Daqo Lines Up Big New Buyer Ahead of Massive Expansion

Key Takeaways:

• Daqo New Energy has signed an agreement to sell 150,300 metric tons of polysilicon to a Chinese polysilicon wafer maker producer over the next five years
• Daqo and its global peers are currently adding major new capacity that will start to come onstream next year 

By Doug Young

Build it and they will come, or so the saying goes.

But Daqo New Energy Corp. DQ is taking no chances, or at least it isn’t assuming that solar wafer makers will automatically line up to buy its products as it embarks on a massive expansion to triple its capacity over the next few years. Following its announcement of a modest new supply agreement in February, the leading maker of polysilicon has just announced a similar, but much-larger, agreement.

The bigger story is that polysilicon makers are scrambling to add new capacity as prices have soared to record heights over the last two years on booming demand for the main component in solar cell production. The solar building frenzy has gained extra momentum this year following Russia’s invasion of Ukraine, which has increased western countries’ resolve to wean themselves from reliance on fossil fuels that are Russia’s biggest export.

But following a spectacular surge that has seen polysilicon prices rise more than sevenfold over the last two years, observers are expecting the trend to finally begin reversing next year as huge new capacity start coming onstream. Daqo reflects the broader trend, with the company’s capacity expected to roughly triple from where it was at the end of last year as it builds a major new facility in China’s Inner Mongolia region whose first phase is expected to come on stream in the second quarter of next year.

Accordingly, Daqo is trying to line up customers to soak up some of that new capacity when it starts producing.

In its latest move to do that, Daqo said on Friday it has agreed to supply 150,300 metric tons (MT) of high-purity mono-grade polysilicon between November 2022 and December 2027 to a solar wafer-making subsidiary of Shuangliang Eco-Energy (600481.SH). The agreement is substantially larger than the one it announced in February, which will see Daqo provide 30,000 MT of polysilicon to an unnamed buyer over a similar five-year period.

Combined, the two agreements would represent about 12% of the roughly 300,000 MT of total capacity that Daqo could have once it completes its massive $5.2 billion Baotou facility, which will ultimately have about 200,000 MT of capacity. We can probably expect to see more similar deals from Daqo in the next year as it seeks to calm any investor concerns that it could be caught with lots of idle capacity in the inevitable upcoming “bust” part of this notoriously cyclical sector.

In a noteworthy appendix to all this, both of the Daqo supply agreements say that actual prices will be determined based on market conditions at the time of delivery. That seems aimed at avoiding a repeat of the last polysilicon cycle, which saw solar wafer makers sign deals to secure polysilicon at what were ultimately inflated prices at the height of the bubble. Most wafer makers ultimately had to renegotiate those contracts, including payment of penalties to the polysilicon suppliers.

Muted reaction

At first glance, shareholders didn’t seem extremely excited about the latest announcement. Daqo’s stock barely ticked up by 0.16% in Friday trade on the news, and the shares are now about 30% below their high for this year reached in July. But the small gain looks a bit more impressive when compared with the broader S&P 500’s 2.4% decline for the day, and the 7% drop for major China stock indexes last week.

Despite slumping from their July high, Daqo’s New York-traded shares are still up about 27% so far this year, which is much better than the S&P 500’s 25% decline over that period and even larger declines for most U.S.-listed China stocks. Shares of solar and wind power companies have all done relatively well over that period due to bullishness about strong demand for their products as countries rush to install new capacity to meet their carbon-reduction targets.

Even after the rally, Daqo’s New York-listed shares still trade at a price-to-earnings (P/E) ratio of just 2.4, which is quite anemic by any standard. Domestic peer GCL Technology (3800.HK) trades at more than double that at 5.5, while Germany’s Wacker Chemie (WCH.DE) also trades much higher at 4. Even Daqo’s China-listed subsidiary, Xinjiang Daqo New Energy Co. Ltd., trades at a far higher P/E ratio of 7.5.

Part of the discount for the U.S.-listed shares owes to concerns about the potential for a forced de-listing amid the ongoing dispute between the U.S. and Chinese regulators over information sharing. The company’s base in the sensitive Xinjiang region – which has drawn attention from Washington – is another possible reason for the discount. But the shares really do look undervalued at the moment, even after their gains this year.

Despite all the talk about soaring prices in the polysilicon spot market, Daqo doesn’t really seem to be benefiting from those gains. That’s probably because the company sells mostly under longer term contracts, whose prices are less volatile for both buyers and sellers.

The company’s latest quarterly report shows its average selling price for polysilicon was $33.08 per kilogram in this year’s second quarter. That was actually down slightly from its average price of $33.91 per kilogram in last year’s fourth quarter, in stark contrast with spot polysilicon prices that more than tripled in the first eight months of this year.

Despite the lack of price gains, Daqo has managed to boost its profits on the back of falling costs for the raw materials it uses to make polysilicon. The company’s average cash cost for a kilogram of polysilicon came down to $6.51 per kilogram in the second quarter from $9.19 in the first quarter and $13.32 in last year’s fourth quarter. As a result, its gross margin improved by more than 7 percentage points year-on-year to 76.1% in the second quarter, while its net income nearly tripled to $627.8 million over the same period.