Daqo Gets Scorched By Tumbling Polysilicon Prices

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By Doug Young

Too hot to handle?

That’s one possible explanation for polysilicon maker Daqo New Energy Corp.’s (NYSE:DQ; 688303.SS) announcement that its two top officials were stepping down, just a half hour after it released new financial results that show just how overheated its volatile sector has become. The big movement at the top could signal more changes ahead for this company, including a potential privatization of its New York listing.

You would never guess such a privatization might be in the works, at least based on Daqo’s share price after it announced its second-quarter results on Thursday. The stock fell as much as 7.4% during the trading day, and ultimately closed down 4.7%. The company’s New York-listed shares have lost about half of their value over the last 52 weeks, giving Daqo a meager trailing price-to-earnings (P/E) ratio of just 1.8.

The bleak picture contrasts sharply with a year ago, when Daqo and its peers were reporting record revenue and profits on booming demand for their polysilicon, the main ingredient used to make solar panels that are rapidly becoming a major source of electricity. That booming demand sent polysilicon prices to record highs last year, in what looked like a classic bubble built on all the hype about renewable energy.

That bubble burst big time in the second quarter. The figure that best tells that story was Daqo’s average selling price (ASP) for its polysilicon, which plunged by nearly two-thirds to $12.33 per kilogram from $33.08 per kilogram in the year-ago quarter. Ouch.

In typical fashion for this kind of hot industry, Daqo and its peers, most of those in China, began aggressively adding capacity as polysilicon prices soared last year. Daqo was typical of the group, laying out plans to more than triple its capacity to 300,000 MT per year from around 100,000 MT at the end of 2022 by building a massive new production center in the Inner Mongolia region.

“The polysilicon industry experienced increased challenges and substantial price volatility during the second quarter,” Zhang Longgen said in his swansong remarks as Daqo’s CEO, in what looks like the understatement of the year. “As several new polysilicon facilities and new entrants finally started production, with some reaching full production in the first half of this year, the shortage of polysilicon of the past two years came to an end.”

The statement was the last for Zhang in his five years at CEO, as the company announced separately that he was stepping down for “personal reasons.” At the same time, it said founder Xu Guangfu was also stepping down as the company’s chairman, though he would remain on Daqo’s board. It named Xu Guangfu’s son, Xu Xiang, as the company’s new chairman and CEO, meaning the elder Xu is likely to continue playing a role at Daqo. The younger Xu had previously been Daqo’s vice chairman and held numerous positions in the company.

The plunge in polysilicon prices nicely summarizes the pain that Daqo felt during the second quarter. But for anyone wanting more information, we’ll quickly review a few other figures that show just how bad things became. Daqo’s revenue fell by about half to $636.7 million in the quarter from $1.24 billion a year earlier, as the big price drop more than offset a 37% rise in its volume of polysilicon sold with the new capacity coming on stream.

Daqo’s production costs also dropped by about 5%, though, again, that was hardly enough to offset the plunge in its revenue. As a result, the company’s gross margin tumbled to 40.7% from 76.1% a year earlier.

The company gave a detailed account of how polysilicon prices trended during the quarter, noting that they reached a bottom in the second half of June and had rebounded by 15% to 20% from that level as of mid-July. As prices plunged, Daqo said it began receiving “aggressive pricing requests by customers,” resulting in a feeding frenzy as those buyers tried to snap up polysilicon before prices began to rebound.

The result was that Daqo managed to sell nearly all of its inventory, which had been building up in the last quarter as buyers – mostly solar cell makers – waited on the sidelines for the bubble burst that finally came. “With brisk customer orders and demand, we had further reduced our polysilicon inventory to a very healthy level of approximately one week of production across our two facilities,” Zhang said.

One could argue that this kind of blood-letting was necessary, albeit painful, and that things should start to look up for Daqo and its peers for the rest of the year. Reflecting that, Daqo left its annual polysilicon production target of 193,000 MT to 198,000 MT unchanged, showing it was confident that prices had nowhere to trend but up for the rest of the year.

All that said, we’ll close by returning to our earlier prediction that the latest turmoil at Daqo could presage more big changes ahead, including a potential delisting from New York. Daqo is one of the last still on Wall Street among a wave of Chinese solar companies that listed in New York around 2010. Most of those later privatized and re-listed in China after enduring years of lackluster interest from U.S. investors.

Such a lack of interest will only continue as the U.S. and other Western countries encourage more manufacturing of solar panels and their components outside of China to wean the world off Chinese dependence for a big majority of all such manufacturing.

Daqo already has another listed unit, after spinning off and making a separate IPO for its main operating unit, Xinjiang Daqo New Energy, two years ago. That unit has performed better than the New York-listed company in terms of share price. And more importantly, Xinjiang Daqo now trades at a trailing P/E ratio of 4.8, or nearly triple the 1.8 for the U.S.-listed Daqo.

A privatization of the New York company would cut off an important channel for Daqo to obtain foreign currency. But it really doesn’t make sense to maintain the U.S. listing when you can get far more money for the same stock by selling it in China. Therein lies the foundation for our prediction that Daqo could soon follow many of its Chinese solar peers and say goodbye to New York.

Disclosure: None.

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