Now all grown up, should Daqo consider privatizing?

The polysilicon maker has more than enough cash to purchase all of its outstanding shares, as its stock remains stubbornly undervalued by investors

Key Takeaways:

• Daqo’s output rose 80% in the fourth quarter with the addition of new capacity, but its profit tumbled on plunging polysilicon prices
• The global solar power sector is likely to enter a new phase of no growth between 2024 and 2028, following several years of strong expansion, according to Wood Mackenzie

By Doug Young

If the global solar energy sector was a person, it would be just entering adulthood after a decade of adolescence that included both explosive growth and also some growing pains. The latest financial report from Daqo New Energy Corp. (DQ.US) contains many signs of that “growing up” period for the global polysilicon industry that is a key supplier to makers of solar panels that are becoming a leading source of clean energy.

After years of making panels that were only commercially viable with help from government subsidies, the industry achieved a breakthrough in the last few years by boosting panel efficiency to levels that could be competitive with coal and other traditional sources. That led to an unprecedented period of exploding demand, with average new installations growing around 28% annually between 2019 and 2023, according to consulting firm Wood Mackenzie.

That growth led companies to install massive new polysilicon capacity. In Daqo’s case the company is tripling its capacity with the construction of a massive new complex that is still gradually coming onstream in China’s Inner Mongolia region. But the addition of so much new capacity caused prices to plunge from recent unusual highs caused by supply shortages.

Now, Wood Mackenzie is saying the industry has reached a new stage, which is the adulthood in our metaphor. While it’s exciting to finally become an adult, Mackenzie also predicts there will be no growth at all in new solar panel installations between 2024 and 2028. What’s more, new installations could even contract in some of those years.

With all that background in mind, a big question becomes: What’s left to excite investors about this industry? And also: What’s the incentive for a cash-rich and debt-free company like Daqo to maintain its U.S. listing, especially considering the lack of investor interest?

That lack of investor interest has been notable since Daqo went public on the Nasdaq in 2010, around the same time that many Chinese solar companies were floating shares in New York. Its price-to-earnings (P/E) ratio has been quite low for most of that time, including its current ratio of just 2.4. Hong Kong-listed Chinese rival GCL Technology (3800.HK) is even lower at 1.8.

Here, we should point out these ultra-low levels are partly due to the companies’ soaring profits for most of last year due to spiking polysilicon prices that have now dropped dramatically. Still, Daqo trades at a forward P/E of just 3.6, which factors in falling profits this year, while GCL trades at a similar forward ratio of 3.1 – still very low levels.

At the same time, Daqo has been aggressively buying back its shares under a $700 million program announced in late 2022. In its latest report, it said it had repurchased about 16% of its outstanding shares under that program as of last December. That means the company currently has the equivalent of about 65.7 million American depositary shares (ADSs) outstanding, according to our calculations, which give the company a market value of about $1.4 billion at its latest stock price.

Lots of cash

Daqo is quite cash-rich, with $3 billion in cash at the end of last year – more than twice what it would need to buy back all of its outstanding shares at their current price. It also has no debt, which speaks to its ability to get its local government partners to foot most of the bill for its massive new facility in Inner Mongolia, and to pay for the rest with its strong cash flow.

One of the main reasons for staying public is to access capital markets to raise money through the issue of new shares. But clearly Daqo has no need for this, and is even buying back its shares. All that leads us to point out that the company really has no reason to stay public, and might be better served by privatizing – especially considering the lack of investor interest in its shares.

The company wouldn’t be the first to reach such a conclusion. Solar panel makers Trina (688599.SZ) and JA Solar (002459.SZ) were once both listed in New York, but privatized after failing to attract much investor interest. Both later re-listed in China, where they got higher valuations from local investors more interested in their stories. That could also be a potential path for Daqo should it decide to leave New York.

A look at its latest financial report just adds to the reasons why Daqo might consider privatizing as it enters its new “adult” phase. The company posted big growth in terms of output, which rose about 80% year-on-year to 61 MT in last year’s fourth quarter. But all of that was due to the addition of new capacity at the Inner Mongolia complex.

The company’s profitability moved in the opposite direction, driven by a crash that saw its average selling price (ASP) for polysilicon tumble to $7.97/kg in the fourth quarter from $37.41/kg a year earlier. As a result, the company’s revenue dropped by about 45% to $477 million year-on-year in the fourth quarter.

In one slightly encouraging sign, the crashing prices appeared to reach bottom in the previous quarter when Daqo’s ASP was an even lower $7.68/kg. But Daqo didn’t give much reason for excitement in that regard, saying it expects prices to “rebound slightly” in the first quarter, and then to stabilize in the second quarter.

The plunging prices caused Daqo’s gross margin to also tumble to 18.3% in the fourth quarter from 77.4% a year earlier. As a result, its net profit dropped year-on-year to $44.9 million in the latest reporting period from $333 million a year earlier. Though here we should also note the company reported a rare loss in the third quarter, so its situation appears to be stabilizing and improving.

At the end of the day, Daqo is entering adulthood as a relatively well-run company in an industry that should see strong and steady demand for at least the next decade. But the lack of investor interest in its story, combined with its strong cash position, show that this company really doesn’t need to be publicly traded. And its strong cash flow also indicates bond buyers would probably be more than happy to purchase its debt if and when it ever needs to raise money in the future.

The Ba

To subscribe to Bamboo Works free weekly newsletter, click here