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Daqo New Energy Corp. (NYSE:DQ)
Q2 2020 Earnings Call
Aug 18, 2020, 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 Second Quarter 2020 Results Conference Call. [Operator Instructions] Please note this event is being recorded.

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

Kevin He -- 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 second quarter of 2020 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 market and operations and then Mr. Yang will discuss the company's financial performance for the second quarter 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 the preliminary view as of today and it 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 law, we will occasionally reference some monetary amounts in U.S. dollar terms. Please keep in mind that our functional currency is the Chinese RMB. We offer these translations into U.S. dollars solely for the convenience of the audience.

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

Longgen Zhang -- Chief Executive Officer

Thank you, Kevin. Hello, everyone. Thank you for joining our conference call today. The second quarter of 2020 was a particularly challenging time for the polysilicon industry. Beginning in the later March, the global spread of COVID-19 and the related lockdowns, particularly in the U.S., Europe, and the certain emerging markets, resulted in significant disruptions to demand for solar PV products. End market customers delayed module orders and shipments due to uncertainties about the duration and economic impact of the pandemic, as well as logistical challenges. This led to short-term market uncertainty and volatility across the entire solar PV industry during the second quarter. As a result, our major waiver customers also delayed orders and pulled out delivery in the month of April, creating a temporary oversupply in the market at the time.

This abnormal market environment with its sharp and sudden drop in demand resulted in significant negative impact to polysilicon pricing for the quarter. Fortunately, the impact was temporary, and the market began to recover in May with orders and demand normalizing in June, supported by a strong end market in China and abroad. We are pleased that despite such challenges faced by the industry during the period, Daqo New Energy was able to generate positive net income for the quarter, further demonstrating the strength and resilience of our business model and our proven lower cost structure. Towards the end of the second quarter, we began to see very positive momentum in solar PV demand in both domestic and overseas markets, supported by additional capacity expansions by downstream mono-wafer customers.

This has translated into meaningful demand improvement for polysilicon, which has driven a significant increase in polysilicon ASPs recently. From feedback from customers, their order book for the third quarter is full. And the more you order, volumes look strong throughout the year-end. This strong volume demand has led to a shortage within the polysilicon market. Current market ASPs for mono-grade polysilicon are approximately $11 to $12 per kg, a significant improvement from approximately $7.5 per kg in the second quarter. Our latest signed customers' orders and contracts reflect this pricing trend. We expect the polysilicon market to be extremely tightly supplied over the coming months as there would only be very limited additional supply of polysilicon coming online over the next 15 months while the end market demand for PV solar continues to be strong and growing.

And in particular, there continue to be significant new additions of mono-wafer production capacity. In the second quarter, we produced and sold 18,097 metric tons and 18,881 metric tons of polysilicon respectively, exceeding our guidance. We conducted annual maintenance for our manufacturing facilities in the second quarter. However, some technology upgrade projects as well as equipment modification have been rescheduled to August due to delayed delivery of some key equipment and long lead time maintenance parts. This will have some impact on the third quarter production volume. As a result, we expect to produce approximately 17,500 metric tons to 18,000 metric tons of polysilicon during the third quarter.

We expect to resume to 100% utilization rate in September after the completion of such projects. Our expected annual production volume for 2020 remains unchanged at 73,000 metric tons to 75,000 metric tons. During the quarter, we continue to make strong progress toward quality improvement and cost structure. Approximately 95% of our polysilicon production reached the mono-grade quality during the quarter. At the same time, we continue to improve our cost structure with further reductions in energy and material usage per unit of production. Despite the impact of annual maintenance during the quarter, we achieved a historically lower cash cost of $4.87 per kg.

In particular, we are making great progress in optimizing our process and manufacturing parameters for our new high flow out polysilicon reactors, improving production volume per watt and leading to lower unit energy usage. We expect cost to go even lower in Q4 as we ramp back up to full production level. We believe the solar PV market has entered a new phase of sustained growth, as a great parity has been achieved in many countries and regions around the world. Solar PV is one of the very few energy resources, which are clean, sustainable and cost effective even compared with traditional fossil fuel power generation methods. It is playing an increasingly important role in meeting the growing global energy demand and is raising critical environmental issues such as climate change and sustainable development.

We will continue our commitment to provide high quality polysilicon products to better save the fast-growing demand for solar PV energy. Let's move into our outlook and guidance for the company. The company expects to produce approximately 17,500 metric tons to 18,000 metric tons of polysilicon and sell approximately 7,000 metric tons to 7,500 metric tons of polysilicon to external customers during the third quarter of 2020. For the full year of 2020, the company expects to produce approximately 73,000 metric tons to 75,000 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 second quarter of 2020. Please.

Ming Yang -- Chief Financial Officer

Thank you, Longgen, and hello, everyone. Thank you for joining our call today. Now, I will discuss our financial performance for the second quarter of 2020. Revenues were $133.5 million compared to $168.8 million in the first quarter of 2020 and $66 million in the second quarter of 2019. This sequential decrease in revenue was primarily due to lower ASP combined with lower polysilicon sales volume. Gross profit was $22.7 million compared to $56.6 million in the first quarter of 2020 and $8.6 million in the second quarter of 2019. Gross margin was 17% compared to 33.5% in the first quarter of 2020 and 13% in the second quarter of 2019. The decrease in gross margin was primarily due to lower average selling prices for the quarter despite the improvement in production costs.

Selling, general, and administrative expenses were $10.1 million compared to $8.9 million in the first quarter of 2020 and $7.8 million in the second quarter of 2019. SG&A expenses during the quarter includes $4 million in non-cash share-based costs related to the company's share incentive plan. Research and development expenses were $2 million compared to $1.7 million in the first quarter of 2020 and $1.5 million in the second quarter of 2019. R&D expenses vary from period-to-period and reflect the R&D activities that take place during the quarter. As a result, the foregoing income from operations was $10.8 million compared to $45.8 million in the first quarter of 2020 and a loss of operations from -- of $0.4 million in the second quarter of 2019.

Operating margin was 8.1% compared to 27.1% in the first quarter of 2020. Interest expense was $6.7 million compared to $6.3 million in the first quarter of 2020 and $1.9 million in the second quarter of 2019. EBITDA from continuing operations was $26.8 million compared to $63.1 million in the first quarter of 2020 and $10.2 million in the second quarter of 2019. EBITDA margin was 20% compared to 37.4% in the first quarter of 2020 and 15.5% in the second quarter of 2019. Net income attributable to Daqo New Energy's shareholders was $2.4 million in the second quarter of 2020 compared to net income of $33.2 million in the first quarter of 2020 and net loss of $2.2 million in the second quarter of 2019. Earnings per basic ADS was $0.17 in the second quarter of 2020 compared to earnings per basic ADS of $2.37 in the first quarter of 2020 and loss per basic ADS of $0.16 in the second quarter 2019.

As of June 30, 2020, the company had $115.8 million in cash and cash equivalents and restricted cash compared to $120.8 million as of March 31, 2020. As of June 30, 2020, the notes receivable balance was $8.2 million compared to $4.4 million as of March 31, 2020. And as of June 30, 2020, total bank borrowings were $264.8 million of which $116.9 million were long-term borrowings compared to total borrowings of $265.6 million including $149 million of long-term borrowings as of March 31, 2020. And for the six months ended June 30, 2020, net cash provided by operating activities was $47 million compared to $67.8 million in the same period of 2019. Of the six months ended June 30, 2020, net cash used in investing activities was $60.4 million compared to $145 million in the same period of 2019. The net cash used in investing activities in 2020 and 2019 was primarily related to the capital expenditures on Xinjiang Phase 3B and 4A polysilicon projects. For the six months ended June 30, 2020, net cash provided by financing activities was $16.2 million compared to $61.3 million the same period of 2019.

And that concludes our prepared remarks.

Questions and Answers:

Operator

Thank you. [Operator Instructions] The first question today comes from Philip Shen with ROTH Capital Partners. Please go ahead.

Justin Clare -- ROTH Capital Partners -- Analyst

Hi, everyone. This is Justin Clare on for Phil today. Thanks for taking our question.

Longgen Zhang -- Chief Executive Officer

Hello, Justin.

Justin Clare -- ROTH Capital Partners -- Analyst

Hi. So, I guess, first off, you indicated in the release that ASPs that you're seeing right now are $11 to $12 a kilogram compared to $7.50 in Q2. So, I was wondering what are you expecting for your overall polysilicon ASP in Q3? And then could you speak to the demand increase that you're seeing as well as we've seen an issue with supply with one of your competitors, given what's going on with that dynamic, what are your expectations for ASPs in Q4 and then how long could ASPs actually be elevated?

Longgen Zhang -- Chief Executive Officer

Justin, this is Longgen and starting I think July, I think basically demand and supply because of downstream demand is so high. So I think as wafer capacity also continue to increase especially in some company, most of the companies want to vertically integrate including wafer sale and module, and to increase the gross margin. Then plus I think some company the expense and the supply should I think cause the silicon prize dramatically I think bounce back. So basically you can see I think the weekly I think PV link the price. So, for example, last week it's back to RMB98 per kg. So we see this situation maybe will continue. And today another news come out because the flood in Sichuan, so maybe another plant, the major player, the plant were temporary stop supplying. So all these, but that's not a major reason.

The major reason event I think is if you look the next 15 months to 18 months we do not think any capacity on the silicon side will come in increase. But the demand we see dramatically a lot of money jumping into as off the grid parity and we see the wafer capacity expansion is continue -- going to increase. So that's why I think core supplies come back so quickly. And we -- for example, I think for this month August because July definitely I think supplies didn't -- they're high, around $70 to $80 ASP. But this month, we're thinking will be around $90 to $98. So for this quarter, I think I'm not going to give you the actual figure. But we see, I think, maybe the silicon price in September will continue to a little over $100. For the -- but I think for the fourth quarter, I think, OK, the price maybe were between $85 to $100.

Justin Clare -- ROTH Capital Partners -- Analyst

That's really helpful. So then, I guess, turning to your production, if we just look at your Q3 guidance and then the full-year production guidance, it implies Q4 production of I think about 18,400 metric tons at the midpoint. In Q1, you were able to produce 19,800 metric tons. So just wondering given the elevated level of pricing, do you have any ability to reach kind of Q1 levels of production in Q4 and to take advantage of that pricing?

Longgen Zhang -- Chief Executive Officer

Justin, we always try to make our efforts and to produce more products to meet the demand of our downstream clients. But in this moment, because for the forecast, we're always conservative. So, basically, to answer your question, we'll make our efforts. Of course, for this quarter, we've given the guidance. You can see that, right? So, basically, we always do that in that manner.

Justin Clare -- ROTH Capital Partners -- Analyst

Okay. And then, just one last one for me on your cost structure. Q2 cost structure decreased about 3% relative to Q1. This is despite your annual maintenance and lower production volume in the quarter. So, I wonder if you just share a little bit about what enabled you to lower costs in the quarter despite the lower volume? And then, could you give kind of outlook for costs in Q3 and Q4? I know in Q4, you said, you expect costs to be lower, so could you provide any more quantification in terms of how much lower? Thank you.

Ming Yang -- Chief Financial Officer

Okay. Hello, Justin. This is Ming. So regarding our costs, I think certainly, our Q2 cost came out to be lower than we anticipated. So even given the impact of our annual maintenance with lower production volume and you could see there's higher contribution from depreciation expense for example. So, we were still able to lower our production costs. And really, a lot of it comes from a reduction in our energy usage. So, we're making progress in optimizing our process and also improving throughput from our manufacturing facilities. So that in terms of energy usage, we're seeing very promising reductions and then that should continue, I think, throughout the end of the year.

And also, a lot of our procurement because of our scale and our efforts, so for example, a lot of the use of other materials, for example, packaging materials and also silicon powder and the graphite that are being used, all those costs are coming down as well. So that's also providing additional reductions. And the other benefit is coming from the scale of our facility. So I would say Q3, we will look to have probably similar or maybe just slightly lower cost compared to Q2. And certainly, if we look at Q4, we think there is still another probably 3% to 5% type of cost reduction even compared to our Q2 level. So that's what our current outlook is right now.

Justin Clare -- ROTH Capital Partners -- Analyst

Okay. Great. Thank you very much.

Longgen Zhang -- Chief Executive Officer

I just want to give you a little more. The cost of goods sold I think is also partially due to the foreign exchange rate. I think renminbi I think appreciation, OK, partially also come from there. But of course, I think the cost, we will continue to cutting the cost map -- major from -- one is from increasing efficiency, and scalability efficiency. Second is the raw materials continue to go down. But you also -- you have to consider like MTS, also maybe price will go up. But we were -- I think the cost, we will control around I think $5.80, maybe $5.60 can go down maybe 2% to 3% by the end of the year.

Justin Clare -- ROTH Capital Partners -- Analyst

Okay. Thanks. Thanks very much guys.

Longgen Zhang -- Chief Executive Officer

Okay. Thanks, Justin.

Operator

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

Gary Zhou -- Credit Suisse -- Analyst

Hello management for taking my questions. So I have three quick questions. So firstly, can management shared with us your view on the polysilicon price outlook for the next year? And secondly, so let's say if the polysilicon price stays relatively at a high level, would you be concerned that the even the low-tier producers may decide to expand their capacities? And the last question is quickly on -- if the management can share with us any update on the -- on your succeeding list stockholder listing? Thank you.

Longgen Zhang -- Chief Executive Officer

Okay. Gary, to answer your question, first of all, and the poly price for 2020, we believe OK in 2020 didn't have any new additional, I think, capacity come in. Meantime, we can see, especially at this time, I think the polysilicon price jumped back. A lot of company right now go into adopt strategic policy of vertically integrated, including the -- I think, for example, like Qingdao, one of the U.S. listing company we're now listing in China and Asia, and the original didn't have any capacity under wafer segments. They just announced this Monday, and it's going to increase -- actually, they have some, OK? I think, frankly speaking, they have like 5 gigawatts to 7 gigawatts wafer in Baotou and [Indecipherable]. But this time, they're going in, I think invest another new project with 20 gigawatts wafer capacity in [Indecipherable].

So, you can see -- we can see forecast a lot of company. For example, maybe Canadian Solar, maybe I think Trina. All these company, they will catch the mono-wafer capacity. Meantime, the major players like LONGi, Tongwei and also Tongwei is going to downstream to the module. Then also Jinko also continue expansion, I think, on the wafer capacity. So, we see by the end of next year, we're calculating maybe around -- wafer capacity maybe around like 270 gigawatts. That's estimated need. The silicon, end of the year, around 800,000 tons. So, that's -- I think as demand and supply totally a lot of gap there. So, basically, I cannot tell you the -- I think exactly polysilicon price. But I think, next year, the polysilicon price the range should be around $85 to $95. To answer your first question. Second is I don't think in this situation we're now, any -- we will do any -- I think the production control -- any production to control demand -- to control supply. Is that your question? You say that you maybe -- to reduce our capacity to.

Ming Yang -- Chief Financial Officer

Expansion plan for the second tier.

Gary Zhou -- Credit Suisse -- Analyst

Sorry. My question is live, so let's say if the polysilicon price stays high for longer, so would you be concerned that even the second tier, relatively low-tier polysilicon producers may think to kind of further expand their capacities?

Longgen Zhang -- Chief Executive Officer

Okay. So, I understand. Okay. As the polysilicon price come back maybe it will stimulate some Tier 2, Tier 3 company continue survive. I don't think so, really, because, A, you still have to keep -- continue to keep the cost down. Secondly is also the quality of the product. That's the most important. Today, in the industry, I think every monosilicon, maybe around 85%. The Tier 2, Tier 3 may be even lower their percentage. Even price come back there, they -- I don't think they will back basically on the small production line will come back to that. But they may be stimulate some plan to continue to expansion, I think, on the polysilicon capacity. For example, I think Asian silicon plants, right? They announced they are going to start a new project. I think 30,000 tons -- metric tons production, I think, to start-up.

So, basically, I think even today, we know the planning, Tongwei have two plants there. I think [Indecipherable] is Asian silicon, maybe 30,000 tons under way. All those capacity, maybe I think around 1,000 to 10,000 tons or 100,000 tons maybe I think will be put into production in 2020, '22 still I think is not enough to meet the demand -- not meet the demand, I think. Then to answer your third question, that's why I think we are planning to do to put our Xinjiang New Energy as a sub of our listing company of U.S., Daqo New Energy listed in New York Stock Exchange, go to China Stock Market. Everything right now is on schedule. We believe, I think, today, stock market valuation, we can -- if we can successfully the planning to raise the money, we think, yes, we were starting planning and study to also at certain time we will consider to expansion our capacity. Gary, did I answer your question?

Gary Zhou -- Credit Suisse -- Analyst

Yes. Thank you very much. That's all my questions, and I will pass on. Thank you.

Ming Yang -- Chief Financial Officer

Great. Thank you. Thanks, Gary.

Operator

The next question Alan Hon with J.P. Morgan. Please go ahead.

Alan W. L. Hon -- J.P. Morgan Chase & Co. -- Analyst

Hi. This is Alan from J.P. Morgan. My first question is, I mean, with the recent price hike on the polysilicon side and also the price hike along the silicon value chain into module, how is feedback by the other customers? I mean, is there any hurdle in terms of, like, downstream PV demand because of the price hike?

Longgen Zhang -- Chief Executive Officer

Alan, basically, I think, as the consolidation continued going on, yes, in some segments right now, there are some big players there. For example, like wafer segments, I think LONGi, Jinko and Tongwei -- they are all bigger player right now, OK? In the module segment, I think you can see that the original, like, Jinko, Trina, Canadian Solar, even LONGi also is a bigger player. Because of each player forecast different segments, and they maybe because we hope, the whole industry should be -- have industry average gross margin to make this industry very healthy to continue to expansion to meet the demand of the downstream clients' needs. So, usually I think the fighting between -- I think maybe between wafer sale and module, yes, today, I think the wafer price continue to increase and it squeeze the module, I think, gross margin.

I don't think that right now, today, like LONGi M6 selling price RMB3.25 per piece right now can make the module, I think a sampling player makes money. So, yes, we see module price also continue maybe back, increase. Also, we see some projects renegotiation even through the -- I think the history, they've already done the bidding system, especially in China. But I don't think that will stop the -- I think, the downstream installation and all the projects; maybe will delay some projects. I think that problem is temporary. Finally, I think the player will come down, I think, to get some certain balance and to stimulate, I think, the demand. So, I think the problem will cool down in Q4.

Ming Yang -- Chief Financial Officer

And Gary, let me add a little bit to that. So, I think if we look at the real downstream market, especially on the projects side, so because of the current money printing at super low interest rates are even negative rates and where money is still available right now, so that a project that may be used to require 8% to 10% project IRR or double-digit equity IRR, now is probably happy with mid to high-single digit type of return to the project. And those projects will still move forward. So, that -- I think some of the projects really are even not that price-sensitive. So, I think you actually have significant amount of demand in the market at a lower yield that's required for these projects to happen. I think that's something that people may not have looked at. And if you look at what's happening in California right now with the power outage and with the record heat, I mean, people are now probably likely want to put in place solar system, even with storage right away without regard to the cost of the system because you're now talking about record heat with no AC. I mean, that's not something that's even sustainable. So, I think there are definitely markets that would open up especially I think with the future trends toward climate change as well.

Longgen Zhang -- Chief Executive Officer

I think, Alan, I think because of the gross margin right now, each settlement is different. Today, especially, I think wafer segments, mono-wafer segments with high gross margin and module with a lower gross margin. So we see some of the magnitude for the bigger wafer player if they also have some module business. I think they maybe can continue to vertically integrate into module segments. But, meantime, those module player, they also can be reversed back, vertically integrated, to touch the wafer segments. That's just a service like [Indecipherable]. They just announced, I think, a 20-gigawatt wafer, I think, expansion. We will see a lot of company like, I think, Canadian Solar, Trina, and other company. I think even Jinko continued expansion on the wafer segments.

So, at that time, as the wafer sale and the module segments continue to vertically integrate it, I don't think the fighting will continue like this way. But the situation I just said, within last 15 months to 18 months, we didn't see any polysilicon production were coming. Even say, after 15 months to 18 months, I think, Xingjiang two plants plus Asian silicon one plant production line come in still cannot meet the demand. So we, I think, also that's why we want to go to stock market as soon as possible. We're working hard. And to a certain time, I think we would announce what we did. So we definitely will in the future we also will schedule continue our expansion plan.

Alan W. L. Hon -- J.P. Morgan Chase & Co. -- Analyst

Thank you. That is clear. And I have another question. This is related to what happened along the industry today. Just like from a technical side of things, if like we have to shut down a poly plant for whatever reason even without damage, I understand that it may take some time to ramp back up the production to 100% and also to have the high mono output. So generally speaking, how long does it take for the plant -- for existing plant to ramp back up?

Longgen Zhang -- Chief Executive Officer

Okay. I think we -- I think, I just only can talk to myself, I think, Daqo, OK.OK? I can't comment on other plants. Other plants, for example, one of the plants in Xinjiang, they have I think accidents are hopeful they can go back as soon as possible. I think they also, I think, announced -- some news they announced that they think it will come back two to three months. I'm not going to judgments there, OK? But if you look at all the guidance, it's very pretty sure this quarter, our production, I think is 17,500 metric tons, right, to 18,000 metric tons. So for example, this month, we are around 5,400 metric tons even though we are in the maintenance and we are in-store update -- upgrading some equipments, so we still make efforts. So, we think in September, we have full capacity running. So, we're very confident and to, I think, to back to full capacity running because we think the market is so high. So, that's what I say. Even -- what I think even today like Tongwei just announced I think, in Leshan, one of plants because of flood, I don't think that would take time, maybe two weeks, one week will come back.

Alan W. L. Hon -- J.P. Morgan Chase & Co. -- Analyst

Got you. Got you. Yeah. Thanks. This is clear.

Ming Yang -- Chief Financial Officer

Okay. Thanks, Alan.

Operator

The next question comes from Colin Yang with China Securities. Please go ahead.

Colin Yang -- Daiwa Securities -- Analyst

Hi, thank you management. This is Colin from Daiwa. I've got two questions. The first one is similar to Alan's questions. As you may know, some [Indecipherable] was already started to renegotiating the module price for already signed competitive orders. So as we consider the percentage has surged by over 50% or percent announced by the module side is only up by 5%. So do you worry about, we're going to see an extremely weak 4Q demand in China? In other words, do you expect to see a severe drop in 2020, solar installation in China affected by the rising module price talking about your polysilicon price?

Longgen Zhang -- Chief Executive Officer

I think because of the, I think, pandemic situation in China in the first quarter, then second quarter -- globally I think pandemic caused the downstream I think, especially the -- I think the downstream business demand is so weak. So that's why I think in the second quarter in each segment, I think the price reduced so very sharply even, let's say, look at the polysilicon price. I think really not too much companies make a profit. We are -- because the quality, the mono silicon almost more than 95% and also the cost advantage scalability, so we have some advantage on the gross margin maybe 10% to 15% better than the industry average. So that's why we make a profit. But other people even, let's say, I think module sale always go down, right. You can see even wafer also go down, but wafer historically as the mono-wafer they have with the high gross margin.

So, I think just like you said because of -- I think starting end of the July, the polysilicon price come back. Then cost, I think wafer price increased, sale price increased and the module price, definitely, I think slightly increased. I think that's OK. I think the market still can absorb that slight increase. If the module price dramatically increase then will cause a lot of problem. One is maybe delayed project; secondly, is also I think will reduce the demand of the module. So I don't think that will happen, because in the history, it's not happened, because the module price go down to certain level never come back in the history, OK? But this time, it happened because of why? Because the module price is too lower, the grid parity is there. Look at China, all the projects right now, the bidding, the government subsidy is only like $0.03, $0.04 per kWh.

The projected return is still higher. So as the interest rate continue to go down, I don't think some projects I still think they can absorb little higher module price. Thinking about that, today silicon cost on the module only around 15% and the inflation of the station, solar station only 7%. So I don't think, right now, silicon is the major cause right now for the module for the downstream solar projects. I think glass, all these other materials maybe glass right now is number one cost for the module. So, I think the market will tell you demand and supply fire will bounce back. I don't think the market will be hurt. Temporary, yes. But long-term, I think the market will come back. I don't think -- even some unreasonable, irrational price of sale or even wafer can be sustainable.

Colin Yang -- Daiwa Securities -- Analyst

I see. I see. Thank you, Longgen. So my second question is about the sustainable gross margin we are expecting, because as you mentioned, there is going to be no effective capacity addition over the next 15 months. So based on expectation of $85 to $95 polysilicon price, the gross margin next year will be outpacing 50%, so the recent 50% is going to be a sustainable gross margin for polysilicon? And do you have any updates for the capacity expansion plan? Thank you.

Longgen Zhang -- Chief Executive Officer

Okay. For the polysilicon, I think the segment polysilicon is the -- I think with the high technology and heavy capital investments and a long-term investment cycle. And for example, any new entry come in, you need to take at least maybe, I think, right now the one year to constructing the project. So it's a very tough even let's say like a new horizon, right. They have the money, they invest in polysilicon, but still not successfully. So what we believe, I think, because the chemistry industry, I think this industry, the average gross margin should be around 30% -- 25% to 30%. But if the good player in the industry should be around 30% to 35%. So Daqo is, I think, one of the, I think, the high quality, low cost player in China. So we believe next year, our gross margin should be around 35% to 45%.

Colin Yang -- Daiwa Securities -- Analyst

Thanks for your answer. Thank you, Longgen. That's all my questions.

Ming Yang -- Chief Financial Officer

Great. Thank you.

Operator

The next question comes from Tony Fei with BOCI. Please go ahead.

Tony Fei -- Bank of China International -- Analyst

Hi, management. Thanks for taking the questions. I actually have two questions. Firstly, regarding your ASP side. So in Q3, we see the poly price actually increased in the very fast fashion. So how frequently do you adjust your sales price, your actual delivery prices to your wafer clients? Is it biweekly -- biweekly basis? That's the first question. Second, regarding your capex in Q3, so given your ongoing maintenance, so what kind of capex are we looking -- expecting in the third quarter? Thank you.

Longgen Zhang -- Chief Executive Officer

Okay. I'll answer the first question, and let Ming to answer the capex, the next question, OK? I think for the ASP, OK, original practice -- practically right now, what we're doing is based on the PV link, every month on the 20th, we negotiation with our clients to determine next month deliver, how much based on market price we will make the price, OK? But starting, I think, the July, because the price go back so quickly, so we, right now, almost, I think two-week to make a -- to sign a contract. Some clients, even one week to sign clients, to update the price. But that's just like because the price change so quickly, OK? We almost one-week, two-week to sign the contracts. But I think when the price become more stable, we'll go back to one-month to sign contract with the one of major clients.

But those clients maybe in a different time, but I think all major clients, as you can see, we signed long-term contracts with LONGi, Jinko as you can see. So it's a very stable. And as soon as we sign contracts, we cannot easily change the price. So that's why in July, our ASP is not -- basically is not too far, a little lag behind the market. But in August, definitely, I think, we catch the market. So August and September, we will almost match the new price. So we think this quarter, the ASP were higher, and we give you current price is around $11 to $12 per kg, and we -- I think September, the price maybe even little higher, maybe go to $13, $14, just I think you know should temporary time. And in the fourth quarter, definitely will come back to normal. So I will believe I think the price should be around $85 to $95 is reasonable.

Ming Yang -- Chief Financial Officer

Okay. Hello, Tony. And regarding your question for capex, so new capex, we will spend on technology upgrade and new equipment installation is only about $5 million for Q3. But total payments will be about $25 million for capital investment and this would include about $20 million of payments related to our project, Phase 4A, based on our payment schedule.

Tony Fei -- Bank of China International -- Analyst

Okay, great. That's very helpful. Thank you management.

Ming Yang -- Chief Financial Officer

Great. Thank you.

Operator

The next question comes from Jun Liu with Citi. Please go ahead.

Jun Liu -- Citi -- Analyst

Hey, management. Thanks for taking my question. I think, most of the question has been asked by the previous analysts. So, I only have two questions. The first one is that, do you -- can you guys give some colors on the -- maybe the detailed timetable to see our resumed production in Xinjiang, our order line, because they have an investigating team to come to Xinjiang to check the safety. So I'm not sure whether you can give us maybe updated timeline on that? And the second is that considering the current price, polysilicon price is very high. So do we think about, I know, we didn't have the reply of capacity expansion yet, but do we think about it to maybe not just expand our capacity in Xinjiang? Will we be seeking some other place, or some other province to expand our capacity? That's all my questions. Thanks.

Longgen Zhang -- Chief Executive Officer

Okay. I think, to answer your first question, I think right now, currently, our older plant, there are four production lines. And three production line right now is working -- is right now in the production. Only one production line, that's the third production line, annual capacity is at 5,000 tons. There because the lag of small incidents plus I think the equipment is lagged behind. So we are planning to put it back to production by end of this month, before end of this month. So that's why we give guidance for this quarter, 17,500 metric tons to 18,000 metric tons. And this month we think that we can manufacture 5,400 tons, to answer your first question. Second question is don't matter the price how high temporary, we consider evaluating the whole picture for the next three to five years. We believe the solar industry has reached grid parity. We think the solar industrial will continue to, I think, if without the pandemic, without the trade war, I think the solar industry should dramatically I think continue to increase in the downstream, the market. So that's why we are evaluating every day, OK?

For example, in Xinjiang, we still -- we already approved 4B projects, that's the 35,000 tons project, and it's feasible, it's approved. Then also we are looking other opportunities, I think, maybe in [Indecipherable] near one of our bigger player, two bigger players right now the wafer capacity there. We also do another study. Then also the opportunities and maybe Mongolia I think also is the one of the large wafer production center there. So, yes, we are doing study right now, and it's possible we are in the future, if we decide to expanding our capacity even abroad, not in China, possible somewhere abroad, because we consider the U.S. market in the future, the anti-dumping maybe including the silicon manufacturing is not -- cannot be in China. So that's why we do all the study right now. And meantime we are making efforts right now just let you know to let our Xinjiang plant go to Asia market, stock market as soon as possible to raise more money and to do that. So to a certain time, when the -- all these is mature, we will announce that.

Jun Liu -- Citi -- Analyst

Thanks, Longgen. I have actually two follow-up questions. The first is that, yes, you have explained we will be back to the production by end of this month. So may I ask that if we have to get some approvals from local governments to get the production, or we can just resume our production by our own schedule? And the second question, as you have mentioned, we at the solar industry has reached the grid parity now. So, the growth will be very fast. So do we have some kind of strategy or long-term planning that we should have certain market share in the polysilicon given we are lowest cost player in this industry?

Longgen Zhang -- Chief Executive Officer

Okay. To the first question, because of another plant in Xinjiang have the accident, so the local government is actually asking us to do all the plant, the full production line even asking third-party to come in to evaluating the safety. And the government has already approved all the production meet safety production criteria allow us to start -- to continue running production, OK? It's already got approved. The only -- the third production line, we're not ready, because we still have to upgrade the equipments, the parts. So that's why we are working on that. Today, actually new parts has already come to the plant. So we think we will finish by the 25th of this month. So we think we're back in full capacity running by the end of this month. So that's the first question, OK?

Jun Liu -- Citi -- Analyst

Yeah. Yes. Thank you.

Longgen Zhang -- Chief Executive Officer

Second question, every company have their strategic, I think strategy. To us, we continue -- we think our -- we have to forecast our experts on the polysilicon side. We have good quality, we have in a lower cost and we have good people, OK? And even we want to be -- to take advantage of stock market with the high valuation to get IPO proceeds to expanding our new plants. So, yes, we are working very hard. Of course, we also have some planning there. If you look our first quarter market share, we think we are around 15% and we think we will continue the market share at least about 15% even reach a little higher. But we don't want to say we are number one, we are largest, we don't want to do that promise and forecast. We do whatever we can, and we forecast our experts and then we forecast our planning, OK? We will announce soon, OK, our strategic plan.

Jun Liu -- Citi -- Analyst

Okay. Okay. Thank you very much. That's all my questions. Thanks.

Ming Yang -- Chief Financial Officer

Great. Thank you.

Operator

The next question comes from Jeffrey Campbell with Tuohy Brothers. Please go ahead.

Jeffrey Campbell -- Tuohy Brothers -- Analyst

Thank you for taking my questions. My first one was I didn't notice any announcement of any material headcount reductions during second quarter and if not, is this due to the high automation in DQ processes?

Longgen Zhang -- Chief Executive Officer

Headcount?

Ming Yang -- Chief Financial Officer

Yeah, so there is no headcount reduction at all for us. I think we just had maintenance, but everybody's -- we've been fully employed throughout this time.

Jeffrey Campbell -- Tuohy Brothers -- Analyst

Thank you. And I ask because.

Longgen Zhang -- Chief Executive Officer

Jeffrey, you can look our -- you look our production, actually we -- in the second quarter, we actually -- because we are in the scheduled annual maintenance, but because of the equipments is not coming on time, so we postponed our two production line to August to maintenance. So basically, Q2, our output is still very high. You look at that. Then even Q3, right now, we've given guidance also around 17,500 tons to 18,000 tons, OK? We're always very conservative. So I think with that output, we don't think we want to cut headcount, actually we have increased, because we have to save employee talents for our future expansion.

Jeffrey Campbell -- Tuohy Brothers -- Analyst

Right. No, I asked that because that's most of the rest of the industry was really having to reduce headcount to maintain costs, but you guys don't seem to have needed to do that. Earlier in the call, you mentioned variability and the ASP pricing. I was just wondering can you maybe talk about on a percentage basis that portion of your sales that are longer term contracts such as those with LONGi and Jinko versus more market-sensitive contracts that adjust frequently?

Longgen Zhang -- Chief Executive Officer

Okay. Basically right now, the contracts that we with LONGi and Jinko is almost approximately accounts right now the current capacity around 70% to 75%. We actually have a little room right now open for other clients, and maybe we will sign another one or two long-term contracts for the future, OK, just to cover another three years. Then also to consider, that's why we almost right now contract our all -- most of our capacity right now. But you have to consider everything is moving. We maybe in the future, we're expanding our capacity. So that's why we're doing that. So the long-term contract with LONGi and Jinko basically is based on -- fixed on the quantity, is not the price. The price is still based on the market price. And the only thing is we collect the deposits to lock the quantity and keep the relationship with our strategic customers.

Jeffrey Campbell -- Tuohy Brothers -- Analyst

Okay, great. Thank you. And finally as you talk about this 15- to 18-month period where you see significant demand growth and very low supply growth, do you have any sense of the extent to which this is being driven by residential markets versus demand for utility type projects?

Longgen Zhang -- Chief Executive Officer

If you look at China, I think China -- the majority in the history, I think, is SOE, the company, working on the farm projects, I think, the distributed project actually is not too much, but as the -- I think in the last -- second half of last year, I think because of grid parity right now, China distributed projects right now more and more because all projects without any subsidized and basically the project itself and can reach profitable and attractive investments to invest money. So, for example, myself also invested in Beijing, I think seven, around I think 10 megawatts because we think it is very profitable. The installments, the cost per watt installed on a roof only cost like as RMB3.2 per watt. You can generate every year, almost 1.6 kWh, even let's say you sell into the grid $0.37, very, very profitable. So that's why, we see in China, the distributed rooftop, the percentage continue to go up.

Even I think globally, especially, I think in the U.S., the market -- potential market is so big. The U.S., the problem right now is, I think is trade war. The trade war -- I think the anti-dumping and the trade war actually add the module price in the final consumers, then plus the labor cost is higher. But I think Solar City right now, I think, use I think the standard package, tried to cutting the labor cost. So I think I was told they, let's say, the rooftop, they have a standard products just put on there only three hours. So, I think those standard products I think in China, we're also working on that. For example, the roof, 5,000 megawatts -- 5,000 watts, 8,000 watts all the standard just coming, put on, within three hours, four hours. So that way dramatically continue to reduce the cost in BOSC [Phonetic]. So I think that's the potential in the future. Definitely, I think, the distributed rooftop, a segment where we continue to increase the percentage.

Jeffrey Campbell -- Tuohy Brothers -- Analyst

Okay, thanks. And I'll just follow up real quickly on that. So it sounds like that is because earlier you said that you're considering the possibility of building some capacity closer to the United States. So based on what you just said, is it fair to say that the distributed -- the potential for distributed growth in the United States is a factor that's driving the possibility of getting that capacity closer to the United States. Is that fair?

Longgen Zhang -- Chief Executive Officer

Yes. Maybe it's not exactly as United States, but yes, because we -- valuation a lot of locations and because of pandemic situation, otherwise, we will speed up this I think projects. But definitely, yes, we are working on that, to certain time, we'll announce it.

Jeffrey Campbell -- Tuohy Brothers -- Analyst

Right. Thanks so much for your help.

Ming Yang -- Chief Financial Officer

Great. Thank you.

Operator

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

Kevin He -- 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 bye-bye.

Operator

[Operator Closing Remarks]

Duration: 66 minutes

Call participants:

Kevin He -- Investor Relations

Longgen Zhang -- Chief Executive Officer

Ming Yang -- Chief Financial Officer

Justin Clare -- ROTH Capital Partners -- Analyst

Gary Zhou -- Credit Suisse -- Analyst

Alan W. L. Hon -- J.P. Morgan Chase & Co. -- Analyst

Colin Yang -- Daiwa Securities -- Analyst

Tony Fei -- Bank of China International -- Analyst

Jun Liu -- Citi -- Analyst

Jeffrey Campbell -- Tuohy Brothers -- Analyst

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