Daqo New Energy: At A Pivotal Buying Moment

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Pieces of polycrystalline silicon connected a polysilicon wafer pinch microchips.

Anatoly Morozov

Daqo New Energy Corp. (NYSE:DQ) released its FQ4'22 net report connected February 28. It demonstrated that nan maturation successful its polysilicon mean trading prices aliases ASPs has continued to normalize, justifying nan steep pullback from its highs in August 2022.

Despite that, we updated investors successful our early January article that nan pullback could scope a bottom, urging investors that it's "time to beryllium greedy."

DQ has outperformed nan S&P 500 (SPX) (SPY) since then, up astir 11%, comparative to nan SPX's 3.8% uptick, contempt nan caller pullback successful Chinese equity ADRs. Moreover, it was up by almost 33% from its January lows done its February highs, arsenic savvy investors bought nan pessimistic lows successful January.

Daqo polysilicon ASPs alteration %

Daqo polysilicon ASPs alteration % (Company filings)

Despite nan moderation successful its ASPs maturation done FQ4, nan resilience of its expertise to sustain its value activity was highly remarkable.

As seen above, Daqo New Energy posted an ASP of $37.3 successful FQ4, up 10.4% YoY, arsenic maturation normalized. It besides represented a 2.7% QoQ increase, contempt nan downstream inventory accommodation successful CQ4'22, worsened by a "temporary seasonal slowdown."

However, DQ stressed that its utilization has improved successful FQ1'23, arsenic customers reacted to little prices to bolster demand.

Despite that, caller price trends and guidance commentary suggested that nan value normalization mightiness not beryllium complete successful 2023, moreover though DQ is still expected to support its value leadership.

Accordingly, downstream customers are still watching from nan sidelines, apt anticipating prices to autumn further arsenic Daqo and its peers ramp production.

CEO Longgen Zhang besides highlighted that prices could autumn from RMB220 successful Q1 to betwixt RMB100 to RMB120 by Q4. However, nan institution remains assured of its costs structure, emphasizing that "[our] polysilicon is very profitable and will proceed to make money."

With that successful mind, we judge investors will apt attraction connected its 5A and 5B description phases, which will beryllium captious to lifting its mean accumulation measurement to mitigate nan imaginable steep autumn successful prices.

Management updated that Phase 5A of its Inner Mongolian description (+100K MT capacity) has proceeded "smoothly." Daqo New Energy anticipates nan task to beryllium completed by June 2023, accretive toward its 2023 accumulation guidance.

Accordingly, guidance guided an FY23 accumulation outlook of 192.5K MT astatine nan midpoint, indicating a YoY summation of 44%. Also, it's connected way for its Phase 5B description plan, which will adhd different 100K MT capacity, expected to beryllium completed by "the extremity of 2023."

As such, we judge nan accumulation ramp for Daqo New Energy must beryllium intimately watched by investors, moreover though nan secular tailwinds for nan star power manufacture stay robust.

Despite that, fears complete a imaginable regularisation of star wafers export from China could perchance scupper nan description plans of nan star proviso concatenation successful China.

A caller DIGITIMES study highlighted specified a anticipation arsenic China reacts to protect against star wafer technological transfers. It stressed:

China's restrictions connected tech exports for star wafers are designed to cement its activity successful nan star power market, hobble nan self-production capacity of competing countries, and create much practice values for its partners successful nan Belt and Road Initiative. - DIGITIMES

The taxable was besides discussed betwixt an expert and guidance astatine its net conference. However, nan institution did not disclose immoderate actual plans to found ex-China accumulation facilities, moreover though Zhang accentuated that "the institution will do a study if immoderate opportunities arise."

Given nan heightened geopolitical rivalry betwixt nan US, its allies, and China, we judge investors request to use an due "geopolitical discount" connected specified headwinds.

Chinese President Xi Jinping has besides planned to consolidate much powerfulness wrong nan statement arsenic he rolls retired "deepening structural reforms" of China's authorities apparatus. Therefore, it appears to beryllium shifting much powerfulness to Xi's statement activity and "further [eroding] boundaries betwixt nan statement and authorities agencies."

As such, investors should ever see nan geopolitical consequence of investing successful Chinese companies arsenic Xi strengthens his control.

DQ value floor plan (weekly)

DQ value floor plan (weekly) (TradingView)

DQ appears to beryllium consolidating constructively, pinch nan lows successful January well-supported.

Despite that, it must robustly clasp nan levels supra nan 200-week moving mean aliases MA (purple line) earlier an upward move to re-test November highs seems possible.

With DQ's momentum perchance adjacent nan oversold zone, we parsed that different introduction opportunity for investors to bargain nan caller pullback is constructive.

Rating: Buy (Reiterated).

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Editor: Naga

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