Intrinsic value of Daqo New Energy ADR - DQ

Previous Close

$48.33

  Intrinsic Value

$47.39

stock screener

  Rating & Target

hold

-2%

Previous close

$48.33

 
Intrinsic value

$47.39

 
Up/down potential

-2%

 
Rating

hold

We calculate the intrinsic value of DQ stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 2016), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 0.5

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2016(a)
   2017
   2018
   2019
   2020
   2021
   2022
   2023
   2024
   2025
   2026
   2027
   2028
   2029
   2030
   2031
   2032
   2033
   2034
   2035
   2036
   2037
   2038
   2039
   2040
   2041
   2042
   2043
   2044
   2045
   2046

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  25.82
  7.00
  6.80
  6.62
  6.46
  6.31
  6.18
  6.06
  5.96
  5.86
  5.77
  5.70
  5.63
  5.56
  5.51
  5.46
  5.41
  5.37
  5.33
  5.30
  5.27
  5.24
  5.22
  5.20
  5.18
  5.16
  5.14
  5.13
  5.12
  5.10
  5.09
Revenue, $m
  229
  245
  262
  279
  297
  316
  335
  356
  377
  399
  422
  446
  471
  497
  525
  553
  583
  615
  647
  682
  718
  755
  795
  836
  879
  925
  972
  1,022
  1,074
  1,129
  1,187
Variable operating expenses, $m
 
  42
  44
  47
  50
  54
  57
  60
  64
  68
  72
  76
  80
  85
  89
  94
  99
  104
  110
  116
  122
  128
  135
  142
  149
  157
  165
  174
  183
  192
  202
Fixed operating expenses, $m
 
  131
  134
  138
  141
  145
  148
  152
  156
  160
  164
  168
  172
  176
  181
  185
  190
  195
  200
  205
  210
  215
  220
  226
  232
  237
  243
  249
  256
  262
  268
Total operating expenses, $m
  164
  173
  178
  185
  191
  199
  205
  212
  220
  228
  236
  244
  252
  261
  270
  279
  289
  299
  310
  321
  332
  343
  355
  368
  381
  394
  408
  423
  439
  454
  470
Operating income, $m
  65
  72
  83
  94
  105
  117
  130
  143
  157
  171
  186
  202
  219
  236
  255
  274
  294
  315
  338
  361
  386
  412
  439
  468
  498
  530
  564
  599
  636
  675
  716
EBITDA, $m
  99
  109
  122
  135
  149
  164
  180
  196
  213
  230
  249
  268
  289
  310
  332
  356
  381
  407
  434
  462
  492
  524
  557
  592
  629
  667
  708
  751
  796
  843
  893
Interest expense (income), $m
  14
  13
  14
  15
  17
  19
  20
  22
  24
  26
  28
  30
  32
  34
  36
  39
  41
  44
  47
  50
  53
  56
  60
  63
  67
  71
  75
  79
  83
  88
  93
Earnings before tax, $m
  51
  60
  69
  78
  88
  99
  110
  121
  133
  145
  159
  172
  187
  202
  218
  235
  253
  271
  291
  311
  333
  356
  380
  405
  432
  460
  489
  520
  553
  587
  624
Tax expense, $m
  7
  16
  19
  21
  24
  27
  30
  33
  36
  39
  43
  47
  50
  55
  59
  63
  68
  73
  78
  84
  90
  96
  103
  109
  117
  124
  132
  140
  149
  159
  168
Net income, $m
  43
  44
  50
  57
  64
  72
  80
  88
  97
  106
  116
  126
  136
  148
  159
  172
  184
  198
  212
  227
  243
  260
  277
  296
  315
  335
  357
  380
  404
  429
  455

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  16
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  657
  686
  733
  782
  832
  885
  939
  996
  1,056
  1,117
  1,182
  1,249
  1,320
  1,393
  1,470
  1,550
  1,634
  1,722
  1,813
  1,909
  2,010
  2,115
  2,226
  2,342
  2,463
  2,590
  2,723
  2,863
  3,009
  3,163
  3,324
Adjusted assets (=assets-cash), $m
  641
  686
  733
  782
  832
  885
  939
  996
  1,056
  1,117
  1,182
  1,249
  1,320
  1,393
  1,470
  1,550
  1,634
  1,722
  1,813
  1,909
  2,010
  2,115
  2,226
  2,342
  2,463
  2,590
  2,723
  2,863
  3,009
  3,163
  3,324
Revenue / Adjusted assets
  0.357
  0.357
  0.357
  0.357
  0.357
  0.357
  0.357
  0.357
  0.357
  0.357
  0.357
  0.357
  0.357
  0.357
  0.357
  0.357
  0.357
  0.357
  0.357
  0.357
  0.357
  0.357
  0.357
  0.357
  0.357
  0.357
  0.357
  0.357
  0.357
  0.357
  0.357
Average production assets, $m
  551
  589
  629
  671
  714
  759
  806
  855
  906
  959
  1,014
  1,072
  1,132
  1,195
  1,261
  1,330
  1,402
  1,477
  1,556
  1,639
  1,725
  1,816
  1,910
  2,010
  2,114
  2,223
  2,337
  2,457
  2,583
  2,714
  2,853
Working capital, $m
  -177
  -66
  -71
  -76
  -80
  -86
  -91
  -96
  -102
  -108
  -114
  -121
  -128
  -135
  -142
  -150
  -158
  -167
  -175
  -185
  -194
  -205
  -215
  -227
  -238
  -251
  -263
  -277
  -291
  -306
  -322
Total debt, $m
  244
  254
  281
  310
  339
  369
  401
  434
  468
  504
  541
  580
  621
  664
  708
  754
  803
  854
  907
  963
  1,021
  1,082
  1,146
  1,213
  1,283
  1,357
  1,434
  1,515
  1,599
  1,688
  1,782
Total liabilities, $m
  387
  397
  424
  453
  482
  512
  544
  577
  611
  647
  684
  723
  764
  807
  851
  897
  946
  997
  1,050
  1,106
  1,164
  1,225
  1,289
  1,356
  1,426
  1,500
  1,577
  1,658
  1,742
  1,831
  1,925
Total equity, $m
  270
  289
  309
  329
  350
  372
  395
  419
  444
  470
  498
  526
  556
  586
  619
  653
  688
  725
  763
  804
  846
  891
  937
  986
  1,037
  1,090
  1,146
  1,205
  1,267
  1,332
  1,399
Total liabilities and equity, $m
  657
  686
  733
  782
  832
  884
  939
  996
  1,055
  1,117
  1,182
  1,249
  1,320
  1,393
  1,470
  1,550
  1,634
  1,722
  1,813
  1,910
  2,010
  2,116
  2,226
  2,342
  2,463
  2,590
  2,723
  2,863
  3,009
  3,163
  3,324
Debt-to-equity ratio
  0.904
  0.880
  0.910
  0.940
  0.970
  0.990
  1.010
  1.030
  1.050
  1.070
  1.090
  1.100
  1.120
  1.130
  1.140
  1.160
  1.170
  1.180
  1.190
  1.200
  1.210
  1.210
  1.220
  1.230
  1.240
  1.240
  1.250
  1.260
  1.260
  1.270
  1.270
Adjusted equity ratio
  0.421
  0.421
  0.421
  0.421
  0.421
  0.421
  0.421
  0.421
  0.421
  0.421
  0.421
  0.421
  0.421
  0.421
  0.421
  0.421
  0.421
  0.421
  0.421
  0.421
  0.421
  0.421
  0.421
  0.421
  0.421
  0.421
  0.421
  0.421
  0.421
  0.421
  0.421

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  43
  44
  50
  57
  64
  72
  80
  88
  97
  106
  116
  126
  136
  148
  159
  172
  184
  198
  212
  227
  243
  260
  277
  296
  315
  335
  357
  380
  404
  429
  455
Depreciation, amort., depletion, $m
  34
  36
  39
  41
  44
  47
  50
  53
  56
  59
  63
  66
  70
  74
  78
  82
  87
  91
  96
  101
  106
  112
  118
  124
  130
  137
  144
  152
  159
  168
  176
Funds from operations, $m
  118
  80
  89
  99
  108
  119
  130
  141
  153
  165
  178
  192
  206
  221
  237
  254
  271
  289
  308
  328
  350
  372
  395
  420
  445
  473
  501
  531
  563
  596
  631
Change in working capital, $m
  19
  -4
  -5
  -5
  -5
  -5
  -5
  -6
  -6
  -6
  -6
  -7
  -7
  -7
  -7
  -8
  -8
  -8
  -9
  -9
  -10
  -10
  -11
  -11
  -12
  -12
  -13
  -14
  -14
  -15
  -16
Cash from operations, $m
  99
  84
  94
  103
  113
  124
  135
  147
  159
  171
  185
  199
  213
  228
  245
  261
  279
  298
  317
  338
  359
  382
  406
  431
  457
  485
  514
  545
  577
  611
  647
Maintenance CAPEX, $m
  0
  -34
  -36
  -39
  -41
  -44
  -47
  -50
  -53
  -56
  -59
  -63
  -66
  -70
  -74
  -78
  -82
  -87
  -91
  -96
  -101
  -106
  -112
  -118
  -124
  -130
  -137
  -144
  -152
  -159
  -168
New CAPEX, $m
  -67
  -39
  -40
  -42
  -43
  -45
  -47
  -49
  -51
  -53
  -55
  -58
  -60
  -63
  -66
  -69
  -72
  -75
  -79
  -82
  -86
  -90
  -95
  -99
  -104
  -109
  -114
  -120
  -126
  -132
  -138
Cash from investing activities, $m
  -66
  -73
  -76
  -81
  -84
  -89
  -94
  -99
  -104
  -109
  -114
  -121
  -126
  -133
  -140
  -147
  -154
  -162
  -170
  -178
  -187
  -196
  -207
  -217
  -228
  -239
  -251
  -264
  -278
  -291
  -306
Free cash flow, $m
  33
  12
  17
  23
  29
  35
  41
  48
  55
  62
  70
  78
  87
  96
  105
  115
  125
  136
  147
  159
  172
  185
  199
  214
  229
  245
  263
  281
  300
  320
  341
Issuance/(repayment) of debt, $m
  -9
  26
  27
  28
  29
  30
  32
  33
  34
  36
  37
  39
  41
  43
  44
  46
  49
  51
  53
  56
  58
  61
  64
  67
  70
  74
  77
  81
  85
  89
  93
Issuance/(repurchase) of shares, $m
  1
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash from financing (excl. dividends), $m  
  -30
  26
  27
  28
  29
  30
  32
  33
  34
  36
  37
  39
  41
  43
  44
  46
  49
  51
  53
  56
  58
  61
  64
  67
  70
  74
  77
  81
  85
  89
  93
Total cash flow (excl. dividends), $m
  2
  38
  44
  51
  58
  65
  73
  81
  89
  98
  107
  117
  127
  138
  149
  161
  174
  187
  200
  215
  230
  246
  263
  281
  299
  319
  340
  362
  385
  409
  434
Retained Cash Flow (-), $m
  -30
  -19
  -20
  -20
  -21
  -22
  -23
  -24
  -25
  -26
  -27
  -28
  -30
  -31
  -32
  -34
  -35
  -37
  -39
  -40
  -42
  -44
  -46
  -49
  -51
  -53
  -56
  -59
  -62
  -65
  -68
Prev. year cash balance distribution, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
 
  19
  24
  30
  37
  43
  50
  57
  64
  72
  80
  89
  98
  107
  117
  127
  138
  150
  162
  174
  188
  202
  216
  232
  248
  266
  284
  303
  323
  344
  367
Discount rate, %
 
  6.50
  6.83
  7.17
  7.52
  7.90
  8.30
  8.71
  9.15
  9.60
  10.08
  10.59
  11.12
  11.67
  12.26
  12.87
  13.51
  14.19
  14.90
  15.64
  16.43
  17.25
  18.11
  19.01
  19.96
  20.96
  22.01
  23.11
  24.27
  25.48
  26.75
PV of cash for distribution, $m
 
  18
  21
  25
  27
  29
  31
  32
  32
  32
  31
  29
  28
  26
  23
  21
  18
  16
  13
  11
  9
  7
  6
  4
  3
  2
  2
  1
  1
  0
  0
Current shareholders' claim on cash, %
  100
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0

Daqo New Energy Corp. is a polysilicon manufacturer. The Company utilizes the chemical vapor deposition process, or the modified Siemens process, to produce polysilicon. The Company's segments include Polysilicon and Wafer. The Company manufactures and sells polysilicon to photovoltaic product manufacturers, whereby the polysilicon is processed into ingots, wafers, cells and modules for solar power solutions. The Company offers ready-to-use polysilicon, packaged to meet crucible stacking, pulling and solidification needs. The Company offers wafers through its downstream photovoltaic product manufacturing business. The Company also provides wafer original equipment manufacturer (OEM) service to external customers through tolling agreements by processing polysilicon to produce ingot and wafer. Its annual capacity for polysilicon is approximately 12,150 metric tons (MT) in Xinjiang. The Company's wafer manufacturing annual capacity is approximately 90 million pieces.

FINANCIAL RATIOS  of  Daqo New Energy ADR (DQ)

Valuation Ratios
P/E Ratio 295.6
Price to Sales 55.5
Price to Book 47.1
Price to Tangible Book
Price to Cash Flow 128.4
Price to Free Cash Flow 397.2
Growth Rates
Sales Growth Rate 25.8%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate -17.3%
Cap. Spend. - 3 Yr. Gr. Rate 15.2%
Financial Strength
Quick Ratio 0
Current Ratio 0.1
LT Debt to Equity 41.9%
Total Debt to Equity 90.4%
Interest Coverage 5
Management Effectiveness
Return On Assets 8.4%
Ret/ On Assets - 3 Yr. Avg. 5.8%
Return On Total Capital 8.5%
Ret/ On T. Cap. - 3 Yr. Avg. 5%
Return On Equity 16.9%
Return On Equity - 3 Yr. Avg. 10.9%
Asset Turnover 0.3
Profitability Ratios
Gross Margin 34.9%
Gross Margin - 3 Yr. Avg. 26.4%
EBITDA Margin 43.2%
EBITDA Margin - 3 Yr. Avg. 36.5%
Operating Margin 28.4%
Oper. Margin - 3 Yr. Avg. 20.1%
Pre-Tax Margin 22.3%
Pre-Tax Margin - 3 Yr. Avg. 13.1%
Net Profit Margin 18.8%
Net Profit Margin - 3 Yr. Avg. 11.7%
Effective Tax Rate 13.7%
Eff/ Tax Rate - 3 Yr. Avg. 7%
Payout Ratio 0%

DQ stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the DQ stock intrinsic value calculation we used $229 million for the last fiscal year's total revenue generated by Daqo New Energy ADR. The default revenue input number comes from 2016 income statement of Daqo New Energy ADR. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our DQ stock valuation model: a) initial revenue growth rate of 7% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 6.5%, whose default value for DQ is calculated based on our internal credit rating of Daqo New Energy ADR, is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of Daqo New Energy ADR.
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of DQ stock the variable cost ratio is equal to 17%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $128 million in the base year in the intrinsic value calculation for DQ stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 5.5% for Daqo New Energy ADR.

Corporate tax rate of 27% is the nominal tax rate for Daqo New Energy ADR. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the DQ stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for DQ are equal to 240.4%.

Life of production assets of 16.2 years is the average useful life of capital assets used in Daqo New Energy ADR operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for DQ is equal to -27.1%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $270 million for Daqo New Energy ADR - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 10.518 million for Daqo New Energy ADR is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of Daqo New Energy ADR at the current share price and the inputted number of shares is $0.5 billion.

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Financial statements of DQ
Valuation of Stocks

The paper VALUATION OF STOCKS: The Quest for Intrinsic Value provides a detailed description of our valuation model and discloses the calculation algorithm.

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