Daqo New Energy Corp. (DQ) Earnings

Management highlights

• Market Environment & Pricing - Downstream demand weakness and industry oversupply pushed polysilicon prices lower across the value chain in Q2 2026; spot polysilicon prices fell from 35-37 RMB/kg at end-Q1 to 31-34 RMB/kg at end-Q2. After the announcement of new anti-involution regulations, polysilicon spot prices stabilized and rebounded more than 10% from recent lows. - DACO adhered to industry self-regulation guidelines and refrained from below-cost sales from Q1 through May 2026, before adopting a more market-oriented approach and resuming full sales activities in June 2026. Sales volume increased sequentially from 4,482 metric tons in Q1 to 15,190 metric tons in Q2, with an average selling price of $4.04 per kg. • Production & Cost Performance - Capacity utilization averaged ~57% in Q2; total polysilicon production volume hit 43,675 metric tons, exceeding the prior guidance range of 35,000-40,000 metric tons. Total production cost remained flat sequentially at $5.95 per kg, while cash costs edged down 0.4% to $4.57 per kg. • Policy & Regulatory Developments - In July 2026, new mandatory national energy consumption standards for polysilicon production were issued, effective January 1, 2027. Producers exceeding the 6.3 kWh per kg threshold (stricter than the 6.4 kWh draft proposal) must complete upgrades by the effective date or face forced shutdown. - Additional regulatory guidance was released by the China Photovoltaic Industry Association (CPIA) and State Administration for Market Regulation (SAMR) to curb irrational below-cost competition, enforce price compliance, and shift the industry from price competition to value-driven differentiation. DACO joined seven other producers to sign an August 6 initiative to eliminate low-cost dumping and comply with new energy standards. • Strategic Diversification - DACO is expanding into the fast-growing AI data center (AIDC) power infrastructure market to hedge core solar business volatility and diversify its earnings base. In June 2026, the company signed an investment agreement to establish a manufacturing base for next-generation AIDC energy solutions, including energy storage systems, solid-state transformers, and solid-state circuit breakers, to support the 800-volt DC architecture standard promoted by NVIDIA and other leading AI infrastructure providers. - The new venture leverages 40+ years of power equipment manufacturing expertise from affiliated DACO Group, and DACO plans to pursue expansion in a disciplined manner that preserves its strong balance sheet. • Financial Condition - DACO maintains a robust, zero-debt balance sheet. As of June 30, 2026, the company held $555 million in cash and cash equivalents, $215 million in short-term investments, and $928.9 million in fixed-term deposits maturing within one year. Gross loss for Q2 was $82.7 million, narrowing from $139 million in Q1, and net loss attributable to shareholders was $81 million, narrowing from $88 million in Q1.

Guidance

• Q3 2026 polysilicon production volume is expected to be in the range of 40,000 to 45,000 metric tons, maintaining production levels similar to Q2 2026. • Full-year 2026 polysilicon production guidance is maintained at 160,000 to 180,000 metric tons, no upward or downward revision from prior targets. • For the new AIDC power infrastructure business: prototypes of core products are expected to be ready by the end of 2026, initial commercial sales are targeted to launch in 2027, and high revenue growth is expected from 2028 to 2030 as the market for new-generation AI data center power infrastructure expands. The total planned project investment is 6 billion RMB, with only 2 billion RMB committed in the first phase; just $30-$40 million of CapEx is planned for 2026, with the remainder of the first phase investment spread over the following two years, and the remaining 4 billion RMB uncommitted as of Q2 2026.

Segment performance

DACO New Energy operates one core polysilicon product segment and one developing AIDC power infrastructure segment. For Q2 2026, the polysilicon segment generated total revenue of $62.7 million, which accounts for 100% of the company's total revenue in the quarter. This represents a 134.8% sequential increase from Q1 2026's $26.7 million revenue, and a 16.4% year-over-year decrease from Q2 2025's $75 million revenue. The AIDC power infrastructure segment is still in pre-revenue development, with only $1.6 million of R&D expenses recorded in Q2 2026, and no revenue contribution as of quarter end.

Risks & headwinds

• Core polysilicon prices have remained below industry average production costs since Q1 2026, and high industry-wide inventory levels (estimated at 500,000-600,000 tons) could delay the pace of price recovery even with new regulatory policies in place. • Downstream wafer buyers remain in a wait-and-see stance amid uncertain policy enforcement, which has limited transaction volumes even after the rebound in quoted polysilicon prices. • While the new anti-involution policy framework is supported by regulators, compliance from all industry producers cannot be guaranteed, and prior industry self-regulation efforts failed to sustain compliance amid price volatility. • The AIDC power infrastructure business is in early development, and market adoption of the new 800-volt DC architecture and DACO's new products may be slower than anticipated, resulting in delayed revenue and lower-than-expected returns on investment. • Semiconductor polysilicon customer qualification cycles have been longer than management initially expected, creating delays for this additional high-margin growth vertical.

Analyst Q&A

• Q: Given that polysilicon ASP remains below production costs even after the 10% recent price rebound, what is the central government's stance on supply rationalization, and will incremental regulatory support establish a sustainable price floor soon? /

  A: Management notes that the current anti-involution effort is led by SAMR, focused on enforcing price law and banning below-cost sales, rather than coordinating pricing or volume allocation between manufacturers (which was blocked over antitrust concerns in prior rounds). There is strong industry consensus that selling below cost is unsustainable, though high inventory means price recovery will take time. Downstream buyers are still observing, but management is optimistic that policy enforcement will progress over the coming months and end the period of below-cost dumping. (297 characters)

• Q: How is the current industry self-discipline framework structurally different from past failed attempts, and how much industry capacity is likely to be phased out under the new energy consumption rules? /

  A: Unlike prior efforts that risked antitrust violations from manufacturer coordination, this round is government-led, market-based, and tied to legal energy consumption and pricing rules. Management estimates that effective industry capacity is already below 2 million tons even with 3 million tons of nameplate capacity built, and the new 6.3 kWh/kg energy threshold will force a significant amount of inefficient, high-energy capacity to shut down permanently, as many of these producers have already suspended operations and laid off staff. (341 characters)

• Q: When can we expect meaningful higher-price transactions to occur, and what is the endgame for this round of policy reform? /

  A: There are already small-volume transactions occurring at ~40 RMB/kg, as some wafer producers with very low inventory need to make small spot purchases to maintain production. Management expects the combination of mandatory energy-based capacity phase-out and voluntary self-discipline against below-cost sales will push more capacity offline starting in H2 2026, leading to progressively more transaction volume at higher price levels over the coming months. (296 characters)

• Q: What is DACO's strategy for the polysilicon business in H2 2026: will you hold prices even if it means keeping shipments low, or prioritize reducing inventory? /

  A: Management confirms DACO will strictly adhere to the rule of not selling below cost, and will wait for marginal high-cost capacity to exit the market rather than cut prices to move inventory. Selling quality product at a reasonable price compliant with government guidance is the priority, with the goal of gradually reducing inventory over time and positioning DACO to capture market share in a healthier 2027 market. (298 characters)

• Q: Can you share more details on capital plans and timelines for the AIDC power infrastructure business? /

  A: Only the first phase 2 billion RMB investment is committed, with just $30-40 million to be spent in 2026 and the rest of the first phase spread over the next two years; the remaining 4 billion RMB is uncommitted. The R&D team is already in place in Shanghai, with prototypes targeted for year-end 2026, initial sales in 2027, and high growth starting in 2028, leveraging synergies from affiliated DACO Group's decades of power equipment expertise. (301 characters)