Daqo New Energy: A Shining Opportunity
Last week, I traveled to Los Angeles to attend a global solar conference, one of the most important conferences in the industry. At the conference, I had opportunities to meet some old friends and learn more exciting news about this industry.
Among the companies I learned about, I am particularly interested in a new player that was just listed at NYSE a couple of weeks ago: Daqo New Energy (DQ).
Macro Background
Polysilicon companies I talked to told me that they could easily find large-volume buyers in the spot market at $80/kg in October, compared with prices at $70-$75 per kilogram two weeks ago and second-quarter prices in the range of $50-$55 per kilogram. A recent Barron’s article even reported that several small-volume polysilicon contracts are signed at $100/kg.
A few Chinese media outlets report similar information. Since European installers have been installing panels like crazy during the second half of this year, panel-makers have had a tremendous number of contracts. Current demand for polysilicon from Chinese panel-makers is estimated to be 160k metric tonnes (MT), but the estimated global output of polysilicon for 2011 is around 100k tons. In addition, polysilicon production capacity in China is estimated to reach only 60k tons in 2011.
Daqo New Energy
This is what I got 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, fixed-price contracts. However, the company will sell a significant portion of its polysilicon on a spot-pricing basis in the fourth quarter of 2010 due to strong market demand. As of June 30, 2010, DAQO’s major photovoltaic product customers included China Sunergy, Solarfun (SOF), Solargiga, Tianwei New Energy and Yingli Green Energy (YGE), all of which are China or U.S. 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 the industry’s average cost range.
DQ told the Barron’s reporter that the company will sell most of its polysilicon at spot market in the following quarters. This means much higher revenue at current market prices than those fixed price contracts signed a few months ago.
Financials
DAQO’s revenue increased from $56.4 million to $111.19 million in 2009. During the first half of 2010, total revenue had 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 in cash and $600 million in total assets with only $259 million total debt.
LDK is another leading polysilicon company. My preference for DQ can be explained very simply: DQ has less debt on its balance sheet. With similar growth potential, it is a no-brainer to pick stock with less debt load.
Valuation
With current capacity and spot polysilicon price, I expect that in the next 12 months, the revenue would be current capacity (3,300 ton) x poly price, which I assume to be $60/kg (it is obviously conservative) = $198 million
If you want to put a volume discount on sales of poly, let’s say 3,000 tons.
With a $30 cost and a $60 price, the gross margin could be around 50%; for the sake of argument, let’s say it is only 45%
Normally, operating expense is around 7% of total revenue. Let’s assume that to be 9%. The Barron’s article provided estimates of interest expense and taxes from DQ’s management. So after interest and taxes, net income is around $51.68 million.
Today’s market cap is around $370 million. So PE is less than 7x, which offers big potential.
Conclusion
Buy great companies at reasonable or bargain prices. I believe DQ will be above $20 within the next two years and able to offer fantastic returns to the investors.
Disclosure: Long DQ
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