China XD Plastics Company Limited
Q3 2013 Earnings Call Transcript

Published: 12 Nov 2013

[Operator:]

Welcome the China XD Plastics’ third quarter 2013 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, [Tom Zhou]. Please go ahead.

[Tom Zhou:]

Thank you, Operator. Good morning and good evening, and thank you for joining us for the China XD Plastics’ third quarter 2013 financial results conference call. Joining the call today are Mr. Jie Han, Chairman and CEO; Mr. Qingwei Ma, Chief Operating Officer; Mr. Taylor Zhang, Chief Financial Officer; and Mr. Junjie Ma, Chief Technology Officer. Earlier on last Friday, November 8, 2013 China XD Plastics issued a press release announcing its third quarter 2013 financial 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 then management may make additional forward-looking statements in response to your questions. The company therefore claims the protection of the Safe Harbor for forward-looking statements that is contained for the Private Securities Litigation Reform Act of 1995. Actual results may differ from those discussed today. We refer you to a more detailed discussion of the risks and uncertainties in the company’s filings with the Securities and Exchange Commission. A more comprehensive description of the company’s forward-looking statements is contained in the company’s filings with the SEC. In addition, any projection as to the company’s future performance represents management’s estimate as of today, November 12, 2013. China XD Plastics assumes no obligation to update those projections in the future as market conditions change. To supplement its financial results presented in accordance with U.S. GAAP, management will make reference to EBITDA, 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 reconciled 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, Tom. And welcome to all of you who have joined us today. I am pleased to report our solid revenue and earnings growth and positive business development. Although gross profit margin declined slightly for the three months period ended September 30, 2013 compared to the same period of last year mainly due to our marketing strategy such as discounts on listed price since the fourth quarter of 2012. This strategy has helped us achieve tremendous progress in market penetration, especially in East China, the largest automobile market in China. Revenues from East China and North China during the third quarter of fiscal 2013 increased by 152.8% and 75.7% respectively compared to revenues in the third quarter of 2012. Furthermore, we continued our entry into Southwest China market on a solid footing with 3.2% revenue contribution from the region during the third quarter of 2013. Our gross profit margin improved to approximately 22.4% during the third quarter of 2013, following the trend of the second quarter, primarily due to our gradual reduction of sales discounts and shift to higher margin products. The financial result in the third quarter speaks volume of our strategy execution and capacity of seizing market opportunities. As evidenced by the higher volumes shipped, we continue to experience strong demand for our products across our portfolio. As market demand grows for our higher-end products and as part of our long-term growth strategy, we remain committed to our investment in research and development in order to enhance our product offerings, especially for the higher-end applications. We believe this strategy is the key to further strengthening our market position and will help us deliver long-term value for our stockholders. [Foreign Language] Thanks to our high level of product customization and comprehensive technical support offer to our customers. The substantial switch in cost due to our customer turnover and our customer has remained very loyal to us. We are confident in our ability to leverage our bargaining power and gradually reach out our profitability without compromising the growth momentum created by our marketing strategy. Our gross profit margin improved to 22.4% during the third quarter of 2013, following the trend of the second quarter. Our effective penetration in East China market serves well our strategy to make inroad to southwest market, where we plan to build our fourth production base in Sichuan province as previously disclosed and expand our sales network coverage nationwide. [Foreign Language] 2013 marks an exciting year with both opportunities and challenges for China XD. As previously disclosed, the company has planned to establish its fourth production base with 300,000 metric tons production capacity in Sichuan province by the end of 2015. The construction is expected to commence by the end of this year. Once our southwest production base is up and running, we’ll be able to effectively cover the entire country geographically and reach our goal of 10% market penetration with our major products, with our southwest production base covering southwest and central China and reaching to east China and our northeast production base covering northeast and north China and reaching to east China. [Foreign Language] With all this said, we are confident in the future prospects of our business in the market and look forward to strengthening our leading position and delivering significant shareholder value over the long-term. Thank you again. And with that, I will 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. Now looking at this quarter as you have seen from our earnings release, we have achieved solid top line growth in the third quarter as well as earnings. Revenues for the third quarter of 2013 were $293.1 million, representing an increase of 79.5% from $163.3 million from a year ago, which was due to 46.9% increase in sales volume and also 18% increase in average RMB selling price of our products, driven by increasing demand for automotive modified plastics used in the parts of mid and high-end branded automobiles by the company's major customers. In the third quarter of 2013, gross profit was $65.7 million, increased by 64.3% from $40 million in the third quarter of fiscal 2012. Gross profit margin was 22.4%, compared to 24.5% in the same period of the prior year. The decrease in gross margin year-over-year was primarily due to an average of 6.5% discount on the listed prices for the three months ended September 30, 2013 as part of our marketing initiatives to increase our market share in East China and Southwest China. The discount is primarily aimed at further expanding into the East China and Southwest China market. As a result, revenues contribution from East China and Southwest China grew to 32.4% and 3.2% during the three-month period ended September 30, 2013 compared to 22.8% and nil in the same period of 2012, respectively. We plan to maintain such discount rate for the rest of 2013. The decrease in gross margin was also due to an increase in shipping expenses to $4.5 million in the three months ended September 30, 2013 from $0.3 million in the same period last year. We started [clearing] the shipping expenses which is a part of our marketing tactics to go market share since the first quarter of 2013. Such arrangement is expected to continue in the future. With the backdrop of gaining market shares in East and Southwest China, gross margin has been steadily improved sequentially mainly due to the shift of our product mix towards high end and higher margin products since the first quarter of 2013, a demonstration of the success of our marketing strategy. G&A expenses were $4.4 million, compared to $3 million for the same period of the prior year. This increase is primarily due to an increase in share-based compensation, payroll from increased headcount, traveling, and office expenses as a result of our business expansion. During the third quarter of 2013, R&D expenses were $5.1 million or 1.8% of total revenues, compared to $5.5 million or 3.3% of total revenues in the same period last year. The decrease in our R&D expenses during this quarter was due to decreased expenses associated with the early conclusion of some R&D experiments after our strategic review in this quarter, which has led to recalibrating of our R&D efforts to focus more long-term but higher-end applications in (inaudible) related fields such as aerospace, high-speed train, biological and medical applications. During the quarter ended September 30, 2013, the company successfully launched 11 new automobile manufacturers certified products, which increased our total number of certification to 274 at end of the quarter of this year. During the third quarter of 2013, operating income was $56 million, or 19.1% of revenues, an increase of 77.8% over operating income of $31.5 million, or 19.3% of revenues, in the same period of the prior year. This increase is primarily due to higher gross profit, partially offset by higher G&A expenses. Both net income and net income available to common stockholders for the third quarter of 2013 was $41.1 million, compared to $25.3 million for the same period a year ago. Basic and diluted earnings per share for the third quarter of fiscal 2013 was $0.64, a significant increase when compared to basic and diluted earnings per share in the same period of last year, which were at $0.40. EBITDA for the third quarter of 2013 was $64.2 million, increase of 72.6% from EBITDA of $37.2 million in the same period of the prior year. Turning to the balance sheet, as of September 30, 2013, China XD Plastics had $94.3 million in cash and cash equivalents, $180.6 million in time deposits with commercial banks, $238.1 million in working capital and a current ratio of 1.6. Stockholders’ equity as of September 30, 2013 was $347.8 million, compared to $264.4 million as of December 31, 2012. As of September 30, 2013, time deposits increased by 276.3% as we generally put our cash deposit with Chinese commercial banks to generate (inaudible). Accounts receivable increased by 84.4% as a result of increase in revenues and increase in turnover days from 56 days for the 12 month period ended September 30, 2012 to 82 days for the nine months period ended September 30, 2013 as it is a bit longer to connect from our customer. However, our DSO is still below in its average. The DSO for the automotive modified plastic industry is generally 90 days based on our industry experience. We expect that all of the account receivables or collectable and anticipate our DSO to remain this level for the remaining of 2013. Inventory increased by 52.1% in order to reach the customer demand for the following 1.5 month, which is generally inventory balanced in the company. Short-term bank loans increased by 60.6% due to the support of our future capacity expansion in Southwest China. Accounts payable increased by 1,473.2% due to the 30 days payment term we renegotiated with our domestic raw material suppliers, a shift from prepayments to suppliers in the past, in order to strengthen our working capital. Finally, given the company's positive outlook on customer demand and successful geographic market penetration with the support of on-schedule ramp-up of its production capacity during the third quarter of 2013, the company now reiterates its annual guidance and expects revenues for fiscal 2013 to range between $960 million and $1 billion and net income for fiscal 2013 to range between $117 million to $132 million. This forecast excludes any non-cash charges related to deferred income tax benefit, stock-based compensation and change in fair value of existing derivative liabilities and is based on constant exchange rates and reflects the company's current and preliminary view, which is subject to change. Before we open the call to your questions, I would like to note that for any questions directed to Mr. Jie Han, Mr. Qingwei Ma or Mr. Junjie Ma, I will translate both the questions and the answers. With that, we’ll now open the call to your question. Operator?

[Operator:]

(Operator Instructions) Your first question comes from the line of Glenn Krevlin from Glenhill Capital. Please go ahead.

[Glenn Krevlin:]

Good morning. Congratulations on some very, very good numbers. I was wondering if you could give us a sense of how much of the sales gain was driven by new customers and new verticals I suspect versus just your existing customer base? That’s my first question.

[Tom Zhou:]

Hi Glenn, thank you for the question. Let me translate your question and my colleague Mr. Ma will answer your question. [Foreign language]

[Qingwei Ma:]

[Foreign language] Hi, Glenn. So to give you some data points in the quarter compared to last year, for example our customers we have actually gained in the first nine months of this year over 150 customers compared to the last year which is a very significant really reflect our ability to penetrate in new markets and also gaining market share in both East and Southwest China. And secondly [this month] estimates about 60% was driven by the new customers and the rest growth is driven by the shift of our product mix to higher end and high margin products.

[Glenn Krevlin:]

My second question is, can you give us a sense of what percentage of sales you think now represent non-commodity sales and where you would expect that to be in 12 months?

[Taylor Zhang:]

Glenn, let me try to address your question by looking at our product mix. I think our products in general are not commodity compared to a low end, for example home appliances or electronics. So auto in the plastic industry is relatively higher tech content. But within our six categories, we think modified PP has the lower value-added compared to other product category. So if you look at our contribution by product mix, modified PP actually has been gradually decreased. So for example in this quarter, it was decreased to about 40% compared to over 50% in the same period last year. For the rest, for example in engineering plastics and modified PA (inaudible) plenty of products, these are all increased except modified [ABS].

[Glenn Krevlin:]

And would you think that would be in a year, the modified?

[Tom Zhou:]

Okay. Let me translate your question and let Mr. Ma (inaudible) the question here. [Foreign Language]

[Jie Han:]

So also then [naming] after Mr. Ma’s response. So as we are fully committed to research and develop higher margin and high value-added products and we think the Modified PP, [execution] from Modified PP will steadily decline as higher margin products picking up more contribution.

[Glenn Krevlin:]

Okay. And lastly Taylor, I don’t know someone else asked it here at somebody on the call, but lastly what is the planned capital expenditure for this year in terms of dollars?

[Taylor Zhang:]

Okay. So then let me answer the question. For this year we are almost half way through the first quarter, the CapEx for the first quarter. The remaining of this year, we are mostly centered in the remaining investment in Harbin for the construction of the plants and building. So out of this approximately $50 million, Harbin plant will be fully invested. And for the future, Harbin, our view of Harbin plant on the full production basis will function as a cash cow to support our expansion in Southwest.

[Glenn Krevlin:]

Great. I'll let someone else ask, I’ve been monopolizing. Thank you.

[Taylor Zhang:]

All right. Thank you --.

[Operator:]

Your next question comes from the line of Graham Tanaka from Tanaka Capital. Please go ahead.

[Graham Tanaka:]

Yeah. Congratulations Mr. Han and Taylor for another great quarter. I just want to get a better feel for your expectations on inventory levels and accounts receivable. We've talked about this in past. And I’m just wondering, at what point you expect the cash flow levels overall to be more positive. And when are you going to be able to have inventories in accounts receivable, sample DSOs be reduced? Thanks.

[Taylor Zhang:]

Well, thank you, Graham. I’ll answer the question. For inventory our policy will most likely stay the same for the foreseeable future which is maintaining a level of one month to 1.5 months of sales. We are, this year truly we focus a lot on grow our market share strategically in [foreign] region like East China and Southwest China. Also this was supported by our added capacity since the end of 2012 or early 2013. So looking forward next year, we think we’ll be in a much better position in terms of what you have imagined, because the capacity, there won’t be any significant capacity coming, next year we will be in the top of growth, mostly it will be a utilization increase story. So we believe next year the collection base, we’ll improve compared to previous level because we’ll have more leverage and also our position in different regional markets will be more stabilized.

[Graham Tanaka:]

Did you have a hope or goal or target for example next year’s DSOs?

[Taylor Zhang:]

We do have internal target, but we prefer to manage internally. And once we achieve that we’re going to disclose in a more detailed fashion.

[Graham Tanaka:]

Okay terrific. And the other is I was just wondering if you could comment on your shipping transportation cost and the discounts longer term, you suggested that that you would continue at current percentage levels through the rest of this year, I am just wondering about next year, will that also be improving those two items? Thanks.

[Taylor Zhang:]

Okay sure. The sales discount I think is, if Graham you remember earlier this year, we expect it to be decreased a little bit by the end of this year. But however during execution we found another very important way to improve our margin is to up-sell our high margin products especially to new customer because our product, because it’s a unique nature once our customer is in the system, there is thickness that we have been very successful in retaining our customers. So the sales discount we think is a very successful tactic to open the door to new customers and win the market share. Once we are in, we found so far very successful to up-sell and improve the overall quarter margin which is our ultimate goal.

[Graham Tanaka:]

So the discount, the percentage of amount of discount would we see more improving next year or by the end of this year even?

[Taylor Zhang:]

For discounts as we mentioned, we tend to keep the level as it was in the quarter, but we think a more powerful way to improve margin is to sell more high margin product to the customers.

[Graham Tanaka:]

So you expect to maintain your discounts at the lower-end moderate priced products and hopefully up-sell the client, the customers to higher richer mix of product, is that correct?

[Taylor Zhang:]

That’s correct. And we actually pay more attention to the results which is the overall gross margin income as [profitability].

[Graham Tanaka:]

Okay. That’s terrific. So just wondering if you put it all together you were always looking for a magic number, but what are the cash and deposit levels going to look like over the next 12 months. Are they going to continue go down a little bit or start to rise at certain quarter then looking out the next four quarters? Thank you?

[Taylor Zhang:]

For next year our cash like I mentioned, next year it will be the CapEx goes towards our [600] times. And as we discussed previously, majority of the CapEx will be [increments], the increments is very scalable, we have a lot of possibility to decide when and how much to come online. So the land and construction itself is actually relatively more competitive overall CapEx which is approximately $[295] million. So the land utilized in construction is approximately $50 million to $70 million. So next year I think most of the CapEx will be for land utilized than construction. And the cash will be used towards that front.

[Graham Tanaka:]

Right. So if we look at the cash levels, the level of cash plus deposits, what would that number tend to look like? Just wondering at what point?

[Taylor Zhang:]

Just wanted to make sure I understand question correctly. You mean the cash and also time deposit we have or other [payable] we have?

[Graham Tanaka:]

The cash and time deposits totaled in September around $275 million, right? $280 million if you include restricted cash, right?

[Taylor Zhang:]

Yeah.

[Graham Tanaka:]

So is that $280 million, what do you expect that level to be say in three months, six months and nine months?

[Taylor Zhang:]

The level would be, the level will decrease because our CapEx for the next year.

[Graham Tanaka:]

Right.

[Taylor Zhang:]

But now, at the end of the third quarter here we’re in net cash position in the north of, we have improved a very strong cash generated from operations.

[Graham Tanaka:]

Right. Okay. So I was just looking at the cash levels, you do have the short-term loans. I'd say you have net cash of around $20 million, net cash at September. Is that net cash that's what I should have been asking, sorry. Is that net cash figure going to be going, it will be going to be a net debt at some point and at what point in time will it start to be going towards more building cash again?

[Taylor Zhang:]

I think Graham, cash position is always very creepy to predict, but we have maintained our cash very conservatively in the past. So I don’t think that there is any risk involved. But to predict we're now for the next year I think we rather not premature to comment to any metrics right now.

[Graham Tanaka:]

Right. Okay, terrific. Thank you. Good quarter.

[Taylor Zhang:]

Thank you.

[Operator:]

Your next question comes from the line of Peter Siris from Hua-Mei. Please go ahead. [Foreign Language]

[Unidentified Company Representative:]

Sorry Peter. Mr. Han would like to further comment on the strategy for the coming year and also touch upon a little bit on the sales discounts. So in his view, the sales discount has proven to be successful this year. And that our overall operating metric has improved compared to last year in the third quarter. So next year, this would also help us to achieve great penetration in East and Southwest China markets. And so next year I believe that there will be most likely continued strategy as we’re gaining traction in both area. But product mix shifting to higher end and high margin product will be a very important strategy for the company for years to come. So with that Peter, please go ahead.

[Operator:]

Sorry. We have [Alfred] Jones on the line or Alfred Jones from Jones Capital Management. Please go ahead.

[Unidentified Analyst:]

Good job executing again as always. I think everybody sees what the numbers are. I think problem we have is perception of China small cap. So again in the US what's happening with (inaudible) and Muddy Waters? I guess my question is what the company does at this point to make everything [believable]. The perception is again in the US, I can imagine the retailer shareholder and the institutions are not happy with again something happening to discredit China small caps. What has the company done, I don’t see any PRs you just spoke about a 160 new customers and we don’t get a PR about any of them. If you want to gain shareholders, certainly the Board and the company has to disprove the perception that is ramping through the US again. There is no analyst coverage, there is never a PR. The conference call should be concentrating on the believed ability of the numbers. I mean the audit process should be spoken about much more often, independent maybe verification pictures of the sites that are being built to grow the company on the website. There is, being a public company in the US is a privilege. We as shareholders own part of that company and I know that the Board is working and the company itself is working to do their fiduciary duty as a public company. This is a privilege, this is not a joke. Again we have a blip in the stock prices, stock prices has been stagnant for three years, no mention of a buyback or dividend. I owe one other China’s small cap which is Xingwei Real Estate which has bought back stock, paid a dividend and shown that they are trying to become a legitimate US listed company. I hate to come on air and chaste out you guys, but something needs to be done and nobody is doing anything. Get the Board off their butts and get them active and let’s get this thing where it should be. Three years is too long the way. Sorry for the [diacrite] but it’s just needed to be said. Take any comments from anybody that one address my concerns?

[Taylor Zhang:]

Okay. Alfred I can certainly understand your feeling. And I think we as a company, we can certainly understand your feeling and we as a company cannot change the entire sector. I think what we have done is we have no; number one, we have been continue executing and we performed as we said and delivered what we promised. And secondly from the transparent perspective, we are a very true company. We are engaged in international business [either] and they have issued clean audit for two years in a row. And secondly we have also received investments from a world class institutional and specialized in Asia, Morgan Stanley Private Equity Asia and also they have two more seats from MSPA. So I think everybody is working very hard to deliver shareholder value and we are equally, if not more disappointed with loan valuation which we don’t believe we deserve. I mean pointing finger is easy, but we are not doing nothing. And we are working very hard in all capacity we could. But we as a company cannot change the macro environment. And with that being said, I am not saying we could not do more and there is a lot more we can do. And I think the management of this company is really the most valuable asset of the company and everybody here has been working very diligently to increase the board members. So we think the disconnection between company’s fundamental and valuation cannot last long, we believe the market is functional. And we believe the US market will be functional just as a matter of time.

[Unidentified Analyst:]

So I think the company has done a good job running the business, that's not the issue. The issue is just trying to disprove that there is possibly anything wrong with the company and the company has not done that and that’s been proactive. The only time companies get proactive is when there is a short in here putting out hit pieces then companies come forward and trying to prove their cash and do this and take a proactive role to show that they are legitimate and not a fraud. The same is like sitting back in the bushes and just waiting for things to change isn’t a working strategy. So again, thank you. Thank you so much, I'll stop now, but I need to see something more. So hopefully, homer and the Board can get together and come up with a solution of some type rather than just waiting for perception to change in the US because it's been three year and nothing has changed. So thank you again and have a good day gentlemen.

[Taylor Zhang:]

Alright. Thank you, Alfred.

[Operator:]

Your next question comes from the line of Peter Siris from Hua-Mei. Please go ahead.

[Peter Siris:]

Okay. Now I get my question to asked right. I have a couple of questions. The, but I actually would make one comment to the last gentleman’s comment which is, I think that he could put up pictures of some of these, I have visited your new factories. I think you could put up pictures of some of the new factories on the website that certainly would be a plus and some of the issuing press releases would help. Anyway that was just a comment and I'd like to know just a couple of questions. My first question is on the factories in Harbin. How many factories did you have opened at the beginning of the year, how many do you have opened now how many will you have opened at the end of the year. And so can you sort of give us an idea of the capacity now coming out of Harbin?

[Taylor Zhang:]

Okay. So Peter, as you know and as you have seen our fourth production base has been operational since mid of last year and right now we have production capacity of 390,000 metric tons. And so for the third quarter of this year the capacity utilization is likely above 92%. So really we're reaching, we're working all the cylinders. And I think in the first quarter we’ll probably maintain the similar level and we will squeeze the most from our assets right now.

[Peter Siris:]

And is there more capacity coming in Harbin or are you had now finished building out all the factories in Harbin?

[Taylor Zhang:]

We're now finished building Harbin.

[Peter Siris:]

Okay. And one more question on Harbin and then I'll let switch one. As the new factories come online they are much more automated than the old factories, have you seen, if we decide the discounts and everything in terms of a [cot] are these new factories more efficient. What sort of efficiency improvements have you found with the new factories?

[Taylor Zhang:]

Okay. The new factory, the machinery the production lines are generally more advanced compared to our older lines. So as we mentioned in our filings the production lines and machineries in the new factory, mostly are focused on high margin and highly added product, this is really a part of our strategy planning and also prove to be very successful future as well.

[Peter Siris:]

Okay. And in Sichuan, the capital expenditures in Sichuan, because there is no more capital expenditures at Harbin basically for next year, so the capital expenditures in Sichuan for next year are going to be how much?

[Taylor Zhang:]

Okay. Let me direct your question to Mr. Ma.

[Peter Siris:]

Okay.

[Taylor Zhang:]

[Foreign language].

[Unidentified Company Representative:]

[Foreign Language]

[Taylor Zhang:]

So Peter, the next year the CapEx as I mentioned we have a lot of flexibility so we think next year we will be approximately RMB 1 billion, which is $130 million, but like I said, just about the flexibility the increment, we don’t decide when and how much to come on line, depends on the market condition and our view of the future.

[Peter Siris:]

Okay and then getting sort of another way of getting Graham Tanaka’s question, how much cash flow will you have next year to support those capital expenditures, is there a way of getting at that number?

[Taylor Zhang:]

We like to provide more color and give more visibility, but we in the past never predict our cash flow situation. But I think if you look at our recent efforts, we have been working in different areas to improve our working capital and cash flow situation. For example we have renegotiated with our supplier so now we are maintaining a 30 day payable compared to prepayments in the past. So we do not have to layout cash in the fund and also like I mentioned next year the account receivable will be in a much better position to improve and reduce the days next year. But these are next year cash flow situations, we are very optimistic.

[Peter Siris:]

Okay. And the last piece of my question, you say that this year your revenues would be like 850 million to 1 billion, right, something like that. When the Sichuan comes online is the what will your -- I mean 950 to 1 billion, as the Sichuan comes online would all the new factories and Harbin, what will be your capacity, how much revenue will you be able to generate two years, three years out?

[Taylor Zhang:]

First of all let me make sure I understand the question. You are saying two years from now….

[Peter Siris:]

One Sichuan is completed, Harbin completed, how much business will you be able to do with these two bases?

[Taylor Zhang:]

Okay. I think we can understand this very simple way. Our production capacity in Harbin is $390 million. So Sichuan once is fully operational, we will bring additional of 300,000 tons.

[Peter Siris:]

So theoretically when Sichuan is fully operational and you could expect to do $2 billion in revenues?

[Taylor Zhang:]

We are going to get close. Compared to now we have probably 80 or a little higher offset compared to current level?

[Peter Siris:]

But because you have new factories in Harbin you e selling more value added products and you are going to add 300,000 capacity, right?

[Taylor Zhang:]

Yeah.

[Peter Siris:]

And when you guys have made -- I do want to understand the frustration with the stock price, I have owned it the whole time, but you guys have made tremendous progress and doing great job building the company, thank you.

[Taylor Zhang:]

Thank you, Peter.

[Operator:]

Your next question comes from the line of [Lian] (inaudible) Please go ahead. Your line is open, please go ahead.

[Unidentified Analyst:]

Hello, can you hear me?

[Taylor Zhang:]

Yeah. Hi Lian. How are you?

[Unidentified Analyst:]

Hi, Taylor. Congrats on another good quarter. I think questions have mostly answered. Just wondering that are you starting to enjoy the tax benefit from selling into the new region?

[Taylor Zhang:]

We, let me translate your question right now. [Foreign Language]

[Unidentified Company Representative:]

[Foreign Language]

[Taylor Zhang:]

So Lian, we are now in the process of finalizing the procedure and we think next year we get the tax benefit from Sichuan.

[Unidentified Analyst:]

Okay. Thank you. I guess most of my questions have being answered. Thank you

[Taylor Zhang:]

Alright. Thank you Lian.

[Operator:]

It looks like, there is a follow up question from Glenn Krevlin from Glenhill Capital. Please go ahead.

[Glenn Krevlin:]

Yes. Taylor I was interested when you think the company's gross margins might be up on a year over year basis?

[Taylor Zhang:]

Okay. Let me translate you question right now. [Foreign Language].

[Jie Han:]

[Foreign Language]

[Taylor Zhang:]

Okay. So Glenn, your question was answered by Chairman Han that if you look at prior to 2012 and ’11, the merger has been gradually increased that market environment. We do have a hiccup because of our marketing development strategy, we have gross margin dipped in early this year. However, we have very actively addressed the margin by adjusting our product. And so we think we are doing a right thing to finance the gross and also the margin stability. Going forward we think if there is upside while there is additional room for us to improve our gross margin. And lastly Mr. Han also want to further comment, want to response comment to Albert. However said, we have always maintained to be open and transparent company and we believe those who understand and trust the company, know the company and we also do the same to all investors and stakeholders.

[Glenn Krevlin:]

Yeah. Taylor, thank you. I believe as the company’s largest outside shareholder now, we would just I think you guys have done a great job, building a company. We would look you guys to be able to bit more proactive on the IR front. I don’t know if the company has any plans to be in New York at all or market, but I think that's something that should be taken under some consideration given all the moves that you’ve made. Thank you.

[Taylor Zhang:]

Glenn (inaudible) and we’ll definitely look on that to prove our visibility and hopefully to further enhance our shareholder value.

[Operator:]

Thank you. There is a follow-up question from Graham Tanaka from Tanaka Capital. Please go ahead.

[Graham Tanaka:]

Yeah. Thank you. Just wondering as we are trying to, we are long term investors and we like to look out to more than just this year. If you could just give us a feeling for kind of rough approximate growth rates for 2014, 2015 given that you are going to be adding capacity significantly what could each of those two years roughly look like in terms of growth in revenues top-line? And secondly the non-auto side that what percent of revenue might that be this year each of the next two years 2014-2015? Thank you.

[Taylor Zhang:]

Let me translate the question. [Foreign Language]

[Unidentified Company Representative:]

[Foreign Language]

[Taylor Zhang:]

Hi, Graham. So let’s answer your question regarding the contribution from non-auto our view in 2014 and ‘15. It’s our goal to achieve about 20% at the end of 2015 from non-auto contribution. So for 2014 and ‘15 in top line growth, even though there is now capacity coming online which would be up and running until the end of ‘15 or ‘16, but however we do believe there is a ASP growth and also the overall utilization for 2014 and ‘15 will be higher than ‘16 because we have a ramp up in 2013, so the top line, we do think of this addition outside for 2014 and ‘15.

[Graham Tanaka:]

And the ASP growth at sometime I imagine that you might kind add some periodically approach, sort of an average of ASP level which might be closer to the high end products you are reaching. So your percentage increases each year might be a little bit lower. Do you have an idea of what the percent increase and average selling prices might be in 2014 and 2015? Thank you.

[Taylor Zhang:]

Okay. Thanks Graham let me translate your question.

[Jie Han:]

[Foreign Language]

[Unidentified Company Representative:]

[Foreign Language]

[Taylor Zhang:]

So, Graham the answers from both Mr. Han and Mr. Ma is, the ASP, there is room to grow ASP and there is a good potential, but it doesn’t, it’s proven possibility of drop in ASP. So we think we have been very successful in managing our product mix in favor of the company and still manage to gain market shares. I think the last comment made by Mr. Han is he sincerely, wish and invites everyone who’d like to come and visits our factory in China and also welcome the opportunity to introduce our supply chain, our supplier, our customers, everyone who wishes.

[Graham Tanaka:]

Thank you very much.

[Taylor Zhang:]

Okay. Thank you, Graham.

[Operator:]

There are no further questions at this time. Tom Zhou, please continue.

[Tom Zhou:]

On behalf of China XD Plastics, we want to thank you for your interest and participation in this call. For those interested in meeting with management, please contact China XD Plastics at 1-212-747-1118. Again, thank you for your participation on this call. Operator.

[Operator:]

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