Daqo New Energy: A Bet on Solar’s Future

Daqo New Energy is one of the world’s leading producers of high purity polysilicon, a critical material used in the manufacturing of solar panels. The company operates large scale production facilities in China and focuses on delivering cost efficient, high quality polysilicon to some of the world’s largest solar manufacturers. With a strong position as a low cost producer, continuous improvements in production efficiency, and exposure to the long term growth of the solar industry, Daqo aims to strengthen its role in the global transition toward renewable energy. The question remains: Does this polysilicon producer deserve a spot in your portfolio?

This is not a financial advice. I am not a financial advisor and I only do these post in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me. 

For full disclosure, I should mention that I do not own any shares in Daqo New Energy at the time of writing this analysis. If you would like to copy or view my portfolio, you can find instructions on how to do so here. If you want to purchase shares or fractional shares of Daqo New Energy, you can do so through eToro. eToro is a highly user-friendly platform that allows you to get started on investing with as little as $50.

The Business

Daqo New Energy was founded in 2007 and has grown into one of the world’s leading producers of high-purity polysilicon for the solar photovoltaic industry. The company operates entirely in China, with large-scale production facilities in Xinjiang and Inner Mongolia, and has built a production base capable of producing hundreds of thousands of metric tons of polysilicon annually. Daqo sells its products to solar manufacturers, which then process the material into ingots, wafers, cells, and modules used in solar power systems. This places the company at the very beginning of the solar value chain, supplying a critical raw material that determines the efficiency and performance of the final solar product. Because polysilicon production is extremely energy-intensive, Daqo’s strategy of locating its facilities in regions with some of the lowest electricity costs in China is central to its business model. These structural cost advantages, combined with large-scale facilities and continuous process improvements, allow the company to produce polysilicon at a lower cost than many competitors. Daqo uses the modified Siemens process with a closed-loop system that recycles materials and reduces waste, improving both efficiency and consistency. At the same time, the company applies strict quality control throughout the production process, enabling it to deliver ultra-high-purity polysilicon that meets the requirements of modern high-efficiency solar cells. Daqo’s competitive moat is primarily built on cost leadership, scale, product quality, process efficiency, and financial strength.  Its low-cost position is the most important advantage, as access to cheap electricity, efficient production processes, and large-scale operations place it among the lowest-cost producers in the industry. This does not eliminate cyclicality, but it increases the likelihood that the company can remain profitable for longer than higher-cost competitors when prices decline and allows it to recover more quickly when market conditions improve. Scale further strengthens this position, as higher production volumes spread fixed costs and improve unit economics, making it more difficult for smaller players to compete. Product quality is another key factor, as reliable and consistent polysilicon is essential for customers producing high-performance solar cells, and this reliability helps build long-term relationships with major manufacturers. The company’s continuous investment in process improvements and operational efficiency further reinforces its competitive position over time. In addition, Daqo’s strong balance sheet provides resilience in a highly cyclical industry where prices can fluctuate significantly depending on supply and demand. This financial strength allows the company to continue investing in capacity and technology during downturns, which can strengthen its position relative to weaker competitors. However, the moat is not without limitations. The business operates in a commodity-like industry with significant price volatility, relies on a concentrated customer base, and is exposed to geopolitical and regulatory risks due to its operations in China. Still, within the polysilicon industry, Daqo’s combination of low costs, large-scale production, high product quality, and financial resilience creates a competitive position that is difficult for many competitors to replicate.

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 the company as a director in 2007 and has since held a variety of leadership positions, contributing to its development into one of the world’s leading low-cost producers of high-purity polysilicon for the solar industry. His appointment reflects a focus on continuity, operational discipline, and long-term capacity expansion in a highly cyclical and competitive industry. Before becoming CEO, Xiang Xu was closely involved in the company’s strategic development and large-scale expansion phases, which transformed Daqo from a relatively small producer into a global leader in polysilicon manufacturing. During this period, the company significantly increased its production capacity while improving cost efficiency through better plant design, process optimization, and location strategy. His long tenure within the organization has given him a deep understanding of the polysilicon production process, capital allocation decisions, and the dynamics of the solar supply chain. 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 operational expertise with strategic oversight, particularly in managing large-scale industrial projects and navigating periods of both rapid growth and industry downturns. This experience is important in a business where profitability can shift quickly depending on polysilicon prices, supply expansions, and demand from solar manufacturers. A defining aspect of Xiang Xu’s leadership is his ownership alignment. He is the son of founder and Chairman Guangfu Xu and remains the largest individual shareholder of the company. This structure creates a strong link between management decisions and long-term shareholder outcomes, as his personal financial interests are directly tied to the performance of the business. It also reinforces continuity in the company’s strategic direction, as leadership remains closely connected to its founding vision. Since becoming CEO, Xiang Xu has taken over leadership at a time when the polysilicon industry is experiencing increased competition, rapid capacity additions, and significant price volatility. His role involves balancing continued expansion with cost discipline while maintaining the company’s position as a low-cost producer. This requires careful capital allocation and operational execution, particularly during periods of oversupply when weaker competitors may struggle. While public information about Xiang Xu remains relatively limited compared to CEOs of global consumer brands, his long history with the company, deep operational knowledge, and significant ownership stake provide a foundation of stability and alignment. His leadership appears focused on maintaining Daqo’s cost advantages, improving efficiency, and navigating industry cycles rather than pursuing aggressive diversification or complex strategic shifts. Given his experience within the company, his understanding of the polysilicon industry, and his direct financial alignment with shareholders, Xiang Xu appears well positioned to guide Daqo New Energy through a cyclical and capital-intensive market. His leadership approach is likely to remain centered on operational excellence, disciplined growth, and preserving the company’s competitive position as a low-cost producer in the global solar supply chain.

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 New Energy has not delivered that. Instead, its ROIC has been highly volatile, ranging from very strong levels above 50% in peak years to negative returns in the most recent period. This pattern is not a coincidence but a direct reflection of the economics of the polysilicon industry. The most important driver behind this volatility is the price of polysilicon. When prices are high, as they were from 2020 to 2022, Daqo generates very strong profits because its cost base remains relatively stable while selling prices increase significantly. This leads to a sharp expansion in margins and, in turn, very high ROIC. The opposite happens when prices fall. In 2023 and especially in 2024 and 2025, the market moved into oversupply, and prices declined rapidly. Because polysilicon behaves like a commodity, Daqo has limited pricing power, and lower prices quickly translate into lower profits or even losses. This is the primary reason why ROIC turned negative in the most recent years. A second important factor is the company’s aggressive capacity expansion. Daqo has invested heavily in new production facilities, particularly with its large expansion in Inner Mongolia. These investments significantly increase the capital base before they contribute fully to earnings. This creates a temporary mismatch where invested capital rises sharply while returns lag, which mechanically pushes ROIC down. In strong markets, this works in the company’s favor, as the new capacity generates high returns. In weak markets, it amplifies the decline in ROIC. Third, the business has a high fixed cost structure. Polysilicon production requires significant upfront investment in plants and equipment, and ongoing costs such as electricity, maintenance, and labor remain relatively stable regardless of output prices. When prices fall, revenue declines much faster than costs, which compresses margins and can push profitability into negative territory. This operating leverage is a key reason why ROIC swings so dramatically across cycles. The negative ROIC in 2024 and 2025 is therefore not a structural breakdown of the business but rather the result of a severe downcycle combined with a recently expanded capital base. Lower polysilicon prices, combined with the full impact of new capacity coming online, have led to weak profitability at a time when invested capital is at its highest level. Looking ahead, ROIC is likely to recover, but the timing depends almost entirely on the balance between supply and demand in the polysilicon market. If supply growth slows and demand for solar installations continues to increase, prices should stabilize and eventually recover. In that scenario, Daqo’s earnings would improve, and ROIC would likely turn positive again. However, if oversupply persists for longer, returns could remain weak for an extended period. Over the long term, it is unlikely that Daqo will achieve consistently high and stable ROIC like asset-light or branded businesses. Instead, ROIC should be viewed as cyclical. During strong parts of the cycle, the company can generate very high returns due to its low-cost position and operating leverage. During weak periods, returns can fall sharply and even become negative. What matters most is that Daqo is positioned as a low-cost producer, which increases the likelihood that it remains among the last companies to be forced out during downturns and among the first to benefit when the cycle turns.

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’s equity has generally increased over time, but with noticeable fluctuations in recent years. This pattern is closely linked to the cyclical nature of the polysilicon industry rather than changes in the underlying business quality. During strong years, especially from 2020 to 2022, the company generated very high profits as polysilicon prices surged. These profits were largely retained in the business, which led to a sharp increase in equity. This is why you see such strong growth in those years. The declines in equity seen in 2023 and 2024 are primarily the result of weaker profitability and losses during a downcycle. As polysilicon prices fell due to oversupply, earnings dropped significantly, which reduced the amount of value being added to the balance sheet. In addition, the company had to adjust the value of certain assets and inventory, which further weighed on equity. These movements can look concerning at first glance, but they are typical for a capital-intensive and cyclical business where profits can change quickly from one year to the next. At the same time, it is important to note that equity has remained positive throughout the entire period. A key reason for this is Daqo’s conservative balance sheet. The company relies less on debt than many industrial businesses and has built up a significant base of retained earnings during strong years. This creates a buffer that allows it to absorb losses during downturns without eroding its financial foundation. Management has also highlighted that the company maintains substantial cash and liquid assets, which further strengthens its ability to navigate weaker market conditions. The increase in equity in 2025 is an early sign of stabilization. While profitability has not fully recovered, the improvement suggests that the worst of the downcycle may be passing, or at least that the company is adjusting to the current pricing environment. However, one year does not establish a trend, and equity development will continue to depend heavily on market conditions. Looking ahead, equity is likely to grow over time, but not in a smooth or predictable way. In strong markets, Daqo can generate significant profits, which will drive meaningful increases in equity. In weaker periods, equity may decline again as profits come under pressure. The key question is not whether equity grows every single year, but whether the company can build value across a full cycle. Given its low-cost position, large scale, and relatively strong balance sheet, Daqo appears well positioned to continue increasing equity over the long term, even though short-term fluctuations are likely to remain a defining characteristic of the business.

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.  Daqo New Energy has not shown stable free cash flow over time. Instead, it has been highly volatile, with periods of very strong cash generation followed by years of significant cash outflows. This pattern is closely tied to the economics of the polysilicon industry and the company’s expansion strategy. The most important driver of this volatility is, once again, the price of polysilicon. When prices are high, the company generates strong cash flow from its core operations because revenues increase while costs remain relatively stable. This was clearly visible in 2021 and 2022, where Daqo produced very high levels of free cash flow and strong margins. However, when prices decline, operating cash flow can drop quickly or even turn negative. This is what happened in 2024, where lower prices combined with weak profitability led to a sharp deterioration in cash generation. Since free cash flow starts with operating cash flow, this has a direct and significant impact. A second major factor is capital expenditures. Daqo operates in a capital-intensive industry and has invested heavily in expanding its production capacity over the years. Large projects, such as the Inner Mongolia expansion, require significant upfront spending before they contribute meaningfully to earnings. This means that even in periods where the business is generating cash, free cash flow can be reduced or turn negative because the company is reinvesting heavily for future growth. The very large negative free cash flow in 2024 reflects both weak operating conditions and peak investment spending. The improvement in 2025 is an important development. While free cash flow remained negative for the full year, operating cash flow turned positive again, and investment spending declined significantly as the major expansion projects were largely completed. This combination led to a much smaller cash outflow compared to the previous year and suggests that the worst pressure on free cash flow may be behind the company. Management has also indicated that capital expenditures are expected to be significantly lower going forward, which should reduce the drag on free cash flow. Looking ahead, free cash flow is likely to recover, but the timing depends on market conditions. If polysilicon prices stabilize and volumes remain strong, operating cash flow should continue to improve. With lower capital expenditures, a larger share of that cash can translate into free cash flow. Based on recent trends and management commentary, it is reasonable to expect that free cash flow could turn positive again in the near term if market conditions do not deteriorate further. However, as with ROIC, this will remain cyclical rather than stable. Over the long term, Daqo’s free cash flow will likely follow the same pattern as its earnings. During strong cycles, the company can generate substantial amounts of cash due to its low-cost position and operating leverage. During downturns, free cash flow can decline sharply or turn negative. The key difference compared to less capital-intensive businesses is that Daqo must continuously invest in maintaining and expanding its production capacity, which adds another layer of volatility. Daqo uses its free cash flow in a relatively disciplined way. A significant portion is reinvested into the business, primarily through capital expenditures aimed at expanding capacity, improving efficiency, and maintaining its cost advantage. These investments are essential in an industry where scale and cost position determine long-term competitiveness. In addition, management has indicated that share repurchases are part of its capital allocation strategy, but the company is taking a cautious approach and prefers to wait for more clarity in market conditions before deploying significant capital toward buybacks. This suggests that preserving financial flexibility remains a priority.

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 of earnings. In 2025, Daqo reported a loss of about 170 million dollars. The main reason for this was that polysilicon prices remained low due to too much supply in the market. Since Daqo sells a fairly standardized product, it cannot control prices, so when prices fall, profits can drop quickly or turn negative. Because earnings were negative, it does not make sense to calculate how many years it would take to repay debt using earnings. However, this is not a concern in Daqo’s case. The company has no debt and maintains a strong balance sheet with significant cash reserves. This gives it the flexibility to get through difficult periods without financial stress.

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Risks

Excess polysilicon production is a risk for Daqo New Energy. The company operates in a market where supply can increase very quickly, as many producers expand capacity at the same time to benefit from periods of high demand. However, demand for solar products, while growing, does not always keep pace with this rapid expansion. This creates a mismatch between supply and demand, which puts pressure on polysilicon prices. This is exactly what happened in 2025. Even though global demand for solar energy continued to grow, it was not enough to absorb the large increase in polysilicon supply. As a result, prices declined, and Daqo’s average selling price fell from ,66 dollars per kilogram in 2024 to 5,25 dollars per kilogram in 2025. At the same time, sales volumes also declined, which led to a significant drop in revenue from just over 1 billion dollars to 665 million dollars. When both price and volume move in the wrong direction, the impact on profitability can be severe. The reason this is such an important risk is that polysilicon behaves like a commodity. Daqo does not control the market price and must accept the prevailing price, even if it is close to or below the cost of production for parts of the industry. When supply exceeds demand, producers compete more aggressively, and prices can fall quickly. This directly reduces margins and can lead to losses, as seen in recent years. Another factor that makes this risk more pronounced is the industry’s tendency to expand during strong markets. When prices are high, companies invest heavily in new capacity to increase output and gain scale. However, these new facilities often come online at the same time, which can suddenly increase supply and push the market into oversupply. This cycle of expansion followed by oversupply has been a recurring pattern in the polysilicon industry. Excess production also affects customer behavior. Solar manufacturers may delay purchases if they expect prices to fall further, or they may reduce orders if they already hold large inventories. This can lead to lower sales volumes for Daqo, even if end demand for solar installations remains strong. In this way, oversupply impacts both pricing and demand at the same time.

The reduction in or elimination of government subsidies is a risk for Daqo New Energy because the growth of the solar industry has historically depended on financial support from governments. Solar energy projects often require high upfront investments, and while costs have declined significantly over time, solar power is still not always the cheapest option without subsidies. To encourage adoption, governments around the world have provided incentives such as feed-in tariffs, tax credits, and rebates. These incentives make solar projects more attractive by improving returns for developers, which in turn increases demand for solar panels and the materials used to produce them, including polysilicon. This matters directly for Daqo because it operates at the very beginning of the solar value chain. When subsidies support new solar installations, demand flows through the entire system, from panels to wafers to polysilicon. But when subsidies are reduced or removed, the economics of building new solar projects can become less attractive. This can lead to delays, cancellations, or slower growth in new installations, which reduces demand for polysilicon and puts pressure on both prices and volumes. This is not just a theoretical risk. Governments, particularly in China, have gradually reduced support for the solar industry over time. Feed-in tariffs have been cut multiple times, and the system has shifted toward more market-based mechanisms where projects must compete on price rather than rely on guaranteed returns. More recently, China has required new renewable energy projects to sell electricity at market prices instead of fixed tariffs. This increases uncertainty for project developers, as future revenues become less predictable. Another important development is the reduction of export incentives, such as lower VAT rebates for solar products. These changes can make it less attractive to produce and export solar components, which can ripple through the supply chain and affect demand for upstream materials like polysilicon. When combined with an already competitive market, this can further pressure prices and profitability. Subsidy reductions also tend to amplify existing industry cycles. During periods of oversupply, like the one seen in recent years, the removal of support can worsen the imbalance between supply and demand. If fewer new solar projects are built, excess polysilicon supply remains in the market for longer, which keeps prices low and delays recovery for producers like Daqo.

Macroeconomic factors is a risk for Daqo New Energy because the company operates in a cyclical industry that is highly sensitive to global economic conditions. Demand for solar energy ultimately depends on investment in new energy projects, and these investments are influenced by economic growth, access to financing, and overall market confidence. When the global economy slows or becomes uncertain, companies and governments may delay or reduce spending on large-scale solar projects. This directly reduces demand for solar panels and, in turn, the polysilicon that Daqo produces. This risk is particularly important because Daqo generates most of its revenue in China. The Chinese economy has shown signs of slower growth in recent years, and this can affect demand in several ways. Solar manufacturers, which are Daqo’s main customers, may reduce production or delay expansion plans if they expect weaker demand for solar installations. At the same time, these customers may become more cautious with their inventories and order volumes, which can lead to lower sales for Daqo. In more challenging economic environments, there is also a higher risk that customers face financial difficulties, which can delay payments and put pressure on Daqo’s cash flow. Macroeconomic conditions also influence the solar industry through financing. Solar projects require significant upfront investment, and they are often financed through loans or external capital. When interest rates rise, as they have in recent years, the cost of financing these projects increases. This can make some projects less attractive or delay new investments, which reduces demand across the solar value chain. Even if interest rates begin to decline, uncertainty about the direction of monetary policy can still make investors more cautious. Geopolitical factors add another layer of risk. Trade tensions between major economies, particularly between China and the United States, can affect the solar supply chain. Tariffs, export restrictions, and changes in trade policy can reduce demand from certain markets or make it more difficult for Daqo’s customers to sell their products internationally. Conflicts in regions such as Eastern Europe and the Middle East can also create volatility in energy markets and broader financial markets, which can indirectly impact investment decisions in renewable energy. The combination of these factors can create a challenging environment. In periods of strong economic growth, demand for solar energy tends to increase, supporting higher prices and profitability. In weaker economic conditions, demand can slow, financing becomes more expensive, and customers become more cautious. This can lead to lower prices, reduced volumes, and weaker financial performance for Daqo.

Reasons to invest

Proactive initiatives for polysilicon is a reason to invest in Daqo New Energy because the industry is beginning to take coordinated steps to address one of its biggest challenges, excess supply. In recent years, rapid capacity expansion across the solar value chain has led to a significant imbalance between supply and demand, which caused sharp declines in polysilicon prices and weak profitability for producers. However, there are now clear signs that both companies and regulators are actively working to restore balance and create a more sustainable market environment. One of the most important developments is the growing level of cooperation among major polysilicon producers in China. Leading companies, including Daqo, have reached agreements to reduce irrational competition and manage production more responsibly. This type of industry self-regulation is important because it helps prevent situations where companies continue producing at full capacity even when prices are unsustainably low. By aligning production levels more closely with demand, the industry can reduce excess supply and support a more stable pricing environment. Government policy is also playing a central role. Chinese authorities have identified overcapacity and destructive price competition as key issues and have made anti-involution initiatives a national priority. These initiatives aim to shift the industry away from competing purely on price and toward a more balanced model focused on efficiency, quality, and technological progress. Measures such as enforcing rules against selling below cost, strengthening quality standards, and encouraging consolidation are designed to improve the overall health of the industry. These efforts are already starting to show results. Production volumes declined meaningfully in 2025 as some capacity was taken offline, and prices began to recover from the lows seen earlier in the cycle. At the same time, Daqo adjusted its own production levels, gradually increasing utilization throughout the year as market conditions improved. The company also reduced inventory levels by selling more than it produced, which is a positive sign that supply and demand are moving back toward balance. These proactive initiatives could lead to a more stable and sustainable polysilicon market. While the industry will likely remain cyclical, the severity of future downturns may be reduced if supply growth becomes more disciplined and better aligned with demand. For Daqo, this creates a more supportive long-term environment where its cost advantages, scale, and operational efficiency can translate more consistently into profitability.

Favorable long term trends for the solar industry is a reason to invest in Daqo New Energy because the company is positioned at the very beginning of a value chain that is expected to grow significantly over the coming decades. Daqo produces high-purity polysilicon, which is a key raw material used in the vast majority of solar panels. As more solar panels are deployed globally, demand for polysilicon increases, which directly benefits upstream producers like Daqo. One of the most important long term drivers is the continued growth in global electricity demand. As economies develop and more industries rely on electricity, the need for power generation continues to rise. This is particularly evident in areas such as electric vehicles, industrial automation, and digital infrastructure. Data centers and artificial intelligence are becoming especially important, as they require large and reliable amounts of electricity. As these sectors expand, the need for new energy capacity increases, and solar energy is one of the fastest ways to meet that demand. Solar energy has several advantages that support its long term growth. It is one of the most scalable forms of energy, meaning new capacity can be added relatively quickly compared to alternatives such as nuclear or large fossil fuel projects. This speed of deployment is increasingly important in a world where energy demand is rising faster than new infrastructure can be built. In addition, the cost of solar energy has declined significantly over the past decade, making it one of the most competitive sources of new electricity generation in many regions. As technology continues to improve, solar panels are becoming more efficient, which further strengthens the economics of solar projects. Another key trend is the global push toward decarbonization. Governments, utilities, and corporations are all working to reduce carbon emissions and transition toward cleaner energy sources. Solar energy plays a central role in this transition because it provides a low-emission alternative to traditional energy sources. This creates a structural demand driver that is likely to persist for many years, regardless of short term economic conditions. The electrification of transport is also an important factor. As electric vehicles gain market share, overall electricity consumption is expected to increase. This applies not only to passenger vehicles but also to commercial transport and charging infrastructure. The shift toward electric mobility therefore supports long term growth in renewable energy installations, including solar. Recent data also supports this trend. Solar installations continue to reach new record levels, with strong growth in key markets such as China. This suggests that demand for solar energy remains robust even in periods of market volatility. For a company like Daqo, which is one of the lowest cost producers with a strong balance sheet, this creates an opportunity to benefit from long term industry growth while navigating short term cycles.

Industry consolidation is a reason to invest in Daqo New Energy because the company is well positioned to benefit from a long-term restructuring of the polysilicon industry. The industry is currently fragmented and characterized by excess capacity, with many smaller and less efficient producers struggling to remain profitable. As a result, there is a growing push, both from companies and regulators, to create a more rational and sustainable market structure through consolidation. One of the key developments is the increasing focus on reducing overcapacity. Chinese authorities have made it clear that the industry needs to move away from destructive price competition and toward a more balanced supply and demand environment. Consolidation, whether through direct acquisitions, coordinated industry structures, or the exit of weaker players, is seen as an important tool to achieve this. By reducing the number of players and removing outdated capacity, the industry can stabilize prices and improve overall profitability. Daqo’s strong financial position plays a central role in this opportunity. The company has no financial debt and holds significant cash and liquid assets, which gives it flexibility that many competitors do not have. In a weak market where prices are low and many producers are under pressure, financially weaker companies may be forced to sell assets, shut down operations, or exit the market entirely. This creates opportunities for stronger players like Daqo to acquire capacity at attractive valuations or to gain market share as competitors disappear. Management has also indicated that the company is open-minded when it comes to acquisitions and consolidation opportunities. Rather than pursuing aggressive expansion at any cost, the approach appears to be disciplined and aligned with broader industry developments. This includes both direct acquisitions of smaller players and participation in more coordinated consolidation efforts alongside other industry participants. The goal is not simply to increase size, but to improve industry structure and long-term profitability. Another important aspect is that consolidation is expected to happen gradually. The industry is likely to go through a multi-year process where excess capacity is phased out over time. This creates a more favorable environment for companies that can remain financially stable during the downturn. As weaker players exit and supply becomes more disciplined, pricing conditions can improve, which benefits remaining producers. Consolidation can also create operational benefits. By integrating smaller or less efficient producers, Daqo may be able to improve efficiency, optimize production, and focus on its most cost-effective facilities. This can strengthen its cost position even further and reinforce its status as a low-cost producer. In a commodity industry, even small cost advantages can have a meaningful impact on long-term profitability.

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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 an 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, as EPS was negative in 2025. 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 2025 or 2024 results, since cash from operations was negative in 2024 and lower than capital expenditures in 2025.

The final calculation is called the Payback Time price. It is based on free cash flow per share and is used to estimate how long it takes to recover the initial investment. However, since free cash flow per share was negative in both 2024 and 2025, we cannot make this calculation.

Conclusion

I believe that Daqo New Energy is an intriguing company with good management. The company has built its moat through its cost leadership, scale, product quality, process efficiency, and financial strength. Daqo New Energy’s ROIC has been volatile over the past decade due to the cyclical nature of the industry it operates in, and while ROIC is expected to improve, it is likely to continue experiencing significant swings. The same pattern applies to free cash flow, which has been negative in the past two years due to industry headwinds but is expected to turn positive as market conditions improve. Excess polysilicon production is a risk for Daqo New Energy because rapid capacity expansion can outpace demand, leading to oversupply that pushes prices lower and reduces profitability. Since polysilicon is a commodity, Daqo must accept market prices, meaning that declines in both price and volume can significantly impact revenue and margins. The reduction or elimination of government subsidies is also a risk because it can make solar projects less economically attractive, leading to slower installation growth and weaker demand for polysilicon, which in turn puts pressure on both prices and volumes. Macroeconomic factors are another risk, as weaker economic growth, higher interest rates, and geopolitical uncertainty can reduce investment in solar projects and lower demand for polysilicon, resulting in weaker pricing and increased pressure on the company’s financial performance. At the same time, there are several reasons to be optimistic. Proactive initiatives in the polysilicon industry, including coordination among producers and government measures, are helping to reduce excess supply and stabilize pricing, which could lead to a more balanced and sustainable market over time. Favorable long term trends for the solar industry also support the investment case, as rising global electricity demand, electrification, and decarbonization are driving sustained growth in solar installations, positioning Daqo to benefit as a key supplier at the start of the value chain. In addition, industry consolidation is likely to improve market dynamics, as the exit of weaker and less efficient producers can reduce excess supply and support more stable pricing, allowing Daqo to strengthen its position and potentially gain market share. There are many things to like about Daqo New Energy, and while we could not make all three valuation calculations due to low cash from operations and negative free cash flow, it is worth noting that the company’s strong balance sheet resulted in a book value per share of 65,72 dollars at the end of 2025, which can be used as a reference point when evaluating a potential investment. Personally, I prefer to stay out of the industry, and I will not be investing in Daqo New Energy at this time.

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