon. Then also, of which, we certainly mostly is the high-quality mono grade, I think, polysilicon. As you can see that even monosilicon classified, I think, right now is 4 products. So we are -- majority right now is selling the high supply. So that's why our ASP is higher, I think around like $10.80. So I think that's my answer. Basically, I think we will continue to enjoy that. The reason I said. We -- I think last -- in middle of last year, we adopted a major digital management. Even, let's say, in the deposit processing, we used [ Symvax ] to do the AI calculation -- AI, I think, the technology. So right now, our monosilicon products, I think every month we produced is above 99%.

And just follow-up to what Longgen said. I think, Alan, I think you're right, in Q4 was a little bit unique, and we did saw more volumes in December than during the month of October or November. I think part of the reason was one -- some of our customers were taking advantage of very attractive pricing at the time. And also, they were preparing for building up additional volumes for production during the Chinese New Year. Yes, so that's where the ASP came in.

Got you. And my second question and also my last one is that I noticed in your other operating income has declined from USD 5.5 million in 2019 to USD 0.2 million. I mean looking at periods like years how it trends, it usually doesn't trend to almost 0. So I just wanted to get a sense of why over there.

Okay. So other operating income historically consist -- is most of, for example, R&D grants and technology grants from various government agencies, okay? And for this stage it so happened that these were less than previous years, okay? And actually, I think, for future periods, we would expect levels that actually would be more similar to the -- our current year, the lower levels than previous years.

Limited to the current year, but not the previous years.

Not the previous years, yes.

The next question is from Chao Ji with Goldman Sachs.

I remember you said that part of your R&D in 2020 was spent on the research of N-type product. So can you please share with some color in terms of progress over N-type poly?

Okay. So basically, we are doing R&D to improve our purity levels because the N-type requirements are much more stringent than the standard mono-type levels. And right now, because of the strong demand from our customers, so we are optimizing our overall production for the mono-type polysilicon. But we do expect starting -- effectively starting this year and through the next, say, 2 years that the demand for N-type wafer and translating to N-type poly will increase over this time. So we are doing R&D efforts to increase the share of N-type poly from our production. And one of the key goal is to increase the level of production in terms of percentage and at the same time without a significant impact to our production costs. So that's our current target right now.

The next question is from Tony Fei with BOCI.

My first question is regarding your 1,000 tons semi-grade capacity. I understand it's at a very early stage right now. But can you share what is your expectation regarding the quality and ASP and maybe addressable market regarding this project? And will it be commissioned at the same time with Phase 4B? Second question regarding your maintenance schedule this year. Which quarter will it take place? And how much production volume would it have impact on that specific quarter?

Okay. I think first question about the 1,000 metric tons of semiconductor-grade polysilicon, this is also in our IPO proceeds. It's based on the IPO success. I think it's a time we think -- it's a time we are going to starting doing that production line. Basically, we will joint venture with one of the -- I think I can't announce the name, okay, very famous, I think, downstream semiconductor wafer producer, continue together to do the projects. And our end is from the highest quality, the polysilicon is [Foreign Language]. I think the polysilicon should be the highest, basically, right now is -- should above 12 inches wafer -- semiconductor wafer quality. So we went from top to down. Rather than our competitor, I think [indiscernible] I think water -- they are failed because they are starting from bottom, I think, lower-quality semiconductor. So basically, I think we have the planning. And it depends on right now, the -- I think proceeds from the IPO and when we're going to be successfully listing. Definitely, we will announce that at that time. Second is the annual maintenance. Annual maintenance mostly will happen, I think, in the third quarter. And just a regular -- I think that will not affect right now in our guidance for this year, 80,000 to 81,000, the output is already considering the annual maintenance.

The next question is from Dora Liu with JPMorgan.

I guess most of my questions have been asked. So I'll just follow up with 2 minor questions. And the first one is related to our long-term contracts. So could you share with us what is the percentage of our 2021 production volume, which have been secured by the long-term contracts? And the second one is more related to the financial statements. I noticed that the note receivables in 2020 has dropped significantly. So could you share with us the reason?

Okay. Dora, I think I answered your first question. Basically, right now, we signed 2 clients, that was Wuxi Shangji. Then another long-term contract with another 5 major wafer producer. I think we booked almost 100% 2021 capacity. The only thing we can continue maybe -- we will sign another contract as soon as just maybe second half of the year we can squeeze some little quantity for the contract then to book, the year 2022, '23, '24. So basically, my answer is 2021 the output, 80,000 tons, almost 100% booked. Then second question, I think, about -- I think our CFO, Ming, will answer that.

Okay. So actually, the note receivables number came down. So during the end of the year, we actually paid down a number of our Chinese bank loans. One source of the funding is from the notes receivables. We converted it to pay down Chinese bank loans. So that's why you saw the balance came down.

The next question is from Robin Xiao with CMBI.

I would like to ask about the customers' inventory level for polysilicon. Do you think that your clients are building up inventory in view of upcoming supply shortage? This is my first question.

Okay. First of all, I'm not sure our clients build inventory or not. But basically, you see our clients is major player right now in the wafer industry. As you can see LONGi, Zhonghuan, Jinko, I think -- I believe -- I don't think they build inventory on the wafer segment. I believe they're selling own -- either sell their own -- even Shangji sell their own products or the integrated to sell module to selling the module. So basically, to me, as I just said, right now, this year, total polysilicon capacity only can support 150 or 160 maybe gigawatts final products. So we're maybe making some efforts to import some polysilicon. I think that's there. So maybe last year, some inventory come out this year, the N products. So what I'd say is, today, I'm not -- even today, I think we don't think any inventory in polysilicon producer like Tongwei, I don't think any inventory -- but besides Tongwei, okay, I don't know because Tongwei is vertically integrated. So I don't think other companies have inventory silicon right now, is sitting there. And also, I don't think the wafer producer even today like Jinko or Zhonghuan, they pipe their wafer in the inventory. I don't think so.

Okay. Very clear. My second question is about the payment terms. So given that the supply is quite tight and downstream is running short of polysilicon supply. So do we getting better payment terms for polysilicon sales?

We still, I think, like the usual. To us, I think, if you can see, most of our delivery is paid. So most right now, yes, we accept the banking notes. And we only accept banking notes. Plus, I think, the cash, okay, the remittance. So basically, we upon that. So we, right now, because of the supply and demand, so we may be in any quarter, months, we may be asking for more remittance cash rather than the banking -- I think it dropped. So I think that's what we're doing. But basically, I think our delivery is a part of the cash received. I think, as you know, the banking notes also is very -- just like cash.

So basically, right now, what happens is -- so one is customers are willing to sign long-term contracts and pay a higher prepayment per kilogram or a higher percentage of prepayment for the contract, right. So I think that's really a sign of customers are really willing to pay upfront to secure supply. And another situation we're seeing right now is that, actually, we usually contract around the end of the month for next month's volume. And actually, customers now are eager to pay us ahead after the contract is signed, so that they could get on the delivery list, so that they could get earlier delivery of polysilicon for their order as well.

So basically, Ming just said, I think the first one and most important. We right now take the advantage of the supply -- tight supply. So we are going to sign some contracts. Basically, I think the majority of quantity is the forecast, I think, the next 3 years. So we collect a high percentage of down payments. I think that's what we're doing right now, to lock the future I think.

Okay. I have one more question regarding the competition landscape. So what do you see in the relatively longer-term development for this polysilicon supply business? So do you think that there will be a big player and several smaller ones with roughly equal capacity? Or you expect we'll have 4 to 5 manufacturer with similar scale? And the second following question about this is, what will be Daqo's long-term market share target in this supply?

I think, basically, the silicon industry is different from the middle stream, the solar industry, like wafer sale and module. We are chemical industry. First of all, we need a heavy capital investment capacity. As you can see, our balance sheet. Second is a long-term investment circle. Third is requirements for environmental, for the safety. All these -- I think this industry, if you look at last year, Q2, our selling price almost -- this last year, only -- I think we make a little money. I think all the industry -- other players lose money. So basically, this industry is not just like you see the glasses. Glasses is even less technology than the polysilicon. Then also, you have to remember that, in this industry, one of the player, you can know that, they have the money right [Foreign Language] but they take the 5 years, they still didn't keep up the quality like a first tier player. So basically, I think in the future, maybe in this industry, maybe where we survive only 4 to 5 players there, and those four, 5 players will forecast, I think, continue R&D, the investments and the capacity expansion. I think definitely Tongwei is one of the bigger player, as you can see there. But they also continue to vertically integrate and we don't know the future what's going on, okay? How much percentage of the polysilicon will go to vertical integrator? How much will go to the market? But definitely, I think Daqo is one of purely, I think, silicon producer player. And we will not touch the downstream. We do whatever we expert are. So I think we definitely will be one-off player. And then maybe I think TBEA is a one-off player. Then also, I think Asian Polysilicon (sic) [ Asia Silicon ] is going to IPO. We don't know the future, whether they can successfully IPO or not, raise enough money to keep up with us -- compete with us. Then another is New Horizon. I think that's -- is the only -- I think left right now, the major player there.

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

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

This conference is now concluded. Thank you for attending today's presentation. You may now disconnect.