Daqo New Energy(DQ) - 2019 Q4 - Annual Report

PART I ITEM 3. KEY INFORMATION This section presents selected historical financial data and outlines key risks, such as market volatility and financial deficits, impacting Daqo New Energy's operations. Selected Financial Data This section presents key financial and operational metrics from 2015 to 2019, highlighting revenue growth, fluctuating net income, increased polysilicon volumes, and changes in asset and liability structures. Consolidated Statement of Operations Data (2015-2019, in Million US$) | Indicator | 2015 | 2016 | 2017 | 2018 | 2019 | | :--- | :--- | :--- | :--- | :--- | :--- | | Revenues | $146.8M | $196.2M | $323.2M | $301.6M | $350.0M | | Gross profit | $38.7M | $77.8M | $144.0M | $98.1M | $80.1M | | Income from operation | $29.6M | $60.9M | $130.8M | $81.2M | $47.5M | | Net income from continuing operations | $19.1M | $40.9M | $97.7M | $61.8M | $28.3M | | Net income attributable to Daqo New Energy shareholders | $13.0M | $43.5M | $92.8M | $38.1M | $29.5M | | Diluted EPS (Continuing operations) | $1.81 | $3.83 | $8.85 | $4.70 | $2.02 | Other Financial and Operating Data (2015-2019) | Indicator | 2015 | 2016 | 2017 | 2018 | 2019 | | :--- | :--- | :--- | :--- | :--- | :--- | | Polysilicon production volume (MT) | 9,771 | 13,068 | 20,200 | 23,351 | 41,556 | | Polysilicon sales volume (MT) | 8,234 | 10,883 | 17,950 | 22,521 | 38,109 | | Unit cost of polysilicon sold ($/kg) | 11.23 | 9.38 | 8.84 | 8.71 | 7.06 | Consolidated Balance Sheet Data (As of Dec 31, in Million US$) | Indicator | 2015 | 2016 | 2017 | 2018 | 2019 | | :--- | :--- | :--- | :--- | :--- | :--- | | Total assets | $660.9M | $656.7M | $748.8M | $854.9M | $1,201.4M | | Total liabilities | $419.2M | $385.0M | $354.3M | $329.8M | $634.2M | | Total shareholders' equity | $240.4M | $270.1M | $391.7M | $525.1M | $566.6M | Risk Factors The company faces significant risks including volatile market demand, polysilicon price fluctuations, a substantial working capital deficit, and potential disruptions from health epidemics and regulatory changes. - The company's growth is highly dependent on uncertain demand for photovoltaic (PV) products, influenced by government subsidies, trade conflicts, and solar energy cost-effectiveness[21][22] - Polysilicon supply-demand imbalances have led to and could continue to cause price declines, materially affecting profitability, with 2019 seeing continued average selling price decreases due to increased supply and weak demand[25][26] - The company reported a significant working capital deficit of $270.8 million as of December 31, 2019, primarily from Phase 4A expansion loans, making its going concern ability reliant on financial support from Daqo Group and shareholders[30][31][32] - The company exhibits high customer concentration, with the top three customers accounting for 81.6% of total revenues from continuing operations in 2019, a significant increase from prior years[64][65] - The business faces potential material adverse effects from health epidemics, such as COVID-19, which could disrupt supply chains, cause facility closures, and result in delayed or cancelled orders[77][78][79] - The independent auditor's work in China is not fully inspected by the PCAOB, potentially depriving investors of inspection benefits and leading to a loss of confidence in financial reporting[153][155][158] ITEM 4. INFORMATION ON THE COMPANY This section details the company's history, corporate development, and business operations, focusing on its polysilicon manufacturing, capacity expansion, strategic shifts, organizational structure, and property holdings. History and Development of the Company This section outlines Daqo New Energy's corporate history, including its NYSE listing, progressive polysilicon capacity expansion to 70,000 MT by 2019, and strategic shift to focus solely on polysilicon manufacturing. - The company completed its Phase 4A project in December 2019, increasing total production capacity to 70,000 MT and reducing production cost to $6.38/kg in Q4 2019[215] - In September 2018, the company strategically discontinued its wafer manufacturing operations in Chongqing to focus on its core polysilicon business in Xinjiang[216] - In April 2018, the company completed a follow-on public offering of 2,064,379 ADSs at $55.00 per ADS, generating net proceeds of $106.6 million[218] Business Overview This section describes Daqo's core business as a leading high-purity polysilicon manufacturer, detailing its production process, strategic focus on mono-wafer applications, major customers, and competitive landscape. - The company manufactures high-purity polysilicon, increasing its annual production capacity from 35,000 MT to 70,000 MT by December 2019[229] - In 2019, approximately 83% of polysilicon sales were for higher-quality mono-wafer applications, with a target to increase this to approximately 90% in 2020[227][229] Quarterly Polysilicon Sales Volume (MT) in 2019 | Quarter | Sales Volume (MT) | | :--- | :--- | | First Quarter | 8,450 | | Second Quarter | 7,130 | | Third Quarter | 9,238 | | Fourth Quarter | 13,291 | | FY 2019 Total | 38,109 | Polysilicon Production Capacity Expansion Timeline | Facility Phase | Annual Production Capacity | Fully Ramped-up Production | | :--- | :--- | :--- | | Phase 2A | 5,000 MT | March 2013 | | Capacity enhancement | 1,150 MT | First quarter of 2014 | | Phase 2B | 6,000 MT | Third quarter of 2015 | | Phase 3A | 5,850 MT | First quarter of 2017 | | Phase 3B | 12,000 MT | December 2018 | | Phase 4A | 35,000 MT | December 2019 | - As of December 31, 2019, major polysilicon customers included Longi, Jinko Solar, and Meike Silicon Energy, with the top three accounting for 81.6% of continuing operations' total revenues in 2019[252] Organizational Structure Daqo New Energy Corp. operates as a Cayman Islands holding company, with its primary polysilicon manufacturing business conducted through its principal subsidiary, Xinjiang Daqo New Energy Co., Ltd., in China. - The company is a Cayman Islands holding company, with primary operations conducted through its Chinese subsidiary, Xinjiang Daqo New Energy Co., Ltd.[295] Property, Plants and Equipment This section details the company's primary production facilities in Xinjiang, including land use rights, and notes the absence of business interruption or product liability insurance. - The company's primary production facilities are in Shihezi, Xinjiang, with land use rights covering approximately 1,001,953 square meters[297] - The company does not maintain business interruption, general third-party liability, or product liability insurance, consistent with similar-sized Chinese manufacturing companies[301] ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS This section analyzes the company's financial performance, liquidity, and capital resources, highlighting revenue trends, margin compression, working capital deficit, and significant capital expenditures for capacity expansion. Operating Results This section details the company's operating results, including revenue growth driven by volume, gross margin compression due to price declines, and successful reduction in polysilicon production costs. Comparison of Operating Results (2018 vs 2019) | Metric | 2018 | 2019 | Change | Reason | | :--- | :--- | :--- | :--- | :--- | | Revenue | $301.6M | $350.0M | +16.0% | Sales volume increased 69.2%, offset by ASP decrease | | Sales Volume (MT) | 22,521 | 38,109 | +69.2% | Increased production from Phase 4A expansion | | Average Selling Price (ASP) | $13.04/kg | $9.09/kg | -30.3% | Increased market supply and weaker demand | | Gross Profit | $98.1M | $80.1M | -18.4% | ASP decline outpaced cost reduction and volume growth | | Gross Margin | 32.5% | 22.9% | -9.6pp | Significant ASP decline | | Net Income (Continuing Ops) | $61.8M | $28.3M | -54.2% | Lower gross profit and higher operating expenses | Comparison of Operating Results (2017 vs 2018) | Metric | 2017 | 2018 | Change | Reason | | :--- | :--- | :--- | :--- | :--- | | Revenue | $323.2M | $301.6M | -6.7% | ASP decrease of 20.5% offset volume increase of 25.5% | | Sales Volume (MT) | 17,950 | 22,521 | +25.5% | Increased production from Phase 3B expansion | | Average Selling Price (ASP) | $16.41/kg | $13.04/kg | -20.5% | Unfavorable solar policy changes in China | | Gross Profit | $144.0M | $98.1M | -31.9% | Significant ASP decline | | Gross Margin | 44.6% | 32.5% | -12.1pp | Significant ASP decline | | Net Income (Continuing Ops) | $97.7M | $61.8M | -36.7% | Lower gross profit and higher SG&A (share-based compensation) | - The company successfully reduced polysilicon production cost to $6.38/kg in Q4 2019, driven by low electricity costs, new processes, and economies of scale from Phase 4A expansion[306][321][322] Liquidity and Capital Resources This section analyzes the company's liquidity, highlighting a significant working capital deficit, reliance on Daqo Group's financial support, and substantial capital expenditures for capacity expansion. - The company reported a working capital deficit of $270.8 million as of December 31, 2019, with current liabilities exceeding current assets, mainly due to increased loans and payables for the Phase 4A expansion[390][401] - The company's going concern ability relies on continued financial support from Daqo Group and certain shareholders, who committed to provide funding and defer debt repayment until May 1, 2021[395][402] Summary of Cash Flows (in Million US$) | Cash Flow Activity | 2017 | 2018 | 2019 | | :--- | :--- | :--- | :--- | | Net cash from operating activities | $142.7M | $95.6M | $181.0M | | Net cash used in investing activities | ($67.9M) | ($164.7M) | ($261.8M) | | Net cash (used in)/from financing activities | ($37.4M) | $86.7M | $102.3M | - Capital expenditures in 2019 were primarily for the Phase 4A expansion project, with a total expected cost of approximately $425.2 million, of which $294.0 million was spent as of December 31, 2019[413] Trend Information This section outlines market trends, including projected global solar PV installations impacted by COVID-19, and the company's consistent operational trend of capacity expansion and cost reduction. - Global solar PV installations are projected to be between 110 GW and 125 GW in 2020, with forecasts considering the impact of the COVID-19 outbreak[415] - The company demonstrates a consistent operational trend of expanding production capacity and reducing costs, with Phase 4A achieving 70,000 MT total capacity and a production cost of $6.38/kg in Q4 2019[416] Tabular Disclosure of Contractual Obligations This section presents a tabular summary of the company's contractual obligations as of December 31, 2019, including long-term debt, interest payments, and capital commitments. Contractual Obligations as of December 31, 2019 (in Million US$) | Obligation Type | Total | Less Than 1 Year | 1-3 Years | 3-5 Years | More Than 5 Years | | :--- | :--- | :--- | :--- | :--- | :--- | | Long-term debt | $201.1M | $49.5M | $112.7M | $38.8M | - | | Interest payment on long-term debt | $22.0M | $10.3M | $10.5M | $1.1M | - | | Capital commitments | $53.9M | $53.9M | - | - | - | | Operating lease obligations | $0.2M | $0.1M | $0.1M | - | - | | Total obligations | $277.2M | $113.8M | $123.4M | $39.9M | - | ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES This section provides information on the company's directors, senior management, and employees, including board composition, compensation practices, share incentive plans, and workforce size, highlighting significant shareholdings by Daqo Group-affiliated directors. - The company's board comprises nine directors, including Chairman Guangfu Xu and CEO Longgen Zhang, supported by Audit, Compensation, and Corporate Governance and Nominating Committees[427][443] - In 2019, aggregate cash compensation to directors and executive officers totaled approximately $1.7 million[444] - The company utilizes three share incentive plans (2009, 2014, 2018) to grant stock options, restricted shares, and restricted share units to employees, directors, and consultants[445][453][465] - As of December 31, 2019, the company employed 1,892 people, an increase from 1,518 at the end of 2018[499] - Directors affiliated with Daqo Group, including Chairman Guangfu Xu (13.3%), Xiang Xu (12.6%), and Dafeng Shi (3.0%), beneficially own substantial ordinary shares as of the report date[506] ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS This section details significant ownership stakes and related party transactions, particularly with Daqo Group subsidiaries, involving both sales and substantial purchases of assets and materials. - In 2019, the company engaged in significant related party transactions, primarily with Daqo Group subsidiaries[519][520][521] * Sales of polysilicon to Zhenjiang Daqo: $4.0 million * Purchases of fixed assets and raw materials from various Daqo Group subsidiaries (e.g., Nanjing Daqo Transformer, Chongqing Daqo Tailai, Jiangsu Daqo): Over $37.9 million in aggregate ITEM 8. FINANCIAL INFORMATION This section confirms the location of consolidated financial statements, states the absence of material legal proceedings, and outlines the company's dividend policy to retain earnings for business expansion. - The company is not currently a party to any material legal proceedings[529] - The company has no present plan to declare or pay dividends, intending to retain future earnings for business operations and expansion[530] ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This section details the company's primary market risks, including interest rate risk from floating-rate debt and foreign exchange risk due to RMB/USD currency fluctuations, noting the absence of hedging instruments. - The company is exposed to interest rate risk from its $201.1 million in outstanding long-term bank borrowings, predominantly bearing floating rates[588] - Foreign exchange risk arises because revenues are in RMB while the reporting currency is USD, meaning RMB appreciation adversely affects USD conversion amounts and vice versa[589][590] PART II ITEM 15. CONTROLS AND PROCEDURES This section confirms the effectiveness of the company's disclosure controls and internal control over financial reporting as of December 31, 2019, as assessed by management and affirmed by the independent auditor's unqualified opinion. - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2019[600] - Management assessed internal control over financial reporting as effective as of December 31, 2019, based on the COSO 2013 framework, with Deloitte Touche Tohmatsu issuing an unqualified opinion on its effectiveness[601][603][604] ITEM 16. Other Information This section covers governance and compliance, including the audit committee financial expert, code of ethics, principal accountant fees, and the company's adherence to home country corporate governance practices as a foreign private issuer. - The Board of Directors determined that Mr. Arthur Wong, an independent director, qualifies as the 'audit committee financial expert'[612] Principal Accountant Fees (in Thousand US$) | Fee Type | 2018 | 2019 | | :--- | :--- | :--- | | Audit fees | 833 | 724 | | Tax fees | — | — | - As a foreign private issuer, the company follows certain home country (Cayman Islands) corporate governance practices that may differ from NYSE standards and offer less shareholder protection[619] PART III ITEM 18. FINANCIAL STATEMENTS This section presents the audited consolidated financial statements for 2017-2019, prepared under U.S. GAAP, with an unqualified auditor's opinion, and includes management's assessment of the company's going concern ability despite a working capital deficit. - The independent auditor, Deloitte Touche Tohmatsu Certified Public Accountants LLP, issued an unqualified opinion on the consolidated financial statements for the three years ended December 31, 2019[630][631] - As of December 31, 2019, current liabilities ($445,146,337) exceeded current assets ($174,328,361) by $270.8 million, yet management deems the going concern assumption appropriate due to expected positive operating cash flow, Phase 4A completion, and Daqo Group's financial support[659][660][662] - In September 2018, the company discontinued its solar wafer manufacturing operations in Chongqing, with results presented separately as discontinued operations in the financial statements[654] Consolidated Balance Sheet Highlights (As of Dec 31, in US$) | Account | 2018 | 2019 | | :--- | :--- | :--- | | Total current assets | 160,068,807 | 174,328,361 | | Property, plant and equipment, net | 616,974,820 | 995,027,214 | | Total assets | 854,929,081 | 1,201,356,021 | | Total current liabilities | 149,853,934 | 445,146,337 | | Total liabilities | 329,797,404 | 634,196,601 | | Total equity | 525,131,677 | 567,159,420 | Consolidated Statement of Operations Highlights (Year ended Dec 31, in US$) | Account | 2017 | 2018 | 2019 | | :--- | :--- | :--- | :--- | | Revenues | 323,199,694 | 301,599,897 | 349,990,753 | | Gross profit | 144,047,764 | 98,113,706 | 80,103,568 | | Income from operations | 130,812,428 | 81,204,907 | 47,485,210 | | Net income from continuing operations | 97,676,659 | 61,797,718 | 28,263,034 | | Net income attributable to shareholders | 92,841,128 | 38,124,705 | 29,524,392 |