CSIQ 阿特斯太阳能

Operator

Ladies and gentlemen, thank you for standing by and welcome to Canadian Solar’s Third Quarter 2016 Earnings Conference Call. My name is Michelle and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Ms. Mary Ma with Canadian Solar’s IR department. Please go ahead.

Mary Ma

Thank you, operator, and welcome everyone to Canadian Solar’s third quarter 2016 earnings conference call. Joining us today on the call are Dr. Shawn Qu, our Chairman and Chief Executive Officer and Dr. Huifeng Chang, our Senior Vice President and Chief Financial Officer. Before beginning, may I remind our listeners that in today’s call, management’s prepared remarks will contain forward-looking statements, which are subject to risks and uncertainties and management may make additional forward-looking statements in response to your questions. Therefore, the Company 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 management’s current expectations and therefore we refer you to a more detailed discussion of the risks and uncertainties in the Company’s Annual Report on Form 20-F filed with the Securities and Exchange Commission. In addition, any projections as to the Company’s future performance represent management’s estimates as of today’s call. Canadian Solar assumes no obligation to update these projections in the future unless otherwise required by applicable law. At this time, I would like to turn the call over to our Chairman and CEO, Dr. Shawn Qu. Shawn, please go ahead.

Dr. Shawn Qu

Thank you, Mary. We appreciate everyone taking their time to joining us today. We are pleased with our results of Q3 given the challenges facing the entire solar industry. Our team worked aggressively to offset headwinds from steep module price declines, demand weakness, capacity concerns and recent regulatory uncertainty. I will also say upfront that we view these challenges as near-term issue rather than a more prolonged deterioration of solar market fundamentals and the prospects. We remain very confident in our long-term outlook for both the industry and for Canadian Solar. Near-term volatility in the stock market does not change the fact that renewable energy sources are just scratching the surface in a single digit of worldwide penetration; lower prices of solar modules and other components ultimately means a lower cost for system ownership which will further improve the competitiveness of solar compared to conventional energy sources. In Q3, our revenue and shipments came in at the low end of our guidance, despite the dislocation of the global solar market during the quarter and the bankruptcy of Hanjin Shipping, one of the largest shipping companies in the world, which happened in September and disrupting our quarter-end logistics. Our team has effectively managed the supply chain and overall production output to offset the macro impact of solar module price decline facing the broader market. Our solar module shipments were closed to 1.2 gigawatts and revenue recognized was $657.3 million. Q3 sales to Americas represented 41% of total revenue, mainly driven by module sales in the U.S. Our shipment to U.S. in Q3 was approximately 300 megawatt. Asia represented 43% of revenue, primarily driven by solid demand in China, Japan and India. Meanwhile, Europe and other regions accounted for about 16% of revenue with strong shipments to Germany, the Netherlands, the United Kingdom and Australia among others. As in the past, Canadian Solar kept our disciplined and conservative approach. We do not chase after market share. We prioritize all opportunities and try to go after only those that reach our profitability and credit criteria. Our tier 1 market leadership, technology and quality, strong balance sheet, bankability and global platform give us greater advantages and allow us to pursue opportunities which others do not have the capacity or scale to pursue. Importantly, we delivered a 17.8% gross margin in Q3, which was well above expectations. We have a long track record for being an industry cost leader, which is critical in challenging markets like the present one. We expect to exit 2016 with further reduction in manufacturing costs. On energy business side, we remain focused on our strategy of developing and monetizing our solar power project. At the end of the third quarter, our late-stage solar project pipeline was approximately 2 gigawatts and our portfolio of solar power plants in operation reached 948 megawatts with our diverse footprint across the world’s most attractive markets in the U.S., Japan, Brazil, China, Canada, Mexico, UK and the Africa. In U.S., as we previously announced, three solar projects Barren Ridge; Mustang; and Tranquillity totaling 470 megawatts reached commercial operation in Q3. Four other projects currently under construction including Astoria 1, Astoria 2, Garland and Roserock are expected to reach commercial operation before the end of 2016. In September 2016, we announced the signing of a 15-year PPA for our 140 megawatts solar power project Tranquility 8 in California with MCE. Construction of the project is expected to begin in 2017 and project will begin providing power to MCE by late 2018. In November, we started the commercial operation of a 24-megawatt solar power plant in Yamaguchi Prefecture, Japan. Electricity generated by this plant is purchased by the utility company under a 20-year feed-in-tariff contract at JPY40 or US$0.38 per kilowatt hour. Now, let me update you with the progresses we have made recently in monetizing our solar power plant assets. Our energy business strategy is to monetize our operating project assets under a flexible and localized strategy to recycle equity and reinvest into the development of new projects. We believe this approach will maximize our profitability, while limiting our risk. Cash from project sales will also help to delever the balance sheet. The investor interest in our pipeline remains robust due to the high-quality of our projects, brand awareness and projects contracted long-term cash flow through PPAs. [Ph] In October 2016, we sold 80% of equity in our 192 megawatts Pirapora 1 solar power project in Brazil to EDF. We target to complete the sales of 100 megawatts and 134 megawatts of utility-scale solar power plant in Canada and China respectively either by the end of 2016 or early next year. The total value of these assets is estimated at approximately $500 million with a gross margin in high teens. In U.S., we have hired bankers and have started the sales process of seven solar projects. As previously mentioned, some of these projects have just reached COD while the remaining will reach COD before the end of this year. In Japan, we’re preparing to potentially form a solar J-REIT to be listed in Tokyo Exchange; in other words, our IPO of Japanese YieldCo. We are encouraged by interest in such a vehicle. We do not control the regulatory approval process or the automated outcome but are currently targeting the IPO of J-REIT in Q2 or Q3 of next year. Moving on to our manufacturing capacity roadmap. We continue to strengthen our capacity profile with selective investments in new wafer, cell and module plants. Our focus is on upgrading our technology and improving our cost structure, especially in the midstream part of the value chain. A new and state-of-the-art wafer cell and module capacities will help us further lower our cost and prepare for future competition. Our wafer capacity has just reached 1 gigawatt including 400 megawatts with slurry wire-saw and 600 megawatts using the new diamond wire-saw technology. We expect to reach 1.3 gigawatts using diamond wire-saw by April 2017. We target to phase out the slurry wire-saw by that time. This is slightly behind our previous schedule as we have to match the production capacity of diamond wire-saw with that of the black silicon surface treatment in the solar cell workshop. The diamond wire-saw technology works compatibly with our proprietary Onyx black silicon multi-crystalline solar cell technology. This significantly increases solar cell efficiency while reducing silicon usage, therefore reducing manufacturing cost. While the ramping up takes time, we believe we have resolved all major technology and processing issues. We believe we will be the first one in the solar industry to phase out the slurry wire-saw and adopt the diamond wire-saw for more multi-crystalline silicon wafer ring in gigawatt scale. Our cell manufacturing capacity is expected to reach 2.4 gigwatts at the end of 2016, which is lower than the 3.1 gigawatts plan we discussed in August. This decrease is primarily due to a delay in the construction of our new 850 megawatt solar cell plan in Southeastern Asia. While the module plant in the same compound went on line on schedule in September, the construction completion date of the solar cell plant has been extended to the first quarter of 2017. The decrease on cell capacity will be partially offset by an earlier than expected partial resumption in production at our Funing solar cell factory, which was damaged by a tornado in June 2016. The work to restore our Funing solar cell factory is proceeding on schedule. We expect to have the first 2 of our 10 production lines up and running by the end of 2016, and remaining production lines back in full production in the first half of 2017. We continue to discuss the amount of our total damages claim with our insurers and have received two prepayments totaling RMB120 million from the insurance company. We expect to receive more insurance payment to recover substantially all of our tornado related property losses. We expect to end of the year with 5.8 gigawatts of total module manufacturing capacity. As a side note, we do not share the view which others have expressed regarding industry overcapacity. Our view is that the supply demand balance is dynamic and healthier than people think. You just have to pull the seek-after capacity away from the outdated legacy capacity. Now, let me comment on our guidance for Q4 2016. We currently expect total Q4 module shipments to be in the range of approximately 1.4 gigawatts to 1.5 gigawatts, including 30-megawatts of shipments to our own utility scale solar projects. Revenue for the Q4 2016 is expected to be in the range of $600 million to $750 million. Q4 gross margin is expected to be between 11% to 16%. The recent demand for our solar module products has been very strong. However, our shipment volume in Q4 is limited by the availability of our solar module capacity. We are overbooked for the current quarter and fully booked for the Q1 2017. As a result, we even have to use third-party solar modules for some of our own downstream solar projects, in order to keep our own capacity for our solar module customers. On the other hand, the gross margin in the quarter is impacted by the loss-of-service of our 1 gigawatt solar cell factory in Funning damaged by the tornado in June and the delay in construction of our 850 megawatts new cell factory in Southeastern Asia. We have to procure a lot more wafer than cell from third-party suppliers this quarter. We have seen the light at the end of tunnel as we bring the Funing cell factory partially back in service at the end of this year and fully back in service before June 2017. Meanwhile, we expect to start production in our new solar cell factory in Southeastern Asia in the first quarter of 2017. We expect to complete the sale of certain utility-scale solar power plants in Canada and China, either in Q4 2016 or early 2017. The total value of these solar power plants is estimated at approximately $500 million with a blended gross margin in high teens. However, according to U.S. GAAP, the Company can only recognize approximately $150 million of these proceeds of thee sales as revenue. However, the remaining proceeds are not lost instead it will be recorded under other income in the income statement after netting out the book value of the provision. We estimate the gain will be in the range of $50 million to $55 million. The actual figure of course maybe different subject to the adjustment at the final closing and there are still some uncertainties on the exact date of the transaction closing. We will reach the high-end of our revenue and gross margin guidance if all these solar power plant sales are completed in Q4 or the low end of the revenue and gross margin guidance if all these project sales are closed in 2017 instead. Accordingly, for the full year 2016, we expect our total module shipments to be in the range of approximately 5.073 gigawatts to 5.173 gigawatts, compared to 5.4 gigawatts to 5.5 gigawatts as previously guided. We have a solid order book in Q4 to reach the previous guidance shipment target but we are short of manufacturing capacity at this moment. We expect our revenue under U.S. GAAP for the full year 2016 to be in the range of $2.78 billion to $2.94 billion compared to $3 billion to $3.2 billion as previously guided. The updated revenue guidance is based on U.S. GAAP, therefore, does not content the sales proceeds of approximately $300 million of the solar power project assets, which may occur in Q4 2016 or early 2017, as previously discussed. We have an experienced project management team. We own a significant stake in a company which directly aligns us with our shareholders. We have successfully navigated numerous ups and downs since founding Canadian Solar 15 years ago, and we are confident we will emerge in an even stronger competitive position for the current period. Let me now turn the call over to our CFO, Dr. Huifeng Chang, for a more detailed review of our results for Q3. Huifeng, please go ahead.

Dr. Huifeng Chang

Thank you, Shawn. As Shawn mentioned, we are pleased with our third quarter results in the face of a challenging marketing environment. For Q3, net revenue was 657.3 million, down 18.4% sequentially and 22.7% compared to a year ago. Gross profit of Q3 was $117.3 million, compared to $138.5 million in Q2 and $126.8 million in Q3 of last year. Gross margin in Q3 was 17.8%, compared to 17.2% in Q2 and 14.9% in Q3 of last year. Our Q3 gross margin came in well above the guided 14% to 16%. The increase in gross margin was primarily due to lower module costs as a result of a decreased purchase price of wafer and cells as well as lower manufacturing costs, which offset module ASP pressure. We also benefited from our ongoing technology upgrade and strong inventory management. We expect to continue to benefit from improved manufacturing efficiencies following our investments in advanced production technologies such as diamond wire-saw technology combined with our proprietary Onyx black silicon multi-crystalline solar cell technology. Total operating expenses were $90.3 million in Q3 compared to $98.9 million in Q2 and $95.9 million in Q3 of the prior year. The sequential decrease was primarily due to the decrease in G&A expenses due to certain Q2 one-time charges of our terminated YieldCo launch and an estimated loss of our Funing plant resulting from the tornado in June 2016 and offset in part by product impairment charges and higher labor costs recorded in Q3. Income from operations was $27 million in Q3 compared to $39.6 million in Q2 and $30.9 million in Q3 of last year. Operating margin was 4.1% this quarter, compared to 4.9% in Q2 and 3.6% in Q3 of last year. Net foreign exchange gain in Q3 was $4.4 million compared to $24.9 million in Q2 and $17.1 million in Q3 of last year. We recorded a gain in fair value of derivatives of $2 million in Q3, compared to a loss of $1.6 million in Q2 and a loss of $12.3 million in Q3 of last year. Income tax expense this quarter was $16,000 only compared to $16.3 million in Q2 and income tax benefit of $3.9 million in Q3 of last year. Net income attributable to shareholders for this quarter was $15.6 million or $0.27 per diluted share compared to net income of $40.4 million or $0.68 per diluted share in Q2 2016 and a net income of $30.4 million or $0.53 per diluted share in the third quarter of 2015. Now, moving to the balance sheet, at the end of Q3, cash and cash equivalents was $480.9 million compared to $495.1 million at the end of Q2. Restricted cash balance was $505.1 million at the end of Q3 compared to $511.6 million at the end of Q2. Trade accounts receivable balance was $351 million at the end of Q3, down from $356.7 million at the end of Q2. Accounts receivable turnover was 68 days in Q3 2016 compared in Q2 2016. Inventories at the end of Q3 2016 were $313.9 million compared to $309.7 million at the end of Q2 2015. Inventory turnover was 56 days in Q2 2016 compared to 51 days Q2 2016. Total build-to-sell project assets at the end of Q3 were $1.2 billion compared to $145.3 million at the end of Q2 2016. Solar power systems at the end of Q3 were $436 million compared to $1.8 billion at the end of Q2 2016 which included operating solar plants as well as plants under construction we held for the purpose of generating electricity income. In the third quarter, we decided to sell certain solar power plants and as a result we reclassified $1.6 billion of assets on these projects legal entities, including $1.5 billion of solar power systems, $24.7 million cash and cash equivalents and the restricted cash and $18.7 million of accounts receivable to project current and assets held for sale. Total project assets and the assets held for sale at the end of the third quarter of 2016 were $1.2 billion and a $529.2 million respectively. Correspondingly, we also reclassified $356.3 million of the liabilities including $143.5 million of short-term borrowings and a $151.7 million of long-term borrowings associated with these assets held for sale to liabilities held for sale. Short-term borrowings at the end of Q3 totaled $1.51 billion compared to $1.37 billion at the end of Q2. Long-term borrowings at the end of Q3 were $615.8 million compared to $828.5 million at the end of Q2. Senior convertible notes outstanding totaled $125.4 million at the end of Q3, down from $128 million at the end of Q2. Short-term borrowings and the long-term borrowings directly related to the utility-scale projects totaled $1.2 billion at the end of Q3 compared to $835 million at the end of Q2. Shawn talked about the top timing of our project sales in Canada, China, and progress in the U.S. I will only add that we will remain focused on our realigned flexible and regionalized strategy for our total solutions business as we further build on our proven track record of developing and monetizing solar power projects worldwide. We expect to delever our balance sheet with the proceeds from expected project sales. Before we take your questions, I’d like to highlight some recent notable financing transactions. On October 13, 2016, we entered into a syndicated three-year loan facility for JPY9.6 billion or US$95 million with Japanese banks. The loan proceeds will be used to finance solar project development in Japan and for general corporate working capital requirements. On September 21, 2016, we signed a financing agreement with Export Development Canada or EDC, in which EDC agreed to provide guarantees or letters of credit of up to US$100 million to support our global project development. And in September, we successfully completed the initial issuance of RMB400 million or US$60 million commercial paper from a term of 12 months with a fixed interest rate of 5.5% to RMB500 million or US$74.8 million commercial paper for a term of nine months with a fixed annualized interest rate of 5.3%. We intend to use the proceeds to repay debt and to enhance our working capital. These financing arrangements will support our global project development, enhance our working capital and improve our long-term access to the credit markets for a broader range of financing solutions. Moreover, these new financings will enable us to pay some of our existing debt, which tends to carry high interest rate and a more restrictive covenant. For example, in October and November, we repaid the outstanding US$180 million borrowings from a credit facility arranged by Credit Suisse and there is a balance of $32 million facility from Harvest North Star Capital. With that, I’d like to open the call to your questions. Operator?

Operator

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of Colin Rusch of Oppenheimer. Please ask your question.

Colin Rusch

Thanks so much, guys. Can you talk about the geographic exposure for the demand through the end of the first quarter? Are you seeing significant amount of Japan in that mix and what can we expect that you work through the first part of -- or I should say after 1Q and the balance of the year in terms of geographic exposure?

Dr. Shawn Qu

Colin, this is Shawn speaking. For Q1, the silver star will be India, because many of the Indian projects have COD deadline of March 31st. Therefore, there is a very strong demand from India in Q1. And Q2, I expect China to provide silver lining as China has been talking about another adjustment date, which would be either June 30 or September 30. But we are now -- but everybody here is planning on June 30. And for Q2 and Q4, I would expect the U.S. project to gain seem. And Japan has been stable and other markets also seem to be stable; actually there is also strong demand from UK in Q1.

Colin Rusch

And then, with the recognition of these projects whether it’s 4Q or 1Q on the below the line cash. Can you just talk about the tax treatment on that; is that after tax number or should we expect in UK and Canada impact majority of that cash?

Dr. Shawn Qu

Well, if it’s Canadian project, then it’s Canadian tax; if it’s U.S. project -- if it’s China project, then maybe China tax. Those near-term projects are in Canada and China.

Colin Rusch

Okay. I am just trying to get a sense of that process, if it’s call it $55 million, should we be thinking about something closer to 30% tax rate pointed on that or should we be thinking about something much lower than that?

Dr. Shawn Qu

I am not a tax expert, but I think it’s going to be a normal Canadian tax. It’s not cash because cash wise, we do have some used tax credit in Canada but for accounting purposes, I would expect a normal Canadian tax rate.

Operator

The next question comes from the line of Philip Shen of Roth Capital. Please ask your question.

Philip Shen

Hi. Thanks for the questions. Can you share with us what you’re seeing in terms of ASPs for Q4, as well as Q1, given that you’re fully booked for the quarter? And then, how do you expect the ASPs to trend throughout 2017?

Dr. Shawn Qu

Usually we don’t guide the current quarter ASP as we still don’t want to affect a customer’s purchasing behavior, although we have already on our book. But the Q4 ASP will be lower than Q3 because for Q3, we have some carrying over orders from Q2. So from Q2, Q3, Q4, you will see the ASP trending down but the Q1, Q2, it’s more or less at the same level of Q4. In other words, we expect Q1 and Q2 we have a stable ASP environment.

Philip Shen

Great. Thanks Shawn. I terms of the cost structure, can you help us understand what the blended module cost structure was in Q3 and then how do you expect that to trend in Q4 and then what do you see in Q4 2017? In the past, I think you’ve talked about it hitting $0.29 a watt in Q4 2017. Just curious to see what the updated numbers might be.

Dr. Huifeng Chang

Right now, we see Q4 for our cost structure maybe for the domestic insurance, the blended module cost in China will be $0.02 lower than Q3, but outside China compared to inside China will be a couple of cents higher.

Philip Shen

Okay. [Multiple Speakers]

Dr. Huifeng Chang

On blended basis our total manufacturing costs, I expect it to be close to $0.03 lower compared to the Q3 level.

Philip Shen

Okay, great. Do you have an updated sense for where you might end up at the end of next year?

Dr. Huifeng Chang

Close $0.30, but not below, I mean in the first half.

Dr. Shawn Qu

So, we guided the China based for the integrated costs to be China $0.25 by Q4 next year. I think we will be on target to achieve that. And the blended is usually couple of cents higher than the China integrated. So, if the China integrated reach $0.25, I would expect the blended could be $0.30 or could be below $0.30 just depending on the supply demand balance because for the branded costs, there for certain market fluctuations and by cell supply and wafer supply, the price will fluctuate depending on the supply demand situation. Typically, it will be a few cents from China vertical integrated provider. [Ph]

Philip Shen

One last question here for me. You mentioned in the release a number of times the delay of the 850 megawatts cell facility in Southeast Asia. I don’t recall what the rationale for the delay was. Can you help us understand why it was, again?

Dr. Shawn Qu

It’s a construction issue, it’s on the building; the construction was delayed due to the geographic condition of that particular land. But, it will be fixed. So, the schedule is delayed for a couple of months.

Philip Shen

Okay, great. Shawn, Huifeng, thank you very much. I will pass it on.

Dr. Shawn Qu

Thank you.

Dr. Huifeng Chang

Thank you.

Operator

[Operator Instructions]The next question comes from the line of Paul Coster of JP Morgan. Please ask your question.

Mark Strouse

Hi. This is Mark Strouse on for Paul. Thanks for taking our questions. So, just one for us. Just hoping you could comment generally on gross margin. So, a lot of moving parts with ASPs coming down and costs coming down but you also have the restarts of the Funing plants over the next few quarters. So, directionally speaking, is there anything you can share on gross margins looking into the first half of next year?

Dr. Shawn Question

Hi. This is Shawn speaking. The Q4, the current quarter, the gross margin will have the impact. So, we expect the manufacturing gross margin of the current quarter to be in low teens. It’s partially because of our -- the out of service of our own cell factory also partially because in the past several weeks, the part of the solar supply chain, the price rebound from the wafer to cell, but the module price, somehow most of the module makers have signed the module orders early on. Therefore, we are a little bit squeezed in Q4. Moving into Q1 and Q2, I expect to get back to the mid-teen range very quickly and our target is high teens to low 20, I hope by the end of next -- end of next year, we’ll be able to get back to that level.

Operator

Your next question comes from the line of Sheng Zhong with Morgan Stanley. Please ask your question.

Sheng Zhong

So, I have several questions here, one is about your black silicon technology. You mentioned that you are rolling out the diamond saw slicing as well. So, basically, I want to ask you about your -- do you have any cost and cost expectation of your black silicon, actually not only in terms of the wafer cost but also of the cell level cost?

Dr. Shawn Qu

The diamond wire-saw itself we think it will be able to reduce the cost, the wafer cost and cell cost for the multi-crystalline silicon cell by $0.02 to $0.03. We think $0.02 to $0.03 is in our hand. Now, there is a chance that we can even do better than $0.02 to $0.03 cost reduction. And for the cell and module process, the cost is almost the same. So, we’ll be able to transfer that $0.02 to $0.03 cost reduction in the silicon to module level.

Sheng Zhong

That’s great. So, another question on your Japanese YieldCo, can you give some more background information about the YieldCo market in Japan such as what the total project capacity like, and what the yield ratio and growth expectations of the investors Japan market? And also Japan’s FIT deadline will be April next year, so if after the deadline, will the project return in Japan be changed for you?

Dr. Huifeng Chang

The demand for the solar yield of J-REIT in Japan is very high; I was there a month ago. Right now, we are planning to launch the Japanese J-REITs in either second or third quarter next year, depends on two factors. One is some internal, we need to some restructuring about the project of the business entities to enhance the tax efficiency; and the second is the Japanese government, sometime middle December, they will make a decision on some tax regulation. Now, if the tax regulation will extend as we expected, then we will probably wait a little bit longer to third quarter to launch the J-REIT, so that we can amass more projects into this launch. But if the ruling is negative, then there is a deadline end of March, we need to rush, probably launch a small J-REIT first and then in the later quarters, after we build more assets, then we will just drop down those assets into this existing YieldCo. So, right now, we have hired the bankers and hired the tax advisors in the final stage of preparing this launch. Thank you.

Sheng Zhong

Yes, so about the timing. So, do you mind to give me some more information about the expected yield ratio and the growth expectation from the Japanese investors?

Dr. Huifeng Chang

Since we have not launched the marketing process yet, I cannot disclose more details, but you may look at our pipeline and look at the data points in the history and then there are a couple of existing J-REITs already existing in the market. So, you can see what type of pricing investors are willing to take. So from there, maybe you can estimate what proceeds we can generate from those launches.

Sheng Zhong

And my last question is -- sorry, I still have one last question, is about our project monetization. So, in this current quarter and next quarter, you are expecting to have to monetize around $500 million of your solar projects with high teen gross margin. And in meantime, you also mentioned that for your current around $915 million project, the resale value is around $1.4 billion with a gross margin around low teens. So, I guess the rest of the projects to be monetized after first quarter next year would be a majority from the U.S. market. And it looks like the margin is lower than the Canada and China projects. So, just wondering if you can give some more color about the U.S. project’s monetization gross profit outlook and what the market demand for the -- demand in the U.S. market?

Dr. Shawn Qu

We are just starting the process there, the process for the U.S. market. So, I don’t want to comment on the pricing or the margin expectation, and I don’t want to influence my potential customers. And so, let us run a process and we will let the market know once we get to the end of that process.

Operator

Your next question comes from the line of Carter Driscoll of FBR. Please ask you question.

Carter Driscoll

I just wanted to follow up on a question, I mean on a comment you made earlier Shawn in your prepared remarks talking about your confidence in why the market is overestimating the overcapacity issue and maybe you could give us a little bit of color, your perception of the outdated technology, maybe quantify in your sense what the supply demand imbalance might be versus maybe the market perception. And I have a follow-up.

Dr. Huifeng Chang

I think the market is really dynamic. For example, in Q3, we did see market weakness and we responded by preparing ourselves by lowering the inventory level in Q2. So, I think we partially succeeded. And therefore, we were able to maintain a relatively healthy gross margin. However, we think to be little bit -- to the conservative side at the end of Q3, so that we didn’t fully utilize our capacity or the material cost is at the low-end. And then all of a sudden, like moving into October, the demand rebounded. This shows us the demand is actually there. However, the customers were waiting, when they see the price change. But by October, the customers are also reaching the -- getting close to the COD dates so they start to purchase. That’s why I comment that the market is dynamic. We can’t say that the market is absolutely overcapacity or under capacity. For example in Q4, we easily get overbooked, and in Q1 we are also fully booked. So, the challenge is to actually predict the demand and the timing of the demand and also the supply demand balance at every step of the value chain. It’s difficult to make such an accurate prediction. So, maybe the right way is to err on the conservative side.

Carter Driscoll

And then maybe just taking a step back, maybe a little bit more philosophical. If you look at obviously change in administration in the United States over the last couple of weeks, certainly has not necessarily been perceived favorably by the global energy community. What types of actions could you take if President-elect Trump were to impose some type of tariff on Chinese manufacturing? I realize a lot of it is not located there domestically anymore. But, are you concerned from a policy perspective there could be major changes or do you see them at the margin or how do you expect the next couple of quarters to play out and how do you think you can plan for that if you had such a view?

Dr. Huifeng Chang

It’s too early to make such a speculation. Let’s give President-elect Trump a chance and give him -- let him articulate his policy. We don’t know yet. However, U.S. already had a 30% antidumping and anti-circumvention duty on Chinese solar modules, so how much more can they do? And there is very little shipment of solar modules from factories in China to U.S. anyway. So most of the product to U.S. suppliers either by U.S. suppliers or by the manufacturers in Southeastern Asia and also Europe. So, I don’t think duty wise, it can be any worse than this. And for other parallels -- other policies, I think we just wait for a couple of months. Whatever comes will come; we’ll see.

Operator

The next question comes from the line of Jeff Osborne of Cowen and Company. Please ask your question.

Jeff Osborne

Just a couple of questions from my end. I wanted to clarify the comments on the cost structure. I think your investor presentation as of September talks about a Q4 2017 cost structure for fully integrated, so I believe the 1.3 gigawatts of capacity you are talking about, in that presentation at $0.29, and then you have a Q4 of 2020 target of $0.25. On this call, I believe you said $0.25 for the end of next year. Can you just talk about where the $0.04 improvement came or perhaps you were mistaken and were referring to 2020 target?

Dr. Shawn Qu

Let me correct myself. The $0.25 is for 2020 and $0.29 is for the Q4 2017. We might be able to do better than $0.29. Therefore, let’s say if $0.29 of fully integrated China cost, then our total blended cost will be in the low 30s.

Jeff Osborne

And just so I’m clear, the $0.29 or perhaps a little bit better than, that’s only for the 1.3 gigawatts of diamond wire that you would have in place in the fully integrated, just as we try to think about the fully integrated cost?

Dr. Shawn Qu

It could be higher than 1.3 gigawatts. And after 1.3 gigawatts, we will continue and we will further ramp up the diamond wire-saw and black silicon. So, let’s wait to early next year when we provide the guidance for the capacity for 2017, end of 2017. But it’s way higher than -- I think it will be way higher than 1.3 gigawatts.

Jeff Osborne

That’s good to hear. Two other quick clarifications, one, so that $0.29 target, that is just a cash cost, correct? So, do we need to add in terms of full accounting treatment, we would add back warranty, shipping and depreciation or all of those?

Dr. Shawn Qu

That’s the total CODs. I think the total CODs include depreciation, also include warranty cost, it doesn’t include the shipping cost.

Jeff Osborne

Okay. And then last question from me -- go ahead.

Dr. Shawn Qu

So, shipping is extra. You just check the accounting block, we follow the GAAP accounting policy.

Jeff Osborne

That’s great. And then, I think you talked about the fully baked cost last quarter was $0.39. Is there a way you could share what that cost was this quarter?

Jeff Osborne

It will be below that; it will be lower than that.

Dr. Huifeng Chang

Can you repeat the question, what’s the $0.39?

Jeff Osborne

I thought that fully blended cost last quarter, it was according to your investor presentation on page 13 suggest that the cost in Q2 of 2016 was $0.39 a watt with $0.18 for wafers, $0.08 for cells and $0.13 for modules. I am just trying to get a sense of in particular as your acceleration as for diamond wire plays out, how we should think about that $0.39 in the third quarter that you just reported and then over the next few quarters.

Dr. Huifeng Chang

Okay. For Q3, it decreased by $0.04 to $0.35 for the blended manufacturing cost in China. So, on the Companywide, the comprehensive blended manufacturing cost was $0.37, $0.02 higher than blended cost in China,

Operator

And there are no further questions at this time. I would now like to hand the conference back to Canadian Solar CEO. Please continue.

Dr. Huifeng Chang

Thank you very much for everyone for attending the call. And if you have any questions, please contact us. And have a good day.