Daqo New Energy Corp
NYSE:DQ
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Daqo New Energy Corp
Earnings Call Analysis
Q2-2024 Analysis
Daqo New Energy Corp
The solar industry has been facing significant challenges, particularly in the second quarter of 2024. Market prices for polysilicon have fallen below production costs, leading to substantial financial difficulties across the sector. Companies are selling at unsustainable prices, with significant cash flow issues causing delays in loan repayments and order deliveries. This environment is likely to lead to market consolidation, as higher-cost manufacturers reduce capacity or exit the business altogether.
Daqo New Energy reported revenues of $220 million for Q2 2024, a staggering decline from $415.3 million in Q1 2024 and $637 million in the same quarter of 2023. This drop was primarily due to reduced average selling prices (ASP) and decreased sales volume. The company faced a gross loss of $159 million, reflecting a negative gross margin of 72%, down from a positive margin of 17.4% in Q1 2024. The loss from operations reached $196 million, compared to an operational income of $30.5 million just one quarter prior.
Daqo recorded a significant inventory impairment expense of $108 million, attributed to a decrease in market value below book value. Approximately 60% of this impairment was linked to finished goods inventory. The average production cost decreased to $6.19 per kilogram, down 3% from Q1, yet remains above the current market pricing of around RMB 40 per kilogram.
In Q2 2024, Daqo's total polysilicon production volume reached 64,961 metric tons, surpassing expectations and marking a quarter-over-quarter increase of 2,683 metric tons. However, due to market conditions, the company announced adjustments to its production utilization rate for Q3, anticipating a total production volume of approximately 43,000 to 46,000 metric tons, down from their previously set targets.
Looking ahead, Daqo has revised its full-year production guidance to a range of 210,000 to 220,000 metric tons. The company's management expressed optimism about potential price recovery due to reduced inventory levels and lower-than-average production from competitors. Recent trends suggest that prices may rise by RMB 2 to RMB 4 per kilogram in the remaining months of 2024, potentially stabilizing near production costs.
Daqo maintains a strong liquidity position with $997 million in cash and significant short-term investments. The company is strategically leveraging higher interest rates by holding $1.4 billion in fixed-term deposits. Additionally, Daqo has initiated a $100 million share buyback program, reflecting confidence in its valuation and operational recovery efforts in the coming year.
Despite current market challenges, Daqo's management believes in a long-term competitive position due to ongoing cost reductions in solar PV products and expected increasing demand with market consolidation. The Chinese solar PV market continues to provide growth opportunities, with new installations reflecting a year-over-year growth rate of 30.7% in the first half of 2024, further bolstering the company's optimistic outlook for future performance.
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Hello, and welcome to the Daqo New Energy Second Quarter 2024 Results Conference Call. [Operator Instructions] Please note, this event is being recorded.
I would now like to turn the conference over to Anita Zhu, Investor Relations Director. Please go ahead.
Hello, everyone. I'm Anita Zhu, the Investor Relations of Daqo New Energy. Thank you for joining our conference call today. Daqo New Energy just issued its financial results for the second quarter of 2024, which can be found on our website at www.dqsolar.com. So today, attending the conference call, we have our Chairman and CEO, Mr. Xiang Xu; our CFO, Mr. Ming Yang; and myself.
The call today will begin with an update from Mr. Xu on market conditions and company operations, and then Mr. Yang will discuss the company's financial performance for the quarter and the year. After that, we'll open the floor to Q&A from the audience.
Before we begin the formal remarks, I would like to remind you that certain statements on today's call, including expected future operational and financial performance and industry growth are forward-looking statements that are made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These statements involve inherent risks and uncertainties. A number of factors could cause actual results to differ materially from those contained in any forward-looking statements.
Further information regarding these and other risks is included in the reports or documents we have filed with or furnished to the Securities and Exchange Commission. These statements only reflect our current and preliminary view as of today and may be subject to change. Our ability to achieve these projections is subject to risks and uncertainties. All information provided in today's call is as of today, and we undertake no duty to update such information, except as required under applicable law.
Also during the call, we will occasionally reference monetary amounts in U.S. dollar terms. Please keep in mind that our functional currency is the Chinese RMB. We offer these translations into U.S. dollars solely for the convenience of the audience. Mr. Xu will make his remarks regarding current market conditions and company performance in Chinese, which I'll translate into English after he finishes.
So, now I'll turn the call to our CEO. [Foreign Language]
[Foreign Language]
Hello, everyone. This is Anita. I'll now translate our CEO, Mr. Xu's remarks. The solar industry experienced significant challenges during the second quarter, as market prices fell across the solar value chain to below production costs for nearly the entire industry. As end-of-quarter polysilicon ASP fell below our production cost, we were required in accordance with accounting rules to record a non-cash inventory impairment expense of $108 million because our inventory market value fell below book value. This had a significant negative impact on our cost of revenue, gross loss, operating loss and net loss.
Nevertheless, we continued to maintain a strong balance sheet free of financial debt. By the end of the quarter, we had a cash balance of $997 million and a combined cash and bank note receivable balance of $1.1 billion. To take advantage of higher interest rates compared to bank savings, we purchased $1.4 billion of short-term investments and fixed term deposits during the quarter. Inclusive of short-term investments and fixed term deposit, we had adequate liquidity with a balance of quick assets of USD 2.5 billion.
On the operational front, during the second quarter, we started initial production at our 100,000 metric tons Phase 5B polysilicon project in Inner Mongolia as planned, which contributed approximately 12% of our total production volume.
Overall, the total production volume of our 2 polysilicon facilities for the quarter was 64,961 metric tons, exceeding our expectations and representing an increase of 2,683 metric tons compared to our production volume for the previous quarter.
Through continued investments in R&D and dedication to purity improvements at both facilities, our overall N-type product mix reached 73% during the quarter. Remarkably, even our Phase 5B, which was still in the ramping up stage, had 70% N-type in the product mix, strengthening our confidence in achieving 100% N-type by the end of next year. In addition, our production cost trended down further in the second quarter, decreasing by 3% from Q1 2024 to an average of $6.19 per kilogram.
In light of the current market conditions and pricing, we have adjusted our target production utilization rate for the third quarter and our production plan for the full year. We expect our Q3 2024 total polysilicon production volume to be approximately 43,000 metric tons to 46,000 metric tons, as we started maintenance and lowered our production utilization rate to support pricing and reduce our cash burn. As a result, we anticipate our full year 2024 production volume to be in the range of 210,000 metric tons to 220,000 metric tons.
During the second quarter, solar market sentiment was depressed and customers showed little interest in purchasing products. As a result, polysilicon prices kept setting new lows, below production costs and even below cash costs.
Polysilicon prices plummeted from slightly above RMB 60 per kilogram on average in early April to RMB 40 per kilogram to RMB 55 per kilogram in late April, and further dropped below RMB 40 per kilogram near the end of May through the end of June.
Overall, sales pressure intensified as industry-wide polysilicon inventory increased from approximately 18 to 20 days of production in early April to more than a month of production by the end of June. With prices declining for weeks to below the industry's cash cost and inventory accumulating, we began to see maintenances and production cuts across the industry.
Based on industry statistics, the total polysilicon production volume in China dropped about 16% from approximately 192,000 metric tons per month in April to approximately 162,000 metric tons in June. However, the supply of polysilicon still exceeded the wafer customer demand, which has dropped around 50 gigawatts in June due to lower utilization rate.
In July, although there have been further industry polysilicon production cuts, an uptick in demand from downstream manufacturers will be needed to drive inventory reduction and price recovery. The solar industry has gone through multiple cycles in the past, and based on our previous experience, we believe the current low prices and market downturn will eventually result in a healthier market, as poor profitability, losses, and cash burn will lead to many industry players exiting the business, with some possible bankruptcies. This will bring the inevitable capacity rationalization, eventually solve the current overcapacity, and ultimately bring the solar PV industry back to normal profitability and better margins.
This year will be challenging for China's solar PV industry, as solar manufacturers along the value chain experience weak margins driven by oversupply, excessive inventory, and lower prices. At this point, we may have reached a cyclical bottom, but do not yet see clear signs of potential improvement. We believe that the current situation of selling below cash cost is unsustainable and that many solar firms are facing significant cash flow challenges leading to delays in loan repayment and order deliveries. Therefore, we are likely to see market consolidation with higher-cost manufacturers gradually phasing out capacity and exiting the business.
So recently, the China Photovoltaic Industry Association has urged central and local governments, financial institutions and companies to coordinate to accelerate industry consolidation. Chinese policymakers are also calling for the healthy expansion of the solar industry.
China's Ministry of Industry and Information Technology issued a draft in early July that sets rules for solar projects, such as meeting specific electricity consumption requirements and minimum capital ratio for new and expansion projects, to ensure the high-quality development of the solar PV industry and eliminate outdated capacity.
On the demand side, we continued to see strong growth in new solar PV installations in China during the first half of 2024, which reached 102.48 gigawatts, representing a 30.7% year-over-year growth rate.
Overall, in the long-run, solar PV is expected to be one of the most competitive forms of power generation in China, and the continuous cost reductions in solar PV products and the associated reductions in solar energy generation costs are expected to create substantial additional demand for solar PV. We believe that we're well positioned to weather the current market downturn and emerge as one of the leaders in the industry to capture future growth.
So, now I'll turn the call to our CFO, Mr. Ming Yang, who will discuss the company's financial performance for the quarter. Ming, please go ahead.
Thank you, Mr. Xu and Anita. Hello, everyone. This is Ming Yang, CFO of Daqo New Energy. We appreciate you joining our earnings conference call today. I will now go over the company's second quarter 2024 financial performance.
Revenues were $220 million compared to $415.3 million in the first quarter of 2024 and $637 million in the second quarter of 2023. The decrease in revenue compared to the first quarter of 2024 was primarily due to a decrease in the ASP as well as decrease in sales volume.
Gross loss was $159 million, compared to gross profit of $72 million in the first quarter of 2024 and $259 million in the second quarter of 2023. Gross margin was negative 72%, compared to 17.4% in the first quarter of 2024 and 40.7% in the second quarter of 2023.
For the second quarter of 2024, the company recorded $108 million in inventory impairment expenses, as the Company's inventory's market value falls below book value. The decrease in gross margin compared to the first quarter of 2024 was also due to lower ASP, which was partially mitigated by lower production cost.
SG&A expenses were $37.5 million, compared to $38.4 million in the first quarter of 2024, and $43.3 million in the second quarter of 2023. SG&A expenses during the second quarter included $19.6 million in non-cash share-based compensation cost related to the company's share incentive plans, compared to $19.6 million in the first quarter of 2024.
R&D expenses were $1.8 million, compared to $1.5 million in the first quarter of 2024 and $2.2 million in the second quarter of 2023. R&D expenses can vary from period to period and reflect R&D activities that take place during the quarter. Most of our R&D activities has been around increasing our N-type percentage.
As a result of the foregoing, loss from operations was $196 million, compared to income from operations of $30.5 million in the first quarter of 2024 and $214 million in the second quarter of 2023.
Operating margin was negative 89%, compared to 7.3% in the first quarter of 2024 and 33.6% in the second quarter of 2023.
Foreign exchange loss was $1.4 million, compared to $0.3 million in the first quarter of 2024, which is attributable to the volatility and fluctuation in the U.S. dollar and Chinese New Yuan exchange rate during the quarter.
Net loss attributable to Daqo New Energy shareholders was $120 million, compared to net income of $15.5 million in the first quarter of 2024 and $103.7 million in the second quarter of 2023.
Loss per basic ADS for the quarter was $1.81, compared to earnings per ADS of $0.24 in the first quarter of 2024, and $1.35 in the second quarter of 2023.
Non-GAAP adjusted net loss attributable to Daqo New Energy shareholders, excluding non-cash share-based compensation costs, was $98.8 million, compared to adjusted net income or non-GAAP attributable to Daqo New Energy shareholders of $36 million in the first quarter of 2024 and $134.5 million in the second quarter of 2023.
Adjusted loss earnings per basic ADS was $1.50, compared to adjusted earnings per basic ADS of $0.55 in the first quarter of 2024 and $1.75 in the second quarter of 2023.
EBITDA was negative $145 million, compared to $76.9 million in the first quarter of 2024 and $230 million in the second quarter of 2023. EBITDA margin was negative 66%, compared to 18.5% in the first quarter of 2024 and 36% in the second quarter of 2023.
Now on the company's financial condition. As of June 30, 2024, the company had $1 billion in cash, cash equivalents and restricted cash, compared to $2.7 billion as of March 31, 2024 and $3.17 billion as of June 30, 2023. As of June 30, 2024, the notes receivables balance was $80.7 million, compared to $194 million as of March 31, 2024 and $798 million as of June 30, 2023.
Notes receivables represent bank notes with maturity within 6 months. And as of June 30. 2024, fixed term deposit within 1 year balance was $1.2 billion, compared to nil in previous periods.
For the 6 months ended June 30, 2024, net cash used in operating activities was $278.6 million, compared to net cash provided by operating activities of $786 million in the same period of 2023.
And for the 6 months ended June 30, 2024, net cash used in investing activities was $1.7 billion, compared to $496 million in the same period of 2023. The net cash used in investing activities in the second quarter was primarily related to the purchases of short-term investments and fixed term deposits, which amounted to $1.4 billion.
And regarding the company's purchase of property, plant, and equipment, for the first 6 months of this year, this amounted to $292 million. We currently anticipate full year capital expenditures in the range of $550 million to $600 million, which is a further reduction from our earlier plans.
Capital expenditure for the second half of 2024 is therefore expected to be in the range of $260 million to $310 million. Capital expenditure for the year is primarily related to our Inner Mongolia polysilicon project, Phase I and Phase II.
And for the 6 months ended June 30, 2024, net cash used in finance activities was $43 million compared to $477 million in the same period of 2023. Net cash used in finance activity in the second quarter of 2024 was primarily related to dividend payments and share repurchase by our company's finance subsidiary.
And that concludes our prepared remarks. We will now open the call to Q&A from the audience. Operator, please begin.
[Operator Instructions] The first question comes from Phil Shen with ROTH Capital Partners.
This is Matt Ingraham on for Phil. Looking ahead, can you give us a sense of pricing and cost structure beyond this year? Do you think that there could be some recovery in price next year? And, how much more room do you have to lower the cost structure?
This is Ming, CFO of Daqo New Energy. I think in recent months, particularly in August, we've already seen some pickup in recovery of pricing. Anita said, at the bottom, I guess, in terms of June and July, pricing was below RMB 40 per kilogram. And as of now, pricing is in the range of RMB 41 per kilogram to RMB 42 per kilogram. So we saw a range somewhere in between RMB 2 per kilogram to RMB 3 per kilogram in terms of price recovery. And this is primarily a result of the industry's production reduction and a slight uptick in demand from customers.
So we do not think the current pricing is sustainable. We do believe that, say, over the rest of the year, we should continue to see likely between RMB 2 to let's say, RMB 4 kind of price recovery production continued to remain at a lower level. And while for next year, we do believe that demand continued to improve, especially from new markets like Middle East, Latin America, Africa and again, I think, further market development in China and Europe, for example. So we do think that pricing should recover to at least production costs, or maybe normalized to higher production costs, higher than production costs. So we think maybe mid-next year is when we will see normalized pricing for polysilicon.
Great.
And quickly follow-up on your cost structure. We do think there continues to be opportunity to reduce cost. I think we're seeing very successful cost transform Inner Mongolia Phase II facility. I think you saw approximately 3% reduction of cost from Q2 to Q1. And we do expect that Q3 costs should be flat to slightly lower than Q2. So we think in the second half, we should -- overall, we should see costs somewhere around $6 million or even slightly lower than $6. And we think this cost structure should continue next year.
Really appreciate the color there. And then can you just talk about the channel inventory in the market? Do you expect that to continue to grow near-term? And where do you think that peaks?
Okay. Actually, channel inventory has already peaked. So inventory is actually coming down as of August, and we think this should continue to go down. I think primarily as a result of continued reduction in supply. So we think you should probably reduce to a much more reasonable level by, say, Q4 or by the end of the year, right? So unless we see some kind of meaningful price recovery at least above the industry cash costs were very unlikely to see improvement in production.
Okay. Great.
The next question comes from Alan Lau with Jefferies.
So, I would like to know about what is the breakdown on the impairment of $108 million because -- and also the inventory level at the end of 2Q because it appears that the production volume is higher than sales volume for $20,000. So as $20,000 a fair assumption on the inventory level by end of 2Q. And if that is the case, an impairment of $108 million seems huge. So I would like to know the basis on that.
Okay. So the reality is the $108 million is a reduction in not just finished goods, but also work in process inventory and raw material, which reduces our costs from our production cost, as I say, is around $6.19 per kilogram to really the current -- or the current market pricing, which is below RMB 40 per kilogram. And about 60% of that is related to finished goods inventory.
And then looking at our inventory at the end of the quarter. Give me a minute. Let me just quickly look that up. Okay. It's approximately 28,000 metric tons. Okay. So we built roughly 20,000 metric tons of inventory, like you said, during the quarter because of the market conditions and the weak demand. But I think starting in August, we're starting to see a reduction in inventory right now.
So if 60% is finished goods, so it's basically around, I guess, $60 million to $70 million of the impairment is related to the impairment of 28,000 tons, right? So that's still like around $2 per kilogram to $3 per kilogram. So, does is infused because the production cost, the spread between the ASP and the production cost appears to be only $1 per kilogram. So, I would like to know, did I miss anything from this front?
Okay. I think, realistically, if we look at pricing, especially what it looks where we have to reduce our inventory to, like, somewhere in the range of, say, RMB 37 per kilogram to RMB 38 per kilogram. So that's why we do a quick math.
So the ASP is RMB 37 or RMB 38, but your production cost is only at around RMB 40 something. So if the impairment is...
RMB 45 per kilogram.
Yes. so that's around -- yes, so that's around RMB 12 and then but if it's 28,000, then it's still at most, it should be like $300 million maybe. So it seems the impairment amount...
$50 million to $60 million. And then there's also raw materials, right? And then working process inventory that's also being reviewed.
I see. So maybe we move on to the guidance. So I have noted that the production volume guidance on 3Q and second half has reduced significantly. So I would like to know, first of all, the thinking behind this, is this to preserve cash? And secondly, what do you see like the utilization rates of your peers? Do they also cut their production volume as well?
I would say, yes. So for most of our peers, I think with the exception of maybe one of the main one, I think most have reduced utilization significantly, I think, in light of the current market pricing environment. I think certainly -- I think in the current market condition, I think we have to balance, right, I think in the most economical way in terms of maintaining production while at the same time minimizing cash burn cash loss. So we do believe that the currentization level that we have that we're operating in light of pricing remains at below cash cost is the most prudent, I think, also the most effective way of minimizing the cash burn of the company.
So there is effectively around 70% of utilization, right? So will this impact the production cost or is it fine?
It's actually, I would say, overall, very minimal impact on production costs, I think only RMB 1 to RMB 2. Yes, because almost 80% of our cost was what we call variable cost, which is electricity and energy and other consumables being and graphite and the silicon seed rod.
Understood. So regarding to the fixed deposit of an investment of $1.4 billion. So, I would like to know how long is those investment and how liquid are those? So basically, the question is related to buybacks because I would like to know the liquidity of the company on that front?
Okay. Almost all of the fixed investment and term loans were purchased by the Xinjiang Daqo subsidiary, right? So in terms of the U.S. ListCo and our cash balance, it's virtually all of it is in liquid savings accounts or money market funds. So -- and then that $1.4 billion is primarily in either 6 months -- I would call it fixed-term deposits with Chinese domestic banks or a high interest savings products offered by the banks.
I see. So...
And those were created within 3 months.
Within 3 months, right?
Yes.
I see. So my last question is basically on the buyback. So the company has launched the $100 million buyback program. So I would like to know, if the company is going to continue on the buyback and what is the planning of the buyback, like which price do you think it's appropriate? Or do you think the current stock price is the level where you think the company will actually accelerate the buyback?
Yes, Alan. So in terms of the share repurchase program, so we are authorized in the amount of USD 100 million back in July. So in terms -- so we definitely think that our stock is undervalued. But in terms of the pace, I would say that, it will be contingent upon the market conditions. And we will be more opportunistic in terms of the repurchase.
So we're going to look to probably to repurchase as many shares as possible for the company to maximize the money that we spend in terms of its effectiveness.
I see. And yes, as you have explained, so the cash is already there in the U.S. level. So probably, it's going to still go ahead in this year?
That's our current assumption, yes.
[Operator Instructions] The next question comes from Rajiv Chaudhri with Sunsara Capital.
My question -- the first question relates to the fully loaded costs that you will incur in Q3 and Q4, if you're reducing the utilization rate, shouldn't that actually increase your fully loaded cost relative to the fourth -- relative to the third quarter?
Well, I think interesting, that has to do with the cost structure of politician production, right? So roughly 35% to 40% is electricity. And then another 35% is silicon metal. And then majority of other costs is actually mostly consumables, like graphite, the silicon seed rod and the packaging.
So, if I look at what we would call -- you can call it variable costs where we don't produce, right? We don't buy silicon metal. We don't buy the consumables. So these represent actually more than 80% of the cost, okay? The remaining 20% approximately, 13% depreciation, right, which is the non-cash portion. So yes, depreciation will -- the deprecation -- the overall depreciation expense will be aggregated over a smaller volume. But I think the overall impact is not that much, right, because it's not a huge portion of our cost. And while in terms of the rest is labor -- roughly 6% of our costs, and then we were reducing labor costs by between 10% to 20%. We are optimizing our staffing level, for example.
So I think the overall impact is actually not that significant. As we maintain production, right? Because we're reducing production by what maybe 35%, something like that -- like the previous level. Yes.
Second question is related to the difference between production and sales. So you will produce 210,000 tons to 220,000 tons. But the sales are likely to be higher than that, right? I mean, if you expect inventories to get back to normal by the end of the year, then sales are likely to be, I don't know, 240,000 to 250,000. Is that the right way to look -- think about it?
I can only say, we -- well, that's -- you're talking about the full year, right? But I think realistically, in the first half, we did build inventory, so volume was less than production. And we expect the second half, we will see more sales than production, right. But depending I guess it's early, right? It's only August. So it really depends on how much more sales we can achieve relative to production, yes.
I see. But for the year as a whole, you expect sales to be greater than production, right?
It's difficult to tell -- to be host. It's difficult to tell. It's really up to Q4 performance.
I see. Okay. And can you give us any specific examples of companies that are of competitors who are actually closing shop as this thing from just reducing their output right now?
Well, I think one well-known case that happened recently was a company called Renyang, which I think they have a nameplate of over 100,000 metric tons. And the company was in a financial crisis where they had problems repaying their bank loans. And they have major issues repaying their suppliers and even pay interest. So our understanding is they're being consolidated by Tongwei. So -- and Tongwei is doing due diligence on them right now, yes. So I think they have significantly reduced production.
And then we know of 2 other cases where we're not going to say the company's name, but one new entrant actually build a 50,000 metric ton facility actually never even started. That facility, that facility remains idle. It's complete and idle. And then there's another peer competitor. I think they've built -- they've claimed they've built approximately 100,000 to 200,000 metric tons capacity. But we -- our understanding is the volume that they're selling into the market is actually fairly trivial. Yes. So those are the cases that we know of right now.
So when you look at -- and Ming when you look at the year as a whole, 2024 as a whole, do you think that with the sales that you will do, which will be, let's say, around your total production levels that you would have gained or lost market share in 2024?
I think at least based on the latest industry production, so even though we reduced utilization, I think we're still maintaining market share. I think based on our current production level were roughly 15% of the market.
But your total output would be about 10% higher than last year, or I should say, maybe your total sales will be about 10% higher than last year, right? So, do you think that, that is roughly the growth rate of the market this year, 10%?
Well, I think it really depends on -- especially Q4 because if you look at our production and sales volume in the first half, especially for Q1, it's still relatively healthy. It's really Q2, it came down. And then at this point, we're expecting our Q3 sales volume and shipment to be above Q2. And then Q4 is looking -- at least for now is looking at a positive trend. So I would say, if I look at industry statistics, I think it's still expecting roughly 20% kind of improvement?
Okay.
Maybe more than -- yes. Okay.
This concludes our question-and-answer session. I would like to turn the conference back over to Anita Zhu for any closing remarks.
Thank you, everyone, again for participating in today's conference call. Should you have any further questions, please don't hesitate to contact us. Thank you, and have an awesome day. Goodbye.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.