Solar Star Daqo at Pivotal Point as It Inks Major New Deal

Stock and profits for key supplier of main ingredient used to make solar panels have soared on rising prices for its polysilicon

By Doug Young

Shares of solar materials maker Daqo New Energy Corp. (NYSE: DQ) have surged over the past year, and the company hit the headlines this week after inking a major new supply agreement.

The announcement follows an unrelated negative development for the industry from the U.S. and a week ahead of Daqo’s next quarterly results announcement.

We’ll examine the various headlines more closely shortly, including what the company has previously promised to deliver in its upcoming fourth-quarter report. But before that, we’ll look at the bigger story about Daqo, namely its meteoric stock gains over the last year.

That’s key background for the latest headlines, since Daqo’s inflated stock looks suspiciously like a bubble that could pop at even the slightest hint of bad news. That means the company faces pressure to keep positive news flowing, including the latest announcement of its supply deal with Tianjin Zhonghuan Semiconductor Co. Ltd., which we’ll examine shortly.

Daqo’s 2010 Nasdaq IPO landed at the height of a wave of solar and other new energy listings in New York by Chinese companies. The company makes polysilicon, the main ingredient in solar cells and in high demand as the technology becomes commercially competitive with traditional coal-powered electricity.

Daqo’s priced its IPO shares at $9.50 apiece, but saw them trade lower for a number of years after that, as the industry struggled from a variety of factors. Those included dependence on government subsidies and a barrage of anti-dumping tariffs by the U.S. and Europe, which claimed China unfairly provided state support to its solar sector.

The company’s shares dipped into penny-stock territory ­– below  $1 at a low point in 2012 – but gradually rebounded as the industry outlook improved. They passed an important milestone in 2019, finally topping their IPO price. But since last April, irrational exuberance has overtaken the broader sector, and Daqo’s stock in particular. Its shares have risen tenfold and now trade around $110 each.

Daqo isn’t the only one to see big gains over the last year. Numerous new energy exchange-traded funds (ETFs) have also posted gains in the 60-80% range over the last year, as many investors anticipate the sector is poised for big growth fueled by governments that see solar power as key to helping them meet carbon-reduction targets.

Rising Prices, Rising Profits

Daqo has benefited from a recent sharp rise in polysilicon prices. In its last earnings report for the third quarter of 2020, the company said the average price for its polysilicon jumped 30% from a year earlier to $9.13 per kilogram. During the same period, the company’s actual production cost for polysilicon was largely unchanged. As a result, its net profit rose by a factor of seven to $20.8 million for the quarter.

Against that larger backdrop, the company has just announced a major new agreement to supply Zhonghuan Semiconductor with 41,000 metric tons of polysilicon over the next three years, averaging around 14,000 metric tons per year. To put that in perspective, the company manufactured 72,500 metric tons in the 12 months through last year’s third quarter. That means this new agreement could account for about 20% of its sales volume over the next three years.

Importantly, the announcement says the price for such sales will be negotiated monthly. That seems to reference a trap that ensnared many solar panel makers seven or eight years ago, when they negotiated long-term polysilicon supply deals at fixed prices when those prices were high. When polysilicon prices later tumbled, the panel makers had to negotiate costly settlements to exit those deals.

In a separate piece of news – unrelated to this deal – but important for Daqo and its peers, U.S. President Joseph Biden has made a move indicating he will support anti-dumping solar tariffs implemented by former President Donald Trump last year aimed at closing a loophole in earloer tariffs against Chinese panels. The original tariffs didn’t include two-sided solar panels, and Trump simply added those to the list of products that were subject to anti-dumping levies.

That news hit the broader solar sector, including Daqo’s shares, which fell about 6.5% on Tuesday.

Last there’s the “news” that Daqo will report its latest quarterly results next Tuesday. In its last quarterly report, it forecast it would produce 19,500 to 20,500 metric tons of polysilicon during the fourth quarter and sell 20,500 to 21,500 tons. The company produced just 16,204 metric tons in the fourth quarter of 2019 and sold 13,291 tons. That means it should post another huge jump in profits due to the big jump in production combined with the big rise in polysilicon prices.

Following its 2020 rally, the company’s stock now trades at a sky-high price-to-earnings (PE) ratio of 106, based on its 2019 earnings. The fact that Daqo is profitable is already an accomplishment in itself, since nearly all of its global peers are losing money, including Germany’s Wacker Chemie, South Korea’s OCI and China’s own problem-plagued GCL-Poly Energy.

Daqo’s profits rose by a factor of five in the year’s first three quarters, so it’s quite possible its PE based on full-year 2020 profit could come down to a more reasonable level of around 20. Still, the past has shown that polysilicon prices are highly cyclical. And if those prices show weakening signs in Daqo’s upcoming earnings report or in the months ahead, which seems quite possible, the company’s stock could be due for a sizable correction.

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