Daqo New Energy: A Bet on Solar’s Future

Daqo New Energy is one of the lowest cost producers of high purity polysilicon, a critical raw material used in the manufacturing of solar panels. Operating primarily in China, the company has built a strong position through cost efficiency, product quality, and a debt free balance sheet. The question remains: Does this solar supplier have a place in your portfolio?

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The Business

Daqo New Energy is a Chinese company that produces high-purity polysilicon for the global solar photovoltaic industry. Founded in 2006, the company operates entirely in China with large-scale facilities located in Xinjiang and Inner Mongolia. These regions offer some of the lowest electricity costs in the country, giving Daqo a structural cost advantage in what is an energy-intensive production process. As of 2024, Daqo has reached a nameplate production capacity of 305.000 metric tons annually, making it one of the world’s largest and most cost-efficient producers of solar-grade polysilicon. The company uses a highly efficient production method called the modified Siemens process, which is designed to recycle materials and reduce waste. This closed-loop system helps lower production costs and minimizes environmental impact. Daqo’s polysilicon is known for being extremely pure and consistent in quality, which is important for making modern, high-efficiency solar cells. More than 99 percent of the polysilicon it produces is used to make mono-wafer solar cells, and about 70 percent meets the even higher standards needed for the next generation of solar technology known as n-type wafers. Daqo’s competitive moat is centered on cost leadership, scale, product quality, and financial strength. Its low-cost position is supported by access to cheap electricity, integrated and efficient production processes, and a location strategy that leverages lower operating costs in western China. The company has grown through a series of well-executed expansion phases that have added scale and improved unit economics. It also maintains high quality control systems that allow it to deliver consistent, ultra-high-purity polysilicon to demanding customers. This reliability and performance have earned the trust of major solar manufacturers. In an industry characterized by price volatility and cyclical downturns, its strong balance sheet, with minimal debt and significant cash reserves, provides resilience and the ability to invest through the cycle.

Management

Xiang Xu serves as the CEO of Daqo New Energy, a role he assumed in August 2023 after more than 15 years of involvement with the company. He joined Daqo New Energy as a director in 2007 and has since held a variety of leadership positions, contributing to the company's growth into one of the world’s leading low-cost producers of high-purity polysilicon for the solar industry. Xiang Xu holds an Executive MBA from Nanjing University and has spent the majority of his professional career in the solar energy sector. His background combines deep operational knowledge of the polysilicon manufacturing process with experience in corporate strategy and management. He is also the son of Daqo’s founder and current Chairman of the Board, Mr. Guangfu Xu, and remains the company’s largest individual shareholder. This alignment of ownership and leadership suggests a strong personal stake in Daqo’s long-term success. While public information about Xiang Xu remains limited, his long tenure at the company and family ties to its founding provide continuity and stability at the executive level. Given his background in the industry, his familiarity with Daqo’s operations, and his significant equity interest, I believe Xiang Xu has both the incentive and the experience to guide the company through a competitive and evolving global solar market.

The Numbers

The first number we will look into is the return on invested capital, also known as ROIC. We want to see a 10-year history, with all numbers exceeding 10% in each year. Daqo’s ROIC has been very up and down over the years, and that mostly comes down to three things. First, polysilicon prices move in cycles. When prices are high, like they were from 2020 to 2022, Daqo makes a lot more money, and its ROIC rises sharply. But when prices fall – as they did in 2023 to 2024 – profits drop quickly, and ROIC can even turn negative. Second, building new production capacity is expensive. Daqo invests heavily upfront to expand its facilities, such as with its Phase 4 and Phase 5 projects. These projects cost a lot of money before they start generating profits. That means the company’s invested capital rises before returns catch up, which temporarily drags down ROIC. Third, Daqo has high fixed costs. Things like electricity, equipment, and maintenance don’t change much whether prices are high or low. So when polysilicon prices fall, the company's revenue drops faster than its costs, and profits shrink quickly. ROIC was negative in 2024 because Daqo made a loss that year, even though it had invested heavily in expanding its production. The main reason was a big drop in polysilicon prices. There was too much supply in the market, and prices fell below the level where Daqo could make a profit. As a result, the company went from earning strong profits in 2023 to reporting a net loss in 2024. At the same time, Daqo had just finished building new factories, especially the large Phase 5 expansion in Inner Mongolia. These projects added a lot of capital to the company’s balance sheet. But since profits collapsed, the company couldn’t earn a return on those investments – at least not right away. To make things worse, Daqo also had to write down the value of some of its inventory and equipment during the year. These accounting losses made the financial results look even weaker. Because the business is cyclical, Daqo’s ROIC is likely to remain volatile in the years ahead.

The next numbers are the book value + dividend. In my old format this was known as the equity growth rate. It was the most important of the four growth rates I used to use in my analyses, which is why I will continue to use it moving forward. As you are used to see the numbers in percentage, I have decided to share both the numbers and the percentage growth year over year. To put it simply, equity is the part of the company that belongs to its shareholders – like the portion of a house you truly own after paying off part of the mortgage. Growing equity over time means the company is becoming more valuable for its owners. So, when we track book value plus dividends, we’re essentially looking at how much value is being built for shareholders year after year. Daqo New Energy has managed to deliver a positive equity every year in the past decade. The main reason is that Daqo has very little debt. The company doesn’t borrow much money, so it doesn’t have large liabilities that could drag down its equity. It relies mostly on its own capital instead of loans to run and grow the business. Another reason is that Daqo made strong profits in earlier years, especially when polysilicon prices were high. The company kept those profits instead of paying them all out, and that built up its retained earnings. Even though it made a loss in 2024, the profits from previous years gave it a strong cushion, so equity stayed positive. Equity dropped in 2023 and 2024 because the company lost money and had to lower the value of some of its assets. But since Daqo had built up strong equity over time, it remained in positive territory despite these setbacks.

Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that margins offer a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. Over the years, Daqo’s free cash flow has been very up and down. In some years, like 2022 and 2023, it was strongly positive. But in 2024, it turned deeply negative. There are a few reasons for this. First, Daqo spends a lot of money building new factories and expanding its production. These big investments often happen before the new capacity starts making money, so free cash flow can drop in those years. Second, Daqo’s cash flow from operations depends heavily on polysilicon prices. When prices were high, the company generated a lot of cash from its core business. But when prices dropped sharply, like they did in 2024, the company lost money on operations. That made it difficult to cover ongoing investments and caused free cash flow to go negative. This also explains why the free cash flow margin has been so volatile. In strong years, Daqo generates solid cash from each dollar of revenue. But in weaker years, it struggles to break even, and the margin drops significantly. The company prioritizes using free cash flow to repurchase shares. They currently have a share buyback program in place and are prepared to deploy that cash once they see a turning point for the polysilicon sector. The free cash flow yield has also been volatile over time, which shows that there are periods when the stock may be available at very attractive prices. However, we will return to valuation later in the analysis.

Debt

Another important aspect to consider is the level of debt. It is crucial to determine whether a business has manageable debt that can be repaid within a period of three years. In 2024, Daqo reported a loss of about 345 million dollars, which came out to a loss of around 5 dollars per share. But a big part of that loss came from one-time accounting charges - about 81 million from inventory write-downs and 176 million from lowering the value of old equipment. These are non-cash items, meaning they don’t affect the actual cash the business brings in. If you take those charges out, the company would have made a profit of around 89 million dollars instead of a loss. That would have worked out to a positive earnings per share of about 1,30 dollars. For that reason, we will use the adjusted numbers when evaluating the company’s ability to manage debt. The calculation shows that Daqo New Energy has no debt. In fact, the company has carried no debt for the past four years and maintains a strong balance sheet. Debt is therefore unlikely to be an issue for the company going forward.

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Risks

Excess polysilicon production is a risk for Daqo New Energy. In 2024, the company faced a very challenging market environment due to a large mismatch between supply and demand in the solar PV industry. While global demand for solar products continued to grow, it did not keep pace with the rapid increase in supply. As a result, polysilicon prices fell sharply, at times even below the cost of production. At the core of the issue is significant overcapacity. Total polysilicon production in 2024 was estimated at around 1,82 million metric tons, but total nameplate capacity - meaning the maximum output if all plants were running - was over 3,2 million metric tons. That’s more than double what the market needed. This imbalance created strong downward pressure on prices, leading to losses for many producers. Even though some leading manufacturers cut back production toward the end of the year to reduce inventory and avoid high seasonal energy costs, the drop in output wasn’t enough to fully correct the imbalance. This kind of oversupply is especially risky for companies like Daqo, whose profitability depends heavily on market prices. The company’s selling prices are driven by supply and demand, and when supply floods the market - as it did in 2024 - prices drop quickly. Because Daqo also operates in a capital-intensive industry with high fixed costs, lower prices can hurt profits significantly. Historically, the polysilicon market has seen similar patterns. Prices tend to rise during periods of strong demand and limited supply, but fall just as quickly when supply catches up or exceeds demand. This has happened several times over the past decade, including in 2018, 2019, and most recently in 2023 and 2024. Going forward, Daqo expects the global solar market to keep growing. However, unless a meaningful number of producers shut down capacity or exit the market, oversupply may continue in the near term. This would likely keep polysilicon prices at low levels, putting further pressure on margins.

The reduction in or elimination of government subsidies is a risk for Daqo New Energy. Although the solar industry has grown rapidly over the past decade, much of that growth has been supported by government subsidies and incentives. These include feed-in tariffs, tax credits, and other forms of financial support that make solar power more competitive with traditional energy sources like coal and natural gas. In many places, solar is still not the cheapest option when you look at the full cost of installing and running a system, especially without subsidies. Daqo sells polysilicon, which is the key raw material used to make solar panels. So when subsidies and incentives encourage more solar projects, that increases demand for Daqo’s products. But if governments reduce or remove that support, demand can drop quickly. This is not just a theoretical risk, it has happened before. For example, China has cut its solar feed-in tariffs several times since 2013. In 2019 and 2020, the country shifted to a competitive bidding system that reduced how much support projects could receive. And in 2025, China announced a major change: all new renewable energy projects will have to sell electricity at market prices, with no guaranteed tariffs. This means that many new solar projects will face more pricing uncertainty and potentially lower returns. If the industry hasn’t yet reached a point where it can grow without support, these policy changes could slow down the pace of new solar installations. That would reduce demand for polysilicon and hurt Daqo’s revenue. Even though global solar capacity continues to grow - reaching over 500 gigawatts of new installations in 2024 - this growth depends in part on how affordable and attractive solar remains for developers. If financial incentives are pulled back too quickly, especially in key markets like China, the transition to solar could slow down.

Macroeconomic conditions are a risk for Daqo New Energy. Daqo operates in a cyclical industry that is sensitive to global economic trends, especially developments in China, where nearly all of its revenues and assets are based. Any slowdown in the global economy or the Chinese economy can reduce demand for solar projects, which in turn lowers demand for polysilicon and affects Daqo’s revenue and profitability. The company’s customers, mainly solar panel and wafer manufacturers, are also vulnerable to economic conditions. When the economy weakens, these customers may delay or reduce orders, slow down production, or face financial difficulties that make it harder for them to pay on time. That puts pressure on Daqo’s sales and cash flow. In China, the government plays a significant role in managing the economy through industrial policies, capital controls, and regulatory guidance. While some of these policies can support growth, they can also restrict investment or limit expansion in industries the government views as having excess capacity, such as polysilicon. If authorities decide to scale back solar development or limit new projects, Daqo could be directly affected. Inflation and interest rate changes are another source of risk. Recent interest rate increases in the United States and other major economies have caused global market volatility. While some countries have begun to ease rates, it is unclear how quickly or consistently that trend will continue. Higher rates make it more expensive to finance large solar projects, which can reduce investment in the sector and weaken demand for Daqo’s products.

Reasons to invest

Proactive initiatives for polysilicon is a reason to invest in Daqo New Energy. Despite recent challenges caused by oversupply in the solar PV industry, there are encouraging signs that the industry is taking active steps to restore balance and stabilize pricing. One of the most important developments is the growing effort among major polysilicon and solar manufacturers in China to introduce self-regulation. In December 2024, Daqo and other leading companies reached a consensus to reduce irrational competition by managing production more responsibly. This collective move aims to improve industry health and prevent further price collapses. These efforts are already having an impact. Since late 2024, production volumes have declined month by month, and industry utilization rates have dropped to around 50 percent. As a result, supply has fallen below demand in some months, helping reduce excess inventory. This has supported a gradual recovery in pricing and improved the short-term outlook for producers like Daqo. Another reason for optimism is the record pace of solar PV installations. China added over 270 gigawatts of new solar capacity in 2024, a 28 percent increase from the year before. This stronger-than-expected demand reinforces confidence in solar’s long-term role in the global energy transition and supports continued demand for polysilicon. Looking ahead, there are also discussions about further structural changes in the industry, including the possible retirement of outdated production lines and stricter coordination on capacity planning. These changes could help reduce long-term supply pressure and support more sustainable margins for producers like Daqo. In summary, while the industry remains cyclical and competitive, Daqo is positioned to benefit from a more disciplined and coordinated market. Proactive steps to cut excess supply and strong end-market demand are signs that the polysilicon market is on a path toward recovery.

Increasing production of N-type products is a reason to invest in Daqo New Energy. In the solar industry, there is a growing shift from traditional P-type products to newer N-type technology. N-type solar products offer better efficiency and longer-term performance. Unlike P-type panels, which can degrade over time due to exposure to light and air, N-type panels are more stable and maintain their output for a longer period. This makes them more attractive for both utility-scale projects and long-term investors. Daqo is actively increasing its focus on N-type production to align with this market transition. Demand for N-type products is rising faster than supply, which stands in contrast to the oversupply seen in P-type products. This creates a favorable environment for companies like Daqo that have the ability to produce high-quality N-type polysilicon at scale. Most new entrants in the industry still lack the technology or expertise to produce N-type products effectively. This gives Daqo an advantage in a space where product quality and purity matter more than ever. The company has already made significant progress, with a growing share of its total output now dedicated to N-type material. By expanding its N-type capacity, Daqo is not only responding to stronger demand but also strengthening its competitive edge. N-type polysilicon also sells at a higher price than P-type, reflecting its superior performance and growing market preference. As the solar market becomes more focused on high-efficiency solutions, this shift improves pricing power, supports better margins, and positions the company to benefit from the next phase of solar adoption.

A strong balance sheet is a reason to invest in Daqo New Energy. Even though Daqo lost money in 2024, the company still has a very solid financial foundation. It holds more than 2 billion dollars in quick assets, such as cash, short-term investments, and bank deposits. These can easily be turned into cash if needed. Just as importantly, Daqo has no financial debt, which means it doesn’t owe money to banks and doesn’t have to make interest payments. This gives the company more flexibility and stability, especially during challenging times. Right now, many companies in the solar industry are struggling because polysilicon prices have fallen below production costs. Some of these companies are losing money and may not be able to stay in business much longer. Daqo, however, is in a much better position. Thanks to its strong balance sheet, it can keep running its operations, invest in its most efficient factories, and continue improving its technology. It is also lowering costs by focusing production in its best facilities and becoming more energy efficient. Because Daqo is financially stronger than many of its competitors, it has a much better chance of making it through the current downturn. Right now, many producers are selling polysilicon at prices that are lower than their actual costs, which means they are losing money on every unit sold. Companies with high debt or weak cash positions may not be able to keep operating under these conditions. Some of them may be forced to shut down production, delay projects, or even exit the market entirely. Daqo, on the other hand, has no debt and plenty of cash. This allows it to keep producing even when prices are low, without the pressure of having to repay loans or raise money just to stay in business. While the company may still report short-term losses, it can afford to wait for better conditions. As weaker players cut back or disappear, the oversupply of polysilicon will gradually shrink. When that happens, prices are likely to recover.

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Valuation

Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators for free

The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 1,30, which is the adjusted EPS from 2024. I have selected a projected future EPS growth rate of 8%. Finbox expects EPS to grow by 8,1% in the next five years. Additionally, I have selected a projected future P/E ratio of 16, which is twice the growth rate. This decision is based on Daqo New Energy's historically higher price-to-earnings (P/E) ratio. Finally, our minimum acceptable rate of return has already been established at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be $11,10. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy Daqo New Energy at a price of $5,55 (or lower, obviously) if we use the Margin of Safety price.

The second calculation is known as the Ten Cap price. This represents the return a company owner or stockholder would receive based on the purchase price of the business. In simple terms, it is a way to estimate the return on investment, and we want to see a minimum annual return of at least 10 percent. However, we cannot make this calculation based on the 2024 results, since cash from operations was negative, even after adjusting for the impairment charges discussed earlier in the analysis.

The final calculation is called the Payback Time price. It is a calculation based on the free cash flow per share. However, since free cash flow per share was negative in 2024, even after adjusting for the impairment charges mentioned earlier in the analysis, we cannot make this calculation.

Conclusion

I believe that Daqo New Energy is an intriguing company with good management. The company has built a moat through cost leadership, scale, product quality, and financial strength. Return on invested capital has been volatile over the past decade due to the cyclical nature of the industry. That same cyclicality also affects free cash flow, which has turned negative in some years. It is something investors need to be prepared for if they want exposure to this sector. Excess polysilicon production is a risk for Daqo New Energy because when supply grows faster than demand, as it did in 2024, prices fall sharply, sometimes even below the cost of production. Since Daqo operates in a capital-intensive industry where profits rely heavily on selling prices, oversupply can lead to significant losses and margin pressure. The reduction or elimination of government subsidies is another risk. Much of the demand for solar projects - and therefore for polysilicon - relies on financial support like feed-in tariffs and tax credits. If those incentives are reduced, as seen in China, solar project returns may decline, slowing installation growth and weakening demand for Daqo’s products. Macroeconomic conditions are also a risk. Daqo’s business depends heavily on the global and Chinese economy. A slowdown can reduce demand for solar installations and polysilicon, while rising interest rates or policy shifts can limit investment in the sector and put pressure on profitability. Proactive initiatives for polysilicon are a reason to invest. Daqo is working with industry peers to reduce oversupply and stabilize prices through self-regulation and responsible production cuts. These efforts, combined with strong demand for new solar capacity, are helping the market recover and improving the outlook for producers like Daqo. Increasing production of N-type products is another reason to invest. These higher-efficiency materials are in growing demand and sell at better prices than traditional P-type products. By focusing on N-type polysilicon, Daqo is gaining a competitive edge in a space where product quality and technical capability matter more than ever. A strong balance sheet is also a key reason to consider Daqo. The company has no debt and holds over 2 billion dollars in quick assets, giving it the financial strength to survive a downturn while others struggle. This allows it to keep operating, invest in efficiency, and emerge stronger when market conditions improve. There are several things to like about Daqo New Energy, but the short-term uncertainty in the industry means I will not be investing in the company at this time.

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