DAQO New Energy Corp. — FY2014 Form 20-F
Reporting period: Fiscal year ended December 31, 2014; filed April 17, 2015. This is an annual report, not a standalone fourth-quarter filing. Amounts are U.S. dollars unless stated otherwise. The filing gives fourth-quarter operating volumes but does not provide a clear standalone Q4 revenue or profit figure.
Business context and reporting period
Daqo manufactures polysilicon in Xinjiang and wafers in Chongqing, selling primarily to China-based photovoltaic manufacturers. It reported under U.S. GAAP. Comparisons with 2013 require care: Daqo deconsolidated related-party entity Daqo New Material at the end of 2013 after terminating the contractual arrangement, and the 2014 business was focused on polysilicon and wafers following the 2012 sale of its module business.
Key financial and operating metrics
| Metric | FY2014 | FY2013 |
|---|---|---|
| Revenue | $182.6 million | $109.0 million |
| Gross profit (loss) | $43.3 million | ($26.1 million) |
| Gross margin | 23.7% | (23.9%) |
| Operating income (loss) | $32.0 million | ($200.6 million) |
| Net income (loss) | $16.6 million | ($221.1 million) |
| Net income (loss) attributable to Daqo shareholders | $16.6 million | ($70.9 million) |
| Cash from (used in) operations | $45.6 million | ($16.5 million) |
| Cash used in investing activities | $90.6 million | $30.7 million |
| Cash from financing activities | $44.3 million | $48.8 million |
| Cash and cash equivalents at year-end | $7.1 million | $7.8 million |
- Revenue rose 67.5%, reflecting higher sales volumes and average selling prices. Polysilicon contributed $127.7 million and wafers $54.9 million.
- Polysilicon production was 6,560 MT and external sales were 5,972 MT; wafer sales were 52.27 million pieces. In Q4, polysilicon production was 1,791 MT and external sales were 1,647 MT; wafer sales were 17.98 million pieces.
- Management reported a 34.4% year-over-year increase in average polysilicon selling price. The 2014 average was approximately $20–$22/kg; prices declined 10.8% in the second half after rising in the first half.
- Cash and restricted cash totaled $29.2 million ($7.1 million unrestricted and $22.2 million restricted). Current assets were $121.9 million versus current liabilities of $396.1 million, a working-capital deficit of $274.1 million.
- Bank borrowings totaled $237.1 million: $159.8 million current and $77.3 million long-term. Weighted-average rates were 6.8% on short-term borrowings and 6.9% on long-term borrowings. Amounts due to related parties were $89.7 million, interest-free and payable on demand under the stated terms.
- No dividend was declared or paid. The company raised $54.6 million net in a May 2014 ADS offering, which it said was fully used by year-end for Xinjiang expansion and technology improvements.
Material changes versus the prior comparable period
- The business returned to profitability after losses in 2012 and 2013. FY2013 included a $158.4 million long-lived-asset impairment; FY2014 recorded no impairment.
- Cost of revenue increased only 3.1% as revenue rose 67.5%. Polysilicon cost reductions, higher selling prices and lower depreciation supported the margin recovery.
- A change in estimated useful lives, effective January 1, 2014, extended machinery and equipment lives from 10 to 15 years and buildings and structures from 20 to 30 years. Management said this reduced 2014 depreciation expense by approximately $18.7 million and increased net income by the same amount, or $0.09 per ordinary share.
- Operating cash flow improved to positive $45.6 million from negative $16.5 million. Investing cash outflow increased to $90.6 million, principally reflecting Xinjiang expansion spending and restricted-cash deposits.
- Related-party sales and financing remain material. The filing reports $15.8 million of product sales to related parties and substantial interest-free related-party loan movements during 2014.
Outlook, risks, contingencies and unusual items
- Expansion plans: Phase 2b was expected to raise annual polysilicon capacity from 6,150 MT to 12,150 MT, with full ramp-up targeted by the end of Q2 2015. Management forecast production cost of $12/kg, including depreciation, and cash cost of $8.70/kg at full ramp-up. A possible Phase 3 expansion was expected, subject to market conditions, to raise capacity to 25,000 MT by early 2017. These are targets, not assured outcomes.
- Funding and going concern: The filing identifies substantial doubt about the company’s ability to continue as a going concern, citing the working-capital deficit, low unrestricted cash, debt maturities and expansion funding needs. A March 6, 2015 support letter from Daqo Group and certain shareholders committed funding for the 12 months ending December 31, 2015 and deferred repayment of specified related-party amounts until January 1, 2016; the filing says there is no assurance the commitments will be honored. Daqo Group support is central to liquidity.
- Capital commitments: Phase 2b cash requirements were estimated at $151.9 million, with about $81.1 million spent by year-end 2014. The filing estimated approximately $451.9 million of total capital expenditures for Phase 2b and Phase 3; completion depends on obtaining funding. Outstanding capital commitments at year-end were $34.8 million.
- Market and operating risks: Results remain sensitive to polysilicon and wafer prices, industry oversupply, Chinese and global solar demand, government subsidies, tariffs and trade policy, customer payment and concentration, electricity costs, production execution, expansion delays and competing technologies.
- Unusual/contingent items: The company accrued $0.4 million for an arbitration claim by an equipment supplier seeking approximately $0.8 million. It also disclosed potential impairment risk on approximately $70 million book value of equipment planned for use in Phase 3 if that project or relocation is unsuccessful.
- Assurance: Deloitte issued unqualified opinions on the financial statements and on internal control over financial reporting as of December 31, 2014. Management also concluded disclosure controls were effective. The filing notes that the auditor was not subject to PCAOB inspection in China at that time.
Important facts for investors to verify
- Whether the March 2015 related-party support commitments were delivered in full, and the terms and status of bank-loan renewals and repayments.
- Actual Phase 2b completion, ramp-up, achieved capacity and costs versus management’s targets; whether Phase 3 proceeds and how it will be financed.
- How much of the return to profit reflects sustainable operating improvements versus the $18.7 million depreciation estimate change and other accounting or nonrecurring effects.
- Polysilicon and wafer selling prices, utilization and cash generation after Q4 2014, particularly given the second-half price decline and market-supply risks.
- Related-party balances, transactions and guarantees, including the enforceability and continuing availability of Daqo Group support.
- Progress and outcome of the supplier arbitration, and whether any impairment is required for equipment designated for future expansion.