Daqo New Energy Corp. Q1 FY2021 Earnings Call

Good morning. Welcome to Daqo New Energy First Quarter 2021 Results Conference Call. Please note, this event is being recorded. I would now like to turn the conference over to Kevin He from Investor Relations. Please go ahead.

Hello, ladies and gentlemen. I’m Kevin He, 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 first quarter of 2021, which can be found on our website at www.dqsolar.com. To facilitate today’s conference call, we have also prepared a PPT presentation for your reference. Today, attending the conference call, we have Mr. Longgen Zhang, our Chief Executive Officer, and Mr. Ming Yang, our Chief Financial Officer. The call today will feature an update from Mr. Zhang on market and operations, and then Mr. Yang will discuss the company’s financial performance for the quarter. After that, we will 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 statement. 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 conference 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. Without further ado, I now turn the call over to our CEO, Mr. Zhang.

Thank you, Kevin. Hello, everyone. Thank you for joining our conference call today. During the quarter, we continued to see strong momentum in customer demand for high-purity polysilicon, which led to a significant shortage of polysilicon and higher polysilicon ASPs. Our ASP in the first quarter of 2021 was $11.90 per kg, approximately 10% higher than Q4 2020. Due to the elapsed time from contract signing, product shipment to revenue recognition upon products’ arrival at customers’ sites, it takes time for market prices to be fully reflected in our ASPs during periods of rapid price change. Based on current customer contracts and product deliveries, we expect our ASP in the second quarter of 2021 to be in the range of $19 to $20 per kg, a significant improvement compared to Q1 that better reflects recent market pricing trends. As of today, current market pricing for high-purity mono-grade polysilicon has already reached the level of $23 to $25 per kg. With strong end market demand driven by global carbon neutrality commitments by all major economies, major mono-wafer manufacturers continue their capacity expansion and new entrants build new wafer capacity. As a result, we believe that supply in the polysilicon market will remain tight until the middle of 2022, when the market will finally see some additional supply of polysilicon. During the quarter, we produced 20,185 metric tons of polysilicon, which lays a solid foundation for achieving our production target this year and gives us the confidence to raise our guidance for annual production volume to the range of 81,000 to 83,000 metric tons from 80,000 to 81,000 metric tons. During the quarter, approximately 99% of our polysilicon products were sold to mono-wafer customers, and we already began commercial shipments of N-type polysilicon to our four major customers. Our production cost was up by 4% in renminbi terms in the quarter compared to Q4 2020, primarily due to the rise in the cost of silicon raw material and the impact of lower production volumes. We expect production costs to stabilize in the coming quarters as the cost of silicon raw material has stabilized for the time being. As we continue our efforts to reduce costs and improve quality, we expect to see the benefits from our newly implemented digital manufacturing system to stabilize production, maximize output, and optimize efficiency. On the business development front, we have already sold out our production volume of this year through long-term supply agreements with customers that span all the major mono-wafer manufacturers as well as major integrated solar manufacturers. More importantly, in connection with these long-term supply contracts, we have received RMB800 million of prepayments from customers this year to date, which will help us fund our future expansion plans and ensure our future market share. This shows the tightness of our polysilicon market and the strong momentum in demand growth, as well as the fact that our customers consider Daqo to be the leading supplier of high-purity mono-grade and N-type polysilicon with high reliability, stability, and consistency. In mid-March, we began construction for our new Phase 4B project, which will add 35,000 metric tons capacity for high-purity polysilicon. We expect to complete the project by the end of 2021 and ramp up to full capacity by the end of Q1 2022. Our Phase 4B project and the potential IPO on China’s STAR Market will bring us into a new phase of development and enable us to quickly expand capacity to address the fast-growing demand from the global solar PV market for ultra-high purity polysilicon. In the present context of global carbon neutrality goals, major economies in the world, including China, are launching ambitious policies to mandate the use of clean energy and address climate change. With the megatrend of the transformation to a lower carbon economy and de-carbonization of the energy sector, we are entering a new era of accelerated growth for the solar industry. We believe Daqo New Energy is very well positioned to benefit from this tremendous opportunity. Now let’s move to our outlook and guidance for our company. The company expects to produce approximately 20,000 to 21,000 metric tons of polysilicon and sell approximately 20,000 to 21,000 metric tons of polysilicon to external customers during the second quarter of 2021. For the full year of 2021, the company expects to produce approximately 81,000 to 83,000 metric tons of polysilicon, inclusive of the impact of the company’s annual facility maintenance. Now I will turn the call over to our CFO, Mr. Yang, who will discuss the company’s financial performance for the quarter.

Thank you, Longgen, and hello everyone. Thank you for joining our conference call today. Now I will discuss our company’s financial performance for the first quarter of 2021. Revenues were $256.1 million compared to $247.7 million in the fourth quarter of 2020 and $168.8 million in the first quarter of 2020. The increase in revenues was primarily due to higher ASPs, partially offset by slightly lower polysilicon sales volume. As Longgen indicated earlier, based on our current customer contracts and product deliveries, we expect our ASP in the second quarter of 2021 to be in the range of $19 to $20 per kilogram, a significant improvement compared to the Q1 average selling price of $11.90, while we saw a rapid and significant rise in market ASP during the first quarter. Due to GAAP accounting revenue recognition policies, there is a significant time lag from customer order contracting based on market price to polysilicon production and scheduled shipments to products finally arriving at the customer side for revenue recognition. Due to this impact, we believe our Q2 ASP will better reflect the recent market pricing trends. Gross profit in Q1 was $118.9 million compared to $109.5 million in the fourth quarter of 2020 and $56.6 million in the first quarter of 2020. Gross margin was 46.4% compared to 44.2% in the fourth quarter of 2020 and 33.5% in the first quarter of 2020. The increase in gross margin was primarily due to higher ASPs. Our polysilicon production cost in Q1 2021 was $6.29 per kilogram, an increase of 6.3% compared to $5.92 per kilogram in the fourth quarter of 2020. The sequential increase in cost was primarily due to an increase in the market price of metallurgical-grade silicon raw material and lower production volume in Q1 compared to the previous quarter, as well as the exchange rate fluctuations, which had roughly a 2% impact on cost in U.S. dollars. For the second quarter, we expect our production costs to be stable compared to the first quarter. Selling, general and administrative expenses were $9 million, compared to $11.2 million in the fourth quarter of 2020 and $8.9 million in the first quarter of 2020. SG&A expenses during the quarter included $2.5 million in non-cash share-based compensation costs related to the company’s share incentive plan, compared to $4.5 million in the fourth quarter and $4 million in the first quarter of 2020. Research and development expenses were $1.2 million, compared to $1.5 million in the fourth quarter of 2020 and $1.7 million in the first quarter of 2020. R&D expenses can vary from period to period and reflect R&D activities that take place during the quarter. As a result of the foregoing, income from operations was $109.2 million, compared to $98 million in the fourth quarter of 2020 and $45.8 million in the first quarter of 2020. Operating margin was 42.6%, compared to 39.6% in the fourth quarter of 2020 and 27.1% in the first quarter of 2020. Interest expense was $7.8 million, compared to $8.3 million in the fourth quarter of 2020 and $6.3 million in the first quarter of 2020. Net income attributable to Daqo New Energy Corp. shareholders was $83.2 million, compared to $72.8 million in the fourth quarter of 2020 and $33.2 million in the first quarter of 2020. Earnings per basic ADS was $1.13, compared to $1.01 in the fourth quarter of 2020 and $0.47 in the first quarter of 2020. EBITDA was $128.1 million, compared to $115.1 million in the fourth quarter of 2020 and $63.1 million in the first quarter of 2020. EBITDA margin was 50%, compared to 46.5% in the fourth quarter of 2020 and 37.4% in the first quarter of 2020. As of March 31, 2021, the company had $227.8 million in cash and cash equivalents and restricted cash, compared to $118.4 million as of December 31, 2020, and $120.8 million as of March 31, 2020. The increase in cash balance of $109 million sequentially was primarily the result of positive operating cash flow offset by capital expenditures related to our Phase 4B project. As of March 31, 2021, the notes receivable balance was $38.5 million, compared to $0.2 million as of December 31, 2020, and $4.4 million as of March 31, 2020. As of March 31, 2021, total bank borrowings were $222.2 million, of which $100.4 million were long-term borrowings, compared to total bank borrowings of $193.7 million, including $123 million long-term borrowings, as of December 31, 2020, and total borrowings of $265.6 million, including $149 million long-term borrowings, as of March 31, 2020. For the three months ended March 31, 2021, net cash provided by operating activities was $159.2 million, compared to $31.1 million in the same period of 2020. The strong increase in operating cash flow compared to last year was primarily due to higher net income as well as customer prepayments related to our long-term supplier agreements. For the three months ended March 31, 2021, net cash used in investing activities was $79.9 million, compared to $12.9 million in the same period of 2020. The net cash used in investing activities in 2021 was primarily related to the capital expenditures on the company’s Phase 4B polysilicon expansion project. For the three months ended March 31, 2021, net cash provided by financing activities was $31.7 million, compared to net cash used in financing activities of $10 million in the same period of 2020. And that concludes our prepared remarks. Operator, we will now open the floor to questions from the audience.

Our first question is from Gary Zhou with Crédit Suisse. Please proceed.

Hello, Management. Thank you for taking our questions. First of all, congratulations on the recorded high earnings. So I have just two questions. First, can management share with us the latest polysilicon ASP outlook for the second half of this year and possibly for next year? And secondly, I want to ask for the latest progress of our Xinjiang Daqo’s IPO, and if possible, what kind of evaluation or market cap do we expect to get from the Asia markets? And certainly, given the likely record high profits and cash flow we are going to achieve this year, how should we think about further capacity expansion over the next few years? Thank you.

Okay, Gary, to answer your first question. The ASP is currently seeing polysilicon ASP rising very fast. As you can see this week, our smaller orders reached over $20 per kg, and we believe that in June, the selling price will be higher. That's why we've guided for a second quarter ASP of around $19 to $20, a significant jump compared to Q1's $11.90, which should reflect improvements in our gross margin in the second quarter. The reason is that for the second half of this year, it’s challenging to forecast the polysilicon price. Currently, it is very difficult to predict peak prices, but wafer customers will continue to buy as their operating cash flow remains positive. The peak will continue until wafer industry average gross margins reach break-even. Right now, the wafer price has continued to rise, making it difficult to forecast polysilicon prices. However, we anticipate that polysilicon prices will continue to rise in the second half of the year since no new polysilicon capacity is being added. For the first half of next year, we may see around 1,000 tons of new capacity coming in. However, wafer capacity continues to expand, and by the end of this year, we expect to see around 450 kilowatts in wafer capacity. I cannot provide you specific numbers for the next year, but I believe the first half should be around RMB150 per kg, and in the second half, as new capacity comes in, we expect the ASP to remain above RMB120 per kg. As for our stock market listing, we cannot guarantee the timetable due to many uncertainties in the Chinese market, but we've updated our Xinjiang Daqo Q1 financial data and estimates for the first half of this year to the Shanghai Stock Exchange. We believe they will be released publicly soon, and we are waiting to begin the registration process with CSRC. This process is expected to take about 20 working days after our documents are officially accepted. After that, we can start the listing process, which may take around a month. If everything goes smoothly, we could be listed by early July. Regarding the valuation, it's tough for me to state, given the current conditions in the Chinese market, but we hope our IPO will benefit shareholders. This year’s financial results are strong and can support future price increases post-IPO. For cash flow, currently, we have approximately $227 million in cash and restricted cash. Additionally, we expect to receive around RMB400 million in deposits under long-term contracts throughout the year. Looking at our Q2 financials and the second half of the year, we are very confident that our operating cash flow will be high. Even without the STAR Market listing, we can support our 4B expansion adequately, with current investments estimated at around RMB3.6 billion, and we have already paid RMB1 billion so far. Therefore, we expect to spend between RMB3 billion to RMB2.8 billion for the 4B project this year, with only about RMB600 million to RMB700 million carrying over to the next year.

Thank you, Mr. Zhang. This is very helpful. I'll pass on now.

This concludes our question-and-answer session. I would like to turn the conference back over to Kevin for closing remarks. Oh, wait, we have one more. I’m sorry. The next question comes from an unidentified analyst. Go ahead.

I missed your price guidance for the second half of 2022. Could you repeat it again? I have a second question...

The price guidance for 2022, okay, basically, I cannot provide specific guidance, but based on my knowledge and discussions with industry peers, even in the second half of next year, the pricing should remain elevated due to continued wafer capacity expansion and strong demand for downstream products. The ASP will be approximately RMB120 per kg.

Okay. In the second half of 2022?

Yes.

Okay. My second question is, your realized price and the lag time between realized price and the market price. Given the fact that right now we’re seeing market prices at maybe RMB150, RMB160 per kg and realize price for the second quarter you guided at maybe $19 to $20 U.S., which is probably still below the current market price. Generally, how does your realized price for the quarter represent a lag time of how many months from the market price?

Yes, Kin, first of all, if you look at the market price, basically we should distinguish two prices: the market price and our ASP. When we talk about market price, okay, let’s say RMB190, RMB200 per kg. That's the peak for high-quality mono-grade polysilicon. However, when selling larger quantities, we usually see prices drop slightly. Our ASP, for example, if June's price is RMB190, ASP would be approximately RMB184 after adjustments. Generally, there's about a one-month delay; for example, shipments in April reflect pricing from March. So it's a little challenging to predict. However, if the price changes quickly, we may see variation in the ASP accordingly, but it’s difficult to provide an exact forecasting model.

To clarify, RMB190 to RMB195 includes VAT, right?

Yes, yes. Kim, please remember that in the industry, when we talk about the price in RMB, it’s always VAT included. When we say U.S. dollar terms, it’s always VAT excluded.

Okay. I’m just wondering when I look at PV info, are the prices quoted there normally ex-VAT or with VAT?

With the VAT, RMB prices are always with VAT included.

Okay. How much do you think costs would go up in the next quarter or two?

If you look at our Q2 costs, we saw a 4% increase. This was primarily driven by the rise in the cost of silicon raw materials and steam prices. However, we expect prices to stabilize moving forward as the market stabilizes, so it should be steady going forward.

Thank you very much.

Our next question is from Philip Shen from ROTH Capital. Go ahead.

Thanks for taking my questions. The first one is on pricing, but from a different angle. With the substantial rise in pricing for polysilicon, are you starting to see demand slow down anywhere in the value chain, whether it’s wafers or further down or even for polysilicon? Is there any talk of a slowdown in demand? What’s your latest outlook for China demand in 2021, how many gigawatts do you expect, and how does that compare with what you thought back in the Q4 call? Has that changed, either lower or higher? Thanks.

First of all, it’s tough for me to provide a forecast on pricing today. From now until mid-next year, for the earnings market, globally, I forecast around 165 to 170 gigawatts of demand. The silicon requirement will be around 40,000 to 55,000 tons. We currently have a shortage in supply. Hence, polysilicon prices are driven mainly by wafer capacity and the fact that wafer prices continue to rise drives silicon pricing up as well. I cannot predict exactly when we will see a price correction, but I expect that the market is still strong given the demand for high efficiency products like P-type and N-type panels. I believe the China market could see around 65 to 70 gigawatts of demand this year, and globally, we might hit around 180 to 190 gigawatts.

Okay. Thank you, Longgen. My next question is on your outlook for 2021. You indicated you are sold out. So this leads to another question: how much of your expected production has been tied up with long-term customer agreements for 2022, 2023 and possibly even 2024? When do you think you’ll be able to lock up all of your 2022 capacity? Will that happen soon, or will you keep some production available for the spot market?

After we signed the long-term contract with Zhonghuan last week, I think we have effectively locked all our production output for this year and next year. This year, we will have locked over 80,000 tons, and next year is in the range of 120,000 to 130,000 tons. So right now, we are not signing any more long-term contracts for 2021 and 2022. For 2023, we’ve locked around 70,000 tons, and for 2024 and 2025, it’s around 80,000 tons.

Thanks for that. Regarding the China listing, it seems like the requirements have tightened, and there’s been a slight delay in the process. Can you talk about the timing you think now for the actual listing? Do you think it could be complete by the end of Q2, or is there a chance that this could go into Q3? We've seen there might be some challenges due to increased pricing or increased R&D spending. Can you comment?

The issues are not related to capital or R&D spending but rather administrative updates that we need to handle. We’ve provided our Q1 update and are now waiting for the Shanghai Exchange to review those figures, following which it should be public soon. We believe we can start the registration process by the end of this month. If everything goes according to plan, we could complete the listing process by the end of July. There may be some uncertainties since we are the first U.S.-listed company attempting a listing of a subsidiary in China.

Okay. That's really helpful. Thank you. As it relates to CapEx, with the rising input costs, do you expect this to impact your CapEx for Phase 4B? What is your current expectation for CapEx for 2021 and 2022?

For regular CapEx, I think Ming can elaborate further. However, for Phase 4B construction, this year's total investment is around RMB3.6 billion. We've largely settled things in our contract, except for around RMB300 million yet to be signed. We expect to pay approximately RMB2.8 billion to RMB2.9 billion this year and carry the remaining RMB600 million to RMB700 million to the next year.

I may have missed it, but what’s your expected quarter for maintenance this year? Is it Q3 or Q4? What is your latest view?

I think we have already finished maintenance on one production line. The rest will take place starting in June, July, August, and September. Major maintenance will occur in Q3.

Great. Thanks for the clarification.

Thanks, Philip.

Our next question is from Dora Liu from JPMorgan. Go ahead.

Hi, this is Dora. I have two questions. The first is regarding the inventory levels. Could you share with us the current inventory level of Daqo and how it compares with the industry average level? The second question is regarding N-type polysilicon. I believe Mr. Zhang mentioned that Daqo started the commercial shipments of N-type polysilicon to major customers. What is the current mix percentage of N-type product within our polysilicon?

By the end of Q1, our inventory was around 1,295 tons, a drop from 2,491 tons in Q4. This drop reflects that we recognized revenue as quantities exceeded production for the quarter. Generally, in this industry, we aim to maintain low inventories; in our experience, we typically keep our inventory below 3,000 metric tons. Regarding N-type polysilicon, we currently sell N-type to four major clients and are shipping around 200 tons per month. In total, we sold around 2,000 tons of N-type in Q1, reflecting a mix that is roughly 2-3% of total sales. The ASP of N-type polysilicon is currently about RMB2 higher than our standard P-type polysilicon as we are incentivizing consumers to adopt N-type.

Thank you so much. That's quite helpful. Thank you. I'll pass it.

Great, thank you.

Our next question is from Tony Fei from Bank of China International. Go ahead.

Hi, management, thanks for your time. This is Tony from BOCI. I just have a follow-up question on the competitive landscape. Last week, we noted that East Hub announced they would build a 250,000-ton project in Ningxia province. How would this potentially affect Daqo’s future expansion plans beyond Phase 4B?

Tony, first of all, we will not comment on our competitors. Yes, we saw those announcements and respect our competitors. New hubs, I think, have started in Xinyang. It typically takes around five years to ramp that up. We're focused on our growth factors and strategies and feel confident in Daqo's capacity expansion with a strong market demand going into the future.

Okay. Thank you, Longgen. That’s very helpful.

Our next question is from John Segrich from Clear Sky. Go ahead.

Hey, guys. I wanted to discuss some issues regarding Xinjiang province and forced labor. I know that you recently did a tour, and the feedback has been positive. However, past tours like Sino-Forest have raised concerns. So, in terms of what you’re going to do to independently certify that there is no forced labor at Daqo or even in the entire supply chain? There have been reports suggesting that your raw material suppliers have direct ties to XPCC, including power supply companies. What steps will you take to ensure you are not subject to a potential ban of your products in the U.S. or the EU?

First of all, we stand firm against political interference. We’re focused on our business and expanding our contributions towards high-quality polysilicon production as part of the global green energy transition. We’ve hosted site tours for many international investors and media to showcase our facilities and processes for managing labor. We understand the need for high transparency regarding forced labor, and we may look to implement third-party audits to ensure compliance. That said, we have reiterated our zero-tolerance policy regarding forced labor.

Can you share the names of your two main suppliers of silicon?

The main suppliers are Hoshine and another silicon provider.

If both suppliers were tied to XPCC, would you cease purchasing from them?

We emphasize zero tolerance for forced labor. However, we also recognize that suppliers procure materials globally. It’s about monitoring relationships and ensuring they comply with our standards.

We have seen no clear evidence that our suppliers are involved in forced labor. If we find any evidence, we will not hesitate to enforce our zero-tolerance policy.

Thank you; this is a very important concern that needs addressing.

Our next question is from Colin Yang from Daiwa Securities. Go ahead.

Hi, management. This is Colin. I have a quick question about our future capacity expansions beyond 4B. Has the location been decided, whether it will be in Xinjiang or Mongolia? And what are our financing plans going forward? If the STAR Market IPO proceeds are insufficient, could we consider pursuing other equity financing?

As you can see from the Q1 financial statements, we have enough cash flow to support the 4B project. Even without STAR Market IPO proceeds, we can continue our business seamlessly. If our IPO is successful, we plan to raise approximately RMB5 billion, which will support future expansions. In terms of location, we are considering additional sites outside of Xinjiang, including Mongolia and other regions.

Thanks. Great to hear.

Our next question is from Chao Ji from Goldman Sachs. Go ahead.

Hi, thank you for taking my question. I would like to ask about the N-type polysilicon. Can you share the production cost level for N-type and the effective supply capacity? If downstream demand picks up quickly, how will we adjust our supply mix? Will we need to upgrade our existing facilities?

Currently, major wafer producers are starting N-type polysilicon lines, including LONGi and Jinko. As of now, we have roughly a 20-30% mix of N-type polysilicon, with capacity to quickly adjust production up to 40-50%. The transition to N-type products will take time, but we are well-positioned as demand increases. The production costs closely resemble our standard polysilicon, with no significant difference as we look to stimulate client adoption.

Understood. That’s super clear. Thank you.

Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Kevin He for 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 goodbye.

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.