Polysilicon Production Cost Keeps Daqo In the Red

Daqo New Energy Corp's (DQ) high production costs make company lag behind the competition. 

In comparison to Renesola (SOL) and GCL-Poly Energy Holdings Limited (HKG:3800), Daqo New Energy Corp. (DQ) costs are higher than the efficient GCL, and due to low-scale module production, the firm does not have an offset in gross margin profits like its competitor Renesola. The company is in dire need of a second plant, in order to lower its costs, but until then it is expected to lose every quarter unless ASP for polysilicon improves.   

The revenue for the first quarter of the year was $34M with shipments of 964 MT of poly, 2.3MW of modules and 23.4MW of wafers.  In comparison to the same time last year revenue declined by 61%.  The company has lost $13.8M for the quarter on 32% negative margins.  Last year, high-flying Daqo had 50% gross margins and earnings equal to this quarter’s revenue.  This time around, Daqo has lost $0.39 per share versus $.99 earnings a year ago.  Xinjiang Polysilicon Project is 85% complete and this plant will contribute to a better business dynamic.  Until then, however, costs will continue to be higher than most efficient operators. In the conference call the company mentioned that pricing of hydroelectricity used by the company was seasonally higher than normal rates, further adding to already high costs.  

The company added $45M in long-term debt to the total of $211M in the quarter, while short borrowing has been reduced by $7M in the same period resulting in $104M. Increase in the long-term borrowing was recognized towards the Xinjiang Project. Accounts receivables also increased by $17M, suggesting more product is sold on credit. Daqo added $11M in a combination of cash and restricted cash as one of fewer balance sheet improvements. The management of inventory has shown improvement as the company has sold a large amount of wafers, almost three times the level of Q4-2011.

The mixture of the higher debt and relatively low cash account with negative operational factors, positions the company at the tail of the peer group of Chinese-US listed companies, with limited opportunity for improvement - at least for this year.  Daqo guided second quarter sales of 900-1000 MT of poly, 20.5MW of wafers and 4.5MW of modules.  Daqo is expected to provide 200 MT of ingots and block manufacturing in the form of outsourcing services.

The company expects weak polysilicon prices going forward this year. Some of the market observers see Chinese poly producers gaining, if the retaliation from the Chinese side is applied to the US-made poly as an answer to the anti-dumping tariff decision against Chinese-made cells.  Further pressure can be added from the OCI’s decision not to expand into two new plants worth around 44,000MT, which were to contribute to production in 2013. OCI Chem reached 42,000MT of poly production at the end of 2011 and has been considered second in scale to GCL Poly, but sees the credit crisis in Europe as the potential danger to the demand, thus causing doubts about adding capacity.

Despite this setback, the availability of polysilicon is not expected to impede production levels for the supply chain, as the market sees polysilicon as being in a state of oversupply. Since China’s polysilicon imports come from other large manufacturers like Wacker, and other South Koreans like Woongjin, KCC, LCY, even in case of the duties applied to the US-based producers like REC or Hemlock, the impact to ASP certainly is not seen as immediate and may have limited long-term effects, if any at all. The situation can change dramatically if the importation duties would include South Korean suppliers, something which companies like LDK Solar (LDK) are lobbying for with government officials.

Such a decision would lead to negative conditions for large tier one companies that had entered into long-term contracts with OCI, including Suntech Solar (STP), Yingli Green Energy (YGE), Trina Solar (TSL) and Ja Solar (JASO). Since the decision dynamic would seriously impede the ability to acquire polysilicon, SPVI does not expect any of the Asian manufacturers, particularly OCI, to be affected by retaliatory actions.