[Ferro-Alloys.com] Over the last few quarters, Daqo New Energy has expanded production capacity, refined the cost structure, and improved yields (quality) at the recently started Phase 4A project of the capacity expansion plan, positioning it well to monetize the demand comeback profitably.

Among major global suppliers of polysilicon – GCL-Poly, OCI (Korea), Sichuan Yongxiang, Wacker Chemie (Germany), Xinte Energy and Daqo New Energy, Daqo will be uniquely positioned with 95% capacity catering to mono-wafers, having idle capacity at hand to capture the expected demand surge and, cost-competitive with all other suppliers.

The company expects to produce 73-75,000 metric tones of polysilicon, up almost 75% from last year, out of which more than 70% was booked till a few months ago, providing high visibility to expected sales growth for the current year.

Average selling prices for Daqo New Energy improved 1% to $8.79/ kg during the first quarter and even if the prices decline over the week summer months due to global lockdown, it seems plausible to expect ASP increases for the company by the end of the year given the average polysilicon prices are trailing lower than the average needed to maintain sustainable gross margins of 25%. For Daqo New Energy, a higher mix of mono silicon will help command better ASPs. 

Cost restructured to allow margins improvement

Daqo New Energy Corp

Gross margins have started to move up again, after years. The cost of production declined from $6.38/ kg in the fourth quarter to $5.86/ kg last quarter. Out of the 51 cents per kg reduction in the cost of production, 31 cents came from savings on lower utility and energy consumption, 13 cents from lower materials costs/ kg, and 8 cents per kg from reduced salary & wages. Going forward, silicon metal powder that constitutes almost 33% of the cost of production does offer some room for improvement from current levels.

There is significant room for upside for gross margins if the sales continue to grow at a steady clip, as the chart above shows. Our rough back of an envelope calculation shows earnings per share can improve almost 35-40 cents for every 1% improvement in gross margin.

Cash flows expansion on the cards

Cash flow is another area that can show significant improvement over the coming quarters. Capital expenditure on Phase 4A of capacity expansion is largely over and capital expenditure is expected to come down to $80 million for the current year, offering a major boost to the free cash flows. Capital expenditure needed to maintain facilities is mere $20 million.

For a business with a $1 billion market capitalization, it can throw off decent free cash flow, as the chart above shows.

The Street is expecting $10.5 of earnings per share for next year, which the fundamentals suggest is achievable, making the stock trade at seven times price to earnings, cheap for a business that is near a cyclical trough, and turning around

• [Editor:tianyawei]