Silicon material prices have been falling below cost, with Q1 net profit shrinking by more than 80%. Is Daquan New Energy "shutting down"?

Both in terms of stock price and performance, Daqo New Energy (DQ.US) had a very "rough" experience in the first quarter of 2024.

On the market front, the stock price surged to around $30 in March, but has now fallen back to $19, approaching the historical low at the beginning of the year; the just released quarterly report continues the downward trend, with the company's operating income at 2.982 billion RMB, a year-on-year decrease of 38.6%; net profit at 330 million RMB, a year-on-year decrease of 88.64%; and gross profit margin at 17.4%, which is nearly 1 percentage point lower than the gross profit margin of 18.3% in the fourth quarter of 2023.

The first quarter has passed, and silicon material prices continue to bottom out without showing signs of stopping. On April 17, data released by the Silicon Industry Branch of China Nonferrous Metals Industry Association (referred to as the "Silicon Industry Branch") showed that the mainstream price range of silicon materials has fallen below 50,000 RMB/ton, already below the cost price of second-tier manufacturers. Various pessimistic signals have made investors worried about when Daqo New Energy's downward cycle will bottom out.

Continuous Decline in Performance

In fact, in the previously disclosed full-year performance for 2023, Daqo New Energy's various financial indicators had already seen significant "shrinking". The total operating income for the year was 16.329 billion RMB, a year-on-year decrease of 47.22%; net profit attributable to shareholders was 5.763 billion RMB, a year-on-year decrease of 69.86%; and non-GAAP net profit was 5.776 billion RMB, a year-on-year decrease of 69.84%.

While performance declined, the company's various expenses saw significant growth. In 2023, sales expenses increased by 152.62% year-on-year, management expenses increased by 33.57%, research and development expenses increased by 6.47%, and financial expenses changed from 78.7284 million RMB in the same period last year to 3.31 billion RMB. The expense ratio was 0.53%, a decrease of 0.25 percentage points from the same period last year.

According to the Zhitong Caijing APP, during the reporting period, Daqo New Energy's heavy reliance on major customers was quite evident. In 2023, the total sales amount from the company's top five customers was 13.64 billion RMB, accounting for 83.52% of the total sales amount, while the total purchase amount from the top five suppliers was 5.596 billion RMB, accounting for 67.89% of the annual purchase total Despite the decline in polysilicon prices dragging down performance, the company's financial indicators remain within a healthy range. The net cash flow from operating activities for the year was 8.741 billion yuan, a year-on-year decrease of 43.12%; free cash flow was 7.986 billion yuan, a decrease of 16.42% compared to the same period last year; the year-end asset-liability ratio was 13.44%, an increase of 0.58 percentage points compared to the end of the previous year.

Overcapacity situation highlights, when will the turning point in silicon prices come?

According to the Securities Times APP, Daquan New Energy's main product is high-purity polysilicon, mainly used in photovoltaic cells, in the upstream segment of the photovoltaic industry chain. Depending on the downstream production of silicon wafers, high-purity polysilicon can be divided into single crystal silicon wafer materials and polysilicon wafer materials.

Affected by the successive release of new production capacity and a significant increase in supply, the price of polysilicon fell rapidly in 2023. According to industry announcements and industry association calculations, in 2023, the national production of polysilicon, wafers, cells, and modules reached new highs, with national polysilicon production exceeding 1.43 million tons, a year-on-year increase of 66.9%; in the same year, the prices of polysilicon and module products both fell by more than 50%.

The trend of "increased quantity and decreased price" can be seen from Daquan New Energy's financial report. According to disclosures, in the first quarter of 2023, the selling price of Daquan New Energy's polysilicon was 190.42 yuan/kg. As of April 10, 2024, data released by the Silicon Industry Branch of the China Nonferrous Metals Industry Association showed that the average transaction price of dense polysilicon was 48,700 yuan/ton (equivalent to 48.7 yuan/kg), a decrease of 18.83% from the previous quotation.

A report from the Merchants Bank Research Institute pointed out that the silicon material industry has high technical barriers, large investment costs, and long expansion cycles. The expansion cycle of polysilicon materials is generally 12-18 months, with a ramp-up period of 3-6 months, while downstream processes such as silicon wafers and battery wafers have an expansion time of about 6-9 months, with a ramp-up period of only about 3 months. The expansion cycle of silicon materials is much longer than that of other downstream processes.

Looking ahead to 2024, the industry's expansion steps continue, and the problem of overcapacity is expected to persist. According to the Silicon Industry Branch, there will be approximately 1.23 million tons of new capacity put into operation in 2024, with the total annual silicon production expected to reach 2.6 million tons, while the additional installed demand is about 1.6 million tons.

The Silicon Industry Branch predicts that the mismatch in the capacity cycle and high inventory operation of enterprises will keep silicon prices at a low level for some time to come. In response to this, Daquan New Energy also admitted in its annual report, "If the continuous expansion of industry capacity in the future leads to adverse changes in supply and demand, polysilicon prices will further decline, thereby affecting the company's profitability." However, as a leading company that has been deeply involved in the silicon material sector for many years, Daquan New Energy's advantages in market share and production costs cannot be ignored. Data shows that in 2023, the domestic production of polysilicon exceeded 1.43 million tons, with Daquan New Energy's polysilicon production reaching 197,800 tons, accounting for approximately 13% of the domestic polysilicon production, placing it in the top tier in the industry.

In terms of cost control, the company's unit production cost, including sales expenses, reached 48.70 yuan/kg in 2023, leading the industry and showing a benign trend of decline quarter by quarter. In comparison, the cost of polysilicon for second-tier companies is roughly in the range of over 50,000 yuan/ton to close to 60,000 yuan/ton.

"Technological Route Competition" in the Silicon Material Field?

Despite significant cost reduction and efficiency improvement achievements in the past year, it does not mean that Daquan New Energy can rest on its laurels. With the emergence of lower-cost granular silicon as a new competitor, Daquan New Energy will also face competitive pressure brought by new technological routes.

According to the Wise Finance APP, the current mainstream production technologies for polysilicon mainly include the improved Siemens method and the silane fluidized bed method, which are respectively referred to as rod silicon and granular silicon due to different product forms. Currently, the market is mainly dominated by rod silicon with a more mature production process, while granular silicon has the advantages of less carbon emission, low energy consumption, and low cost. In the first half of 2023, the production cost of granular silicon for some companies has reached 35.68 yuan/kg, significantly lower than Daquan New Energy's rod silicon production cost. With continuous improvement in production processes, the production cost is expected to further decrease in the future.

Looking at the industry trends in 2023, under the price pressure of polysilicon, many companies have shifted their focus to granular silicon. According to statistics from Huaxia Energy Network, the number of companies focusing on granular silicon increased from 2 in 2022 to 7 in 2023, and the production capacity increased from less than 160,000 tons in 2022 to 400,000 tons in 2023, with planned capacity reaching 900,000 tons.

In response, Daquan New Energy appears more conservative. The company's vice chairman, Xu Xiang, publicly stated that there are still many bottlenecks to overcome for granular silicon, and the quality of rod silicon produced by the Siemens method is far superior to granular silicon. This implies that there seems to be no plan for Daquan New Energy to focus on granular silicon.

However, the price gap between granular silicon and rod silicon has gradually narrowed recently, which does not seem to be a good sign for Daquan New Energy. Data disclosed by the Silicon Branch of the China Nonferrous Metals Industry Association recently shows that the average transaction price of N-type rod silicon is 52,500 yuan/ton, while the average transaction price of N-type granular silicon is 47,500 yuan/ton. In 2023, the average selling price of granular silicon for listed companies reached 76,800 yuan/ton, while Daquan New Energy's annual unit sales price of silicon material was 81,100 yuan/ton, with a price difference of only 4,300 yuan per ton.

In the market environment where the price of silicon material continues to be under pressure, the cost advantage brought by granular silicon is evident. Whether Daquan New Energy's market share of rod silicon will be caught up by granular silicon still remains uncertain.

On the other hand, Daquan New Energy's current focus is clearly more on high-purity N-type silicon material. Photovoltaic monocrystalline silicon cell technology uses silicon wafers as substrates, which are classified into P-type cells and N-type cells based on the differences in silicon wafers The production process of N-type batteries is more complex, but the conversion efficiency is higher, making it gradually become an industry trend in recent years. According to InfoLink statistics, the market share of N-type batteries in 2023 has rapidly increased from about 9% in 2022 to 27%.

In the first quarter of 2024, Daquan Energy successfully achieved a production volume of 43,000 tons of N-type polysilicon materials, with sales of 37,000 tons. The production and sales of N-type polysilicon materials accounted for 69.0% and 68.6% respectively. The company revealed in its first quarter report for 2024 that the Inner Mongolia Baotou Phase II 100,000-ton high-purity polysilicon project is planned to be completed and put into operation in the second quarter of 2024. Once this project reaches full production capacity, the company's cumulative annual production capacity can reach 305,000 tons. As the Inner Mongolia production line already has the capability to produce 100% N-type silicon materials, it is expected that the sales proportion of N-type materials for the company will exceed 70% in 2024.

Summary

After years of development, the photovoltaic silicon material industry has entered the second half of competition. Under the dual pressures of demand and inventory, it is expected that the performance of enterprises in the industry will continue to differentiate, with cost and efficiency becoming important factors to test the stability of enterprise operations. With little improvement in silicon material prices, 2024 will be a more challenging year for Daquan New Energy