Daqo New Energy Corp – current price $40/ share
I wrote this DD but its a repost from KS_stocks. Full Disclosure: I own stock in DQ.
Daqo is a chinese company that manufactures polysilicon for photovoltaic cells. In the latest quarter (Q1, 2022) the company produced 31,383 MT of polysilicon, up from 23,616 MT the quarter before. They sold over 38k MT, considerably higher than the 31k MT they produced but with covid and normal business practices this is not that much more, though we might want to cut their numbers around 19.2% (the difference between what they produced and what they sold) as next quarter the sales will assumedly be closer to the actual amount produced. From sales they generated 1280mil in revenue (1034 mil when cutting the revenue the 19.2% discussed above) and 535 mil in net income (432 mil with 19.2% subbed out) or $6.99 per ADS ($5.64 with 19.2% subbed out).
Though they may have lower volumes next quarter due to the effects of covid (or maybe not, hard to say what effect this may have on next quarter), this nonetheless implies $5.64 * 4 = $22.56 in yearly earnings at the current run rate giving an implied PE ratio of 1.77. That's right, they have a PE of somewhere around 1.77, at the current run rate.
In addition to their ridiculously low PE, the current quarters adjusted sales of 1034 mil is 303% higher that sales from the same quarter the year before (256.1 mil sales for Q1, 2021). A large part of the huge increase in sales is due to a new plant opening, though higher sales prices also comes into play.
Daqo's guidance for this year in terms for sales seems to infer that sales for the remainder of the year will be at similiar levels to the 1st quarter but no higher. When companies offer this guidance they tend to err on the safe side, so its possible volumes for the remainder of the year will be higher, but its probably safest to take the company at their word and thus assume, for now, no major change in sales volumes this year.
Its also worth noting that many Chinese companies (including Daqo) in the same and similiar sectors to Daqo have come under fire for possible human rights violations. However, Daqo has said they are not themselves quilty of these violations and have even allowed some access to some of their facilities to prove it. Additionally, they have gotten into some trouble with the Chinese authorities for making these statements. From all this, it seems likely that Daqo is mostly telling the truth, though admittedly this is difficult to verify completely. However, some companies similiar to Daqo also look very enticing in terms of their multiples and much of the reason for this may be the alleged human rights violations and turning off many western investors, but this may be unfair to Daqo, though again it difficult to say for sure.
Additionally, I want to note a feeling I get regarding Daqo. This is nothing more than a feeling, but it might mean something. With regards to Daqo, I just get the impression that they are on the up and up, and management is doing an excellent job. You can't really assign any value to a company based on a feeling and I could be completely wrong, but it does at least seem like they are making the right moves, and doing an excellent job and this could be a company worth holding for many years.
So, what is a company with 300%+ growth in the past year and a PE of somewhere around 1.77 really worth. Though Daqo may not have much growth this year in revenue (per their outlook, though as stated earlier this outlook may be very conservative) its likely they will have decent growth going forward, possibly far better than decent. Thus, I am going to assign them a forward growth rate of 25% (though in my heart I feel like this number may actually be far larger). Dilution in the company is fairly low so I'm leaving it out of the calculation.
So, with a possible growth rate of 25%, I would assign them a possible future PE of 15 (to give a PEG of well below 1 and again, the 25% growth rate may be far to low). This implies that the company current should be priced 15 / 1.77 = 8.47 times higher than the current price (giving a return of 747%). If we guess that is would take 4 years for this to occur, then when the 25% growth rate is added in this gives a extremely high 1.25 ^ 4 * 8.47 = 20.68, or 1968% return in 4 years, which amounts to about 112% annualized.
Now its not clear that Daqo will ever achieve a PE of 15, or anywhere close to it. Its not clear that Daqo's sales will grow at 25%, though its highly like they will grow (and may easily grow by alot more than 25%). There are multiple problems that could come up with this company relating to covid, problems with authorities, who knows what else. Nonetheless, it seems obvious that even with all the problems taken into account, this company could do very, very well in the future. So, with a possible future return of 100% plus, this company easily meets the annualized 42% plus requirement to be included on this board.
Best luck everyone and remember – do your own DD because I could be some idiot that knows nothing about anything.
Final note, if anyone reading this DD is interested in doing a bit extra DD and putting anything they find in the comments, it appears that on top of everything else, Daqo may be issuing a dividend (via a subsidiary of around 5%). If anyone could check that and see it that's true, I'd appreciate it. Also, I read somewhere (and now I can't find the article) that Daqo was finishing a new plant, possibly at the end of 2022, making a better type of polysilicon. Problem is, this could've been an old article and the “new” plant may actually be the plant they recently finished. If anyone finds any other info on this, please put it in the comments. thanks.
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