China XD Plastics Company Limited
Q1 2015 Earnings Call Transcript

Published: 11 May 2015

[Operator:]

Welcome to the China XD Plastics First Quarter 2015 Financial Results Conference Call. At this time, all participants in a listen-only mode. Following management’s prepared remarks there will be a Q&A session. As a reminder, this conference is being recorded and the replay is going to be available shortly after the call. I would now like to hand the call over to your host for today’s call, Sandy Qin. Please go ahead.

[Sandy Qin:]

Thank you, Operator. Thank you for joining us for the China XD Plastics’ first quarter 2015 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; Mr. Kenan Gong, General Manager of the Dubai Subsidiary; Mr. Shi Young, General Manager of the Sichuan Subsidiary; and Mr. Lou Jintai, General Manager of the [A1 Shuangxing] [ph]. Earlier today, China XD Plastics issued a press release announcing its first quarter 2015 results. Before management’s presentation, I would like to refer to the Safe Harbor statement in connection with today’s conference call and remind our listeners that management’s prepared remarks during this call may contain forward-looking statements, which are subject to 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 contained are forward-looking statements, including but not limited to the company's growth potential in international markets, the effectiveness and profitability of the company's product diversification, the impact of the company's product mix shift to more advanced products and related pricing policies, the volatility of the company's operating results and financial condition, the company's projections of performance in 2015 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 current expectations, assumptions, estimates and projections about 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 projection as to the company’s future performance represents management’s estimate as of today, May 11, 2015. China XD Plastics assumes no obligation to update those projections in the future as market conditions change. To supplement the financial results presented in accordance with the U.S. GAAP, management will make reference to earnings before interest, taxes, depreciation and amortization, which we will call by its abbreviated named EBITDA. EBITDA is a non-GAAP financial measure reconciled from 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 today. I would now like to turn the call over to Mr. Han. Mr. Han will be speaking Chinese and I will translate his presentation into English. Mr. Han, please go ahead. [Foreign Language]

[Jie Han:]

Thank you, Sandy, and thank you all for joining us today. Our first quarter 2015 results were in line with our expectations. Our revenue of $221.9 million was consistent with our sales from the same period in 2014 backed by the same level of production capacity. As we discussed on our last quarter’s call, we have seen slowing growth in China’s automobile industry in recent month. We anticipate that it will continue. We are adopting to these changing dynamics and are confident we will be able to maintain our position as a leading supplier of specialty plastics in China’s auto industry. As we also strategically shift into new products, such as high-speed rail, ship, airline, electronics, 3D printing materials, bio-based plastics, medical devices and food packaging, et cetera to further diversify our business. As we talked about on our Q4 call, we have seen increased pricing pressure into the auto supply chain as parts supplier and OEMs looked to cut costs meet to changing dynamics. In response we were able to quickly develop new more cost efficient formulations of our PA6 and PA66 products and successful get them out to customers. And in fact, our ability to understand and adapt to customers need in the changing market conditions quickly refresh the uses China XD from its competitors especially our multi-national peers. China’s auto industry is very fragmented. There are many OEMs and even more auto parts manufacturers, each with its own requirements, engineered tooling and product specifications. In China, the automotive market has shorter motor life cycles, close relationships with OEMs customization, short reaction time and flexible deliveries are critical and create high barriers to enter into the space. While certain products are in the pricing pressure, the overall product remain is pointing higher end category. Also our flexibility allows us to maintain our leading position in the industry as we strategically expand our reach into new markets and products that offer meaningful growth potential. Now let’s talk in more detail about those expansion opportunities. We have completed our retrofitting and equipment installation in our new Dubai facility and it will be operational by the end of the second quarter. In terms of capacity, our new plant in Dubai is relatively small compared to our existing facility in Harbin and the Sichuan plant now under construction. While Harbin and Sichuan have 390,000 and 300,000 current capacities, respectively, Dubai has a capacity of 2,500 metric tons of the first phase to be in operational this quarter. In light of sales orders already secured from Korean customers and our assessment of other potential customers in Korea, Germany and Russia. We plan to further expand our Dubai production to 18,000 metric tons in total. This additional expansion will be mostly financed by long-term offshore bank loans and the Dubai facilities cash flow from operations. Our operations in Dubai will focus our small batch, high-margin specialty plastic for use in functional components in automobile, high-end electronics, circuit boards, shape and high-speed rail applications, among others. Dubai provides important opportunity for our growth due to a physical proximity to Europe and the Middle East, Asia and Russia, key markets that we hope to penetrate. Dubai also offers international business environment, very access to low costs and high quality raw materials, convenient to logistics and tax exemptions. We will begin shipping high-end composite material production to Dubai in the coming months and expect to scale up production through the remainder of 2015. We may see some incremental increase in domestic sales this year due to the additional freed-up capacity in the Harbin plant. As far our Sichuan project construction is continuing as planned, all major construction is on track to be completed by the end of 2015 and we expect the facility to be operational in early 2016. This plant will be comparable in size to Harbin facility and we’ll primarily serve all the OEM and past customers in Southwest, East, South and Central China, which offer a meaningful growth opportunity. Additionally, Southwest China is becoming a major car manufacturing hub and is home to several major universities, which we will offer a recruiting base for new talent in our R&D programs. We are in the process of scaling up our sales and marketing presence in the region now in preparation for the new plant coming online early next year. We expect automotive applications to continue to be our core business, which is why we are investing heavily in Southwest China. However, our R&D programs have also launch in the new applications in airplane, ship, high-speed rail, electronics, biodegradable, plastics, 3D printing materials, food, packaging and medical devices, as planned. We are very optimistic about the commercialization prospects in these areas. As we look at these growth opportunities, we remained focus on leveraging our [indiscernible] advanced R&D capabilities and operational agility to diversify our business and reduce our exposure to a single industry or region, while we position the company for continued and sustainable growth. Based on the company’s consideration for slowing demand throughout the Chinese automotive supply chain and uncertainty of the impact of volatile crude oil prices and polymer composite materials in Chinese [setting] [ph], I would like to reiterate our 2015 full year guidance. For the full year, we expect sales to range between $960 million and $1.06 billion and net income to range between $100 million to $120 million. 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 thank you everyone for joining the call today. Before I review the numbers, let me remind you that all figures I discuss are for the reporting period, the first quarter of 2015 unless I state otherwise. Additionally, any year-over-year comparison is to the first quarter of 2014 and any sequential comparison is to the first quarter of 2014. So, let’s review our first quarter results. Revenue of $221.9 million was down slightly from the first quarter of 2014 and 27.7%, sequentially. You should know that the first quarter is traditionally our slowest quarter, as our operation time shutdown for several days over the Chinese New Year holiday, so sequential decline is consistent with our historical results. The slight year-over-year decline was a 1% decrease in average selling price of our products, partially offset by an approximately 1.6% increase in sales volume. As we discussed on last quarter’s call, we have seen slower growth in domestic auto production in recent months. To meet our customer changing need and help drive sales, we reformulated several of our high-end products, namely PA6 and PA66 to provide cost efficient alternatives to auto parts customers. Turning to margins. Gross margin was up 100 basis points to 21.9% from 20.9% in the first quarter of 2014 and 18.9% in fourth quarter of 2014. Gross profits increased 4.3% year-over-year to $48.6 million. The increase in gross margin was primarily due to higher end product sales, accounting for 78.4% of our total revenues for the first quarter ended March 31, 2015 compared to 73.7% in the same period over the prior year and lower raw material costs as we benefited from raw materials procured at lower prices due to the decline in crude oil price at the end of 2014. General and administrative expenses of $5 million were invested in building our corporate infrastructure to support growth. We continue to maintain a reasonable level of expenses in this category at approximately 2.3% of sales. R&D spending was $5.8 million or 2.6% of sales, down from 3.9% in Q1 2013. As we have discussed previously, we are recalibrating our R&D programs in response to changing market dynamics. During the first quarter, we scaled down R&D by ending several projects early and we are now in a process of expanding our R&D programs to multiple applications in more diversified fields, including biodegradable plastics and 3D printing materials. There are 126 active research projects at the end of this quarter compared to 96 in the first quarter of 2014. Operating income was $37.6 million or 16.9% of sales. Operating income was up 10.3% over the prior year period. This increase was primarily due to higher gross profits and lower research and development expenses, partially offset by higher selling expenses and G&A expenses. Net interest expense was up meaningfully year-over-year. Net interest expense was $8.2 million, up from $5.6 million a year ago, primarily due to the notes we issued in February of 2014. Additionally, we had interest expense resulting from new bank loans used to meet the needs of our capacity expansion in the Southwest China and Dubai. Our leverage is still extremely manageable with very high coverage ratios. Income tax expense was $4.2 million equivalent to an effective income tax rate of 14.3%. This was well below our effective income tax rate of 24.7% in the first quarter last year. The decrease was primarily due to Sichuan Xinda Group's preferential income tax rate and exemption of income tax for the income earned by the Dubai subsidiary, which generated a greater proportion of the company's net income in the first quarter of 2015 compared to the first quarter of 2014. All this resulted in net income of $25.4 million or basic and diluted earnings per share of $0.39, compared to basic and diluted earnings per share $0.34 in the first quarter of 2014. Moving to more cash flow oriented metrics. During the quarter, our operating cash inflow was $37.5 million, investing cash outflow $122.1 million, and financing cash flow of $69.9 million. EBITDA was $46.3 million compared to $43.5 million in the same period of the prior year. Now let’s turn to the balance sheet. Our balance sheet remained solid. As of March 31, 2015, our working capital remained in good condition. During the first quarter, day sales outstanding was 81 days compared to 77 days during fiscal year of 2014. We have borrowed to fund our growth with the proceeds from loans going into earmarked capital spending, yet we are managing our debt level appropriately. During the first quarter, we increased our average short-term and long-term loan by $92.5 million, primarily due to loans guaranteed by investment company affiliated with the local Government institution and overseas offshore bank loans borrowed by the company's Dubai subsidiary. Debt as percentage of assets increased slightly in the first quarter but we continue to maintain an acceptable assets to liability ratio and debt service burden continues to be manageable. Now for Q&A, I’d like to note that for any question directed to Mr. Han, Mr. Qingwei Ma and Junjie Ma, 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 benefits of our listeners. With that, we now open the call to your questions. Operator?

[Operator:]

[Operator Instructions] Your first question comes from the line of Nicholas Chen from Nomura. Your line is open. Please go ahead.

[Nicholas Chen:]

Hi. Thanks, gentlemen. Thanks for the presentation. I have two major questions. One is regarding the revised guidance of the CapEx. Since Jie Han just mentioned like company is looking to expand to buy project to 18,000 tons in the next stage. I just want to get the updated number of how much pending CapEx is for that and how many it takes for you to complete the project? Number three is like, can you also recap the pending CapEx for Sichuan project and the expansion of Harbin projects, if any. And then also, can you just recap a little bit like why the -- advance payment of the equipment and machineries has been increasing from $180 million to over $200 million? And that represents how much percentage of total estimated cost of the PP use to be delivered? And why is that kind of -- why you’re required to pay such big amount of advanced payment for the machinery? And second part of the question is regarding your liquidity versus debt structure? It seems like company has sufficient liquidity by end of last year. It seems like in first quarter you have been drawn down additional lines from the banks but also increasing the amount of term deposit. May I ask like how much interest income you’ve been earning from this term deposit and just want to understand why you’re kind of building up to post cash and the debt simultaneously?

[Kenan Gong:]

Hi. This is Kenan. Me is General Manager of our XD Dubai subsidiary. I think I can take the first part of the questions regarding the CapEx from our Dubai second phase constructions. And actually, I think now is the time on our first phase of the Dubai constructions has been fully completed. And that we realized the local manufacturing in auto and with orders from oversea customers has been fully booked our capacity. And so this is reason why we’ll not expand the second phase of the construction because the limitation -- the CapEx is very limited just for the first phase of the construction of the Dubai subsidiary. And the total capacity for the second phase of Dubai construction to Dubai campus is around US$280 million that’s mainly for the machinery requirements. We’re going to put up another 75 production line in our Dubai second phase campus. And Taylor, I think you can translate the second part of the questions regarding Sichuan and constructions to Mr. Han.

[Taylor Zhang:]

[Foreign Language] So, Nicholas, I just translate your question, so for the last part, the interest we earned from…

[Nicholas Chen:]

Yeah.

[Taylor Zhang:]

… is approximately 3.4% annually.

[Nicholas Chen:]

3.4%. Okay. Got it.

[Operator:]

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

[Matthew Larson:]

Hi. Good morning. With the new capacity coming online, not only Dubai but of the other China factory, I guess reestablish or capacity. Can you give us any guidance for 2016?

[Taylor Zhang:]

Hi, Matthew. It is Taylor. So, we expect the new capacity in China from our Sichuan subsidiary to be operational in early 2016. So to give you some updates as we also mentioned in the earnings release, we expect all the major infrastructure build up will be completed by the end of this year and in the meantime, we are also expecting equipments production line to be delivered and installed by the end of this year. So, we are planning to start testing machinery in early 2016 and then start producing after that. So basically, you can look at it from the volume, the capacity to be added from Sichuan. So currently, we have 380,000 metric tons from our Harbin production base and at Sichuan, we will be adding additional 300,000 metric tons, which is slightly over 80%.

[Matthew Larson:]

Okay. So, we can pro rate your current profitability, I guess based on that?

[Taylor Zhang:]

That’s our belief. Because one-time in Sichuan, there is new opportunities from some other OEM we have been working on. And in addition, outside of automotive application, we also are in the process of getting products back for application such as high speed rail and airplanes. So those will be positive for the margin and profitability even though, the contribution we will start with small percentage. Over time, we do believe that we will grow.

[Matthew Larson:]

So, with the massive rally in the local markets and the PRC and in Hong Kong for that matter and with your dramatic increase in profitability and revenues based on the increased capacity you are looking probably, all things being equal of your company trading at a pre-multiple less than two for 2016. I don’t know what comparable companies are trading at in Shanghai but it’s got to be several times of that. Does that concern you or what sort of measures are you considering to try and close that gap?

[Taylor Zhang:]

I think we definitely are looking at monitoring the multiples, especially of our peers or competitors trading at different exchange venues. So obviously, they are trading at much higher and especially in this huge rally in China’s stock market. So, we think there are several things we have been working on. One is to be more proactive in terms of meeting with our institutional investor both in the U.S. and also in China. And we do believe over time and as far as we tell our story to the audience, the valuation will improve. So, I don’t think there is any showcase or weight around it, as long as we keep working at, I think eventually, the valuation or the gap will be narrowed.

[Matthew Larson:]

Great. Okay. Thanks for the answer. Appreciate it.

[Taylor Zhang:]

Operator, can we go back to Nicholas because we haven’t finished the question with him yet? [Foreign Language]

[Taylor Zhang:]

Can we go back to the line of Nicholas Chen from Nomura, please?

[Operator:]

Noted. Nicholas Chen, your line is open. Please go ahead.

[Nicholas Chen:]

Okay. Thanks. It’s a bit kind of weird I got cutoff. Yeah. I heard the first part of the answers, just follow-up like on CapEx on the Sichuan project, ending CapEx?

[Taylor Zhang:]

So the CapEx of Sichuan in total this year is pretty much in line with our previous guidance, which is around $150 million. Let’s get answer for the other question regarding prepayment from Mr. [Junjie] [ph].

[Junjie Ma:]

[Foreign Language]

[Taylor Zhang:]

So Nicholas as you heard, first from our CTO, Mr. Junjie Ma. So because of the nature of our production line with order, they are not standard increments, they are highly customized to our spec. So there is a long lead time to make those products. And secondly due to the scale of the increments order from us, it’s pretty substantial to in the short time delivery we have to start early. And typically, there are some milestone payments as a normal practice, which is deposit at the beginning and then we are going to exam their manufacturing sites to see if they have reached certain milestone of making the production line. And even after the increments delivered to our facility, we still hope 20 deposits. We are 50 funds from the supplier. So basically, our CEO also added which is regarding the risk. We don’t see the risk because we have monitored the progress very, very thoroughly and timely. And so in the past, we have been dealing with reliable partners and we don’t think there is a risk here.

[Nicholas Chen:]

Okay. Understood. Thanks. That’s very good. And just to recap a little bit. I mean, regarding my very first question, regarding the CapEx budget for the second phase of the Dubai project, and is it $280 million I just heard, or is this another number?

[Taylor Zhang:]

$280 million.

[Nicholas Chen:]

The U.S. dollar, right?

[Taylor Zhang:]

Yes.

[Nicholas Chen:]

Okay. Got it. So that $280 million plus like $150 million for Sichuan totaling somewhere around $530 million is for the pending CapEx 2015?

[Taylor Zhang:]

Yes, Nicholas.

[Nicholas Chen:]

Okay. Good. And last part is like regarding the logic of increasing liquidity together with debt, I mean just I guess to me it’s like simple calculation is like unless that you are telling me like the incremental debt cost of funding of the debt is like very minimal or kind of very close to the current deposit we’ve been charging, otherwise it sounds like kind of a temporary and negative carry to me. So I just want to understand the rational behind that?

[Taylor Zhang:]

Sure. So Nicholas the additional borrowing in Q1 basically are two parts, one is from the investment company affiliate was the Sichuan local government. So this is basically a temporary arrangement and eventually based on certain milestone we agreed with the government basically depends on our construction progress. This will be once we reached certain milestone the loan will be paid by the local government. So this is a temporary arrangement as you can see. So it’s just a -- will be a subsidies. So this basically has no cost is the first part. And second part is the long-term, one year loan by our Dubai facility, our Dubai company. So the cost from offshore bank is very low. I believe it’s a LIBOR plus less than 2%.

[Nicholas Chen:]

Okay. Understood. So you are seeing actually, it’s kind of a funding cost versus actual your earning small kind of a positive carry over there right. If you -- I mean for you deploy the cash or put the cash in the current deposit looks like a marginal kind of positive carry, right?

[Taylor Zhang:]

Yes. Exactly. And that’s also our plan to finance, mostly to finance our Dubai expansion from offshore of lending.

[Nicholas Chen:]

Yes. Very last question here. Just try to help me to understand. Because if I look alike on the per tonnage capacity basis, if I use like factories, I mean the first and second phase for the Harbin factory, if I use look at kind of the gross book value divided by the capacity on the per tonnage basis and versus like total investment in Dubai divided by the capacity in Dubai. On the per tonnage basis it seems like Dubai project looks bit more expensive than the previous ones. And is that because of like the product is different, or is it just like equipment is really sourced from international suppliers, any special reason for that?

[Kenan Gong:]

Hi, Nicholas. I am Kenan. I am the General Manager, Dubai. I think you are right, it’s basically down to the two reasons you just mentioned. First of all, the product is very different between the products from Dubai and from the domestic manufacturing base [indiscernible]. Dubai product is focused on very high end, the long carbon chain the polyamide and so this, kind of, we take that as a special engineering plastics. For manufacturing processing of the special engineering plastics, we need a very specialized equipments as well and the increments is very different machineries, very different that we use in Heilongjiang Xinda Enterprise in terms of the materials, steels, and also in electronic control panels and even weighting systems are very different. So we need the more -- we need materials, special materials, special steel alloys, which can sustain the much higher processing temperature, like a 350 degree C which is a way higher than we use for the processing than to general purpose use engineering plastics which has been manufacturing in Heilongjiang Xinda Enterprise. So that should be one, the product is very specialized from the Dubai Enterprise. Secondly the machinery is very specialized, very special made also much more advanced compared with [indiscernible] Heilongjiang.

[Nicholas Chen:]

Okay. And how many picks -- based on your origin, how many takes for you to basically recover all the initial investment if other products sale goes mostly the payback year?

[Kenan Gong:]

Yes. I think in terms of the number of the years as we are looking at the 3 to 3.5 years to get all the investments back in terms of marketing we are generating.

[Nicholas Chen:]

Okay. Understood. Thanks. That’s all. Thank you.

[Operator:]

Your next question comes from the line of Glenn Krevlin from GHC Capital. Please go ahead.

[Glenn Krevlin:]

Hi, good morning, everybody. I had a couple questions. First, in terms of the recent developments in the marketplace that you’re talking about, the auto industry and also your success with the Dubai facility and its products, does that change in anyway the way you’re thinking about your new major capacity, either in terms of the type of products that you might produce there or how might phase it in over time? So I am really getting to sort of the strategy of that plant given where we are in the marketplace today.

[Taylor Zhang:]

Hi, Glenn. So let me answer first and I think Kenan can add anything additional he wants. So basically the new product has been supplied from Dubai subsidiary since last year, were developed and formulated from our China based for many years and this obviously including not only automotive but other applications as well. So we do see there are going to be opportunities in functional components within auto, which is mostly for parts used in the engine area. That’s number one. And secondly, we have also successfully developed the formulation for high end electronics and that also presents additional opportunity aside of automobile. And besides that there is also opportunities for high speed rail and airplanes. So I think the Dubai, if you’ve taken together with our overall operation is -- basically Dubai is leading the innovation in product developments on the top. And so overall, our product mix is still pointing to higher end categories. And let’s see if Kenan has anything to add.

[Kenan Gong:]

Yes. I think Taylor you’re right. And the main orientation of our products -- our production, all the product application haven’t been sent yet, which they are focusing mainly -- primarily focusing on the auto use. But as I said, to buy the capacity, it’s limited much smaller than they are beginning to try in the Heilongjiang Province, which is the specialized focusing on applications and other than motto, in motto with very high special applications in the functional component parts, except the autos, the materials also being used in very high end electronics like circuit board as well. But our production, our R&D focus is totally the market driven and with also focusing -- with still primarily focusing on the auto. By the way, our R&D production, the production -- our R&D focus also shifted to like to validate materials and also the packaging materials and 3D printing materials and those kind of the future product orientations. We think could be potentially the benefit for the company.

[Glenn Krevlin:]

Okay. And then secondly, can you give me some sense of what D&A is likely to be depreciation, amortization for this year? And when the Southwest facility is up and running, what percentage or capacity are you planning on putting into production in the first half of next year?

[Taylor Zhang:]

[Foreign Language] Hey, Glenn, let me answer your question. So the D&A run rates right now based on our production mostly in China and the new production from Dubai is approximately slightly over $5 million product. And so you can basically rate it for 2016. And the production for 2016 we expect initially will be one-third of the total 300,000, which is 100,000 metric tons.

[Glenn Krevlin:]

And Taylor, how much of that 100,000 do you currently have indications of interest for and how much of that is auto versus non-auto?

[Taylor Zhang:]

So the interest, 2016 the orders will be signed by the end of this year, but we have already penetrating Southwest markets since 2013. So for example, in the latest quarter Southwest market contributed to almost 4% of total sales, given the longer distance we are supplying right now. And a more dynamic changes we are supplying to as many customers as possible but we cannot give them 100% what they need. But basically we want to maintain the new relationships once we have the production up and running and which is also their expectation. We can smoothly to scale up the supply into Southwest and also as neighboring region. So the indication I think, we don’t know the exact indication until end of this year, but we feel very confident based on our market and customer developments.

[Glenn Krevlin:]

Okay. And then lastly, as you’re looking for sales history roughly flat, can you speak to your inventory levels and whether you expect them to come down and provide cash throughout the course of the year because they are up a fair amount year-over-year?

[Taylor Zhang:]

Okay. So the inventory, I think right now we are the level bit end of Q1 can be viewed as a approximation for the whole year, but let me double check with our COO. [Foreign Language]

[Qingwei Ma:]

[Foreign Language]

[Taylor Zhang:]

So Glenn, I probably can get back to the confirmation of the inventory either.

[Glenn Krevlin:]

Okay. That’s all I have at the moment. Thank you.

[Taylor Zhang:]

All right. Thank you.

[Operator:]

Your next question comes from the line of Robert Linka from Vertex Group. Please go ahead.

[Robert Linka:]

Hi all. I have three questions. One is could you please update us on the status of the lawsuits? Two, auto sales in China are growing, but your sales declined year-over-year during the quarter, especially considering 17% of those sales went to Korea? Could you explain how come sales are lower? And thirdly, we’ve heard about these new products for air, rail, ships, electronics, for over year, yet you’ve made no announcement or discussion about any of these industry sales? Could you discuss what’s holding this back?

[Taylor Zhang:]

Sure, Bob. So first question, this is Taylor. The lawsuits we have updated as we also mentioned in the 10-Q filing is, we are -- we maintained our position which the lawsuits has no merits. And secondly, we have responded the revised complain from the plaintiff and so we are -- we remained very optimistic about the progress and actually we cannot give any prediction of when this will be resolve. So your second question regarding our sales volume. So, basically, the sales volume is essentially very similar to last year level, down by 0.6%. So the major factor is we have the same -- pretty much the same capacity -- production capacity as last year. And so, even though down a little bit but we don’t think that that is material. Actually the volume is up by 0.6%, this is a question. So the average selling price down like 1%, mostly because of the impact from energy and crude oil price. But we are seeing that stabilized by the end of Q1 and also recovered in Q2. So volume wise is basically up slightly and we do see…

[Robert Linka:]

Well, Taylor, if I might, I just -- I’m looking at it more as the China auto industry, even though it had slowdown in terms of its growth rate, it still growing at 5% to 10% a year, yet you guys were flat? I was just wondering that you servicing different markets that were down or how would you kind of reconcile that?

[Taylor Zhang:]

So basically we have capacity constraint actually discussed before. So until additional capacity coming up from Dubai or Sichuan, we -- we are -- we can just workout with what we have. So I think that -- I hope that explained the question.

[Robert Linka:]

Okay. And the new products?

[Taylor Zhang:]

Okay. So the new application, even though we are very excited about the progress and we have achieved. But so far they are still immaterial and volume-wise they are still very small. And for example, in airplane we have -- we are still working on getting the certification. So once we have that, I think we can communicate with the public on that. So others in, for example, in ships as the rail and the volume is still -- is yet to be grown.

[Robert Linka:]

Okay. Thank you.

[Taylor Zhang:]

All right. Thank you, Bob.

[Operator:]

Your next question comes from the line of Private Investor, [Peter Siris] [ph]. Please go ahead.

[Peter Siris:]

Hello. Hello, everybody. I just want to make sure I understand some of the numbers. So I just want to take piece by piece. The total investment in Dubai is now how much?

[Taylor Zhang:]

The total investment in Dubai is RMB500, I mean, for the first phase of the Dubai construction which is completed is RMB500 million is equally to US$80 million.

[Peter Siris:]

Okay. And what -- just so I have this in my model, if I am looking out for 2016 to 2017, what kind of sales and profits can I expect from Dubai?

[Taylor Zhang:]

Yeah. According to our forecast from Dubai campaigners and we are looking for the number in terms of the nice margin is about RMB500 million is roughly US$80 million as well.

[Peter Siris:]

Is -- that would be revenue?

[Taylor Zhang:]

Net income, net income

[Peter Siris:]

Net income, okay. So, okay, net income of $80 million in when over the -- just what time is that that you are talking about?

[Taylor Zhang:]

The time we are talking about is should be in 2016.

[Peter Siris:]

Okay.

[Taylor Zhang:]

Yeah.

[Peter Siris:]

Okay. So and then in Sichuan, taking Sichuan and Harbin together, I understand the capacity Sichuan is coming on a like third of its capacity next year. To what degree do you think -- in 2017 do you think there is an issue what level of capacity do you think you will be operating in the two places together Sichuan and Harbin in 2017?

[Taylor Zhang:]

All right, so Peter, in 2017, we expect the total capacity will be close to 500,000 metric tons and we do believe by 2017, we can get utilization close to 80% or 85% of the optimal level.

[Peter Siris:]

Okay. So if I take -- I just want to make sure I understand. If I take kind of earnings you are expecting from Dubai close to assuming 500 in 80% operating capacity combined in 2017 that seems to -- but seems to say to me that I’ve got, I don’t know somewhere in terms of income like $300 million in income, is that -- am I missing something?

[Taylor Zhang:]

I think in addition to $80 million from Dubai as Kenan mentioned for China all the production taking as a whole, we can probably expect somewhere between 50% to 65% on top of our 2014, 2015 level. So we have…

[Peter Siris:]

Okay. So 50% to 65% in China or in China plus Dubai.

[Taylor Zhang:]

That's in China, that's in China.

[Peter Siris:]

Okay. So the -- why only, why only 50% if you are -- you’ve had heavy investment this year you’ve had interest expense, why only 50% if you are getting bigger than that increase in revenue? Are you assuming margins are going to go down assuming the -- that's what I am asking?

[Taylor Zhang:]

Peter, so our assumption there is basically a timing so if the capacity ramp up goes smoothly we can expect, we can expect the upper range, upper level to the range so after all it is a pretty big production...

[Peter Siris:]

No, no I understand that. So but basically if we’ve got a $100 million to $120 million now and you are saying 50% to 65% increase by 2017 assuming sort of normal ramp up plus $80 million in Dubai -- at least so I have those numbers correct?

[Taylor Zhang:]

Yeah, yeah.

[Peter Siris:]

Okay, okay. And I actually going back to the last question about the China auto market and your auto sales, I’m just curious about something which is I see the numbers --- the numbers from the Chinese auto market look not great but okay. But then I see the auto parts makers not necessarily you but people making parts for cars and things and their number have been terrible. Is -- have -- from your view point, have manufacturers been cutting back on production because bigger than sales decreases?

[Taylor Zhang:]

We are seeing production is holding up relatively well. Basically, there is indeed pricing pressure as we mentioned. So we believe that's why the diversification into non-auto and also outside of China is very important.

[Peter Siris:]

Great. Thank you very much for your answers.

[Taylor Zhang:]

Sure. Thank you Peter.

[Operator:]

Your next question comes from the line of [Frank Hu from Homerun Investments] [ph]. Please go ahead.

[Frank Hu:]

Hi. My name is [Frank Hu] [ph] and I am from [Homerun Investments] [ph]. My question is regarding the tax benefit. How sustainable is tax benefit? And why there is such a big tax benefit in Dubai project is pretty new and Sichuan is not in operation? And what’s the forecast with the tax rates for 2015? And now going to translate my questions [Foreign Language]

[Taylor Zhang:]

Hello, Frank this is Taylor. So, the tax situation is basically….

[Jie Han:]

[Foreign Language]

[Taylor Zhang:]

[Foreign Language]

[Jie Han:]

[Foreign Language]

[Taylor Zhang:]

So, Frank, basically let’s look at the split of effective tax rate of our subs. So in Harbin obviously, we had enterprise which is 15%. And in Sichuan, our Sichuan sub has tax rates of basically 9%. So, as you know, the U.S. policy of Ford’s company was 15% and also we will be -- we are entitled to get 40% back from the local holdings, which basically bring our effective tax rates in Sichuan to 9%. And in Dubai, there is no -- any taxation in the jurisdiction. So your second part question is even though, we do no have the Sichuan plant is still under construction but we do not wait until the plan is up and running. So as we disclosed in the past, we have maintained southwest and other part of new markets since 2013. So basically, we have sales force and also R&D developments team in our Sichuan sub. So they develop customers and also basically, our Sichuan sub -- sub contract, our Harbin based produce products for their customer. So this will enable our Sichuan sub to the transition of the preferential tax rates before the plant is completed. Similarly that’s also what happened in our Dubai subsidiaries. So this tools are basically temporary arrangements, once Sichuan is producing and we will supply manufacture and supply by self and the addition of the capacity to be freed up from Harbin will go to service, basically in Northeast, East China, and North China as it did before. Does that answer your question, Frank?

[Frank Hu:]

So what’s the forecast for the tax rate for 2016? Do you have a forecast for that, for the short or usual all of in pass-through years?

[Taylor Zhang:]

Sure. This year, we think -- right now, we can expect around between 14% to 17% range.

[Frank Hu:]

Okay.

[Taylor Zhang:]

That’s the all year effective tax rates.

[Frank Hu:]

Okay. Thank you.

[Taylor Zhang:]

Sure. Thank you, Frank.

[Operator:]

[Operator Instructions] Your next question comes from the line of [Frank Thomas] [ph] from BAML. Please go ahead.

[Frank Thomas:]

Yeah. Hi. I have two questions. The first question is could you safely use some of your cash to pay down your debt and the second question is what about using some of that cash for a share buyback? Thank you.

[Taylor Zhang:]

Hi, Frank. Let me answer your first question. So the -- other than the long-term notes we issued, there is a penalty for early repayment for short-term loans, I think we do have the flexibility depending on our CapEx and cash flow situation. And let me translate your second question to my team? [Foreign Language] So, Frank, for the buyback, we have evaluated the situation because of the limited flow in the company’s shares outstanding. Any buyback, I think we will further reduce the liquidity. And as you know, liquidity is important for institutional investor when they are looking at investment opportunities. [Foreign Language]

[Operator:]

There are no further questions at this time. Ms. Sandy Qin, please continue.

[Sandy Qin:]

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

[Operator:]

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