Executive Summary / Key Takeaways

• Daqo New Energy Corp. (DQ), a leading high-purity polysilicon manufacturer, is demonstrating strategic resilience amidst a challenging market characterized by severe industry overcapacity and polysilicon prices consistently below cash cost levels.
• The company maintains an exceptionally strong balance sheet with no financial debt and approximately $2.06 billion in quick assets as of June 30, 2025, providing ample liquidity to weather the prolonged downturn.
• DQ is proactively managing market dynamics through strategic production curtailments, a relentless focus on N-type technology enhancement, and continuous cost optimization, which has driven cash costs down to $5.12 per kilogram in Q2 2025.
• Chinese government "anti-involution" initiatives and industry self-discipline measures are emerging as potential catalysts for market rebalancing and price recovery, with polysilicon futures prices already surging in July 2025.
• A recently authorized $100 million share repurchase program underscores management's optimism about the industry's future and its commitment to enhancing shareholder value, with consideration for A-share sales to fund U.S. ADR buybacks.

The Polysilicon Powerhouse in a Cyclical Trough

Daqo New Energy Corp., founded in 2006 and evolving into a premier manufacturer of high-purity polysilicon, stands as a critical upstream supplier for the global solar photovoltaic (PV) industry. Its products are fundamental to the production of ingots, wafers, cells, and modules that power solar solutions worldwide. The company's journey has been marked by significant capacity expansion, notably tripling its annual production capacity to approximately 300,000 metric tons by the end of 2024. This growth, however, has coincided with a period of unprecedented overcapacity across the solar PV value chain, leading to intense price wars and market prices frequently dipping below production cash costs.

In response to these challenging conditions, Daqo has strategically curtailed its polysilicon production, operating at a reduced utilization rate of approximately 30-35% in recent quarters. This proactive measure aims to mitigate cash burn and align supply with a demand environment grappling with high inventory levels. Despite the industry headwinds, Daqo's foundational strength lies in its advanced manufacturing capabilities and a strategic pivot towards higher-efficiency N-type polysilicon, which is crucial for next-generation solar cells.

Technological Edge and Innovation Roadmap

Daqo New Energy's core technological differentiation is rooted in its refined modified Siemens process. This established method has consistently delivered proven cost efficiency, scalability, and high-quality polysilicon, meeting stringent customer specifications. The company's commitment to technological advancement is evident in its rapid transition to N-type polysilicon. The N-type product mix significantly increased from approximately 40% of total production in 2023 to 70% in 2024. Its Phase 5B facility, which commenced initial production in May 2024 and is currently ramping up, already boasts a 70% N-type product mix, reinforcing the company's confidence in achieving 100% N-type production by the end of 2025. This focus on N-type technology provides tangible benefits, enabling the production of higher-efficiency solar cells that command better pricing and meet evolving market demands for superior performance.

Beyond its core process, Daqo is actively exploring future technological frontiers. The company established a research center in Inner Mongolia in the fourth quarter of 2024 to evaluate innovations and emerging technologies, including Fluidized Bed Reactor (FBR) technology. FBR offers potential advantages such as lower energy consumption and reduced costs, which could facilitate easier carbon footprint certifications. However, Daqo acknowledges FBR's inherent risks, including purity challenges that currently prevent its 100% use in downstream production, hydrogen displacement and retention issues leading to potential defects, and process instability from reactor clogging or uneven silicon deposition. While there are no concrete plans for immediate FBR adoption, Daqo's R&D initiatives demonstrate a forward-looking approach to assess long-term viability and maintain a competitive edge, ensuring the company remains at the forefront of polysilicon innovation. For investors, this technological roadmap signifies Daqo’s commitment to sustaining its cost leadership and product quality, which are vital for long-term profitability and market positioning.

Competitive Dynamics and Strategic Positioning

Daqo New Energy operates within a fiercely competitive polysilicon market, characterized by a fragmented landscape and intense price competition. The company positions itself as one of the world's lowest-cost producers with the highest quality N-type products, a critical differentiator in a commoditized environment. This cost leadership is a significant competitive moat, translating into potentially superior margins and market share gains, particularly against rivals with less efficient operations.

Comparing Daqo to key competitors reveals distinct strengths and weaknesses. Against Wacker Chemie AG (WCH), a global chemical company with a strong polysilicon presence, Daqo leads in manufacturing scale and cost efficiency, particularly in emerging markets. Wacker, however, often holds an edge in technological sophistication and benefits from a diversified portfolio. Similarly, when contrasted with REC Silicon ASA (RECSI), another polysilicon producer, Daqo's larger production scale and cost leadership provide broader market accessibility and potentially faster supply chain responses. REC Silicon may differentiate itself through specialized silicon technologies for niche applications. Lastly, against JinkoSolar Holding Co., Ltd. (JKS), a vertically integrated solar panel manufacturer that also sources polysilicon, Daqo's focus on raw material efficiency can lead to significantly lower operating costs for upstream production. JinkoSolar, in turn, excels in end-to-end innovation and finished product market positioning.

Daqo's competitive advantages are further bolstered by high barriers to entry in the polysilicon industry, including substantial capital requirements, advanced technological expertise, and complex regulatory hurdles. These factors favor established players like Daqo, leveraging its existing scale and operational excellence. However, vulnerabilities persist, notably a dependency on Chinese supply chains, which could expose the company to cost increases during disruptions. The ongoing industry overcapacity, exacerbated by well-financed competitors like Tongwei (600438.SS), which recently announced a 10 billion RMB fundraising, suggests that market rebalancing may be prolonged without significant structural reforms. Daqo's strategic response involves leveraging its strong balance sheet and operational efficiency to outlast less competitive players, while actively participating in industry-wide self-discipline measures to foster a healthier market environment.

Financial Performance and Operational Resilience

The current market environment has significantly impacted Daqo New Energy's financial performance, leading to a period of operating and net losses. In the second quarter of 2025, the company reported revenues of $75.2 million, a notable decrease from $123.9 million in the first quarter of 2025 and $219.9 million in the same quarter of 2024. This revenue decline was primarily driven by a decrease in sales volume, as Daqo proactively scaled back new sales orders in anticipation of future price recovery. The gross loss for Q2 2025 stood at $81.4 million, resulting in a negative gross margin of 108%, largely due to decreased sales volume against relatively fixed idle facility costs. The operating loss for the quarter was $115 million, with a negative operating margin of 153%, culminating in a net loss attributable to shareholders of $76.5 million.

Despite these losses, Daqo has demonstrated strong operational resilience and cost management. The company's cash cost decreased by 4% sequentially to $5.12 per kilogram in Q2 2025, driven by a decline in silicon metal costs and reduced energy consumption. This figure includes approximately $0.18 per kilogram related to idle facility maintenance, reflecting the impact of operating at a reduced utilization rate. The overall polysilicon unit production cost also decreased by 4% sequentially to an average of $7.26 per kilogram in Q2 2025. Management anticipates a continued improvement in cost trends for Q3 2025, with current cash costs estimated around $5 per kilogram. The company expects to generate a positive cash margin from sales in Q3 2025, even if GAAP gross margins remain negative due to non-cash depreciation from idle facilities.

Daqo's financial strength remains a cornerstone of its investment thesis. As of June 30, 2025, the company boasted a robust balance sheet with no financial debt and approximately $2.06 billion in total financial bank deposits and investment assets readily convertible into cash. This ample liquidity provides critical strategic resilience to navigate the prolonged market downturn.

While net cash used in operating activities for the first six months of 2025 was $105.4 million, and net cash used in investing activities was $342.7 million (including $87.8 million in property, plant, and equipment purchases and $255 million in short-term investments), the company's substantial cash reserves underscore its ability to sustain operations and strategic investments.

Strategic Outlook and Catalysts for Recovery

Daqo New Energy's outlook is cautiously optimistic, underpinned by a confluence of internal strategic initiatives and external market forces. For the third quarter of 2025, the company expects polysilicon production volume to be approximately 27,000 to 30,000 metric tons. The full-year 2025 production volume is anticipated to be in the range of 110,000 to 130,000 metric tons, reflecting a continued strategy of maintaining low utilization rates until a clear market turning point emerges.

A significant catalyst for potential market rebalancing stems from intensified efforts by Chinese authorities to address "irrational competition" and "energy overcapacity" in the solar PV sector. These "anti-involution" initiatives include calls for curbing below-cost selling, promoting high-quality development, and phasing out outdated capacity. Key policy developments include a People's Daily article on June 29, 2025, President Xi Jinping's emphasis on regulating disorderly low-price competition on June 1, 2025, and a draft amendment to the price law on July 24, 2025, strengthening accountability for unfair pricing practices. A symposium held on August 19, 2025, involving multiple government bodies and industry players, reinforced these objectives and discussed the formation of a "buyout SPV" to acquire outdated capacity, potentially setting a precedent for other industries.

These policy signals have already had a tangible impact on market sentiment. Polysilicon sales prices rebounded in July 2025, with futures prices surging significantly. The 2,500 six-nine contract, for instance, rose sharply from a low of RMB30 per kilogram in June 2025 to a record high of RMB55 per kilogram in July 2025, the strongest level since 2020. Management believes the industry will be required to sell above average production costs, estimated to be in the mid-RMB40s per kilogram, supported by these new government policies.

On the demand side, China experienced a record-breaking 93 gigawatts of new solar power capacity added in May 2025, although installations plummeted to 14 gigawatts in June following front-loading ahead of a May 31, 2025, policy cutoff. Despite this short-term volatility, full-year 2025 China demand is still expected to be robust, in the range of 250 to 300 gigawatts. Long-term global solar PV prospects remain strong, driven by the global energy transition and sustainable development goals. Daqo's participation in the polysilicon futures market also offers opportunities for hedging and arbitrage.

Further demonstrating confidence, Daqo's board approved a $100 million share repurchase program, effective August 26, 2025, through December 31, 2026. This program reflects management's optimism about an impending industry turning point and its commitment to strengthening shareholder confidence. The company is also actively considering selling A-shares to fund buybacks of its U.S. ADRs to address the significant valuation gap between the two listings.

Risks and Challenges

While the outlook shows signs of improvement, several risks and challenges could impact Daqo New Energy's investment thesis. The primary risk remains the prolonged industry overcapacity, exacerbated by the financial strength of some competitors who can sustain losses for extended periods. The timing and effectiveness of government anti-involution policies and the proposed "buyout SPV" are uncertain, and delays could prolong the market downturn. There is also demand volatility, particularly in China, following the front-loading of installations and uncertainties surrounding new market-based electricity tariff policies.

Geopolitical tensions between the U.S. and China, including the potential for "trade war 2.0" and the risk of ADR delisting, pose significant external threats. Daqo acknowledges these concerns, though it views ADR delisting as a "relatively low probability," while actively evaluating strategic options like a Hong Kong listing to protect shareholder interests in extreme scenarios. Furthermore, technological risks associated with emerging technologies like FBR, particularly regarding purity challenges and process instability, could impact future competitive positioning if not adequately addressed. The lack of a standardized method for measuring energy consumption across the industry also presents a challenge for equitable policy enforcement.

Conclusion

Daqo New Energy Corp. is navigating a period of profound transformation within the global solar PV industry. Despite facing significant headwinds from overcapacity and depressed polysilicon prices, the company's core investment thesis is anchored in its robust financial health, operational excellence, and strategic commitment to high-purity N-type polysilicon technology. Daqo's formidable balance sheet, devoid of financial debt and boasting substantial liquidity, provides a critical buffer against market volatility, positioning it to outlast less resilient competitors.

The confluence of Daqo's proactive cost management, its technological leadership in N-type production, and the increasing determination of Chinese authorities to foster a healthier industry through anti-involution measures and potential capacity consolidation initiatives, suggests a potential turning point. While risks such as prolonged overcapacity and geopolitical uncertainties persist, the company's strategic responses, including its share repurchase program, underscore management's confidence in a future market recovery. Daqo New Energy is poised to emerge from this cyclical trough as a strengthened leader, ready to capitalize on the long-term growth trajectory of global solar power, with its technological edge and cost efficiency serving as enduring competitive advantages.