Daqo New Energy Announces Unaudited Fourth Quarter and Fiscal Year 2015 Results

Daqo New Energy Corp. a leading manufacturer of high-purity polysilicon for the global solar PV industry, recently announced its unaudited financial results for the fourth quarter and fiscal year of 2015.

Fourth Quarter 2015 Financial and Operating Highlights

• Polysilicon production volume of 3,547 MT in Q4 2015, an increase of 31.9% from 2,689 MT in Q3 2015
• Polysilicon external sales volume⁽¹⁾ of 3,092 MT in Q4 2015, an increase of 35.8% from 2,277 MT in Q3 2015
• Polysilicon average total production cost⁽²⁾ of $9.74/kg in Q4 2015, a decrease of 12.7% from $11.15/kg in Q3 2015
• Polysilicon average cash cost⁽²⁾ of $7.69/kg in Q4 2015, a decrease of 11.7% from $8.71/kg in Q3 2015
• Average selling price (ASP) of polysilicon was $13.86/kg in Q4 2015, a decrease of 7.5% from $14.98/kg in Q3 2015
• Solar wafer sales volume of 21.0 million pieces in Q4 2015, an increase of 9.9 % from 19.1 million pieces in Q3 2015
• Revenue of $59.3 million in Q4 2015, an increase of 27.3% from revenue of $46.6 million in Q3 2015
• Non-GAAP gross margin⁽³⁾ of 31.9% in Q4 2015, up from 23.4% in Q3 2015
• EBITDA(non-GAAP)⁽³⁾ of $23.4 million in Q4 2015, an increase of 56.3% from $15.0 million in Q3 2015
• EBITDA margin (non-GAAP)⁽³⁾ of 39.5% in Q4 2015, compared to 32.1% in Q3 2015
• Net income attributable to Daqo New Energy shareholders of $9.6 million in Q4 2015, compared to $3.1 million in Q3 2015 and $3.6 million in Q4 2014
• Earnings per basic ADS of $0.92 in Q4 2015, compared to $0.29 in Q3 2015, and $0.40 in Q4 2014
• Adjusted net income (non-GAAP)⁽³⁾ attributable to Daqo New Energy shareholders of $11.9 million in Q4 2015, compared to $6.3 million in Q3 2015 and $7.1 million in Q4 2014
• Adjusted earnings per basic ADS (non-GAAP)⁽³⁾ of $1.14, compared to $0.60 in Q3 2015, and $0.79 Q4 2014
  

  Full Year 2015 Financial and Operating Highlights

  • Polysilicon production volume of 9,771 MT in 2015, an increase of 48.9% from 6,560 MT in 2014
  • Polysilicon external sales volume⁽¹⁾ of 8,234 MT in 2015, an increase of 37.9% from 5,972 MT in 2014
  • Solar wafer sales volume of 76.4 million pieces in 2015, an increase of 8.4% from 70.5 million pieces in 2014
  • Revenue of $182.0 million in 2015, compared to $182.6 million in 2014
  • Non-GAAP gross margin⁽³⁾ of 26.5% in 2015, an decrease from 31.3% in 2014
  • EBITDA(non-GAAP)⁽³⁾ of $ 58.2 million in 2015, an decrease of 2.9% from $60.0 million in 2014
  • EBITDA margin (non-GAAP)⁽³⁾ of 32.0% in 2015, compared to 32.9% in 2014
  • Net income attributable to Daqo New Energy shareholders of $13.0 million in 2015, decreased from $16.6 million in 2014
  • Earnings per basic ADS of $1.26 in 2015, decreased from $2.02 in 2014
  • Adjusted net income (non-GAAP)⁽³⁾ attributable to Daqo New Energy shareholders of $ 27.4 million in 2015, compared to $ 32.3 million in 2014
  • Adjusted earnings per basic ADS (non-GAAP)⁽³⁾ of $2.65 in 2015, compared to $3.91 in 2014
    

    Commentary

    “In the fourth quarter of 2015, we delivered strong operating and financial results that were beyond our internal expectations. Our polysilicon facilities were running successfully at full capacity for the entire quarter, and we are excited to report that both our external sales volume and cost structure exceeded our prior guidance. We achieved record-high quarterly polysilicon production volume of 3,547 MT, an increase of 31.9% from 2,689 MT in the third quarter of 2015 and 12% above our name plate capacity. Thanks to our technology and operations team, we made solid progress on our cost reduction efforts, and reduced our polysilicon average total production cost and cash cost even further to $9.74/kg and $7.69/kg, respectively, which is our lowest-ever cost and ahead of our cost reduction roadmap,” said Dr. Gongda Yao, CEO of Daqo New Energy.

    In the fourth quarter of 2015, we generated revenue of $59.3 million, an increase of 27.3% as compared to the third quarter of 2015. We achieved EBITDA margin of 39.5%, which increased from 32.1% in the third quarter of 2015. Our income from operations was $14.3 million, an increase of 113.4% from $6.7 million in the third quarter of 2015.  Despite a 7.5% reduction in polysilicon ASPs as compared to the third quarter of 2015, we were able to deliver higher gross margin, operating margin and net margin in the fourth quarter as compared to the third quarter, primarily as a result of our successful cost reduction efforts in polysilicon manufacturing.

    In February 2016, we began to see recovery in polysilicon ASPs, driven by strong customer demand for our high-purity polysilicon products.  Furthermore, we saw overall polysilicon channel inventory reduced to a normal level by strong end market demand.  As the industry and our customers continue to add on additional wafer capacities through 2016, we anticipate continued strong demand for polysilicon.  As of March 2016, the spot market price for polysilicon has rebounded by approximately 15% as compared to December of 2015, and we expect to see stable to improving polysilicon ASPs in the coming quarters supported by strong end market demand and increases in downstream solar manufacturing capacities.

    Additionally, our Chongqing wafer subsidiary was operating well and contributed meaningfully to the company’s financial performance.  Wafer gross margin, on a standalone basis, improved to 25.8%, a substantial increase from third quarter gross margin of 17.4%.  The improvement in gross margin was driven primarily by a 9% improvement in product pricing, as well as further reductions in manufacturing costs.  Currently our wafer annual capacity is approximately 87 million pieces. As we continue to execute on our technology enhancement project at our wafer manufacturing facilities to increase production volume and further reduce cost, with the goal to achieve an annual production capacity of 100 million pieces by mid-2016, we anticipate our wafer subsidiary would continue to contribute positively to the company’s financial results.

    Market outlook and Q1 2016 guidance

    Global solar PV installations in 2015 totaled approximately 57 GW, representing a 26.7% increase from 45 GW in 2014. China, Japan and the United States are the three largest solar PV markets globally in 2015. China installed 14.95 GW solar PV system in 2015, ranking No.1 globally in terms of volume for three consecutive years, with China’s cumulative solar PV installation reaching 43 GW by the end of the year. In the draft version of China’s “13th Five-Year-Plan”, the cumulative solar PV installation is expected to reach 150 GW, which means China would install an additional 107 GW over the next five years from 2016 to 2020 in order to meet the target. In December 2015, the United States announced a 5-year extension for Solar Investment Tax Credit (ITC), which provides a 30 percent tax credit for solar systems on residential and commercial properties. The extension will significantly support the deployment of solar energy in the United States in the next five years. In addition, several emerging solar end markets are experiencing rapid growth, including India, Southeast Asia, Latin America and Africa. In particular, India’s solar PV installation is reported to be approximately 2 GW in 2015, which makes it the fifth largest solar PV market in the world. India’s newly added solar PV installation is expected to be approximately 4.8 GW in 2016.  According to several market forecast reports, the global solar PV installations in 2016 are expected to be in the range of 62 to 65 GW. We believe the overall solar PV demand will remain strong in 2016, resulting in favorable demand for polysilicon in the year.

    For the first quarter of 2016, the Company expects to sell approximately 2,800 MT to 3,000 MT of polysilicon to external customers.  The above guidance reflects increased consumption of polysilicon internally by our own wafer subsidiary due to increased wafer production and wafer capacity expansion.  Wafer sales volume is expected to be approximately 21.5 million to 22.0 million pieces for the quarter. This outlook reflects our current and preliminary view as of the date of this press release and may be subject to change. Our ability to achieve these projections is subject to risks and uncertainties. See “Safe Harbor Statement” at the end of this press release.

    Fourth Quarter 2015 Results

    Revenues

    Revenues were $59.3 million, compared to $46.6 million in the third quarter of 2015 and $49.5 million in the fourth quarter of 2014.

    Revenues from polysilicon sales to external customers were $42.9 million, compared to $34.1 million in the third quarter of 2015, and $33.8 million in the fourth quarter of 2014.  The increase in polysilicon revenue was driven primarily by an increase in external polysilicon sales volume, offset by lower ASPs.  External sales volume was 3,092 MT during the fourth quarter, compared to 2,277 MT in the third quarter of 2015 and 1,646 MT in the fourth quarter of 2014.  With the successful ramp up of the Company’s phase 2B polysilicon expansion in Xinjiang, the company reached full production during the quarter and produced 3,547 MT of polysilicon in the fourth quarter of 2015, an increase of 31.9% from 2,689 MT in the third quarter of 2015. Average selling price (ASP) of polysilicon was $13.86/kg in the fourth quarter of 2015, a decrease of 7.5% from $14.98/kg in the third quarter of 2015.

    Revenues from wafer sales were $16.4 million, compared to $12.5 million in the third quarter of 2015 and $15.7 million in the fourth quarter of 2014. Wafer sales volume was 21.0 million pieces, compared to 19.1 million pieces in the third quarter of 2015, and 18.6 million pieces in the fourth quarter of 2014.The increase in revenue from the third quarter of 2015 was primarily due to higher sales volume and higher wafer ASPs.

    Gross profit and margin

    Gross profit was approximately $16.9 million, compared to $8.6 million in the third quarter of 2015 and $12.6 million in the fourth quarter of 2014. Non-GAAP gross profit, which excludes costs related to the non-operational polysilicon operations in Chongqing, was approximately $18.9 million, compared to $10.9 million in the third quarter of 2015 and $15.9 million in the fourth quarter of 2014.

    Gross margin was 28.5%, compared to 18.4% in the third quarter of 2015 and 25.4% in the fourth quarter of 2014. The improvement in gross margin compared to the third quarter of 2015 was primarily due to our continuous cost reduction effort in polysilicon manufacturing, partially offset by polysilicon ASP decline, as well as higher wafer ASPs combined with our improved wafer processing cost.

    In the fourth quarter of 2015, total costs related to the non-operational Chongqing polysilicon plant including depreciation were $2.0 million, compared to $2.3 million in the third quarter of 2015 and $3.3 million in the fourth quarter of 2014. Excluding such costs, the non-GAAP gross margin was approximately 31.9%, compared to 23.4% in the third quarter of 2015 and 32.1% in the fourth quarter of 2014.

    Selling, general and administrative expenses

    Selling, general and administrative expenses were $2.3 million, compared to $2.9 million in the third quarter of 2015 and $4.7 million in the fourth quarter of 2014.

    Research and development expenses

    Research and development expenses were approximately $0.5 million, compared to $0.1 million in the third quarter of 2015 and $0.2 million in the fourth quarter of 2014.

    Other operating income (expense)

    Other operating income was $1.7 million, compared to $1.1 million in the third quarter of 2015 and other operating expense of $0.1 million in the fourth quarter of 2014. Other operating income was mainly composed of unrestricted cash incentives that the Company received from local government authorities, the amount of which varies from period to period.

    Impairment of long-lived assets

    The Company recognized $1.6 million fixed assets impairment loss in the fourth quarter of 2015, compared to nil in the third quarter of 2015 and nil in fourth quarter of 2014. The company is currently in the process of relocating and repurposing the Company’s temporarily idle polysilicon machinery and equipment in Chongqing to the Company’s Xinjiang polysilicon manufacturing facility. The impairment loss incurred was related to the identified relocation assets in Chongqing that were not transferrable and could not be reutilized by its Xinjiang polysilicon expansion project.

    Income from operations and operating margin

    Income from operations was $14.3 million, compared to $6.7 million in the third quarter of 2015 and $7.6 million in the fourth quarter of 2014.

    Operating margin was 24.1%, compared to 14.3% in the third quarter of 2015 and 15.4% in the fourth quarter of 2014.

    Net interest expense

    Net interest expenses were $4.0 million, compared to $3.0 million in the third quarter of 2015 and $4.0 million in the fourth quarter of 2014.

    EBITDA

    EBITDA was $23.4 million, compared to $15.0 million in the third quarter of 2015 and $14.7 million in the fourth quarter of 2014. EBITDA margin was 39.5%, compared to 32.1% in the third quarter of 2015 and 29.6% in the fourth quarter of 2014.

    Net income attributable to our shareholders and earnings per ADS

    Net income attributable to Daqo New Energy Corp. shareholders was $9.6 million, compared to $3.1 million in the third quarter of 2015 and $3.6 million in the fourth quarter of 2014.

    Earnings per basic ADS were $0.92, compared to $0.29 in the third quarter of 2015 and $0.40 in the fourth quarter of 2014.

    Financial Condition

    As of December 31, 2015, the Company had $33.6 million in cash and cash equivalents and restricted cash, compared to $68.7 million as of September 30, 2015 and $29.2 million as of December 31, 2014. The decrease in cash and cash equivalents and restricted cash compared to the third quarter of 2015 was primarily due to loan repayments amounting to $31.6 million.

    As of December 31, 2015, the accounts receivable balance was $19.9 million, compared to $15.4 million as of September 30, 2015 and $8.7 million as of December 31, 2014. As of December 31, 2015, the notes receivable balance was $11.1 million, compared to $16.5 million as of September 30, 2015 and $50.2 million as of December 31, 2014. As of December 31, 2015, total borrowings were $242.5 million, of which $118.5 million were long-term borrowings, compared to total borrowings of $259.1 million, including $144.0 million long-term borrowings as of September 30, 2015, and total borrowings of $237.1 million, including $77.3 million long-term borrowings as of December 31, 2014. As of December 31, 2015, the notes payable balance was $20.2 million, compared to $52.2 million as of September 30, 2015 and $48.9 million as of December 31, 2014.

    Cash Flows

    For the twelve months ended December 31, 2015, net cash provided by operating activities was $66.4 million, compared to net cash used in operating activities of $45.6 million in the same period of 2014.

    For the twelve months ended December 31, 2015, net cash used in investing activities was $74.1 million, compared to $90.6 million in the same period of 2014. The net cash used in investing activities in 2014 and 2015 was primarily related to the capital expenditure of Xinjiang Phase 2b polysilicon project.

    For the twelve months ended December 31, 2015, net cash provided by financing activities was $15.2 million, compared to $44.3 million in the same period of 2014. The net cash provided by financing activities in 2015 was primarily contributed by the net proceeds from the follow-on offering in February 2015 and net bank loan borrowings.

    Full Year 2015 Results

    Revenues

    Revenues were $182.0 million in 2015, compared to $182.6 million in 2014.

    Revenues from polysilicon sales to external customers were $125.9 million in 2015, compared to $127.7 million in 2014. The polysilicon sold in 2014 and 2015 was mostly contributed by our Xinjiang facilities. During the third quarter of 2015, we successfully ramped up our Phase 2B expansion project, which increased our annual capacity from 6,150 MT to 12,150 MT. As a result, our polysilicon production volume increased by 48.9% from 6,560 MT in 2014 to 9,771 MT in 2015. Accordingly, our external polysilicon sales volume increased by 37.9% from 5,972 MT in 2014 to 8,234 MT in 2015. Nevertheless, the improvement in external sales volume was offset by the decrease in our annual polysilicon average selling prices (“ASP”) which decreased by 28.5% from $21.37/kg in 2014 to $15.29/kg in 2015.

    Revenues from wafer sales were $56.1 million in 2015, compared to $54.9 million in 2014. Wafer sales volume was 76.4 million pieces, compared to 70.5 million pieces in 2014. The increase in wafer revenues as compared to 2014 was primarily due to higher sales volume.

    Gross profit and margin

    Gross profit for 2015 was $37.6 million, decreased by 13.2% from $43.3 million in 2014. Gross margin was 20.6% in 2015, compared to 23.7% in 2014. The decrease in gross profit and gross margin was primarily due to decreased gross profit and gross margin of our polysilicon sector offset by the improved gross margin and gross margin of our wafer sector.

    In 2015, gross profit of our polysilicon sector was $38.9 million excluding the cost of non-operational Chongqing polysilicon operations of $10.7 million, decreased from $50.1 million in 2014. Gross margin of our polysilicon sector was 30.9%, decreased from 39.2% in 2014. The decrease in polysilicon gross profit and gross margin was primarily due to lower polysilicon ASPs, despite that we successfully reduced our annual polysilicon total production cost by 17.9% from $13.68/kg in 2014 to $11.23/kg in 2015.

    In 2015, gross profit of our wafer sector was $9.4 million, increased from $7.0 million in 2014. Gross margin of our wafer sector was 16.7%, increased from 12.8% in 2014. The improvement in wafer gross profit was primarily due to the reduced wafer production cost and higher sales volume.

    In 2015, total costs related to the non-operational Chongqing polysilicon plant including depreciation were $10.7 million, compared to $13.9 million in 2014. Excluding such costs, the non-GAAP gross margin was approximately 26.5% in 2015, compared to 31.3% in 2014.

    Selling, general and administrative expenses

    Selling, general and administrative expenses were $12.7 million in 2015, compared to $10.3 million in 2014. The increase in selling, general and administrative expenses was primarily due to increased shipping cost, as a result of higher polysilicon shipping volume and less reversal of bad debt expense.

    Research and development expenses

    Research and development expenses were $0.9 million in 2015, compared to $1.5 million in 2014. The research and development expenses in 2015 and 2014 primarily resulted from continuous technology improvement projects for polysilicon and wafer production.

    Long-lived assets impairment loss

    In the fourth quarter of 2015, the Company recognized a $1.6 million impairment loss related to the long-lived assets of its Wanzhou polysilicon facilities. In 2014, no long-lived assets impairment loss was recognized.

    Other operating income

    Other operating income was $3.8 million in 2015, compared to $0.6 million in 2014, which mainly consisted of unrestricted cash incentives that we received from local government authorities, which varies from period to period at the discretion of the government.

    Income from operations and operating margin

    As a result of the foregoing, income from operations was $26.2 million in 2015, compared to $32.0 million in 2014. Operating margin was 14.4% in 2015, compared to 17.5% in 2014.

    Net interest expense

    Net interest expenses were $12.7 million in 2015, compared to $15.3 million in 2014. The decrease was primarily due to a decrease in bank borrowing balance combined with a decreased average borrowing interest rate.

    Income tax expense

    Income tax expenses were $1.1 million in 2015, compared to $nil million in 2014. In 2015 one of our PRC entities started to pay enterprise income tax as a result of the recovery of accumulated loss.

    Net income attributable to our shareholders and earnings per ADS

    As a result of the factors described above, we had net income attributable to our shareholders of $13.0 million in 2015, compared to $16.7 million in 2014. Earnings per basic ADS were $1.26 in 2015, compared to $2.02 in 2014. Adjusted net income (non-GAAP) attributable to our shareholders was $ 27.4 million in 2015, compared to $32.3 million in 2014. Adjusted earnings per basic ADS (non-GAAP) were $2.65 in 2015, compared to $3.91 in 2014.