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Daqo New Energy Corp. (NYSE:DQ)
Q3 2019 Earnings Call
Nov 12, 2019, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day and welcome to the Daqo New Energy Third Quarter 2019 Conference Call and Webcast. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Mr. Kevin He of Investor Relations. Please go ahead.

Kevin He -- Head of Investor Relations

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 third quarter of 2019, 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 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 the market and operations, and then Mr. Yang will discuss the Company's financial performance for the third quarter of 2019. 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 the 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 contained in any forward-looking statements. Further information regarding these and other risks is included in the reports or documents we have filed with or furnished to the Securities and Exchange Commission. These statements only reflect our current and the 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 will occasionally reference monetary amounts in US dollar terms. Please keep in mind that our functional currency is Chinese RMB. We offer these translations into US dollars solely for the convenience for the audience.

Without further ado, I now turn the call over to our CEO, Mr. Zhang, please.

Longgen Zhang -- Chief Executive Officer & Executive Director

Thank you, Kevin. Hello everyone, thank you for joining our conference call today. We had an outstanding quarter in which we reached a record high production volume of 9,437 metric tons while achieving a lowest production cost in the Company's history of $6.97 per kg. Our results for the quarter reflect the full production capacity and cost structure of our original 35,000 metric tons facility. In mid-September, we successfully completed the construction and installation of our new Phase 4A expansion project and now are currently working to ramp up the production of these additional 35,000 metric tons plant. We expect Phase 4A to reach full production capacity by the end of 2019, approximately three months ahead of schedule.

With Phase 4A's additional capacity quickly coming online, we expect production volumes during the fourth quarter of 2019 to be approximately 14,000 metric tons to 15,000 metric tons. Once our Phase 4A reaches full capacity, we believe our production costs should be further reduced to approximately $6.50 per kg.

We continue to enhance mono-grade production quality and are optimizing our product portfolio toward it in order to maintain higher ASPs. We sold approximately 86% of our products to mono-wafer customers during the quarter. Once Phase 4A is fully ramped up, we expect mono-grade products to account for approximately 90% of our total production volumes. With our downstream mono-wafer customers expected to rapidly expand, their capacities for next year, we believe this will lead to continued increase in mono-grade polysilicon demand, which should lead to improvement in the price of mono-grade polysilicon for next year.

During the first three quarters of 2019, China installed approximately 16 gigawatts of new solar PV projects, significantly below the market -- market's expectations. We believe the primary reason is the long delayed announcement of a subsidy policy, which has rippled downwards, forcing many project developers to postpone project completion dates and expand the time needed for planning, preparation, permit applications and procurement. It is possible that many of the 22.8 gigawatts of subsidized projects, which were originally expected to be installed in the fourth quarter of 2019, could be delayed to the first half of 2020. Despite softening demand from China's downstream market, demand from overseas markets remains robust and could possibly reach 85 gigawatt this year, a significant increase from approximately 60 gigawatts in 2018. With the Chinese downstream market expected to robust -- rebound next year and overseas demand continue to -- continuing to grow, we believe global solar PV demand could exceed 140 gigawatts in 2020, a significant acceleration when compared to 2019.

Solar Energy is now one of the most competitive forms of energy generation, even when compared with traditional fossil fuel in many markets. When combined with efficient methods to store power, solar energy has the potential to become a sustaining baseload power. As the economics improve and governments enact more policies to address climate change, we believe we are at the cusp of major change in the market which will create enormous opportunities for us over the next several years.

We are confident in our ability to navigate these temporary downturn in the market and are ready to take advantage of the recovery next year when the market will continue advancing toward grid parity. As a one of the lowest cost polysilicon producers with the highest standards for quality, we are among the very few polysilicon producer who are able to generate profit in the current challenging market environment. For the first three quarters of this year, our net cash provided by operating activities was approximately $100 million. Once Phase 4A is operating at full capacity, we expect to make improvements in production quality and the cost structure so as to further enhance our leadership position in the industry.

In the month of September, our Xinjiang Daqo subsidiary received certification from China's Ministry of Industry and Information Technology. As a national technological innovation model enterprise, these certification brings national recognition that Xinjiang Daqo is a national leader in innovation and technological investment, application of new technology, innovative development of strategies and our corporate culture that fosters innovation. We are very pleased to receive this certification as it further demonstrates the government's recognition that Daqo New Energy is a national leader in the industry.

In our strategy to enhance our industry leadership, we continue to engage in R&D initiatives that improve product period in our manufacturing process. We are also working on cost reduction efforts, including energy efficiency projects as well as improvements in our supply chain and material procurement that would bring further cost reductions. We are also pleased to announce that during the third quarter, we have begun shipments of N-type polysilicon to our strategic customers for production of N-type wafers for trial, testing and qualification.

The N-type polysilicon carry additional premium over the mono-grade polysilicon, and it will be required to produce high efficiency solar cell technologies such as TOPCon and HJT which are currently ongoing initial development in the industry. We believe that in the future, Daqo will be well positioned as a key material supplier for these emerging technologies.

We are also planning digital transformation at Xinjiang Daqo and implementing digital manufacturing system. We would become one of China's first specialty chemical companies to do the transformation that would be implemented throughout our entire manufacturing process and related management systems. This would include digital implementation of real time automated manufacturing data collection, real time monitoring and analysis of our manufacturing system and optimization. We believe that, upon completion, this initiative would bring further enhancements in safety, product quality and cost structure.

Now let me discuss our outlook and guidance. We expect to produce approximately 14,000 metric tons to 15,000 metric tons of polysilicon during fourth quarter of 2019 and sell approximately 12,500 metric tons to 13,500 metric tons of polysilicon to external customers during the fourth quarter of 2019. For the full year of 2019, we expect to produce approximately 39,300 metric tons to 40,300 metric tons of polysilicon.

Now I will turn the call over to our CFO, Mr. Yang, who will discuss the Company's financial performance for the third quarter of this year.

Ming Yang -- Chief Financial Officer

Thank you, Longgen, and good day everyone. Thank you for joining our conference call today. Revenues for the third quarter of 2019 were $83.9 million compared to $66 million in the second quarter of 2019 and $67.4 million in the third quarter of 2018. The increase in revenue was primarily due to higher polysilicon sales volume, which were offset by slightly lower ASPs.

In RMB terms, the Company's polysilicon ASP during the quarter were slightly higher than during the second quarter of 2019. In US dollar terms, the Company's polysilicon fell as a result of the depreciation of the renminbi against the US dollar. Gross profit was $18.1 million compared to $8.6 million in the second quarter of 2019 and $12.8 million in the third quarter of 2018.

Gross margin was 21.5% compared to 13% in the second quarter of 2019 and 19% in the third quarter of 2018. The increase in gross margin was primarily due to lower production costs despite a slight decrease in ASP. During the quarter, we achieved total production cost of $6.97 per kilogram and cash cost of $5.85 per kilogram. Successful cost reduction come from efforts to reduce energy usage per unit of polysilicon production, which is the result of our enhanced manufacturing process, better equipment and energy efficiency efforts.

During the second quarter, we installed new energy efficiency systems for waste heat recovery and heat exchange. And during the third quarter, we're already seeing significant improvements in energy savings. Overall, when compared to a year ago, we estimate we're saving approximately 20% in energy usage per kilogram of polysilicon production.

Other factors benefiting our cost reduction include economies of scale and our enhanced manufacturing efficiencies. As an example, our annualized polysilicon unit production per employee will increase from last year's average of approximately 16 metric ton per employee to currently approximately 22 metric ton per employee to an anticipated 38 metric ton per employee for next year.

Our successful efforts in continuous cost reduction will allow us to remain a cost leader in the polysilicon industry with sustained profitability. SG&A expenses were $8.2 million compared to $7.8 million in the second quarter of 2019 and $7.6 million in the third quarter of 2018. This quarter's SG&A expense include $4 million of non-cash share-based compensation costs related to the Company's share incentive plan. The increase in SG&A for the quarter was primarily due to an increase in shipping costs as a result of higher sales volume.

R&D expenses were $1.2 million compared to $1.5 million in the second quarter of 2019 and $1.4 million in the third quarter of 2018. R&D expenses could vary from period-to-period to reflect R&D activities that took place during the quarter.

Income from operations was $8.8 million compared to loss from operations of $0.4 million in the second quarter of 2019 and income from operation of $4 million in the third quarter of 2018. Interest expense was $2.6 million compared to $1.9 million in the second quarter of 2019 and $2.1 million in the third quarter of 2018.

EBITDA from continuing operations was $19.7 million compared to $10.2 million in the second quarter of 2019 and $14.8 million in the third quarter of 2018. EBITDA margin was 23.5% compared to 15.5% in the second quarter of 2019 and 22% in the third quarter of 2018. Despite the market challenges, we continued to generate healthy EBITDA and EBITDA margins.

Net income attributable to Daqo New Energy Corp. shareholders was $5 million in the third quarter of 2019, compared to net loss attributable to Daqo New Energy Corp. shareholders of $2.2 million in the second quarter of 2019 and 18.3 million in the third quarter of 2018.

Earnings per basic ADS were $0.37 compared to loss per basic ADS of $0.16 in the second quarter of 2019 and $1.39 in the third quarter of 2018. As of September 30, 2019, the Company had $68.2 million in cash, cash equivalents and restricted cash, compared to $79.6 million as of June 30, 2019.

As of September 30, 2019, the accounts receivable balance was $0.1 million compared to $0.1 million as of June 30, 2019. As of September 30, 2019, the notes receivable balance was $4.3 million compared to $9.4 million as of June 30, 2019. As of September 30, 2019 total bank borrowings were $248 .8 million, of which $163.5 million were long-term borrowings compared to total borrowing of $243.2 million, including $151.5 million of long-term borrowings, as of June 30, 2019.

For the nine months ended September 30, 2019, net cash provided by operating activities was $101.6 million compared to $63.6 million in the same period of 2018. For the nine months ended September 30, 2019, net cash used in investing activities was $202.3 million compared to $99.9 million in the same period of 2018. The net cash used in investing activities in 2019 and 2018 were primarily related to the capital expenditures on our Xinjiang's Phase 3B and Phase 4A polysilicon projects.

For the nine months ended September 30, 2019, net cash provided by financing activities were $76.6 million compared to net cash used in financing activities of $84.3 million in the same period of 2018.

This concludes our prepared remarks. We will now turn the call over to the operator to begin the Q&A session. Operator, please begin.

Questions and Answers:

Operator

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

Philip Shen -- Roth Capital Partners -- Analyst

Hey, guys. Thanks for the questions. I'm in transit right now. So I may have missed some of your prepared remarks. But that said, I wanted to talk through what China's outlook is? It seems like the back half recovery in 2019 really hasn't happening and doesn't seem like it well. And then, why have this carry over of the 23 gigawatt into next year? I was wondering if you could talk through how you expect and what you expect China's demand to look like by quarter through 2020? And I think you -- in your press release, had a 140-gigawatt global demand for 2020, how much of that is China? Thank you.

Longgen Zhang -- Chief Executive Officer & Executive Director

Thank you, Philip. I think, as I just in -- talking on the speak, China this year so far because of announcements is delayed -- subsidy policy delay, so we believe most [Indecipherable] because it's already national planning. So around 23 gigawatts we believe will extend to most -- first half of next year. So basically, this year, we don't believe in China, maybe I think around 25 gigawatts, maybe 30 gigawatts, that's the most.

So next year, basically I believe is China total maybe around 40 gigawatt to 50 gigawatt because some may be delayed from this year and also next year will speed up. There is a lot of things happened because the subsidy policy delay due to because I think a lot of, if you want, the trade war, then the government's policy delay, the adjustments and all those stuff. But anyway, we see the grid parity, then next year China beside I think the subsidized projects and also a lot of grid parity projects is there.

So basically then foreign markets, I think obviously this market also continue to grow -- grows. This year is around at 80 gigawatts; next year, we think is 90 to 100 gigawatts, it's possible. So that's why we come out -- right now it's 140 gigawatts. But to us, I think for silicon materials, the most right now think should then the silicon price rise and steel stays cool like steel didn't increase too much, still like just around $9 [Phonetic] per kg. The reason because I think of the wafer capacity expansion is not fast as we expected or people claimed.

If you look Longi, they are claiming, I think, around 60 gigawatts. But actually, right now -- by the end of next year, but actually right now, only around 35 gigawatts to 30 gigawatts is actual capacity, same as like Jinko. I think right now their actual capacity maybe only 25 gigawatts. But from 25 gigawatts to 50 gigawatts, I think, most will be done, I think, the next year, first half -- first three quarters. So that's why I believe I think silicon price right now is not a temporary, short-term. It's not determined by the end module price up and down or demand/supply. It's dependent on the -- I think the wafer capacity expansion. I think right now, for example, the mono, I think, wafer [Indecipherable] furnaces supply is shut. You need like a three months to six months for the order period.

So basically, I believe, you see, like Jinko, like Longi, like Zhonghuan, those are a lot of bigger player for the next year, especially in the first half of the year, the capacity is installed, I think silicon price would go up next year. I think in first quarter -- end of first quarter, beginning of next quarter -- second quarter of next year. We are back to $10 even $11. Okay?

Kevin He -- Head of Investor Relations

Do you have...

Philip Shen -- Roth Capital Partners -- Analyst

That's really helpful. Thank you, Longgen. So $10 to potentially $11 in Q1 and Q2. I was wondering if you could comment also on the outlook for supply? So, you talked about the demand with the mono-wafer coming online. But can you talk through some of what you're seeing with your competitors and what they're ramping up in terms of polysilicon production or capacity, and how much of that do you think will be capable of producing mono-grade polysilicon?

Longgen Zhang -- Chief Executive Officer & Executive Director

Okay. Because since Daqo most products right now is in mono grades. 86% of our product were now in mono grades. So I'm not emphasis on the multi, because multi is not too much player there. So if you look at the third quarter, Beijing is the major player which still important, I think, from Wacker, OCI, is still around like 30,000 tons to China in third quarter. Then the second player, maybe I think -- the major, I think, today I think Daqo is the bigger player in China.

Then also look our competitors, I'm not going to mention the name, because I think like PVA [Phonetic], maybe they also have the second -- they also have new projects starting production. But they still not reached purely -- I think a high percentage of mono silicon -- grade silicon quality products, same as I think Tongwei. So basically, I think Tongwei, PVA, today they may be around like a 50%, the old plant maybe, OK, PVA, frankly speaking maybe around 60% to 70%. I'm talking about new plants.

So they're still in the processes of ramping up. I think today, I think, a major -- bigger player is Daqo, Tongwei and PVA. So in fact, maybe some policing has come from new hopes, because they actually -- basically power is almost -- they say the power is free then the MGS -- you see the silicon powder, the raw materials also is made by themselves. So even though the quality is poor, but their quantity step by step has improved and has come to market.

I think right now, a new hopes -- I think annual output of maybe around 50,000 tons. So basically, you can see what I can forecast by the end of this year our capacity -- actually, extra capacity may be reach 78,000 tons. So next year our majority, 90%, is mono-grade. So I'm not compare -- Tongwei, I'm not sure how much, but they claim they may be around 80,000 tons come out. But I doubt the mono-grade maybe already around 50% -- below even 50% overall. PVA maybe around a 60% to 70%. The total output maybe around, I think, also 70,000 tons to 75,000 tons. That's the major players. So it's not really too much there. So basically what I'm thinking right now, silicon prices not go up because of I think mono-grade wafer capacity is not as they are -- the expansion is not we expect right now.

So by the end of -- by the middle of next year, all the capacity of the catch-up, for example, Longi claim right now, by the middle of next year they will go to 45 gigawatts, then by the end of next year we go to 60 gigawatts. Then Tongwei by end of September will reach to 50 gigawatts. So all these capacity come out, they need a lot of mono-grade silicon.

I don't think the foreign import silicon, their cost can be competitive with us. As you can see, we continue to reduce the cost. So we will continue even -- right now, the price is a loss scenario. Our gross margin still can reach around, this quarter, third quarter, is around 21% to 23%. We think already give out our cost target is $60.50 [Phonetic] so you can imagine the gross margin how much we can improve.

Philip Shen -- Roth Capital Partners -- Analyst

Great, thank you, Longgen. One more if I may, as it relates to Phase 4B. Can you talk through what factors and conditions need to be in place for you to launch the Phase 4B? And is there a sense of timing it or is that still unclear?

Longgen Zhang -- Chief Executive Officer & Executive Director

Basically, right now, we think we still forecast Phase A because we almost a one quarter ahead to complete the construction and put into the production. So I think by the end of this month, we were ramping to 70% to 80% our output of our capacity. So November -- December definitely will be 100% capacity running, even -- based on our guidance you can see the projected.

So basically, based on our -- right now the balance sheets status and we still have some 4A capital expenditures need to pay out next year. Today, I think as you can see, our debt to equity ratio still is reasonable and debt to total assets is 49%. So we will see -- I think, the next year first quarter and second quarter, we will see what the performance and continue to improve the balance sheet and then to make decision, also the market situation will we continue to do 4B or not.

Philip Shen -- Roth Capital Partners -- Analyst

Okay. Thank you, Longgen. I'll pass it on.

Kevin He -- Head of Investor Relations

Great. Thank you, Phil.

Operator

Our next question comes from Gary Zhou with Credit Suisse. Please go ahead.

Gary Zhou -- Credit Suisse -- Analyst

Hello, management. Thank you for taking my questions. This is Gary from Credit Suisse. I have three questions. So firstly, I noticed that your unit production cost for early next year is now at $6.5. So I think this is probably lower than the $6.8 you previously guided in September. So may I ask what is the reason behind this kind of a better than expected cost to outlook?

And secondly may I ask the latest capacity utilization of your Phase 4A project and what -- how much of its current output is from the mono-garde? And thirdly, so based on the current capacity expansion plans of your peers, we think that probably we won't see much kind of a new capacity from top-tier producers in the next 12 months or so, if not longer. So, I just wonder if management has an estimate on what kind of polysilicon price may be sustainable in the next one to two years? Thank you.

Longgen Zhang -- Chief Executive Officer & Executive Director

Thank you, Gary. I think first of all to answer your question, if you look our third quarter, our cost I think of the goods sold is $6.97. That's based full capacity running on the existing capacity, 35,000 tons. And we think if we are fully running 4A and it's not only the scalability but also I think in October we successfully find the supply long-term contracts. So compare last year, all the supply -- almost cut 5% from, for example, like silicon powder and as the rods, and the package, everything. So we think, dramatically, we're cost cutting around $0.20 per kg.

Then also I think scalability, as you can see there, next year we are around 78,000 [Phonetic] metric tons. So we believe it's not only considering now where it actually maybe continue go down, basically the contract we signed with the governments and also Asia company, the supply. So those two reduce to [Indecipherable] $0.20 per kWh. So we believe I think very confident $6.50 we can be achievable.

To the second question, I think, answer your question 4A, what's the status of it right now, we are running. We actually starting trial production in September and -- where now currently almost 70% furnaces is running. For this quarter, I actually to -- I think to -- yesterday -- to the 10th -- November 10, our 4A output is around the 850 tons. So our planning for this month, the 4A, I think, total production maybe around 2,000 tons. So to answer your question, I think December we will ramp up almost to 100%.

So then next year, you can see, I think, we will give guidance I think on the fourth quarter earnings release. So our 4A right now, the ramping up the speed and also the quality is very good. For example, we narrowed the product almost 72% to 80% is right now the mono grades and all the bigger supplier, I am not naming, always testing right now. So I think in our -- for this month and also next month, so we can selling our 4A products, mono grades quality products.

To your third question, to answer your question, for next year -- I'll just also answer Philip because I think if you look today's silicon price, most -- right now the producer is lose money. Even though our gross margin is around at 21%, the Q4, maybe, gross margin is more improved. For all the competitors, especially, I think of small player, their gross margin may be below 12%, industry maybe around 15%. So right now majority producer is lose money. But I think as you see that, the major four company, I think at PVA, Tongwei and also New Hope and us, I think that's the four major player. I think their capacity next year, I think we've -- almost I think it [Indecipherable] only is a quality. We believe 90% our product is mono grades product.

Then also if you look -- if add together all of these, I think maybe mono-grade product maybe around the China producer, maybe around 25 -- I think 240,000 -- 250,000 tons to 300,000 tons next year and then plus part of our imports next year, what I think, maybe around 80,000 tons. So I think on the supply side next year for the mono grades, maybe just around 30,000 -- 300,000 tons to 350,000 tons. But for the demand side, you should be -- I think I just mentioned that, majority I think most of the mono-wafer increase [Phonetic], let's say, capacity expansion right now, would -- they will reach their high capacity. For example, Longi by the next year will be sixth grade [Phonetic]. But in the middle of next year, will be 45 gigawatts.

Zhonghuan will be by the end of September will go to 50 gigawatts. Then [Indecipherable] another Asia company would be 9 gigawatts, Jinko is claimed right now 25 gigawatts, all those kind of capacity is coming. What I'm add up next year, the mono whole capacity average -- the whole year average is around like 100 gigawatts to 110 gigawatts.

So that's I think on demand side, may be around 350 gigawatts to 400 gigawatts also. So, I think the supply even -- supply and demand maybe even. So then should a time period, I think it may be around I think the second quarter I think the demand may be higher than supply. So maybe cause the silicon price go up, but right now, I think a $9 for mono silicon price is our average. Of course, we see our some product stand higher because we are 90% right now is mono-grade, our average selling price right now this quarter is $8.99.

So I think mono grades maybe selling around $9.20, $9.10, then some multi products right now selling maybe only like $7.50, whatever. So, we believe, I think, the mono-grade quality products right now the selling price should not continue go down. We already see this quarter, almost fourth quarter, that's driven the price for the mono-grade polysilicon price status quo right now. So, we believe, I think, the fourth quarter the ASP should be the same as third quarter.

Gary, did I answer your question? Or Ming, you have some comment to add?

Gary Zhou -- Credit Suisse -- Analyst

Yes. Thank you very much. Yes. I have no further questions. Thank you.

Ming Yang -- Chief Financial Officer

Great. Thank you, Gary.

Operator

Our next question comes from Lu Jun [Phonetic] with CICC. Please go ahead.

Lu Jun -- CICC -- Analyst

Hey, management. Thanks for taking my question. I have three question. The first that you have mentioned the electricity price you purchased next year werer going down. So, could you please give us some color on the DPP [Phonetic] you are signing with local power station in Xinjiang next year, because we are heard that some company in Xinjiang now have the pressure of the electricity price increase.

And the second is that we have given the guidance where the cost will be at $6.5 kilogram. So may I understand what's the assumption of the electricity price for that cost is at the current cost or we already come to the electricity price decline?

And third is that, consider we have no further capacity ramp ups planned in 2020, we have, say, positive free cash flowing in the next year we really have any plan to give dividend in the next year? Thank you.

Longgen Zhang -- Chief Executive Officer & Executive Director

Okay. I think first of all, Mr. Lu, to answer your question -- so you are from CICC. I think you know China better than me.

Lu Jun -- CICC -- Analyst

Yes. Thank you.

Longgen Zhang -- Chief Executive Officer & Executive Director

First of all, about electricity, I think our electricity supply and the price are secured by specific terms in the investment account agreement signed with four parties, including one is tin foil company, it's Asia company, is a supplier. They also serve the governments and also serves the economic development zone administration committee. So I think on their contract, it's base that [Phonetic] will finish 4A, our electricity should be from current price, $0.24 per kWh, down to $0.20 per kWh. According to them, the electricity supply and the price are secured for the -- at least 10 years after Phase 4A running at full capacity. We believe the local governments and our supply will continue to follow the agreements and we able to maintain our advantages in cost structure.

In addition, if you know the regulatory, the state consul, the central government released regulations optimizing the business environmental in which it clearly states, I think on Item Study 1 local governments at all levels and their relevant department fulfill the policy promise and all kinds of contracts and all -- should not commit any breach and [Indecipherable] to the obligations due to adjustments of an administration, jurisdiction, government transition, adjustments of institutes, or their responsibilities, all charges of relevant officials in charge. So you can see that's the government's regulation starting January 1, 2020.

Lu Jun -- CICC -- Analyst

Yes.

Longgen Zhang -- Chief Executive Officer & Executive Director

To answer your second question. We now forecast next year at full capacity at 4A, our cost -- manufacturing cost of $6.50, we are not considering further to the current electric cost, $0.24 per kWh. We now consider right now the electricity continue to go down, maybe $0.04 per kWh. If that's the case, the cost maybe continue go down to $6.30.

Then to the third question about the cash flow, yes, we see that year-to-date to end of December, our operating cash is almost $100 million. And we believe on the fourth quarter, the cash flow -- operating cash continue to come in. But also I want to remember -- remind you that, 4A with our total investments is around it RMB2.95 billion, I think. It's around $425 million. We still have some payments [Indecipherable] pay I think arrangement.

So next year, we still have 4A, we still have around $120 million payout. Then in 2021, we still have $20 million payout. So we want to continue to run the business and to improve our balance sheet. Right now our total banking loan is around $248 million. We still have banking facilities around like $100 million. But we still want to prudently to make decision whether we continue to strengthen [Phonetic] 4B or not by the middle of next year.

Operator

Our next question comes from John Segrich with Luminus. Please go ahead.

John Segrich -- Luminus -- Analyst

Hey guys. Just a quick housekeeping. Depreciation has kind of been fairly flat. I assume now that you're ramped with the expansion that depreciation will start flowing through the P&L. So, just remind us kind of how much incremental depreciation we should be thinking about for next year, Ming? And what's the period over which the new plant is depreciated versus the old plant?

Longgen Zhang -- Chief Executive Officer & Executive Director

[Foreign Speech]

Okay. I think, John, I think as you know that for 4A because our total investments is around $420 million, so if you capitalize that, I think basically every month is around $2 million where we -- depreciation I think into the P&L. So basically we account that also on our cost of goods sold. So that $6.50 also including that. But if you look our total output [Phonetic] next year, I'm not giving guidance. Our main place is 70,000 tons. But we believe, OK, we can reach may be around 75,000 tons to 78,000 tons.

John Segrich -- Luminus -- Analyst

Okay. And then just one more, when we look at the guidance for 4Q as you are ramping. It's kind of the first time where you're not projecting to sell everything that you produce. And just wondering kind of is that a timing issue or as you bring on this new capacity, do you still need to find a home for it and we should expect to maybe build some inventory over the next couple of quarters.

Longgen Zhang -- Chief Executive Officer & Executive Director

No. John, because of some products we produced like this months, some maybe still is not good quality, still in the trial production. Still is not -- the production still not ramping to 70%, our criteria for capitalization, so some product we still need capitalization. That's a partial, maybe around like 100 tons. Then also, I'll just remind you some products we may be used to our -- to making our rods. You know the rods, the silicon rods. So that's why we may be use this month [Indecipherable] like 500 tons. We're used to -- used -- inside it used to our silicon rods. We are going to use the silicon to outsourcing OEM, the [Indecipherable] then asking people to cut into the rods so basically to reduce our cost. So our inventory is still we keep around three days production as of end of the quarter.

Operator

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

Kevin He -- Head of Investor Relations

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

Operator

[Operator Closing Remarks]

Duration: 59 minutes

Call participants:

Kevin He -- Head of Investor Relations

Longgen Zhang -- Chief Executive Officer & Executive Director

Ming Yang -- Chief Financial Officer

Philip Shen -- Roth Capital Partners -- Analyst

Gary Zhou -- Credit Suisse -- Analyst

Lu Jun -- CICC -- Analyst

John Segrich -- Luminus -- Analyst

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