Polycrystalline silicon foam tends to burst, and the future of Daqo New Energy is uncertain

With an impending oversupply, domestic rival LONGi shares slashed prices for key materials used to make solar panels for the first time in a year and a half

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Shares in Daqo New Energy are down 40 percent in the past month as there are signs that a two-year spike in polysilicon prices has peaked

The company reported that revenue in the third quarter increased nearly fourfold year-over-year as polysilicon prices quadrupled over the period

This article is written by Yang Ge

As the winter solstice approaches, solar stocks make headlines, with news that a long-simmering bubble in the field of polysilicon, the main raw material used to make solar panels, is about to burst. The news came as no surprise, as many have been predicting that this will happen after the amazing rise over the past two years.

But you might think that the rupture was a bit abrupt, based on the stock performance of DQ.US, China's leading polysilicon maker. The value of the stock has lost a quarter of the past week and has fallen 40% in the past month.

The latest catalyst for the sale appears to be media coverage. According to Caixin, one of the company's competitors, China-listed LONGi Green Energy Technology Co., Ltd. (601012. SH) cut the price of polysilicon wafers for the first time in a year and a half. Caixin quoted the company's website as reporting that specifically, LONGi shares lowered the price of its 182 mm, 166 mm and 159 mm silicon wafers by 7.2% to 9.8% on November 30.

The report quoted analysts as saying that LONGi shares tried to seize the opportunity by first reducing prices, and there may be further price cuts in the future. InfoLink, a Chinese website that tracks polysilicon prices, said prices of various sized polysilicon wafers fell by 3.1 percent to 9.7 percent last week, with more declines expected in the coming week.

The news could be the main factor in the 10 percent decline in Daquan New Energy stocks on Friday. Like many of its peers, Daqo New Energy has rapidly built new capacity to meet the explosive demand for solar panels as countries race to install more clean energy. At the same time, solar power is competitive with traditional coal-fired power plants for the first time, which means that solar power plants no longer need government subsidies to be commercially operated, which has played a further role.

Typically, the construction of all these new capacities is helping to puncture the current polysilicon price bubble.

Daqo New Energy is currently building such a large new plant, known in the company's materials as "Phase 4B," and it talked about the project in its earnings call after the latest quarterly results released at the end of October. The plant will have the capacity to produce about 35,000 tons of polysilicon per year, an increase of nearly 50 percent over Daqo New Energy's existing capacity.

The company's management said on a conference call that construction of the facility should be completed by the end of this year and that it should be able to produce at full capacity in the first quarter of next year. The big question, of course, is what level of prices will be in the first quarter of next year when all the new capacity is put into use. After spending so much money on the construction of facilities, even if the price falls, Daqo New Energy will face the pressure of having to invest all its production capacity.

Soaring

At this point, we will take a look at the latest financial report of Daqo New Energy, from which we can see the surge in polycrystalline silicon prices in the past year, and the company's prediction of the price trend of polycrystalline silicon in the coming year.

It should be noted that these predictions were made more than a month ago and are probably outdated. But as we pointed out at the outset, the prediction that polysilicon prices will peak in the fourth quarter of this year has been around for a long time, so arguably the recent signs of price declines are not surprising.

No matter how you look at it, after the recent decline, Daqo New Energy's stock looks undervalued, perhaps because it added too much new capacity when the market peaked. The stock's current forward P/E ratio is only 3.4 times, compared to 30 times. German giant WCH.DE has a forward price-to-earnings ratio of 14 times, while Daqo New Energy's local rival, 1799.HK, has a trailing P/E ratio of 9 times.

Of course, Daqo New Energy cannot be blamed for not telling investors that the price of polysilicon is about to fall, because the company has been warning about this for a long time. The company said in its latest results that the average price of polysilicon in the third quarter was $27.55, up 32% from the average price of $20.81 in the second quarter, meaning the price was twice as high as a year ago.

PVinsights said polysilicon sold for as much as $36.8 on the spot market last week, with a low of $22, indicating a lot of volatility at the moment. Zhang Longgen, CEO of Daqo New Energy, said on a conference call that the company expects the price of polysilicon to remain between $30 and $36 per kilogram in the first half of next year, and hover around $30 in the second half of the year.

Such prices still represent huge growth compared to a year ago, although LONGi's recent sharp price cuts could herald an imminent war, as producers may be more aggressive in their price cuts in order to retain market share.

Daqo and its peers certainly made huge profits from the boom. The company reported that third-quarter revenue jumped to $585.8 million, up 33 percent sequentially and nearly five times year-over-year. Profit rose 26% quarter-on-quarter to $292.3 million, a slower but healthy pace.

Unsurprisingly, more than a dozen analysts surveyed by Yahoo Finance believe that Daqo's profits will stagnate next year and remain at 2021 levels. Revenue is expected to grow slightly by 13 percent, which is well below the company's share of new capacity additions. Given all the new production coming soon, and the relatively large price cuts at LONGi, it wouldn't be too surprising if analysts were to finally downgrade their forecasts for Daquan and the industry as a whole based on price trends in the coming weeks.