Last week I traveled to Los Angeles to attend a global solar conference, which is one of the most important conferences in the industry. At the conference I had the opportunity to meet with some old friends and learn some exciting industry news. Among the many new companies, I am particularly interested in one which just got listed on the NYSE a couple of weeks ago, Daqo New Energy (DQ).
The polysilicon companies I talked to told me that they can find buyers for large volume in the spot market at $80/kg in October very easily compared to two-weeks ago with prices at $70-$75 per kilogram and second-quarter prices in the $50-$55 per kilogram range. A recent Barron's article even reported that several small volume polysilicon contracts are signed at $100/kg.
A few Chinese media reports gave similar information. As European installers install panels like crazy in the second half of this year, panel makers have gotten a tremendous number of contracts. Current demand for polysilicon from Chinese panel makers is estimated to be 160K Metric Ton (MT) but the estimated global output of polysilicon 2011 is around 100k ton and polysilicon production capacity in China is estimated to reach only 60k ton in 2011.
Daqo New Energy
From DQ's SEC filing:
Daqo produced 1,826 MT of polysilicon in the first half of 2010, which, on an annualized basis, exceeded its installed annual production capacity of its Phase 1 production line. The company is now in the process of expanding annual production capacity to 7,300 MT by the end of 2012 through adding a Phase 2 production line and improving production efficiency.
DAQO’s clients are mainly China-based photovoltaic product manufacturers. The majority of sales are made under long term framework fixed price contracts. However, the company will sell a significant portion of its polysilicon on a spot pricing basis in the 4th quarter of 2010 due to strong market demand. As of June 30, 2010, DAQO’s major photovoltaic product customers included China Sunergy (CSUN), Solarfun (SOLF), Solargiga (GM:SEHLF), Tianwei New Energy and Yingli Green Energy (YGE), all of which are China or US listed companies.
The most important indicator of efficient operations is cost structure: DQ's cost is now only $33.5/kg, which is at the lower end of industry average cost range. DQ told Barron Reporter that the company will sell most of its polysilicon at spot market in the following quarters. This means much higher revenue at the current market than those fixed price contracts signed a few months ago.
Daqo's revenue increased from $56.4 million to $111.19 million in 2009. In the first half of 2010, total revenue has reached $97.58 million. Net Income jumped from $21.85 million in 2008 to $29.94 million in 2009. In the first half of 2010, net income was $18.15 million. The company also has a healthy balance sheet with $147 million cash and $ 600 million total assets with only $259 million total debt.
LDK (LDK) is another leading polysilicon company. The reason why I prefer DQ is very simple: DQ has less debt on its balance sheet. With similar growth potential, it is a no-brainer to pick the stock with less debt load.
With current capacity, and spot polysilicon price, I expect in the next 12 months the revenue will be current capacity (3300 ton) x poly price, which I assume to be $60/kg (it is obviously conservative) = $198 million.
If you want to put a discount on sales volume of poly (let's say 3000 ton), with $30 cost and $60 price, gross margin could be around 50% (let's say it is only 45%).
Normally, operating expense is around 7% of total revenue. Let's assume it to be 9%. The Barron's article provided an estimate of interest expense and tax by DQ management. So after interest and tax, the net income is around $51.68 million. Today's market cap is around $370 million, so PE is less than 7x.
Disclosure: Author long DQ