Daqo New Energy Corp. — FY2015 Form 20-F
Reporting period: Fiscal year ended December 31, 2015. Although the request identifies 2015 Q4, this filing is an annual report; it provides some Q4 operating data but not a complete quarterly income statement. Financial statements are prepared under U.S. GAAP. Unless stated otherwise, amounts are U.S. dollars.
Business context
Daqo manufactures polysilicon in Xinjiang and wafers in Chongqing, principally serving photovoltaic manufacturers in China. The company completed its Phase 2B polysilicon expansion and reached annual nameplate capacity of 12,150 metric tons in Q3 2015. Wafer capacity was 87 million pieces annually at year-end.
Financial and operating performance
| Metric | FY2015 | FY2014 |
|---|---|---|
| Revenue | $182.0 million | $182.6 million |
| Gross profit / margin | $37.5 million / 20.6% | $43.3 million / 23.7% |
| Operating income | $26.2 million | $32.0 million |
| Net income attributable to Daqo shareholders | $13.0 million | $16.6 million |
| Basic earnings per ordinary share | $0.05 | $0.08 |
| Cash flow from operations | $66.4 million | $45.6 million |
| Cash flow from investing | $(74.1) million | $(90.6) million |
| Cash flow from financing | $15.2 million | $44.3 million |
- Polysilicon revenue was $125.9 million, down 1.4%; external sales volume rose 37.9% to 8,234 MT, while average selling price fell 28.5% to $15.29/kg. Production was 9,771 MT. Reported full-year average production cost was $11.23/kg; Q4 production cost was $9.74/kg, with cash cost of $7.69/kg.
- Wafer revenue, including OEM services in the company’s discussion, was approximately $56.1 million, up 2.3%. Wafer sales volume was reported as 76.4 million pieces, including OEM shipments.
- Gross profit declined 13.2%, mainly reflecting lower polysilicon selling prices; wafer gross profit improved. Selling, general and administrative expense rose to $12.6 million, while R&D expense fell to $0.9 million.
- Unrestricted government subsidies recorded as other operating income were $3.8 million, versus $0.6 million in 2014. Share-based compensation was $3.7 million.
Financial position, liquidity and debt
- At December 31, 2015, cash and cash equivalents were $14.5 million and restricted cash was $19.1 million. Current assets were $88.8 million against current liabilities of $275.4 million, a working-capital deficit of $186.6 million.
- Total assets were $660.9 million, total liabilities $419.2 million and total equity $241.7 million.
- Total bank borrowings were $242.5 million: $123.9 million current and $118.5 million long-term. Long-term borrowings had a 5.68% weighted-average interest rate; short-term borrowings had a 5.40% rate. Related-party interest-free loans payable on demand totaled $46.4 million at year-end.
- Capital expenditures included $81.4 million of cash purchases of property, plant and equipment. Phase 3A was expected to require about $94.7 million in total; $1.7 million had been spent by year-end. Capital commitments were $15.5 million, principally due within one year.
Changes, outlook and principal risks
- Revenue was essentially flat year over year despite higher output and shipments, because lower polysilicon prices offset volume growth. Net income attributable to shareholders fell from $16.6 million to $13.0 million.
- Operating cash flow improved to $66.4 million from $45.6 million. The company reported positive operating cash flow and operating income in both 2014 and 2015.
- Management expected positive operating cash flow and operating income in 2016. Phase 3A was planned to raise polysilicon capacity to 18,000 MT, with construction expected to finish by year-end 2016 and full ramp-up by Q2 2017. These are plans, not guaranteed outcomes.
- A February 22, 2016 support letter from Daqo Group and certain shareholders committed funding intended to cover obligations during 2016 and deferred repayment of $46.4 million of related-party amounts until January 1, 2017. The filing nevertheless identifies substantial doubt about the company’s ability to continue as a going concern, dependent on operating cash flow, refinancing and continued support.
- Key risks include polysilicon price and supply-demand volatility, reliance on a concentrated customer base, significant near-term debt maturities and capital needs, dependence on Daqo Group support, execution and funding risks for Xinjiang expansion and equipment relocation, and exposure to Chinese regulation, currency controls and foreign-exchange movements.
- The company recognized a $1.6 million impairment charge in 2015 for Chongqing equipment that could not be relocated or reused. No material legal proceedings were reported. Deloitte issued an unqualified opinion on the financial statements and an unqualified opinion on internal control over financial reporting as of year-end.
Important facts for investors to verify
- Whether Daqo Group and other shareholders honor the support commitments and whether the company can refinance or repay debt falling due in 2016.
- Whether polysilicon prices, margins and cash generation can withstand continued price pressure; compare the reported annual and Q4 unit-cost figures and their definitions.
- Actual progress, funding, spending and commissioning milestones for Phase 3A and the wafer upgrade.
- Customer concentration and receivable collection: the filing says the top three customers generated 40.5% of FY2015 revenue; confirm customer exposure and payment performance.
- Potential dilution and capital allocation: the 2015 follow-on offering raised about $28.0 million net, and the company repurchased 94,276 ADSs under its $10 million authorization.