China XD Plastics Company Limited
Q2 2015 Earnings Call Transcript

Published: 10 Aug 2015

[Operator:]

Welcome to the China XD Plastics Second Quarter 2015 Financial Results Conference Call. At this time all participant are 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 a 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, all, for joining us for the China XD Plastics second 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 Jintal, General Manager of the Heilongjiang subsidiary. Earlier today, China XD Plastics issued a press release announcing the second quarter 2015 results. Before management presentation, I would like to refer to the Safe harbor statements in connection with today's conference call and remind our listeners that management's prepared remarks during the 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, August 6, 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 US 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 in Chinese and I will translate his presentation into English. Mr. Han, please go ahead.

[Jie Han:]

[Foreign Language] Thank you, Sandy, and thank you all for joining us today. [Foreign Language] We reported consistent with a very strong cash flow in the first half of 2015, amidst the slowing and challenging conditions in China's domestic automotive markets. Vehicle sales in China grew by 1.4% in the first half of 2015, the slowest rate in approximately 24 years, in which the state-backed auto association revised its 2015 full year forecast to 3% growth due to the economic slowdown in the world's largest car market. Further, both automakers and parts manufacturers in China experienced a pricing pressure from 2014 to the present. The unusual volatility of the Chinese stock market since June 2015 also seemed to have certain negative impacts on consumer sentiment. While our topline was truly even with the year ago quarter, our focus on high end manufacturing led to strong sales outside of our traditional sales base in China, which coupled with our disciplined working capital management, resulted in a 14% increase in EBITDA for this quarter. [Foreign Language] We are pleased to announce that our new facility in Dubai has been operational since late May. The facility contains state-of-the-art equipment that produces an array of specialized high margin products and serves as a gateway to geographic opportunities in the Middle East and Europe. Phase 1 of Dubai is complete with plant capacity capable of producing 2,500 metric tonnes of high end products and we expect production to ramp up into the third quarter to reach optimal utilization. We are confident that Phase II of our Dubai facility, where we will add plant capable of producing an additional 15,200 metric tonnes of our high end products. We will be mostly completed by the end of 2015 for a total plant capacity of 18,700 metric tonnes. [Foreign Language] Our expansion plans in South West China are proceeding as scheduled and we are seeing new and increasing demand for our products from this region. The new facility will increase our total production capacity by an estimated 73%. One third of the 300,000 metric tonnes of this new production capacity is expected to come online in 2016. We believe that the timing for the new facility in Sichuan is especially opportune since South Western China is rapidly becoming a major auto manufacturing hub, and a center for high speed rail shipping and aviation. While we expect automotive applications to continue to be our core business, the new facility will include precision equipment that will facilitate products deployment into additional growth verticals. [Foreign Language] We continue to work closely with our upstream customers in the earliest phases of the development process and believe that it is our technological edge as well as our relentless pursuit of new and improved products for our customers that afford us a strong competitive advantage. We are confident that our ongoing expansion and culture of innovation will enable us to leverage our market position and weather different industry conditions in the periods ahead. [Foreign Language] While China continues to be a growing and prosperous economy, uncertainty as to China's macroeconomic environment both domestically and internationally, may inhibit consumer buying especially or such large-ticket items as automobiles. While the market environment for the automobile sector could be challenging for the rest of 2015, we believe that we have adapted to changing market dynamics by offering more cost-effective formulations of our products and by expanding our product portfolio to applications in other industries. [Foreign Language] Due to our leading market position, culture of innovation and visibility into current and new business, we are reiterating our full year guidance for 2015. The Company expects full-year 2015 sales to be in the $960 million to $1.06 billion range, and expects net income to be in the $100 million to $120 million range. This financial forecast reflects the Company's business outlook for the remainder of fiscal 2015. It makes certain assumptions about the impact of crude oil prices on polymer composite materials for 2015 and makes assumptions about exchange rates and interest expense associated with both its long and short-term debt. This financial guidance is subject to revision based on changing market conditions at any time. [Foreign Language] 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, Sandy, and thanks everyone for joining the call today. Before I review the numbers, let me remind you that all figures I discuss is for this reporting period, the second quarter 2015 unless I state otherwise. Additionally, any year-over-year comparison is to the second quarter of 2014. And any sequential comparison is to the first quarter of 2015. So let us review our second quarter results. Revenues of $265.4 million, was up 0.5% from the second quarter of 2014 and up 19.6% sequentially. The year-over-year increase was due to approximately 4% increase in sales volume, partially offset by 3.4% decrease in average selling price of our products. Turning to margins, gross margin was slightly down to 19.4% from 19.3% in the second quarter of 2014 and 20.9% in the first quarter of 2015. Gross profits decreased 1.5% year-over-year to $51.5 million. The decrease in gross margin was primarily due to the slowdown of the auto industry in China resulting in the pricing pressure to the Company, an increase of depreciation expenses as production facility in Dubai were put in operation and non-recurring others for individual products from the Korean customer. G&A expenses of $6.6 libertarian were invested in related business expansion to support expansion and growth. We continue to maintain a reasonable level of expenses in this category at approximately 2.5% of sales. R&D spending was $6.7 million or 2.5% of sales, down from 5.1% in the second quarter of 2014. As we have discussed previously, we are recalibrating our R&D programs in response to changing market dynamics. It benefits our R&D efforts to multiple applications in more diversified and high value added fields including biodegradable plastics, 3D printing materials, there were 144 ongoing research projects in the end of the quarter compared to 126 for the last quarter. Operating income was $37.8 million or 14.2% of sales. Operating income was up 10.2% over the prior year period. The increase in operating income was primarily due to lower R&D expenses, partially offset by higher G&A expenses.Net interest expense was $8.5 million for the quarter ended June 30, 2015, compared to net interest expense of $8.2 million in the same period of 2014, primarily due to first, the decrease of interest income which was caused by the decrease of average deposit balance in the amount of $344.5 million for the three months ended June 30, 2015 compared to $442.4 million for the same period of 2014, combined with the decrease in the average interest rate of 2.8% for the three month period ended June 30, 2015 compared to 3.0% for the same period of last year. And second, the decrease of interest expense which was caused by the decrease in the average interest rate to 5.3% for the three months ended June 30, 2015compared to 5.7% for the three months ended June 30, 2014, and these were offset by the increase of short-term and long-term loans in the amount of $409.9 million for the three months ended June 30, 2015 compared to $374.4 million of the prior year. Income tax expense was $4.4 million in the second quarter of 2015, representing an effective income tax rate of 14.7%, compared to an effective income tax rate of 19.8% in the second quarter of 2014. The decrease was primarily due to the Sichuan Xinda Group's R&D expense bonus tax deduction. The decrease in effective income tax rates was partially offsetting by effect of -- the obvious result in net income was $25.5 million for basic and diluted earnings per share of $0.39 and compared to net income of $19.8 million for the same period in 2014 for a basic and diluted earnings per share of $0.30 in the second quarter of 2014. Moving to more cash flow oriented metrics, during the 6-months ended June 30, 2015, our operating cash inflow was $71.7 million the investing cash flow, investing cash outflow was $120.1 million, and financing cash flow was $55.5 million. EBITDA was $47.8 million compared to $41.8 million in the same period over the prior year. Now, let us turn to the balance sheets. Our balance sheets remain solid even as we fund business growth. As of June 30, 2015, our working capital remain in good condition during the six months ended June 30, 2015, DSO was 76 days down from 77 days during the fiscal year of 2014. We have borrowed to fund our growth with the proceeds from the loan going into more earmarked for capital spending. We are managing our debt level appropriately. As of June 30, 2015, we increased our aggregate short and long term loan by $73.9 million to meet the need in capital expenditures. The Company's short term and long-term bank loan increased by 27% in the second quarter of 2015 from fiscal year end 2014 as we further utilize our existing line of credits within the constraints of maintaining a manageable debt level. We define manageable debt level as the sum of aggregate short term and long-term loans and those payable over the total assets. In addition, we have recognized $28.9 million of rent from the Sichuan government as deferred impact. Now, for the Q&A, I would like to note that for any questions directed to Mr. Han, Mr. Qingwei Ma, Mr. Qingwei Ma, or my other colleagues in China, I will translate both the question and the answers. If you want to ask your question in Chinese, please also ask it in English for the benefit of our listeners. With that, we will now open the call to your questions.

[Operator:]

We will now begin the Q&A session [Operator Instructions] Your first question comes from the line of Matthew Larson from Morgan Stanley. Your line is open. Please go ahead.

[Matthew Larson:]

Everybody here in the U.S. is consistently concerned about the state of the economy in China, it sounds like you guys are doing reasonably well within that framework. But I think the real story for me, at least, and maybe other investors, is the guidance for y next year and the year beyond because of the new capacity coming on. Because you guys seem to be maxed out currently and can you give us any sort of guidance on what you expect you all to be able to do revenue and perhaps bottom line wise next year?

[Taylor Zhang:]

And so as we mentioned, there is certain uncertainty with the macro economy which also inevitably affect our industry. And so it is really hard to give you very specific concrete prediction, but I think that probably we can provide you more additional information, for example, next year, the way we look at our business is we expect weakness here -- one-third of our Sichuan plant will be up and running and so that is approximately 100,000 metric tonnes capacity we are contributing. So considering the ramp up at the beginning, so we can say approximately, we get utilization for the whole year of around 60%. So that is for Sichuan. And for Dubai, as we know, the second phase is ongoing and we also expect in very similar timeframe for the next year, the second phase from Dubai will also kick in and also make a contribution to revenue. And so that business, even though it is smaller in scale, but really concentrate with the best part, the crown jewel of our business. So next year, Dubai is going to have about 18,700 metric tonnes compared to go ahead.

[Matthew Larson:]

Yes, I was just going to say I don't have a spread sheet in front of me, how many metric tonnes of the product you would produce this year, so that I can put it into perspective for next year.

[Taylor Zhang:]

Yes, sure. So Sichuan and Harbin, I think, let's starting from here, because Sichuan and Harbin are very comparable. The Harbin business are very stable and reliable and also again, really stable cash flow. So the capacity is 390k metric tonnes. In respect, the sales volume on an annualized basis is going to be approximately 340k. So which give us close to $1 billion of sales and anywhere between $100 million to $120 million of net income. So you can basically make assumption Sichuan will be similar although they are not going to be the same but very similar, you can just get the sense of how Sichuan will contribute to the -- to our overall business next year.

[Matthew Larson:]

Okay, so I mean we are talking almost a doubling basically, like both top and bottom line, is that reasonably accurate?

[Taylor Zhang:]

Not next year and because next year, Sichuan, the total capacity, the plant capacity is 300,000 metric tonnes. So one-third of that which is 100,000 metric tonnes will be up and running and also, as I mentioned, 60% is our estimated utilization. So next year, Sichuan will add topline probably 60,000 metric tonnes using very similar ASP as Harbin. Does that make sense?

[Matthew Larson:]

Yes. And just a second question. With the decline in our oil prices, which must be a big input for you, in your product costs, is that a big benefit for you or does it -- is it just neutral because you passed on the cost savings to your customers?

[Taylor Zhang:]

In a normal oil pricing environment, with no -- huge volatility, we will not feel much impact because we have a cost pattern mechanism. However, there is a limit to that structure and volatility of our raw material, if they are beyond 5%, we are going to adjust it and pass that to the customers. So if the price of our material goes down, more than 5%, and our -- the price of our product will also be adjusted accordingly. So this was actually -- happened in Q2 and as we discussed before. So we think that the longer term of this volatility probably going to be evened out. And so we think right now, the raw material pricing is very attractive and you have seen our inventory has been increased and so not only because of the pricing reason but also because we have to serve more customers in longer distance.

[Matthew Larson:]

And finally, last question and I will let somebody else jump in here. There has been a lot said about the differing, I guess valuations and multiples that are -- I guess offered to companies that are similar to your company in Shanghai versus a US listing. And is there any sort of thought with you and your large shareholders about trying to get a higher valuation on your company because it is -- really at a shockingly low, earnings multiple and price to revenue and any metrics you want to use which is a function, I guess, of just being listed in the US, maybe that will change, hopefully, US investors will decide to give a higher valuation to your company, but any thoughts on your end on how to get that going?

[Taylor Zhang:]

Okay, Matthew, let me answer first and I will also check with some other teams to see if they have additional thoughts. So in my opinion, I think definitely, the extremely depressed valuation is not only a concern for us but also frustration. So in the past, we have done multiple efforts to change that status including associate us with reputable institutional investor, changing to big provider when no one is doing that. And also, just keep our heads down and work on the sentimental, growth business. In our opinion, the valuation cannot be depressed forever for a company like us which we obviously do not deserve. So we also monitor the situation for valuation level in other regions and so, there definitely. So I think that is pretty much my thoughts and there is no -- any plan for the Company but I will check with the other team.

[Matthew Larson:]

Okay, great. Thanks for your time and answers. Am I still on?

[Taylor Zhang:]

Yes, you are still on. I'm just translating the question in Chinese.

[Matthew Larson:]

Oh, I'm sorry, I'm done. Okay so I just didn't realize. Okay thank you.

[Taylor Zhang:]

Okay, so Matthew, with respect to the management, as of now, we don't have any plan.

[Matthew Larson:]

To do something internally to potentially affect the price, you are just going to wait for the market to make its assessment of where your Company's value should be?

[Taylor Zhang:]

Yes, and I think, we will keep executing our business plan and grow the business. I think for the past year, we are being more aggressive of communicating with, the investment public, for example, we attended two investment conference this year and also have conducted two non-deal roadshow with investors in the US and we will continue doing so.

[Operator:]

[Operator Instructions]. Glenn Krevlin from Glenhill your line is open. Please go ahead.

[Glenn Krevlin:]

Thank you,, good morning everybody. I was wondering if you could give -- I have a number of questions on the plan for capital spending for this year and your preliminary thoughts around next year for capital spending is my first question and I have a few others.

[Taylor Zhang:]

Hi, Glenn, this is Taylor. And so this year, for the remainder of the second half, basically, we will continue to invest approximately $95 million for Sichuan, and for Dubai, the second phase expansion, we earmarked approximately $150 million and so altogether, about $245 million this year. Next year, it is going to be the remaining CapEx for Sichuan is going to be approximately $150 million. And for Dubai -- go ahead.

[Glenn Krevlin:]

No, continue.

[Taylor Zhang:]

Okay, and for Dubai next year, we will be approximately $60 million. Let me just one correction. For Sichuan next year, we will be $47 million and Dubai is $60 million.

[Glenn Krevlin:]

And so total capital spending for this year, Taylor, is now going to be how much, the total for this year?

[Taylor Zhang:]

The total for this year will be approximately 330, and of that, we have actually some R&D equipments investment in Harbin, mostly as well which will be sometime in the second quarter of approximately $60 million.

[Glenn Krevlin:]

Okay, are you considering any form of longer term debt at this point?

[Taylor Zhang:]

Yes, we have not only considered - we have started doing so and so I think you have seen long-term bank loan shown on the balance sheets since last year and we will keep working with the financial institutions we have very good and long-term relationship to basically expand the duration of our bank loans.

[Glenn Krevlin:]

Okay, and just to clarify on capacity to a former question, Harbin has how much tonnes of capacity this year and how much is there in Dubai for the current year?

[Taylor Zhang:]

Okay, so for Harbin, the total capacity is basically the same as last year which is 390k. And for Dubai, this year, is only contained to phase one which is 25k -- 2,500, sorry.

[Glenn Krevlin:]

Okay. And the average price that you are realizing per ton at Dubai is what?

[Taylor Zhang:]

It is actually around 120 -- 12,000, around $12,000 per ton in Dubai.

[Glenn Krevlin:]

And how does that compare to your plan when you built the plant?

[Taylor Zhang:]

It is actually quite matched with the original plan and we plan to actually build up the Dubai campus because from the very beginning and we already pinpoint that the product from our Dubai campus is only focused on the very -- the specialty engineering plastics.

[Glenn Krevlin:]

I'm sorry I couldn't hear but relative to your plan for when you built it, it is in line, above or below?

[Taylor Zhang:]

Yes, it is actually in line.

[Glenn Krevlin:]

Okay, thank you. I couldn't hear. And okay, those are all my questions for now. Thank you.

[Operator:]

Peter Siris from Hua Mei, your line is open. Please go ahead.

[Peter Siris:]

I would like to follow up on this capital expenditure question and ask a little more long-term question which is after you spending a lot of money for Sichuan and for Dubai. And so the Sichuan will be complete, I guess, in both of those facilities should be complete in 2016. Is that correct?

[Taylor Zhang:]

Hi, Peter. This is Taylor. And so the campus, basically the infrastructure will be completed mostly by the end of this year and well outfit the facility with equipment early next year and start testing, running test runs as well.

[Peter Siris:]

Okay and so what I'm interested in is you have been building up a fair amount of debt; you are running negative cash flow as you open these two new projects. So after those two projects have finished, what is going to happen after that? Are you going to open more projects? Are you going to start to generate free cash flow, what are you going to do with that money? What are we looking at over the next four or five years.

[Taylor Zhang:]

Okay, let me translate the question and I will defer the answer to my colleagues. [Foreign Language]

[Jie Han:]

[Foreign Language]

[Taylor Zhang:]

Hi, Peter, the answer comes from Chairman Han. And first of all, he said he was glad to hear your voice. And so this question is basically boil down to our long-term planning and so obviously in the past, you have followed us for quite a while and you have known us as -- one project at a time and do our best to make sure smooth and successful execution. So tomorrow, we are actually going to be -- tomorrow, August 7, will mark 30 year anniversary of the founding of Xinda. And so as we discussed before, our company has a five year routine planning process and we are actually right now, in the process of finalizing our next five year plan but business taken to be very responsibly said here that we will continue to grow the business and obviously providing shareholder values.

[Peter Siris:]

Well, let me follow up on the question to shareholder value because once Dubai is open and once Sichuan is open, you will be generating a lot of free cash flow and you said that in response to an earlier question that you are not looking to list on other exchanges and Oil Search, what are you thinking about other than the market will wake up and understand it has been wrong. What are you thinking about as far as shareholder value is concerned?

[Taylor Zhang:]

Okay, let me translate your question here. [Foreign Language]

[Jie Han:]

[Foreign Language]

[Taylor Zhang:]

Hi, Peter, let me translate Mr. Han's answer. Honestly, he is very disappointed with the current valuation of the Company and once, after the next couple of years, once we reach a very mature and stable state, return to shareholder will definitely be the top priority to the Company, to the management.

[Peter Siris:]

So -- just to stay on that point, if you will assume that -- if you will assume that as you reach stability in all these three business are up and operating, and you are generating, more than twice your current level of sales and earnings. It looks to me like you will have very substantial free cash flow and the question I have is, you can use that free cash flow to build more plants or you can use some of that free cash flow to pay dividends or do other things. And what I want to know is will the Company commit in the future, to doing something like paying a substantial dividend.

[Taylor Zhang:]

Let me make sure I understand the question correctly. Do you mean that whether the Company would consider commitment now for future dividends or other form of returning to shareholders.

[Peter Siris:]

What I want to understand is this. In the five year plan going forward, the Company has assets, it can build many more factories, it can make acquisitions, it can pay dividends or things like that and I want to really understand to what degree the Company is willing to do something that returns capital to shareholders other than just keep growing.

[Taylor Zhang:]

I think, Mr. Han has made it clear, at least to me, that once we get to a level of maturity, return to shareholder will be the number one priority for the Company.

[Peter Siris:]

Okay. And that -- and when you say get to maturity, once these two more -- once Dubai and Sichuan are complete, that will at least is some level of maturity?

[Taylor Zhang:]

Yes.

[Peter Siris:]

And that was -- the current plan is not to go open two more Sichuans? The current plan is once Sichuan and Dubai are complete, pay down your -- some of your debt, generate free cash flow. Is that correct?

[Taylor Zhang:]

Yes, that is the plan.

[Operator:]

Jason Cooper from Stuyvesant Capital. Your line is open. Please go ahead.

[John Cooper:]

Thank you, this is John Cooper and it is Stuyvesant Capital. Congratulations, Taylor, on a good quarter and a challenging environment. I have a kind of a two part question. The first is on R&D. We saw a reduction in R&D and I'm wondering whether that reflected a reduction in engineers, scientists, or was it more of a reduction in the R&D tax credit that you get from the government. That is the first part of my question. The second part is if you could give us an idea of what the debt to capital structure would look like at the end of this year. And maybe if you can, look forward to exiting next year; how that might change, and also the debt to EBITDA at the end of this year and possibly by the end of next year, and how that relates to your current restrictions under your debt covenant.

[Taylor Zhang:]

Sure. So first of all, the R&D reduction has nothing to do with our R&D personnel. Basically, it is a redirection of our R&D focus to more nodal applications. And so I think of this is not a very representative of a longer term trend which we believe R&D expense will be approximately 3% of the total sales. And so the R&D bonus deduction is basically a credit we can use to reduce our tax basis. And so the R&D is still going to be R&D and the P&L. Secondly, the way we manage our debt level as we mentioned already during the speech is we target to maintain our debt level and approximately less than 40% of our assets. That is how we look at our leverage level and we also monitor all other debt covenants that we have in relation with the five year notes on a periodic basis. And so we are comfortable with our leverage and we will continue to manage our leverage in a very responsible manner.

[Operator:]

Nicholas Chen from Nomura, your line is open. Please go ahead.

[Nicholas Chen:]

Okay, very quickly, my first question is just try to confirm some numbers on the CapEx. It just seems like, for the full year, the CapEx is around $330 million in total, is it?

[Taylor Zhang:]

That is for the whole year of this year.

[Nicholas Chen:]

Right, and this is something like you can, additional CapEx on the existing Harbin plant which is around $60 million?

[Taylor Zhang:]

It's around $27 million, for fiscal 2015, $27 million.

[Nicholas Chen:]

$27 million, that is for the Harbin one, right? Which is on top of the $330 million or included in the $330 million?

[Taylor Zhang:]

Included, or blended.

[Nicholas Chen:]

Okay, got it, got it. And the post the completion of the Dubai phase 2 and the Sichuan? What will be the runrate and the momentum is for routine CapEx going forward for the -- all the existing facility?

[Taylor Zhang:]

You mean for both Sichuan and Dubai? Correct?

[Nicholas Chen:]

And Harbin on total, I mean in terms of completion of all the existing projects.

[Taylor Zhang:]

And so for Harbin, we will be a little higher because the equipments are brought in, we don't repair it and so maintenance CapEx is going to be around $10 million. However, for Sichuan and Dubai, both are going to be state of the art, very advanced equipment and so the maintenance CapEx for Sichuan is going to be lower, and approximately between, $6 million to $7 million. And Dubai, the CapEx actually, because of the equipment, as my colleague, Dr. Gong explained, are really focused on high end and specialized products. So the CapEx is a little -- if you look at the CapEx in relation to the capacity, it is higher than Sichuan and Harbin. But the maintenance CapEx is going to be approximately $5 million.

[Nicholas Chen:]

Okay. And you just said like, I don't want [indiscernible], the effective average ton price for Dubai, is it going to be $12,000 per ton?

[Taylor Zhang:]

Yes, $12,000.

[Nicholas Chen:]

That's right. And can you also give us a kind of ramp up schedule of the Dubai phase 1 and phase2, let's say, you sound like phase 1 is already completed and what would be the expected kind of volume, out of Dubai for the rest of this year? And what will be the ramp up schedule for phase 2?

[Taylor Zhang:]

So just want to make sure I understand the question. So basically you want to understand the ramp up schedule for both Sichuan and Dubai?

[Nicholas Chen:]

Just Dubai, the Sichuan, you just said --

[Nicholas Chen:]

Just Dubai? Okay.

[Nicholas Chen:]

Just Dubai, phase 1, phase 2?

[Taylor Zhang:]

So Phase 1 was already up and running from end of May. And in Q3, we're going to be able to reach the optimal utilization, which going to be around 85%. So Q4 are going to be also at that level, so this is basically for this year. Next year we're going to be having Phase 1 and Phase 2 both operational even though Phase 2 we'll make fuller contribution later in 2016. So all together in 2016 we're going to have 18.7K metric tonnes capacity.

[Nicholas Chen:]

So you are seen like okay. So basically you're starting from end of Q3 onwards?

[Nicholas Chen:]

Nicholas, can you speak up a little bit?

[Nicholas Chen:]

Okay. You are seeing like Phase 1, from end of Q3 onwards, that will be around run rate of 85% utilization rate, 2,500.

[Taylor Zhang:]

In Sichuan or Dubai?

[Nicholas Chen:]

Dubai -- Dubai. So 85% utilization rate is the run rate utilization rate for Dubai Phase 1. Is that correct?

[Taylor Zhang:]

In Q3 and Q4.

[Nicholas Chen:]

And going forward will be like 90%, 85% or --

[Taylor Zhang:]

Going forward for Phase 1, we'll be approximately 85 level, 2015 onwards. And for the remaining 16.2K, which is going to be third quarter utilization in 2016.

[Nicholas Chen:]

Can you give us some color of the price trends realizing from July? I just want to know because I think your competitors are seeking high and that they also have some new capacity --

[Taylor Zhang:]

Oh, Nicholas, I'm really sorry. We're having some difficulty to hear your question clearly, probably the line quality. Can you please repeat your question?

[Nicholas Chen:]

Sure. Hold on one second. Hello? Can you hear me now?

[Taylor Zhang:]

Much better please.

[Nicholas Chen:]

Okay, trying to fix the line. So my question is like, can you give us some kind of a price guidance or just an update of the most recent price you've been getting in July and August versus the average selling price in Q2? Are you seeing the realized prices have stabilized or is this a further kind of price competition?

[Taylor Zhang:]

I think in Q2 basically as we discussed previously, the overall ASP has been decreased by 3.4%. So obviously, it's very hard to make assumption and predict the price because there's a commodity assumption that we have to make. And I think a lot of people failed to do that. And secondly, industry also has some uncertainty. But basically we are hoping in September or October, these two months are the strongest seasons of the year. So even though the oil associations they're predicting this year will be revised, all the growth to 3%, but I still remain to see how September and October play out. But basically our guidance for this year is pretty much based on the ASP remains at pretty much at Q2 level. We are not predicting either or down for the rest of the year.

[Nicholas Chen:]

But what about the July price you've been seeing? Is July price is the kind of stabilized versus the second quarter or there are some concerns, weakness or strength?

[Taylor Zhang:]

Let me check over with some of my team here on the spreadsheet.

[Nicholas Chen:]

Okay, thank you. [Foreign Language]

[Qingwei Ma:]

[Foreign Language]

[Taylor Zhang:]

So the answer came from our COO, Mr. Ma. So in July we're also seeing some pricing weakness in July.

[Nicholas Chen:]

Thanks very much. Last question from my side and before passing line to other people, it's like -- can you give us a rough idea of how you're going to make up the kind of cash-out for the pending CapEx? Because based on your current EBITDA level, it seems like this year likely you can generate somewhere around like let's say $160 million, $170 million, but your CapEx budget is like 330 minus/plus. So it's too short for some capital. So are you looking to some bank lines, long-term, short-term to fund that deficit? And if so, you can you give us an update of what kind of standing by or committee or standing committee, credit facilities or bank loans you have as of today? And what are the roughly average funding cost of this debt?

[Taylor Zhang:]

Okay. So basically, as we have term deposit similar instruments to certified deposit in the U.S., so there's definitely a source for further CapEx. In addition I want to find out we also have a very stable cash flow generation from operation, so that's the second part of the source. For existing credit facility as we disclosed in 10-Q we have not untapped line of credits from various financial institution, manage approximately $200 million. And as we said earlier to the question from Glenn, we also work to increase the lens of our debt basically to be shaped more to longer-term debt. And next year we also expect a stable, reliable cash flow from generation to fund to the CapEx. The cost of funding line -- your last question is the cost of funding. So in second quarter, the average interest expense reached approximately 4.8%.

[Nicholas Chen:]

4.8%, okay.

[Operator:]

Alex Liu from [indiscernible]. Your line is open. Please go ahead.

[Alex Liu:]

I just want to confirm a couple of numbers. So the total CapEx for this year is $330 million or is it the second half of this year that will be $330 million?

[Taylor Zhang:]

That's for the whole year Alex.

[Alex Liu:]

So right now I see that you've spent about $200 million already, of a $126 million. So I'm guessing you have another $200 million, a little less than $200 million to go then for the remainder of the year.

[Taylor Zhang:]

Yes.

[Alex Liu:]

I'm wondering if you guys have any plans for -- I mean, you guys still have a lot of term deposits which is technically based on the high yield notes that you raised last year, that's a negative carry assuming that your time deposit is probably a bit less than what you're paying for the high-yield note. Is there any plans to use the time deposits to actually repurchase the notes that will actually make more sense in terms of cash management as a plan to reduce that as well? What are your thoughts on that?

[Taylor Zhang:]

You may use the term deposit to purchase the long-term notes.

[Alex Liu:]

Right, right, because the long-term notes hits, I mean, interest expense wise -- a little more than 11%, but I'm assuming your term deposit is probably less than 1%. And you have $200 million of term deposits that's outstanding you can use to fund -- it will make - it seems to make more cash, yes.

[Taylor Zhang:]

Right; I think from a financial management perspective, it does definitely make sense. So from our point of view, this year there's a CapEx concentrate hurts, but we have less than two quarters to go. The next year the CapEx is going to be dramatically lower. So I think, if we're going to consider to make a repurchase; I think probably we're going to have the capacity to do so because we are confident with our cash flow generation ability. But probably the timing can be up-to-debate.

[Alex Liu:]

Okay. So technically you guys should be having, assuming that the Sichuan project goes well. You guys should have free cash flow, positive free cash flow, or at least breakeven by the second half of 2016 then.

[Taylor Zhang:]

Yes, by the end of Q3, yes.

[Operator:]

It appears we have no more questions. I will now turn the call back over to Sandy Qin for closing comments.

[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 China' XD's New York office or our IR from [indiscernible]. The contact numbers for all of us are listed at the end of the press release.

[Operator:]

That concludes our conference for today. Thank you for participating. You may all now disconnect.