Daqo New Energy Looks To Beijing For Policy Support

The polysilicon maker said plunging prices have begun to stabilize recently and could even rise over the next two months if Beijing announces new policy support

Key Takeaways:

• Daqo's revenue fell nearly 60% in the fourth quarter, hit by falling polysilicon prices and the company's own decision to sharply cut back its output
• The company said prices have begun to stabilize on expectation of major policy support in China that could be announced in the next month

Polysilicon maker Daqo New Energy Corp. (DQ.US; 688303.SH) has become a hotbed of mixed signals these days, though a majority of those in the company's latest quarterly report were decidedly negative. The company and its peers, whose products are a primary component of solar panels, are stuck in a storm of oversupply after building up massive new capacity over the last two years, causing prices to plunge amid tepid demand.

Daqo's latest report did contain some slightly positive signals, however, as company officials said plunging prices may have finally stabilized, at least for now. They also discussed growing signs that Beijing may soon step in by offering policy support to soak up excess supply through the continued massive buildup of new solar farms.

In that regard, Deputy CEO Anita Zhu said on Daqo's conference call that China is expected to add 250 GW to 300 GW of solar capacity this year, roughly similar to the 277 GW it added last year. Even without any growth, that would equal roughly half of global new solar installations that Zhu said are expected at 550 GW to 600 GW.

In one slightly concerning signal outside its plunging sales, the company's latest report also revealed it is rapidly burning through its cash reserves. Its amount of "quick assets" that can be easily convertible to cash totaled about $2.2 billion at the end of last year, down from $3.2 billion in cash and bank notes receivable a year earlier.

At least part of the cash drain was the $345 million loss that Daqo recorded for all of last year. Another major component of the drop could also be the company's big spending over the last two years on a massive new production facility in Inner Mongolia, which more than tripled its capacity to 300,000 MT of polysilicon annually from 100,000 MT at the end of 2022.

A significant part of that new capacity may already be lying idle as China has stepped in to try and stabilize prices by pushing companies to produce at half or less of their capacity. Daqo first hinted at such "self-discipline" in its last quarterly report in late October, and by December it confirmed it was carrying out such production cuts. In its latest report, the company said it is currently using just 40% to 50% of its capacity, and Deputy CEO Zhu said she expects the entire industry's utilization rate to stay in that range "in the mid-term to the more longer-term."

All those mixed signals are nicely reflected in the very mixed views of Daqo among the analyst community. Of the nine analysts polled by Yahoo Finance, four actually rate the stock a "strong buy," probably less because of its strong position and more because they think it's undervalued. But another two rate it a "hold," while the remaining three rate it a "buy."

Lowly valued

Daqo's stock sagged 7.5% in the two trading days after the announcement, though most of that came on Friday amid a Chinese stock selloff that saw the Hang Seng China Enterprises Index tumble 3.6%. And we should also note that Daqo's New York-listed stock is up 37.5% over the last six months.

After all those ups-and-downs, the company's U.S.-listed shares trade at an anemic price-to-sales (P/S) ratio of 0.26. That's a fraction of the 1.42 P/S for Hong Kong-listed peer GCL Technology (3800.HK) and 1.03 for Shanghai-listed Tongwei (600438.SH), and is also just half of the 0.58 for Wacker Chemie (WCH.DE), one of the few major non-Chinese producers.

We've previously suggested that Daqo should consider privatizing its U.S. stock using its large cash reserves, since the company's current market cap is just $1.33 billion. But given the way its cash is rapidly shrinking, that may no longer be a good option.

Most of the company's latest metrics tell a similar story of declines ranging anywhere from 30% to 60%, which isn't too surprising given how much prices have plunged and how Daqo itself is now only using 40% to 50% of its capacity. The company's revenue took the worst hit, tumbling 59% year-on-year to $195.4 million during the fourth quarter from $476.3 million a year earlier, dragged down by both falling prices and low utilization.

As it lowered its utilization rates, the company's polysilicon production fell 44% in the fourth quarter to 34,236 MT from 61,014 MT a year earlier. It said it would further turn back the taps in the current quarter, forecasting just 25,000 MT to 28,000 MT in production in the first three months of 2025. Similarly, it forecast it would only produce between 110,000 MT and 140,000 MT of polysilicon this year, down sharply from 205,000 MT in 2024.

The company continued to manufacture its polysilicon at a loss in the latest quarter. Its average production cost was $6.81 per kilogram during the period, which was up 5% year-on-year, even as the average selling price was just $4.62 per kilogram, down 42% over that period. Given that big gap in its production costs and selling prices, it's not too surprising that Daqo's net loss widened to $180 million for the quarter from a $60 million loss in the third quarter and a $53.3 million profit a year earlier.

We'll close by providing some color on the potential stabilizing of prices that company officials discussed, which would end more than a year of declines that have seen prices fall by roughly half from their peaks. Zhu said the company has recently observed prices stabilizing in the range of 36 yuan to 42 yuan per kilogram ($4.94 to $5.77), and even predicted that prices could increase over the next couple of months on anticipation of policy support from Beijing to encourage more solar farm building.

"But demand in the second half of 2025 and onwards appears to be somewhat more challenging if there are not enough new application scenarios or alternative business models," she said.