Daqo New Energy After Q1 Earnings: Too Cheap To Ignore

Leading high-purity polysilicon producer Daqo New Energy Corp.'s (NYSE:DQ) Q1 FY2023 earnings release showed further weakness in growth from Q4 FY2022.

However, we assessed that market operators previously anticipated the less robust release, as DQ had fallen more than 25% from its early March highs through this week's lows.

Notably, we gleaned buyers have stepped up to defend the selloff, returning after the earnings release. Management also reminded investors that Daqo had started to execute its massive $700M share repurchase authorization that was approved in November 2022.

Accordingly, Daqo has deployed about $85M so far, buying back its shares at an average cost of about $50.4. Management highlighted the company is expected to consummate its repurchase authorization fully by the end of 2023.

As such, based on the remaining authorization of about $615M, it represents nearly 20% of DQ's current market cap, a significant support to defend against steep selling pressure.

CFO Ming Yang articulated that while there's "no specific timing for [the] share repurchase," management will consider the "share price attractiveness" in making its move.

Hence, we assessed that management's commentary suggests that the company will likely be a buyer on significant dips, providing more support for buyers who decide to add exposure.

With that in mind, it likely helps assure investors that the company can manage the potentially falling average selling prices, or ASPs through the rest of the year, as it impacted Q1's results.

Accordingly, Daqo posted revenue of RMB709.8M in Q1, down 44.6% YoY, as ASPs fell significantly.

However, the company's ability to lower its production costs helped mitigate the drop in its gross margin.

Daqo posted a gross margin of 71.4% in FQ1, down from 77% in the previous quarter. However, it was well above the 63.5% mark the company posted in the previous year.

Management also highlighted that it's confident in its ability to drive down costs further as it expands production capacity in 2023.

Notably, Daqo highlighted that the construction of its Phase 5A 100K MT Inner Mongolia facility had been completed. As such, the company "expects to ramp up production to full capacity by the end of June 2023."

With that in mind, the company should see a remarkable bolster for its Q2 production capacity to about 45K MT at the midpoint, representing about a 33% increase from Q1's capacity.

In addition, the company is targeting a full-year production of about 190.5K MT for FY23, representing a YoY increase of about 46%.

While the demand/supply dynamics remain in flux and could potentially impact the ASPs moving forward, the company has demonstrated that its low-cost base has remained resilient.

Moreover, management reminded investors that it does not expect an oversupply currently, as "the supply and demand are relatively balanced overall."

Furthermore, if necessary, the company has the levers to pull to curtail production increases to deal with unforeseen circumstances leading to potential overproduction.

Coupled with its solid profitability, strong cost controls, and execution track record, Daqo's operating performance should remain robust, even though investors should anticipate further ASP impact in the next few quarters.

Moreover, DQ is given the best possible A+ grade for its valuation by Seeking Alpha Quant, suggesting it remains highly attractive.

Despite that, DQ still suffered from selloffs at critical resistance zones in August 2022, November 2022, and March 2023.

As such, we believe investors must choose their buy levels carefully to avoid buying into momentum surges and improving their risk/reward profile.

However, the recent surge in DQ has already been digested.

As seen above, DQ dropped significantly from its early March highs toward its lows this week.

Buyers came back to defend against the selloff (but the week is not over yet), likely holding the line against the 200-week moving average or MA (purple line).

As such, we assessed that buying sentiment in Daqo New Energy Corp. remains constructive at the right support levels and, therefore, is conducive to adding more positions on weakness.

Rating: Buy (Reiterated).

Important note: Investors are reminded to do their own due diligence and not rely on the information provided as financial advice. The rating is also not intended to time a specific entry/exit at the point of writing unless otherwise specified.

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