Daqo Ticked All Right Boxes in Q1/2020

Strategic Contracts With Big Clients Helped Daqo New Energy Sail Through In Q1/2020 Despite COVID-19 Impact; Company Reiterates Full year Guidance For 2020
03:18 AM (Beijing Time) - 24. May 2020
cost Presentation1

Daqo New Energy brought down its total production cost in Q1/2020 to its lowest level of $5.86 per kg due to economies of scale, savings on energy consumption and improved operational efficiency. At the same time, its long term contracts with the world's largest wafer company LONGi and the largest vertically integrated solar module manufacturer JinkoSolar helped continue producing in the quarter. (Source: Daqo New Energy)

Key Takeaways

  • Daqo New Energy improved adjusted net income for Q1/2020 by 53.5% sequentially and EBITDA by 39%
  • Company sold a little above the guidance for an ASP of $8.79 per kg compared to $8.77 per kg in Q4/2019
  • Annual maintenance has been preponed to Q2/2020 as the company sees demand taking a hit in the quarter due to the pandemic’s impact
  • Full year guidance of 73,000 MT to 75,000 MT polysilicon production has been reiterated by the management that sees the market stabilizing by third and fourth quarters

Chinese polysilicon maker Daqo New Energy seems to have escaped unscathed from the impact of COVID-19 in Q1/2020 as it managed to improve its financial metrics from last year on almost all accounts according to its unaudited results for the quarter.

The company produced 19,777 metric tons (MT) of polysilicon in the reporting quarter, Daqo’s highest quarterly amount, for a record low average production cost of $5.86 per kg. Management attributed the 8% sequential decrease in production cost to growing economies of scale, savings on energy consumption and improved operational efficiency, and of course to strategically signed long-term contracts with big clients – such as LONGi and JinkoSolar – that came to its rescue during the difficult time of Q1/2020.

Of the polysilicon produced, the Chinese supplier sold 19,101 MT for an ASP of $8.79 per kg, compared to $8.77 per kg in the previous quarter, to report revenues of $168.8 million vis-à-vis $81.2 million last year.

Daqo CEO Longgen Zhang admitted the company experienced difficulties in securing raw materials, managing on-site operations and facilitating logistics due the COVID-19 outbreak, yet sailed through it all. “Despite the challenging market environment, we successfully expanded our gross margin by further optimizing our cost structure during the quarter. Gross margin during the quarter was 33.5% compared with 29.5% in the fourth quarter of 2019,” he emphasized. “An expanding gross margin and increasing sales volume resulted in $63.1 million in EBITDA, up 39% sequentially, and $37.7 million in adjusted net income, up 53.5% sequentially.” In Q1/2019, the net income dropped 79% YoY.

Guidance

Despite a good run in the first quarter, the management wants to tread cautiously and has guided for polysilicon production of between 15,500 MT to 16,500 MT in Q2/2020 out of which 14,500 MT to 15,500 MT will be sold to external customers. For the entire calendar year 2020, Daqo reiterated its annual guidance of polysilicon production of 73,000 MT to 75,000 MT inclusive of the annual facility maintenance impact at Xinjiang which is being preponed to Q2/2020 as it is expecting low demand.

With its production lines running at full capacity in Q1/2020, Daqo New Energy has decided to conduct annual maintenance in Q2/2020 expecting lower demand. However, the management is confident of achieving its annual numbers as shared previously. (Source: Daqo New Energy)
With its production lines running at full capacity in Q1/2020, Daqo New Energy has decided to conduct annual maintenance in Q2/2020 expecting lower demand. However, the management is confident of achieving its annual numbers as shared previously. (Source: Daqo New Energy)

Management sees the global solar markets recovering from the pandemic over the next 2-3 months. “We expect to see some rush orders from solar PV developers in China for legacy projects delayed from last year in order to meet the grid connection deadline set for the end of June,” said Zhang. “However, a recovery of demand from markets outside of China is critical going forward as overseas markets currently account for approximately 75% of total global solar end market demand. With many economies beginning to reopen, we expect to see a gradual recovery of solar PV demand in the third quarter.”

Philip Shen, research analyst at Roth Capital Partners cautions that as Chinese and US governments lock horns, Congress and the Trump Administration are seeking to increase the oversight, scrutiny and disclosure requirements for Chinese companies listed on US exchanges. Shen said, “We expect DQ to pass muster, but the headlines could create some noise.”

Roth Capital has lowered its 2020 estimates for Daqo accross the board, decreasing its Q2 ASP estimate to $7.05/kg from $8.20/kg. However, it noted on the positive side of Q1, that “Daqo’s cost of production came in ‘better than [DQ’s] original plan’ largely due to a ~7% reduction in per unit electricity usage QoQ to 66 kWh/kg due to the Phase 4A upgrade from 48-rod reactors to 72- to 80-rod reactors.” It added, that management further believes overall cost/kg can be reduced by another 5% as Phase 4A continues to ramp up and achieve optimal efficiency.”

 

Anu Bhambhani

Anu Bhambhani is the Senior News Editor of TaiyangNews

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Anu Bhambhani