Daqo New Energy Q3 2024 Earnings Call Transcript

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Provided by Quartr
October 30, 2024
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Operator

Good day, and welcome to the Daqo New Energy Third Quarter 2024 Results Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Anita Xu.

Operator

Please go ahead.

Anita Zhu
Anita Zhu
Investor Relations Director at Daqo New Energy

Hello, everyone. I'm Anita Xu, the Deputy Chief Executive Officer of Daqo New Energy. Thank you for joining our conference call today. Daqo New Energy just issued its financial results for the Q3 of 2024, which can be found on our website at www.dqsolar.com. Today, attending the conference call, we have our CFO, Mr.

Anita Zhu
Anita Zhu
Investor Relations Director at Daqo New Energy

Ming Yang and myself. Given the time conflict, Mr. Zhu will not be able to attend today's meeting in person. I'll first begin the call by reading Mr. Zhu's comments on market conditions and company operations, and then Mr.

Anita Zhu
Anita Zhu
Investor Relations Director at Daqo New Energy

Yang will discuss the company's financial performance for the quarter the year. After that, we'll open the floor to Q and A from the audience. Before we begin the formal remarks, I would like to remind you that certain statements on today's call, including expected future operational and financial performance and industry growth, are forward looking statements that are made under the Safe Harbor provisions of the U. S. Private Securities Litigation Reform Act of 1995.

Anita Zhu
Anita Zhu
Investor Relations Director at Daqo New Energy

These statements involve inherent risks and uncertainties. A number of factors could cause actual results to differ materially from those contained in any forward looking statements. Further information regarding these and other risks is included in the reports or documents we have filed with or furnished to the Securities and Exchange Commission. These statements only reflect our current and preliminary view as of today and may be subject to change. Our ability to achieve these projections is subject to risks and uncertainties.

Anita Zhu
Anita Zhu
Investor Relations Director at Daqo New Energy

All information provided in today's call is as of today, and we undertake no duty to update such information, except as required under applicable Also during the call, we'll occasionally reference monetary amounts in U. S. Dollar terms. Please keep in mind that our functional currency is a Chinese RMB. We offer these translations into U.

Anita Zhu
Anita Zhu
Investor Relations Director at Daqo New Energy

S. Dollars solely for the convenience of the audience. So without further ado, let me begin with our management remarks. So entering the Q3, China solar industry market conditions remain challenging, exacerbated by the overall oversupply in the industry. Market selling prices continue to be below production costs for the majority of industry players throughout the entire value chain.

Anita Zhu
Anita Zhu
Investor Relations Director at Daqo New Energy

Although this caused Daqo New Energy to sustain quarterly operating and net losses, our losses narrowed compared to the 2nd quarter and we continue to maintain a strong and healthy balance sheet with no financial debt. At the end of the third quarter, we had a cash balance of US853 million dollars and short term investments of US245 million dollars banknote receivables of US83 million dollars and a fixed term bank deposit balance of US1.2 billion dollars To capitalize on higher interest rates compared to those of bank savings, we purchased short term investments and fixed term bank deposits during the past two quarters. Overall, the company maintained strong liquidity with a balance of quick assets of US2.4 billion dollars These mainly consist of bank deposits or bank financial products that can be quickly converted to cash when necessary. On the operational front, during the Q3, we started maintenance of our facilities and adjusted our production utilization rate to 50% in light of weak market demand and to reduce our cash burn. The total production volume at our 2 polysilicon facility for the quarter was 53,592 metric tons.

Anita Zhu
Anita Zhu
Investor Relations Director at Daqo New Energy

Through continued investments in R and D and dedication to purity improvements at both facilities, our overall N type product mix reached 75% during the quarter. Our Phase 5B, which started initial production in May and is still ramping up, reached 70% N type in its product mix, strengthening our confidence in achieving 100% N type by the end of next year. Despite lower utilization levels, we further reduced our cash costs to US5.34 dollars per kilogram compared to US5.39 dollars per kilogram in the Q2. However, unit production costs trended up 7% sequentially to an average of US6.61 dollars per kilogram as a result of reduced production level, which led to facility idle costs of approximately US0.55 dollars per kilogram. Regarding our semi grade polysilicon, we started initial production in the second quarter and have since then worked toward qualification by downstream customers.

Anita Zhu
Anita Zhu
Investor Relations Director at Daqo New Energy

Recently, we passed qualification with certain customers and anticipate initial commercial delivery early next year. In light of the current market conditions, we expect our Q4 twenty twenty four total polysilicon production volume to be approximately 31,000 metric tons to 34,000 metric tons. As a result, we anticipate our full year 2024 production volume to be in the range of 200,000 metric tons to 210,000 metric tons. During the Q3, challenging market conditions forced more industry players to reduce production utilization rates and begin maintenance. Based on industry statistics, polysilicon supply in China decreased by 15% and 6% month over month in July August, respectively, with the total polysilicon silicon production volume falling below 130,000 metric ton in August, the lowest yield to date.

Anita Zhu
Anita Zhu
Investor Relations Director at Daqo New Energy

This reduction eased inventory pressure with prices bottoming in a range of approximately RMB 35 to RMB 40 per kilogram. Despite relatively weak downstream wafer demand during the quarter, poly prices stabilized after reaching their lowest level and stopped declining. This price level was below the cash cost of even the Tier 1 players. And 4 consecutive months of cash losses have led all manufacturers to reassess their future strategy. In August September, due to downstream customers' efforts to take advantage of low prices amid production cuts, polysilicon prices rebounded to approximately RMB 38 to RMB 43 per kilogram.

Anita Zhu
Anita Zhu
Investor Relations Director at Daqo New Energy

However, industry polysilicon inventories remained significant at the end of the quarter. 1 month into the Q4, the polysilicon industry is still rebounding seeing supply and demand and needs further production costs and stronger market demand to sustain a price recovery. The 4th quarter has historically seen strong new installations in China and the aggressive stimulus packages unveiled in September October to support domestic economy might encourage investment from state owned enterprises. In the medium to long term, we believe the current low prices and market downturn will eventually result in a healthier market as poor profitability losses and cash burn will lead to many industry players exiting the business. Ultimately eliminating overcapacity and bringing the solar PV industry back to normal profitability and better margins.

Anita Zhu
Anita Zhu
Investor Relations Director at Daqo New Energy

This year is challenging for China's solar PV industry. At this point, we may have reached the cyclical bottom, but have yet to see a third as the price wars have undermined the healthy development of the industry. On October 14, the China Photovoltaic Industries Association convened a special conference attended by senior executives from major manufacturers in the industry, calling to strengthen self discipline and reduce unbridled competition. While further details of promoting the sustainability of the industry still need to be discussed, We believe this is a positive signal to where market consolidation with higher cost and inefficient manufacturers gradually phasing out capacity and exiting the business. On another positive note, on October 18, CTLA announced a reference price of RMB0.68 per watt for modules, setting a floor for WingVIP.

Anita Zhu
Anita Zhu
Investor Relations Director at Daqo New Energy

On the demand side, NIO solar PV installations in China in the 1st months of 2024 reached 160.88 gigawatts, growing 24.8% year over year. Overall, in the long run, solar PV is expected to be one of the most competitive forms of power generation globally and the continuous cost reductions in solar PV products and the resulting reductions in solar energy generation costs are expected to create substantial additional demand for solar PV. We are optimistic that we'll capture the long term benefits of the global solar PV market and maintain our competitive advantage by enhancing our higher efficiency and tech technology and optimizing our cost structure through digital transformation and AI adoption. As one of the world's lowest cost producers with the highest quality NTech product, a strong balance sheet and no financial debt, we believe we're well positioned to weather the current market downturn and emerge as one of the leaders in the industry to capture future growth. Now, I'll turn the call to our CFO, Mr.

Anita Zhu
Anita Zhu
Investor Relations Director at Daqo New Energy

Ming Yang, who will discuss the company's financial performance for the quarter. Ming, please go ahead.

Ming Yang
Ming Yang
Chief Financial Officer at Daqo New Energy

Thank you, Anita, and hello, everyone. This is Ming Yang, CFO of Daqo New Energy. We appreciate you joining our earnings conference call today. I will now go over the company's Q3 2024 financial performance. Revenues were $198,500,000 compared to $219,900,000 in the Q2 of 2024 and $484,800,000 in the Q3 of 2023.

Ming Yang
Ming Yang
Chief Financial Officer at Daqo New Energy

The decrease in revenue compared to the previous quarter is primarily due to a decrease in ASP as well as a decrease in sales volume. Gross loss was $60,600,000 compared to 179 200,000 in the Q2 of 2024 and gross profit of RMB67.8 million in the Q3 of 2023. Gross margin was negative 30.5%, compared to negative 72% in the Q2 of 2024 14% in the Q3 of 2023. For the Q3, the company recorded $80,900,000 in inventory impairment expenses, compared to $108,000,000 in the 2nd quarter. The increase in gross margin was primarily due to the inventory subject to larger amount of inventory write downs in the Q2 that were subsequently sold in the Q3 of 2024.

Ming Yang
Ming Yang
Chief Financial Officer at Daqo New Energy

SG and A expenses were RMB37.7 million, compared to $37,500,000 in the Q3 of 2024 and $89,700,000 in the Q3 of 2023. SG and A expenses during the Q3 included $18,900,000 in non cash share based compensation costs related to the company's share incentive plan, compared to $19,600,000 in the Q2 of 2024 $46,300,000 in the Q3 of 2023. R and D expenses were $800,000 compared to RMB1.8 million in the Q2 of 2024 and RMB2.8 million in the Q3 of 2023. R and D expenses compared from period to period reflect R and D activities that take place during the quarter. Loss from operations was $98,000,000 compared to $195,600,000 in the Q2 of 2024 and income from operations of $22,500,000 in the Q3 of 2023.

Ming Yang
Ming Yang
Chief Financial Officer at Daqo New Energy

Operating margin was negative 49% compared to negative 89% in the Q2 of 2024 and 4.6% in the Q3 of 2023. Net loss attributable to Daqo New Energy shareholders was RMB60,700,000 dollars compared to a loss of $120,000,000 in the Q2 of 2024 and $6,300,000 in Q3 of 2023. Loss per basic ADS was $0.92 compared to loss of 1 point 8 1 in the Q2 of 2024 and $0.09 in the Q3 of 2023. Adjusted net loss attributable to Daqo New Energy shareholders, excluding non cash share based compensation costs, was $39,400,000 compared to $98,800,000 in the Q2 of 2024 and adjusted net income of $44,000,000 in the Q3 of 2023. Adjusted loss per basic ADS was $0.69 compared to $1.50 in the Q2 of 2024 and adjusted earnings per basic ADS of $0.59 in the Q3 of 2023.

Ming Yang
Ming Yang
Chief Financial Officer at Daqo New Energy

EBITDA was negative 34,000,000 dollars compared to negative $145,000,000 in the Q2 of 2024 and $70,200,000 in the Q3 of 2023. EBITDA margin was negative 17% compared to negative 66% in the Q2 of 2024 and 14.5% in the Q3 of 2023. Now on the company's financial condition. As of September 30, 2024, the company had $853,400,000 in cash, cash equivalents and restricted cash compared to $997,500,000 as of June 30, 2024 and $3,300,000,000 as of September 30, 2023. And as of September 30, 2024, notes receivable balance was RMB83 1,000,000 compared to RMB80.7 million as of June 30, 2024 and RMB276 1,000,000 as of September 30, 2023.

Ming Yang
Ming Yang
Chief Financial Officer at Daqo New Energy

Notes receivable represent banknotes with maturity within 6 months. Now for the company's cash flow. The 9 months ended September 30, 2024, net cash used in operating activities was RMB376,500,000 compared to net cash provided by operating activities of RMB1.5 billion in the same period of 20.23. And for the 9 months ended September 30, 2024, net cash used in investing activity was RMB1.75 billion, compared to net cash used in investing activities of RMB954.3 million in the same period of 2023. Net cash used in investing activities in the 3 quarters of 2024 was primarily related to the purchase of short term investments and fixed term deposits, which amounted to RMB1.4 billion.

Ming Yang
Ming Yang
Chief Financial Officer at Daqo New Energy

And for the 1st 9 months of the year, purchases of property, plant, equipment and land use rights were approximately RMB336 1,000,000. For the full year, we currently anticipate our total capital expenditure costs to be approximately RMB426 1,000,000. And for the 9 months ended September 30, 2024, net cash used in finance activities was RMB48.5 million compared to net cash used in finance activities of RMB602 1,000,000 in the same period of 2023. The net cash used in finance activities in the 3 quarters of 2024 was primarily due to dividend payments and share repurchases by our A share subsidiary. And that concludes our prepared remarks.

Ming Yang
Ming Yang
Chief Financial Officer at Daqo New Energy

We will now open the call to Q and A from the audience. Operator, please begin.

Operator

Yes. Thank you. Will now begin the question and answer session. And the first question comes from Philip Shen with ROTH Capital Partners.

Philip Shen
Managing Director, Senior Research Analyst at Roth Capital Partners, LLC

Hi, everyone. Thank you for taking my questions. Wanted to check-in with where you think the government might be in terms of cutting off capacity based on energy intensity. So when do you think that policy become effective? Is it near term before the end of the year?

Philip Shen
Managing Director, Senior Research Analyst at Roth Capital Partners, LLC

Or do you think we need to wait for a much longer time? Thanks.

Ming Yang
Ming Yang
Chief Financial Officer at Daqo New Energy

Phil, are you referring to the government policy about reduction in production?

Ming Yang
Ming Yang
Chief Financial Officer at Daqo New Energy

Yes, that's right.

Philip Shen
Managing Director, Senior Research Analyst at Roth Capital Partners, LLC

And so I think the government is looking to reduce production based on energy intensity. And so if you have a 55 kilowatt hour per kilogram cutoff, then producers above that energy intensity would no longer be able to sell into the market or produce at least. So just curious, when do you think that could become effective? And then also, how much of the market in terms of percentage or capacity in metric tons could exit if that's the case?

Philip Shen
Managing Director, Senior Research Analyst at Roth Capital Partners, LLC

Thanks.

Anita Zhu
Anita Zhu
Investor Relations Director at Daqo New Energy

Hi, Phil. Thank you for the question. So I think there have been discussions going around in the industry, both from the CPOIA and also from MIT and other government entities, right. So I'll first talk about the CPOIA and then I'll get to the policies. So there has been conversations going on regarding potentially reducing the production level or the utilization rate to 50% across all the players And I think there has been consensus among the manufacturers to promote a healthier development of the industry through exercising self discipline.

Anita Zhu
Anita Zhu
Investor Relations Director at Daqo New Energy

If we look at the current condition, inventory level is above 350,000 metric tons across all, around 250,000 metric tons at the poly level and then another 100,000 at the wafer level. However, if we look at the demand side, right now, wafer demand per month is only less than 50 gigawatts, which means that it would only need around 100,000 metric tons of quality demand per month. So there's still a relatively oversupply if we look at it from that aspect. I think in terms of the structural reform that we've been hearing or in the market, they were contemplating either via energy consumption or it could be a certain percentage times the name capacity in terms of the production volume. So for the energy consumption, we don't have more details around that, but I think if we look at companies that have energy intensity or consumption of less than 55 kilowatt hours, it would only be the top for to 5 players.

Philip Shen
Managing Director, Senior Research Analyst at Roth Capital Partners, LLC

Okay. All right, please.

Ming Yang
Ming Yang
Chief Financial Officer at Daqo New Energy

So quickly just to add Anita's comments, understanding is NDRC and National Energy Administration is looking at this And there could be some kind of enforcement and allocation in terms of how much energy usage is allocated to the various manufacturers to restrict production. And we don't know what the actual policy might look like, right, or what the ultimate rules are. But if you look at China in history, I know China has done a lot of the supply side reform, especially for example, aluminum industry, the glass industry and the steel industry. And historically, the government has had a lot of success in these supply side reform to stabilize the market and stabilize pricing. So we think the government is looking at this as a practical approach to fix the issues at the solar industry rates.

Philip Shen
Managing Director, Senior Research Analyst at Roth Capital Partners, LLC

Great. Okay. Thank you, Anita and Ming. And so as a follow-up there, I know I asked this earlier, but I'm just going to get a I'm going to ask it again. But from a timing standpoint, when do you think like do you think this is already positively impacting prices?

Philip Shen
Managing Director, Senior Research Analyst at Roth Capital Partners, LLC

And do you continue to expect pricing to be supported near term? Or do you think the policy needs to be implemented first and then you see the pricing move more materially? Thanks.

Ming Yang
Ming Yang
Chief Financial Officer at Daqo New Energy

I think realistically with regard to timing, we really don't know. I think in terms of what we've heard or understand is the government the various government agencies are studying this and they're talking with the industry players and talking with the industry association with the top manufacturers. And I think policies like this probably will take 1 to 2 months to formulate. So we're looking at maybe end of November or December or maybe even later. So we really don't have any real insight on timing.

Ming Yang
Ming Yang
Chief Financial Officer at Daqo New Energy

Okay. So what is the sense like yes, go ahead.

Philip Shen
Managing Director, Senior Research Analyst at Roth Capital Partners, LLC

Sorry, Ming, I cut you off. I think that was the I mean, you gave a little bit of color on timing.

Ming Yang
Ming Yang
Chief Financial Officer at Daqo New Energy

What's about pricing, right?

Ming Yang
Ming Yang
Chief Financial Officer at Daqo New Energy

Yes. So pricing is actually Yes.

Philip Shen
Managing Director, Senior Research Analyst at Roth Capital Partners, LLC

Just give your pricing outlook in general, so with and without the

Philip Shen
Managing Director, Senior Research Analyst at Roth Capital Partners, LLC

reform.

Ming Yang
Ming Yang
Chief Financial Officer at Daqo New Energy

Okay.

Ming Yang
Ming Yang
Chief Financial Officer at Daqo New Energy

I think overall, the pricing is complicated, right? So pricing is a function of supply and a function of demand and market pricing and also in terms of utilization and I think future expectations of pricing. I certainly I think for the industry, we do believe the pricing has bottomed for now and likely to go up further in the future, but we don't know what the timing looks like or how much it could go up.

Philip Shen
Managing Director, Senior Research Analyst at Roth Capital Partners, LLC

Okay, great. I think I'll leave it there. Thank you very much and best of luck.

Ming Yang
Ming Yang
Chief Financial Officer at Daqo New Energy

Okay, great. Thanks, Phil.

Operator

Thank you. And the next question comes from Ranjit Kuparade, a Private Investor. Please go ahead.

Analyst

Yes. So my question is not more on the operation side of the business and more on the potential of the usage of buybacks to correct the difference between Shanghai and New York. As investors, in January 2015, the lockup period, the volume 31 we did in July, it should end. So my question is, what are the plans for selling some Shanghai shares as they're trading at we currently own $7,000,000,000 of Shanghai shares, 72% of Daquan Shanghai. And yes, it would be a critic for everyone to close some of the difference.

Analyst

It's a 4.3 times difference. And my question is what will happen after January 15 as the next report quarterly report will be likely after January 15?

Anita Zhu
Anita Zhu
Investor Relations Director at Daqo New Energy

Hi, thank you. Thank you, Andre, for the questions. So considering we have considered the proposal of potentially selling down the Asia and then use that to repurchase ADRs to close down the gap. But I think back in July, it was due to regulatory difficulties because there was a new regulations launched in May. If the stock price was trading below the IPO issue price that we're not able to sell down, which is why we also voluntarily disclosed we wanted to extend the period until January.

Anita Zhu
Anita Zhu
Investor Relations Director at Daqo New Energy

As of now, it's difficult for us to say what's the plan next because it would also be contingent upon the stock price by January, but I think it's definitely something that we would consider to potentially close down the gap between the Asia and the ADRs.

Analyst

Okay. So regarding that, could you provide a bit more color to investors? So even if it would be available, the option, we are the letter of undertaking of the intent to reduce shareholding, which I see on the Securities Exchange Commission. Could you provide more color? IPO price wasn't at RMB21.49 from what I see in 2021?

Analyst

And aren't we trading currently above IPO prices in Shanghai?

Anita Zhu
Anita Zhu
Investor Relations Director at Daqo New Energy

Back then, when we were at the expiration of the lockup period, the share price was also very low, which is why it was Okay.

Analyst

It was below. It was indeed below when it expired below. But the IPO price is RMB21.49, right?

Ming Yang
Ming Yang
Chief Financial Officer at Daqo New Energy

Yes. Yes. That's correct.

Analyst

Okay. So currently, are there any other closes? I see like 3 or 4 closes here. Are there any closes which we like if January was now, it was in, what, we are October 30, even though it's not now. But are there any closes which are not approved or they're not functioning?

Ming Yang
Ming Yang
Chief Financial Officer at Daqo New Energy

Okay. So let's say so we do have a voluntary lockup, right, that I think will expire in January. So once that expires and if the Board of DQ does decide to sell its A Share Holdings, then we would need to file a plan to reduce our A share ownership in the open market with the Shanghai Stock Exchange. Yes, and then we would sell the shares under that plan.

Analyst

Okay. But there are no other clauses which are preventing that from happening if the conditions continue to be the same as are currently? Yes. If January was now

Ming Yang
Ming Yang
Chief Financial Officer at Daqo New Energy

As long as share price is above $21,490,000 at least based on the rules, we are allowed to sell down

Ming Yang
Ming Yang
Chief Financial Officer at Daqo New Energy

ships.

Analyst

And it's just 10% in 2025?

Ming Yang
Ming Yang
Chief Financial Officer at Daqo New Energy

I don't think right now, the rules is that we could sell roughly 1% to 2% per quarter per 90 days.

Analyst

Okay. I didn't know if that will. Okay. Thank you for that. And the last question, again, it's not relevant to operations, but the difference is huge.

Analyst

And I would capitalize some like show some willingness to capitalize on this huge, huge difference between the two share prices. It's 4.3x or 4.5x the difference. My other question is, I think in the previous quarter, we're currently reporting the share count only decreased by 0.5% from last quarter. It decreased to 66,300,000 from 66,000,000 sorry, the other way around. But it's just a small decrease.

Analyst

So buybacks were not that much used in this quarter. Like I was expecting more buybacks, but yes. Okay.

Anita Zhu
Anita Zhu
Investor Relations Director at Daqo New Energy

All right. So in terms of the share repurchase, right, I think after we announced the share repurchase program, our management team was also waiting to see when would be a good timing. I think if we assess it based on the cycle of the poly cycle this round, we were expecting if there's no structural reform or any sort of policies done to accelerate the balance of supply and demand than it might last 2 to 3 years, given that the players in this round are very strong in financials. And for instance, some of them have already raised a lot of capitals in the financial market and also some of them have other business lines to support the poly business. So if we let it rebalance, it might take a slightly longer time.

Anita Zhu
Anita Zhu
Investor Relations Director at Daqo New Energy

So we were waiting for the turning point of the energy to be more clear before we could buy more aggressively. I think that was the rationale behind it.

Analyst

Yes. It was as if the world was falling. I understand. Okay. I understand.

Analyst

But and the last question okay, this is the last question. Regulatory changes in China, they should help the most the polysilicon producers, which are the lowest average selling cost and the producers which are the most efficient, which Taco is 1. So or my question is, will it focus the regulatory changes? Will it help the large players the most and the ones which have the lowest average cost, which in turn means that they have the lowest average cost of energy for producing polysilicon, I guess? So that's the question.

Anita Zhu
Anita Zhu
Investor Relations Director at Daqo New Energy

I think it's the other way around. If you have the with the economy of scales and with more advanced technologies, right, I think the larger players have a smaller energy consumption, which is why they have a lower cost, it's the other way around. So I think the policy would not necessarily be helping the big guys to survive and force the smaller or the nuclear to exit the market, but rather they would want advanced capacity to remain in the market and the less advanced or I should say the ones that was cost higher in terms of energy consumption, silicon consumption, steam, etcetera might gradually phase out.

Analyst

Okay. Congratulations to the promotion to CEO. And please consider after January 15, because if the company does not capitalize on this difference, I think there's a possibility that this difference will just be raised by a fund or somebody else. So it's accretive also to the owners of the company, which are the investors, but also the Chairman, the CEOs, the directors, which own 29% of the company shares in New York. So it will be very accretive after January 15 for everyone, all investors.

Analyst

Thank you very much. Have a wonderful day.

Ming Yang
Ming Yang
Chief Financial Officer at Daqo New Energy

Thank you. Thank you. Thank

Operator

you. And the next question comes from Jiho Wu of CICC. Please go ahead CICC. You are live. Okay.

Operator

Well, the next question comes from Alan Lau with Jefferies.

Alan Lau
Alan Lau
Analyst at Jefferies

Thanks a lot for management for taking my questions. So we'd like to know the first question is, how much is the impairment embedded in the COGS and what is the breakdown of that in terms of finished goods and raw materials? Because I noticed that this might distort the gross margin by a lot.

Ming Yang
Ming Yang
Chief Financial Officer at Daqo New Energy

Okay. So in terms of the inventory impairment, look at the previous quarter, we took impairment charge of 108,000,000 and all the related inventories, including finished goods of those right now were sold in Q3. Okay. And then at the end of Q3, then we recorded about $80,000,000 of inventory write down. So the net inventory write down right now is about $80,000,000 and then we had roughly 20 $7,000,000 of reversal, okay, doing the quarter and that showed up in the cost of goods sold.

Ming Yang
Ming Yang
Chief Financial Officer at Daqo New Energy

Okay. Okay. Around 66% or 2 thirds is finished goods and about 1 third of that is in raw material.

Alan Lau
Alan Lau
Analyst at Jefferies

Thank you. Thank you. Like

Ming Yang
Ming Yang
Chief Financial Officer at Daqo New Energy

working boxes.

Alan Lau
Alan Lau
Analyst at Jefferies

So it's 66% of RMB80 1,000,000, right, are finished goods?

Ming Yang
Ming Yang
Chief Financial Officer at Daqo New Energy

Around 2 thirds, like 66%, yes.

Alan Lau
Alan Lau
Analyst at Jefferies

Understood. And my second question is basically on the average production cost. So there appears to be a rebound in the cost. So just to confirm that this is basically due to the lower utilization rates. So the unit depreciation went up, right?

Alan Lau
Alan Lau
Analyst at Jefferies

Is this the correct understanding of the rebounding production cost?

Ming Yang
Ming Yang
Chief Financial Officer at Daqo New Energy

Yes. That is the correct understanding. So of the $6.61 production cost, roughly $0.55 is related to the facility idle cost and majority of that is depreciation. Okay. So if you subtract that I think you get to like $6.06

Alan Lau
Alan Lau
Analyst at Jefferies

Understood. That's fair enough.

Ming Yang
Ming Yang
Chief Financial Officer at Daqo New Energy

And if you ignore the facility, idle facility cost, yes. Because if you look at our cash cost actually came down for the quarter.

Alan Lau
Alan Lau
Analyst at Jefferies

Yes, exactly. So we'd like to know because the company is guiding for a further lower utilization rate in 4Q in terms of the production volume. So we'd like to know if we can fairly expect that in 4Q the trend would be similar, meaning that cash costs will continue to be at similar level where average production costs might increase because of a further decline in utilization rates?

Ming Yang
Ming Yang
Chief Financial Officer at Daqo New Energy

Yes, that's correct. So we're actually expecting cash cost to go down because we're now using the most efficient part of our facility for production, right, so with the lowest cash costs, while unfortunately because of depreciation, yes, I think the total production costs will be higher. Because we're not appreciating the same amount of money over much less production.

Alan Lau
Alan Lau
Analyst at Jefferies

Understood. And in terms of the recent policy changes in China, which led to a very strong rally in the past 1 to 2 weeks, I would like to know from our perspective, have we seen any what do you see of the possibility of the energy control materializing? And at the same time, do you see high changes of price rebound into the next couple of quarters?

Anita Zhu
Anita Zhu
Investor Relations Director at Daqo New Energy

Okay. So thank you, Alan. So I think recently there are having a lot of conversations going on between the different entities and the industry associates, so CTIA has held a meeting last week and this week as well to discuss what the industry is looking like, what the corporate what are the utilization rates and what are needed from the corporate. So I think ideally or I should say it would come more in terms of a blend of, for instance, government enforced structural reform based on either energy consumption like you mentioned or based on a nameplate capacity times a certain percentage of utilization rates to cap the production volume. So we blend up the structural reform and also based on industry self discipline of players who have to also assess their own strategies, right.

Anita Zhu
Anita Zhu
Investor Relations Director at Daqo New Energy

So I think during the most recent meetings, there have been consensus reducing the utilization rate to around 50%, but because different companies have different conditions, for instance, some players might have a low inventory, So and a lower cost as well, right? So I think it will take longer time to materialize in terms of a reduction in supply. So what's the second question?

Alan Lau
Alan Lau
Analyst at Jefferies

Price.

Anita Zhu
Anita Zhu
Investor Relations Director at Daqo New Energy

Oh, in terms of the price, I think for the Q4, given how quickly or how much production would get reduced in the coming months, there could be a chance of price rebound before the end of the year. But really going to the next year, it's hard to forecast or it's hard to comment because we don't know exactly how it's going to look like from both the supply and demand side, right? Like as a quick example, so usually historically in the Q4, demand has been strong for new solar installations, but this Q4, it's really slightly or relatively weak demand as we see it right now. So per month, the poly demand is only around 100,000 metric tons. So I think it will be a more dynamic moving trend.

Alan Lau
Alan Lau
Analyst at Jefferies

Understood. So I think when it comes to the production cut, because a lot of discussion is around the energy consumption. So we'd like to know if you might share what is the per unit energy consumption for the different plants for now?

Anita Zhu
Anita Zhu
Investor Relations Director at Daqo New Energy

For our plants?

Alan Lau
Alan Lau
Analyst at Jefferies

Yes.

Ming Yang
Ming Yang
Chief Financial Officer at Daqo New Energy

Okay. Right now for Xinjiang, this is roughly 55. And then for Inner Mongolia, it's in the range of 50, I would say low 50s to mid 50s.

Alan Lau
Alan Lau
Analyst at Jefferies

Understood.

Ming Yang
Ming Yang
Chief Financial Officer at Daqo New Energy

Per

Ming Yang
Ming Yang
Chief Financial Officer at Daqo New Energy

kilogram.

Alan Lau
Alan Lau
Analyst at Jefferies

So from this perspective, the market rumor of cutting off at power consumption of 50 seems not very likely, right? Otherwise, that would mean only probably 1, 2 companies continues to operate.

Ming Yang
Ming Yang
Chief Financial Officer at Daqo New Energy

I think and then that also depends on how it's measured, right? Because right now, how it's been there's no standardized way of measuring it. So the way we measure ours is actually the power usage by the entire facility, including the front end of the growth of the silicon, the back end, even the water and our own generation of hydrogen, we produce our own TCS and things like that. So it's the whole facility concept. The total use of energy in the whole facility divided by total production.

Ming Yang
Ming Yang
Chief Financial Officer at Daqo New Energy

Okay. I think not all companies do this. Some companies only measure the poly production part without including the facilities. And so, yes, so I think there has to be first a standardized way of measurement first.

Alan Lau
Alan Lau
Analyst at Jefferies

Which probably would take time and it's not easy to align the standard.

Ming Yang
Ming Yang
Chief Financial Officer at Daqo New Energy

Well, I think what's being discussed is some independent third party auditor would actually be hired and standardized this first. This is being discussed right now.

Alan Lau
Alan Lau
Analyst at Jefferies

I see.

Alan Lau
Alan Lau
Analyst at Jefferies

I see.

Alan Lau
Alan Lau
Analyst at Jefferies

Very clear.

Alan Lau
Alan Lau
Analyst at Jefferies

I'll pass on. Thanks a lot for the answer and also the improvement in the results as well.

Ming Yang
Ming Yang
Chief Financial Officer at Daqo New Energy

Great, great. Thank you.

Anita Zhu
Anita Zhu
Investor Relations Director at Daqo New Energy

Yes.

Alan Lau
Alan Lau
Analyst at Jefferies

Thank you.

Operator

Thank you. And the next question comes from Sarah Lee. Please go ahead, Ms. Lee. Your line is live.

Operator

All right. Well, at this time, this does conclude the question and answer session. So I would like to return the floor to Ms. Xu for any closing comments.

Anita Zhu
Anita Zhu
Investor Relations Director at Daqo New Energy

Thank you, everyone, again for participating in today's conference call. Should you have any further questions, please don't hesitate to contact us. Thank you, and have an awesome day. Goodbye.

Operator

Thank you. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines.

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Executives
    • Anita Zhu
      Anita Zhu
      Investor Relations Director
    • Ming Yang
      Ming Yang
      Chief Financial Officer
Analysts
    • Philip Shen
      Managing Director, Senior Research Analyst at Roth Capital Partners, LLC
    • Analyst
    • Alan Lau
      Analyst at Jefferies
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Earnings Conference Call
Daqo New Energy Q3 2024
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