Daqo New Energy - Q1 2024

Transcript

Operator (participant)

Good day, and welcome to the Daqo New Energy First Quarter 2024 Results Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the Star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press Star then One on a touch-tone phone. To withdraw your question, please press Star, then Two. Please note, this event is being recorded. I would now like to turn the conference over to Xiang Xu, CEO. Please go ahead.

Anita Zhu (Head of Investor Relations)

Hello, everyone. I'm Anita, 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 first quarter of 2024, which can be found on our website at www.dqsolar.com. Today, attending of conference call, we have our Chairman and CEO, Mr. Xiang Xu, our CFO, Mr. Ming Yang, and myself. The call today will begin with an update from Mr. Xu on market conditions and company operations, and then Mr. Yang will discuss the company's financial performance for the quarter. After that, we'll 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 may be 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'll 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. Mr. Xu will make his remarks regarding current market conditions and company performance in Chinese, which I'll translate into English after he finishes. Now I'll turn the call to our CEO.

Xiang Xu (CEO)

[Foreign Language]

Anita Zhu (Head of Investor Relations)

Hello, everyone, this is Anita. Thank you for joining the call. I'll now translate our CEO, Mr. Xu's remarks. During the first quarter, we continued to optimize our manufacturing operations and made improvements in both yield and throughput at our two poly facilities. Total production volume for the quarter was 62,278 metric tons, which was above our expectations and represented an increase of 1,264 metric tons compared to the previous quarter. Our Inner Mongolia 5A facility contributed 46% of our total production volume for the first quarter. Through achievements in R&D and significant purity improvements at both facilities, we've further increased our N-type product mix from 60% in December last year to 72% in March.

Compared to the end of last year, production costs trended down over the quarter, decreasing further by 2% from fourth quarter 2023 to an average of $6.73 per kilogram in the first quarter of 2024. For the quarter, we generated $77 million in EBITDA. By the end of first quarter 2024, the company maintained a strong cash balance of $2.7 billion and a combined cash and bank note receivable balance of $2.9 billion. We expect second quarter 2024 total poly production volume to be approximately 60,000-63,000 metric tons, similar to that of first quarter 2024, as the company maintains full production.

We expect to finish construction and begin initial pilot production at our new Inner Mongolia Phase 5B facility in the second quarter of 2024, and expect to ramp up to full production level by the end of third quarter 2024. As a result, we anticipate full year 2024 production volume to be in the range of 280,000 metric tons to 300,000 metric tons, approximately 40%-50% higher than that of 2023. With more than 15 years of experience in poly production, as well as a fully digitalized and integrated production system that optimizes operational efficiency, we'll continue to increase our N-type product, production in the product mix. During the first quarter, the solar market initially showed signs of strength as we head into the Chinese New Year holiday in February.

Despite the production cuts and downtime as usual during the holidays, polysilicon demand had been strong pre-holiday as wafer manufacturers kept utilization rates unchanged or even higher, in anticipation of higher demand and better product pricing post holidays. The general polysilicon price range was 65-70 RMB per kilogram for N-type and 55-60 RMB per kilogram for P-type during this period. However, with weaker than expected production plans downstream starting March, the wafer sector faced significant pressure from accumulated inventories and negative margins. Market sentiment shifted significantly in mid-March, with widespread expectations of falling prices throughout the value chain, particularly for polysilicon. As a result, downstream manufacturers began to lower utilization, reduce inventory and delay orders to minimize the impact of falling prices.

In April, further pressure on polysilicon prices emerged as the issue of excess inventory among wafer manufacturers worsened and wafer customers further delayed orders and product delivery. Therefore, polysilicon prices dropped further by late April to 47-54 RMB per kilogram for tier one producers at the industry's cash break-even cost. At this level, we believe the entire solar value chain, including polysilicon, is likely to be loss-making in general, and that a large number of polysilicon producers are currently unprofitable. The solar industry has gone through multiple cycles in the past, and based on our previous experience, we believe that the current low prices and market downturn will eventually result in a healthier market, as poor profitability and losses, as well as cash burn, will lead to many market players exiting the business with some possible bankruptcies.

This will bring the inevitable capacity rationalization and solve the overcapacity issue we're currently experiencing. As demand growth resumes after excess inventories are depleted in the short term and on the backdrop of positive policies pushing renewable installations in the long run, the solar PV industry will return to normal profitability and achieve better margins. We believe that at the end of the quarter, we had one of the industry's lowest levels of finished goods inventory, with approximately two weeks of production. Overall, 2023 marked a step change for renewable power growth, with China's newly installed solar PV capacity reaching a record high of 216.9 GW, representing 148% year-over-year growth.

We continue to see strong growth in solar PV installations in China during the first quarter of 2024, which reached an aggregate of 45.7 GW, representing a 36% year-over-year growth rate. Solar has become one of the most competitive forms of power generation, and continuous cost reductions in solar PV products and associated reductions in solar energy generation costs are expected to create substantial additional demand for solar PV. With 2023 setting the stage for gradually phasing out P-type products, we believe that 2024 will mark the year when N-type products dominate the industry. We are optimistic that we'll capture the long-term benefits of the growing global solar PV market, and maintain our competitive advantage by enhancing our higher efficiency N-type technology and optimizing our cost structure through digital transformation and AI adoption.

As one of the world's lowest cost producers with the highest quality N-type product, a strong balance sheet, and no financial debt, we believe we're well, very well positioned to weather the current market down cycle and emerge as one of the leaders in the industry to capture the market's future growth. Now, I'll turn the call to our CFO, Mr. Ming Yang, who will discuss the company's financial performance for the quarter. Ming, please go ahead.

Ming Yang (CFO)

Hello, everyone. This is Ming Yang, CFO of Daqo New Energy. We appreciate you joining our earnings conference call today. I will now go over the company's first quarter 2024 financial performance. Revenues were $415.3 million, compared to $476.3 million in the fourth quarter of 2023, and $709 million in the first quarter of 2023. The decrease in revenue compared to the fourth quarter of 2023 was primarily due to a decrease in average selling prices and lower polysilicon sales volume. Gross profit was $72 million, compared to $87 million in the fourth quarter of 2023, and $506 million in the first quarter of 2023.

Gross margin was 17.4%, compared to 18.3% in the fourth quarter of 2023, and 71.4% in the first quarter of 2023. The decrease in gross margin compared to the fourth quarter of 2023 was primarily due to lower average selling prices, which was partially mitigated by lower production costs. Selling, general, and administrative expenses were $38.4 million, compared to $39 million in the fourth quarter of 2023, and $41.3 million in the first quarter of 2023. SG&A expenses during the first quarter included $19.6 million in non-cash share-based compensation costs related to the company's share incentive plan, compared to $19.6 million in the fourth quarter of 2023.

R&D expenses were $1.5 million, compared to $3.3 million in the fourth quarter of 2023, and $1.9 million in the first quarter of 2023. R&D expenses vary from period to period and reflect the R&D activities that take place during the quarter. Our R&D activities currently focus on processes and technologies that improve purity for the polysilicon and remove contamination to increase our N-type polysilicon percentage. As a result of the foregoing, income from operations were $30.5 million, compared to $83.3 million in the fourth quarter of 2023, and $463.8 million in the first quarter of 2023. Operating margin was 7.3%, compared to 17.5% in the fourth quarter of 2023, and 65% in the first quarter of 2023.

Foreign exchange loss was $0.3 million, compared to a loss of $0.8 million in the fourth quarter of 2023, and this is attributed to the volatility and fluctuation of the US dollar to our RMB exchange rate during the quarter. Net income attributable to Daqo New Energy shareholders was $15.5 million, compared to $53.3 million in the fourth quarter of 2023, and $278.8 million in the first quarter of 2023. Earnings per basic ADS was $0.24, compared to $0.76 in the fourth quarter of 2023, and $3.56 in the first quarter of 2023.

Adjusted net income attributable to Daqo New Energy Corp shareholders, excluding non-cash share-based compensation costs, was $36 million, compared to $74.3 million in the fourth quarter of 2023, and $310 million in the first quarter of 2023. Adjusted earnings per basic ADS was $0.55, compared to $1.06 in the fourth quarter of 2023, and $3.96 in the first quarter of 2023. EBITDA was $76.9 million, compared to $128 million in the fourth quarter of 2023, and $490 million in the first quarter of 2023. EBITDA margin was 18.5%, compared to 26.9% in the fourth quarter of 2023, and 69% in the first quarter of 2023. Now the company's financial condition.

As of March 31, 2024, the company had $2.689 billion in cash and cash equivalents, compared to $3.05 billion as of December 31, 2023, and $4.1 billion as of March 31, 2023. As of March 31, 2024, the notes receivable balance was $194 million, compared to $116 million as of December 31, 2023, and $791 million as of March 31, 2023. Note receivables represent bank notes with maturity within six months. For the three months ended March 31, 2024, net cash used in operating activities was $115.9 million, compared to net cash provided by operating activities of $807 million in the same period of 2023.

Net cash used in operating activities for the quarter was a result of change in operating assets and liabilities, primarily related to the company's payment of approximately $75 million in tax payables that is due during the first quarter, as well as an increase in notes receivable balance of approximately $78 million. Other items that used cash include payments to suppliers in conjunction with the period related to the Chinese, Chinese New Year holidays, as well as the increase in inventory. For the three months ended March 31, 2024, net cash used in investing activities was $190.5 million, compared to $268.9 million in the same period of 2023.

Net cash used in investing activities in the first quarter of 2024 was primarily related to the capital expenditures on the company's Phase 5A and Phase 5B polysilicon expansion projects in Baotou City, Inner Mongolia. Due to the recent changes in market conditions, the company's board and management team have decided to temporarily postpone the company's non-polysilicon manufacturing capacity expansion plans to reserve capital. As such, the company's capital expenditure plan has been reduced to approximately $700 million for the year, which is related to the company's Inner Mongolia polysilicon project. And this represents a significant decrease from the previous capital expenditure plan for the year of approximately $1.1 billion-$1.2 billion.

For the three months ended March 31, 2024, net cash used in finance activity was $6 million, compared to net cash provided by finance activities of $59.9 million in the same period of 2023. Net cash used in finance activity in the first quarter of 2024 was primarily related to approximately $5 million that were used for the company's share repurchase. That concludes our prepared remarks. We will now open the call to Q&A from the audience. Operator, please begin.

Operator (participant)

We will now begin the question-and-answer session. To ask a question, you may press star, then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. The first question today comes from Phil Shen with Roth MKM. Please go ahead. Phil, your line is open if you'd like to ask your question. We seem to be unable to connect to Phil Shen's audio. The next question comes from Alan Lau with Jefferies. Please go ahead.

Alan Lau (Autos and Auto Parts Research Analyst)

Thanks a lot for taking my question, management. So I think the first question that I've received after the announcement is about the buyback. So I wonder if there's any guidance from the management in regards to buyback or dividends planned in this year?

Ming Yang (CFO)

Okay, so, the board actually had a discussion about potentially doing a share- continue to do the share repurchase program. But I think in light of the current market condition, where, you know, the industry overall is actually looking like it's going to be making losses, and we're uncertain how long this might last. So the board does feel that it's more prudent to conserve capital for now to weather the market downturn. And then we- they would like, they would like to see, you know, you know, how the market would perform. And if the market does improve, perhaps later in the year, I think the board would definitely consider a program at a later date, as appropriate.

I think just, you know, because of the market condition, I think the board does feel that we need to conserve capital, right? I think including that, we significantly reduced our capacity expansion plans. And separately, I think the company is also strategically looking at potential expansions overseas, outside of China, you know, including in areas in Middle East, where we're actually looking at several locations pretty actively, and then also potentially in other areas in Southeast Asia as well. So the board is also making some considerations because of that as well.

Alan Lau (Autos and Auto Parts Research Analyst)

I see. So, yeah, and another question I have is on the sales volume. So in terms of the production, and actually the company has actually have an upside surprise in the production volume, but the sales seems lower than the production volume. So we would like to know how much is the inventory right now in the company? And also this, in regards to the sales volume in the first quarter, was it related to the cut in utilization rate in wafer segment?

Ming Yang (CFO)

Okay, yes. I think operationally, the company actually was doing very well this quarter. I think if you exclude the impact of the market condition, the second half of March, I think, you know, we produce more than 62,000 metric ton, right? Increase over the previous quarter. So this is a pretty good improvement, but particularly on the quality side, we made very significant improvements in quality, particularly in Inner Mongolia, on new Inner Mongolia facility. So N type, as of March, is now north of 70% of our mix. And at the same time, we also saw further reduction in production cost. I think just that, you know, since mid-March, the industry conditions declined significantly. I think customers delayed their orders.

They delayed delivery of polysilicon for production. They lowered their utilization, I think, in anticipation of lower polysilicon pricing, but also because of the significant wafer inventory that was occurring at the time. Yeah, so actually, this situation actually persisted more or less through mid to late April. I think now we're shipping normally, but at a much lower pricing. At the end of the quarter, we had approximately two weeks, slightly less than two weeks of production of finished goods inventory. So we think that's probably one of the lowest within the industry.

Alan Lau (Autos and Auto Parts Research Analyst)

Yeah. Two weeks of inventory is actually quite impressive. So, another question I have is on the other operating income. So the QOQ change is relatively significant. So I'd like to know, is it related to the change in the subsidies provided in terms of the power tariff?

Ming Yang (CFO)

So it's actually an expense for the quarter rather than an income, and then it's related to some of the older equipment that we replaced. So the old equipment needs to be expensed. It's no longer being used. It's amounted to about $1.6 million, so it's not too significant. This happens, you know, like maybe once a year or something like that.

Alan Lau (Autos and Auto Parts Research Analyst)

I see. So I understand. So in the first quarter, there isn't any subsidies coming in, right? Like in four Q?

Ming Yang (CFO)

Yeah. So, so we would expect some subsidy potentially in the second quarter, and then, you know, more subsidy likely in the fourth quarter. Well, usually it's in the second half of the year.

Alan Lau (Autos and Auto Parts Research Analyst)

I see. So I think, my last question is regards to the industry. Like, how do you see the poly price going forward this year? And then, when do you see a turnaround in the industry?

Ming Yang (CFO)

Okay. So the most recent price decline, we believe actually is more of a result than the inventory adjustment that's happening, right? Right, so customers delaying orders and with the expectations of a lower pricing in future periods, right? So some people would then want to take a wait and see mode. And now, at the lower price, we're starting to see orders returning, although at a lower level, lower pricing level. We think this, the pricing level where the industry is at right now is actually money-losing, probably for, I would call 70%-80% of the industry. So I think almost majority of the players are losing money right now, and this certainly cannot be sustainable.

I think if this price does persist, it's a matter of time that a number of players will likely need to shut down or some may, you know, exit the business or go into bankruptcy. I think we're likely to see that if prices stay at this low level. But then that will bring the eventual capacity rationalization, right? I think that people are expecting. And then at the same time, you also have a lot of opportunity on demand. So, we think China is likely to be very strong this year because of where the panel price is right now. So it's offering very high return for the solar projects here in China, I think globally as well.

So, we are optimistic that we could see a very significant an end market this year. So, I think it's the balance of these two. I think timing is hard to tell. I think we could see some improvements in the second half of this year.

Alan Lau (Autos and Auto Parts Research Analyst)

Thank you. So, I think and another thing is. Sorry, another thing is, so let's talk about a lot of players are actually losing money. So are you going to delay your Phase 5B? Or like, what is the cap that is going to look like in this year, especially at current prices?

Ming Yang (CFO)

So, we're delaying everything else, almost everything else except 5B. So, 'cause 5B is already ready to go into production, because it's been under construction for a year or over a year. So I think 5B, we're still, at least for now, as of today, it's still being planned as originally scheduled, you know, to start production in Q2, in this quarter, actually. Initial production and then ramp up in Q3.

Alan Lau (Autos and Auto Parts Research Analyst)

Thanks, I'll pass on, yeah, I'll pass on to other investors. Thanks a lot for taking my questions.

Ming Yang (CFO)

Great. Thank you.

Operator (participant)

The next question comes from Leo Ho with Daiwa Capital Markets. Please go ahead.

Leo Ho (Director)

Thanks, management, for your time today. My first question is regarding the FBR granular silicon. We noticed that there are several major module makers, including, for example, Longi and JKS, suggesting that the FBR doping ratio, now they can do around 50% for N-type wafer. I just wonder if we can share any update on, you know, this FBR usage situation, what's our take, and then, you know, why we're seeing such a sudden increase in the doping ratio? Thank you.

Ming Yang (CFO)

I think on the FBR, at least based on feedback from our customers, is that it continues to have, you know, higher levels of contaminants, and a higher surface metal, and a higher hydrogen and higher carbon. So I think the challenge with most of the wafer producer is that, the higher carbon content actually leads to, breaking of the wafer. So, and then also, the contamination and also the hydrogen jumping issue means that, less amount of poly can be used, per run. So if you use FBR, you have a slight reduction in production yield per run on the ingot. So and that's the main reason why customers require a discount and currently primarily use it as a mix.

In the previous understandings is, the mix is between 10%-30%, but I think every producer probably has a slightly different mix. I think, you know, some of the main players are also our customer, right? But I think, I know they wanna diversify their sourcing or maybe they wanna lower their costs, right? Right. So they're, I mean, they're always looking for lower cost sources to the extent that they can use, right? So we're not surprised that they are near some kind of agreement. And these agreements are always, at least in China, almost always, these are kind of framework agreements, right? So the volume and pricing is adjusted on a monthly basis.

Leo Ho (Director)

Understood. That's okay. My next question is regarding the price gap for different type of polysilicon. Say, for example, N-type versus P-type, and then also for N-type, high quality polysilicon that we produce against FBR. What are those, like, price gaps? Thank you. Look like right now and also looking forward. Thank you.

Ming Yang (CFO)

I think consistently the N-type poly has had price premium in the range of maybe 5-10 RMB per kilogram. I think currently it's somewhere in the 7-8 RMB per kilogram still, you know, even at the current pricing. While FBR is generally priced at a discount to the P-type poly, generally. But obviously, FBR has different grades, right? So, but within N-type and P-type, there's also different grades, you know, generally related to the form factor of the surface structure. Yeah, so it's not like one single price. It's usually a range of price.

Leo Ho (Director)

My last question is regarding electricity tariff for our Baotou and Shihezi capacities. Would there be any, like, electricity tariff changes that we expected for this year or for next year?

Ming Yang (CFO)

Are we expecting any electricity tariff adjustments on the electricity rates?

Leo Ho (Director)

Thanks so much. That's very clear. Thank you.

Ming Yang (CFO)

Okay. I think for Xinjiang, we're expecting the rate to be very stable. I think the rate has been fixed. The previous adjustments was mostly related to I think of a policy issued by NDRC that kind of forbid you know single entity type of energy price structure. At the same time, it also coincided a time where the coal prices was at a higher price. So our utility company actually was losing money on the power sales to us, on the power they generate. So after the rate adjustment, that's no longer the case.

I mean, we continue to have the most favorable utility rate, you know, for that local utility, right, for the region, and still very competitive. But we don't expect that to change, or the rate to change. I think similarly for Inner Mongolia, Inner Mongolia already had an adjustment, I think around in the first half of 2023, I believe, also based on the NDRC rule. So now the Inner Mongolia rate structure is actually a market-based structure, where actually the rate is not fixed, it's actually floating based on market supply and demand for the utility market. But because we buy a significant portion of our power comes from renewables, and renewable pricing utility is lower than coal for the Inner Mongolia grid. So...

Also, we have the most preferential pricing for the whole local grid there. So, we do have. Think we have a very, very competitive utility price there, and we don't expect that to change. It's already been adjusted.

Leo Ho (Director)

Thank you so much for the additional color. These are all from my side. Thank you.

Ming Yang (CFO)

Oh, great. Thank you.

Operator (participant)

As a reminder, if you would like to ask a question, please press star then one to enter the question queue. The next question comes from Phil Shen with Roth MKM. Please go ahead.

Philip Shen (Managing Director and Senior Research Analyst)

Hi, everyone. Thanks for taking my questions. Sorry about the technical difficulties earlier. I'd like to explore price just a little bit more. Can you give us a sense of pricing beyond this year as well? Do you think there could be some recovery next year? And we've seen price decline recently, and some of the experts that we've been consulting with suggest that, you know, prices will continue to decline as we go through the year. So, wondering if you can give us a view of 2025. Thanks.

Ming Yang (CFO)

Okay. We do think pricing is probably at the bottom, or if not at the bottom, near the very bottom. It's already below cash break-even price for a lot of the producers. You know, we think 70%-80%. We think starting in the next two months or so, we will start to see shutdown. We're already starting to see shutdowns, and we will see more shutdowns going forward. So if this, say, persists through Q3, we think some of the producers will run into cash problem. And then if it goes into next year, and I mean, we might see an OCI-like type of shutdown, right? I think, I don't know, some of the investors might remember OCI shutdown in 2020, I think that was. They kind of gave up.

So I think if price stays low, we will see this kind of condition. We don't think price can stay this low until, say, through next year. Certainly, you will have much lower production of poly than, you know, poly is not sufficient to service the market and demand grows. Because and then some of it, the current market condition is due to inventory adjustments, right? So I mean, ultimately, the downstream customers will need to restart buying again, right? Because they bought probably more than they need in, say, in the first half of the quarter, and then when you know, their expected demand or price increase did not materialize in the second half of March, that's when they slowed down or stopped ordering.

So it's kind of the market behavior that's creating kind of the volatility that we're seeing in the market right now.

Philip Shen (Managing Director and Senior Research Analyst)

Got it. Thanks, Ming. And can you talk about the amount of channel inventory that's in the market now? And then do you expect that to continue to grow for the near term? And then when do you think that peaks? Thanks.

Ming Yang (CFO)

We've heard various amounts of what you call it statistics or a number of. We've heard it's somewhere in the range of 150,000-180,000 metric tons right now of channel inventory, and we're a very insignificant part of that, and some of our peers and main peers actually have a lot of inventory currently. So we'll see how that works.

Philip Shen (Managing Director and Senior Research Analyst)

Mm-hmm. Okay, and then you talked about 70%-80% are losing money. What, what's your guess as to what percentage of the industry could be shut down by the end of the year? I mean, do you think it could be as much as a quarter of the industry could be, you know, shut, like, well, what percentage of the business could, of the industry could go out of business and maybe go away? Or, what are your thoughts on that? Thanks.

Ming Yang (CFO)

This is very ballpark. I think about half, half would shut down. Like-

Philip Shen (Managing Director and Senior Research Analyst)

Okay. So half can exit the industry.

Ming Yang (CFO)

Yeah. Yeah, I mean, yeah, I think capacity that's kind of in Chongqing is definitely not competitive. Capacity in China is not competitive at the current market, and then some, even some capacity in Inner Mongolia is competitive to the current price.

Philip Shen (Managing Director and Senior Research Analyst)

Okay, last question.

Ming Yang (CFO)

Or cannot produce sustainably. Yeah. Okay.

Philip Shen (Managing Director and Senior Research Analyst)

Yeah. Thank you. What are your thoughts on the Chinese government stepping in to influence or regulate, you know, maybe setting price caps or something like that? We were reading and seeing some potential for that for the module industry. Do you think there could be something like that for poly, where the government steps in to avoid this overcapacity in the future?

Ming Yang (CFO)

We haven't heard about that at all. Yeah, we haven't seen any government actions related to that.

Philip Shen (Managing Director and Senior Research Analyst)

Okay, thank you very much.

Ming Yang (CFO)

No.

Philip Shen (Managing Director and Senior Research Analyst)

I'll pass that.

Ming Yang (CFO)

Okay. Thank you.

Operator (participant)

The next question comes from Alan Hon with JP Morgan. Please go ahead.

Alan Hon (Head of Asia Power, Utilities and Renewables Equity Research)

Hi, this is Alan from JP Morgan. I have, like, questions on the amount of capacity in the system right now, and also, like, the outlook in the next 1-2 quarters. I mean, other than you, who else would be adding capacity? That would be my first questions.

Ming Yang (CFO)

Understanding the capacity in the system is around maybe 1.8-2 million tons per year.

Alan Hon (Head of Asia Power, Utilities and Renewables Equity Research)

Got it. My second question is, like, what do you expect your cost structure will be with the new plant commencement in second quarter, or for the new plant, what do you expect the new plant's cost structure will be?

Ming Yang (CFO)

Okay. I think at least as of today, okay, so we are expecting our costs to continue to decline. So I think preliminarily, because we're ramping up in Inner Mongolia phase two, so cost for Q2 is probably similar to slightly less than Q1. And then we think costs will continue to trend down for Q3 and Q4.

Alan Hon (Head of Asia Power, Utilities and Renewables Equity Research)

Well, I guess, like one driver of the cost down would be the commencement of the new plant in second quarter. That will be, fully ramped up in Q3, right? So do you have like a target for the cost structure of the new plant?

Ming Yang (CFO)

Okay. Right. So, I don't think we've discussed this earlier. So you know, for the first time, Inner Mongolia cost is now below our Xinjiang cost, right? I don't know if you remember. So the Inner Mongolia cost design was to be below Xinjiang, but was higher than Xinjiang, I think, Q3, Q4, until this quarter. Okay, also, we had very significant improvements in quality as well. So, I think that gave us further confidence that once Inner Mongolia phase two starts, it should be able to see similar or even better trajectory in terms of cost reduction and quality improvement, right? Because now we've done this once already, so we know where all the issues are.

Alan Hon (Head of Asia Power, Utilities and Renewables Equity Research)

Got it. Thanks, and these are all the, all my questions.

Ming Yang (CFO)

Very great. Thank you, Alan.

Operator (participant)

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

Anita Zhu (Head of Investor Relations)

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 have an awesome day. Goodbye.

Operator (participant)

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