The polysilicon producer Daqo New Energy will collaborate with the Kunshan government to invest 6 billion yuan in building a production base to manufacture power equipment for AI data centers.

Key Points:

• Daqo New Energy will cooperate with the Kunshan Economic and Technological Development Zone to invest 6 billion yuan in constructing a production base for power equipment needed by AI data centers.
• This move comes just three years after Xu Xiang took over the company from his father, indicating a return to the company's roots in power equipment manufacturing.

Yang Ge

China's history is never short of stories of inheriting family businesses. Many second-generation entrepreneurs attempt to surpass the commercial empires built by their predecessors, but the results are often mixed. Today, such a story seems to be unfolding at Daqo New Energy Co., Ltd. (DQ.US; 688303.SH). The company is one of the world's major polysilicon producers, and polysilicon is the core raw material for manufacturing solar panels, which are rapidly becoming one of the most important sources of clean energy globally.

This is our assessment of Daqo New Energy's latest developments. The company announced a significant and somewhat unique strategic transformation on Thursday, venturing into the manufacturing of power infrastructure required for future AI data centers. In recent years, AI data centers have suddenly become a hot pursuit for developers and investors, with the market widely betting that as AI applications rapidly proliferate, the demand for massive computing power and electricity will surge simultaneously.

The driving force behind this major transformation is Xu Xiang, who is in his 50s. In August 2023, he took over as chairman and CEO of Daqo New Energy from his father, Xu Guangfu, who is in his 80s. Prior to this, the CEO position was held by professional manager Zhang Longgen for five years.

Joining Xu Xiang in the company's power core is his sister, Xu Xiaoyu. She joined Daqo New Energy in May 2023 as the head of investor relations. Unsurprisingly, Xu Xiaoyu quickly rose within the company, being appointed as a director just six months after joining and promoted to vice CEO in October 2024.

This sibling duo's executive combination appears to be quite complementary. Xu Xiang has clearly grown up within the Chinese education system and has been with Daqo New Energy since at least 2000, suggesting he has likely been groomed as a successor. In contrast, Xu Xiaoyu has a shorter tenure with the company but possesses a more distinct international background, holding an MBA in finance from the Wharton School of the University of Pennsylvania and a bachelor's degree from the University of California, Berkeley.

Understanding this family background, we can look at the strategic transformation led by this sibling pair. According to the plan, Daqo New Energy will establish a new manufacturing base in the Kunshan Economic and Technological Development Zone. Geographically, Kunshan sharply contrasts with Daqo New Energy's previous polysilicon production bases located in China's inland regions such as Xinjiang and Inner Mongolia. Compared to the more remote and less developed western regions, Kunshan is adjacent to China's financial center, Shanghai, and is one of the wealthiest urban agglomerations in the country According to the announcement, the cooperation between the two parties will focus on new generation energy solutions and related equipment for AI data centers, including energy storage systems, solid-state transformers, solid-state circuit breakers, and solid-state batteries. The entire project will be constructed in two phases, with a total investment of approximately 6 billion yuan (about 886 million USD), and the initial investment amount is about 2.1 billion yuan.

Xu Xiang stated, "With our and our affiliates' deep professional accumulation and mature technical capabilities in transformer and circuit breaker technology, we have a significant advantage in seizing this enormous growth opportunity." He added, "This investment agreement is an important cornerstone for the company to promote its product diversification strategy and will also help seize the huge market opportunities brought by the global energy transition."

Dead Cat Bounce?

At first glance, investors reacted quite positively to this seemingly significant news. After the announcement, Daqo New Energy's stock price rose 5.1% on Thursday. However, this rebound also has the flavor of a "dead cat bounce," as the stock has still accumulated a 43% decline this year. Over the past two to three years, Daqo New Energy and its peers have significantly expanded production, leading to a severe oversupply in the global polysilicon market, and the company has thus continued to face pressure.

Daqo New Energy is a typical representative of this wave of production expansion. Over the past three years, the company has invested 17.7 billion yuan to build a new production base in Inner Mongolia, increasing its annual production capacity from 75,000 tons to the current 300,000 tons. As the entire industry's capacity has rapidly expanded, polysilicon prices have collapsed, and Daqo New Energy and most of its peers have successively fallen into losses. In the first quarter of this year, Daqo New Energy recorded a net loss of 88.4 million USD.

Last year, many market participants originally expected an industry recovery, as the Chinese government encouraged companies to eliminate old and inefficient production capacity and promoted large enterprises to integrate some small and medium-sized manufacturers to form new industrial platforms. However, the relevant progress has been much slower than the market expected, and currently, most companies' production costs for polysilicon are still higher than the selling price of the products.

This brings us back to Daqo New Energy's latest transformation plan. For many, this decision may seem puzzling, especially for those who are only familiar with its polysilicon business. After all, polysilicon has always been the core asset of this New York-listed company. However, in fact, Daqo New Energy's historical roots actually come from the power equipment industry. Its unlisted parent company, Daqo Group, currently covers areas such as medium and low voltage electrical equipment, transformers, and switchgear. The related businesses are mainly operated by subsidiaries such as Nanjing Daqo Transformer Co., Ltd. and Zhenjiang Daqo Power Transformer Co., Ltd., and these assets do not belong to the New York-listed Daqo New Energy.

This indicates that Daqo indeed possesses the technology and experience required to produce related power equipment. More importantly, although the total investment for the new project reaches 6 billion yuan, which is not a small amount, it is still relatively moderate compared to the previous 17.7 billion yuan polysilicon expansion plan.

According to the company's latest quarterly report, as of the end of March this year, Daqo New Energy had approximately 2 billion USD in easily convertible cash assets, thus having sufficient financial resources to promote this new investment. In addition, Daqo does not need to bear all the funding expenditures alone. The financially strong Kunshan government is almost certain to bear a significant portion of the costs Overall, Xu Xiang's decision likely also incorporated the opinions of his father Xu Guangfu and sister Xu Xiaoyu, appearing to be a relatively cautious diversification strategy aimed at reducing Daqo New Energy's reliance on the polysilicon industry. After all, even during the best of times, the polysilicon industry itself remains highly cyclical. However, Daqo is not the only company targeting these new business opportunities, especially in the energy storage sector. The final outcome may be that Daqo successfully escapes an oversupplied industry, only to step into another market that may also face oversupply