Editor's note: "US Stock Gold Mining" Keep up with daily market trends, insight, and consolidate hot and outstanding stocks, providing multi-dimensional investment opportunities for Mooer and helping them grasp investment opportunities with one chart! Focus on: 1. Performance and stock prices take off! Global fast fashion giant $Gap Inc (GPS.US)$ soared nearly 29% after its performance, reaching a new high for the year. Gap announced its first fiscal 2023 first-quarter results, with net sales of $3.4 billion, exceeding analysts' expectations of $3.28 billion, and earnings per share of $0.41, with overall comparable sales growth of 3%, better than expected 0.91%. In addition, the gross profit margin for the quarter reached 41.2%, higher than analysts' forecast of 38.5%. Its subsidiary brand Old Navy's same-store sales grew by 3%, exceeding market expectations of 2.5%. Based on this, Gap raised its sales and operating profit outlook for the year. Baird has recently raised its target share price for Gap from $23 to $28, and Goldman Sachs has raised its target share price for Gap from $20 to $27. 2. US electric power stocks collectively agitated! The largest wind and solar power generator developer in the United States $NextEra Energy (NEE.US)$, the fourth largest power plant in the United States $Southern Company (SO.US)$, the power and natural gas company $CenterPoint Energy (CNP.US)$, and the electrical production and transmission company $Edison International (EIX.US)$ have all reached new highs for the year. On the news front, as AI technology often requires a lot of energy to develop and operate, utility stocks are becoming a new opportunity for investors. 3. Low-key AI beneficiaries! Data storage giant

On January 25-26, 2024, China Securities Regulatory Commission held the 2024 System Work Conference and emphasized that it should highlight the concept of investor orientation. To help investors better understand the real development situation and value of the enterprise, further protect the legitimate rights and interests of investors, etc., Caijing.com and 'Science and Technology Innovation Board Daily' jointly created the 'Shareholders Meeting in Perspective' column.

The 'Shareholders Meeting in Perspective' column is reported on site, focusing on the core management of the chairman of the listed company and others at the shareholders meeting, focusing on the long-term strategy, major decisions, and operational policies of the enterprise, aiming to enhance the image of the enterprise in the capital market, optimize investor relations management, and improve the governance and development of the listed company.

This issue's company: Daquan Energy

Company profile

Daquan Energy focuses on the research, production and sales of high-purity polycrystalline silicon. The main product is high-purity polycrystalline silicon, which is mainly used in the photovoltaic industry, and is in the upstream link of the photovoltaic industry chain. After the polycrystalline silicon is melted and cast or sliced, it can be made into polycrystalline silicon cells and monocrystalline silicon cells, and then used to manufacture photovoltaic cells.

Company Highlights

Daquan Energy uses the improved Siemens method and hydrogenation process to produce polycrystalline silicon, which has mature technology, high safety, and high product quality. It can produce solar-grade products with purities ranging from 6N to 9N. The company not only focuses on the production of high-purity polycrystalline silicon, but also actively develops industrial silicon, semiconductor-grade polycrystalline silicon, and other links.

Business model

Daquan Energy mainly achieves profitability through the sales of high-purity polycrystalline silicon and other photovoltaic products.

"At present, the power of the β in the photovoltaic industry is too strong, and the α of the enterprise is inevitably overshadowed." At the scene of Daquan Energy's first extraordinary shareholders' meeting in 2024, Li (pseudonym), an individual investor who has long invested in the photovoltaic industry, told the reporter of "Science and Technology Innovation Board Daily". (Note: In stock investment, α and β are usually used to describe the relationship between the company and the industry. β usually represents the industry's increase, and α represents the stock's outperformance of the industry.)

In recent years, the imbalance of supply and demand in the photovoltaic market has led to continuous price declines in various links of the industry chain, and the profit margin of companies has been greatly compressed. Daquan Energy, a silicon material company, is no exception. In the first half of this year, Daquan Energy's net loss was 670 million yuan, while the net profit for the same period last year was 4.426 billion yuan. But with the recent rise in the average transaction price of solar-grade polycrystalline silicon in the past two weeks, the industry seems to have seen the "dawn" of coming out of the downturn cycle.

At this shareholders' meeting, the issues of when the photovoltaic industry can come out of the quagmire and whether the price of silicon materials can continue to rise have become the focus of investors' attention.

At the same time, Daquan Energy passed the resolution on "Amendment of the Company's Business Scope, Registered Address, and Revision of the ", the resolution on the resignation and appointment of supervisors, and the resolution on the appointment of Mr. He Guangjin as a supervisor of the company's third Board of Supervisors.

▍Short-term silicon material quotations may rise, and the "tug of war" may continue for 2-3 quarters.

Regarding the recent rise in silicon material prices, the on-site investors of Daquan Energy shareholders told the reporter of "Star Daily" that there are two logical supports behind the rise in silicon material prices: First, Longi shares, TCL Zhonghuan, and other manufacturers have raised silicon wafer prices, and the downstream support has brought a certain degree of support to the upstream silicon material prices; the second is that the overall silicon material production output in August was at a historic low for nearly a year. "The continuous decrease in supply may bring a tight balance between supply and demand, and there is not much downward space for subsequent quotes, and they may even rise in the short term. Most importantly, the current price is already lower than the cash cost."

Although the recent trend of silicon material prices is optimistic, the current industry capacity utilization rate is not at a high level. During the downturn of photovoltaics, many manufacturers have chosen to reduce production or even shut down some high-cost production capacity. After the rise in silicon material prices, if it causes a return to production, will it once again suppress the upward trend in prices?

In response to the questions from the reporter of the "Star Daily", the above-mentioned Daquan Energy investor relations personnel stated: "This issue involves the actual operation of the factory. In fact, reopening the shut-down production capacity will lead to an increase in costs."

"For chemical plants, stable and full-capacity operation is like a 'long-distance run', with the highest energy and material utilization rates and the lowest costs." The investor relations personnel further explained: "During the switching on and off of production capacity, the load rate does not reach 100%, and the cost amortization rate is very high; on the other hand, there is a significant disturbance to the product quality during this time. Therefore, during the switching on and off of production capacity, manufacturers will suffer from 'double hits' of cost and quality."

Therefore, for silicon material factories, if the transaction price of silicon material only rises slightly, restarting the shut-down production capacity is not cost-effective. Daquan Energy revealed that, after financial accounting and comprehensive evaluation, the current capacity utilization rate of the company is 50%, and this capacity utilization rate is the "most economical" balance point. Its semi-annual report shows an expected production volume of 43,000 to 46,000 tons of polysilicon in the third quarter, with the full-year expected production volume for 2024 adjusted to 0.21 million tons to 0.22 million tons.

It is worth noting that although Daquan Energy expects the short-term trend of silicon material prices to rise, the company still admits that the actual transaction price may not follow the quoted price. Whether the transaction price can be executed according to the quoted price is still unknown. "The actual transaction price depends on the game between the upstream and downstream."

Looking at the overall production capacity, the Daquan Energy investor relations personnel stated, "The current industry production capacity is about twice the demand, and it will take at least 2 to 3 months to destock. At the same time, it has not yet reached the stage of 'depleting inventory', and there is still surplus production capacity every month, and the inventory level is relatively high. Therefore, the tight balance between supply and demand for silicon materials has not yet been achieved.

"We expect that this round of 'tug-of-war' will continue for 2 to 3 quarters. After experiencing two to three quarters of 'cash burning', some second- and third-tier enterprises will inevitably have to 'leave the table'." Daquan Energy indicated.

Currently, the photovoltaic industry is in the process of capacity clearance, during which industry mergers and acquisitions are also accelerating. Just in August of this year, Tongwei Co., Ltd. announced a planned 5 billion yuan capital increase to acquire a controlling interest in Runyang Co., Ltd.

There is also no shortage of voices encouraging mergers and reorganizations within the industry. In May of this year, the China Photovoltaic Industry Association issued a document stating that through market-based means to address the current industry predicament, encouraging industry mergers and reorganizations to facilitate market exit mechanisms.

As for the matter of mergers and acquisitions, the director of Daquan Energy revealed at the shareholders' meeting that the company currently has no intention of mergers and acquisitions. "The company believes that the most important thing at the moment is to protect the existing cash on hand, and then make corresponding adjustments and changes according to the market trends. In terms of inventory clearance, the company is also discussing issues related to polycrystalline silicon futures with the Guangxi Futures Exchange.

▍ Supply chain stability plus cost reduction demands "Upstream Integration" layout of industrial silicon

Why not expand downstream? At the shareholders' meeting, an investor expressed to the reporter of "Star Market Daily" that on the one hand, Daquan Energy has a background in the chemical industry, not in manufacturing. "Whether it's silicon wafers, battery wafers, or modules, they all belong to the manufacturing domain, and manufacturers need to compete in terms of scale and gross profit."

"Going back to 2017, Daquan Energy once expanded its silicon wafer capacity, with a scale of only 500 megawatts, making it difficult to achieve economies of scale and lacking cost advantages," the investor recalled. "In fact, for a company, it is difficult to lead in all four links of the photovoltaic industry, which poses a great test to talent, teams, and funds."

The director of Daquan Energy also frankly stated at the shareholders' meeting: "At this point, it is difficult for manufacturers to compete for more market share downstream."

The aforementioned investor also mentioned that during the industry's upward phase, photovoltaic manufacturers can capture the dividends from all four links by layout. However, with the current market conditions taking a sharp downturn, manufacturers with integrated layout mean there will be "bleeding" in all four links. "The company only has one point of blood loss, so the current cash loss is not as severe as that of other peers."

For ordinary investors, due to Daquan Energy's focus on the silicon material field, the indicators such as cash cost, quality, and energy consumption are relatively transparent. "From the perspective of investors, if they layout integrated, it is difficult for ordinary investors to separate their product costs and allocation of some financial indicators data, unless they are professional investors," a stakeholder added.

According to the financial report, Daquan Energy's cash cost of polycrystalline silicon in the first half of the year was 40.31 yuan per kilogram, the unit sales price (excluding tax) was 47.01 yuan per kilogram, with a production capacity of 12.72 tons and sales of 9.71 tons.

It is easy to see that, considering costs, financial pressure, and other reasons, Daquan Energy did not lay out downstream silicon wafers, battery wafers, etc. Unlike other photovoltaic manufacturers, Daquan Energy chose the "upstream integration" layout, focusing on developing industrial silicon.

On-site investor Mr. Li (alias) expressed relevant doubts about Daquan Energy's strategic choice. The company's secretary of the board clarified that the company's choice to lay out industrial silicon has two appeals: "First, to ensure the stability of the entire supply chain of silicon raw materials; second, the company intends to reduce the manufacturing cost of polycrystalline silicon by laying out industrial silicon."

In terms of production capacity, Daquan Energy is building a 0.3 million tons/year high-purity industrial silicon project in Baotou, Inner Mongolia.

▍ There are already 8-10 potential customers for semiconductor-grade polycrystalline silicon products.

At a time when the profitability of the silicon material business is under pressure, it is particularly important for the company to seek the next profit growth point, in addition to upward layout of industrial silicon to enhance supply chain stability and seek cost reduction.

"Science and Technology Innovation Board Daily" reporters observed that in May of this year, Daquan Energy's first batch of products from the semiconductor-grade polycrystalline silicon project was released. Prior to this, in 2021, Daquan Energy planned to build a 0.021 million-ton semiconductor-grade silicon-based material project in Baotou, Inner Mongolia. In the first phase of the plan, the annual production capacity of semiconductor-grade polycrystalline silicon reached 1000 tons, and construction began in the second quarter of 2022.

The energy investment person at Daquan Energy said to the reporter of the Star Daily at the shareholders' meeting that the products of the project are currently in the process of improving quality. Once the quality meets the internal control standards, it will enter the product classification verification phase. "Currently, there are 8 to 10 potential customers for the semiconductor-grade polycrystalline silicon products. Once the products are qualified, customers are willing to start production verification.

As an upstream material of semiconductor silicon wafers, semiconductor-grade polycrystalline silicon has completely different process technology compared to photovoltaic-grade polycrystalline silicon. The production of 8-inch and 12-inch wafers using polycrystalline silicon technology is more challenging, with higher requirements for production process control, technology threshold, equipment, and processes. For a long time, the technology and market for 12-inch CZ polycrystalline silicon and 8-inch zone melting polycrystalline silicon are mainly controlled by a few international giants such as Germany, Japan, and the United States.

The company secretary at Daquan Energy said at the shareholders' meeting, "At present, the company is fully capable of breaking through the technical barriers of 4-inch and 6-inch products, and the related products are already in the process of implementation. However, the related products of 8-inch and 12-inch are still being polished."