China XD Plastics Company Limited
Q2 2016 Earnings Call Transcript

Published: 7 Aug 2016

[Vicky Yu:]

Thank you all for joining us for the China XD Plastics second quarter 2016 financial results conference call. Joining me on the call today are Mr. Jie Han, Chairman and CEO; Mr. Qingwei Ma, Chief Operating Officer; Mr. Taylor Zhang, Chief Financial Officer; Mr. Junjie Ma, Chief Technology Officer; Dr. Kenan Gong, General Manager of the Dubai subsidiary; Mr. Jin Jintai [ph], General Manager of Heilongjiang subsidiary. Earlier today, China XD Plastics issued a press release announcing the second quarter of 2016 results. Before management presentation, I would like to the Safe Harbor statements in connection with today’s conference call and to remind our listeners that the management prepared remarks during the call may contain forward-looking statements, which are subject to the risks and uncertainties and that management may make additional forward-looking statements in response to your questions. All statements other than statements of historical fact contain forward-looking statements, including, but not limited to, the company’s growth potential in international markets, the effectiveness and the profitability of the company’s product diversification, impact of the company’s product, mix shift to the more advanced products and related pricing policies, the volatility of the company’s operating results and the financial condition, the company’s projections, our performance in 2016 and other risks detailed in the company’s filings with the SEC and available on its website at www.sec.gov. These forward-looking statements involve known and unknown risks and uncertainties and are based on the current expectations, assumption, estimates and the projection of both the company and the industry. The company therefore claims the protection of the Safe Harbor for forward-looking statements that is contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ from those discussed today and we refer you to a more detailed discussion for the risks and uncertainties in the company’s filings with the Securities and Exchange Commission. In addition, any projections as to company’s future performance represents management’s estimates as of today, August 5, 2016. China XD Plastics assumes no obligation to update these protections in the future as market conditions change. To supplement the financial results presented in accordance with the US GAAP, management will make reference to earnings before interest expenses, income taxes, depreciation and amortization, which we will refer to as EBITDA. EBITDA is a non-GAAP financial measure reconciled from the net income which the company believes to provide meaningful additional information to better understand its operating performance. A table reconciling net income to EBITDA can be found on the earnings press release issued earlier today. I would now like to turn the call over to our Chairman and Chief Executive Officer, Mr. Han. Mr. Han will speak in Chinese and I will translate his opening remarks into English. Mr. Han, please go ahead.

[Jie Han:]

Thank you, Vicky. And thank you all for joining us today. We’re pleased with the financial results of the second quarter as they’re consistent with our expectations of a steady recovery throughout China automotive supply chain. According to the China Association Automobile Manufacturers, the number of automobiles manufactured in China increased 10.5% in June 2016 compared to the same month in 2015. We’re particularly pleased to see this improvement confined with our progress in expanding our market into growth frontiers, such as South and Central China regions, in addition to our continued and the steady business development in Southwest and Eastern China. As a follow-up to our announced product testing trial and a pilot trial with new customers outside of China, as expected, commercial orders of higher-end products including specialty plastic alloy from the overseas market were received and the products were delivered in the second quarter of 2016. Our diversification into overseas markets is an essential component of our strategic plan. Once deployed last year and we are firmly on track shows the improvement in the macroeconomic conditions and our overseas new customer efforts have contributed to the improvement of our operational performance and the key financial performance metrics such as sales volume, average selling price and gross and net margin. As previously announced, we held a commissioning ceremony at our Sichuan manufacturing facility on July 7th, 2016, an important milestone in our corporate development. Our plant has been designed with the highest production specifications with state-of-the-art equipment to facilitate product deployment into new growth verticals, while maintaining the highest standards in quality control and batch consistency. The new facility extends our geographical reach beyond our established Northeast base as the Southwest region is rapidly becoming an important economic driver in China. In addition, the new campus will diversify our product platform into additional high-growth verticals such as automotive, ships, high-speed rail, airplanes, bio-degradable materials, medical-grade materials and food packaging. We anticipate 60,000 metric tons contribution of production capacity in the second half of this year at the new facility. In addition to our new Sichuan campus, our new facility in Dubai also extends our specialized high-tech products into an important new market. This highly specialized facility will ultimately enable more active inroads into the markets of Europe, the Middle East and other international regions. China XD continues to value our deep working relationships with our customers and is committed to create lasting value to customers, employees and shareholders with our culture of hard work and innovation, which we believe differentiates us from our competitors. We expect that our expansion into Southwest and Central China and our Dubai presence will strengthen our leadership position as we penetrate new markets. As evidenced by the current quarter's results, we anticipate benefiting from a continued recovery throughout the Chinese automotive supply chain and look forward to additional progress in both our domestic and international business and reiterate our fiscal 2016 financial guidance. With that, I will now turn the call over to Taylor Zhang, our CFO, to walk you through our financials. Taylor?

[Taylor Zhang:]

Thank you, Mr. Han. And thanks everyone for joining the call today. Before I review the numbers, let me remind you that all figures that I discuss are for this reporting period, the second quarter of 2016, unless I state otherwise. Additionally, any year-over-year comparison is to the second quarter of 2015 and any sequential comparison is to the first quarter of 2015. So let’s go on over our second quarter results. Revenues were $277.1 million in the second quarter, an increase of $11.7 million or 4.4% compared to $265.4 million in the same period of last year. This was due to a 5.4% increase in sales volume and 4% increase in the average RMB selling price of our products, offset somewhat by a 4.5% negative impact from exchange rate due to a weakening RMB against the US dollar. Premium products, including PA66, PA6, Plastic Alloy, PLA, POM and PPO, in total, accounted for 80.6% of revenues compared to 78.5% in the prior-year period. The company continued to shift its product mix from traditional polymer materials to higher-end products. Gross profit was $60.3 million in the second quarter ended June 30, 2016 compared to $51.5 million in the same period of 2015, representing an increase of $8.8 million or 17.1%. Gross margin increased to 21.8% during the quarter ended June 30, 2016 from 19.4% during the same quarter of 2015, primarily due to a greater contribution from higher-margin products sold overseas. G&A expenses were $6.6 million in the quarter ended June 30, 2016, which were stable as compared to $6.6 million in the same period last year. Research and development expenses were $5.9 million in the quarter ended June 30, 2016 compared with $6.7 million during the same period last year, a decrease of $0.8 million. This decrease reflects our improved efficiency in managing our R&D projects and our efforts to adjust our R&D activities on new products, primarily for industrialized applications from automotive to other advanced applications such as ships, airplanes, high-speed rail, 3D printing materials, biodegradable plastics and medical devices, et cetera. As of June 30, 2016, we were engaged in 187 ongoing R&D projects. Total operating income was $47.4 million in the second quarter ended June 30, 2016 compared to $37.8 million in the same period of 2015, representing an increase of $9.6 million or 25.4%. This increase is primarily due to a higher gross margin and lower research and development expenses, with stable G&A expenses. Net interest expense was $9 million for the second quarter compared to net interest expense of $8.5 million in the same period of 2015, primarily due to, first, the decrease of interest income which was caused by the decrease of the average interest rates of 2.4% for the second quarter ended June 30, 2016 compared to 3.1% for the same period of last year, partially offset by the increase of average deposit balance in the amount of $409.6 million for the three months ended June 30, 2016 compared to $344.5 million for the same period of 2015; and partially offset by the decrease in interest expense which was caused by the decrease of average interest rate of 5.2% for the three months ended June 30, 2016 compared to 5.3% for the three months ended June 30, 2015, partially offset by the increase in short-term and long-term loans in the amount of $496.6 million for the three months ended June 30, 2016 as compared to $409.9 million of prior year. The effective income tax rates for the three-month periods ended June 30, 2016 and 2015 was 13.6% and 14.7%, respectively. The decrease was primarily due to our Heilongjiang Xinda Group's R&D expense super deduction, partially offset by the effect of tax rates differential on entities not subject to PRC income tax, the effect of non-deductible expenses and increase of valuation allowances against deferred income tax assets of certain subsidiaries, which were at a cumulative loss position. Net income was $33.3 million in the quarter ended June 30, 2016 compared to $25.5 million for the same period of last year, representing an increase of $7.8 million or 30.6%. Basic and diluted earnings per share were $0.51 compared to $0.39 per basic and diluted share in the second quarter of last year. Average number of shares used in the computation of basic and diluted earnings per share for the three months ended June 30, 2016 was 49.4 million compared to 49.2 million shares in the prior year period. Earnings before interest, tax, depreciation and amortization was $56.4 million for the second quarter of 2016 compared to EBITDA of $47.8 million in the same period of 2015, representing an increase of $8.6 million or 18%. For a detailed reconciliation of EBITDA, a non-GAAP measurement, to its nearest GAAP equivalent, please see the financial tables at the end of our press release issued today. Now, let’s turn now to balance sheet. Our balance sheet remains strong even as we continue to continue our business expansion. As of the end of the second quarter, the company had $58 million cash and cash equivalents, $282.5 million in time deposits with commercial banks, $187.1 million in working capital and a current ratio (current assets divided of 1.21. Stockholders' equity as of June 30, 2016 was $609.7 million compared to $578 million as of December 31, 2015. Inventories increased by 43.2% from fiscal year end 2015 as a result of more purchases made by the company to take advantage of lower purchase price of the raw materials and our strategy to stock up inventory and prepare for the opening of Sichuan plant. The aggregate short-term and long-term loans increased by 28.6% from fiscal year-end 2015 as a result of utilization of existing line of credits. We believe our current debt level is manageable. We define manageable debt level as the sum of aggregate short-term and long-term loans and notes payable over total assets. As of June 30, 2016, due to the announced redemption of the 11.75% guaranteed senior notes due 2019, notes payable within one-year was $146.2 million, net of discount. Finally, the company reiterates its financial guidance for fiscal 2016 with revenue to range between $1 billion and $1.1 billion and net income to range between $100 million to $110 million. This is based on the anticipation of a steady recovery throughout the Chinese automotive supply chain, the company's belief in its ability to secure new customers and a stabilization of crude oil pricing and its impact on polymer composite materials in 2016. This forecast also assumes contribution from the Sichuan plant, which started production in the second half of 2016. It also assumes a stable average exchange rate of US dollar to RMB at 6.5 and excludes certain non-cash and non-operational items. This financial guidance reflects the company's preliminary view of its business outlook for fiscal 2016 and is subject to revision based on changing market conditions at any time. Before we open the call to your questions, I’d like to note that for any questions directly to the management in China, I will translate both your questions and their answers. If you want to ask your question in Chinese, please also ask it in English for the benefit of other listeners. With that, we now open the call to your questions. Operator?

[Operator:]

Thank you. [Operator Instructions] your first question comes from the line of Jason Cooper. Your line is open. Please go-ahead.

[Jason Cooper:]

Hi. Thanks for taking my questions. And congratulations on the recent announcements in the quarter. In terms of the CapEx, what do you have left with Dubai for 2016 and will that go into 2017 at all?

[Taylor Zhang:]

Hi, Jason. Good morning. So, for Dubai, basically, in the second quarter, we have a small amount, which is approximately $11.6 million. So the CapEx for Dubai pretty much remains the same, as we discussed before. So, in the second half, we have about $90 million remaining.

[Jason Cooper:]

Okay. And you expect to finish that this year?

[Taylor Zhang:]

Yeah. We expect to finish pretty much the construction and also the equipment assembly by the end of this year. So we’re looking to the Dubai plants to be operational early next year.

[Dan Moore:]

Okay. And in terms of your liquidity position, once we get to the end of your CapEx cycle at the end of this year, how should we look at – or how should we expect the short-term assets and the short-term liabilities?

[Taylor Zhang:]

Okay. So as you probably have seen, we’re going to redeem the senior notes this month. And so, even though, as I talked earlier, our short-term and long-term aggregates have increased about 28%, but given the effects that the redemption – post-redemption, I think our debt level will become lower compared to right now. So, basically, we have enough liquidity with the cash time deposits in other credit facilities. Long-term, we have with banks to do that. And I think, in the next year, pretty much all the [indiscernible] CapEx will be concluded and we will be in a much better position to – much better liquidity position.

[Jason Cooper:]

Okay. And how are your product approvals coming with some of those three plastics, biodegradable plastics, medical tech?

[Taylor Zhang:]

I think, for biodegradable, we have made a pretty good progress in POA, which is a sustainable and environmentally-friendly material and has been used a lot in the 3D printing application. So we do have some commercial success in that regard. And I think for medical devices, obviously, we’re still in R&D stage and there is also regulatory hurdle we’re going to need to achieve in the future. So that is more a long-term R&D strategy compared to other initiatives.

[Jason Cooper:]

Okay. And, I guess, the Chinese government has announced a lot of stimulus with respect to high-speed railway construction. I know you guys are developing products there to. So do you see any increased demand from the government?

[Taylor Zhang:]

There is definitely a huge demand and also potential for applications in high-speed rail, not limited to material level. It’s across the board. I think the opportunity for us is very similar to what happened 20 years ago in the auto industry when most of the parts materials were imported. It’s a similar situation here today in high-speed rail. So we have some – we have obtained some certification for high-speed rail application. And, obviously, there is so many different type of products we can go after. So in terms of timing, we think that this is a more – in a more readiness position compared to other applications such as in aerospace or medical devices. So we think, especially given our, right now, footprints in Southwest where high-speed rail industry is a pretty important and big market there. And I think we have both the R&D capability ready for that and also the production capability and logistics advantage to tap into that market.

[Jason Cooper:]

Okay. And as we start looking into your international shipments, do you have any guidance for what we might expect in 2017?

[Taylor Zhang:]

I think, for 2017, obviously, it’s still little early to say that because the nature of our annual contract which typically finalizes by the end of the year. But we feel very optimistic, as our Chairman has mentioned earlier during the call, with the international customers. And we also have more products in the development stage and testing stage in the pipeline with customers in different region. So we think that the – definitely, we feel the international markets will become more and more important and also significant in our business mix. So I think to answer your question, we think probably the current level, we think, is very sustainable and with additional upsides that we think we’ll be able to achieve.

[Jason Cooper:]

Okay. And, domestically, your new orders are outpacing shipments?

[Taylor Zhang:]

I beg your pardon.

[Jason Cooper:]

Are your new orders outpacing your shipments?

[Taylor Zhang:]

That’s generally the pattern we have seen, especially we have more orders from overseas customers. But we want to manage and control the pace to ensure, number one, quality and product batch consistency and customer experience. So I think, after over two years of experience, I think we’re in a very good position to develop and expand, grow our international business.

[Jason Cooper:]

Okay, thanks. And getting into next year, since you’re going to have – basically gone through the Dubai expansion and free cash flow should be ticking up, what should we be looking for in terms of return to shareholder? A dividend possible?

[Taylor Zhang:]

I think our Chairman has mentioned previously; obviously, we can. One is to – for corporate finance, lower our funding cost; and secondly, return capital to shareholders one way or another; and also maybe some potential opportunity for either merger or acquisition on a selective business.

[Jason Cooper:]

Okay. That’s all the questions from me. Thanks again and congrats.

[Taylor Zhang:]

All right. Thank you, Jason.

[Operator:]

Your next question comes from the line of Matthew Larson, Morgan Stanley. Your line is open. Please go-ahead.

[Matthew Larson:]

Good morning. Thanks for taking my call. And congratulations on a very sound quarter and for accomplishing what you had – what you’ve been able to do over the last few months. Jason, the previous caller, covered a lot of my questions, but there’s just a couple others I’d like to put forth. The early redemption of the senior notes, the 11.75%, was that done just because you have better visibility going forward and you felt comfortable redeeming it early and perhaps protect against currency swings or was there other reasons?

[Taylor Zhang:]

Hi, Matthew. Thank you. So there are several reasons. One, obviously, is, frankly speaking, the cost of capital for the notes is pretty steep, 11.75%. And given our current availability of alternative funding, as you can see, even with the senior notes, on the balance sheets, our average interest rates is less than 6%. So you can get a sense how much lower our other funding cost right now is. So it’s basically a corporate finance exercise to refinancing and lower our interest cost. Obviously, the foreign-exchange exposure is one consideration, but not the primary.

[Matthew Larson:]

All right. So you had an opportunity to just refinance it. Since your capital expenditure program is winding down, I would assume you have less cash requirements going forward. So you could afford to just retire them early. And I think that’s great. And I think it shows the market – I think that really was a positive for the market to see that you had the capability of doing that. I think you – on a question regarding the Dubai facility, you said that, for the second quarter, there would maybe $11.6 million in expenses. And then, did you say there is $90 million remaining to complete that by early 2017?

[Taylor Zhang:]

Yeah. That’s approximately $90 million remaining, yeah.

[Matthew Larson:]

Got you. All right. And then, since the other facility is completed, you had the opening ceremony a couple of weeks ago, the capital requirements that you’ve had to build out your capacity is coming to an end. And I think Jason was asking for some guidance perhaps for next year and – or maybe not. I would be interested, now that you have greater capacity – and it seems like you’ve been running full out over the last couple of years because your topline has been pretty much maxed out. And with these new facilities, presumably, topline could grow and, hopefully, bottom line as well. Do you have orders that you could maybe – an order level you can discuss or you can give some guidance of topline growth for 2017?

[Taylor Zhang:]

Hi, Matthew. So, basically, we’re going to have more visibility by the end of this year. But I think, right now, we can probably look at it from an indirect angle, which is the capacity we have. So for our Harbin plants, which is very stable, so there’s not much change going on there. For our second plants this year, we have the capacity as we stated in the press release of 60,000 metric tons, and this is for this year. And next year, we will be able to increase to over 100,000 tons, probably a little bit more. So that’s pretty much going to be a third of our Harbin plants. In addition, for our Dubai plants, early next year, we’re going to have more contribution from Dubai and local production. So that, I think, is probably going to be at a level of 10% to 15% of revenue contribution at the current level. So I hope this kind of gives you some color of how we view as we are not – I think probably a little too early to give you a guidance as we are not in December yet.

[Matthew Larson:]

Why do you think your stock trades at such a low valuation relative to your revenue as well as your earnings? It is 2, 2.5 times earnings, one-fifth of revenues, is that typical of a company in your industry in China or is it just typical of the stock as it trades here in the US?

[Taylor Zhang:]

In China, our competitors – because they are in different listing venues and different market environments, their valuation is much higher. I think, one is – I think our low valuation has several reasons. One is, the small cap China-based company, in general, are not getting fair valuation for the reason we have known. And I think, secondarily, the macroeconomic headwinds China experienced also are not making the sector attractive to the US investors right now. I think the third is probably – the previous two are pretty much applying to the companies within this category. But I think the third one is kind of a specific and unique to us is, the smaller floats we have also limits the ability by some large institutions to make a meaningful position.

[Matthew Larson:]

Right. And it probably precludes you from buying back shares which would reduce that float. Because I’ve always felt, even if you just bought back 1 million shares or something, which would certainly send a message to the market, and since you trade well below book at such a low multiple of sales and earnings, it seems to me a no-brainer if you had the capital to do so and it looks like you do. All right, I guess that’s it. I appreciate it. And let’s hope that, going forward – now that you’ve gotten these capital expenditure build-outs behind you, and going forward, there’s, I guess, greater risk to execution that the stock price will follow.

[Taylor Zhang:]

Okay, sure. Thank you, Matthew.

[Matthew Larson:]

Okay. Nice weekend.

[Operator:]

The next question comes from the line of Ben Choo, Caldwell & Lee [ph]. Your line is open. Please go-ahead.

[Unidentified Analyst:]

Okay, thank you. I think, first of all, congratulations, Han and Taylor, for the quarter results. And also, I think the redemption of the bond is, definitely, we see it as a very positive sign that the company is managing the capital structure in a positive way. And just regarding to that, and I think – the dividend notice is already issued to the bondholders. Then it now becomes an obligation for the bonds to – for the company to go ahead with that redemption. And I think, at the same time, we also saw in the market there is a loan that we’re doing with standard chartered. So just to confirm with the company that whether the loan proceeds is to redeem the bond? And also the second question is, how is that loan process going because we understand that is still ongoing? And the third is, if anything happens with the loan, will we still comply with the bond redemption note or will we choose to redeem the bond at a better timing?

[Taylor Zhang:]

Hi. Good evening, Ben. I assume you’re in Hong Kong. So, basically, I think the redemption notes, the redemption is pretty much set. There is – we have sent out a notice to the trustee and in the process. I don’t think that it has to do with other structure or other funding. As we stated in the press release, for this redemption, we have, number one, the cash time deposits and other credit facility available. So I think with regard to the ongoing loan, I believe it was a – the person whoever has said to the media was not authorized to [indiscernible]. So it’s not something, I think, we can comment on.

[Unidentified Analyst:]

Okay. That’s okay. That’s okay. I think it was on Bloomberg news or something. But still being able to do a loan in the Hong Kong market, if that is, it would be a positive sign because I think the cost of loan is relatively low compared to the other financing we did in the bond market. But I think as I said, even if – despite of the loan process and everything, the bonds redemption will be like a done deal?

[Taylor Zhang:]

Yeah, thanks.

[Unidentified Analyst:]

Okay, thank you.

[Taylor Zhang:]

Thanks, Ben.

[Operator:]

[Operator Instructions] Your next question comes from the line of Glenn Krevlin, GHC Capital. Your line is open. Please go-ahead.

[Glenn Krevlin:]

Good morning, Taylor. Good morning, Chairman Han. I had several questions. First, can you give us the updated capital spending plan for this year? And maybe give me a sense – you said that Dubai was going to be about $100 million, maybe more for the full year. You’ve got the capital spending for the Beijing move. I don’t know if there is any balance to be spent on Sichuan and then maintenance CapEx. Can you give me those components? And what total CapEx will be for the year?

[Taylor Zhang:]

Sure. Hi. Good morning, Glenn. So the CapEx is pretty much – as the first caller has asked, the CapEx has pretty much remained the same as we discussed in prior quarters. So, in Dubai, there is approximately $90 million balance for the remaining of this year. And, obviously, there may be some timing shift, probably going to be some spillover into next year. And for Beijing, there is not much CapEx because it was pretty much already done. In Sichuan, similar situation. And for our Harbin Heilongjiang plants, there is some very small, insignificant amounts. I think they’re probably [indiscernible]. So that is pretty much the [indiscernible] picture.

[Glenn Krevlin:]

And, Taylor, the total dollar number for the full year is estimated to be what?

[Taylor Zhang:]

You mean for the entire group?

[Glenn Krevlin:]

For the entire company, capital spending for 2016?

[Taylor Zhang:]

Which is approximately $150 million.

[Glenn Krevlin:]

$150 million. And that includes Beijing and everything?

[Taylor Zhang:]

Yeah.

[Glenn Krevlin:]

Okay. In terms of the capacity you expect, how much capacity in Dubai to be online second, third and fourth quarters?

[Taylor Zhang:]

Let me direct your question to our general manager in Dubai, Dr. Kenan Gong. Hi, Kenan. Can you pick up the question from Glenn?

[Kenan Gong:]

So, Glenn, we anticipate there going to be about 50% increase in Q3 and Q4 compared to the second quarter. In the second quarter, we have slightly over 3000 tons.

[Glenn Krevlin:]

And the total capacity of Dubai once the capital spending is done is in the 16,000, 17,000 tons, am I close?

[Taylor Zhang:]

That’s about right. And, obviously, the final configuration, I think probably you remember because of the local regulation limitation sometimes – the plant set up may have some change, but that’s pretty much the ballpark capacity we’re going to have during this year.

[Glenn Krevlin:]

Okay. But in the quarter just reported, there was 3,000 tons of capacity that was active?

[Taylor Zhang:]

Yeah. But those are not all – those were not all locally manufactured as we still have to rely on the production capability from China through a two-stage production method. But, eventually, we will shift all the production to Dubai and achieve localization.

[Glenn Krevlin:]

Okay. Can you give us an update on where you are with the original Korean customer? Are you now shipping at the same level you were last year, at some reduced level? I believe the accounts receivable has now been paid up and what the prospect for that customer is going forward and other customers in Dubai?

[Taylor Zhang:]

Okay. So the first quarter Korean customer, as you said, the AR has been paid up and also the raw material purchase on behalf of them, the balance also was collected. So in terms of legacy collection issue, they were all resolved. So, in addition, there is also a discussion of the specs, the technical specs that – of the product we’re supplying to them and which also pretty much reached a mutual understanding and agreements. So the customer is very eager to get sales – products shipped resumed. But we’re kind of holding – manage and control the space. And I think we want to be – we want to make sure not to make the same mistakes again. But we think, in the second half, we’re going to be able to resume supplying to the customer. In addition, another new customer, which we have gone through testing for almost a year and we have received their order and delivery in the second quarter, and we think the order is very solid and we will be recurring in the remaining of this year.

[Glenn Krevlin:]

Okay. So we didn’t ship, so there were zero, Taylor, shipped in the second quarter to the Korean customer?

[Taylor Zhang:]

Yeah.

[Glenn Krevlin:]

Okay. We expected to be the second half, but at about half the pace as it was in prior?

[Taylor Zhang:]

I think we probably are going to be a little slow in the beginning, so just to be conservative. But I think we have – one, we have additional customer; and secondly, we have other customers overseas in the pipeline and are very close to receive commercial orders. So I think it’s prudent as we proceed that this way.

[Glenn Krevlin:]

Right. Out of your $1 billion sales expectation for the year, what percent of that is non-auto?

[Taylor Zhang:]

Non-auto, I think that, right now, probably going to go above 10%, slightly over that.

[Glenn Krevlin:]

For 2016.

[Taylor Zhang:]

That’s right.

[Glenn Krevlin:]

Okay. All right, I have no further questions. But congratulations on getting those gross margins back in good standing.

[Taylor Zhang:]

Yeah, sure. Thank you so much, Glenn.

[Operator:]

Your next question comes from the line of Frank Thomas, Raymond James. Your line is open. Please go-ahead.

[Frank Thomas:]

Good morning and congratulations on great results. With respect to your plans worldwide including the new plants in Dubai and Sichuan, you mentioned capacity growth, but what about your utilization rate? Could you comment on your utilization rate of these plants?

[Taylor Zhang:]

Yeah. Sure, Frank. Thank you for the call. So the utilization, basically, we look at our Harbin plants, has been consistently at or over 85%. That is pretty much the optimal level. And for Sichuan, obviously, we just started producing, just launched the plant recently – actually last month. There’s going to be some ramp-up in the third quarter, but I think once we get close to the end of the year, the utilization will pretty much catch up the level at Harbin at 85%. So 85% is pretty much the optimal level we’re looking.

[Frank Thomas:]

How are you getting such fantastic utilization rates from your existing and your new plants? Are you taking the business from other competitors? Is the market growing?

[Taylor Zhang:]

Sure. I think we can probably break down the business by region. So in our Harbin plants, we have a very steady and leading position in Northeast, which is probably – which is, in fact, the second largest auto base in China. So the business in Northeast has been very stable and not too much growth we’re trying to push from Northeast. I think the real growth in China is coming from Southwest and also its neighboring regions, not only for automotive and also many other applications and higher-end applications. For Southwest, the region’s economy actually is growing at a faster pace than national average and the auto industry also is in much better growth pattern. That’s why we have seen many international leading automakers including, like, VW, Ford, GM, Volvo have set up manufacturing facility in the region to capture the growth and to benefit from the economic developments. We are also among one of the early material supplier in the region and, obviously, we’re going to have a first-mover advantage and also we can leverage our existing relationships and also our broad product portfolio to meet the customer demands in the regions.

[Frank Thomas:]

Are your manufacturing facilities interchangeable? If one plant had an issue, could the other plant pick up the production?

[Taylor Zhang:]

There is some interexchangeability especially for the newer lines that were commissioned. But, obviously, we have some limitation for the legacy lines. Keep in mind, in our Harbin plants, we have three facilities which were started in different times. I think the earliest one probably started over ten years. Obviously, there’s some upgrades in production line. But, generally speaking, the new lines are very versatile and we can manage and exchange, if needed. Hi, Frank. Does that answer your question?

[Operator:]

This is the operator. It appears that Frank’s line has disconnected from the call. Thank you. Your next question comes from the line of Matthew Larson, Morgan Stanley. Your line is open. Please go-ahead.

[Matthew Larson:]

Hi, guys. I thought I would jump back into the queue, back on to the line. Just wanted to visit the potential of getting some sort of forward guidance. You spent the last couple of years spending a lot of money, building out capacity and you’re pretty much near the end of that process. And during the time that you’ve been building out these alternative manufacturing sites, your topline has pretty much flat-lined, maxed out really at $1 billion, $1.1 billion. So I would assume you’ve gone through this whole process to grow that topline dramatically and you have a sense of what your margins would be and what your earnings capability would be. And you seem to be hitting – timing it right because the Chinese government has been enacting certain policies that have stimulated the economy and, in particular, auto sales with certain tax reforms regarding the purchase of vehicles and what have you. So with that in mind, you must have at least a general sense of what 2017 and 2018 can show as far as sales growth and earnings growth. And I was wondering if you’re in a position to give us just a general ballpark figure of what you can expect this company to make in the future.

[Taylor Zhang:]

Yeah, sure. Matthew, I think we can talk about this in a ballpark sense. So I think I have stated, for Sichuan, we’re going to have pretty much 20% or more capacity increase coming in next year. So it’s pretty straightforward. And in terms of our overseas business, as Chairman Han put it, for the end of – for the second half, we’re going to see 50% at the current level. So in this regard, the international components will probably account for 15% or a little higher next year. So, in aggregate, we’re looking at a pretty much 30% to 35% topline growth next year.

[Matthew Larson:]

Got you. So we could look at something optimistically maybe at $1.5 billion and, hopefully, a reasonable percentage of that flows to the bottom line. I think that, if you could get that out, that sort of general back-of-the-envelope guidance in the public domain, it would really be a catalyst for your stock performance. Just in a short period of time that it’s been trading today since you announced your earnings this morning, it’s kind of broken out to a level we haven’t seen in a while. But, really, the story in my mind, for CXDC is pretty open-ended. And I think that you all will be best served to get the message out there even more than you’ve been doing already just to highlight it for people who are unaware of the story.

[Taylor Zhang:]

Yeah, sure. Thank you so much. And your comments are greatly appreciated.

[Matthew Larson:]

Okay. Thanks for taking my call.

[Taylor Zhang:]

Sure. No problem.

[Operator:]

There are no further questions at this time. Please continue. Thank you.

[Vicky Yu:]

on behalf of China XD Plastics, we want to thank you for your interest and participation in this call. If you’d like to speak with us further, please call either myself or Taylor at the XD New York office or our IR from Grayling. The contact numbers for all of us are listed at the end of the press release. Operator?

[Operator:]

That does conclude our conference for today. Thank you for participating. You may all disconnect.