Good day, and welcome to the Daqo New Energy Q3 2021 results conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touch-tone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Kevin He. Please go ahead.
Hello, everyone. I'm Kevin He, the investor relations of Daqo New Energy. Thank you for joining our conference call today. Daqo New Energy just issued its financial results for the third quarter of 2021, which can be found on our website at www.dqsolar.com. To facilitate today's conference call, we have also prepared a PPT presentation for your reference. Today attending the conference call, we have Mr. Longgen Zhang, our Chief Executive Officer, and Mr. Ming Yang, our Chief Financial Officer. The call today will feature an update from Mr. Zhang on market and operations, and then Mr. Yang will discuss the company's financial performance for the quarter. After that, we will open the floor to Q&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 US Private Securities Litigation Reform Act of 1995. 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.
All information provided in today's conference call is also as of today, and we undertake no duty to update such information except as required under applicable law. Also, during the call, we will occasionally reference monetary amounts in US dollar terms. Please keep in mind that our functional currency is the Chinese RMB. We offer these translations into US dollars solely for the convenience of the audience. Without further ado, I now turn the call over to our CEO, Mr. Zhang. Please go ahead.
Thank you, Kevin. Hello, everyone. Thank you for joining our conference call today. We are very excited to report an excellent quarter with a record high production volume and net profit in the company's history. The strong end-market environment, supported by favorable global policies to address climate change and a rapidly increasing use of green energy, resulted in strong and expected downstream demand that continues to push polysilicon market prices. Our third quarter polysilicon ASP was $27.55/kg, a significant sequential improvement of more than 30% from $20.81/kg in the second quarter. The end-market demand continues to be strong, even under today's high-price module environment, and this has further raised the polysilicon market prices to the current level of $33-$35/kg.
Our production cost increased 8.4% quarter-over-quarter, primarily due to the increase in silicon powder's cost. Excluding this impact, our production cost actually decreased by approximately 1% quarter-over-quarter. The increasing silicon powder cost will continue to impact our cost structure in the fourth quarter. However, with the strong market demand, so far, we have been able to transfer the majority of such cost increase to our customers. Over the past three weeks, we have seen silicon powder prices stabilizing, and we expect they will gradually normalize in the first half of next year as the energy and emission controls could be somewhat relaxed compared to the fourth quarter of this year, and new supply of silicon powder will start to enter the market.
During the first three quarters of 2021, we generated $653 million in cash flow from operations. We repaid all our banking loans in the third quarter and reduced our debt-to-asset ratio to 18.2%. At the end of third quarter, we had $661 million in cash and cash equivalents, $440 million in short-term investments, which are lower-risk financial products, and $353.3 million in bank notes receivables, which will mature in the next three to six months. This total liquidity of $1.4 billion is a strong foundation to support our expansion projects and further plans to reward our investors. The construction of our phase IV B capacity expansion project is going smoothly according to schedule.
We expect it to complete the construction by the end of 2021, and ramp up the full capacity by the end of the first quarter of 2022. In the third and fourth quarters of this year, we have observed some volatility in the global energy market. Prices of almost all energy resources are going up quickly and significantly, including the prices of natural gas, oil, and coal. In many regions in China, many companies are required to shut down production from time to time due to the shortage of electricity supply and carbon emissions control. Fortunately, the Chinese government quickly responded to the challenging situation by accelerating coal production and allowing electricity prices for industrial users to float according to the market, resulting in rising electricity prices. We expect these measures will further stimulate the solar end market for electricity generation in the near term.
With solar already at grid parity globally, higher fossil fuels make solar projects more competitive. In addition, according to the newly released policies, the usage of renewable energy will not be counted towards the energy quota, which will further promote renewable energy in the future. This also explains why the demand from industrial users for solar distributed generation is strong even in the current high-price module environment. On the other hand, because of the strong energy quota and the carbon emission control, the overall expansion pace of the polysilicon industry will inevitably slow down. For example, as we are now in the process of identifying the location for the next expansion project, the energy quota issues become more and more challenging.
We will be committed to using more renewable energy in our new polysilicon project in order to secure the energy quota, which will allow us to gradually realize the idea of green poly and solar for solar or solar for solar. This October, at the United Nations Biodiversity Conference in Kunming, Chinese President Xi Jinping announced that the first step had been taken towards the construction of a huge 400 gigawatts wind and solar park. Construction on the phase I , comprising 100 gigawatts of wind and solar in deserts in China, is already underway. 400 gigawatts projects would be half finished by 2025. The Chinese government has already also released policies to promote energy storage systems, especially for storage systems, especially for water reservoir storage in the new term.
With all these plans and the policies in place, it's very clear that China has made a strong determination, supported by initial and detailed plans to build a new national energy infrastructure, in which renewable energy will play a critical role. The newly announced policies and evolving energy market environment, and illustrate a vast potential market for solar in China, which is much higher or much larger than previously anticipated. Therefore, we are very optimistic about solar PV's demand in the future, and expect the polysilicon sector will continue to be one of the most favorable sectors in the foreseeable future, as polysilicon availability will remain as the main constraint and determinant for the future size of solar in the market. Let's move to outlook and guidance.
The company produced 62,970 metric tons of polysilicon and sold approximately 63,714 metric tons of polysilicon in the first three quarters of 2021, representing 44% utilization level of the company's production facilities. For the full year of 2021, the company's guidance and annual polysilicon production volume is at the level of approximately 83,000-85,000 metric tons, inclusive of impact of company's annual facility maintenance. Now let's move to our financial. Our CFO, Ming Yang, explain the financial results.
Thank you, Longgen Zhang, and good day, everyone. Thank you for joining our earnings conference call today. This is Ming Yang, I'm the CFO of the company. We are very pleased to report an excellent financial performance for the third quarter of 2021. We had record high revenues of CNY 585.8 million, an increase of 33% sequentially as compared to CNY 441.4 million in the second quarter of 2021, and an increase of 366% year-over-year as compared to CNY 125.5 million in the third quarter of 2020. The increase in revenue as compared to the second quarter of 2021 as well as the third quarter of 2020 was primarily due to higher polysilicon average selling prices and higher polysilicon sales volume.
During the third quarter, market conditions for solar remained robust, with strong demand for mono-grade polysilicon that far exceeded supply. Our third quarter polysilicon ASP was $27.55 per kilogram, an increase of 32% sequentially as compared to ASP of $20.81 per kilogram in the second quarter. Gross profit was CNY 435.2 million, compared to CNY 303.2 million in the second quarter of 2021, and CNY 45.3 million in the third quarter of 2020. Gross margin was 74.3% compared to 68.7% in the second quarter of 2021, and 36% in the third quarter of 2020. The increase in gross margin was primarily due to higher average selling prices, offset by slightly higher production costs.
As Longgen Zhang indicated, higher production costs during Q3 were the result of higher market price for silicon raw material. Selling, general, and administrative expenses were $11.4 million, compared to $9.3 million in the second quarter of 2021, and $9.2 million in the third quarter of 2020. SG&A expenses during the quarter included $2 million in non-cash share-based compensation costs related to the company's share incentive plan, compared to $2 million in the second quarter of 2021, and $4 million in the third quarter of 2020. The increase as compared to the second quarter of 2021 as well as the third quarter of 2020 was primarily due to expenses related to the IPO of our Xinjiang Daqo subsidiary on China's A-share market.
R&D expenses were CNY 1.9 million, compared to CNY 2.1 million in the second quarter of 2021, and CNY 1.7 million in the third quarter of 2020. R&D expenses can vary from period to period and reflect R&D activities that take place during the quarter. As a result of the foregoing, income from operations was CNY 421.7 million, compared to CNY 292.4 million in the second quarter of 2021, and CNY 33.3 million in the third quarter of 2020. Operating margin was 72%, compared to 66.3% in the second quarter of 2021, and 26.6% in the third quarter of 2020.
Interest expense was CNY 6.4 million, compared to CNY 7.2 million in the second quarter of 2021, and CNY 5.4 million in the third quarter of 2020. Net income was CNY 355.8 million, compared to CNY 242.9 million in the second quarter of 2021, and CNY 21.9 million in the third quarter of 2020. Adjusted for minority interest, net income attributable to Daqo New Energy Corp. shareholders was CNY 292.3 million, compared to CNY 232.1 million in the second quarter of 2021, and CNY 20.8 million in the third quarter of 2020. Earnings per basic ADS was $3.95, compared to $3.15 in the second quarter of 2021, and $0.29 in the third quarter of 2020.
EBITDA was CNY 441.8 million, compared to CNY 311.7 million in the second quarter of 2021, and CNY 51.6 million in the third quarter of 2020. EBITDA margin was 75.4% compared to 70.6% in the second quarter of 2021, and 41.1% in the third quarter of 2020. Now on the company's balance sheet and financial conditions. As disclosed previously, the company successfully completed the IPO listing of its Xinjiang Daqo subsidiary on China's A-share market in July 2021. Net proceeds of the IPO minus listing-related expenses are approximately CNY 6.1 million or approximately $935 million, which will fund Xinjiang Daqo's polysilicon expansion project and provide additional capital for the company's future growth plans.
Following Xinjiang Daqo's IPO, Daqo New Energy in aggregate holds approximately 80.7% of the A-share-listed subsidiary. As of September 30, 2021, the company had CNY 660.9 million in cash and cash equivalents and restricted cash, compared to CNY 269.7 million as of June 30, 2021, and CNY 109.8 million as of September 30, 2020. To better utilize the company's cash balance with improved capital efficiency, the company purchased short-term investments during the quarter, which are primarily principal-protected short-term interest-bearing bank deposits with 3-month and 6-month maturity duration. These term deposits have higher interest rate than the regular bank deposit accounts.
As such, at the end of the quarter, the company had CNY 414.2 million in short-term investments, compared to CNY 10.4 million as of June 30, 2021. As of September 30, 2021, bank notes receivable balance was CNY 353.3 million, compared to CNY 97 million as of June 30, 2021, and CNY 1.9 million as of September 30, 2020. Inclusive of our cash and cash equivalents, short-term investments and bank notes receivable balance, the company has total liquidity of approximately CNY 1.43 billion as of September 30, 2021. With our strong cash balance, we also took the opportunity to repay all of our bank borrowings at the end of the quarter.
As of September 30, 2021, we had no bank borrowings compared to total borrowings of $156.6 million as of June 30, 2021, and total borrowings of $271 million as of September 30, 2020. For the nine months ended September 30, 2021, with our strong earnings, operating cash flow and cash balance, we repaid approximately $195 million of bank borrowings. With our total capital liquidity of $1.43 billion and no interest-bearing bank loans, we now have what we believe to be one of the best balance sheets in the industry. Combined with the ability to access the attractive A-share capital markets in China, we're very well-positioned competitively for our company's future growth and expansion plans.
For the nine months ended September 30, 2021, net cash provided by operating activities was CNY 653 million, compared to CNY 71 million in the same period of 2020. The increase was primarily due to higher ASPs and higher polysilicon sales volume, as well as prepayments of long-term contracts from customers. For the nine months ended September 30, 2021, net cash used in investing activities was CNY 855 million, compared to CNY 80.3 million in the same period of 2020. The net cash used in investing activities in 2021 and 2020 was primarily related to the capital expenditures on the company's polysilicon expansion projects. Purchase of property, plant, and equipment and land totaled approximately CNY 444 million in the first nine months of the year, primarily related to our phase IV B polysilicon expansion project.
The remaining balance was primarily related to the company's purchase of short-term investments. For the nine months ended September 30, 2021, net cash provided by financing activities was CNY 741.6 million, compared to CNY 1.1 million in the same period of 2020. The net cash provided by financing activities in 2021 was primarily related to the net proceeds of CNY 935 million contributed by Xinjiang Daqo's IPO in China, offset by net repayments of bank borrowings. That concludes our prepared remarks. Operator, now we would like to open the call for questions from the audience.
Thank you. We will now begin the question-and-answer session. If you would like to ask a question, press star then one to join the queue. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Philip Shen with ROTH Capital Partners. Please go ahead.
Hi, everybody. Thank you for taking my questions. I'd like to ask about your outlook for polysilicon prices. You know, with the silicon metal pricing going up so high, you know, we've seen, as Longgen, you mentioned in your prepared remarks, pricing as high as $35 per kilogram. How do you expect the poly pricing to trend in Q1 and in Q2 and for the balance of 2022?
I think the voice maybe is not clear. Okay. I think a little broken. We see right now the market price has continued to go up. The reason is because I think a high-efficiency module price also continue can be accepted by the market. In the fourth quarter, even though the silicon powder cost increased, dramatically increased, even more than 100%, the selling price also go up. Today, current selling price is around $35-$36 per kg. For the, you know, the price for the future, we think based on our historical research, we expect to see approximately, I think, around 180-220 per thousand metric tons.
Two per 1,000 metric tons of additional polysilicon supply, in which it can be used to, you know, produce, I think, approximately 250 GW of solar module. We say, you know, just based on our research, I think for next year, additional metric tons, only 180-220 metric tons available. We believe they will be very strong support to poly price, given solar has already reached grid parity and high price module has already been accepted by the market, which means we expect to see higher than expected module price in 2022.
Since the poly will still be the sector in shortest supply, we believe poly will continue to generate very healthy profit. Basically, you know, if the metallurgical-grade silicon price remains today's ASP, we think the polysilicon price will remain at around $30-$36 per kg for the first half of next year, and around $30 maybe for the second half of next year.
Thank you, Longgen.
Philip.
That's very clear. Yeah, really appreciate it. Can you hear me okay?
You break up a little bit, but I think so far it's fine.
Okay. All right. My team on my side says it's clear, so maybe it's the long distance call. Okay.
Okay.
Thank you for that, Longgen Zhang. Let's move on to the capacity expansion plan. With the strong pricing, I can imagine you're more encouraged to pursue your capacity expansion. I think on the last call, you talked about 180,000 metric tons by year-end 2023 and 270,000 metric tons by year-end 2024. Would you have any plans to accelerate that? What's the latest update on your capacity expansion plans? Thanks.
Okay. Basically, Philip, you know, the phase IV B, we are now under construction. The main phase is 35,000 tons. We will starting trial production by the end of the year. By the end of the first quarter of next year, we'll reach, you know, the, I think, the capacity. If we reach, because that project actually output is maybe around 50,000 tons. Total next year, maybe we're thinking around, you know, 120,000-130,000 tons. We will giving guidance next year. For the further continue, you know, the capacity increase, basically, you know, for example, like phase IV B, the CapEx, expanding CapEx is from the proceeds of Chinese IPO.
We think, you know, in the future, the Chinese, because of the high valuation for the company, Xinjiang, the company in Asia, we will continue through all the capital market to raise more money and to support, you know, the future expansion. Yes, we are looking for the next phase, you know, other places, I think maybe around the 1,000 tons projects. I think, you know, if finalized, we will announce that. Basically, yes, we are looking for future CapEx. The money will come from the capital market.
Okay, great. Thanks. As it relates to your cost structure, I know pricing's gone up significantly, but your cost structure is also going up a little bit with the silicon powder increase. We saw a bit of an increase of your cash costs in Q3 versus Q2. As we go through next year, how do you expect that to trend as well? Thanks.
Okay. At least as of now, the cost structure for Q4 is a bit difficult to determine. We are currently looking at silicon powder pricing of roughly in the range of $8-$10 per kilogram. This is up from approximately $2.50-$3 per kilogram in the previous quarter. It really depends on how the pricing trends, but so far what we are seeing is the pricing trend has stabilized for silicon powder. In fact, for certain grades the price has declined, and some of it has declined more meaningfully. We do believe that over the next two months or so, the silicon powder pricing should be stable to down.
With next year, I would say as the power shortage in China should abate a bit, which should allow more silicon metal production and to ramp up. You look at what's really happening the second half especially, I think since September, the shortage of power and the lack of power that's really led to a forced production shutdown of some silicon metal producers, especially in the Yunnan Province. There's no shortage of silicon metal production capacity, but the ability for the producer to produce it is diminished. We believe the situation should improve in the first half of next year. We do look for pricing, silicon metal pricing to go down as a result.
Philip, I just add a comment. You know, for the fourth quarter, we think, you know, the silicon powder price will go up, but we think, almost, we can transfer the increased part, you know, almost 100% transfer to the selling price.
Yes.
We can maybe continue keep the gross profit, you know, remain the same as fourth quarter, remain same as the third quarter. That's our, you know, planning. For next year, as Ming mentioned, you know, because the capacity almost increased more than 50%, even though the selling price, we think, will be a little slowed down as the silicon powder also go down. But the supply is still very tight. Really it's difficult to, you know, forecast, you know, finally, you know, how much money, cash flow we can make it. But our planning is to keep, you know, at least, you know, 20%-25% increase based on this year.
Great. Thank you very much. I'll pass it on.
Great. Thanks, Phil.
The next question comes from Gary Zhou with Credit Suisse. Please go ahead.
Yeah. Hello, management. Thank you for taking my questions and, congrats again on the very strong results. Three quick questions from me. Firstly, I want to ask, do you see any kind of a risk for your company's production or your peers' kind of production into, let's say, November or December due to China's kind of energy control policy and the power shortage issues? Secondly, based on my calculation, I think the current kind of polysilicon ASP hike actually more than kind of cover the silicon metal cost hikes. Basically there's even a little bit of kind of margin expansion.
Just wondering, into November, December, do you see room that the polysilicon price can ease or come down a little bit, to let's say, to help the downstream demand? Lastly, I think you mentioned earlier, so basically, we were talking about possible dividends in the next annual results. Just and then now we have seen very kind of strong results, earnings and cash flows. Just wondering if there's any guidance for the kind of a dividends payout ratio or kind of a absolute dividend amount. Thank you.
Gary, first of all, I think thank you very much. The first question about, you know, the I think energy power control, emission control, you know, affected a lot of provinces in China. I think six provinces because of, you know, two red lines and put a very strict, I think, policy on the energy supply side. Because the production site is in Xinjiang Shihezi. So, use local energy grids. At the beginning, I think, like, you know, September, yes, we got some government calls and also remind maybe, you know, the need to cut the energy supply.
Later because I think, you know, we are one of the, I think, important company, I think, producer in local city. Also we are growing energy, you know, I think to the upstream solar industry. The governments understand. In a word, so far we didn't feel, you know, any energy cutting. Also the governments guarantee us, you know, the further no cutting energy supply and to guarantee us to continue to full capacity running. That's why we're giving guidance on the fourth quarter. We don't think, you know, that will affect our current production. Second question about the, I think, you know, the ASP, our products and also silicon powder price continue go up.
You know, we sign long-term contracts with one of the, you know, the silicon powder supply. We think, you know, majority of time, the supply is compliance with the contract supply the powder. That's why you see our third quarter, our silicon powder price actually is lower than market. For the fourth quarter, because of the new year beginning, you know, right now the cost of silicon is more close to the market. For October, I think, our silicon powder may be around RMB 80-85, you know, RMB per kg. For November, we see the price is stable, so we try to control under 80. That's what we try, okay? I think December definitely will be under 75.
Overall, I think silicon cost, powder costs that we're accountable for the fourth quarter, I right now kind of estimate it maybe around RMB 70-RMB 75 per kg. Plus other cash cost, so our fourth quarter cash costs will go up maybe around I give a little bigger range, around RMB 90-RMB 105 per kg. But I think at least right now our selling module price October is I think around I think average is above RMB 265 per kg, average selling price. The November we see the price continue go up, maybe RMB 3-RMB 5 per kg continue up. That's why we think, you know, we can transfer the polysilicon price increase part to the selling price.
We try, the gross margin maybe will go down compared the third quarter, but as a gross profit, we try to keep, you know, remaining the same. Okay? I think that's the answer to your second question. For the third question, I think about the dividends. The dividends, because you know, we basically Xinjiang Daqo is right now listed in China A-share company, so we need to follow their law or rules. Basically I think, after the annual reports come out, I think right now, the A-share company, the general rule is minimum 30% we have to declare dividends. Our percentage is not sure because, you know, a certain time the government, you see, the board will approve that. We will announce that. Basically, you know, that's your third question answer.
Okay. Yeah. This is very helpful. Thank you. I'll pass on. Thanks.
The next question comes from Dennis Ip with Daiwa. Please go ahead.
Okay, congratulations for a very strong result. Basically most of the answers, questions have already been well answered. I would like to know more like the long-term capacity growth. We have a plan to achieve 250,000 tons by 2024. Do we have more like a concrete, you know, plan, timeline or, you know, when are we going to be able to have more details in terms of the site selections and also the timetable, given that our competitors are also aggressively adding capacity, you know, in 2022 and 2023 as well?
Okay, just to be clear, so you're talking about our long-term capacity expansion plans, right?
Yes. After phase IV B. Yeah.
Okay. Right now these plans are quite preliminary and we will make a further announcement when they become more concrete, when we have more details. It is very preliminary. Beyond phase IV B, we do plan to continue to expand our capacity. As you can see, we have a very strong balance sheet to support that, and also the ability to access the A-share market with a very attractive valuation. We do expect to reach our plan of 270,000 metric tons by the end of 2024. This will represent approximately 50% average annual growth rate. We are in the process of negotiating with various different localities for our next expansion project, including in Inner Mongolia as an example.
Right now, getting the energy quota, it is a big challenge and we are looking to source green energy to produce polysilicon in the future. That one is, it would allow us to secure the energy quota. As you know, the coal quotas has now been pretty much over-allocated. Also this would also give us the ability to produce poly to do what's called green poly, right? Poly with green energy. We are seeing that getting the energy quota is a challenge in China, and this will very much likely slow down the overall pace of expansion in the polysilicon sector going forward, as many of our competitors with new projects will find it challenging to secure the energy quota. We will disclose more details upon finalizing the plan for our next project. Okay. Thank you.
Okay. Thank you.
Again, if you would like to ask a question, press star then one to join the queue. The next question comes from Alan Lau with Jefferies. Please go ahead.
Thanks a lot, and congratulations to the management and for the performance of the results. I would like to know, first of all, what is your view on granular silicon, meaning FBR, as one of your competitors are having aggressive plans ahead?
I think, Ming maybe answer this question.
Okay, about the FBR or granular poly, based on our understanding of the current market situation, including some of the production and quality data that the existing granular producers have provided, we do see that the quality and purity levels of granular poly compared to particularly Daqo's mono-grade poly, chunk poly. We do see that there are material differences in quality, okay, and purity. On the application level, okay, the different downstream manufacturers do have different perspectives on this. But basically overall the feedback that we have received is that there is a material quality difference of granular compared to chunk poly. Most producers, if they are using, are only using it as a mix, as part of the mix right now.
Understood. My last question. Thanks a lot, Ming. My last question is about the power tariff. To my understanding, one of the key moat of the company is the low power cost in Xinjiang. I would like to know, just like, just to reconfirm, the phase IV B will get the same Xinjiang low tariff for the next 10 years along with phase IV A. Is that correct?
Now, basically, I think we signed with the local governments and also. Actually, that's the power supply company, okay? And also the city distribution developing zone authority and also the city. The contract is including the phase IV A and the phase IV B. That mean the nameplate is 70,000 metric ton. I think the price was fixed, I think, you know, 15 years. Basically it should be the same.
Thanks a lot.
Great. Thank you, Alan.
This concludes our question and answer session. I'll now turn the conference back over to Kevin for any closing remarks.
Thank you to everyone. Thank you for participating in today's conference call. If you have any further questions, please don't hesitate to write us email to make a phone call. Yeah. Thank you, everyone.