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Daqo's Profit Plunges As Growing Polysilicon Glut Casts Cloud Over Sector

Apr. 29, 2023 2:00 AM ETDaqo New Energy Corp. (DQ)6 Comments
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  • Daqo New Energy’s revenue and profit plunged by about half in the first quarter as polysilicon prices fell and the company’s inventory grew.
  • The company’s average selling price could fall further in the second quarter as new capacity comes on stream and it clears out inventory.
  • As its sales and polysilicon prices sagged, Daqo’s revenue plunged 45% in the first quarter to $710 million from $1.28 billion a year earlier.

Closeup of polysilicon plate

bee_photobee/iStock via Getty Images

Let the blood-letting begin.

The latest quarterly results from Daqo New Energy Corp. (NYSE:DQ; 688303.SS) were filled with such blood, as the polysilicon sector where the company is a global leader entered a highly

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Comments (6)

Alternative take:
As polysilicon margins skyrocketed to 400% during black swan supply chain event of 2020-2022, Daqo wisely converted cash into debt-free capacity expansion (from 70,000MT to approx 205,000MT).

Now, as margins return to normalized ≈100% levels (around $15/kg), Daqo produces at the lowest cost ($7.51 kg cash cost + depreciation) and can now manufacture 4x as much poly as at the end of 2019.

The latest results are not a "bloodbath", but a fully anticipated regression to normalized margins.

As the cost leader in the industry and with the strongest balance sheet, Daqo is positioned to continue dominating the polysilicon industry for years to come, and will be able to continue growing capacity, though at a lower rate than when margins temporarily ballooned to over 400%.

If they're going to sell 205,000,000 kgs of polysilicon a year (without further expansion) and make around $7.50 in gross profit per kg doing it - and then take cash and put it into buybacks and hopefully dividends - then I think $3.5bn is an insanely low market cap.
DQ commented that the share buy back of remaining USD 615mio is likely to be executed over the course of 2023 and it will bring its share count to approx 65mio. The incoming dividend by its subsidiary is slightly more than 50% of its net income and it is worth about $14.40 per share. The adjusted PE is 1.14x.

I am unsure how much is the dividend income going to be regular but in a NAV and FCF viewpoint, it is very undervalued. I believe the solar industry is here to stay and should have a positive long term prospect as we marched into greener form of energy.

Based on my DCF model, the intrinsic should be close to 100 per share. We do not include the equity interest of their subsidiary (70%). This remains a high quality classic Ben Graham style of investing.

Happy Investing!
Do you have an update about the delisting risk?
Friso Alenus profile picture
@Fuad123 the delisting risk is the same for all adr's or chinese listed companies on the U.S. stock market. Auditing is being checked by SEC, we still need to hear back.
Friso Alenus profile picture
Very blood-letting for great company performance. Ooooh no EBITDA margins fell to only 69%, really worrisome. No mention of the quartz shortage (maintenance in quartz maker companies) to make silicon wafers, which caused temporarily lower demand for polysilicon and higher demand for wafers, next to seasonal lower demand. Polysilicon can fall to $16 dollar and Daqo still has 50% margins. Revenues next quarter back to a minimum of $1.2 Billion (1/3 of market cap).

GCL also produces wafers and the price of wafers has increased. So it is not surprisingly the company increased their profits compared to a decline for Daqo. Next, you don't know the volume sold. GCL production has increased a lot from last year. The news does not say anything about profitability and margins.

Publishing a proper article this week.
Thanks for summarizing the facts. Appreciated. The main point for the low valuation is not the fundamentals and the poly pricing, neither the inventory. DQ has to list in HK or they have to pay dividends. The ADR structure in combination with operating in the Xinjiang could be toxic for US investors IMO. Additionally when listening into the earnings call, management still works with a lot of conditional phrasings with regards to buybacks and dividends. Last time a majority of the buyback program should have been executed in May/ June, now it is the official full year 2023 again. What I would appreciate if you could dig deeper into the share count, instead of decreasing ADS count we see in 1 year an increase from basic 74.710.994 to 78.298.405. I do not get the ends together with the SBC over the last year. For me very intransparent. The buyback program should take 18% of the ADS from the market. Expected ADS 31.12.2023 in the area of 65.000.000.
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