Friday Jan 27, 2023

Daqo New Energy: An Undervalued Powerhouse In The Clean Energy Sector – Seeking Alpha

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Thesis

Daqo New Energy (DQ) is a leading polysilicon manufacturer in China with massive potential and soft competition. Daqo’s financial results paint a picture of an undervalued company that has been ignored by the broader market. The company’s free cash flow, earnings, retained earnings, return on equity, margins, and debt levels all look impeccable. Additionally, Daqo’s operational forecast looks promising as well. Polysilicon is used in the production of solar power products made by photovoltaic product producers. The clean energy market has massive growth ahead, and Daqo is poised to take advantage of it as a global leader in polysilicon manufacturing. Daqo’s production and sales volume has been consistently on the rise, the average sales price of polysilicon is increasing significantly, and Daqo’s production costs have been nearly cut in half over the last several years. The financial results produced by Daqo along with its operational outlook moving forward are extremely favorable for prospective investors looking for an undervalued gem in the current market.

(Note: All financial data addressed below is sourced directly from YCharts.com.)

Quantitative Analysis

Daqo’s free cash flow generation is strong and just getting started

I’m going to give TTM free cash flow per share figures from 3Q21, 3Q20, and 3Q16 to provide a brief insight into how Daqo’s free cash flow generation has developed. Daqo’s 3Q21 TTM free cash flow per share came in at $4.05 per share. Compare that with 3Q20 TTM free cash flow per share of ($2.87) and it’s clear that Daqo has significantly jumpstarted its free cash flow generation. Daqo’s 3Q16 TTM free cash flow per share came in at ($0.06), outlining exceptional growth in a five-year period. Daqo New Energy has gone from a company with negative free cash flow to essentially a cash cow. The company’s free cash flow yield is sitting at 10.35% which is extremely high, especially for the photovoltaic industry. Daqo’s current price to free cash flow ratio is sitting at 9.67. According to data that I could pull from CSIMarket, the average price to free cash flow ratio Daqo’s industry is roughly 48. Regardless of industry, Daqo’s price to free cash flow ratio of 9.67 and overall free cash flow generation is quite attractive.

Free Cash Flow TTM (Dalton Hicks. MS Excel.)

Daqo’s earnings performance and growth of retained earnings look great

Daqo’s earnings results have also looked great. I will provide 3Q16 TTM EPS and 3Q21 TTM EPS to provide insight into Daqo’s impressive earnings growth over the last five years. Daqo’s 3Q16 TTM EPS came in at $0.92, with 3Q21 TTM EPS at $8.88. That translates to a massive CAGR of 57.4% on a year-over-year basis. With Daqo’s EPS sitting at $8.88, the company is trading at a P/E ratio of 4.4. Data from CSIMarket puts the average P/E ratio of peers in the renewable energy industry at roughly 62. Daqo New Energy is undervalued according to basic financial analysis as well as peer comparisons on an earnings basis.

Earnings Per Share TTM (Dalton Hicks. MS Excel.)

Daqo has also done a solid job at growing its retained earnings. Daqo’s retained earnings figure in 3Q16 came …….

Source: https://seekingalpha.com/article/4490397-daqo-new-energy-an-undervalued-powerhouse-in-the-clean-energy-sector

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