Daqo New Energy Corp. Q1 FY2022 Earnings Call

Good day, and welcome to the Daqo New Energy First Quarter 2022 Results Conference Call. All participants will be in a listen-only mode. Please note this event is being recorded. I would now like to turn the conference over to Kevin He of Investor Relations. Please go ahead.

Hello, everyone. I'm Kevin He, Investor Relations of Daqo New Energy. Thank you for joining today's conference call. Daqo New Energy just issued its financial results for the first quarter of 2022, 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 first quarter of 2022. 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, and 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 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. Longgen Zhang. Longgen, please.

Thank you, Kevin. Hello, everyone. Thank you for joining our conference call today. We are very pleased to report exceptional results for the first quarter of 2022, the best ever in the Company's history. I would like to thank our entire team for their hard work and dedication in delivering such excellent operational and financial performance. For the quarter, we achieved polysilicon sales volume of 38,839 metric tons, more than 3x our sales volume for the fourth quarter of last year. We recorded $1.3 billion in revenue, also more than 3x of the revenue for the fourth quarter of 2021, and we recorded operating income of $797 million, net income attributable to Daqo New Energy shareholders of $536 million, earnings per share of $7.17 per share, and EBITDA of $827 million, all representing substantial sequential and year-over-year growth. At the end of the quarter, our combined cash, short-term investments, and bank note receivable value reached $2.6 billion, an increase of $1.2 billion compared to the end of last year. This strong financial performance reflects not only the strength of the end market but also the trust that our customers place in the quality and reliability of our high-purity mono-grade polysilicon products. Last December, we began production in our new Phase 4B polysilicon facility. Production ramp-up was successful throughout the first quarter. During the first quarter, we produced 31,383 metric tons of polysilicon, a 33% increase compared to the fourth quarter of last year, of which 97.2% was mono-grade. In the first quarter, our production cost was $10.9 per kg, a significant decrease from $14.11 per kilogram in the fourth quarter of 2021, primarily due to the decrease in the cost of silicon powder as well as manufacturing efficiency improvements and better economies of scale. We continue to see very strong demand for our solar PV products both in China and overseas. In the first two months of this year, the new installations of solar PV in China were approximately 10.9 gigawatts. According to China PV Industry Association, new PV installations in China are expected to increase from 53 gigawatts in 2021 to 75 gigawatts to 90 gigawatts this year. In the first two months of 2022, based on China's customer's data, China solar PV module exports volume was approximately 26 gigawatts, doubled from the same period of last year. As a result of the stronger than expected market demand, product pricing across the entire solar PV value chain increased consistently during the first quarter. Based on statistics from the China Silicon Industry Association, the average market ASPs, including that of small chunk mono-grade polysilicon increased from RMB231.8 per kilo in the 1st week of January to RMB253.3 kilograms in the 3rd week of April, reflecting healthy demand from our customers and continued tight supplies. We also see a healthy gross margin in the downstream wafer sector, which indicates that the solid value chain is able to pass down the impact of strong polysilicon prices to the end market. Global trends continue to favor the solar industry, which particularly benefits the polysilicon sector. We are beginning to witness significant policy shifts to accelerate clean energy adoption and decarbonization around the world. During the month of March 2022, the European Union announced its REPowerEU initiative, which calls for an acceleration of clean energy transition under the European Green Deal. Germany, in particular, has announced an ambitious program to significantly accelerate its clean energy transition with plans to deploy 22 gigawatts of solar installations per year starting in 2026, a four-fold increase from 2021 installations of 5.3 gigawatts. As solar energy has already achieved grid parity broadly in many regions globally, the recent spike in high and volatile energy prices will further drive solar adoption with attractive economic results. All these factors lead to additional demand for our products, which cannot be met by the current market supply. We believe the polysilicon sector will remain one of the most profitable sectors in the solar PV value chain as polysilicon will continue to be in short supply and determine the actual pace and total volume of global installations. We will continue to focus on the efficient operation of our core business, increase our capacity based on market needs, enhance our competitiveness in quality and reliability, and further optimize our cost structure to provide consistent returns to our shareholders. Now let me move to our outlook and guidance for the first quarter and the whole year of 2022. The Company expects to produce approximately 32,000 metric tons to 34,000 metric tons of polysilicon in the second quarter of 2022, and approximately 120,000 metric tons to 125,000 metric tons of polysilicon in the full year of 2022 inclusive of the impact of the Company's annual facility maintenance. Now, I would like to turn the call to our CFO, Mr. Ming Yang. Ming, please.

Thank you, Longgen, and hello, everyone. Thank you for joining our call today. Now, I will discuss our financial performance for the first quarter of 2022. Revenues were $1.28 billion, compared to $395.5 million in the fourth quarter of 2021 and $256 million in the first quarter of 2021. The increase in revenue as compared to the fourth quarter of 2021 was primarily due to significantly higher polysilicon sales volume, as we saw very strong demand for our products from our customers during the quarter. Gross profit was $813.6 million compared to $239.8 million in the fourth quarter of 2021 and $118.9 million in the first quarter of 2021. Gross margin was 63.5%, an increase of 290 basis points compared to 60.6% in the fourth quarter of 2021 and 46.4% in the first quarter of 2021. The increase in gross profit compared to the fourth quarter was primarily due to higher sales volume. The increase in gross margin as compared to the fourth quarter was primarily due to lower polysilicon production costs due to lower purchasing prices for silicon raw material during the quarter. SG&A expenses were $15.5 million compared to $10.2 million in the fourth quarter of 2021 and $9 million in the first quarter of 2021. The increase in SG&A expenses compared to the fourth quarter of 2021 was primarily due to an increase in shipment expenses as a result of the increased sales volume. Expenses during the first quarter included non-cash share-based compensation costs related to the Company's share incentive plan. R&D expenses were $2.1 million compared to $1.3 million in the fourth quarter of 2021 and $1.2 million in the first quarter of 2021. R&D expenses converted from period to period and reflect R&D activities that take place during the quarter. The R&D activities this quarter include purity and process improvements and research related to N-type polysilicon and semiconductor polysilicon. Income from operations was $796.9 million compared to $228.1 million in the fourth quarter of 2021 and $109 million in the first quarter of 2021. Operating margin was 62.2% compared to 57.7% in the fourth quarter of 2021 and 42.6% in the first quarter of 2021. EBITDA was $826.8 million compared to $251.1 million in the fourth quarter of 2021 and $128 million in the first quarter of 2021. EBITDA margin was 64.6% compared to 63.5% in the fourth quarter of 2021 and 50% in the first quarter of 2021. Net income attributable to Daqo New Energy shareholders was $535.8 million compared to $141.3 million in the fourth quarter of 2021 and $83 million in the first quarter of 2021. Earnings per basic ADS was $7.17 compared to $1.90 in the fourth quarter of 2020 and $1.13 in the first quarter of 2020. As of March 31, 2022, the Company had $1.13 billion in cash, cash equivalents, and restricted cash compared to $724 million as of December 31, 2021. Additionally, as of March 31, 2022, bank notes receivable balance was $1.5 billion compared to $366 million as of December 31, 2021, and $38.5 million as of March 31, 2021. Total combined balance for cash, short-term investments, and bank note receivables at the end of the first quarter was $2.6 billion, an increase of $1.2 billion compared to a combined balance of $1.4 billion at the end of 2021. And as of March 31, 2022, the Company has no bank borrowings. Now on the Company's cash flow. For the three months ended March 31, 2022, net cash provided by operating activities was $235 million compared to $159 million in the same period of 2021. The increase was primarily due to higher revenues and higher gross margin. For the three months ended March 31, 2022, net cash provided by investing activities was $166 million compared to net cash used in investing activities of $80 million in the same period of 2021. The net cash used in investing activities in Q1 2021 was primarily related to capital expenditures on the Company's Phase 4B and Phase 4A polysilicon projects. Net cash provided by investing activities in Q1 2022 was primarily due to the redemption of short-term investments, offset by capital expenditures on the Company's Phase 4B project in the Mongolia polysilicon project. For the three months ended March 31, 2022, net cash provided by financing activities was zero compared to net cash used in financing activities of $31.7 million in the same period of 2021. And that concludes our prepared remarks. Now, we'll open the call for questions from the audience. Operator, please begin.

Thank you. We will now begin the question-and-answer session. Our first question comes from Philip Shen from ROTH Capital Partners. Please go ahead.

This is actually Justin Clare on for Phil today. So I guess, first off, I just wanted to start off on the construction timeline for your 100,000 metric ton poly facility in Inner Mongolia. Just wondering, were you able to commence construction in March, which I think was the plan? And then, do you continue to expect completion by the end of Q2 2023? And then if possible, could you share a bit of the details on what the ramp-up could look like? Would you be able to share your volume expectations for that new capacity in 2023 by quarter?

Justin, I think for Mongolia project, the project started last year, in October, with the design. Last year, in December, we already booked some contracts for long-term equipment supply. So, basically, last month, we started the field work. We scheduled all the equipment, and I think it will be on-site maybe by the end of August of this year. We expect to try production in Q1 next year and then ramp up in the second quarter. So next year, the 100,000 tons will help us add the output, maybe around 70,000 to 80,000 tons. So, plus Xinjiang, our production schedule, I won’t give guidance, just estimate for the whole output, maybe around 200,000 to 210,000 tons for next year.

Okay. Great. Go ahead.

Of course, we are right now filing with the Chinese SEC and doing the follow-on offering. The total offering is RMB11 billion. If we can successfully raise that money by the end of June or July, then we will consider a second phase for another 100,000 tons. But definitely, I think we're already starting the feasibility study and energy approval for the 200,000 silicon metal project in Mongolia. So that project is funded with our money, and a certain time in the second half of this year, when we start producing to reduce our silicon powder cost and vertically integrate the silicon metal.

Right. Okay. When will the silicon metal facility be available?

It depends on the approval process. We plan to start seeing projects in the third quarter of this year. Hopefully, we can release products since silicon metal is easier to produce. By the end of this year or the first quarter of next year, we expect to have some products available.

Okay. Assuming you successfully raise the capital in June or July, what would be the potential timing for the next 100,000 metric tons of poly? Would that also include the planned 20,000 metric tons of semiconductor capacity? Do you have any insights on the timing for those facilities?

Currently, we have nearly $7 billion in cash on our balance sheet. We have just begun the first project in Mongolia, Phase 1, which is 100,000 tons, and we will monitor its progress. In the second half of the year, we will assess the situation, including market conditions. Therefore, we may announce the start of the second phase, which includes 20,000 metric tons of semiconductor silicon materials, in the latter half of this year.

Okay. Great. And then maybe shifting over to poly pricing. Could you share your latest view on the outlook for poly pricing this year, given the new supply that you expect to come online? I think previously, you had talked about maybe 250,000 metric tons of capacity coming to market this year. Any change to that expectation, and then, yes, just an updated look on the poly pricing from here?

In the first quarter, China's total manufacturing was approximately 160,000 tons. For the entire year, we estimate that domestic manufacturing may reach around 700,000 to 800,000 tons, along with imports expected to be about 800,000 to 900,000 tons. The demand and supply of polysilicon are influenced not only by installations in the end market but also by the expansion capacity of the wafer segment. We observe that the wafer segment is currently expanding rapidly, especially with larger furnaces. Therefore, polysilicon prices are likely to continue rising this year, and we are already seeing prices increase in May. We do not anticipate any price declines for the remainder of the year. Looking ahead to next year, while new projects are coming online, it is important to note that there are project timeline delays, including at Daqo; implementation takes longer than expected. For new entrants, we predict it will take about 2 to 2.5 years to bring market-demand products to fruition. Additionally, technology continues to advance within the industry. Consequently, we believe that meaningful supply for China next year will be around 1.2 billion tons, indicating a persistent bottleneck for the entire industry in the next two to three years.

Okay. Great. That's really helpful. Maybe just one more from me. We saw the cost of silicon powder decline in Q1. It helped the cost structure. But as you look into Q2, can you share what you've seen in regard to silicon powder pricing and what that might mean for your cost structure also considering potential improvements in efficiency in the quarter as well?

I think silicon powder is very stable right now. We procured it at a price of around RMB23,000 per ton, or you can say, around RMB23 per kg. Then in April, I think it dropped down to RMB21. We think it will remain stable, around RMB20 to RMB21. So basically, that figure can keep our cash cost around that because the investment cost is now influenced by the coal price. So I think our future costs can be controlled, with cash costs expected to be around RMB45 or RMB46.

Our next question comes from Gary Zhou from Credit Suisse. Please go ahead.

My first question is about the balance sheet at the end of the first quarter. I noticed we still have some inventory, so I'm curious about how much unsold polysilicon product we have by the end of the first quarter.

Gary, I will answer your question on the inventories. Looking at our balance sheet, our inventory position declined significantly from the end of 2021 from almost $330 million to now around $100 million. The balance is still higher than in Q1 2021 for a few reasons. One is we have a significant portion of what we call products that are shipped to customers but not yet recognized as revenue or products in shipment to customers. We can only recognize revenue when the products arrive at the customer site. Some recent logistical challenges with China's COVID-19 restrictions have made the shipment period longer than normal compared to the past. Additionally, with our increase in production of around 40% to 50% relative to Q1 last year, naturally, our work-in-process inventory and finished goods inventory will increase as well. So I would say the combined impact led to the current inventory level. However, our finished inventory remains relatively healthy, and we expect it to continue to decrease in the second quarter as well.

Very clear. So my second question is on our cash cost. If we compare the first quarter cash cost level in RMB terms, I think it's still kind of close to RMB15 or RMB20 higher than our earlier kind of level, compared to when the industrial silicon price was still low. So just wondering in terms of the average selling silicon cost, what is the average cost in the first quarter this year? And how do we expect the level to be into the second quarter?

Okay. I think you are right; our Q1 production and cash costs were influenced by the higher-cost raw materials at the end of last year, primarily related to silicon and relative grades of silicon cost. Some silicon metal prices were as high as $10 per kilogram in Q4 last year. Since then, prices have declined significantly. As mentioned earlier, based on our March costs, we will expect cash costs to be in the range of RMB45 to RMB46 per kilogram.

Our next question comes from Chao Ji from Goldman Sachs. Please go ahead.

Can you provide details on the significant cost reduction we observed in the first quarter? Specifically, how much of that reduction is attributed to the decrease in silicon powder prices versus improvements in efficiency? Additionally, could you offer guidance on the potential for further reductions in non-silicon powder costs in the upcoming quarters? Also, considering the current Shanghai lockdown, what impact do you anticipate on the logistics and transportation of raw materials and polysilicon? Can you elaborate on the expected effects on our production and polysilicon prices in the months ahead?

Okay, Ji Chao. I think because our facility for Phase 4B is still in a ramp-up period, most of the cost reduction from Q4 to Q1 is coming from the silicon metal cost — procurement cost reduction. A small portion is from the improvements in economies of scale. For Q2, we will continue to benefit from the reduction in silicon metal cost, and also a greater benefit from economies of scale and manufacturing efficiency. It's difficult to break these components apart but the combined reduction should still continue.

Okay. Understand. Can you also share a bit more color in terms of the impact of the current lockdown? And how do you think it will impact the polysilicon prices in the coming weeks?

I think what we're seeing in terms of the lockdown, which is mostly affecting Shanghai and the eastern regions, we are not seeing any significant disruptions at our Xinjiang facility or our customers in Mongolia. Our operations are running smoothly with no impact right now, although we are making preparations for any potential impacts from future COVID restrictions. Most of the issues we are seeing are logistical challenges; perhaps a longer time for product delivery to customers, for which we are making preparations. Other than that, there's no significant impact on the supply chain. In fact, we continue to see very strong demand from our customers. For April, we have much more demand than what our production can supply to the market. Our customers continue to ask for more products as well.

The next question comes from Alan Lau from Jefferies. Please go ahead.

And congratulations to management for achieving the highest best quarter historically. I have a couple of questions. First of all, I would like to know what is the status of the human rights audit for now? And my second question is about what is your view on certain major players pursuing into polysilicon business like Zhonghuan and Shanxi? Would there be any contract of interest with the Company? And my last question is about what is your view on the U.S. ADR risk? So, I'm aware that the Company is confident that the issue will be resolved, but just to know if there are any actions that the Company is also taking impacting those challenges.

So your first question is about what? Is it related to human rights?

The Xinjiang-related audit progress.

With regard to the human rights audit, we continue to work on and pursue this. We've finished our internal audit with the help of a consultant. We are now in the process of updating our internal guidelines and policies to fully reflect the United Nations guiding principles, including human rights and anti-forced labor issues, but also anti-discrimination and promoting labor rights. We hope this could be concluded by the Q3 timeframe, and then we could move forward with potential third-party audits, which would need to be subject to government approvals given the current COVID restrictions.

I think regarding the wafer player issue, the high profitability in polysilicon has attracted a lot of newcomers to invest money in this segment. As I just mentioned, because silicon production from newcomers takes a long time, at least two to three years, from design to investments, procurement to construction to fully operational plants. Today, we have more than 180 filed patents. It's not as simple as manufacturing wafers—you cannot just buy a machine and start production in three or four months. We are aware that a couple of wafer players like Zhonghuan and Shanxi are stepping into polysilicon, and we hope they can be successful, but it takes time for them to produce high-quality polysilicon products. This industry needs more polysilicon due to the hot demand in the end market. If the market reaches 800 gigawatts by 2025, we would need 1.5 million metric tons of polysilicon. Even we at Daqo continue to expand our capacity by 50% every year. We may consider mergers to acquire companies based on market situations and our strong balance sheet. We are aware of market dynamics, but we believe we will continue to focus on producing high-quality polysilicon, as prices are determined by demand and supply as well as quality improvements. I think, yes, we are listed in the U.S., and the industry right now is in a good position, leading to strong profitability. Unfortunately, the FHCAA regulations affect all Chinese companies listed in the U.S. We believe both China and the U.S. governments will resolve these issues. We see the Chinese SEC has been more open to audits, and we feel confident in making this occur for our industry. However, it depends significantly on governance decisions. Overall, we are not currently worried about this issue, anticipating resolution within the deadline.

Understood. And just a quick follow-up question on the second question. So is there any transaction ongoing with Zhonghuan and Shanxi? Is that going as usual?

As we know, I think Shanxi right now has some real action. First of all, they announced they will do a follow-on offering of RMB6 billion. So we see their stock price has gone down by about 10%. We also see they are starting to sign contracts locally. However, it takes time for them to produce high-quality polysilicon materials that meet the industry's demand. We still consider the challenges of entering this industry. We are a major player focused on gradual and careful expansion, even with our Xinjiang site. This year, we believe we can produce 120,000 to 125,000 tons. No, they didn't change. They signed a long-term contract with us. Especially Shanxi right now has a capacity of around 100 gigawatts. Every year, they need 300,000 metric tons of polysilicon. Even though they have a joint venture with another company in Xinjiang, it only amounts to 60,000 tons. Even if they are going to increase to 100,000 tons, that still won’t fully meet their needs. Their capacity needs are expanding significantly in Ningxia, with an expected 150-gigawatt capacity by the end of this year, necessitating 450,000 metric tons of silicon.

The next question comes from Tony Fei from Bank of China International. Please go ahead.

I have two questions. First, regarding your margin in the first quarter. We see it up quarter-on-quarter a bit, but it could be higher without the high-cost inventory in Q4, if you accumulate it. So I'm just wondering, do you have a breakdown of the margins for the materials you made and sold in the first quarter compared to those inventories sold in the quarter?

I think Ming, you're going to answer the first question about the margin. I will take the second question.

Yes. I think you're right. The first-quarter cost and gross margin were impacted by higher costs from previous higher-cost inventories and raw materials at the end of last year. These costs have now been absorbed in Q1. Because we are using an average costing method to determine our costs, it is difficult to segment specific figures. However, without these impacts, our gross margin would have been meaningfully higher than reported.

For the dividends, Xinjiang Daqo will pay the cash dividend to its shareholders. We announced on May 23 that total distributable dividend is around RMB1.155 billion. Daqo New Energy will receive 80.7% of this equity interest in Xinjiang. We expect to receive payment from Xinjiang Daqo in late June, as we must perform foreign exchange processes to convert RMB to U.S. dollars before transferring to overseas. Once we receive these funds, the Board will continue to discuss potential share distribution or even share repurchases based on approval conditions.

Our next question comes from Colin Yang from Daiwa Securities. Please go ahead.

It's Colin from Daiwa. A simple question. I understood we have guidance of 32,000 to 34,000 tons production volume in the second quarter. Wondering if we have any guidance on the sales volume in the second quarter. Do we have concerns that the first quarter could be the peak season in 2022 because it's going to be difficult to beat the first quarter sales volume?

Thank you, Mr. Yang. By the end of Q1, we had approximately 2,574 tons in merchandise shipments and 2,951 tons in inventory. Thus, total inventory was around 5,591 tons. We held some inventory as every day, we manufacture around 400 tons, but shipping was limited over several days. In Q2, we've guidance of 32,000 to 34,000 metric tons. We hope the sales volume will exceed even this estimate as we aim to reduce inventory. Currently, we observe a very strong market demand.

Do we have our estimate of the potential impact from the annual maintenance?

Yes. The polysilicon plants in China usually do maintenance during the hot weather, primarily from June to the end of the year. Some players have COVID-19 issues and have had to alter schedules. For our planning, we aim to stagger maintenance across our six production lines, starting around June through July. This approach minimizes our production volume impact because we have long-term contracts with our clients that require ongoing production.

Can we say that in the third quarter, it could be the lowest quarter with production volume affected by annual maintenance being quite minimal?

We don't expect too much impact from maintenance. We plan to carry out maintenance line-by-line, meaning that all production lines won’t shut down simultaneously. Therefore, the production volume will remain steady throughout. Currently, our monthly production is about 10,000 to 12,000 tons.

The next question comes from Rajiv Chaudhri from Sunsara Capital. Please go ahead.

Can you talk about what you see in terms of both demand and supply for N-type polysilicon in 2022? And how much of your production would be ready in the current year?

That's a good question. We see that N-type sales because the efficiency is higher than P-type. Currently, we are shipping around 11,000 to 12,000 tons of N-type monthly. We see N-type demand is increasing. In April, we shipped more than 1,000 metric tons of N-type. The price difference between N-type and P-type has also increased. At the beginning of last year, it was just RMB1 to RMB2 per kg. However, in April, it increased to RMB5 per kg. It is currently a growing component of our production, and we are preparing for a doubling of our N-type supply in the future.

So is it your view that the only N-type polysilicon suppliers this year are Daqo and Walker? The other Chinese companies are not able to supply N-type this year?

I am not saying that. The major suppliers currently are Daqo and Walker. Other producers are offering small portions of N-type polysilicon, but we notice that the bigger players are purchasing from us. We are seeing significant interest from major wafer manufacturers asking for more supplies than we can currently fulfill. We are adjusting our production lines to appropriately balance N-type and P-type polysilicon. However, ensuring a consistent supply of high-quality products remains our priority.

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

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