Daqo Energy's slash with suppliers sparks lawsuits: product quality is the focus

Source of this article: Times Finance Author: Yuchen

On May 14, Daqo Energy (688303.sh) issued an announcement disclosing that the litigation case between the company and its suppliers Xinjiang Xian'an New Materials Co., Ltd. (hereinafter referred to as "Xian'an New Materials") and Xinjiang Dengbo New Energy Co., Ltd. (hereinafter referred to as "Dengbo New Energy") has entered the first-instance trial stage.

Among them, Daqo Energy is the defendant, and Xian'an New Materials and Dengbo New Energy are merged as the plaintiff.

In response to the latest progress of the case, on May 14, Times Finance called Daqo Energy Securities Department, and its staff said that on the one hand, the company has hired an external lawyer to evaluate the content of the lawsuit and believes that the other party is unlikely to win the lawsuit; On the other hand, the company has sufficient funds and will not affect the company's regional operations or daily operations due to litigation.

Due to non-renewal

As early as January 24 this year, Daqo Energy issued an announcement to introduce the beginning and end of the lawsuit.

According to the announcement, the lawsuit originated from the cooperation between Daqo Energy, Xian'an New Materials and Dengbo New Energy, and the tripartite cooperation method is: Daqo Energy provides polysilicon materials, Xian'an New Materials is responsible for silicon rod crystal pulling, and Dembo New Energy is responsible for silicon core cutting.

The core dispute in the case lies in the performance of the contract signed by the plaintiff and the defendant and involves product quality issues.

In January 2022, Daqo Energy signed a Business Cooperation Agreement with Xian'an New Materials, stipulating that the company would lease its plant to Xian'an New Materials for crystal pulling production plants, and adopt the outsourcing processing model to hand over the polysilicon to Xian'an New Materials and its affiliates for silicon core processing. At the same time, it is agreed that on the premise that Xian'an New Materials and its affiliates ensure that the silicon cores are delivered to the Company in accordance with the quantity and delivery date agreed in the contract signed between them and the Company, and ensure that they meet the requirements of the Company's quality indicators, when the paid-in registered capital of Xian'an New Materials reaches RMB 33.49 million or above, Daqo Energy and its affiliates shall have exclusive procurement obligations to Xian'an New Materials and its affiliates.

In July of the same year, Daqo Energy and Dengbo New Energy signed the "Annual Contract", stipulating that Daqo Energy entrusts Dengbo New Energy to cut the silicon core and arrange the silicon rod crystal pulling, and the specific silicon rod crystal pulling work is implemented by Xian'an New Materials, and the silicon core processing fees under the "Annual Contract" are settled by Daqo Energy and Dengbo New Energy.

According to Daqo Energy's announcement, the plaintiff believes that since the expiration of the validity period of the "Annual Contract" (April 30, 2023), Daqo Energy has not renewed the new contract with Dengbo New Energy, and has stopped the issuance of purchase orders since April 19 of the same year.

In June 2023, the plaintiff filed a lawsuit with the Shihezi Municipal People's Court of Xinjiang Uygur Autonomous Region (hereinafter referred to as the "Shihezi Municipal People's Court"), demanding the termination of the Business Cooperation Agreement with Daqo Energy and demanding that Daqo Energy compensate it for economic losses of 388 million yuan.

Three months later, the plaintiff submitted an Application for Modification of Litigation Claim to the Shihezi Municipal People's Court, requesting that the amount of compensation be increased from 388 million yuan to 1.959 billion yuan. Because the subject matter of the litigation exceeded the jurisdiction of the Shihezi Municipal People's Court, the Shihezi Municipal People's Court issued a ruling on the transfer of jurisdiction in the same month, transferring the case to the Intermediate People's Court of the Eighth Division of the Xinjiang Production and Construction Corps for adjudication.

Regarding the plaintiff's sudden increase in the huge amount of compensation, the staff of Daqo Energy Securities Department said, "We are a listed company and have the obligation to disclose information. It cannot be ruled out that the other party deliberately increased the amount to force the company to disclose the litigation situation in order to force the company to compromise. ”

When asked why it did not renew the contract with the other party, Daqo Energy said that it was due to the quality problems of the product and the other party did not rectify it in accordance with the company's requirements. However, the court has not yet made a final judgment on the dispute between the parties to the litigation over the quality of the product.

"The plaintiff in the lawsuit is a silicon core processing manufacturer of the company's raw and auxiliary materials. In the early stage of expansion, the company tried to control product quality and cost by cultivating suppliers. However, in the course of cooperation, the company found that with the increase of the plaintiff's production scale, the quality of its products did not meet the expected standards and requirements of our company, so it stopped purchasing and requested the other party to rectify. However, the other party did not rectify as required, so the company did not continue to place orders. The above-mentioned staff member said.

The two sides have worked together for many years

In fact, the two suppliers accused of "quality problems" have been working with Daqo Energy for many years.

Tianyancha shows that the largest shareholder of Xian'an New Materials is Xinjiang Sokos, holding 70% of the shares, and its actual controller is Jinsheng, a natural person, after equity penetration, and Jinsheng also wholly owns Dengbo New Energy.

Image source: Tianyancha

Xinjiang Sokos is an important partner of Daqo Energy and has long occupied the position of the largest supplier of raw materials.

According to public information, Daqo Energy was listed on the Shanghai Stock Exchange in 2021, and the company's main business is the research and development, production and sales of high-purity polysilicon. Cooperate with Tongwei Co., Ltd. (600438. SH), TBEA (600089. SH), GCL Technology (03800. HK) is collectively known as the "Four Heavenly Kings" of polysilicon.

Daqo Energy once said in the prospectus that the company is located in Xinjiang, and purchases raw materials such as industrial silicon powder and electricity, steam and other energy nearby. SH).

According to the prospectus, from 2018 to 2020, Daqo Energy's purchases from Xinjiang Sokos were 249 million yuan, 375 million yuan, and 633 million yuan, respectively, and the procurement ratios were 55.15%, 45.84%, and 49.53%, respectively.

It should be pointed out that due to the control of the same actual controller, Daqo Energy once disclosed the purchase amount of Xinjiang Sokos, Xinjiang Shenken Silicon Materials Co., Ltd., and Dengbo New Energy as Xinjiang Sokos in the prospectus.

"At that time, the cooperation agreement signed (with the plaintiff) stipulated that the maximum cooperation period was 20 years, but the precondition for cooperation was that the other party could meet the company's quality requirements." Daqo Energy Securities Department said.

Regarding related matters, on May 15, Times Finance called Jin Sheng, the actual controller of the plaintiff, and the other party said that it was inconvenient to respond to the litigation between the two parties.

Daqo Energy said that after the "quarrel" with the plaintiff's supplier, it did not affect the company's supply and production. "We have maintained stable relationships with other suppliers, and our supply has not been affected in any way since we did not cooperate with the plaintiffs. We have reasonably distributed the relevant supply to other suppliers to ensure that we can still meet the company's daily procurement and production needs. ”

On May 15, Times Finance learned from Hesheng Silicon that Hesheng Silicon is still a supplier of Daqo Energy.

Profit in the second quarter may fluctuate

According to Daqo Energy's first quarter report in 2024, the company achieved operating income of 2.982 billion yuan, a year-on-year decrease of 38.60%; The net profit attributable to the parent company was 331 million yuan, a year-on-year decrease of 88.64%.

Daqo Energy said that the decline in performance was mainly due to the decline in polysilicon prices and the decline in revenue scale. In the first quarter of 2024, polysilicon prices continued to bottom out due to the mismatch between supply and demand.

On May 14, the staff of Daqo Energy Securities Department said, "The company's production and operation in the second quarter are normal, but it may be affected by the fluctuation of polysilicon prices, and compared with the first quarter, the profit situation may fluctuate to a certain extent." However, the market order volume remains solid. ”

As for the follow-up trend of polysilicon prices, the above-mentioned staff member said that it is difficult to make an accurate judgment at present.

"As the PV market continues to have new capacity landed, the overall supply of the market is showing a slight growth trend. Judging from the order signing in the second quarter, polysilicon prices are still on a downward trend, and this price is gradually approaching the cost line of first-tier manufacturers, and may have already broken through the cash costs of second-tier companies. ”

In the face of downward pressure on the price of the industry as a whole, Daqo Energy said that its production and operation conditions are still relatively stable. "On the one hand, our own cost control work is continuing to advance; On the other hand, we still have abundant cash money on hand. The above-mentioned staff of the securities department said.

According to the first quarter report of 2024, Daqo Energy's polysilicon output was 62,000 tons, sales volume was 54,000 tons, and the unit cost dropped to 45.99 yuan/kg, down 13.96% from the same period last year.