The Most Mispriced Stock In The Market, Q1 Results | Daqo New Energy Analysis

Today I will discuss the Q1 results of Daqo New Energy $DQ together with you, which I think is currently one of the most mispriced stocks in the market.

Daqo’s Q1 results were exceptional. The company reached an all-time high production volume of 31000 metric tonnes. We can expect this volume to grow even more as they make their new factory more efficient. The cash cost to make the polysilicon has decreased since last quarter which will give the company better results in margins and earnings.

Of course, the growth in production volume is only important if the company can sell everything they make. Last quarter Daqo sold more than 38000 metric tonnes of polysilicon at an average selling price of around 33 dollars per kg. This is extremely good news, we got higher sales with very high selling prices and lower cash costs than the previous quarter. Analysts expected the average selling price to drop in 2022, which I thought was unrealistic in the current environment, and as you can see it’s only been going higher.

All this resulted into record high revenues and earnings. Daqo had almost 1.3 billion dollars in revenue with 540 million dollars in earnings. This is revenue growth of 400% year over year and earnings growth of 550% year of year. The current gross margins are still a bit lower than the 74% in September. But with the cost of silicon powder dropping we might reach the same gross margins again in the next quarters.

Since this quarter Daqo has 2.6 billion dollars in cash and cash equivalents. With 1.5 billion dollars in note receivables. Note receivables are a balance sheet item that records the value that a business is owed and should receive payment for. Funny note, Daqo has almost more cash than the current market cap. The stacked inventory from last quarter is going down, the inventory was higher due to the shipment problems in China because of COVID-19 restrictions, revenue can only be claimed if the shipment has arrived.

If we look at the liabilities side, we can see that Daqo has no short term or long-term debt. They do have some accounts payable for property. Most of the liabilities are advances from customers. The customers did pay for the goods, but since they did not yet receive their products the money is still under liabilities. This is good indicator that Daqo has a lot of demand for their products even at the higher selling prices! Overall, the balance sheet looks extremely healthy.

From here things might get a little bit crazy, the valuation. Daqo is currently trading at a pe of 2.64. This is extremely low. For sure considering this is a growth stock. Daqo is increasing their capacity 50% every year till 2025, which increases their revenue and earnings a lot as we saw in this quarter. Price to earnings to growth is 0, which means the company is highly undervalued. The company is valued around book value, given the fact that Daqo’s return on assets are 9% in the last 5 years means that something is overlooked here… Price to cash flow is only 4.3, where I usually like to see a number below 20.

In the subsidiary of Daqo, the board approved a dividend. Which would be around 5 to 6% dividend yield. The board of Daqo will also have to approve if they will pay the dividend to Daqo shareholders or maybe buyback some stock. My guess is that they will payout a dividend to cheer up the US stockholders.

Unfortunately, Daqo New Energy has been identified by the SEC under the Holding Foreign Companies Accountable Act. This means the company will be delisted by 2024, if they do not show the right auditing under the rules of the United States. The company is actively working to solve this issue. The Chinese government communicated they will be giving more access to auditing papers. I believe the management team will fix this issue, next to this Daqo does not carry any important data. For now, this will probably explain the reason why the valuation is so low at the moment. Solving this issue might bring the company to a more reasonable valuation.

Last thing that I want to discuss are the reasons why the average selling price will stay high for at least this year. First, we have inflation, war and supply chain issues. We all saw that this made commodity prices soar. Energy is important, last year we already saw some energy shortages in China. China will do everything to serve their energy needs to continue their economy growth. Reason enough to push green energy companies forward.

Second reason is demand. The demand is still higher than the current capacity available on the market, so companies are willing to pay more to get their hands on polysilicon. Analysts were afraid that other competitors would increase their capacity faster and the possible danger of new players entering the market. So far, I’ve have not seen this play out. Building a factory is one thing, manufacturing the same quality is another thing. Quality is what makes clients pay for a higher average selling price of polysilicon.

What have I been doing with this stock?

I’ve been buying more on a consistent basis. Daqo has grown to one of my conviction stocks. I’m not scared for a delisting since neither China nor the US gain anything from it. Daqo is a hard tech company and does not contain delicate data. I’m aware that the stock will probably stay flat till this issue is resolved, but you can expect huge gains if it gets solved. In the meantime, I’ll enjoy the dividends and/or buybacks.

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DISCLAIMER: I do own shares of Daqo New Energy. I am not a financial advisor. Investing is your own responsibilty. I am not accountable for any of your losses.

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