Daqo New Energy Is a Budding Chinese Value Play

Shares of Daqo New Energy NYSE: DQ closed Thursday's trading session by 3.75% after reporting its first quarterly earnings for 2023, along with filing its official annual report for 2022 via form 20-F with the SEC. Now that more institutional money managers and investors like Fidelity and Templeton are increasing their positions in Daqo, investors are beginning to take notice and deep dive into the business fundamentals and the massive growth it has displayed over the years.

Operating as a polysilicon manufacturer in China, Daqo is sitting at the top of the value chain for every industry that may need the material to produce and perform their respective products and services. Namely providing their finished products to the solar panel industry as one of the highest quality polysilicon producers offering a relatively low price, Daqo has a long history of expanding their size across the board. 

An Unstoppable Path

A 15-year look back would suggest a 23% compounded annual growth rate (CAGR) in revenues, made possible by a twofold expansion in demand and capacity. Daqo has had a long history, since 2008, of nearly doubling its production capacity every three years. To get a quick snapshot of the growth the company has experienced, in 2015, Daqo counted on an annual capacity of 6,150 metric tons of polysilicon. In contrast, today, management expects 205,000 metric tons for the 2023 total. 

These economies of scale have allowed the company to achieve and retain some pricing power. In 2017, it cost $9.38 to produce a single kilogram of polysilicon, whereas today, it only costs $7.55. In addition, gross profit margins worthy of a global conglomerate have been stamped on Daqo since 2021 as the world came together and agreed to increase each nation's quota for green energy production. 

In the earnings press release, management pointed out that the company not only met production expectations but also completed the construction of a new project in Mongolia, with which they expect an additional 100,000 metric tons of capacity; this facility will be primarily dedicated to breaking into the semiconductor supplying industry, where Daqo's polysilicon may be used by customers involved in chip manufacturers such as Taiwan Semiconductor Manufacturing NYSE: TSM. The Mongolian facility will also serve as a pilot program for a new fully digitalized and highly automated production system, with the objective of expanding margins from lower operating costs and bringing on more production efficiency and pricing power among market competitors. 

Overlooked Valuations

Daqo analyst ratings assigned a 70% upside from today's prices, as they may also realize that such rapid and organic growth is worthy of higher multiples or earnings. However, today's price-to-earnings ratio for Daqo lies at 1.7x, and not even a failing slow, growth tech company gets such a pessimistic outlook. Therefore, this sentiment from the overall market must be purely political in sensing that China is still 'uninvestable.'

Some bears in the stock may point to the reported annual decline in revenue of 44.6%; others may point to the fact that management does a pretty good job at alerting investors that the first quarter of every year seems to be a slow one for the solar PV industry as some operators await tax season to end and renew their credit allowance for the year. What is undeniable by both ends is the following statement within the press release:

"In November 2022, our board of directors approved a US$700 million share repurchase program, effective until December 31, 2023. As of now, we have already spent US$85.1 million and repurchased approximately 1.688 million ADSs. On April 6, 2023, our subsidiary Xinjiang Daqo's cash dividend plan for 2022 was approved by its shareholder's meeting. Therefore, as a 72.7% shareholder of Xinjiang Daqo, we expect Daqo New Energy to receive the dividend distribution in May with an amount of approximately RMB4.96 billion (after tax), which could be the financial source to implement the approved share repurchase plan."

MacKenzie Financial Corporation added 111,510 shares to their total holdings of DQ stock as of March 31, 2023, adding confidence to the narrative that the company may have some overlooked value. With major tailwinds at play for Daqo, the second quarter may bring further surprises for investors and markets alike. As the price of solar installations and systems keeps declining due to adoption and economies of scale, Daqo management expects this to be the beginning stages of a multi-decade-long value creation opportunity to fulfill the pent-up demand and prove analysts right in their bullish targets.

On a fundamental level, which can take all 'buts' off the table, net asset value per share (NAV), computed as total assets minus total debt, stands at $97.70. Book value per share, subsequently, is $88.60 today, earning an average return on equity of 18-20% on a decade-long look back period. So without a doubt, it is only a matter of time before investors see this chart take off on their screens.