Summary

• Daqo New Energy Corp is a polysilicon industry leader, delivering the highest levels of purity at the lowest cost levels.
• Polysilicon is a vital feeder material for photovoltaic systems, which makes the material, and its producers vital for the growth of the solar industry.
• Daqo’s performance is currently undergoing explosive growth in revenue and EPS ballooning heavily with each subsequent quarter, showing no sign of slowing down.
• The stock’s valuation metrics point towards a significant undervaluation, in comparison to each of its peers, making it the best investment choice in the wider industry.

Daqo New Energy Corp (DQ) is a strong buy. I do not think this is a bold claim, as anyone looking into the stock’s strategic positioning, financial fundamentals, and valuation metrics would inevitably arrive at the same conclusion. Looking at each of these dimensions, I can only conclude that DQ is heavily underpriced, and investors rarely get exposed to any opportunity as good as this.

Company Overview

Daqo New Energy Corp. is a leading high-purity, Shanghai-based polysilicon manufacturer, which is contributing to the clean energy transition across the globe, whilst headquartered in China. Polysilicon, which is from amongst the highest purity forms of silicon, is a fundamental component in solar and photovoltaic technologies. This makes it a critical requirement for our transition to a clean-energy system, where solar systems occupy a much more mainstream role in energy transmission and consumption.

The company runs on a B2B business model where it primarily sells polysilicon cells to manufacturers of photovoltaic products, which include Chinese, as well as international industry players. The most significant advantage that Daqo New Energy holds is the significantly low cost it manages to achieve in developing polysilicon material, which makes it a prime supplier for most PV manufacturers looking to enhance the economic value of their business line. This combination of low cost and high purity gives the company the status of a growth star that is likely to dominate the solar markets in the near future.

The company has entered into a number of arrangements in recent years, which have allowed it to dramatically upscale its production capacity, and hence driven down its cost. Its most recent strategic cooperation has been in December 2021, with Baotou City in Inner Mongolia, China, where polysilicon projects will be set up, in order to serve the solar industry with its capacity of 200,000 metric tons per annum. The company is looking to expand beyond serving the solar industry exclusively, and also take a foothold in the semiconductor space, where polysilicon is a vital feedstock resource. The agreement with Baotou City further includes plans to deliver an annual capacity of 21,000 MT of polysilicon for use in semiconductors.

Polysilicon Industry Overview

Polysilicon is a critical material in terms of the wider solar industry, as it is one of the core feedstock resources used to manufacture silicon-based photovoltaic cells. This makes the polysilicon industry fundamental in the transition toward the wider clean energy transition, that political activism is increasingly advocating for. Given the wide-scale growth of the solar industry, which the International Energy Agency claims are accelerating at unprecedented rates, and is expected to see a 60% rise by 2026, I believe polysilicon may be on its way to enjoying the strategic significance that was historically afforded to the crude oil industry.

With the recent wave of surging oil prices since early 2022, industries have been increasingly looking towards the solar power sector to meet their energy needs. Photovoltaic-based systems have been showing increased feasibility toward a mini-grid system, which benefits people not connected to a central grid via transmission lines. As a result, polysilicon is currently experiencing record-high demand, which is clearly pushing the world towards a transition. Indonesia had announced plans in January 2022, to develop polysilicon plants worth $4 billion.

In fact, the International Renewable Energy Agency had claimed that despite the challenges from the outbreak of the Covid-19 pandemic, solar saw a 127GW capacity expansion in 2020, which was an impressive climb from 98GW reported in 2019. This was in large part driven by decreasing installation costs, and a comparatively higher cost of fossil fuel energy.

At the heart of all these developments lies polysilicon, which is fundamental to the growth of the solar industry being sustained in the long term. As the solar industry continues to climb, so does the demand for polysilicon. I believe Daqo New Energy is potentially the best-positioned company in the polysilicon market to capture these wider gains, given its position as a cost leader in the high-purity polysilicon market.

In addition, to use in solar PV, the material is also vital in the following domains:

Earnings and Performance

After a nearly 2100% shoot up in income from operations in two years, as reported in its 2021 annual reports, market participants had been eagerly awaiting Daqo’s next earnings release. It is rare that investors see their diluted EPS jump up from $0.08 to $1.95 in a mere two-year period.

What the recent earnings release of F22Q1 found was that the DQ growth rocket was only getting started. Where the first quarter of the prior year delivered an EPS figure of $1.08 per share, Daqo had managed to reel in an EPS of a whopping $6.99 per share. This was 11% higher than analyst expectations of $6.29 per share. Revenues in this quarter shot up from $256 million to a staggering $1.28 billion, showing that the growth gradient for DQ is further increasing. This can be demonstrated in the EBITDA quarterly trends shown below, indicating that this growth is far from being flattened out just yet:

I believe, given the direction of the wider industry, and DQ’s position as a cost leader in the market, this phenomenal growth comes as no surprise. As the solar power transition accelerates, so too does the profitability of the polysilicon industry’s best player. This growth is far from over, and I firmly believe will continue to climb exponentially with each subsequent quarter. Solar power is coming to a stage where not adopting it is too costly a mistake.

Valuation

The table below indicates some of the most prominent players from the solar sector, and it is pretty clear that no peer comes close to the value attractiveness that DQ holds:

For one, both the PE and Forward PE of DQ is extremely low in comparison to its industry peers. This shows that the stock is currently priced extremely low in comparison to the current and future earnings. This is in part because of the heavy undervaluation that is presently inherent to DQ, as well as its extremely efficient results, with the highest return, against the lowest share price. Its ROA and ROE figures both are the highest and attest to this fact. It also points to the high financial feasibility which DQ possesses, leaving each of its competitors behind. The company’s operating margin is further evidence of this and highlights the money-making potential of DQ.

Both its EPS and revenue growth in the last five years show that its progress is unmatched and has come a long way in rapidly rising to the ranks of being a market leader. The stock also holds no long-term debt, having paid off its bank borrowings in 2021, which gives it the most impressive debt-to-equity ratio. This emphasizes the low credit risk that the stock is exposed to in comparison to its peers.

Just like the earnings story of DQ is nothing short of legendary, its valuation metrics paint just as delightful a picture. Based on the figures observed above, DQ is heavily discounted, and can only climb upwards.

Risks

The most concerning side to the impressive tale of DQ are the dark allegations of the use of slave labor and human rights abuses in its Xinjiang facilities. The region is globally known as being the region where the Chinese government has been systematically brutalizing the ethnic Uighur Muslim minorities. Allegations of forced labor have been leveled against a number of companies, specifically includes Daqo New Energy. With the UN chief of human rights expected to visit Xinjiang by late May 2022, the global spotlight will once again be shed on the systematic oppression in the region. In fact, in February 2022, a list of four Xinjiang-based companies was put before the US President, in order to be barred from imports in the US. Daqo was included in this list of companies.

Although Daqo vehemently denies these allegations, human rights groups continue to keep a close watch on the company’s activities. If the reports are proven to be true, DQ would effectively be proven as a being a facilitator of genocide. The most likely outcome of this scenario is companies from all over the world wanting to cut ties with the firm and distance themselves from it. There is no doubt that this would cause the share price of DQ to plummet and would seriously threaten its financial sustainability.

Conclusion

Few stocks have as epic a tale to tell as does DQ, which I consider being a strong buy. It is part of an industry that is rising fast and will continue to dominate as the world continues its progression towards a clean energy transition. Because of its low cost and high purity in polysilicon, DQ is proving its leadership in the industry, with an earnings growth rise that is monumental and is only just getting started. As a result of these fundamental features, the stock has the most attractive valuation metrics in comparison to its peers, where it outshines by a substantial margin.