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S&P 500   5,011.12
DOW   37,775.38
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What's Driving Tesla Lower Ahead of its Earnings?
Stock market today: Wall Street drifts to a mixed finish as yields tick higher
How major US stock indexes fared Thursday, 4/18/2024
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These are the Top 4 Stocks for Buybacks in 2024
CSX Co.: The Railroad Powering Ahead with an Earnings Beat
'There is no time to waste': EU leaders want to boost competitiveness to close gap with US and China
S&P 500   5,011.12
DOW   37,775.38
QQQ   423.41
What's Driving Tesla Lower Ahead of its Earnings?
Stock market today: Wall Street drifts to a mixed finish as yields tick higher
How major US stock indexes fared Thursday, 4/18/2024
3 Steel Stocks Could Soar on New China Tariffs
These are the Top 4 Stocks for Buybacks in 2024
CSX Co.: The Railroad Powering Ahead with an Earnings Beat
'There is no time to waste': EU leaders want to boost competitiveness to close gap with US and China
S&P 500   5,011.12
DOW   37,775.38
QQQ   423.41
What's Driving Tesla Lower Ahead of its Earnings?
Stock market today: Wall Street drifts to a mixed finish as yields tick higher
How major US stock indexes fared Thursday, 4/18/2024
3 Steel Stocks Could Soar on New China Tariffs
These are the Top 4 Stocks for Buybacks in 2024
CSX Co.: The Railroad Powering Ahead with an Earnings Beat
'There is no time to waste': EU leaders want to boost competitiveness to close gap with US and China

Daqo New Energy Charged Up For New Highs

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Daqo New Energy stock width=

Key Points

  • Daqo New Energy (is within the top 5 largest producers of this material, competing through low-cost production advantages and taking market share by the quarter through aggressive expansion projects. 
  • Suffering from the negative prevalent sentiment toward Chinese equities, our target company is diagnosed with suppressed valuations below Net Asset Values (NAV) of $82.85 or a current discount of 47%.
  • Keeping a margin of safety by projecting lower polysilicon prices, and lower production capacity, analysts are pointing to a valuation around the $90-$110 range initially. This translates to 106-152% upside.
  • 5 stocks we like better than Daqo New Energy

Stealthy like UV Rays

Daqo New Energy NYSE: DQ has been quietly expanding its annual polysilicon production capacity from a mere 18,000 Metric Tons in FY2018 to a current 132,000 Metric Tons as of 3Q'22. This massive growth is shown in their achieved economies of scale and lower production costs, which stood at approximately $9.40/kg in FY2016 to a fantastic $6.82/kg as of 3Q'22

This low-cost advantage is met with unprecedented demand for the finished good, from the solar panel industry to semiconductor wafer production. Daqo New Energy, being a Chinese company, naturally generates most of its revenue from Chinese enterprises with a smaller component from the U.S. and EU regions. This dynamic provides a major tailwind for the company, given that China is the largest polysilicon and solar panels producer and the largest buyer of the two. 

Daqo Average Sale Prices

Taken from Daqo's 3Q'22 earnings presentation, investors can appreciate the extraordinary environment the industry is currently benefitting from - speaking to ASP/kg -. Polysilicon has reached a near 2-year trend price per kilogram of $32-$36, tied to Daqo's 52-week high price in the high 70s.

Despite these prices being out of the norm, management and other sources like PV Magazine, First-Green Consulting, and the World Economic Forum have stated their cases for sustained high prices in the material. Being Cautious investors, however, we have projected financials based on a reasonable historical price and production capacity below management guidance. 

Is going Green Profitable?

Most investors grew apart from terms like "green energy" or "EVs" and even "Metaverse," some with good reason. It should be clear that Daqo - even among other speculative firms in this category - has demonstrated resilience and strong profits through more than a couple of business cycles.

Daqo's ROIC metrics 

A few things should be pointed out to express the historical profitability of this business. Throughout the 2010-2013 period, China's PV tariffs and policy challenged the industry greatly, thus many contracts fell through and wiped out many, if not most, of the operators in the country. 2014-2017 saw the market reopening through easier policy and tariffs on polysilicon.

Thus prices rose and increased Daqo's profitability, allowing for CAPEX into expansion projects as described in the Metric Ton Capacity. 2018-2020 experienced lower demand and trade troubles when the U.S. looked to slap further tariffs on Chinese goods, thus profitability and cash flows suffered greatly.

The 2020-Present day represents the strongest macro environment for the industry and Daqo, who prepared by paying off all outstanding debt as of 3Q'22 and is looking to deploy a large part of its liquidity into Mongolian expansion projects for a total Metric Ton annual capacity of 300,000+.

Should Markets Switch to Solar?

Just like buying a car, house, groceries and stocks, people want more for less. Daqo potentializes exactly that:

Daqo's Valuation

Utilizing several methods of valuing this business, there are two scenarios in Orange/Purple for a sensible exit. Despite being bullish for the stock, these two scenarios are still derived from conservative projections in the price of polysilicon and underlying margins in the business. 

Base Exit: 

Covering the Orange bar above, a sensible price target for Daqo lies in the $90-$110 range. This is not far from what Wall Street analysts are predicting, where NAV lies and reasonable multiples are considered. 

Best Exit:

Keeping polysilicon prices closer to the current trend and demand + production near guidance, we end up at the higher end of analyst estimates and assumptions. This best scenario covering the purple bar above represents an implied value of $115-120.

Entry Points

Daqo Technicals

Speaking to technicals, Daqo is trading in the "Golden Ratio" in the weekly Fibonacci levels, weekly RSIs hovering near the oversold region, and weekly stochastics are bouncing off the oversold area. 


Volatility also seems to be compressed, pointing to a possible near catalyst incoming, namely earnings being announced toward the end of February. This catalyst could push volatility along with bullish technical setups for a bullish rally. 

 

 

 

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Companies Mentioned in This Article

CompanyMarketRank™Current PricePrice ChangeDividend YieldP/E RatioConsensus RatingConsensus Price Target
Daqo New Energy (DQ)
3.8431 of 5 stars
$22.67+1.3%N/A4.19Hold$36.23
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Gabriel Osorio-Mazilli

About Gabriel Osorio-Mazilli

  • gosoriomazzilli@gmail.com

Contributing Author

Value Stocks, Asian Markets, Macro Economics

Experience

Gabriel Osorio-Mazilli has been a contributing writer for MarketBeat since 2023.

Areas of Expertise

Value investing, long/short trading, options, emerging markets

Education

CFA Level I candidate; Goldman Sachs corporate training; independent courses

Past Experience

Analyst at Goldman Sachs, associate at Citigroup, senior financial analyst in real estate


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