Daqo (DQ) Has $1.9B in Liquidity and a Negative Gross Margin. Which Number Matters More?

Daqo New Energy Corp. (NYSE:DQ) reported a $1.9 billion liquidity aggregate at the end of June, consisting of cash, short-term investments, bank notes, held-to-maturity investments, and fixed-term deposits. However, the company's gross margin remains negative at 132%. While the margin improved from an even more negative 521.5% in the first quarter, the business has not reached an operating inflection point.

The selling economics remain unsustainable, as the average selling price fell to $4.04 per kilogram, while the cash production cost averages $4.57 per kilogram, and the total production cost averages $5.95 per kilogram. Consequently, Daqo recorded an $82.7 million gross loss. Its non-GAAP EBITDA also declined to negative $29.3 million.

With only 57% of nameplate capacity utilized during the quarter, Daqo has room to adjust production and manage inventory during unfavorable market conditions. If polysilicon prices rise, margins could improve quickly. Despite its liquidity, Daqo's equity value is still below its consolidated liquidity aggregate, as nearly $1.5 billion of non-controlling interests are included in the balance sheet. Currently, 20 hedge funds hold DQ, with no change in the number since the previous quarter.