Daqo New Energy Corp. (NYSE:DQ) Q4 2023 Earnings Call Transcript

Daqo New Energy Corp. (NYSE:DQ) Q4 2023 Earnings Call Transcript February 28, 2024

Daqo New Energy Corp. misses on earnings expectations. Reported EPS is $0.64 EPS, expectations were $0.84. DQ isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, and welcome to the Daqo New Energy Fourth Quarter and Fiscal Year 2023 Results Conference Call. All participants will be in the listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note that this event is being recorded. I’d now like to turn the call over to Ms. Anita Zhu. Please go ahead.

Anita Zhu: Hello, everyone. I’m Anita Zhu, the Investor Relations of Daqo New Energy. Thank you for joining our conference call today. Daqo New Energy just issued its financial results for the fourth quarter and fiscal year 2023, which can be found on our website at www.dqsolar.com. Today, attending the conference call, we have our Chairman and CEO, Mr. Xiang Xu; our CFO, Mr. Ming Yang; and myself. The call today will begin with an update from Mr. Xu on market conditions and company operations. And then, Mr. Yang will discuss the company’s financial performance for the quarter and the year. After that, we’ll open the floor to Q&A from the audience. Before we begin the formal remarks, I would like to remind you that certain statements on today’s call, including expected future operational and financial performance and industry growth, are forward-looking statements that are made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995.

These statements involve inherent risks and uncertainties. A number of factors could cause actual results to differ materially from those contained in any forward-looking statement. Further information regarding these and other risks is included in the reports or documents we have filed with were 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’ll 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. So Mr. Xu will make his remarks regarding current market conditions and company performance in Chinese, which I’ll translate into English after he finishes. Now I’ll turn the call to our CEO.

Xiang Xu: [Foreign Language] [Interpreted] Thank you, Anita. Hello, everyone. This is Anita. I’ll now translate our CEO Mr. Xu’s remarks. 2023 was a year of unforeseen developments and challenges in the solar industry with record installation volumes worldwide, but also record low prices at the end of the year. Thanks to the dedication and valuable contribution of our team, we reached an annual polysilicon production volume of 197,831 metric tons in 2023, meeting our guidance of 196,000 to 199,000 metric tons and representing a 47.8% year-over-year growth rate, compared to 133,812 metric tons produced in 2022. We sold 200,002 metric tons, 50% higher than 132,909 metric tons in 2022. Despite robust demand growth for solar PV products globally in 2023, the high poly prices driven by capacity mismatches between upstream and downstream players and the resulting supply shortages that we have seen in 2022 were alleviated by early 2023.

As a result poly-ASPs declined significantly for the year to $11 per kilo from $32.54 per kilogram in 2022. Our revenue was $2.3 billion in 2023, compared to $4.6 billion in 2022 due to much lower ASPs. The decline was partially offset by the higher sales volume. Despite the challenging market conditions, gross margin still came in strong at 39.9% for 2023. The company generate a very strong operating cash flow of approximately $1.6 billion for the year and continued to maintain a healthy balance sheet with no financial debt. By the end of the year the Company had a cash balance of $3 billion and a combined cash and bank notes receivable balance of $3.2 billion. During the fourth quarter, continued optimization of operations and improvements in yield and throughput at our two poly facilities resulted in total production volume of 61,014 metric tons, an increase of 3,350 metric tons, compared to the previous quarter.

Fourth quarter saw solid demand from customers for our high-quality N-type poly and as a result our finished goods inventory was at a very low level of which will has allowed us to effectively hedge against downside risks during the off-season period close to the end of year. In Q4, as new capacity was released, the price disparity became more apparent between high-quality manufacturers and new entrants. Despite fierce market competition due to the addition to poly supply, we continued to maintain our leadership in both cost and quality. Compared to the end of last year our production cost trended down quarter-over-quarter reducing by approximately $1.2 per kilo from fourth quarter of 2022, compared to that in fourth quarter of 2023. During the month of December, our entire product mix reached approximately 60%.

Overall, we maintain profitable despite the challenging market conditions, generating $128 million in EBITDA for fourth quarter and maintain a strong cash flow. We expect our first quarter 2024 total poly production volume to be approximately 60,000 metric tons to 62,000 metric tons, similar to that for our fourth quarter 2023, as the company maintains full production. We plan to begin initial production at our new Inner Mongolia 5B facility in the second quarter of 2024 and as such we anticipate full-year 2024 production volume to be approximately 280,000 metric tons to 300,000 metric tons, approximately 40% to 50% higher than in 2023. With more than a decade of experience in poly production, as well as a fully digitalized and integrated production system, that optimizes operational efficiency will further increase anti-production in the product mix.

The briefing on the industry, poly prices in the fourth quarter declined from approximately RMB87 per kilo for mono-grade poly in September to approximately RMB65 per kilo in December, primarily due to a seasonally lower demand. On the demand side, in October, the ingot segment reduced utilization rates due to accumulated inventory and lower wafer prices. In November, N-type module prices dropped below RMB1 per watt for the first time and solar cell manufacturers could hardly make a profit. On the supply side, poly production volumes in China continued to increase on a month-over-month basis in Q4 and Tier 2 and Tier 3 manufacturers, including new engines, contributed most of the growth in poly supply. However, leading high quality manufacturers produced less than anticipated, widening the price gap between high quality manufacturers and Tier 2 companies.

Near the end of December, N-type and P-type poly prices came in at around RMB65 to RMB68 per kilogram and RMB55 to RMB62 per kilogram respectively. Going to the first quarter of 2024, we accept poly prices to rebound slightly in Q1, seasonally affected by the Chinese New Year, and then stabilize in Q2. The market transition to N-type products has been accelerating as downstream producers continue to switch to N-type products, driven by the higher price premium for N-type TOPCon products over P-type per product. We expect this trend to continue throughout 2024 with strong demand for higher-purity N-type poly in a market with tight supply. Overall, 2023 was an unprecedented year marking a step change for renewable energy growth. The global acceleration in the transition to renewable energy was primarily driven by China’s booming solar market with new solar PV capacity reaching record high at 216.88 gigawatt, a 148% year-over-year growth.

This surge was particularly evident in December when China added 53 gigawatt, which is roughly a quarter of the entire year’s additional capacity. Solar has become one of the most competitive forms of power generation. The continuous cost reduction in solar PV products and the associated reduction in solar energy generation costs are expected to create substantial additional green energy demand. So with 2023 setting the stage for gradually phasing out P-type products, we believe that 2024 will mark the year when N-type products dominate the industry. We are optimistic that we’ll capture the long-term benefits of the growing global solar PV market and maintaining our competitive advantage by enhancing our higher efficiency N-type technology and optimizing our cost structure through digital transformation.

In 2023 alone, we collected more than 20 billion manufacturing process data points at each of our poly production facilities. We believe that we have one of the largest pools of collected and stored poly production data amongst our peers in China. So we have begun to apply AI to this vast amount of data to help increase the proportion of N-type in our product mix and reduce our production costs by identifying relationships across discrete processes and ultimately predicting the optimal inputs and parameters that will yield the best production results. We expect that as we collect more data and further leverage our AI-powered analytics to provide additional insights, we’ll be able to further reduce cost, achieve higher efficiency, and increase productivity.

So now I’ll turn the call to our CFO, Mr. Ming Yang, who will discuss the company’s financial performance for the quarter. Ming, please go ahead.

Ming Yang: Thank you, Anita. Hello, everyone. This is Ming Yang, CFO of Daqo New Energy. We appreciate you joining our earnings conference call today. We’ll first go over the company’s fourth quarter 2023 financial performance, then follow with our full-year 2023 financial results. Revenue for the fourth quarter of 2023 were $477 million, compared to $484.8 million in the third quarter of 2023 and $864.3 million in the fourth quarter of 2022. The decrease in revenue compared to the third quarter of 2023 was primarily due to decrease in sales volume, mitigated by increasing ASP. As Mr. Xu mentioned earlier, ASP for Q4 was $7.90 per kilogram, which was 3.8% above Q3 ASP of $7.68 per kilogram. Gross profit was $87.2 million, compared to $67.8 million in the third quarter of 2023 and $669 million in the fourth quarter of 2022.

Gross margin was 18.3%, compared to 14% in the third quarter of 2023 and 77% in the fourth quarter of 2022. The increase in gross margin compared to the third quarter of 2023 was primarily due to higher average selling price and lower production cost. Despite an 8% increase in silicon metal procurement costs in Q4, compared to Q3, we managed to reduce costs slightly due to improvements in utilization, as well as other improvements in manufacturing efficiency. SG&A expenses were $39 million, compared to $89.7 million in the third quarter of 2023 and $44 million in the fourth quarter of 2022. SG&A expenses during the fourth quarter includes $19.6 million in non-cash share-based compensation expense related to the company’s share incentive plan, compared to $46.3 million in the third quarter of 2023.

R&D expenses were $3.3 million, compared to $2.8 million in the third quarter of 2023 and $2.7 million in the fourth quarter of 2022. R&D expenses can vary from period-to-period reflect R&D activities that take place during the quarter. R&D activities for the quarter were primarily related to quality improvements and anti-product research. Foreign exchange loss was $0.8 million, compared to a gain of $3.1 million in the third quarter of 2023, and is attributed to the volatility and fluctuation in the USD, the CNY exchange rate during the quarter. Income from operations was $83.3 million, compared to $22.5 million in the third quarter of 2023 and $623 million in the fourth quarter of 2022. Operating margin was 17.5%, compared to 4.6% in the third quarter of 2023 and 72.1% in the fourth quarter of 2022.

Net income attributable to Daqo New Energy shareholders was $44.9 million, compared to net loss of $6.3 million in the third quarter of 2023, and net income of $332.7 million in the fourth quarter of 2022. Earnings per basic ADS was $0.64, compared to loss per basic ADS of $0.09 in the third quarter, and earnings per basic ADS of $4.26 in the fourth quarter of 2022. Adjusted net income attributable to Daqo New Energy shareholders, which excludes non-cashier-based compensation costs, was $66 million, compared to $44 million in the third quarter of 2023 and $363 million in the fourth quarter of 2022. Adjusted earnings per basic ADS was $0.94, compared to $0.59 in the third quarter of 2023 and $4.65 in the fourth quarter of 2022. EBITDA was $128.2 million, compared to $70 million in the third quarter of 2023, and $649 million in the fourth quarter of 2022.

EBITDA margin was 26.9% compared to 14.5% in the third quarter of 2023 and 75% in the fourth quarter of ‘22. Now I will go over the company’s full-year 2023 financial results. Revenue for 2023 was $2.3 billion, compared to $4.6 billion in 2022. The decrease was primarily due to lower polysilicon average selling prices and partially mitigated by higher sales volume. Gross profit was $920.7 million for 2023, compared to $3.4 billion in 2022. Gross margin was 39.9%, compared to 74% in 2022. The decrease in gross profit was primarily due to lower average selling price. SG&A expenses were $213 million, compared to $354 million in 2022. The decrease was primarily related to a reduction in non-cash share-based composition costs related to the company’s share incentive plan.

R&D expenses in 2023 were $10 million, compared to $10 million in 2022. Income from operations was $783.4 million, compared to $3 billion in 2022. Operating margin was 33.9%, compared to 66% in 2022. Net interest income was $52.3 million, compared to $14.5 million in 2022. The increase in interest income for 2023 was due to the company’s higher cash balance at banks. Income tax expense was $174 million, compared to $577 million in 2022. Net income attributable to Daqo New Energy Corp shareholders for the full-year of 2023 was $421 million, compared to $1.8 billion in 2022. Earnings per basic ADS were $5.64, compared to $24 in 2022. Non-GAAP adjusted net income attributable to Daqo New Energy shareholders was $554 million, compared to $2.1 billion in 2022.

Adjusted earnings per basic ADS were $7.42 in 2023, compared to $27.97 in 2022. EBITDA was $918.6 million, compared to $3.15 billion in 2022. EBITDA margin was 39.8%, compared to 68.4% in 2022. And now on the company’s financial condition. As of December 31, 2023, the company had $3 billion in cash, cash equivalents, and restricted cash, compared to $3.28 billion as of September 30, 2023, and $3.5 billion as of December 31, 2022. At the end of 2023, the bank notes receivable balance was $116 million, compared to $275.8 million as of September 30, 2023 and $1.13 billion as of December 31, 2022. Notes receivable represent bank notes with maturity within six months. Now on the company’s cash flow. For the 12 months ended December 31, 2023, net cash provided by operating activities was $1.61 billion, compared to $2.46 billion in the same period of 2022.

And for the 12 months ended December 31, 2023, net cash used in investing activities was $1.19 billion, compared to $998 million in the same period of 2022. Net cash used in investing activities in 2023 primarily related to the company’s capital expenditures on the company’s 5A and 5B polysilicon expansion projects in Baotou City, Inner Mongolia. And for the 12 months ended December 31 2023, net cash used in finance activity was $795 million, compared to $1.47 billion of net cash provided by financing activities in the same period of 2022. The net cash used to invest in finance activities in 2023 was primarily related to $486 million in share purchases and $303 million in dividend payments made by the company’s subsidiary Xinjiang Daqo, to its minority shareholders on the China’s Asia market.

And that concludes our prepared remarks. We will now open the call to Q&A from the audience. Operator, please begin.

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Q&A Session

Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Philip Shen with Roth MKM. Please go ahead.

Philip Shen: First one is on the outlook for price. You said in your prepared remarks that polyp prices could rebound in Q1 and then stabilize in Q2? Can you quantify what N-type and P-type pricing could be in Q1? When you say rebound slightly, what does that mean? And then would you expect that to just be flat in Q2. And then if you have any view on what poly pricing does in the back half of 2024, that would be very helpful. Thanks.

Anita Zhu: [Foreign Language]

Xiang Xu: [Foreign Language] [Interpreted] So based on our understanding of the market supply and demand and our own forecast. We expect that in the first-half N-type will range between RMB70 to RMB73 per kilogram, while P-type will be around RMB65 per kilogram. And in the second-half, depending on demand and whether it will exhibit a fly recovery and a growth, we expect that N-type might rebound to RMB80 per kilogram and P-type around RMB75 per kilogram.

Philip Shen: And can you explain the dynamics for what’s going on and why there could be that expansion of price? Is it — have you seen from an industry structure standpoint, have you seen many players exit or shut down? And do you expect utilization to be lower as a result of having limited supply? Or do you expect demand to be the offsetting factor resulting in the higher price? Thanks.

Anita Zhu: [Foreign Language]

Ming Yang: I’ll fill in for Mr. Xu. Okay, in terms of dynamic, right? So if we look at the current market, we are actually in a period of relatively low end market demand. We think the current end market movement in terms of module production utilization is probably only 60% to 70%, compared to say the September level of last year. So this already brings us to N-type poly in the RMB70 to RMB73 range in P-type in the RMB60s range, right? Much improvement from the December level of pricing. So we do think going into the summer when the demand level recovers, let’s say that we can recover to the level that we saw in the August-September time frame. Then certainly we think N-type can easily go back to the RMB80s level while P-type probably in the RMB70s level.

And in terms of what we’re seeing in the market, overall, we are seeing a relative oversupply of poly relative to demand. But specifically, we look at the N-type poly based on industry statistics, we think there’s only around 60,000 to 70,000 metric tons of supply per month, while the demand we think actually exceeds 100,000 metric tons a month based on the amount of N-type cell capacity that has been put in place in the market. So we do believe we will continue to see a very strong demand — robust demand for N-type in a tight supply market going forward. And actually that’s what we’re seeing today for N-type products.

Philip Shen: Great, thank you, Ming. Do you think, from a capacity standpoint for N-type, do you see others trying to ramp up that N-type poly capacity and do you think they can be successful to try to close the gap or do you expect this difference between supply and demand under the under supply situation? How long could that last? Could that last about a year or do you think it’s maybe just six months or could it last for a number of years? Thanks.

Ming Yang: [Foreign Language]

Xiang Xu: [Foreign Language] [Interpreted] So our N-type production in product mix is in between 60% to 70% as of now. And based on our awareness, our peers, especially the top players like Tongwei, it’s somewhat similar to our N-type production level. But for the new players, they are almost incapable in producing the N-type at the current stage. So we believe that this year it will still be a market where there’s tight N-type supply.

Philip Shen: Okay, great. Thank you. One last one and then I’ll pass it on. You know, the stock is down 30% year-to-date. What’s your view or thinking around another buyback program? Could you add more to the program or restart it? And is that something that you’re interested in doing? Thanks.

Anita Zhu: [Foreign Language]

Xiang Xu: [Foreign Language] [Interpreted] So thank you. Thank you, Phil. So we are, first of all, we are very confident in our company’s operations and we have sufficient cash flows that Ming has mentioned previously. However, as the market is currently undergoing tremendous challenges and there are a lot of unforeseeable market dynamics happening, the board is keeping an close eye on the current market conditions and see how it evolves as time goes. And we believe that we still want to maintain a very healthy balance sheet to survive in this market and to undergo the current conditions. That being said, we have — we are still considering the share repurchase plan, but that will be contingent upon the A-share dividend plan, which the A-share board will discuss.

And post they decide on the A-share dividend plan for 2023, we believe that we will get back to our investors about whether we’ll release another share repurchase program or via other methods to increase shareholder confidence like dividends.

Philip Shen: Okay. Thank you very much. I’ll pass it on.

Ming Yang: Okay, thanks, Phil.

Operator: Thank you. The next question comes from Alan Lau from Jefferies. Please go ahead.

Alan Lau: Thanks a lot for taking my question. And actually the 4Q result is decent amid the challenging market situation. So a couple of questions, so first of all, what is the CapEx plan for 2024?

Ming Yang: Hi, Alan. This is Ming. So, regarding the CapEx plan this year, so if you look at our ongoing CapEx projects, right, so primarily this year will be for the Inner Mongolia Phase 2, that’s where we’re spending most of our CapEx, as well as some of the remaining payments on the Inner Mongolia Phase 1. And there’s some small payments on the semiconductor project that’s expected to start production this year, and then our silicon metal projects in both in the Mongolia and Xinjiang. So from that perspective, our current CapEx budget for the year is around RMB8 billion to RMB9 billion for 2024 to implement the above projects and we’re expecting that, so in terms of U.S. dollars roughly $1.1 billion to $1.3 billion. And certainly the CapEx fully funded.