DAQO NEW ENERGY CORP. — FY2013 Form 20-F
Reporting period: Fiscal year ended December 31, 2013. This is an annual report, not a standalone fourth-quarter filing. Financial statements are prepared under U.S. GAAP and audited by Deloitte; the auditor did not audit internal control over financial reporting.
Business context and reporting period
Daqo manufactures polysilicon and silicon wafers in China. In 2013, polysilicon production was concentrated at its Xinjiang facility after production at the Chongqing Phase 1 plant ceased. Annual capacity was 6,150 metric tons of polysilicon and 72 million wafer pieces. The company sold its module business in 2012 and deconsolidated Daqo New Material, its former variable-interest entity, at the end of 2013 following termination of the principal lease.
Key financial and operating metrics
| Metric | FY2013 | FY2012 |
|---|---|---|
| Revenue | $109.0 million | $86.9 million |
| Gross profit (loss) / margin | $(26.1) million / (23.9)% | $(37.4) million / (43.1)% |
| Operating loss | $(200.6) million | $(88.5) million |
| Consolidated net loss | $(221.1) million | $(115.6) million |
| Net loss attributable to Daqo shareholders | $(70.9) million | $(111.9) million |
| Operating cash flow | $(16.5) million | $(10.3) million |
| Investing / financing cash flow | $(30.7) million / $48.8 million | $(102.9) million / $27.1 million |
| Cash and cash equivalents at year-end | $7.8 million | $6.7 million |
| Current assets / current liabilities | $91.1 million / $299.1 million | $96.5 million / $260.3 million |
| Total borrowings | $253.7 million | $307.8 million |
FY2013 revenue rose 25.5%, reflecting higher shipment volumes in polysilicon and wafers, partly offset by lower full-year average selling prices. Polysilicon revenue was $76.7 million and wafer revenue $32.3 million; wafers contributed 29.6% of continuing-operation revenue, up from 15.4% in 2012. Gross margin improved through the year, reaching 2.6% in Q4, but remained negative for the full year. The filing reports a FY2013 polysilicon unit cost of $17.02/kg for Xinjiang output.
The $158.4 million long-lived-asset impairment, recorded in Q2 against Chongqing polysilicon facilities, drove much of the operating loss. The company reported a $150.1 million loss attributable to noncontrolling interest in 2013, largely associated with the former VIE; consequently, the loss attributable to Daqo shareholders was substantially smaller than the consolidated net loss. Basic loss per ordinary share was $0.41, or $10.25 per ADS.
Year-end working capital deficit was $208.0 million. Cash and restricted cash totaled $16.7 million. Borrowings included $118.9 million classified as current and $134.9 million long-term; the weighted-average rate on long-term bank borrowings was 7.2%. Daqo also owed related parties $88.5 million at year-end. Operating cash flow was negative for the full year, although management reported positive operating cash flow in Q3 and Q4.
Material changes versus the prior year
- Revenue increased from the depressed 2012 level, while the gross loss narrowed from $37.4 million to $26.1 million.
- Polysilicon sales prices remained lower on a full-year comparison, but the company said its average selling price rose 17.1% from January to December 2013.
- The operating loss widened substantially because of the $158.4 million impairment, compared with $42.8 million of impairment in 2012.
- Total borrowings declined by approximately $54.1 million, but current liabilities increased and the working capital deficit remained significant.
- Termination of the Daqo New Material lease ended its consolidation and removed the reported noncontrolling interest from the year-end balance sheet; this affects year-over-year comparability.
Outlook, risks, contingencies, and unusual items
- Going concern and funding: The filing states there is substantial doubt about the company’s ability to continue as a going concern. Management cites a March 2014 irrevocable support letter from Daqo Group covering obligations during 2014, related-party debt not payable before January 1, 2015, and $56.2 million of committed and available standby credit facilities. Continued liquidity depends on support, refinancing, operating cash flow, and additional funding.
- Expansion plans: Daqo planned to increase Xinjiang polysilicon capacity from 6,150 MT to 12,150 MT, targeting pilot production by the end of 2014 and full ramp-up in Q2 2015. Estimated project capital spending was about $100 million, including relocation costs; completion depends on obtaining additional funding. Management projected production cost of about $14/kg at current capacity and $12/kg after expansion.
- Management assumptions: The going-concern cash forecast assumed a 2014 polysilicon average selling price of about $22/kg and Xinjiang cash production cost of about $11/kg. Management cited a Q1 2014 selling price of $21/kg as of March 31. These are assumptions and forecasts, not reported full-year results.
- Market and operating risks: Results remain exposed to polysilicon oversupply and price volatility, competition and technology shifts, changes in solar subsidies and trade restrictions, customer concentration, energy costs, and execution risks at the Xinjiang expansion. The top three customers represented 38.5% of 2013 revenue.
- Related parties and concentration: Daqo Group and affiliates provide funding and guarantees, and related-party balances and transactions are material. The company also reported increased bad-debt provisions in 2013 and customer collection risks.
- Other items: Government cash subsidies recognized as other operating income fell to $5.2 million from $9.3 million in 2012. The company had $36.7 million of outstanding capital commitments at year-end. It reported no material pending legal proceedings and no dividends paid or planned in the near future.
Important facts for investors to verify
- Confirm the scope, enforceability, and duration of Daqo Group’s 2014 financial-support commitment, and the status of refinancing and available credit facilities.
- Track operating cash flow, cash collections, related-party balances, and the company’s ability to meet current maturities and capital commitments.
- Test the assumptions behind the $22/kg selling-price forecast and stated $11/kg cash cost against actual prices, costs, and margins.
- Monitor whether the Xinjiang expansion receives funding and approvals, meets its timetable, achieves targeted capacity and cost, and uses relocated assets as planned.
- Reconcile the filing’s polysilicon sales-volume disclosures: the selected-data and operating discussion generally report 4,283 MT of external sales, while one passage states 4,823 MT. Also confirm related-party revenue classification and the impact of VIE deconsolidation on comparisons.
- Assess the effect of customer concentration, subsidy changes, trade measures, and the company’s dependence on Daqo Group on future earnings and liquidity.