Daqo New Energy – Producer of extremely cheap polysilicon (NYSE:DQ)

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Daqo New Energy Corp. (New York Stock Exchange: DQlisten)) is a producer of polycrystalline silicon (hereinafter simply silicon), which is used in the manufacture of solar cells. Green energy is the trend of the last decade. And solar energy is still one of the main drivers of green energy. The first players in the supply chain are the polysilicon players: the process involves the processing of raw materials (quartzite, silicon) to produce polysilicon (high-frequency silicon). The key players in this market are Chinese companies: Daqo (listed on US platforms), Tongwei, Asia Silicon. Generally, polysilicon is a silver-gray crystal made from industrial silicon through chemical reactions that purify the silicon to a certain degree of purity (99.9%). The production process requires a high degree of processability.

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solar value chain (company presentation)

Recent key results

Successfully brought the new Phase 4B facility to full capacity and further optimized its operational characteristics. In June 2022, the Xinjiang Daqo subsidiary received total gross income of about RMB11 billion from a private placement on the Shanghai Stock Exchange. Proceeds from the offering will be used primarily for the 100,000-ton capacity Phase 5A polysilicon project in Inner Mongolia.

Thanks to favorable trends in the first half of this year, the global solar industry experienced strong demand. Demand both in China and abroad continues to exceed market expectations. According to the China Photovoltaic Industry Association, the output of polysilicon and solar modules in China in the first half of this year was about 365,000 tons and 123.6 GW, respectively, an increase of 53.4% ​​and 54. 1% compared to the same period last year. The board approved a $120 million buyback in June. To date, ADRs worth $50mn have already been repurchased. The current ADR price is believed to be seriously undervalued and does not reflect the position of an industry leader with high profitability and strong operating cash flow. To protect US shareholders, the board is considering listing in Hong Kong.

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market information (company presentation)

finance

A very strong and especially valuable report is the increase in the volume of production, economies of scale, resulting in a multiple of the financials. Revenues reached $1.24 billion, gross profit was $947 million with a margin of 76%. Net income was $628 m$, +17.2% QoQ and +170% YoY. Continue to increase production volumes, seeking to increase capacity by 50% per year for the next three years. The average sales price has also increased due to strong demand in end markets. According to the China Silicon Association, the average price, including VAT, of high-density monograde polysilicon increased by 29.3%. Despite the price increase, they have a large order book. Many newly built wafer manufacturing plants are sitting idle due to polysilicon shortages, as plant capacity expansion is much faster than in the polysilicon sector.

The company did not provide a forecast; Analyst consensus forecast is for revenue to grow to $4.42bn (+163% YoY) in 2022. Annual production forecast increased to 129,000-132,000 tonnes.

finance

Financial report (company presentation)

Valuation

Multiples are unusually cheap even for Chinese companies, FWD P/E 1.8, FWD EV/EBITDA 0.6, for all-time lows, 3-year revenue CAGR of 130%, but this year will be even higher at around 160%. Finances are elegant, and the main contributor to this was the price of polysilicon, which is now at an all-time high.

finance

Valuation multiple (company presentation)

main takeaway

Now, there are many polysilicon producers and new players are entering this market, despite the high barriers to entry, because the prices of the products are very attractive. The management itself sees this too and expects prices to drop from the second half of 2023. Naturally, halving the current prices would have a significant impact on the company’s profitability and bring it down to normal levels. We will likely see a revenue spike in the next 1-2 quarters, and if the price drop is justified, there will be a further deterioration in performance. Daqo, on the other hand, is significantly increasing production, which will offset the price drop to some extent. Also, it should be noted that, thanks to the significant amount of cash and customer deposits, it is highly unlikely that the price will drop below $30. From an investment point of view, levels around $30-40 seem safer, because prices are unpredictable and a sharp drop will automatically pull the company’s price down. Not to be forgotten is the single listing in the United States, which imposes infrastructure risks on all Chinese companies.

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