This is my third article on Daqo New Energy Corp. (New York Stock Exchange: DQ) in a short period of time. Largely due to the fact that the company is vastly under-hedged and under-reported. Since the positive catalysts are building up massively, time to act now… Daqo currently has a 15% weight in my portfolio as I am very bullish for obvious reasons to me. I will explain everything you need to know in this article. If you have any further questions, feel free to ask me in the comments section below.
Solar and wafer companies need polysilicon
Daqo New Energy’s future is all but defined, in view of the fact that all of its polysilicon capacity is being purchased. In recent weeks, Daqo signed 5 contracts by 821,100 MT of polysilicontwo more contracts than since my last article.
On November 3, Daqo announced a fourth deal for a 5-year polysilicon supply agreement with a leading company in the manufacture of solar energy. Xinjiang Daqo and Inner Mongolia Daqo will provide the company with a total amount of 57,600 MT of high-purity monograde polysilicon between 2022 and 2027.
On November 7, the company announced a fifth deal to another 5-year polysilicon deal with a leading solar energy manufacturing company in China. Xinjiang Daqo and Inner Mongolia Daqo will provide the company with a total amount of 137,000 MT of high-purity monograde polysilicon between 2022 and 2027. Currently, this is more than the production volume in the entire year of 2022.
I mentioned in my previous article that:
Offers for polysilicon are coming in, which has secured almost 5 times the production capacity of 2022 for the following years. You can expect more deals to come as wafer companies scramble to find polysilicon.
The current expected production volume for the whole year 2022 it is between 130,000 – 132,000 MT. That means the company now has ensured 6.3 times the annual production in agreements for the next 5 to 6 years. All of this further emphasizes that polysilicon is in short supply, even until 2023. Furthermore, these deals protect the company from overproduction, which might have worried some investors.
Huge share buybacks at an unbelievable price
Daqo New Energy Corp. shares are trading at an extremely low price given that we are talking about a company in a growth industry. Therefore, share buybacks have a higher value, a better purpose, and are easier to implement than dividends. Also, if the company decides to pay dividends in the future, it will have to burn less cash because there are fewer shares outstanding.
But this share buyback plan is much more special than it appears on the surface. The company typically waited for a buyback announcement until Daqo’s subsidiary, Xinjiang Daqo, announced its 2023 dividend. Daqo receives the dividend as majority owner and redistributes it to US shareholders through dividends or buybacks. Against all odds, Daqo’s board of directors decided to start a new share buyback program earlier, without waiting for Xinjiang Daqo’s dividend. Not only does this indicate that the management team believes the company is grossly undervalued, it also indicates that US shareholders are also a priority to be rewarded.
The share repurchase program has a total amount of $700 million, which represents a 18.2% of total shares outstanding at a price of $51 per share. Also, this completely covers the share incentive plan which diluted shareholders in the third quarter. Personally, I think the stock incentive plan is great for keeping very talented employees in the company. However, outside investors should also be rewarded for business performance, which is what management has decided to do now.
To illustrate how strong Daqo’s balance sheet is, I’ll apply the net-net formula on the stock. net-net is a value investing formula developed by Benjamin Graham, in which the company’s market capitalization is equal to its current net asset value per share. Net deals are attractive as long-term growth potential and any long-term asset value are not included in the price. The market will reassess the business closer to its fair value in the future, and investors stand to benefit greatly.
The stock is currently trading at $51 per share, while NCAVPS is around 49.43 per share.
China Audit Risk
Unfortunately, Daqo New Energy has been identified by the SEC under the Foreign Companies Liability Law. This means the company will be delisted by 2024, if they don’t show the correct audit under US rules. Finally, there has been relief news that the US and China have finished the on-site inspection of the audit documents of Chinese companies listed on the US stock exchanges. For now, there has been no information yet, but investors speculate that it will be positive as that the momentum in Chinese equities will reverse.
However, the management team is working on a solution for the delisting risk. They are planning to list Daqo New Energy on the Hong Kong stock exchange as a dual listing. This would mean that you can convert your US shares into Hong Kong-listed shares, should a delisting ever occur. Another possibility is that you sell your shares and buy them back at the same price on the Hong Kong stock exchange. Furthermore, this could also attract Chinese investors to the cheaper shares compared to Xinjiang Daqo’s listing on the Shanghai stock exchange. Another possible boost catalyst.
Xinjiang Forced Labor
On top of that, Xinjiang Daqo imports to the US are still banned. The percentage of revenue from the United States was quite low at the time, but it may affect future relationships with companies doing business in the United States.
The company has opened its factories to the public for inspection. Although there is no evidence that Xinjiang Daqo used any type of forced labor, the entire Xinjiang region is blocked from imports into the US. Also, Xinjiang’s forced labor issue is currently not affecting demand for the products. of the company. The new Inner Mongolia facility could bring back deals with the United States.
For now, these risks will probably explain why the valuation is so low right now. Resolving these issues could bring more positive momentum to the stock and give the company a more reasonable valuation. Personally, I see these risks as an opportunity to build a position in one of the leaders in the polysilicon industry.
I feel like the train is about to leave the station very soon. The $700 million buyback program will create a lot of buying pressure in the coming months. As a result, the downside pressure from shorts should fade and a further rally in momentum should ensue.
Furthermore, Daqo’s business performance is outstanding, to say the least, and the company has an excellent leadership position in the industry. Although the stock is up 10% today, I have increased my position because $50 per share is far from fair value. China is and will be the world leader in polysilicon for the next 5 to 10 years. Daqo New Energy will benefit greatly from the solar transition.
At the current stock price, polysilicon average selling prices don’t matter to me, since we’re talking about a net deal. Daqo New Energy is growing its business and improving cash cost efficiency to manufacture polysilicon.