Daqo New Energy Corp. :DQ-US: Earnings Analysis: Q1, 2017 By the Numbers : June 21, 2017

Daqo New Energy Corp. reports financial results for the quarter ended March 31, 2017.

We analyze the earnings along side the following peers of Daqo New Energy Corp. – Dow Chemical Company, Cabot Microelectronics Corporation, Hanwha Q CELLS Co., Ltd. Sponsored ADR, Yingli Green Energy Holding Co. Ltd. Sponsored ADR and JinkoSolar Holding Co., Ltd. Sponsored ADR (DOW-US, CCMP-US, HQCL-US, YGE-US and JKS-US) that have also reported for this period.

Highlights

  • Summary numbers: Revenues of USD 81.92 million, Net Earnings of USD 22.38 million.
  • Gross margins widened from 29.02% to 42.83% compared to the same period last year, operating (EBITDA) margins now 48.89% from 36.76%.
  • Year-on-year change in operating cash flow of 130.86% is about the same as the change in earnings, likely no significant movement in accruals or reserves.
  • Earnings growth from operating margin improvements as well as one-time items.

The table below shows the preliminary results and recent trends for key metrics such as revenues and net income growth:

2017-03-31 2016-12-31 2016-09-30 2016-06-30 2016-03-31
Relevant Numbers (Quarterly)
Revenues (mil) 81.92 44.58 53.18 69.61 56.16
Revenue Growth (%YOY) 45.88 -23.37 15.89 103.19 35.11
Earnings (mil) 22.38 3.99 10.97 19.45 8.11
Earnings Growth (%YOY) 176.08 -57.72 260.96 2204.85 593.14
Net Margin (%) 27.32 8.95 20.62 27.94 14.43
EPS 2.2 0.48 0.98 1.72 0.73
Return on Equity (%) 31.42 5.81 16.14 29.94 13.1
Return on Assets (%) 13.23 2.42 6.61 11.65 4.86

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Market Share Versus Profits

Revenues History
Earnings History

DQ-US‘s change in revenue this period compared to the same period last year of 45.88% is almost the same as its change in earnings, and is about average among the announced results thus far in its peer group, suggesting that DQ-US is holding onto its market share. Also, for comparison purposes, revenues changed by 83.76% and earnings by 460.64% compared to the immediate last period.

Revenues Growth Versus Earnings Growth

Quadrant label definitions. Hover to know more

Leader, Earnings Focus, Laggard, Revenues Focus

Earnings Growth Analysis

The company’s earnings growth was influenced by year-on-year improvement in gross margins from 29.02% to 42.83% as well as better cost controls. As a result, operating margins (EBITDA margins) rose from 36.76% to 48.89% compared to the same period last year. For comparison, gross margins were 30.74% and EBITDA margins were 34.66% in the last reporting period.

Gross Margin Versus EBITDA Margin

Quadrant label definitions. Hover to know more

Differentiated; Low Cost, Commodity; Low Cost, Commodity; High Cost, Differentiated; High Cost

Gross Margin Trend

Companies sometimes sacrifice improvements in revenues and margins in order to extend friendlier terms to customers and vendors. Capital Cube probes for such activity by comparing the changes in gross margins with any changes in working capital. If the gross margins improved without a worsening of working capital, it is possible that the company’s performance is a result of truly delivering in the marketplace and not simply an accounting prop-up using the balance sheet.

Gross Margin History
Working Capital Days History

DQ-US‘s gross margin improvement has not produced any big difference in its working capital. Working capital days are currently -173.32, compared to last year’s level of -297.71 days. This leads Capital Cube to conclude that the improvements in gross margins are likely from operating decisions and not trade-offs with the balance sheet.

Gross Margin Versus Working Capital Days

Quadrant label definitions. Hover to know more

Customer Financed, Cash Starved, Supplier Financed, Cash Rich

Cash Versus Earnings – Sustainable Performance?

It is important to examine a company�s cash versus earnings numbers to gauge whether its performance is sustainable.

DQ-US‘s change in operating cash flow of 130.86% compared to the same period last year is about the same as its change in earnings this period. Additionally, this change in operating cash flow is about average among its peer group. This suggests that the company did not use accruals or reserves to manage earnings this period, and that, all else being equal, the earnings number is sustainable.

Operating Cash Flow Growth Versus Earnings Growth

Quadrant label definitions. Hover to know more

Cash Flow based Earnings, Likely Non-cash Earnings, Low Cash Flow Base, Likely Undeclared Earnings

Margins

The company’s earnings growth has also been influenced by the following factors: (1) Improvements in operating (EBIT) margins from 21.84% to 37.45% and (2) one-time items. The company’s pretax margins are now 33.28% compared to 16.47% for the same period last year.

EBIT Margin Versus PreTax Margin

Quadrant label definitions. Hover to know more

Operation driven Earnings, One-time Favorables, Low Earnings Base, One-time Unfavorables
EBIT Margin History
PreTax Margin History

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Company Profile

Daqo New Energy Corp. is a holding company, which engages in the manufacture and sale of polysilicon products for solar cell and module manufacturers. It operates through the Polysilicon and Wafer segments. The company was founded on November 22, 2007 and is headquartered in Wanzhou, China.

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