China XD Plastics Company Limited
Q4 2014 Earnings Call Transcript

Published: 16 Mar 2015

[Operator:]

Thank you for standing by. And welcome to the Fourth Quarter 2014 China XD Plastics Corporation Limited Earnings Conference Call. At this time, all participants in a listen-only mode. There will be a presentation, followed by question-and-answer secession. [Operator Instructions] I must advice you that this conference is being recorded today March 16, 2015. I would now like to hand the conference over to your first speaker today, Ms. Qin. Please go ahead.

[Sandy Qin:]

Thank you, operator and thank you for joining us for the China XD Plastics’ fourth quarter and fiscal year 2014 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 our Dubai Subsidiary, Mr. Shi Young, General Manager of Shuangxing Dye Group [ph] and Mr. Lou Jintai, General Manager of A1 Shuangxing [ph] Dye Group. Earlier today, China XD Plastics issued a press release announcing its fourth quarter and fiscal 2014 results. Before the 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 the 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 projection of performance in 2015 and other risks detailed in the company's filings with the SEC and available on its website at ww.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, March 16, 2015. China XD Plastics assumes no obligation to update those projections in the future as market conditions change. To supplement the financial results presented in accordance with the U.S. GAAP, management will make reference to earnings before interest, taxes, depreciation and amortization, which we will call by its abbreviated named EBITDA. EBITDA is a non-GAAP financial measure reconciled from net income, which the company believes to provide meaningful additional information to better understand its operating performance. A table reconciling net income to EBITDA can be found on the earnings press release issued today. I would now like to turn the call over to Mr. Han. Mr. Han will be speaking Chinese and I will translate his presentation into English. Mr. Han, please go ahead.

[Jie Han:]

[Foreign Language]

[Sandy Qin:]

Thank you, Sandy and thank you all for joining us today. We are pleased with our results for 2014. We achieved top line growth of 5.7% over 2013, despite challenges and changing dynamics in China's automobile industry and macroeconomic conditions. Our focus in 2014 was to strategically position China XD for a sustainable growth. To achieve this we emphasized and invested in three key areas. First, developing key markets outside of China with high growth potential, by leveraging tax exemption and put [ph] raw materials and logistics from our Dubai subsidiary. Second, diversifying our product offering through R&D and expanding our product applications to electronics biodegradable plastics, 3D printing high-speed rail and marine. Third, building additional capacity in strategic locations to support future growth.

[Jie Han:]

[Foreign Language]

[Sandy Qin:]

First, let's look at our international markets, our sales outside of China during the fourth quarter was $60.8 million or 19.8% of total revenues, which is an increase of our revenues of $59.3 million during the third quarter or 18.8% of total revenues. For the year, sales outside of China represented approximately 12.6% of our total revenues. Overseas markets offer an ideal opportunity for us because of its auto industry, as well as its high end electronics industries. We expect Korea to continue to be a strong growth market for us. Additionally, we continue to develop relationships in Europe, the Middle East and other parts of Asia which we believe will also provide meaningful growth for us in the coming years. Our new manufacturing facility in Dubai will provide additional capacity for these other international growth markets.

[Jie Han:]

[Foreign Language]

[Sandy Qin:]

Secondly, another area of focus we believe growth is product diversification, well we expect that automotive applications will continue to be our core business, we are also diligently working to develop other applications and higher margin products. As I mentioned, we are already selling higher margin products for use in high end appliances and electronics, other than automobiles to customers in oversea market. Additionally, we are optimistic about the prospects of applications in medical devices, food packaging and 3D printing, et cetera, that we have being actively researching and developing towards commercialization.

[Jie Han:]

[Foreign Language]

[Sandy Qin:]

Finally, to support these growth efforts, we are investing in capacity expansion and pursuing sustainable and diversified growth opportunity internationally. As we have discussed over the past several quarters, our new facilities in Dubai and Southwest China are strategically located in proximity to markets that represent greatest growth opportunities for us. We are currently installing the production lines in the Dubai facilities. They will be completed in April 2015 and we expect the new facility to be fully operational in the second quarter of this year. The Dubai plant will be dedicated to production of our premium higher margin products and will better serve growing markets outside of China. In addition, we will be able to maximize our profits by leveraging our Dubai subsidiaries advantages, including the tax exception, lower cost of raw materials and convenient logistics.

[Jie Han:]

[Foreign Language]

[Sandy Qin:]

Construction on our Sichuan facility in Southwest China is progressing smoothly. We expect major construction to be completed and equipment delivered by the end of 2015 with operations beginning in the first half of 2016. In preparation for the plant construction, we will continue investing in sales, marketing and business expansion activities in Southwest China throughout this year.

[Jie Han:]

[Foreign Language]

[Sandy Qin:]

Now looking towards to 2015. In 2015 we expect a slower growth in the China auto industry relative to prior years, as well as uncertainty [ph] about the potential impact on polymer composite materials from volatile crude oil prices. Yet, we remain optimistic about our prefix. We continue to focus on penetrating new markets both in China and internationally, as well as diversifying our product offering for the reality on non-automotive applications. With our new Dubai facility starting operations in the second quarter, we can more easily supply customers in Middle East, Europe and other parts of Asia with our premium products. Accordingly, we expect full year 2015 sales to range between $960 million and $1.06 billion and net income to range between $100 million to $120 million.

[Jie Han:]

[Foreign Language]

[Sandy Qin:]

Now 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. Before I review the numbers, let me remind you that all figures I discuss are for this reporting period, the fourth quarter of 2014 unless I state otherwise. Additionally, any year-over-year comparison is to the fourth quarter of 2013. And any sequential comparison is to the third quarter 2014. So, let’s go over our fourth quarter results. Revenue of $307.1 million was down 20.2% year-over-year and down 2.7% sequentially as a result of decreased sales volume, and lower ASP. In particular, volume declined by 17.9% from the first quarter of 2013, while average RMB selling price was down 2.1%. The decrease in sales volume driven by slow growth in domestic’s auto production. A decrease in average RMB selling price was mainly due to first, our new lower-cost formulations of Polyamide, PA products, developed and offered to our customer in response to the price experienced by Chinese auto makers and their supplier to reduce costs up and down the supply chain. In 2014, the lowest gross rates of Chinese automotive industry in over 20 years. And second, the impact of spread compression resulting from falling market prices of certain products caused by significant falling of crude oil prices associated with raw materials procured at higher unit cost before the price selling of those products. These were partially offset by a higher selling price and margin products sold into non-China markets and reduction in average selling discounts applied to low-end products. Turning to margin, gross margin was down to 18.9% from 23.8% in the third quarter of 2013 and 20.7% in the third quarter of 2014. Gross profits declined 36.4% year-over-year to $58.1 million. The decline was similarly cost and shift of sales mix to new and lower market modifying PA products and the impact of spread compression. Other impact was mitigated by the gross in new premium products with higher margin and a reduction in average selling discounts applied to low-end products. G&A expenses of $6.8 million were invest in building our corporate infrastructure to support growth. We continue to maintain a reasonable level of expenses in this category at approximately 2.2% of sales. R&D spending was $2.4 million or 2.8% of sales, down from 1.4% in Q4 of 2013. During the quarter, the company recalibrated its R&D programs in response to changing market dynamics. The company scaled down R&D by ending several projects early, while expanding to multiple applications in more diversified fields. There was 96 active research projects end of the year. Operating income was $48.7 million or 15.8% of sales. Operating income was down 39.7% year-over-year, and 11.2% sequentially. The decrease was due to the lower gross profits combined with higher selling and G&A expenses. Net interest expenses was up meaningfully year-over-year as we continue to borrow more to fund growth. Net interest expense was $8 million, up from $1.9 million a year, primarily due to the notes we issued in February of 2014. Additionally, we had interest expense resulting from new bank loans used to fund future capacity expansion in the Southwest China and Dubai. Our leverage is still extremely manageable with very high coverage ratios. Income tax expenses were $1.7 million, representing an effective income tax rates of 4.5%. This was well below our effective income tax rates of 9.5% in the third quarter, mainly due to the preferential income tax rates of our Sichuan subsidiary and exemption of income taxes in our Dubai subsidiary and greater portion of income before taxes from these subs in the fourth quarter, compared to the – in the previous quarter. All this resulted in net income of $35.8 million or basic and diluted earnings per share of $0.84, compared to basic and diluted earning per share of $0.89 in the fourth quarter of 2013. Moving to more cash flow oriented metrics. During the quarter our operating cash flow was $84.7 million, investing cash outflow was $78.5 million, and financing cash outflow was $26.2 million. EBITDA was $53.8 million compared to $88.8 million in the same period of the prior year. Now let’s take a look at our full year financial results. Revenues were $1.11 billion, representing a increase of 5.7% from $1.05 billion in fiscal 2013. The increase in revenue was due to 0.6% in sales volume, and a 5.3% increase in average RMB selling price. The increase in sales volume was primarily driven by new business from overseas markets, while increase in ASP was driven by general shift to product mix to higher end products. For fiscal 2014 sales of premium products, including PA6, PA66, POM, PPO and Plastic Alloy represented 75.1% of revenues compared to 69.1% of revenues in the fiscal year of 2013. Gross profits over the year was $222.4 million, down slightly from $223.4 million in 2013. Gross margin was 20% compared to 21.3% in the fiscal year of 2013. The decrease of our full year gross margin was primarily due to the new lower cost formulation of PA products developed and offered to our customer in response to the changing market condition and the impact of spread compressions, partially offset by higher selling price and margin products sold in overseas markets. G&A expenses were $20.6 million in 2014 or 1.9% of revenue compared to $16.3 million or 1.6% of revenues in fiscal 2013. The increase was primarily due to an increase of $3.1 million in payroll, resulting from high accounts and salary increases, $0.4 million in leasing expense due to general business expansion, $0.4 million of professional fees and $0.2 million in fixed assets depreciation. R&D expenses for the year were $29.4 million or 2.6% of total revenues compared to $21.3 million or 2% of total revenue in fiscal 2013. The increase in R&D spending in 2014 was primarily due to consumption of raw materials from the testing of auto and non-auto applications. We successfully launched 38 new auto manufacturer-certified products or AMCP, during 2014 resulting in our total number of AMCPs increasing to 321. We are currently working on other non-auto targets, including carbon fiber, specialty engineering plastics, bio-plastics, alloy plastics, 3D printing materials for application in aerospace, high-speed train, biological and medical fields. Operating income for fiscal 2014 was $171.7 million or 15.5% of revenues, a decrease of 7.5% from operating income of $185.6 million or 17.7% of revenue in the prior fiscal due to decreased gross profits and higher G&A expenses. Net interest expense was $30.5 million in 2014, compared to net interest expense of $8.5 million in 2013. The increase is primarily due to an increase of $16.9 million in interest expenses resulting from notes issued on February 4, 2014, an increase of $9.3 million in interest expense resulting from the increase of bank loans to finance the company capacity expansion in Southwest China and Dubai. The average balance of short-term and long-term bank loans in 2014 was $373.7 million, compared to $238.4 million during the prior year. The average deposit balance in 2014 was $399.2 million, compared to $226.4 million during the prior year, resulting in an increase of $4.2 million in interest income, which partially offsets the increase in interest expense. Income tax expenses were $18.3 million, representing an effective tax rates of 13.1%. This was well below our effective income tax rates of 25.9% in 2013, mainly due to the preferential income tax rates of our Sichuan subsidiary and exemption of income taxes now to Dubai subsidiary. We reported net income of $120.7 million for the year, compared to a net income of $133.8 million in 2013. Basic and diluted earnings per share were $1.85, compared to basic and diluted earnings per share of $2.08 in fiscal 2013. Average number of shares used in the computation of both basic and diluted earnings per share for the fiscal year 2014 was 48.8 million, compared to 47.8 million in the prior fiscal year. EBITDA for 2014 was $203.5 million, a decrease of 6.3% from $217.2 million in the prior fiscal year. Now let’s turn to the balance sheet. Our balance sheet remained solid even as we fund record growth. As of December 31, 2014, our working capital remained in good condition. In the end of the first quarter, day sales outstanding were 58 days compared to 55 days at end of Q3. We have borrowed to fund our growth with the proceeds from loans going into or earmarked for our capital spending. Yet we are managing our debt level appropriately, that is currently 52.1% of total assets down from 52.6% of our total assets. Leveraging our cash flow generated from operation, the company reduced its short-term bank loans by 68.3% to improve our financial stability. The company took on long-term loans – long-term bank loans of $174.3 million to support our expansion in Southwest China and Dubai under a more stable capital structure. Accounts payable increased by 24.2%, as a result of increase in inventories. Bills payable increased by 69.5%, due to the purchase of raw material to support inventory growth. Before we open to the call to your questions, I would like to note that for any questions directed to Mr. Han, Mr. Qingwei Ma and Junjie Ma, I will translate both their questions and their answers. If you want to ask your question in Chinese, please also ask it in English for the benefits of our listeners. With that, we'll now open the call to your questions. Operator?

[Operator:]

We will now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of Glenn Krevlin from GHC Capital. Please go ahead.

[Glenn Krevlin:]

Hey, good morning. I have three questions. First, if you could explain how the reduction in crude and energy prices may affect the business in this calendar year and how it affected the results in the fourth quarter, so first question. Second question, just relates to how you are looking at your balance sheet now that you're hitting the end of the capital spending cycle on you new plant activity, will you start to pay back some debt? Those are my first two questions.

[Taylor Zhang:]

Okay. Glenn, thank you for your question. Let me translate your first one. [Foreign Language]?

[Qingwei Ma:]

[Foreign Language]

[Taylor Zhang:]

Hi, Glenn. Let me translate the answer from our COO, Mr. Ma on the first question. So as we talked before there is typically a delay between plastic resin and the crude oil price. So as you'll see there is some impacts in Q4. But after Q4 crude oil price has been stabilized. So we think in addition our year end [ph] trade was increased during Q4 periods. So we do expect in Q1 the margin compression impact will be very, very small. And we could see some margin recovery and improvements in Q1. For the whole year, I think it’s probably little hard to predict. And the second question let me translate as well [Foreign Language]?

[Jie Han:]

[Foreign Language]

[Taylor Zhang:]

Hi, Glenn. The answer from our CEO, Mr. Han, as we borrow to fund our capacity expansion, we will be pretty much – concentrate this year and we will reduce our debt level throughout the year to the end of this year.

[Taylor Zhang:]

And Glenn, do you have third question?

[Glenn Krevlin:]

Yes, I just had a follow up on that, you have very high cash balances relative to you debt, given that you are entering the end of the capital spending cycle, would it not make sense to use a large amount of your cash to start to either refinance your debt or prepay you debt?

[Taylor Zhang:]

You mean – by debt you mean the bank loans or the senior long-term payable [ph] notes?

[Glenn Krevlin:]

The bank loans?

[Taylor Zhang:]

Okay. [Foreign Language]?

[Jie Han:]

[Foreign Language]

[Taylor Zhang:]

Hi, Glenn. So the answer to your follow up question on the second one is, as you have probably seen in 2014 we have reduced our total debts and also our short term versus long-term there is also a shift to long-term, to longer term bank loan which is to give us more financial stability. So going forward, as we – firstly, we will make sure the CapEx and target expansion underwent smoothly and then we will – when we will reduce our repay, our short term and longer term bank loans.

[Glenn Krevlin:]

Then Taylor my last question is what is your assumption for the auto industry in China for this year in terms of units, what are you assuming in your forecast for sales?

[Taylor Zhang:]

Okay. [Foreign Language]?

[Jie Han:]

[Foreign Language]

[Qingwei Ma:]

[Foreign Language]

[Jie Han:]

[Foreign Language]

[Taylor Zhang:]

Okay. Glenn, so our view on auto industry in 2015 is we think more likely in 2015 the auto will grow approximately 7%, similar to the level of 2014. However it is remain to see – to be seen whether we can exceed 10% prior level, prior to 2014. So it really depends on the macroeconomic condition and also government policy and some other factors.

[Glenn Krevlin:]

So then why are you assuming that revenues will be down if the auto industry is growing and you are going to have the benefit of the Dubai facility in 2015?

[Taylor Zhang:]

Okay. Let me translate this question. [Foreign Language]?

[Jie Han:]

[Foreign Language]

[Taylor Zhang:]

So Glenn, compared to our previous 2014 guidance, we upped revenue guidance a little bit because of the additional capacity from Dubai. But also we want to be conservative in the beginning of the year, especially because of the uncertainty of crude oil price. So for net income we think we'll also remain on the conservative sides because there are going some increase in G&A expenses, as we are beefing up our staff in both the trend in Dubai.

[Glenn Krevlin:]

Okay. Thank you.

[Taylor Zhang:]

All right. Thank you, Glenn.

[Operator:]

Your next question comes from the line of Nicholas Chen from Nomura. Please go ahead.

[Nicholas Chen:]

Hey. Hello, gentlemen. Thanks for the call. I have several questions. Firstly, I want to ask about like the pending capital expenditures for 2015, for the ongoing project both in Dubai and the Sichuan. Can you give us like a rough breakdown in between the two project and then how much you have to spend like, during 2015 and maybe some carry on to – for 2016 as well? Second part of the question is regarding your expansion plan beyond 2016, once you complete the commission [ph] stage for both Sichuan and the Dubai project, is there any kind of further, either in terms of new product lines or you know, increasing of capacity in any other regions, et cetera. And what will be the kind of run rates to capital expenditures for 2016 onwards. And lastly, I would like to ask about the price outlook for the major product for the automobile and plastics. Given one of your major competitor and Kingfa has the – I think around 800,000 tons capacity dedicated for the auto industries under construction and they have been delaying a bit. But I think like, the latest update is like they are going to commission that and pretty soon somewhere in 2015 or 2016? So once that – the competing lines coming upstream what would be the possible impact to the market, to margin, to ASP and the market share to you? Thanks.

[Taylor Zhang:]

Okay. Sure, Nicholas. So I am going to take on number one, number question and then turn over the third one to our management, our COO. So the CapEx plan for 2015 very, very insignificant for our Harbin plants, basically the remaining minor products amounted to approximately $2.5 million in that we'll conclude our CapEx for our Heilongjiang [ph] plants. And for Sichuan, we expect the CapEx of $160 million and for Dubai most of the CapEx for the production capacity was occurred in 2014. So let me translate your third question. [Foreign Language]?

[Qingwei Ma:]

[Foreign Language]

[Nicholas Chen:]

Okay. And then what about the pricing, sorry, we have [indiscernible] coming on the pricing part. I mean, given the competition is still there, I mean, I understand the market is growing along with the supply. But I just want to understand like once these new lines becoming upstream, do you have any estimation of the potential pressure to the pricing?

[Kenan Gong:]

Hi, Nicholas. This is Ken online. I think first of all I'd like to translate to what Mr. Han answered a lot of questions. Actually and to make this supplementary to our COO Mr. Ma and we are excited to market side of the Chinese market. And I think the three points that Mr. Han want to emphasize. The first one is our history in the pipelines, China XD has certain years over the history in the automobile use [indiscernible] This is the first history. Secondly, and we have the vast R&D accumulations and that’s including – that’s dedicate and also performer level data base. So this is a second advantage and then speaking of the competitions. And I think the third point that Mr. Han will emphasize, as we have the real excellent, the R&D team and also the macro development team which is including our technical consultant and also the [indiscernible] Yes, I hope I answer a lot of the questions. This is the supplementary answer from Mr. Han. And also could you repeat your questions.

[Nicholas Chen:]

Okay. Just want to ask, like potential pressure on the pricing, once the new capacity from competitor coming on-stream and given like you know, I don’t how much like – will the company still be able the maintain the current pricing in RMB or US dollar terms and or there could be some of kind down side pressure because of competition?

[Jie Han:]

[Foreign Language]

[Qingwei Ma:]

[Foreign Language]

[Kenan Gong:]

So Nicholas, I think if you go back little bit, as we know the auto industry even though growing slowly compared to previous but still China has produced over 20 million units and we will becoming more in the coming years. And so I think another, even though the competition will be little bit intense compared to previously high gross rates of industry, another a very favorable developments is more domestic manufacturer like us, we will continue to in place foreign and also by joint venture companies. So we have evaluated the competition dynamic and also we were aware of Kingfa and other competitors plan to past expansion before our determination and decision now to trend expansions. So there is no doubt at low end and middle level, products will be able to more intense competition, but the key to success as our Chairman mission is really to how we can response quickly to the – our customer and auto maker demands in terms of changing in new model requirements for raw material. So this really drawdown to our competitive advantage. As we mentioned we are first in the industry in China and with our human capital and our technology, so we think the – we will be able to succeed, focus on the higher end and premium products going forward.

[Nicholas Chen:]

Okay. Thanks very much. Lastly, last question, just regarding the foreign exchange. I mean, given that RMB has bee weakened a lot like overseas trend over last year, just wondering like weakening RMB what will be the kind of a busy implication, either for pricing or for margin to your business?

[Kenan Gong:]

Hi, Nicholas, I think for our oversea markets, the Forex probably not in consideration, but in China we think there is something we can do is, one is to manage our liability sides, the foreign currency risk by structure some hedging and limiting the risk of foreign exchange. So we think even though there is increase in price for RMB to devaluation, but we don’t think anything very radical will occur.

[Nicholas Chen:]

Okay. Understood. Thanks very much.

[Kenan Gong:]

Thank you.

[Operator:]

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

[Robert Linka:]

I have few questions, I'll list them. First of all, what will your market share versus the prior year and would you also discuss what, if you had any new customers from South Korea or anywhere else in addition to what you mentioned in the third quarter. Were your December orders inline with expectations? Can we get some insight into the current quarter March 31, since where it is only about 15 days left? And lastly, Smug [ph] is a big deal in China, and what affect if any would you expect from new vehicle growth restrictions by the government and local municipalities, and I'll let it go there? Thank you.

[Taylor Zhang:]

Okay. Sure. Robert, so let me answer the first question. So our market share was similar to last year at approximately 11%. And let me translate some other question you just asked. [Foreign Language]?

[Jie Han:]

[Foreign Language]

[Kenan Gong:]

Taylor and Robert, this is Kenan, the General Manager from our Dubai subsidiaries. I think I can answer the question too. I think in regard, the overseas cost to emerge and now we have another three customers. The new customer which has under developing the stage in the South Korea and that we have been coming into the final trial, the full our product and except the Asian areas like the South Korea that we also are developing, there is some new customers in Russia and also in the European zone like Germany. Therefore two customers and potential customers in Germany were also in the first stage of the trials and the first testing result have just been coming out and the result days really gauge and now we just and – to adjust our processing techniques to make sure that we have the budget match the consistency before we realize that the volume productions. And I think also that the third question, I can touch on little bit regarding the overseas orderings and actually by the end of the 2014 the overseas and – the overseas orders which have secured like 12000 metric ton for the overseas customers by its own under – yes, I think this is my answers for the question too and I think Taylor you can direct it to the further question, again.

[Robert Linka:]

Well, actually I was looking for your orders in December from your China accounts, because as in December when you received the bulk of your anticipated orders for the year?

[Taylor Zhang:]

[Foreign Language]

[Qingwei Ma:]

[Foreign Language]

[Taylor Zhang:]

Hi, Robert. So the orders we received from China sites in December of 2014 for 2015 they are similar last year level, which is little bit above 300,000 metric tons. [Foreign Language]?

[Qingwei Ma:]

[Foreign Language]

[Taylor Zhang:]

So Robert, for the last question regarding the implication of vehicle restriction, because of Smug in China. So we think first of all, it is a lot of restrictions in tier 1 city because of the environments concern. But we think still in tier 2 and tier 3 city there is less – they are less restrictive and the gross potential still not diminishing. And the – there will be opportunities for some less emission vehicles and frankly speaking modify plastics will be a solution to save the energy and in terms of reducing the vehicle weights and reduce emission. So we are now seeing that this will be a leap and bounce in 2015, but in longer term plastics will be – becomes more – it’s going to be a favorable developments for plastics.

[Robert Linka:]

Thank you. You did not answer the other question though regarding can we get some insight to the current quarter.

[Taylor Zhang:]

Okay. [Foreign Language]?

[Qingwei Ma:]

[Foreign Language]

[Taylor Zhang:]

So Robert, compared to first quarter over last year, the current quarter is expected to be at similar levels. So in terms of iron [ph] you can probably be looking at into somewhere around 69,000 metric tons and for – because of the hardness and the correction we will be a little no where compared to the average of the year, which is not in euros. And for raw material, we actually – because of the stabilization of cooler price we do have more novel cost for our raw material purchase and the resin price in general was probably little soft compared to Q4. So those are the major observation we have for Q1 this year.

[Robert Linka:]

Thank you. I'll get back in line.

[Taylor Zhang:]

All right. Thank you, Robert.

[Operator:]

Your next question comes from the line of Erin Jean [ph] from Nomura. Please go ahead.

[Unidentified Analyst:]

Hi. I have two questions. One is up with expenditure sales that came from the new business structures in 2014 and what's the target for 2015. And the second question is what's R&D to sales ratio. And I am wondering if you could elaborate a bit more about the future direction of our research and development. [Foreign Language]?

[Taylor Zhang:]

[Foreign Language] So our R&D of 2014 as a percentage of sales is approximately 2.7. I think in 2015 its going to be at similar level. For the first question, can we clarify the new business you were referring to, is it our oversea markets where new applications? Please.

[Unidentified Analyst:]

New applications, please.

[Taylor Zhang:]

Okay. Let me [Foreign Language]?

[Unidentified Company Representative:]

[Foreign Language]

[Taylor Zhang:]

So Erin, let me [Technical Difficulty]

[Kenan Gong:]

Taylor, are you there?

[Taylor Zhang:]

So Erin let me translate for the benefit of other listeners. So the answer come from our general manager of our Harbin Province., Mr. Di [ph] so he like to, he just shared our outlook from applications in 2015. So as we mentioned before, so R&D has become – our R&D efforts have become more diversified and more inclusive to the market demand in each. So we have developed, we are working on multiple industry and application. Now, first the 3D printing has been we have seen some big screens 3D printing and we are currently working with a Japanese company and we also obtained average certification. And in addition we have some products are currently are using in subway and for marine application we expect some initial certification for the industry that will be – that will mark pensions to the industry, for the company. And in some other part application, we have for example in medical devices, we are working with some hospitals that train all products and bio-plastics I just mentioned before going to be good growth potential for us to explore. So all taking together, non-auto business I think are going to be more than 5% in 2015. Erin, don’t you have any follow up questions.

[Unidentified Analyst:]

Hi. Yes, I actually have one. So its live, [ph] sounds very good. So you mentioned lot's of like research and development areas, so do you have, do you think the products are price competitive or do you see – you still have some efforts to go through?

[Taylor Zhang:]

So you mean, is the price going to be competitive? Our price will be competitive?

[Unidentified Analyst:]

Yes. That will nominal to – yes.

[Taylor Zhang:]

Okay, compared to auto right?

[Unidentified Analyst:]

No, for the non-auto areas?

[Taylor Zhang:]

Okay. Okay. [Foreign Language]

[Unidentified Company Representative:]

[Foreign Language]

[Taylor Zhang:]

Okay. For the benefit of other listeners, let me translate Mr. Di's answer. So Mr. Di mentioned the acceptance by the markets I think are approved, proved our value proposition as a new entrants and we are very confident about our competitors pricing and more importantly in the value and quality we provide to our customers.

[Unidentified Company Representative:]

Okay, Taylor.

[Taylor Zhang:]

Yes. Erin, do you have any other questions?

[Unidentified Analyst:]

No, that’s fine. Thank you.

[Taylor Zhang:]

Okay. Thanks, Erin.

[Operator:]

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

[Robert Linka:]

Yes. In anticipation of the new plant opening, have you – I think the last time you had eight of ten of the major vehicle manufacturers and you were looking for the other two, I think maybe four, it was one I can't remember the last one, that you thought would be coming online once you opened the plant. And I wondered have you started working with those customers providing product in anticipation of the plant opening or is too early?

[Taylor Zhang:]

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

[Unidentified Company Representative:]

[Foreign Language]

[Taylor Zhang:]

So Robert, your answer come from our General Manager of our Harbin Province, Mr. Di So he said it’s not worthy to talk about exactly. We have been working on the two other auto manufacturer for quite a while. So for this year we will for sure to cover all the 10 auto makers going from where we are getting through their system and that the last one is Guangzhou [ph] and we also believe we will be able to get to – gain through their system in this year.

[Robert Linka:]

Thank you. And the company indicated last quarter it was going to be more transparent with investors, yet during the past four months there is been no information releases regarding any business products – progress. You've indicated you have new customers in Korea, you are working with new customers in Germany and Russia. Is this all just really a chatter or are you really going to be providing us more information?

[Taylor Zhang:]

Okay. Let me translated your question. [Foreign Language]

[Jie Han:]

[Foreign Language]

[Taylor Zhang:]

[Foreign Language] So Robert, the answer comes from our Chairman and CEO Mr. Han. So to your answer, so first of all, we in the past 30 years we have followed a very systematic approach of planning our business, basically we developed a three year plan. So 2015 marks the beginning of how our developments of our next three year plan. So we did tremendous amount of work of bringing various aspects in terms of market research and also strategy operation, layout, et cetera. So we, even though we have not finalized it yet, but by year end of this year we'll be able to finalize our comprehensive three year plan for the next three years. So once to their point we're going to be able to get more information and share with our – with the investment public.

[Jie Han:]

[Foreign Language]

[Taylor Zhang:]

In addition, we will be attending the MP, National Plastics addition in the US this month and our senior management will also be leading with investor in the US and we invite and welcome investors who are interested to meet us in the US as well.

[Robert Linka:]

Taylor, I appreciate the answer, but I don’t think it’s the answer to the question that I asked. I am talking short term, I am talking during the past four months the company made no press releases regarding its business, whether it got new customers, whether it got new orders, whether it got an award, whether there was a slowdown at the plant, whether the plant looks in – is moving along faster than expected. I mean, jut the company for the last year has basically waited for the end of the quarter to tell its investing public what transpired during that quarter. And last time in last quarter you said no we opened, we hired a new IR firm and we're going to be more open and transparent with investors. I haven’t seen it and I am just wondering if you're going to be more open or you are not?

[Taylor Zhang:]

[Foreign Language]

[Jie Han:]

[Foreign Language]

[Taylor Zhang:]

Hi, Robert. So Mr. Han, so we will definitely be more financially as we said before, and as you know we hired a investor relation firm and even though we've been busy with – in the past couple of months with our annual planning progress and also the annual contract et cetera. But our commitment to the investment – investing public does not change and if you have any question we welcome you to contact either our self and our investor relation firm.

[Robert Linka:]

All right. Thank you.

[Taylor Zhang:]

All right. Thank you, Robert.

[Operator:]

Your last question comes from the line of [indiscernible] Please go ahead.

[Unidentified Analyst:]

Hi. Thank you for the opportunity to ask question. First can you tell me more about the business in Korea and what currency do you transact, how do you ship the product there and I will ask for the last question later? Thank you.

[Taylor Zhang:]

Hi, Stuart [ph] Thank you for the question. So for Korean, basically the most transaction are dominated in US dollar and the shipping as we – recent before was manufactured in Harbin on behalf of our Dubai subsidiary and shipped from Harbin to Korea.

[Unidentified Analyst:]

What did say about this Dubai subsidiary, again can you repeat, I am sorry.

[Taylor Zhang:]

Yes, sure. So basically the products sold to Korean markets were manufactured in our Harbin plants on behalf of our Dubai subsidiary. Basically our Dubai subsidiary – because relationships with our Dubai subsidiary and they developed the product and so that’s restructured.

[Unidentified Analyst:]

I see, I understand. Thank you. And secondly, how can you share you capital allocation thinking. And I am just curious you have a lot of cash $284 million of cash which is more than the market cash, and you still have a lot of debt and you not doing any share buyback or putting any dividend, well the company is selling asset alone, two times earning, there is something that is quite disconnect there, I couldn’t figure? Thank you.

[Taylor Zhang:]

[Foreign Language]

[Jie Han:]

[Foreign Language]

[Taylor Zhang:]

So the answer from our Chairman is, so for dividends and he can say to the public right now, is bolster by back end dividends are often [ph] group interest as the middle shareholder of the company. So for dividends he said today definitely the company we will do that. And so for share repurchase I think Chairman Han said, we think we are happy with our capital structure and any further share purchase we actually reduced the capital flows and which maybe negatively impact the liquidity of the stock. So for the cash we have and basically we have – with the cash we have we can go ahead with our CapEx. And our principal is to develop once we have the resources and these are means, instead of do something and then figure out what's the resource to be.

[Unidentified Analyst:]

Okay. Thank you. Last question if I may, you have done a lot of sales in Korea via Dubai and I just noticed on the balance sheet based on the September 30th number, I see only $4 million in Dubai, US$4 million, the rest of the cash are all in China. I was wondering how do you allocate cash between Dubai and China?

[Taylor Zhang:]

[Foreign Language]

[Jie Han:]

[Foreign Language]

[Taylor Zhang:]

So for Dubai, the cash flow generated from Dubai we will – will use to support our development and expansion in China as long as Dubai's operation is not impacted.

[Unidentified Analyst:]

Okay. Okay, thank you. I have no further question. Thank you.

[Taylor Zhang:]

All right. Thank you.

[Operator:]

There are no further questions at this time. Mr. Han, please continue.

[Sandy Qin:]

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

[Operator:]

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