Daqo New Energy Corp. (DQ) Earnings Call Transcript & Summary

Good day, and welcome to the Daqo New Energy First Quarter 2025 Results Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to [ Jessie Zhao ], Investor Relations Director. Please go ahead.

Hello, everyone. I'm Jessie Zhao, the Investor Relations Director of Daqo New Energy. Thank you for joining our conference call today. Daqo New Energy just issued its financial results for the first quarter of 2025, which can be found on our website at www.dqsolar.com. So, today, attending the conference call, we have our Chairman and CEO, Mr. Xiang Xu; our Deputy CEO, Ms. Anita Zhu; our CFO, Mr. Ming Yang and myself. Today's call will begin with an update from Mr. Xu on market conditions and company operations, followed by a translation from Ms. Anita Zhu for Mr. Xu, and then Mr. Yang will discuss the company's financial performance for the quarter. After that, we will 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 statements. Further information regarding these and other risks is included in the reports or documents we have filed with or 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 will 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. Now, I will turn the call to our Chairman and CEO, Mr. Xiang Xu. Mr. Xu, please go ahead.

[Interpreted] Hello, everyone. This is Anita. So, thank you for joining our conference today, and I'll now deliver the management remarks on behalf of Mr. Xu. So in the first quarter of 2025, the solar PV industry continued to face significant challenges. Overcapacity persisted and polysilicon prices stayed below cash cost levels. Although this caused Daqo New Energy to sustain quarterly operating and net losses, our losses narrowed sequentially and we continued to maintain a strong and healthy balance sheet with no financial debt. As of March 31, 2025, the company had a cash balance of USD 792 million, short-term investment of USD 168 million, bank notes receivable of USD 63 million, and a fixed-term bank deposit balance of USD 1.1 billion. In total, our quick assets, readily convertible into cash if needed, stood at USD 2.15 billion, providing us with ample liquidity. With no financial debt, our solid financial position gives us the confidence that we'll remain strategically resilient and well positioned to overcome the current market downturn. On the operational front, the company operated at a reduced utilization rate of approximately 33% of our nameplate capacity in response to challenging market conditions and weak selling prices. Total production volume at our 2 polysilicon facilities for the quarter was 24,810 metric tons, slightly below our guidance range of 25,000 metric tons to 28,000. However, sales volume reached 28,008 metric tons, exceeding production and enabling us to reduce inventory to a healthier level. As a result of lower utilization across our factories, idle-facility related cost for the quarter was approximately USD 1.58 per kilogram, which was primarily related to non-cash depreciation expenses. Overall, polysilicon unit production costs increased by 11% sequentially to an average of USD 7.57 per kilogram, primarily due to higher unit depreciation costs as a result of lower production. Our cash cost increased by 5% to USD 5.31 per kilogram quarter-over-quarter, primarily due to maintenance and facilities-related costs during the quarter. In light of the current market conditions, we expect our total production volume in the second quarter of 2025 to be in the range of 25,000 metric tons to 28,000 metric tons. As a result, we anticipate our full-year 2025 production volume to be in the range of 110,000 metric tons to 140,000 metric tons. During the first quarter, polysilicon producers implemented self-disciplined measures to mitigate the impact of irrational competition amid falling prices, resulting in industry-wide capacity utilization of approximately 50%. According to industry data, domestic polysilicon production volume came in at 105,500 metric tons in March and below 100,000 metric tons for both January and February. Consequently, supply in the first quarter fell short of demand, gradually reducing industry inventory levels. On February 9, Chinese authorities introduced a market-based reform policy for new energy on-grid tariffs to promote the high-quality development of the renewable energy sector. All on-grid electricity generated from renewable energy, such as wind and solar power will be traded through market mechanisms with prices determined by supply and demand. This policy aims to balance grid load more effectively. As mandated in the policy, the cutoff date that distinguishes new projects from existing projects is May 31, 2025, and new energy projects that commence operations on and after June 1, 2025, will be subject to a provincial-level competitive bidding process. As the fixed-tariff structure for renewable energy electricity transitions to a market-based pricing mechanism, uncertainties around future electricity prices and revenue generations have emerged. In response, project developers and investors are accelerating project completions ahead of the June 1 deadline in order to secure current policy benefits, which has led to a surge in downstream installations. So fueled by this front-loading, market price of solar products have trended upward, narrowing losses across the value chain, particularly for end-products. However, given the relatively high level of polysilicon inventory held by wafer manufacturers, price increases have yet to fully materialize in the polysilicon segment. Polysilicon prices remained stable throughout the quarter at approximately RMB 37 to RMB 42 per kilogram. In the medium to long term, however, we believe current low prices and market downturn will eventually result in a healthier and more sustainable industry. As ongoing losses, poor profitability and cash burn force less competitive players to exit the market, we expect overcapacity to be ultimately eliminated, bringing the solar PV industry back to normal improved profitability and healthier margins. The solar PV industry continued to show promising prospects. China's new solar PV installations reached 59.71 gigawatts in the first quarter, a robust 30.5% year-over-year growth. In the long run, as one of the most cost-effective and sustainable energy resources worldwide, solar power is expected to remain a key driver of the global energy transition and sustainable development. Looking ahead, Daqo New Energy is well positioned to capitalize on the long-term growth in the global solar PV market and strengthen its competitive edge by enhancing its higher-efficiency N-type technology and optimizing its cost structure through digital transformation and AI adoption. As one of the world's lowest-cost producers with the highest quality N-type product, a strong balance sheet with no financial debt, we're confident in our ability to weather the current market downturn and emerge as a leader in the industry ready to capture future growth. So now, I will turn the call to our CFO, Mr. Ming Yang, who will discuss the company's financial performance for the quarter. Ming, please go ahead.

Thank you, Anita, and hello, everyone. This is Ming Yang, CFO of Daqo New Energy. We appreciate you joining our earnings conference call today. I will now go over the company's first quarter 2025 financial performance. Revenues were $123.9 million compared to $195.4 million in the fourth quarter of 2024, and $415 million in the first quarter of 2024. The decrease in revenues compared to the fourth quarter of 2024 was primarily due to a decrease in sales volume. Gross loss was $81.5 million compared to $65.3 million in the fourth quarter of 2024 and gross profit of $72 million in the first quarter of 2024. Gross margin was negative 66% compared to negative 33% in the fourth quarter of 2024 and 17.4% in the first quarter of 2024. The decrease in gross margin compared to the fourth quarter of 2024 was primarily due to a lower average selling price and higher production costs. SG&A expenses were $35.1 million compared to $29.4 million in the fourth quarter of 2024 and $38 million in the first quarter of 2024. SG&A expenses during the first quarter included $18.6 million in non-cash share-based compensation costs related to the company's share incentive plans compared to $14.9 million in the fourth quarter of 2024. R&D expenses for the quarter were $0.5 million compared to $0.4 million in the fourth quarter of 2024 and $1.5 million in the first quarter of 2024. R&D expenses can vary from period-to-period and reflect R&D activities that take place during the quarter. And as a result of the foregoing, loss from operations was $114 million compared to a loss of $300 million in the fourth quarter of 2024 and income from operations of $30 million in the first quarter of 2024. The decrease of loss from operations in the first quarter of 2024 compared to the fourth quarter of 2024 -- first quarter 2025 was also attributable to the long-lived asset impairment of $175.6 million assets and allowance for expected credit loss of $18 million recorded in the fourth quarter of 2024. Operating margin was negative 92% compared to negative 154% in the fourth quarter of 2024 and 7.3% in the first quarter of 2024. Net loss attributable to Daqo New Energy shareholders was $71.8 million compared to $180 million in the fourth quarter of 2024, and net income of $15.5 million in the first quarter of 2024. Loss per basic ADS was $1.07 compared to $2.71 in the fourth quarter of 2024, and earnings per basic ADS of $0.24 in the first quarter of 2024. Non-GAAP adjusted net loss attributable to Daqo New Energy shareholders, excluding non-cash share-based compensation costs, was $53 million compared to $170.6 million in the fourth quarter of 2024, and adjusted net income of $36 million in the first quarter of 2024. Adjusted loss per basic ADS was $0.80 compared to $2.56 in the fourth quarter of 2024, and adjusted earnings per basic ADS of $0.55 in the first quarter of 2024. EBITDA was negative $48 million compared to negative $236 million in the fourth quarter of 2024 and $76.9 million in the first quarter of 2024. EBITDA margin was negative 39% compared to negative 121% in the fourth quarter of 2024 and 18.5% in the first quarter of 2024. Now on the company's financial position. As of March 31, 2025, the company had $792 million in cash, cash equivalents and restricted cash compared to $1.04 billion as of December 31, 2024, and $2.7 billion as of March 31, 2024. And as of March 31, 2025, the notes receivable balance was $62.7 million compared to $55 million as of December 31, 2024, and $194 million as of March 31, 2024. Notes receivable represent bank notes with maturity within 6 months. And as of March 31, 2025, the balance of fixed term deposits within 1 year was $1.12 billion compared to $1.09 billion as of December 31, 2024, and nil as of March 31, 2024. And now on the company's cash flows. For the 3 months ended March 31, 2025, net cash used in operating activities was $38.9 million compared to $116 million in the same period of 2024. And for the 3 months ended March 31, 2025, net cash used in investing activities was $211 million compared to $190.5 million in the same period of 2024. The net cash used in investing activities in the first quarter of 2025 was primarily related to the purchase of short-term investments and fixed term deposits. And for the 3 months ended March 31, 2025, net cash used in financing activities was nil compared to $6 million in the same period of 2024. And that concludes our prepared remarks. We will now open the call to Q&A from the audience. Operator, please begin.

[Operator Instructions] The first question today comes from Philip Shen with ROTH Capital Partners.

In your prepared remarks, you talked about overcapacity ultimately being eliminated. I was wondering if you could talk through when you think that could happen? And you also mentioned less competitive players will exit the market. Who have you seen exit thus far? And then which exits do you think might be near term?

Thank you, Phil. So in terms of the rebalancing of supply and demand, to give a quick recap, so back in 2024, the total polysilicon production volume is around 1.82 million metric tons. And the nameplate capacity production -- production capacity of polysilicon of all completed projects, regardless of whether it's completed or temporary shutdown, exceeded 1,400 gigawatts, which is roughly 3.2 million metric tons. That's more than double of demand. And what we've seen in this cycle compared to the previous cycle is that the incumbents and even some of the new players, they either have a very solid shareholder base that in the worst case can inject asset or have other source of financing. For instance, recently, we've seen Tongwei announcing RMB 10 billion in fundraising at its Yongxiang subsidiary. So, I think that's just one case that signals the rebalancing of supply and demand will take longer than expected compared to the previous cycles. And we've seen that the overall industry utilization rate is currently at around 40% to 50%. And we actually haven't seen any companies completely exiting the market. Most of them are either lowering their utilization rate or undergoing this temporary shutdown. So it's hard to say when exactly we would see the players exiting. But as we are still transacting at prices below most of the company's cash costs, it will be relatively difficult for some of the companies to sustain the current situation.

That's helpful. So, you mentioned the industry utilization rate is between 40% and 50%. Can you tell us what you expect that to trend or how you expect it to trend by quarter through this year? Do you think it goes above 50% by Q4? Or do you think we're well below -- sorry, 50% even in Q4?

Yes. Sure. So in the first quarter, the monthly domestic production actually came in around 90,000 metric tons to 100,000 metric tons per month. And we've seen a slight shortage in supply compared to the monthly demand. And the inventory depletion of polysilicon is actually happening at a very slow pace. However, because of the high level of inventory in polysilicon, we've seen almost, I would say, 400,000 metric tons in total of poly at the poly manufacturer and at the ingot manufacturer. Now, that's across the value chain. We think the inventory depletion will take at least 4 months, assuming the most extreme case of 0 production per month and also a monthly production of 950,000 metric tons. And because of that, the poly prices actually remained relatively stable during the first quarter, trading at RMB 38 to RMB 42 per kilogram, with N-type from the top players actually coming in at RMB 41 to RMB 42. And if we're looking at the second quarter and maybe going forward, we believe the prices will be supported at the current level because of the policy that was rolled out in February. So, we expect price level to sustain at the current range before the policy cutoff date of May 31, especially because we expect strong April and May demand at around 55 gigawatts to 65 gigawatts, which will translate to a total demand of around 125,000. But we do see potential downside risk both coming from the policy change, also coming from the external tension, especially from the Trump administration's trade war 2.0. So after the Russian installation, we see demand would trend down slightly. And that's why we maintain cautious and expect pricing to be relatively suppressed at the low price range of RMB 35 to RMB 40 per kilogram throughout the remaining of 2025.

Okay. Great. So again, a lot of information there. So, you said demand in China after May would be down slightly. But I think you mentioned 55 gigawatts for those April, May. What's your expectation for after May 31, how much demand -- how much lower could demand be on a monthly basis in China?

I think overall, the whole year of 2025, we believe China demand will still come in relatively strong in the range of 250 gigawatts to 300 gigawatts, which would be roughly equivalent to 1.4 million metric ton to 1.6 million metric ton of poly demand. Although compared to 2024, it may seem more stagnant, primarily because of the potentially deteriorating solar project returns, which was impacted by the new policies in February, primarily because of the uncertainty in calculating the yield. But in the long run, we are encouraged to see that renewable energy is actually transitioning to a more market-driven and heading into a more sustainable and high-quality development compared to being subsidized by the government with more guaranteed on-grid volume price for all incremental renewable energy projects. So yes, I think overall, this year in China, it would still be relatively supported at 250 gigawatts to 300 gigawatts.

[Operator Instructions] The next question comes from Alan Hon with JPMorgan.

My first question is regarding ADR delisting risk. I mean, what is the strategy? I mean, you're looking for to -- or what do you think -- like how should we encounter the ADR delisting risk?

Thank you, Alan. So first of all, we fully understand our investor concern over the risk of forcing the ADR to delist from the U.S. amidst the heightened U.S.-China trade war. Although we personally, although we -- I think that we would remain vigilant and consider the delisting of ADR a relatively low probability. I do acknowledge that the Trump administration is putting all options on the table. And because of that this would be a key stake for negotiation as decoupling from the 2 largest economies spread to the financial sector. And we actually considered a potential dual listing of returning to Hong Kong Exchange back in 2022 as some background information because of the risk arising from the Holding Foreign Companies Accountable Act. But that issue was effectively resolved in the same year after PCAOB determined at the end of 2022 that it was able to inspect and investigate all the firms in Mainland China and Hong Kong completely. So it vacated its 2021 determination. And this is why our listing in Hong Kong was held off, and we decided to keep our ADRs because the trading volume is much higher for the ADRs compared to the Hong Kong listing. And based on our understanding, I think, for Hong Kong listing would take maybe around 6 months, depending on regulatory approvals, also market conditions and our internal readiness. And to be fully transparent to our investors, while we have no immediate plans in place amid the current situation, we are definitely closely monitoring the market and the regulatory development. And we want to assure you that we remain fully committed to driving the long-term value for our stakeholders and also executing our long-term growth vision. And it's very unfortunate for us to see tensions escalating. But if circumstances do exacerbate to the most extreme case of a forced delisting, our management team will definitely evaluate all strategic options to protect the interest of our shareholders, such as the listing in Hong Kong or seek other means to return capital to our shareholders.

And my next question is regarding cash cost. I note that the cash production cost in first quarter has edged up a little bit from fourth quarter last year. And there, you mentioned about maintenance cost. Just want to get a feeling about like the outlook on cash cost, I mean, in the subsequent quarters in the year.

Okay. Alan, thanks for your question. So, cash costs did trend up slightly this quarter, I guess, about 5% to 6% compared to the previous quarter. It's primarily due to 2 primary reasons. okay? The first reason is that, I think since December of last year, our Inner Mongolia Phase 2 was shut down completely and then went into what's called in Chinese [ Weibo ] or maintenance of the facilities for longer term. So it's incurring equivalent to roughly $0.20 per kilogram of cost this quarter, okay? Even though there's no production, there's that additional costs related to, for example, the electricity, the air and the people employed necessary to maintaining facilities. So, that actually adds roughly $0.20 in cash cost. Because if you look at the way that we record cash cost is actually all the cash costs that occur for the facilities, right? So not just for production, but also for the maintenance, okay? And then we subtract out the depreciation and the non-cash share-based compensation to arrive at the cash cost, okay? So there's that $0.20 additional impact because of the maintenance related to the facility that's now being shut down. And then there's another roughly $0.10 of cost related to the maintenance of facility. Inner Mongolia went to maintenance in roughly the second half of March, okay? So as you can see, it had some impact on production for the quarter. And for example, if you compare to the previous quarter, right, I mean, we produced around 34,000 metric tons, right? And for this quarter, we only produce roughly 24,800 metric tons, but we incurred relatively similar level of employees in terms of staffing costs. So, I think that's the part that has to be kind of amortized over a fewer amount of production. So there's that $0.10 impact of cost that we have. I think if we remove the impact, I think we would have roughly $5. So, I think going forward for Q2, I think -- again, I think depending on production level, but I think based on our current guidance, we should probably have similar to slightly lower cash cost compared to the current quarter.

[Operator Instructions] This concludes our question-and-answer session. I would like to turn the conference back over to Jessie Zhao for any closing remarks.

Thank you, everyone, again for participating in today's conference call. Should you have any further questions, please don't hesitate to contact us. Thank you, and have an awesome day. Goodbye.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]