Daqo New Energy Corp. (NYSE: DQ) The second-quarter release demonstrated the company’s pace of growth as one of China’s leading polysilicon players remains intact. However, investors are advised to consider the possibility of further normalization in selling prices rise as supply increases. In addition, management also hinted that they expect further moderation until 2024, although it should still be at reasonable levels.
We observed that DQ had recovered remarkably from its March capitulation lows, as the perfect storm of headwinds from radiation risks, worsening macros and COVID lockdowns rattled Chinese stocks. However, we remain concerned about a possible normalization of growth in the future, which could have a significant impact on its underlying parameters.
Additionally, DQ is approaching critical resistance levels that previously saw heavy selling pressure. Therefore, we urge investors to be cautious at current levels and patiently wait for a deeper pullback first.
As such, we rate DQ as a Hold for now.
Solid DQ growth, but expect growth to normalize
As seen above, average selling prices (ASP) of Daqo’s polysilicon have exploded over the past year. Given China’s hunger for the transition to renewable energy, Daqo has been a key beneficiary as a leading player in the polysilicon supply chain. Additionally, it has also benefited from the up cycle in semiconductors as the accumulation of fabs continues to demand critical supplies from Daqo as the industry struggles to address the imbalance between supply and demand. demand, further driving up polysilicon prices.
However, we also noted that the growth rate slowed from 2021, with Daqo’s ASPs growing 59.1% in Q2, down from the 176% increase in Q1. The company also hinted at further standardization through 2024 as supply catches up. CEO Longgen Zhang emphasized:
So we consider [in H1′] 2023, [the] the price will continue to hold at around 250 RMB per kg. For the second half of next year, the price may come down. I think it might be 180-200 RMB. Then, beyond next year, really, we can’t predict which direction the price will go. Whereas if the module price goes down, the market demand will be higher. I think this will stimulate the demand for polysilicon. So I think at a certain point there is a certain balance. So we think the price maybe will drop slightly [in] Q4 2023. Then really get back to maybe normal around 120 in 2024. So basically we don’t think polysilicon will fall below 120 RMB per kg. That’s what we believe. (Call on Daqo FQ2’22 results)
Still, Daqo is well-prepared to capitalize on the current high prices, as its production has held up remarkably well, with Daqo reporting 67.4% year-on-year production volume growth in the second quarter. Additionally, the company’s upcoming facilities in Inner Mongolia could add another 100,000 tonnes, coupled with lower costs. Therefore, even with potentially lower ASPs through 2024, the company has worked hard to improve its operational efficiency and margin profile.
However, consensus (bullish) estimates suggest that Daqo’s margin profile may continue to deteriorate through FY23. Therefore, we postulate that investors should expect further normalization in growth of its polysilicon ASPs, which could impact Daqo’s margins in the future.
Accordingly, we are concerned that the recent pick-up in DQ’s buying momentum may be affected by the underlying impact on its profitability through FY23. Accordingly, investors are advised to pay close attention the company’s ability to maintain its margins in the future.
Is DQ stock a buy, sell or hold?
We postulate that DQ likely hit its long-term low in March, consistent with the capitulation lows seen in Chinese equities.
However, investors should note that DQ has recovered remarkably from its lows in March and May. Further upside buying has also been rejected recently at its early July highs, fairly close to its near-term resistance zone.
Therefore, we consider Daqo’s price action to be fairly well balanced now, with no clear buy triggers, and we are not bearish on its momentum either. However, we remain concerned about its ability to maintain its buying momentum at current levels, given the potential normalization of its growth and profitability profile going forward.
Therefore, we rate DQ as a hold for now.