Daqo New Energy (688303.SH): Navigating the Cycle with Robust Liquidity and Cost Discipline – 1H25 Review

Date: August 28, 2025
Ticker: 688303.SH (STAR Market)
Current Price: CNY 29.23
Rating: Overweight (Maintained)
Target Price Implied Valuation: 2026E PE 79x / 2027E PE 42x

Executive Summary

Daqo New Energy (“Daqo” or the “Company”), a leading high-purity polysilicon manufacturer in China, released its interim financial results for the first half of 2025 (1H25) on August 26, 2025. The report reflects a period of significant industry-wide distress characterized by severe supply-demand imbalances and depressed polysilicon prices. Consequently, Daqo reported a substantial contraction in top-line revenue and a net loss attributable to shareholders. Specifically, 1H25 revenue stood at CNY 1.47 billion, representing a year-over-year (YoY) decline of 67.93%, while net profit attributable to parent company shareholders recorded a loss of CNY 1.147 billion. On a non-GAAP basis, the net loss was CNY 1.154 billion.

Despite the challenging operating environment, the Company’s strategic response has been marked by disciplined production management and rigorous cost control. In alignment with national initiatives to curb excessive internal competition (“anti-involution”), Daqo proactively reduced output during 1H25. Polysilicon production volume decreased by 60% YoY to 50,800 metric tons (mt), and sales volume dropped by 52% YoY to 46,100 mt. Crucially, through refined management practices and efficiency enhancements, the Company successfully lowered its cash cost of production to CNY 37.66/kg in 1H25, a 6.6% reduction compared to the same period last year. This cost leadership, combined with a significant reduction in cash losses and negative operating cash flow relative to prior periods, underscores the resilience of Daqo’s operational model.

From a balance sheet perspective, Daqo remains exceptionally robust. As of June 30, 2025, the Company held total liquid reserves (including cash, bank acceptance bills, time deposits, and structured deposits) amounting to CNY 12.09 billion. The debt-to-asset ratio remained at an ultra-low 8.04%, with zero interest-bearing liabilities. This fortress-like financial position provides Daqo with a distinct competitive advantage, offering ample strategic flexibility to withstand the current industry downturn and positioning it favorably for consolidation or expansion opportunities as the cycle turns.

Looking ahead, Daqo intends to maintain its prudent production strategy in the second half of 2025 (2H25) to manage inventory levels effectively. The Company guides for 3Q25 polysilicon production between 27,000 and 30,000 mt, with full-year 2025 production expected to range between 110,000 and 130,000 mt.

We maintain our Overweight rating on Daqo New Energy. While near-term earnings are under pressure due to sector-wide headwinds, the Company’s superior cost structure, pristine balance sheet, and status as a tier-1 polysilicon supplier provide a compelling long-term investment thesis. We project the Company to return to profitability in 2026, with estimated net profits of CNY 791 million in 2026E and CNY 1.51 billion in 2027E. At the closing price of CNY 29.23 on August 27, 2025, the stock trades at implied forward P/E multiples of 79x for 2026E and 42x for 2027E. We believe the market is currently undervaluing the Company’s ability to survive the consolidation phase and emerge as a dominant player in a healthier supply landscape.

Key Takeaways

1. Financial Performance: Deep Losses Reflect Industry Bottoming Process

The 1H25 financial results clearly illustrate the severity of the current downcycle in the photovoltaic (PV) upstream sector. The primary driver of the performance deterioration is the structural oversupply in the polysilicon segment, which has driven spot and contract prices to levels below the cash cost of many higher-cost producers.

Revenue Contraction:
* 1H25 Revenue: CNY 1.47 billion, down 67.93% YoY.
* 2Q25 Revenue: CNY 563 million, down 64.87% YoY and down 37.96% quarter-over-quarter (QoQ).
* Analysis: The sequential decline in 2Q25 revenue indicates that pricing pressure persisted and potentially intensified through the spring, coupled with the intentional reduction in sales volume as part of the Company’s destocking and production curtailment strategy.

Profitability Metrics:
* 1H25 Net Profit (Attributable): -CNY 1.147 billion.
* 1H25 Non-GAAP Net Profit: -CNY 1.154 billion.
* 2Q25 Net Profit: -CNY 589 million.
* 2Q25 Non-GAAP Net Profit: -CNY 584 million.
* Analysis: The loss in 2Q25 was broadly consistent with 1Q25, suggesting that the bottoming process in terms of quarterly earnings volatility may be stabilizing, albeit at a loss-making level. The slight difference between GAAP and non-GAAP figures is negligible, indicating that one-off items or adjustments had minimal impact on the core operational result. The losses are primarily attributed to the spread between selling prices and production costs turning negative, exacerbated by the fixed cost absorption issues resulting from lower utilization rates.

Table 1: Daqo New Energy Financial Highlights (1H25 vs. Prior Periods)

*Note: 1H24 and 1Q25 figures derived based on reported YoY/QoQ percentage changes for analytical context.

The divergence between revenue decline (-67.9%) and production volume decline (-60%) suggests that average selling prices (ASPs) also contracted during the period, compounding the impact of volume reduction. However, the Company’s ability to limit the breadth of losses through cost reductions is a critical positive signal.

2. Operational Strategy: Proactive Production Cuts and Cost Leadership

In response to the distorted market dynamics, Daqo has adopted a defensive yet strategic operational posture. The Chinese government’s call to address "involution" (excessive, destructive competition) in the PV sector has provided a policy backdrop for leading manufacturers to coordinate supply-side discipline. Daqo’s actions in 1H25 exemplify this shift from volume-maximization to value-preservation.

Production and Sales Adjustment:
* 1H25 Production: 50,800 mt (-60% YoY).
* 1H25 Sales: 46,100 mt (-52% YoY).
* Strategic Rationale: By reducing output, Daqo aims to align supply with softened demand, thereby preventing excessive inventory buildup and mitigating further downward pressure on spot prices. This approach helps preserve capital and reduces the working capital burden associated with storing unsold goods.

Cost Management Excellence:
Despite the inherent inefficiencies of running plants at lower utilization rates—which typically leads to higher unit fixed costs for labor and depreciation—Daqo achieved a notable reduction in variable costs.
* 1H25 Cash Cost: CNY 37.66/kg.
* YoY Reduction: 6.6%.
* Implication: This achievement highlights the effectiveness of Daqo’s "refined management" initiatives. These likely include optimizations in energy consumption, raw material procurement, yield improvements, and operational maintenance schedules. A cash cost of CNY 37.66/kg places Daqo in the lowest quartile of the global cost curve. In a market where prices have frequently dipped below CNY 40-50/kg, maintaining a cash cost below this threshold is vital for survival. It means that while the Company is reporting accounting losses (due to full-cost absorption including depreciation), its actual cash burn from operations is significantly contained.

Outlook for 2H25 Production:
* 3Q25 Guidance: 27,000 – 30,000 mt.
* Full-Year 2025 Guidance: 110,000 – 130,000 mt.
* Interpretation: The 3Q25 guidance implies a continued conservative stance. Assuming a midpoint of 28,500 mt for 3Q, and extrapolating the 1H run rate, the full-year guidance of 110k-130k mt suggests that 4Q25 production might see a modest seasonal adjustment or remain flat. This guidance reinforces management’s commitment to inventory control and price stabilization over market share expansion in the short term.

3. Balance Sheet Strength: The "Fortress" Advantage

Perhaps the most compelling aspect of Daqo’s investment case in the current cycle is its financial health. In an industry characterized by high capital intensity and cyclical volatility, liquidity is king. Many competitors are facing tightening credit conditions, rising debt burdens, and cash flow crises. Daqo, conversely, stands apart.

Liquidity Position (as of June 30, 2025):
* Total Liquid Reserves: CNY 12.09 billion.
* Components: Cash on hand, bank acceptance bills, time deposits, and structured deposits.
* Interest-Bearing Debt: CNY 0.
* Debt-to-Asset Ratio: 8.04%.

Strategic Implications of Strong Liquidity:
1. Survival Capability: With zero debt and over CNY 12 billion in liquid assets, Daqo can sustain operations through an extended period of negative margins without risking solvency or needing to raise expensive emergency capital. This removes the "bankruptcy risk" discount often applied to cyclical stocks at the bottom of the cycle.
2. Strategic Optionality: The strong balance sheet provides Daqo with the dry powder to pursue counter-cyclical opportunities. This could include:
* Technology Upgrades: Investing in next-generation polysilicon technologies (e.g., granular silicon, higher purity grades for electronic applications) while competitors cut R&D.
* M&A Activity: Potential acquisition of distressed assets or competitors at depressed valuations, consolidating market share.
* Vertical Integration: Strategic investments in downstream or complementary sectors if valuation becomes attractive.
3. Customer Confidence: In a volatile market, downstream wafer and cell manufacturers prefer suppliers with financial stability to ensure long-term supply continuity. Daqo’s strength enhances its stickiness with key Tier-1 customers.

Table 2: Comparative Balance Sheet Health Indicators

Source: Company Reports, Industry Analysis.

4. Earnings Forecast and Valuation

Based on the 1H25 results and our assessment of the polysilicon supply-demand trajectory, we have updated our financial models for Daqo New Energy. We anticipate a U-shaped recovery, with 2025 representing the trough year, followed by a gradual normalization of margins and volumes in 2026 and 2027.

Key Assumptions:
* Polysilicon Prices: We assume prices remain depressed in 2H25 but begin a slow recovery in 2026 as high-cost capacity exits the market and demand growth from global PV installations absorbs excess supply.
* Volume: We incorporate the Company’s guidance of 110k-130k mt for 2025. For 2026E and 2027E, we model a gradual increase in utilization rates as market conditions improve, assuming volumes of ~180k mt and ~220k mt respectively, driven by both organic recovery and potential market share gains from exited competitors.
* Costs: We assume cash costs remain stable around CNY 37-38/kg due to ongoing efficiency gains, though full costs (including depreciation) will decrease per unit as utilization rates rise in 2026-2027.

Financial Projections (2025E - 2027E):

Valuation Analysis:
* Current Price: CNY 29.23 (as of Aug 27, 2025).
* 2026E P/E: 79x.
* 2027E P/E: 42x.
* Price-to-Book (P/B): 1.6x (2025E/2026E), declining to 1.5x (2027E).

Interpretation of Valuation:
While a 79x P/E for 2026E may appear elevated compared to historical averages for mature manufacturing firms, it must be contextualized within the cyclical nature of the industry. Cyclical stocks are often valued at high P/E multiples at the trough of the cycle (when earnings are depressed) and low P/E multiples at the peak (when earnings are inflated). The key metric for investors here is the forward-looking recovery trajectory. The drop to 42x P/E in 2027E suggests a more normalized valuation as earnings power is restored. Furthermore, the P/B ratio of 1.5-1.6x is reasonable for a technology-leading asset-light (in terms of debt) manufacturer with significant optionality. The market is essentially pricing in the uncertainty of the timing of the cycle turn, but not fully accounting for Daqo’s disproportionate share of the upside when margins normalize.

Risks / Headwinds

Investors should carefully consider the following risks, which could materially impact Daqo’s financial performance and stock price:

1. Downstream Demand Uncertainty

The primary driver of polysilicon demand is the installation volume of solar PV modules globally.
* Policy Risk: Changes in subsidy policies, trade barriers (e.g., tariffs in the US, EU, or India), or grid connection delays in key markets (China, Europe, US) could suppress demand growth.
* Economic Slowdown: Macroeconomic headwinds affecting financing costs for utility-scale projects or consumer spending on residential solar could lead to demand falling short of expectations. If global PV installations grow slower than anticipated, the oversupply situation in polysilicon could persist longer than modeled, delaying price recovery.

2. Intensified Market Competition

Despite the "anti-involution" narrative, the risk of price wars remains.
* Capacity Exit Lag: If high-cost producers do not exit the market as quickly as expected (due to local government support or strategic reasons), supply will remain glutted.
* New Entrants/Expansions: Although slowed, some new capacity may still come online. If these new entrants have even lower cost structures (e.g., through newer technology or cheaper energy access), they could exert further downward pressure on prices, challenging Daqo’s margin recovery.
* Technological Disruption: Rapid shifts in downstream technology (e.g., faster-than-expected adoption of thin-film or alternative PV technologies, though unlikely in the short term) could alter long-term demand dynamics for crystalline silicon.

3. Inventory Impairment Risks

• Price Volatility: If polysilicon prices drop further or remain stagnant at low levels, the value of Daqo’s inventory may fall below its carrying cost. This would necessitate inventory write-downs, leading to additional non-cash charges that would worsen net losses.
• Obsolescence: While polysilicon is a standardized commodity, changes in quality requirements (e.g., stricter purity standards for N-type wafers) could render certain grades less valuable, requiring potential reclassification or discounting.

4. Operational and Cost Risks

• Energy Costs: Polysilicon production is energy-intensive. Fluctuations in electricity prices (particularly in Xinjiang, where Daqo operates) could impact cash costs. While Daqo has favorable long-term energy contracts, regulatory changes in energy pricing cannot be ruled out.
• Production Disruptions: Unplanned plant outages, safety incidents, or environmental compliance issues could disrupt production, increase maintenance costs, and damage reputation.

5. Geopolitical and Trade Risks

• Export Restrictions: As a Chinese manufacturer, Daqo faces potential geopolitical headwinds. Trade restrictions such as the U.S. Uyghur Forced Labor Prevention Act (UFLPA) or similar measures in other jurisdictions can limit access to lucrative markets, forcing sales into lower-margin domestic or non-restricted markets.
• Tariffs: Retaliatory tariffs or anti-dumping duties imposed by foreign governments on Chinese solar products could indirectly reduce demand for upstream materials like polysilicon.

Rating / Sector Outlook

Sector Outlook: Consolidation and Rationalization

The global polysilicon industry is currently undergoing a painful but necessary consolidation phase. The period of irrational expansion seen in 2022-2023 has resulted in a structural oversupply. However, we view the current environment as the "clearing house" phase of the cycle.

1. Supply Side: We expect accelerated exit of high-cost, older capacity. Manufacturers with weak balance sheets will be forced to shut down lines or declare bankruptcy. This supply destruction is the prerequisite for price stabilization. Daqo’s strategy of voluntary production cuts contributes to this rationalization.
2. Demand Side: Long-term demand fundamentals remain robust. The global energy transition, driven by climate goals and energy security concerns, continues to support double-digit growth in PV installations. The International Energy Agency (IEA) and other bodies forecast sustained growth in renewable energy capacity, ensuring that once supply aligns with demand, the industry will return to healthy profitability.
3. Technology Trend: The shift towards N-type silicon wafers (TOPCon, HJT) requires higher purity polysilicon. Daqo’s focus on high-quality product positions it well to capture the premium segment of the market, differentiating it from producers of lower-grade material.

Conclusion on Sector: We are Neutral-to-Positive on the sector for the long term, but Cautious in the immediate short term (next 6-9 months). The bottom is likely in sight, but the recovery will be L-shaped rather than V-shaped. Investors should focus on companies with the lowest cost curves and strongest balance sheets, as these entities will gain market share and pricing power in the subsequent upcycle.

Company Rating: Overweight (Maintained)

We maintain our Overweight rating on Daqo New Energy.

Rationale:
1. Best-in-Class Balance Sheet: In a credit-constrained environment, Daqo’s zero-debt status and CNY 12bn cash pile are unmatched. This minimizes downside risk and maximizes strategic optionality.
2. Cost Leadership: The ability to reduce cash costs to CNY 37.66/kg despite low utilization demonstrates operational excellence. This cost advantage provides a wider safety margin than peers.
3. Disciplined Management: The proactive production cuts show management’s willingness to prioritize long-term value over short-term volume metrics, aligning with shareholder interests.
4. Valuation Appeal: While 2025 is a loss-making year, the stock price arguably reflects extreme pessimism. The potential for earnings leverage in 2026-2027, combined with the company’s survival certainty, offers an asymmetric risk-reward profile.

Target Price Context:
While we do not issue a specific numeric target price in this note, our valuation framework implies significant upside from current levels as the market re-rates the stock from "distressed" to "recovery" status. The implied 2027E P/E of 42x suggests that if the market assigns a more standard cyclical multiple (e.g., 15-20x) to normalized earnings of CNY 1.5bn+, the stock has substantial room for appreciation. However, given the high volatility, we emphasize the strategic hold nature of the recommendation for institutional portfolios seeking exposure to the PV upstream recovery.

Investment View

Core Investment Logic: Surviving the Winter to Own the Spring

Investing in Daqo New Energy at this juncture is a classic contrarian play on cyclical recovery, underpinned by idiosyncratic strength. The core logic rests on three pillars: Survival, Share Gain, and Margin Expansion.

1. Survival: The Liquidity Moat

In cyclical industries, the biggest risk is not low prices, but insolvency. Many investors fear that prolonged losses will force even large players to raise equity at dilutive valuations or take on dangerous debt. Daqo eliminates this fear. With CNY 12.09 billion in liquid assets and no debt, the Company can endure negative margins for several years without compromising its operational integrity. This "fortress balance sheet" acts as a moat, protecting intrinsic value during the downturn. For institutional investors, this reduces the tail risk significantly compared to leveraged peers.

2. Share Gain: Consolidation Beneficiary

The current price war is unsustainable for high-cost producers. We anticipate a wave of capacity exits in 2025-2026. As these competitors leave the market, Daqo—along with other low-cost leaders—will absorb their market share. Because Daqo is maintaining production discipline now, it is preserving its customer relationships and brand reputation without flooding the market. When demand picks up, Daqo will be positioned to ramp up utilization rapidly, capturing a larger slice of the pie. The guided production of 110k-130k mt in 2025 is a temporary tactical retreat, not a strategic withdrawal.

3. Margin Expansion: Operating Leverage

Polysilicon manufacturing has high fixed costs (depreciation, plant maintenance). When utilization rates are low, these fixed costs are spread over fewer units, crushing margins. Conversely, when utilization rises, margins expand exponentially.
* Current State: Low utilization -> High unit fixed cost -> Losses.
* Future State (2026E+): Higher utilization -> Lower unit fixed cost + Stable/Lower Variable Cost -> Significant Profitability.
Our model projects gross margins recovering to 19.3% in 2026E and 22.2% in 2027E. This recovery is driven not just by potential price increases, but largely by the dilution of fixed costs as volume returns. This operating leverage means that every incremental increase in ASP or volume flows directly to the bottom line.

Strategic Implications for Institutional Portfolios

For institutional investors, Daqo represents a high-conviction satellite holding within a broader renewable energy or materials portfolio.

• Timing: The entry point is attractive given the depressed sentiment. The 1H25 results, while negative, confirm that the Company is executing its survival strategy effectively. The "bad news" is largely priced in.
• Catalysts:
  1. Industry Capacity Exit Announcements: News of major competitors shutting down lines or filing for bankruptcy will be a positive catalyst for Daqo, signaling the approaching supply-demand balance.
  2. Price Stabilization: Any sustained uptick in polysilicon spot prices above CNY 40-45/kg will trigger a re-rating of the stock.
  3. Quarterly Turnaround: A return to quarterly profitability (likely in late 2025 or early 2026) will serve as a technical confirmation of the cycle turn.
  4. Policy Support: Further concrete measures from the Chinese government to restrict new capacity or encourage mergers and acquisitions.

Detailed Financial Analysis & Sensitivity

To provide a deeper understanding of the investment case, we analyze the sensitivity of Daqo’s earnings to key variables.

Sensitivity Analysis: Impact of Polysilicon ASP on 2026E Net Profit

Assuming 2026E Volume of 180,000 mt and Cash Cost of CNY 38/kg:

Note: This simplified sensitivity illustrates the high operating leverage. A CNY 5/kg increase in ASP can nearly double net profit estimates.

Cash Flow Analysis:
* Operating Cash Flow (OCF): In 1H25, OCF was negative but significantly improved YoY. For full-year 2025E, we estimate OCF to remain negative or breakeven as the Company manages working capital. However, in 2026E, we project OCF to turn strongly positive (CNY 2.88 billion), providing internal funding for future growth without external financing.
* Capital Expenditure (CapEx): Daqo has drastically reduced CapEx (estimated CNY 67 million in 2025E vs. CNY 527 million in 2024A). This disciplined capital allocation preserves cash and indicates that the Company is not chasing growth in a depressed market. Future CapEx will likely be focused on efficiency upgrades rather than massive greenfield expansions.

Competitive Landscape Comparison

While detailed peer data is not provided in the source report, general industry knowledge allows for a qualitative comparison:

• Vs. GCL Technology: GCL is a major competitor with significant granular silicon capacity. While GCL has cost advantages in certain segments, Daqo’s balance sheet is generally considered cleaner with less debt burden.
• Vs. Tongwei Co.: Tongwei is a diversified giant (polysilicon + cells/modules). Its scale is larger, but its complexity is higher. Daqo’s pure-play focus on polysilicon allows for specialized expertise and agility.
• Vs. Xinte Energy: Xinte is another key player. Daqo’s consistent execution in cost reduction and its zero-debt status give it an edge in financial resilience.

Daqo’s differentiation lies in its financial conservatism combined with technical excellence. In a boom, this might lag behind aggressive expanders. In a bust, it is the ultimate survivor.

Conclusion

Daqo New Energy’s 1H25 results are a testament to the harsh realities of the current PV cycle, but also to the Company’s robust defensive capabilities. The revenue and profit declines are symptomatic of the sector, not specific to Daqo’s operational failures. On the contrary, the Company’s ability to cut cash costs, manage inventory, and maintain a pristine balance sheet demonstrates superior management quality.

We believe the market is overly focused on the trailing 12-month losses and underestimating the value of Daqo’s liquidity and cost position. As the industry consolidates and demand grows, Daqo is uniquely positioned to emerge stronger, with greater market share and improved profitability. The path to recovery will be gradual, but the direction is clear.

For institutional investors with a medium-to-long-term horizon (12-24 months), Daqo New Energy offers a compelling risk-adjusted opportunity to participate in the inevitable recovery of the solar upstream sector. The combination of a "fortress" balance sheet, industry-leading cost structure, and disciplined strategic execution supports our Overweight rating. We advise investors to monitor quarterly production guidance, polysilicon spot price trends, and signs of competitor capacity exits as key indicators of the unfolding recovery.

Appendix: Detailed Financial Tables

Table 3: Income Statement Forecast (CNY Million)

Table 4: Balance Sheet Forecast (CNY Million)

Table 5: Cash Flow Statement Forecast (CNY Million)

Table 6: Key Financial Ratios and Metrics

Analyst Certification and Disclaimer

Analyst Certification:
The analysts named in this report, Deng Yongkang (S0100521100006), Lin Yutao (S0100524070001), Wang Yiru (S0100523050004), and Zhu Biye (S0100522120001), certify that they have the requisite securities investment consulting qualifications registered with the Securities Association of China. They declare that the views expressed in this report accurately reflect their personal, independent, and objective research opinions. They have not received, nor will they receive, any direct or indirect compensation for the specific recommendations or views contained herein.

Disclaimer:
Minsheng Securities Co., Ltd. ("the Company") holds the securities investment consulting business qualification approved by the China Securities Regulatory Commission. This report is intended solely for the use of the Company's domestic clients. Receipt of this report does not constitute a client relationship. This report is for reference only and does not constitute an offer or solicitation to buy or sell any securities or financial instruments. The views and suggestions contained herein do not take into account the specific investment objectives, financial situation, or particular needs of any recipient. Clients should independently evaluate the information and consult with legal, tax, or financial advisors as necessary. The Company assumes no liability for any losses arising from the use of this report.

The information herein is based on publicly available sources believed to be reliable, but the Company does not guarantee its accuracy or completeness. The opinions and forecasts reflect the judgment of the Company as of the date of publication and are subject to change without notice. The Company may hold positions in the securities mentioned and may provide investment banking or other services to the companies discussed. Conflicts of interest may exist; clients should consider this report as only one factor in making their investment decision.

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