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Daqo (DQ)

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1 hour ago, Klothilde said:

Could happen.  Or the opposite could happen.

Based on current valuation and a PE of 10 the market seems to anticipate a yearly EPS of roughly $4 going forward.

That is in line with an APS/cost spread of approx. $1.5/kg:
(75kt * $1.5/kg = $112.5M - $50M(OPEX&NI) = $62.5M * 0.8(tax) = $50M / 14M(#shares) = $3.6

A spread of $1.5 is roughly in line with current conditions (Q3, i.e. ASP=$9, cost=$7.5M)

Thus the market seems to anticipate that the current spread or margin will remain stable going forward.

Imo there's a risk that the polysilicon glut could intensify in 2020 and that the spread could deteriorate further, possibly falling under $1/kg.  At that level EPS would drop to roughly $1.4 and the current price would no longer be justified.

The above shows that margins have shrunk already so much that a very small change in ASP will have a huge impact on EPS.

Why could the poly glut intensify?  Poly supply expanding faster than poly demand.  Poly demand possibly flat or decreasing slightly due to low PV market growth coupled with a significant reduction in g/W consumption due to further migration from multi to mono.

Within 2 years DQ will shutter their legacy  capacity and be only producing in the low cost regions. In the meantime, their cost structure and ability to fall becomes less as their mass of scale increases. It is going to take the shuttering of the legacy plants in order to drop costs  to $6.50 loaded costs.

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2 hours ago, Klothilde said:

Imo there's a risk that the polysilicon glut could intensify in 2020

I'll quote your own words back to you:

"Could happen.  Or the opposite could happen."

 

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1 hour ago, solarpete said:

OK, anybody got any idea what's going on with DQ today?  Not that I'm complaining, mind you (grin)....

I was wondering the same... typical DQ low float nonsense move I guess.  I was lucky enough to trade a few of those over the last year, but swore off the stock for that very same reason.  Trading solars is wild enough, but DQ can give me intraday ulcers.  However, its strength has me scaling back into CSIQ at a bit higher price than I expected.

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3 hours ago, Mark said:

typical DQ low float nonsense move I guess.

Hmm... I don't know.  While the volume is certainly small compared to other names, it's nearly twice their daily average.  But still no news I can see anywhere.  Apparently just a (relatively) large position being established.

Hey, one man's junk is another man's treasure--that volatility that gives you ulcers "puts bread in my jar," as Billy Joel would say (chuckle)!  But I think I'll be careful about establishing too many new trading positions until I know if this new level will hold, or if we back off into the high 40s again.

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Xinte TBEA, one of Chinas top 4 polysilicon producers, announcing H1 2019 results:
http://fastsfc.com/document/7876336

H1 metrics: 18200 tons produced at an ASP of $8.7/kg and cost of $7.3/kg

Current capacity of 36kT/year to be expanded to 80kT/year by Q3.  Both quality and cost position set to improve.

Takeaways:
- Lower cost position than DQ.  Myth of DQ being the lowest cost producer busted.  

- New capacity of Xinte will expand total polysilicon supply in China by 10% approximately.  Together with a similar supply expansion by DQ (4A) we are looking at 20% supply expansion just by these two players over Q3 and Q4.  Very likely to screw up supply/demand balance further and lead to further price erosion in 2020.

-->  Careful with your 2020 ASP and EPS estimates for DQ you guys cuz it sure looks bloody

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48 minutes ago, Klothilde said:

Xinte TBEA, one of Chinas top 4 polysilicon producers, announcing H1 2019 results:
http://fastsfc.com/document/7876336

H1 metrics: 18200 tons produced at an ASP of $8.7/kg and cost of $7.3/kg

Current capacity of 36kT/year to be expanded to 80kT/year by Q3.  Both quality and cost position set to improve.

Takeaways:
- Lower cost position than DQ.  Myth of DQ being the lowest cost producer busted.  

- New capacity of Xinte will expand total polysilicon supply in China by 10% approximately.  Together with a similar supply expansion by DQ (4A) we are looking at 20% supply expansion just by these two players over Q3 and Q4.  Very likely to screw up supply/demand balance further and lead to further price erosion in 2020.

-->  Careful with your 2020 ASP and EPS estimates for DQ you guys cuz it sure looks bloody

As the new low cost capacity comes online, the legacy capacities of companies that have loaded costs of $10-$12/KG will start being retired. This will offset some of the over production you are suggesting.

China still imports lots of Poly. In 2018 they imported 152,000 tons mostly from OCI and Wacker. This was downs from the previous year for the first time. The imports of poly was mostly high grade for Mono wafers. You can expect that as new capacity is added  while the market demand for high grade poly continues to grow ,  those importers will have their business get crushed.

 

https://www.globenewswire.com/news-release/2019/05/24/1843135/0/en/Global-and-China-Polysilicon-Industry-Report-2019-2023.html

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52 minutes ago, SCSolar said:

China still imports lots of Poly. In 2018 they imported 152,000 tons mostly from OCI and Wacker. This was downs from the previous year for the first time. The imports of poly was mostly high grade for Mono wafers. You can expect that as new capacity is added  while the market demand for high grade poly continues to grow ,  those importers will have their business get crushed.

I agree that Wacker and OCI will have their business crushed.

Just to illustrate: the new capacities of Xinte and Daqo (36+35kt) are enough to replace one of the foreign players.

That also implies market prices falling further below the cash cost or even production cash cost level of Wacker & OCI for a sustained period of time so that they make the strategic decision of shutting down their plants and withdrawing from the industry.

For this to happen prices need to fall 10-20% from current levels imho.

At what price do you think the non-Chinese poly players will throw the towel?  And what will DQ EPS be at that price?

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4 hours ago, Klothilde said:

I agree that Wacker and OCI will have their business crushed.

Just to illustrate: the new capacities of Xinte and Daqo (36+35kt) are enough to replace one of the foreign players.

That also implies market prices falling further below the cash cost or even production cash cost level of Wacker & OCI for a sustained period of time so that they make the strategic decision of shutting down their plants and withdrawing from the industry.

For this to happen prices need to fall 10-20% from current levels imho.

At what price do you think the non-Chinese poly players will throw the towel?  And what will DQ EPS be at that price?

I expect DQ and others to shut down legaccy capacity as their  new capacity grows  and the shift in price moves below cash cost. To me that is sustained in the $9+/- range.

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43 minutes ago, SCSolar said:

... To me that is sustained in the $9+/- range.

I take it you don't see polysilicon prices falling further then because right now mono-grade poly is selling for $9.

I personally don't think current prices are low enough to force Wacker and OCI out of business.  They both reported positive EBITDA in Q2, which suggests operating cash flow is positive under current prices.  I think mono-grade polysilicon needs to fall below $8.0 for them to die.

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Good news:

https://finance.yahoo.com/news/daqo-energy-begins-pilot-production-080000451.html

Some relevant quotes:

"In addition, with greater economies of scale, higher manufacturing efficiency, and cutting-edge equipment and process, we expect the total cost of polysilicon production at our Xinjiang facilities to decrease to approximately US$6.80/kg in the first quarter of 2020."

"We have seen that mono-crystalline solar technology is rapidly expanding market share and accounting for an increasingly significant portion of capacity expansion projects of our solar wafer customers. We believe that mono technology will account for over 80% of the global PV market by the end of 2020. The supply of ultra-high-quality mono-grade polysilicon still lags behind the growing demand. As a result, mono-grade polysilicon is being sold at a significant premium over multi-grade polysilicon."

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2 hours ago, Klothilde said:

As we all know, Zack's focuses on momentum plays, and they're usually late to the party.  DQ's stock has stalled recently, so they're now no longer a momentum play, so Zack's downgrades them.  The next time the stock spikes, Zack's will upgrade them again--after most of the move has already taken place.

And speaking of the stock's next upward move, see my next post....

Solarpete

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That guy is kinda misinformed.  The 23GW of approved projects he's talking about have a hard deadline of June 2020 and not year-end 2019.  They only have to be commissioned by year-end 2019 to get the full FIT, otherwise the FIT drops slightly each quarter the grid-connection is delayed:

"...The average submitted tariff was RMB 0.3281 ($0.0478)/kWh, and the official deadline of the approved 22.78 GW is set for December 31, 2019. If the grid connection takes place in 2020, the approved tariffs will be reduced by RMB 0.01 ($0.001)/kWh each quarter up to the second quarter of 2020. If solar PV projects are connected after June 30, 2020, the approved feed-in-tariff will be revoked, and the projects would stand canceled..."
https://mercomindia.com/china-fit-solar-projects-22-gw/

Thus connecting your project in June 2020 instead of now would give you a FIT of RMB 0.3081 instead of 0.3281, i.e. 6% lower.  That difference is so small that many developers will probably take a gamble and wait for falling module prices in 2020.  Same old story all over again: postpone your projects as long as possible to benefit as much as possible from falling module prices.  Boring.

 

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1 hour ago, Klothilde said:

That guy is kinda misinformed.

I think you missed his point, which is not about a 6-month difference in project timing but about the fact that GCL has a material stake in keeping expectations low for now.  I'm not saying who's right or wrong here--we'll know in 6 months--but I AM saying I take GCL's prognosis with the same grain of salt you're recommending for JKS's and DQ's forecasts.

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2 hours ago, solarpete said:

...but about the fact that GCL has a material stake in keeping expectations low for now...

That is not a fact but a theory of the author (a rather far-fetched one imo).  You could equally argue that GCL poly, having liquidity issues, is interested in hyping the PV and polysilicon market to attract more debt and equity.

However I think that as DQ is concerned it is not too relevant whether we'll have a rallye or not in Q4 but what the polysilicon market prospects are over the next two years, wouldn't you agree?  Or are you just interested in a rallye in Q4 so you can have a nice string of trades?

Looking beyond Q4 it does not look very rosy to me.  By ramping their new plant (4A) they will increase total polysilicon output in China by over 10% over a few months.  Plus there are other players bringing additional capacity online as well.  If a rallye takes place in Q4 the blow won't be that hard, but once we're into Q1 and demand slows down again the poly glut could become really nasty and prices could drop well below where they are right now.

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Well, the author's theory makes sense to me.  Even the idea that GCL MIGHT have an interest in lower demand was news to me, and puts those comments into a new perspective.

But you're right, the question is the long-term outlook.  And here I hate to beat a dead horse, but that's just a revisit of our two different viewpoints:  you forecast doom and gloom every single quarter, foreseeing price declines so sudden as to drive producers into financial jeopardy.  I agree that prices will continue to fall until global grid parity (which has already arrived for some regions, and is getting closer every quarter for the rest), but think they will do so gradually, allowing producers to lower their costs at the same pace, thereby avoiding financial disaster until we all arrive in the promised land when prices stabilize, demand explodes, and profits rain on everybody (chuckle).  Only time will tell who will ultimately be proven right, but so far, CSIQ, JKS, and DQ appear to be booked out every quarter, and so far, no one's filing for bankruptcy.

In the meantime, though, yes, short rallies are good time periods for rapid strings of profitable trades, so I'll take those as part of the long-term plan.

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9 hours ago, solarpete said:

...you forecast doom and gloom every single quarter, foreseeing price declines so sudden as to drive producers into financial jeopardy...

I think you are exaggerating.  Never did I say DQ was going bankrupt.  I said margins and EPS would go down, which happened.  And now I say margins could take another blow with the current expansion in supply going on.

 

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