China XD Plastics Company Limited
Q3 2015 Earnings Call Transcript

Published: 9 Nov 2015

[Operator:]

Welcome to the China XD Plastics Third Quarter 2015 Financial Results Conference Call. At this time, all participants 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, operator. Thank you for joining us for the China XD Plastics third quarter 2015 financial results conference call. Joining me on the call today are Mr. Jie Han, Chairman and CEO, Mr. Taylor Zhang, Chief Financial Officer; Mr. Qingwei Ma, Chief Operating Officer; Mr. Junjie Ma, Chief Technology Officer, 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 its third quarter 2015 results. Before management’s 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 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, November 9, 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 name 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 experienced a challenging first nine months if 2015 and this slowing and changing conditions in China’s domestic automotive market. Vehicle sales in China grew by only 0.31% in the first nine months of 2015, the slowest rate in 24 years due to the economic slowdown in the world’s largest car market. Further, both automakers and parts manufacturers in China experienced pricing pressure beginning in 2014, which has continued to the present. The unusual volatility of the Chinese stock market since June 2015 has also had a negative impact on consumer sentiment and the growth in demand. [Foreign Language] As a result of the slowdown in our sector and the resulting contraction in demand and pricing pressure, plastic fabricators have been seeking newer products utilizing lower cost raw materials and more cost-efficient formulations. Since early 2014, the company developed such cost-efficient new products and started to market higher-end products to customers overseas. [Foreign Language] As previously announced, the company has experienced a delay in its payment collection with respect to a South Korean customer. To better manage its financial risk, the company implemented a ceasing supply to the customer. While the customer has continued its payment and mutual agreement on pricing and specification of product what was reached, the company will resume shipping products to this customer only after all of the outstanding balance is collected as contractually agreed. [Foreign Language] We are very excited about our two expansion initiatives after representing important long-term growth catalyst for the company. Our expansion plans in Southwest China affords us closer proximity to certain key customers and higher margin manufacturers. Despite the recent rainy season, Sichuan campus construction is on schedule and expected to complete trial run by mid-2016. We are seeing increasing demand for our products from this region, since Southwest China is rapidly becoming a major auto-making 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 product deployment into additional high growth verticals. [Foreign Language] Our new facility in Dubai contains an array of specialized high margin products and serves as a gateway to the Middle East and Europe. The majority of the ground construction for [indiscernible] is expected to be completed by the end of 2015. [Foreign Language] We believe that our two new expansion initiatives are important growth catalysts that will substantially augment our current production capabilities and allow us to enter new geographical markets that will reach our current technology into environmentally friendly, light-weighted and bio-degradable new materials for applications in high-speed rail, ships and airplanes, further reducing reliance on auto sector and win new customers. Our timing is especially opportune to engage new markets and industry verticals, given the current slowdown in our car markets. In sum, we expect our new plans will help us capitalize upon our proven business model of technology, innovation and development of strong customer relationships to capture new market opportunities. We are confident about our growth prospects in the long-term. [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, Ms. Sandy, 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 this reporting period, the third quarter of 2015 unless I state otherwise. Additionally, any year-over-year comparison is to the third quarter of 2014 and any sequential comparison is to the second quarter of 2015. So let us review our third quarter results. Revenues of $239.1 million, was down 24.3% from the third quarter of 2014 and down 9.9% sequentially. The year-over-year decrease was due to 14.2% decrease in sales volume and 9.8% decrease in average RMB selling price of our products. Turning to margins, gross margin reduced to 12.3% from 20.7% in the third quarter of 2014 and 19.4% in the second quarter of 2015. Gross profits decreased 55.2% year-over-year to $29.3 million. The decrease in gross margin was primarily due to three reasons. The slowdown of the auto industry in China, which has resulted in pricing pressure to the company; the increase of depreciation expenses as our production facility in Dubai was put into operation; and ceasing supply to our Korean customer to which sales has higher gross margin. G&A expenses of $5.8 million were invested in business growth, to support geographical and management staff expansion. We continue to maintain a reasonable level of expense in this category at approximately 2.4% of sales. R&D spending was $5.8 million or 2.4% of sales, up from 1.6% in the third quarter of 2014. As we have discussed previously, we are recalibrating our R&D programs in response to changing market dynamics and are now dedicating our R&D efforts to multiple applications in more diversified and high value added fields, including ships, aviation, high-speed rail, material additive manufacturing, biodegradable plastics, medical devices and other sectors. There were [108] ongoing research projects at the end of this quarter compared to 144 as of the second quarter. Operating income was $17.3 million or 7.3% of sales. Operating income was down 68.4% over the year ago quarter. The increase in operating income in the current quarter was primarily due to reduced profits, higher R&D expenses and higher G&A expenses. Net interest expense was $8.3 million for the three-month period ended September 30, 2015, compared to net interest expense of $8.8 million in the same period of 2014, primarily due to the decrease of average loan interest rates to 5.2% for the three months ended September 30, 2015 compared to 5.5% for the three months ended a year ago. And an increase of average balance of short-term and long-term loans in the amount of $368 million for the three months ended September 30, 2015 compared to $431 million of the prior year. The effective income tax rate for the three-month period ended September 30, 2015 and 2014 were 35.5% and 9.5%, respectively. The increase of effective income tax rate was mainly due to lowered profit contribution from our composites, our Dubai subsidiary, an income tax exempt subsidiary, to 27.3% during the three-month period ended September 30, 2015, compared to 73.6% a year ago, and the income tax effect of an increase of $2.3 million inter-company transaction which were not tax deductible. All this resulted in net income of $6 million or basic and diluted earnings per share of $0.09 compared to net income of $43.2 million for the same period of 2014 or basic earnings per share of $0.66 per and diluted earnings per share of $0.62 in the third quarter of 2014. Moving to more cash flow oriented metrics, for the nine months ended September 30, 2015, our operating cash flow was $1.4 million, investing cash outflow [indiscernible] and financing cash flow was $108.1 million. EBITDA was $26.9 million compared to $64.3 million in the same period of the prior year, attributable primarily to lower net income in the third quarter. And now, let’s turn to the balance sheet. Our balance sheet remain solid even as we fund expansion initiatives. As of September 30, 2015, our working capital remain in good condition. During the nine months ended September 30, 2015, days sales outstanding remained stable at 83 days compared with 77 days for the year ended December 31, 2014. The increase in DSO was mainly due to the delayed collection from our Korean customers. The management concludes that no additional provision is necessary for the overdue balances taking into consideration the historical collection experience, customer specific facts and current economic conditions. We have borrowed to fund our growth with the proceeds from the loans going into earmarked for capital spending and we’re managing our debt level appropriately. As of September 30, 2015, we increased our average short and long term bank loans by $105.7 million from fiscal year ended 2014 to meet our requirements for capital expenditures. The company’s short and long-term bank loans and notes payable increased by 25.1% in the third quarter of 2015 from fiscal year ended 2014, as we’ve further utilized our existing lines of credit within constraints of maintaining a manageable debt level. We define the manageable debt level as the sum of aggregate short term and long-term loans and notes payable over the total assets. In terms of our guidance, the deceleration of China’s economy and its contractionary effect on its domestic auto industry has increased pricing and sales pressure on China’s auto industry’s upstream suppliers. In particular, plastic manufacturers are seeking new products that utilize lower cost raw materials and more cost-efficient formulations. As previously disclosed, we instituted a ceasing supply to the Korean customer. The combination of these factors resulted in 14.2% contraction of our sales volume compared to a year ago. Despite this contraction in customer demand from overseas, the pricing of the majority of our existing products has remained relatively stable. However, our newly launched products have a relatively lower average selling price which has lowered our total average selling price in response to reduced customer demand. Despite the slowdown in China’s economy and its auto supply chain, the change in our overseas product mix and the delay in our payment collection with respect to Korean customers, and due to our strong customer relationships, strategic market positioning and visibility into current and new business, we reiterate the September guidance and expect full-year 2015 sales to be in the range of $900 million to $1 billion range, and expect net income to be in $80 million to $100 million range. This financial forecast reflects the company’s business outlook for the remainder of fiscal 2015. Our forecast makes certain assumptions about impact of crude oil prices on polymer composite materials for the remainder of this year and makes assumptions about exchange rates and interest expense associated with both its long and short-term debt. Now for Q&A, I’d like to note that for any questions directed to Mr. Han, Mr. Qingwei Ma, Mr. Qingwei Ma, we will translate both your 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?

[Operator:]

[Operator Instructions] Your first question comes from the line of Matthew Larson, Morgan Stanley.

[Matthew Larson:]

Just a couple of questions on the relationship with the Korean customer, I was glad to see that you’re still paying, or the entity is still paying but at a slower rate, I guess, than you guys would like, I guess there’s an outstanding accounts receivable and that you’ve got the clean up so that you have to adjust some numbers accordingly. Am I right in suggesting that that one customer represents around 14% of sales volume?

[Taylor Zhang:]

You have noted very correctly the customers have been paying, even though not to the full overdue, but based on our communication with the customer, we believe the outstanding balance will be able to be collected by the end of this year. So the sales represented from overseas, contribution from overseas in the third quarter actually was lower becuase of the ceasing supply for two months, which is about 3.1% compared to 10% roughly in the prior year quarter.

[Matthew Larson:]

I’m sorry, that was because you cut back on the supply until the South Korean customer caught up? And if that’s the case, since historically you all have been able to produce and sell flat out all the capacity that you have available. If this customer turns out to not being able to fully meet the obligations, is there other customers that want the product that you can produce?

[Taylor Zhang:]

So there is two fronts to answer your question. First is, as we cease supply to the overseas customer, we’re adjusting our production capacity, so that’s why in Q4 we believe from domestic sales we can see a improvement sequentially by allocating the capacity to meet the demand from customers for our higher end products. And for internationally, as I mentioned before, in addition to the current customer who has the deal, we have been working in developing products for other customers in Europe. So that probably is going to come into fruition in the following quarters.

[Matthew Larson:]

So this could very well just work out to be not a – not even a one-time write-off since you we expect to get fully reimbursed just at a later date, yet you’ve taken the conservative approach to have it already reflected on your forward guidance, suggesting it might be uncollectable, but you just insinuated that it’s most likely you will collect it. So is that accurate?

[Taylor Zhang:]

Yes, that’s accurate. From our risk factor disclosure standpoint, we always want to be conservative and disclose the risky scenario, but based on our communication with the customer and we believe all the outstanding deal will be collected by the end of this year.

[Matthew Larson:]

Alright, that’s only a month, month and a half to go. I mean, why do you feel then the company’s stock which was trading around 6.5% which is kind of coincided with when you all were in lower in New York presenting for the first time in a while to institutional investors, it’s dropped a third of its value during a period where Chinese stocks in general have done very well. Do you feel that getting the message out that in fact that customer will most likely make your firm whole and we should see a response in the stock price?

[Taylor Zhang:]

I think definitely timely and prompt communication with the investor, especially given the changing market dynamics and also the business environment is very crucial to make sure investor community understand our status quo and more importantly our long-term prospects. So as we mentioned before, we will continue to seek more communication opportunities both in the form of investment confidence where [indiscernible] investors here in the US and also in other areas.

[Matthew Larson:]

So we could very well – the next time we have a conference call, we could see a situation where you’ve collected all the outstanding funds due from the South Korean customer because of your patience for year-end, those numbers will be in calendar year 2015 numbers? Is that true?

[Taylor Zhang:]

That’s true, yes.

[Matthew Larson:]

And I’m sorry, just another question I have, because this has been a long term investment for some customers and it’s been a frustration because by any metric it’s a very inexpensive stock and just when it looks like it’s going to join the group of stocks rallying, it has a follow back here and it’s quite frustrating. I mean at two times earnings, even at reduced levels, even if you only get – I think you gave us a $80 million to $100 million is your estimation for this year, at the current market cap that’s $1.60 to $2 you’re talking at some of your two times earnings, which must be significantly below what typical stocks in China trade. I know they’re lot lower than typical stocks that trade here. Can you give us guidance for 2016 with the new capacity coming on and a lot of it being able to produce in the next calendar year?

[Taylor Zhang:]

Let me ask my colleague for 2016 outlook. [Foreign Language] So that came from our COO, Mr. Ma. So basically the current quarter, the first quarter will be very important because we are going to see a more industry market data as well as our operation results in the next month and a half. And we currently are in the process of completing our estimates and projections for 2016 and we will be able to provide an update at a later date.

[Matthew Larson:]

Can one make the assumption that the numbers will be significantly higher both in top line and bottom line?

[Taylor Zhang:]

[Foreign Language] So we believe the top line will improve compared to 2015. And in addition from the margin perspective, we think our product mix will continue to shift, especially to more non-auto verticals, which we consider will be high value-added. So we expect improvements in 2016 in general.

[Matthew Larson:]

I guess I like hearing the fact that the item that really hurt the stock recently which was the big reduction in revenues and potential net income could very well just correct itself over the next six weeks. And if that’s the case, it would make sense that the stock price should recover accordingly, because you offer a tremendous value and the Chinese market is breaking out to a new bull market really, there is no reason why the stock shouldn’t join that sort of upward movement. So good luck and thanks for the information.

[Operator:]

Your next question comes from the line of Graham Tanaka, Tanaka Capital Management.

[Graham Tanaka:]

I’m sorry I had to join the call late. So I didn’t hear any explanation about the Korean business that was – how long are these receivables, I wonder they do, could you describe that please?

[Taylor Zhang:]

So basically as we previously updated, we see ceased supply to the customer because of the overdue balance from the customer, so – which has impacted Q3 for most of the two months in Q3. So the balance right now is over 100 days. As you remember, our standard payment term is 90 days. So as we discussed earlier with Matthew, we believe the balance will be collected before the end of the year.

[Graham Tanaka:]

The reasons that you give for the overdue balance and how large is this company...

[Taylor Zhang:]

Sure. How large is the outstanding balance?

[Graham Tanaka:]

How large is the company, how large is the balance?

[Taylor Zhang:]

So the outstanding accounts receivable from the customer is approximately $60 million. Let me check with my team so that they can give you more detailed description of the customer. [Foreign Language] So based on our understanding of the customer, their annual turnover is between probably within $180 million to $200 million revenues.

[Graham Tanaka:]

That’s the annual turnover of your sales to the company or that’s not the company’s sales, correct?

[Taylor Zhang:]

That’s theirs.

[Graham Tanaka:]

This is not a large company, it’s $182 million per year?

[Taylor Zhang:]

No, $180 million to $200 million.

[Graham Tanaka:]

This is not an auto company?

[Taylor Zhang:]

They are an auto parts and some other plastics fabrication manufacturer.

[Graham Tanaka:]

Now, in terms of the lost or the foregone delay in profits from that – revenues from that company, are their margins close to the corporate average and margins on the sales of the company close to the corporate average?

[Taylor Zhang:]

The products we supply to the customer with margin higher than our average, so in the mid 40%.

[Graham Tanaka:]

You are saying that in a few weeks you’re going to discuss the outlook for next year, I gather 2016, just wondering what is happening to auto sales and GDP in China in the third and fourth quarter this year here?

[Taylor Zhang:]

Let me give your question to my team from China. [Foreign Language] The answer comes from our CEO, Mr. Han. So basically as you probably know, in recently the Government of China has issued an incentive policy for auto industry, which is reduction of sales tax on automobile. We think this is a very positive and encouraging sign for auto industry being the first to receive this benefit. And secondly, we’re also seeing some of other amendments by the Government of China to stabilize the economy. So we think we will see the benefits coming to our industry. As for Q4, performance for our company that we expect, we think Q4 is going to be – we expect to see a lot improvement compared to Q3 and we think our results will be most likely in line or slightly better than we guided.

[Graham Tanaka:]

How does that compare with the fourth quarter of last year?

[Taylor Zhang:]

[Foreign Language] So Q4 we expect to be pretty much similar to the level of second quarter of this year, probably closer to the results of Q4 last year, although the gross margin might be slightly lower.

[Graham Tanaka:]

So the gross margin be lower, why would the gross margin be lower and what will be the mix of non-auto in the fourth quarter?

[Taylor Zhang:]

The reason for lower gross margin is because the pricing pressure from domestic customers because of the slowdown in auto industry.

[Graham Tanaka:]

And what might the decline in average selling prices per pound be?

[Taylor Zhang:]

You mean compared to which period? Q4 last year?

[Graham Tanaka:]

Yes, compared to the fourth quarter of last year.

[Taylor Zhang:]

[Foreign Language] So we will be, as I mentioned, ASP will be also slightly lower. I think it’s going to be approximately 5% taking into account of two factors. One is the lower oil price, the impact on the raw material in our pricing. And secondly, the lower price of our newly launched product in response to the customer demand.

[Graham Tanaka:]

Interesting comment on the raw materials, how much lower have raw material prices come down with the decline in oil prices?

[Taylor Zhang:]

The raw material inputs, even though it’s probably little difficult to quantify exactly, but we think it’s approximately 3% compared to the – in Q3 this year compared to the prior year.

[Graham Tanaka:]

So despite the decline in average selling prices, you do have some decline in raw material costs, so that – gross margin somewhat?

[Taylor Zhang:]

Yes.

[Graham Tanaka:]

What are economists expecting auto sales to do as a response of the taxes, the lower taxes – actually, how much lower what are auto sales tax is going to be and when do they come into effect and then what are economists thinking about this?

[Taylor Zhang:]

Let me translate your question. [Foreign Language] The answer comes from our Chairman and CEO, Mr. Jie Han. So the sales tax on auto is a 50% deduction and secondly the [three times] of our lower prime rates and also bank reserves by the economy in China, so all these together, we have seen positive effects in the economy. And specifically to us, we have seen in the current quarter we have seen positive developments in terms of interest from customers increasing demand and sales orders as well.

[Graham Tanaka:]

Sorry, the 15% reduction, that was within the reduction in the sales tax or how larger the sales tax, I just want to know how significant, how much is that lower to total price?

[Taylor Zhang:]

[Foreign Language] The sales tax may vary depending on the selling price of automobile, but we think the sales tax is possibly approximately 7% of the sales price.

[Graham Tanaka:]

In other words, I’m just trying to confirm, the 15% reduction in the sales tax mean is going from 7% to 5.5% or so or is that 7% down from 8% to 9%?

[Taylor Zhang:]

The 7% was before reduction.

[Graham Tanaka:]

The last question I have was related to what is the status, again if you could refresh for us, how much capacity you’re going to bring online and whether that might be – what kind of start-up costs might there be in the next few quarters?

[Taylor Zhang:]

The capacity we are looking to add approximately [indiscernible] capacity in 2016 from our Sichuan production facility, as most of the production will start contributing in the second half of next year, so we’re going to see some ramp up initially. So even though the capacity is going to be approximately 100, but it really depends on how smoothly the ramp up goes next year.

[Graham Tanaka:]

How much will you be able to load the production mine from sales from the other operations? Will you be able to smoothly increase production or will there be some start-up write-offs and losses?

[Taylor Zhang:]

I think the start-up we may expect to see some start up cost because of the initially when the production lines are running we may incur some associate depreciation expense. But we will do our best to optimize the production and also the ramp up.

[Graham Tanaka:]

How many production lines will it be in terms of at this joint plant and how many will you be starting up initially?

[Taylor Zhang:]

[Foreign Language] We are working to make sure all the production lines will be ready to produce before the end of first half in 2016.

[Graham Tanaka:]

I’m sorry, all the production lines of the – you’re talking about 100,000 metric tons per quarter or per year and you’re saying all the production lines will be ready? That would be surprising.

[Taylor Zhang:]

That’s for the year, for the full year.

[Graham Tanaka:]

The 100,000 metric tons is the capacity for the year?

[Taylor Zhang:]

Yes, for the year.

[Graham Tanaka:]

Did you say that all the production lines will be ready in 2016?

[Taylor Zhang:]

Yes, we will be ready to produce, but it really depends on the demand and order we received. Keep in mind, the first half will not be producing meaningful amount because of the setup and also the test run of the machinery.

[Graham Tanaka:]

I’m just trying to get an understanding again going back to your forecast for the outlook and guidance of $900 million to $1 billion range, that would imply that the fourth quarter is going to be about $174 million to $274 million. Is that correct?

[Taylor Zhang:]

Yes, that’s right.

[Graham Tanaka:]

That’s a pretty wide range.

[Taylor Zhang:]

As our CEO mentioned, we think it’s going to be in line with the guidance and most likely we will be slightly better than we guided.

[Graham Tanaka:]

I forgot, we didn’t discuss the non-auto sector, what percentage of your sales or what size in sales was non-auto in the third quarter and non-auto in the coming fourth quarter?

[Taylor Zhang:]

[Foreign Language] The non-auto ambition is in the third quarter there is approximately 10% and we think it’s going to be relatively the same level in the current quarter.

[Graham Tanaka:]

I’m sorry, I forgot, I did want to ask you also about the balance sheet and the cash and debt. Where will debt and cash be approximately at the end of this fiscal year and then what might happen to that debt and cash next year, we are wondering where will your net debt position peak out at?

[Taylor Zhang:]

[Foreign Language] The answer comes from our COO, Mr. Ma. We believe our cash position will improve by the end of Q4 this year because of the better business expected in Q4. For the debt level, we think it’s going to be largely remain the same for the current quarter.

[Graham Tanaka:]

And next year, so that implies positive cash flow in the fourth quarter, correct?

[Taylor Zhang:]

That’s right, yes.

[Graham Tanaka:]

How about next year, will you be having positive cash flow in the first, second and in every quarter next year as business recovers or will you be still consuming cash for the start-up?

[Taylor Zhang:]

We think the next year on the timing for net cash flow probably it’s a little too early to the estimate, but we think overall next year is going to be in a net cash flow situation because most of the CapEx will be concluded from now.

[Graham Tanaka:]

You’re saying most of CapEx will have been spent by the end of this year?

[Taylor Zhang:]

Yes, there may be some remaining to be spent early next year, but it’s just a timing issue. So the remaining amount is not very significant.

[Operator:]

Your next question comes from the line of Peter Siris.

[Peter Siris:]

I had two questions. First, can you give us an update on Dubai? What’s happening there, how much business is coming out of there? What are your expectations for Dubai?

[Taylor Zhang:]

Let me answer your question first and if there’s any addition, I’ll ask my CTO to supplement. So basically, in Q3, the last quarter, because of the two months’ supply ceasing, we do see a drop to 3.1% of sales compared to over 10% previously. So right now as we mentioned in our press release, the customers has continued making payment, even though they are – although not to certify the full balance and after communication we believe we’ll be able to collect all the outstanding balance by the end of this year. So after that, we will resume supply sales to the customer. In addition, we’re also proactively working and developing products for other customers in Europe. And we think in the following quarters, we’ll be able to see some initial purchase from the new customers.

[Peter Siris:]

So your Korean customer is primarily Dubai?

[Taylor Zhang:]

That’s correct, yes.

[Peter Siris:]

Second question is with the slowdown in China and new capacity coming on line, can you talk about what the long term supply/demand equation is? Do you feel that there is enough demand to fully utilize all of your new capacity that’s coming online?

[Taylor Zhang:]

Let me translate your question for my team. [Foreign Language] The answer come from our Chairman and CEO. Basically, while auto remain our core business, since 2014 we have to date an initiative to diversify our business into non-auto sector. So for our products and our current technology, we have a lot more to offer than auto application. For example, our new facility in Sichuan, we have more emphasis on the following non-auto and high-end applications. [indiscernible] material, which is actually a better name for it should be material additive manufacturing. And food packaging is a huge volume business and also high-end as well. And in addition, we’re also making some progress in application in medical devices. So we’re not only looking into auto, but diversifying into more application in different industry to minimize the expansion risk.

[Peter Siris:]

So in the past, you talked about when all this capacity comes online, with Heilongjiang, Sichuan and Dubai, that you felt that when all that capacity was online and mature, that CXDC could have $4 in earnings capacity. Is there any reason to change that view now?

[Taylor Zhang:]

Peter, we don’t think there is any reason to change our long-term view. We think given our current position, our products and our also R&D commitments, we think we’ll be able to achieve success not only in auto, but also in some other sectors we have mentioned. And the strategic location for our expansion in Southwest is also is very important and crucial to long term success, given its proximity to not only the new and emerging auto hub, but also with a lot of aviation manufacturing and ships manufacture and many other consumer markets available for us to pursue.

[Peter Siris:]

And do you see are your competitors opening a lot of capacity or – so is there capacity issue in general or you don’t see – what do you see from our competitors?

[Taylor Zhang:]

Let me translate your question. [Foreign Language] The answer come from our Chairman and CEO, Mr. Jie Han. So basically, we’re observing also expansion activities by both domestics and international players in our industry. So we think our long-term view on this is basically we have seen the lower end products becoming more competitive because of the lower entry barrier and easier for newcomers to get in. But we have been shy away from that segment for almost two years. So the long-term key to success is the ability to innovate and provide products to go out to the higher end markets, because those are still very niche markets, can only meet by a few selective players. We believe we have the ability and infrastructure to be able to go after the market and become successful. So the key really comes down to which sector and which sub-markets companies are targeting. So believe we are well positioned in the marketplace compared to our peers in the industry.

[Operator:]

Your next question comes from the line of Rachel Lee, Nomura.

[Rachel Lee:]

I just have two simple questions. The first one is related to capital expenditure. You mentioned that most of the capital expenditure will be spent before this year-end. So I’m wondering what is the outstanding amount CapEx expenditure. And the second question is related to the Sichuan capacity. You mentioned next year capacity [indiscernible] is that capacity for next year or the capacity for long-term?

[Taylor Zhang:]

So basically we expect the remaining balance mostly for Sichuan and Dubai. We will be approximately – for Dubai, we expect approximately $90 million either in the current quarter or early next year in the Q1 of 2016. For Sichuan, the remaining is approximately $45 million and that pretty much conclude our CapEx. For Sichuan, the total production capacity in the facility we’re constructing is going to be [300,000 metric tons].

[Rachel Lee:]

You mean 300,000, so you just mentioned the production capacity will be [indiscernible] next year production, so maybe in 2017 the production volume will be around 300,000?

[Taylor Zhang:]

The production capacity will be staged and based on our market penetration and developments in both auto sector in the region as well as some non-auto business we’re currently pursuing right now.

[Operator:]

Your next question comes from the line of Alex Liu, SC Lowy.

[Alex Liu:]

I have one question. Since most of your cash tax will be spent by this year, do you guys still have a lot of time deposits left? What’s the plan on how to use the time deposits? And if it would make sense to use the time deposits to pay down some of your debt, because [indiscernible] is pretty expensive financing cost, so how do you guys consider using time deposit to repay some of those or to buy back some of your senior notes?

[Taylor Zhang:]

[Foreign Language] Let me translate, I think you understand, but just for the benefit of other listeners. So the answer comes from our Chairman and CEO, Mr. Han. So basically, we’re very keen to our debt level. So under the condition that our operation will be carried out mostly with the additional funding resource we have, we’ll do the best, whatever we can, to lower our capital expense. So even though the higher notes, we can redeem the earliest in 2017, but the overall consideration is we’ll do with our action capital in hand to reduce our overall debt burden.

[Operator:]

Your next question comes from the line of [indiscernible].

[Unverified Analyst:]

Can I just confirm again that the sales of the Korean customer is $180 million to $200 million, and this is customer sales and not your sales to the customer?

[Taylor Zhang:]

Yes, that’s our estimate of their annual sales figure.

[Unverified Analyst:]

I notice from your annual result, last year you sold $140 million to this customer, so does that mean that this customer – account of majority or most of their cost of goods sold?

[Taylor Zhang:]

I think we are – they have about $180 million to $200 million based on our estimate and we have $140 million.

[Unverified Analyst:]

So this customer doesn’t buy from other place?

[Taylor Zhang:]

They bought from other place before we supplied to them and basically we’re substituting their purchase with our products after developing according to their expectation.

[Unverified Analyst:]

Second question I had, I notice is account receivable is still increasing despite you’re trying to collect from this customer. I think as of June, you had $211 million and now it seems you have $246 million. How much does this customer still owe you?

[Taylor Zhang:]

The accounts receivable and the customer still owe us is approximately $60 million.

[Unverified Analyst:]

That’s about half a year worth of sales?

[Taylor Zhang:]

Yes. They have been lower in payments since the – around second quarter this year. But last year, they’ve been pretty on time. But in any event, we believe we’ll be able to collect by the end of this year of all outstanding due balance.

[Operator:]

There appear to 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 firm Grayling. 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.