Daqo raises margin by doubling down relentlessly on costs

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Polysilicon manufacturer Daqo New Energy seems to have pulled off the neat trick of increasing its profit margin despite a continued fall in average selling prices (ASPs), if its latest financial update is any guide.

The Chongqing-based poly giant announced new records in its first quarter update today and was even bullish enough to take a swipe at its rivals, despite the fact its own latest production expansion effort has not come without the odd hiccup.

CEO Longgen Zhang said his company had weathered the storm of last year’s market shock in the company’s homeland better than smaller rivals. He said the resulting shakeout and industry casualties would clear any danger of oversupply in the raw material used to make PV panels as markets outside China boom.

“While Daqo remained solidly profitable in the first quarter, with our low cost and high mix of mono-grade polysilicon products,” wrote Zhang in today’s update, “we believe the current challenging pricing environment for polysilicon has resulted in serious financial losses for many of the existing polysilicon producers. According to news from [the] China Silicon Industry Association, at least three major Chinese polysilicon producers have shut down their facilities for maintenance since April and May, resulting in reduced supply.”

Rivals on thin ice

In a chill note for overseas competitors such as REC Silicon, whose U.S.-made polysilicon is caught in the middle of President Trump’s trade conflict with Beijing, Zhang added: “Looking into the future, we believe current oversupply will be alleviated by a reduction in supply from high cost players.”

And it wasn’t just smaller rivals producing costlier poly that came into Zhang’s sights, the chief executive also had a snipe at rival big beasts who, like Daqo, are going hell for leather to expand their production capacities as quickly as possible in the race for global market share.

“The ramp-up process of other Chinese players’ new capacities have not been as fast and smooth as they expected, including production delays and unscheduled shutdowns,” wrote the Daqo boss. “Furthermore, these new capacities are generally unable to immediately produce high quality mono-grade polysilicon due to quality issues. This has resulted in increased pricing spread between mono-grade and multi-grade polysilicon.”

That pricing spread prompted Daqo to gear 80% of its polysilicon output towards mono-grade product last month and this.

However, despite the latest stage of Daqo’s production ramp up being ahead of schedule, it has not been entirely plain sailing, with the company revising down the output and sales figures expected in the current quarter as a debottlenecking process aimed at adding another 5,000 MT of annual poly capacity is carried out. Daqo now expects to produce 7,200-7,400 MT in this reporting period, rather than the 7,600-7,800 envisaged in March’s full-year 2018 update.

One step back…

The cost of producing polysilicon will rise too. Daqo bust its own records in the first quarter, grinding the total production cost down to $7.42/kg – and a cash cost of just $6.20/kg when depreciation expenses at its Xinjiang factory are taken out of the equation. However, Zhang revealed those costs are expected to rebound to $8-8.50/kg during a debottlenecking exercise that is expected to last until early next month. The CEO predicted the price will return to around $7.50/kg in the third quarter but the intervening period will mean a squeeze on margins with the average ASP falling to $9.55/kg in the first quarter, from $9.69/kg in the previous three-month period.

And despite the rash of new records for quarterly production volume – of 8,764 MT – and external sales volume (8,450 MT), plus rising quarter-on-quarter revenue (up from $75.6 million to $81.2 million), gross profit (from $16.9 million to $18.3 million) and gross margin (22.4% to 22.6%), Daqo still experienced a big hit in net income in the January to March period.

Having banked $29.9 million in the first quarter of last year, and $17.1 million in the final period of 2018, net income slumped to $5.9 million in the last quarter.

However, it seems curmudgeonly to focus on the negatives from a company which still raised profit margin in a period which had such stark year-on-year contrasts from the pre-May 31 period of last year. And although Daqo had to shoulder RMB830 million ($120 million) of new borrowings to finance its expansion bid, its balance sheet is still in reasonable shape, with total borrowings of $193 million, of which $149.7 million are long-term commitments.

Grand plans

Zhang said Phase 4A of the capacity expansion program is set to be complete this year and will take the company’s annual output to 70,000 MT by the opening three months of next year. The figures also vindicate the company’s decision to pull out of wafer making in the third quarter of last year. The $5.7 million net loss that strategy incurred in the final quarter of last year had already become an $800,000 dividend from the sale of fixed assets in the first three months of 2019.

With the board anticipating a doubling, or even trebling of solar capacity installations in China from July onwards – for an expected 35-40 GW of new solar for the year – Daqo does appear to be carrying out a less debt-saddled repositioning in the chase for polysilicon market share than its rivals.

Maybe it is worth crowing about after all.