DAQO New Energy Corp. — FY2018 Form 20-F
Reporting period: Fiscal year ended December 31, 2018. This is an annual report, not a standalone 2018 Q4 filing; quarterly revenue and profit figures are not clearly provided in the filing text. Financial statements are prepared under U.S. GAAP and reported in U.S. dollars.
Business context and reporting period
Daqo manufactures high-purity polysilicon in Xinjiang, China, primarily for photovoltaic manufacturers. In September 2018, it discontinued its Chongqing wafer business and reported it as discontinued operations. Polysilicon was the company’s only continuing operating segment at year-end.
In Q4, Phase 3B reached full capacity, bringing reported annual polysilicon capacity to 30,000 metric tons (MT). Q4 polysilicon sales were 7,030 MT. The filing does not provide a clear Q4 revenue or net income value.
Key financial and operating metrics
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue from continuing operations | $301.6 million | $323.2 million |
| Gross profit | $98.1 million | $144.0 million |
| Gross margin | 32.5% | 44.6% |
| Operating income | $81.5 million | $131.1 million |
| Net income from continuing operations | $62.1 million | $97.9 million |
| Net loss from discontinued operations | $23.3 million | $4.1 million |
| Net income attributable to Daqo shareholders | $38.1 million | $92.8 million |
| Operating cash flow, consolidated | $95.6 million | $142.7 million |
| Investing cash flow, consolidated | $(164.7) million | $(67.9) million |
| Financing cash flow, consolidated | $86.7 million | $(37.4) million |
Polysilicon production rose 15.6% to 23,351 MT and external sales volume rose 25.5% to 22,521 MT. Average selling price fell to $13.04/kg from $16.41/kg, while annual production cost (including depreciation) edged down to $8.71/kg from $8.84/kg. Q4 production cost was reported at $7.94/kg.
At December 31, 2018, cash and cash equivalents were $65.4 million and restricted cash was $28.6 million. Current assets were $160.1 million and current liabilities $149.9 million, a $10.2 million working-capital surplus. Short-term bank borrowings, including current maturities, were $38.2 million; long-term borrowings were $133.3 million, for total bank debt of $171.5 million. Total assets were $854.9 million and total equity was $525.1 million.
Material changes versus the prior comparable period
- Continuing-operations revenue declined 6.7% as higher sales volume did not offset the lower polysilicon selling price, which management attributed primarily to China’s May 31, 2018 solar policy.
- Gross profit fell 31.9%, and gross margin contracted by 12.1 percentage points to 32.5%. Shareholder net income declined 58.9% to $38.1 million.
- The discontinued wafer business generated a $23.3 million net loss, including a $7.3 million impairment charge; the company also recorded $11.5 million of impairment on non-transferable Chongqing polysilicon assets.
- Operating cash flow decreased to $95.6 million, while investing outflows increased to $164.7 million, primarily reflecting expansion capital spending. Cash, cash equivalents and restricted cash increased by $22.5 million overall.
- Other operating income increased to $13.2 million, mainly from unrestricted local-government cash subsidies, compared with $3.8 million in 2017.
- Share-based compensation expense increased to $13.8 million from $4.2 million. The company also completed a follow-on offering in April 2018, raising $106.6 million net and increasing year-end outstanding shares to 332.0 million.
Outlook, commentary, risks and unusual items
- Management expected global solar installations of approximately 120–140 GW in 2019. This is an industry estimate, not company revenue or earnings guidance.
- Planned capacity milestones included debottlenecking to 35,000 MT by June 2019 and Phase 4A, adding 35,000 MT, with pilot production expected in Q4 2019 and full ramp-up targeted in Q1 2020. The company cited lower electricity costs, more efficient processes and scale as expected cost benefits. Plans are subject to funding, execution and market risks.
- The Phase 4A project was estimated to cost approximately $415.3 million; $56.1 million had been spent by year-end. Total capital commitments were $222.7 million, including $155.9 million due within one year.
- A March 18, 2019 financial-support letter from Daqo Group and certain shareholders committed funding for operations through March 31, 2020 and deferred specified related-party repayments until after March 31, 2020. The filing cautions that there is no assurance the commitments will be honored. Expansion must be suspended if resources are insufficient after obligations fall due.
- Management identified polysilicon oversupply and price declines, subsidy and tariff changes, customer concentration, high capital needs, reliance on Daqo Group support, and competition as significant risks. The top three customers accounted for 64.2% of 2018 continuing-operations revenue.
- Debt exposure includes floating-rate long-term loans; the weighted-average rates were 5.9% on long-term borrowings and 5.0% on short-term borrowings. The company reported no interest-rate hedging. It also disclosed RMB translation exposure and no foreign-exchange hedging.
- Unrestricted government subsidies were $13.1 million in 2018, and share-based compensation was $13.8 million. These items materially affect interpretation of operating income and reported earnings.
- Daqo reported no material pending legal proceedings. It had not paid dividends and reported no near-term dividend plan. Management and the auditor concluded internal control over financial reporting was effective; the auditor issued unqualified opinions on the financial statements and internal controls.
Most important facts for investors to verify
- Whether the 2019–2020 capacity expansion schedule and approximately $415.3 million Phase 4A funding plan remain feasible, given capital commitments and liquidity needs.
- Whether Daqo Group and shareholders provide the support described in the March 2019 letter, and the conditions attached to that support.
- How polysilicon selling prices, China’s solar policy and supply-demand conditions affect realized margins and cash generation.
- Whether the 64.2% top-three-customer revenue concentration declines, and whether customer collections and contract volumes remain dependable.
- The final disposition and recoverable value of the discontinued Chongqing assets, including assets classified as held for sale.
- The scale and timing of share-based compensation expense and potential dilution from awards and the 2018 offering.