Daqo New Energy Corp. Q1 FY2023 Earnings Call

Hello, everyone. I am Kevin He, the Investor Relations of Daqo New Energy. Thank you for joining our conference call today. Daqo just issued its financial results for the first quarter of 2023, which can be found on our website at www.dqsolar.com. To facilitate today’s conference call, we have prepared a PPT presentation for your reference, which you can also find on our website. Today, attending the conference call, we have our CEO, Mr. Longgen Zhang; and CFO, Mr. Ming Yang; and myself. So today, 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 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. Now, without any further ado, I now will turn the call to our CEO, Mr. Longgen.

Thank you, Kevin. Good evening or good morning everyone. Our efficient operation of polysilicon facilities in the first quarter of 2023 resulted in the production volume of 33,848 metric tons. Our production cost decreased by 5.5% in Renminbi terms primarily due to a reduction in the procurement cost of metallurgical-grade silicon powder. For the quarter, we generated $490 million in EBITDA with strong operating cash flow and maintained a healthy balance sheet. Our cash balance further improved to $4.1 billion and our combined cash and bank note receivable balance reached $4.9 billion. In April, we completed the construction of our Phase 5A, which is a 100,000 metric ton polysilicon project in Inner Mongolia and successfully started initial production of polysilicon. We expect to ramp up production to full capacity by the end of June 2023, bringing our total polysilicon nameplate capacity to 205,000 metric tons per annum. Therefore, we expect our total production volume to be approximately 44,000 to 46,000 metric tons of polysilicon in Q2 2023, an increase of 30% to 36% as compared to Q1 2023 and approximately 193,000 metric tons to 198,000 metric tons of polysilicon in the full year of 2023, an increase of 44% to 48% as compared to last year. In addition, based on the latest project schedule, our new semiconductor-grade polysilicon project with 1,000 metric tons annual capacity is expected to be completed and start pilot production by the end of September 2023. With its new fully digitalized and highly automated production system, we believe our Phase 5A Inner Mongolia project will bring the company to a new level in terms of overall competitiveness, including its production capacity, low cost structure, and superior product quality. Polysilicon demand was weak in January due to the seasonal slowdown in the solar PV industry. In February, lower module prices stimulated end-market demand causing a meaningful recovery in demand and price improvement across the solar value chain. In March and April, polysilicon ASPs declined gradually due to increased supplies and constrained short-term demand for wafers caused by the limited supply of high-purity quartz used in the silicon-ingot production process. Despite the ASP decline in the quarter, in our major operational subsidiary Xinjiang Daqo, we still achieved a very strong gross margin of 71.4% and robust net income after-tax per unit of polysilicon sold of approximately RMB115 per kg, which we believe is significantly higher than that of many of our competitors and reflects our outstanding quality and cost structure. Recently, we have seen a clear trend that the ASP gap between high quality and lower quality polysilicon has started to enlarge and the demand for high quality N-type products is increasing. We expect that this trend will enable us to differentiate ourselves from our competitors based on our high-quality and lower-cost polysilicon ready for the next-generation N-type technology. We believe that the overall demand for solar PV will continue to grow in the coming quarters and that continued capacity expansions by downstream manufacturers will lead to further increases in polysilicon demand. In the second quarter of 2023, our Phase 5A project will continue to produce a meaningful output of approximately 10,000 metric tons to 12,000 metric tons of polysilicon. We plan to reduce our inventory to approximately 5,000 metric tons by the end of the second quarter. To achieve this, we will need to increase our shipment to 59,000 metric tons to 61,000 metric tons in Q2, an increase of 133% to 141% as compared to Q1. In November 2022, our Board of Directors approved a $700 million share repurchase program, effective until December 31, 2023. As of now, we have already spent $85.1 million and repurchased approximately 1.688 million ADS. On April 6, 2023, our subsidiary Xinjiang Daqo’s cash dividend plan for 2022 was approved by its shareholders’ meeting. Therefore, as a 72.7% shareholder of Xinjiang Daqo, we expect Daqo New Energy to receive the dividend distribution in May, with an amount of approximately RMB4.96 billion after-tax, which could be the financial resource to implement the improved share repurchase plan. We believe a new era for solar PV has just begun. The continuous cost reduction in solar PV products is expected to create substantial additional green energy demand likely exceeding most analysts’ expectations. It is generally expected that solar PV will eventually become one of the most important sources of energy to power the world. In addition, as solar PV technology keeps evolving, we believe that the increasing needs for polysilicon of very high purity will help differentiate us from our competitors, thanks to our ability to produce the type of polysilicon required for the next generation of N-type technology. We will continue to maintain solid growth and make sure to have one of the best balance sheets in the industry in order to capture the long-term benefits of our global solar PV market. Now, let’s move to the outlook and guidance. The company expects to produce approximately 44,000 metric tons to 46,000 metric tons of polysilicon during the second quarter of this year. The company expects to produce approximately 193,000 metric tons to 198,000 metric tons of polysilicon for the full year of 2023, inclusive of the impact of the company’s annual facility maintenance.

Thank you, Longgen, and good day, everyone. Thank you for joining our earnings conference call today. Let me begin by discussing our company’s balance sheet and strong cash position. As Longgen mentioned, we ended the first quarter of 2023 with a cash balance of $4.1 billion, representing an increase of over $600 million from the end of 2022. Including our bank note receivable balance of $791 million, the total cash and bank note receivable balance reached $4.9 billion at the quarter's end. These bank note receivables are notes issued by major domestic banks for trade financing and can be redeemed for cash or used to pay suppliers for raw materials and equipment purchases. On a per share basis, reflecting Daqo New Energy Corp.’s 72.7% ownership of our operating subsidiary, Xinjiang Daqo, this amounts to approximately $45.70 per share of ADS. This figure represents the value of cash alone, excluding the value of our property, plant, and equipment, which was valued at $2.8 billion at the end of the quarter. Our two world-class polysilicon production facilities have a combined nameplate capacity of 205,000 metric tons and consistently generate healthy operating cash flow, evidenced by over $800 million in cash flow from operating activities in the first quarter of this year. For our capital expenditures and capacity expansion plans in the first quarter of 2023, we spent approximately $277 million on property, plant, and equipment, primarily related to our polysilicon projects in Baotou City, Inner Mongolia. By the end of March, around $1.2 billion had already been allocated to the Inner Mongolia Phase 1 project, with a total planned CapEx of approximately $1.4 billion. We anticipate spending the remaining $200 million by the end of this year. For the Inner Mongolia Phase 2, we also expect a total CapEx of about $1.4 billion, with an estimated $800 million for this year and the rest in 2024 and 2025. The construction schedule for the Inner Mongolia Phase 2 project may be adjusted based on market conditions, affecting both the project schedule and capital expenditure plans as needed. Now, let me discuss the company’s financial performance for the first quarter of 2023. Revenues were RMB709.8 million, down from RMB864.3 million in the fourth quarter of 2022 and RMB1.28 billion in the first quarter of 2022, mainly due to a decline in average selling prices. Gross profit was RMB506.7 million compared to RMB668 million in the previous quarter and RMB830 million for the same quarter last year, with a gross margin of 71.4%, down from 77% in the fourth quarter of 2022 and 63.5% in the first quarter of 2022. The decrease in gross margin from the fourth quarter was largely due to lower average selling prices, though this was somewhat offset by reduced production costs. Selling, general, and administrative expenses were RMB41 million, down from RMB44 million in the fourth quarter of 2022 and up from RMB15.5 million in the first quarter of 2022. The first quarter expenses included $28 million in non-cash share-based compensation related to our share incentive plan, compared to RMB28.4 million in the previous quarter. Research and development expenses were RMB1.9 million, compared to RMB2.7 million in the fourth quarter and RMB2.1 million in the first quarter of 2022, reflecting our ongoing quality improvement initiatives. Income from operations was RMB463.8 million, compared to RMB623 million in the fourth quarter of 2022 and RMB796.9 million in the first quarter of 2022, resulting in an operating margin of 55.3%, down from 72% in the fourth quarter of 2022 and 62% in the same quarter last year. Net income attributable to Daqo New Energy Corp. shareholders was RMB278.8 million, compared to RMB232 million in the fourth quarter of 2022 and RMB535.8 million in the first quarter of 2022. Earnings per basic ADS was $3.56, down from $4.26 in the fourth quarter and $7.17 in the first quarter of 2022. Adjusted net income, including non-cash share-based compensation costs, was RMB310 million, compared to RMB363 million in the prior quarter and RMB538 million in the same quarter last year. Adjusted earnings per basic ADS was $3.96, down from $4.65 in the fourth quarter and $7.20 in the first quarter of 2022. EBITDA was RMB490.2 million, compared to RMB648.5 million in the previous quarter and RMB826.8 million in the first quarter of 2022, resulting in an EBITDA margin of 69%, down from 75% in the fourth quarter and up from 64.6% in the first quarter of 2022. Regarding our financial condition as of March 31, 2023, we had RMB4.13 billion in cash and cash equivalents and restricted cash, compared to RMB3.52 billion as of December 31, 2022, and RMB1.12 billion as of March 31, 2022. Our notes receivable balance as of March 31, 2023, was RMB791 million compared to RMB1.13 billion as of December 31, 2022, and RMB1.5 billion as of March 31, 2022. Looking at our cash flows for the three months ended March 31, 2023, net cash provided by operating activities was RMB807 million compared to RMB231 million in the same period last year. For the same three months, net cash used in investing activities was RMB268.9 million, compared to net cash provided by investing activities of RMB170.4 million in the same period of 2022. Net cash provided by financing activities was RMB59.9 million for the three months ended March 31, 2023, while it was zero for the same period of 2022. Now, operator, we would like to open the call for questions from the audience.

Hi, everyone. Thanks for taking my questions. First one is on your shipment volumes. I think why have volumes been so low as a percentage of production for two quarters in a row? We thought you might ship more than 100% of your production in Q2 because of the inventory – sorry in Q1 because of the inventory that you didn’t ship in the prior quarter. When do you think you will release that inventory? Thanks.

I think, Phil, our first quarter is still the Chinese New Year, and sales in January were really slow. Also, I remember that the downstream wafer producers reduced their capacity last year starting in November and December, to almost the minimum maintenance capacity, which we call maybe 20% or 30%. As that capacity quickly comes back, we started selling in February and March. Some shipments at the end of March had to be moved to the second quarter. So far this quarter, as of today in April, we have already signed contracts for more than 20,000 tons. We see that in the second quarter, the selling volume should be high. So we expect to reduce our inventory by the end of last quarter to 20,000 tons, and by the end of this quarter, to 5,000 tons, just from regular shipping goods in the week, so basically, this month our sales volume mostly will be shipping to this quarter.

Great. Thank you, Longgen. And I did see your Q2 shipping guidance there, I think 59,000 to 61,000 metric tons. So that’s great. Can you talk about the outlook for poly pricing for Q2, Q3, and how you are seeing 2024 given the supply-demand situation for poly? Thanks.

Basically, I cannot give you the projection of the future. But if you look at our Q1, our selling price was $27. We see the selling price for wafers going down. If you look at China, for future Q3 and Q4, the module selling price, contract price, bidding price also slowed down. Basically, what that tells you is that if from silicon wafer cell module, the cost by now today is around RMB0.98. So, your selling module – if Q4 is selling for RMB0.175, the net maybe is around RMB150. So, your gross margin in the whole industry is around RMB0.50 or even $0.45. Compared to last year, your selling last year was around $0.74, that’s in the module selling price to RMB2 per watt. Basically, we will see that in the second quarter, I think ASP will slightly go down. How much, I cannot tell you because we see right now the price is stable around RMB180 per kg. Maybe in the next 2 months it will continue to slow down. But I think still the ASP will be around $20 to $25. In the third quarter, it all depends on how much new production comes out and how big the demand pickup is. So really, we think Q3, the selling ASP will be stable, maybe like Q2, then Q4, is generally challenging every year. That’s not only because of Western holidays, but also I think in China, the traditional bargaining between silicone and a wafer. So, basically, Q4 is a challenging quarter. So, maybe I think it will go down to RMB150 or even RMB120. I cannot tell you the exact figure. If you look at 2024, as we said, the demand is continuing to grow. Of course, silicon output in China also continues to increase. So, Daqo has differentiated ourselves in selling more high-quality N-type silicon to differentiate ourselves from others. We hope our ASP can sell a little higher than our competitors in China. Today, OCI, they are still selling for around $35 to $37 per kg. The reason is they use their silicon outside of China, ship to the U.S. market. So, the differentiator is already there, and our efforts are concentrated on quality and cost. Even though we think 2024 is a challenging year, let’s say the industry’s gross margin might be around 5% or even 10%, we hope Daqo can achieve a premium of 10% to 15% or a little more.

Okay, that’s a lot of color. Thank you, Longgen. You talked about the pricing premium that you think you might be able to get. I think you just talked through that a little bit. But specifically, I think in Q1, I think your ASP was close to $27 per kilogram and the average spot price was closer to $24. Can you talk about the – what your realized premium is due to your quality? Is it about $4 per kilogram or is that difference in the first quarter primarily due to better timing of your poly sales versus spot pricing? Thanks.

Basically, right now N-type and P-type, we already see the difference is around RMB15 to RMB20 per kg. We think that difference will enlarge later because you see, as the demand for N-type products is increasing, we think that in the future, our selling price should be if we can sell 70% of our products as N-type, the price could have a $5 difference. But I cannot tell you exactly how the future goes. There are many challenges.

Yes, okay. That’s great.

But the most important to us is we have a fortress balance sheet. As Ming just said, right now the banking note receivable plus cash is almost $5 billion. We are continuing to generate cash from operations and we try to control our CapEx as the market continues. For example, if the market enters a worse scenario, then for the Inner Mongolia 5B, we can slow down CapEx. So we continue to focus on strengthening our balance sheet. That’s the most important, I think.

Great. Okay. And given that, this is my last question here. Are you planning to do additional buybacks this year beyond the $700 million approved? What are your thoughts on that given the cash that you have? Thanks.

At this moment, I think we just declared $700 million. We have already used around $85 million. So we only have $615 million left. Dividends are too slow; the foreign exchange were heated accounts, I think early May. So even let’s say we still have like $650 million compared to the capital market; it’s almost 18% of our total shares outstanding. That’s a lot. So, basically, you know that all the repurchase program must consider the renminbi to foreign exchange. Currently, the only reliable sources are the dividends declared. So basically, I can only tell you that by the end of this year, we still just forecast the $700 million purchase program. Thanks, Phil.

Hello, management. Thanks for taking my question. This is Gary Zhou from Credit Suisse. So, two questions from my side. So firstly, also to follow up on the buybacks, as Longgen has mentioned, the rest of the amount is quite significant. Just wondering if the company has more insight on timing or any price range that we would consider doing more share buybacks. And secondly, could management provide color on the April polysilicon sales? Have we started to see our inventory decrease in April and how confident is management that our inventory can reduce significantly in the second quarter? Thank you.

I will ask Ming to answer your first question about the buyback color, and I will answer your second question, Ming?

Gary, thank you for your question. So, as Longgen indicated earlier, we do have our $700 million share repurchase program, of which $85 million has been used, and there is $615 million left. This program is scheduled through the end of 2023. We have just received the dividend distribution from Xinjiang Daqo, which is pending transfer offshore. This will total approximately RMB4.96 billion, or just north of $700 million. So certainly, we do anticipate this would be the financial source that could be used to fund our share repurchase plan. In terms of timing, there is currently no specific timing; it will be repurchased throughout the year. We will look for opportunities to repurchase the shares, especially if the share price is very attractive.

Gary, I have answered a few questions about the April shipment movement. By the end of the first quarter, we had an inventory of around 20,000 tons. In April, we signed contracts for more than 20,000 tons so far. We see a quick rollout. We are receiving more orders from customers because today’s scenario is different from history. Customers are concerned about fluctuations in silicon prices. However, we see that prices are stable, almost between RMB170 to RMB200 per kg. Hopefully, if that price remains or gradually slows down, we see that in May we will sell more. Our expectation is to keep the inventory by the end of this quarter at 5,000 tons, which we cannot recognize as revenue just yet.

Thanks, Longgen. This is very clear. I will pass it on. Thank you.

Thank you, Gary.

Thanks, management for taking my questions. We would like to ask from a more long-term perspective. Some of the peers have been very aggressive with capacity expansion plans—more than 400,000 tons next year—and also some of the peers are having very low costs with VR technology. I would like to know your strategy in maintaining your market share or whether there will be an acceleration in capacity expansion or potential partnerships with some of your peers to stabilize prices. Thanks.

Ming?

Thank you for your question. We indeed see our peers’ aggressive capacity expansion plans. However, this is subject to their funding from the Asia capital market regarding additional capital raising. Many of these projects will be subject to market conditions. For example, if demand in the second half remains strong and polysilicon pricing remains healthy, we may decide to move ahead with our Inner Mongolia Phase 2 project and look at additional capacity plants. Conversely, if polysilicon pricing becomes less attractive, we would delay our project expansion and not accelerate capacity expansions. Additionally, we believe that based on our Siemens process for polysilicon—where we produce more than 99% of our production model grade—we are one of the largest suppliers of untied polysilicon in China. We continue to produce top quality, especially for N-type products, which are increasingly accepted by customers. Even though some manufacturers might have lower costs based on their processes, we believe that as quality becomes more critical, pricing will reflect that. Currently, the gradual price decline we have observed in the market has been due to an influx of lower-quality products, and they must offer lower prices which pull down the average pricing of polysilicon in the market.

Understood. Thanks a lot, Ming. Another question from my side is, how do you see the cost going forward? Do you think our production costs can get below RMB50 eventually with the optimization and ramping up of new plants?

Actually, Alan, if you compare our Q4 production costs to our Q1, you will see it went down almost 6% quarter-over-quarter on a RMB basis. Our Q4 costs were close to RMB55 per kilogram, and our Q1 cost is already close to RMB51 per kilogram. We anticipate that once we ramp up our Inner Mongolia facility, which has similar or better manufacturing efficiency compared to our Xinjiang facility, we will see additional price reductions as this facility ramps up. In our internal planning, we believe we have a very good opportunity to reach your indicated cost targets.

Thanks a lot. That’s very clear. So, I will pass it. Thank you.

Thank you.

Thank you, good morning and congratulations for producing a strong quarter in very challenging circumstances. I just want to follow-up on the cost question. You are also beginning to produce the raw material internally now, or at least the capacity is being built for that. How will that shape your cost structure in the coming quarters?

Yes, we are already planning to invest in silicon metal in Mongolia. We are still in the process of obtaining licenses and energy improvements. Hopefully, the licenses will be acquired by the end of July. If everything goes smoothly, by the end of this year or Q1 next year, we can produce silicon metal. I believe that will dramatically reduce our costs, potentially by $7 to $8.

Okay. So, $7 to $8, that would reduce your…

Renminbi per kg. Right now, our cash cost for the first quarter is $45. If we produce our silicon metal, we can reduce it to around RMB37 or RMB38.

Hey. Congratulations for the good earnings. My first question is, can you tell me our repurchase program, the pace of our repurchase program? I mean will you report all your $600 million this year?

Yes. I think the current plan is still to complete the program for the current year. In terms of pace, it should be more or less stretched out over the year. At least that’s the current plan right now.

Okay. Got it. And my second question is, our competitors are expanding their capacities, but I think maybe somehow oversupply, so is there any possibility that you will stop your expansion plan for the second phase after – expanding plan of Inner Mongolia?

Overall, there is no oversupply of polysilicon in the market today. The supply and demand are relatively balanced overall. There is actually a very healthy demand from the end market. The peak market demand escalation timeframe is approaching, generally from June through October. We think that Q2 and certainly Q3 demand should be much stronger than Q1. Currently, wafer manufacturers are running at high utilization levels, looking at production estimated at 40 gigawatt to 45 gigawatt per month. However, the overall capacity is constrained due to the availability of high-quality quartz used to produce quartz crucibles. We estimate that the industry current consumption on a monthly basis is between 100,000 metric tons and 110,000 metric tons, which is similar to the production in the market. Unless there is a substantial increase in polysilicon production without a corresponding increase in end market demand, the situation will not change.

Yes, I mean, if the prices contract down really low—like less than… I mean will you stop second time?

If pricing goes down to less than $10 per kilogram on an assumption basis, I think we will slow down our capacity expansion.

That’s all my questions.

Thank you.

Hi. Thank you for taking my question. Can I ask if you would have any guidance for the production costs for the second quarter? And will it be possible for you to share your current and second quarter expected cash cost level? Thank you.

For our Q2 costs, I have been looking at the recent trends of our raw materials, especially for silicon metal, and electricity. We expect these to remain stable. Overall, we believe our Q2 costs should be fairly similar in RMB compared to our Q1 cost structure. Looking to Q3, costs should decline as Inner Mongolia ramps up.

In the second quarter, the operational cash will be high, as we expect a sales volume increase of almost 133% to 141% compared to Q1.

Understood. Thank you so much.

Thank you.

Thank you, everyone again for participating in today’s conference call. Should we 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.