Daqo New Energy vs. JinkoSolar: Which Chinese Renewable Energy Stock is a Better Buy?

Daqo New Energy Corp. (DQ), in Chongqing, China, develops and sells polysilicon to photovoltaic product manufactures. It offers ready-to-use polysilicon and is packaged to meet crucible stacking, pulling, and solidification products. In comparison,  JinkoSolar Holding Co., Ltd. (JKS), which is based in Shangrao, China, designs, develops,  produces, and markets photovoltaic products. The company offers solar modules, silicon wafers, solar cells, recovered silicon materials, and silicon ingots.

The increasing frequency of droughts, a record number of wildfires, and floods have led governments worldwide to take aggressive steps to transition their countries to renewable-energy-based societies. While producing energy from renewable sources is still expensive, solar and wind energy costs have declined considerably over the past few years. Furthermore, China has emerged as a global leader in renewable energy and is currently the world’s most significant wind and solar power producer and the largest domestic and outbound investor in renewable energy. According to a Facts & Factors report, the global renewable energy market is expected to grow at an 8%-plus CAGR between 2021 - 2026. Therefore, both DQ and JKS should benefit.

JKS’ shares have gained 26% in price over the past three months, while DQ has returned 6.5%. However, DQ’s 1.1% gains year-to-date are higher than JKS’ negative returns. Furthermore, DQ is the clear winner with 28.2% gains versus JKS’ negative returns regarding their past year's performance.

But which of these two stocks is a better buy now? Let’s find out.

Latest Developments

On October 28, Longgen Zhang, CEO of DQ, said, “This total liquidity of $1.4 billion is a strong foundation to support our expansion projects and future plans to reward our investors. The construction of our Phase 4B capacity expansion project is going smoothly and according to schedule. We expect to complete the construction by the end of 2021 and ramp-up to full capacity by the end of the first quarter of 2022."

On November 3, JKS announced that its principal operating subsidiary, Jinko Solar Co., Ltd., plans to invest RMB450 million in Sichuan Yongxiang Energy Technology Co., Ltd., a subsidiary of Tongwei Co., Ltd. Kangping Chen, CEO of Jinko Solar Co., Ltd. said, “By securing this new line of clean, high-quality and highly reliable raw material, we will be able to guarantee the long-term reliability of our wafer and module production for the next few years.”

Recent Financial Results

DQ’s revenues increased 366.8% year-over-year to $585.80 million for its fiscal third quarter, ended September 30, 2021. The company’s non-GAAP EBITDA grew 756.2% year-over-year to $441.80 million, while its adjusted net income came in at $294.70 million representing a 1,069.4% year-over-year increase. Also, its adjusted EPS was $3.98, up 1,037.1% year-over-year.

JKS’ revenues decreased 2.3% year-over-year to $1.33 billion for its fiscal third quarter, ended September 30, 2021. The company’s gross profit declined 13.3% year-over-year to $201.10 million, while its non-GAAP net income came in at $2.50 million representing a 95.1% year-over-year decrease. Also, its non-GAAP EPS was  $0.01, down 95.6% year-over-year.

Past and Expected Financial Performance

DQ’s revenue and EBITDA have grown at CAGRs of 64.3% and 85.6%, respectively, over the past three years. Analysts expect DQ’s revenue to increase 146.2% for the quarter ending December 31, 2021, and 181% in its fiscal year 2021. The company’s EPS is expected to grow 372.9% for the quarter ending December 31, 2021, and 584.3% in its fiscal 2021. And  its EPS is expected to grow at a rate of 74.9% per annum over the next five years.

In comparison, JKS’ revenue and EBITDA have grown at CAGRs of 13.33% and 38.3%, respectively, over the past three years. The company’s revenue is expected to increase 40.1% for the quarter ending December 31, 2021, and 14.3% in its fiscal year 2021. Its EPS is expected to grow 1,354.5% for the quarter ending December 31, 2021, but decline 19.7% in its fiscal 2021. Also, JKS’ EPS is expected to grow at a rate of 25.9% per annum over the next five years.

Profitability

JKS’ trailing-12-month revenue is 3.45 times DQ’s. However, DQ is more profitable, with gross profit and EBITDA margin of 63.15% and 65.06%, respectively, versus  JKS 16.79% and 8.21%.

However, DQ’s ROE, ROA, and ROTC of 48.68%, 27.49%, and 33.85%, respectively, are higher than JKS’ 0.94%, 1.59%, and 2.11%.

Valuation

In terms of forward non-GAAP P/E, JKS is currently trading at 23x, which is 438.6% higher than DQ’s 4.27x. And JKS’ 16.35x forward EV/EBITDA ratio is 471.7% higher than R’s 2.86x.

So, DQ is relatively affordable here.

POWR Ratings

DQ has an overall B rating, which equates to a Buy in our proprietary POWR Ratings system. In contrast, JKS has an overall rating of D, which translates to a Sell. The POWR Ratings are calculated considering 118 distinct factors, with each factor weighted to an optimal degree.

DQ has a B grade for Growth, consistent with analysts’ expectations that its EPS will increase in the current year. In comparison, JKS has a C grade for Growth, which is in sync with analysts’ expectations that its EPS will decline in the current year.

In addition, DQ has a B grade for Quality. This is justified given DQ's 33.85% trailing-12-month ROTC is 586.6% higher than the 4.93% industry average. On the other hand, JKS has a Quality grade of D, which is in sync with its 2.11% trailing-12-month ROTC, which is 57.2% lower than the 4.93% industry average.

Of the 90 stocks in the A-rated Chemicals industry, DQ is ranked #44. However, JKS is ranked #4 of 18 stocks in the F-rated Solar industry.

Beyond what I have stated above, we have also rated the stocks for Momentum, Value, Stability, and Sentiment. Click here to view all the DQ ratings. Also, get all the JKS ratings here.

The Winner

Favorable policy measures and a decline in costs are expected to drive the renewable energy industry’s growth. While both DQ and JKS are expected to gain, we think it might be better to bet on DQ now because of its robust financials, better growth prospects, higher profitability, and lower valuation.

Our research shows that the odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the other top-rated stocks in the Chemicals industry here. Also, click here to access all the top-rated stocks in the Solar industry.

DQ shares were trading at $55.59 per share on Wednesday afternoon, down $1.75 (-3.05%). Year-to-date, DQ has declined -3.09%, versus a 23.86% rise in the benchmark S&P 500 index during the same period.

Nimesh Jaiswal's fervent interest in analyzing and interpreting financial data led him to a career as a financial analyst and journalist. The importance of financial statements in driving a stock’s price is the key approach that he follows while advising investors in his articles.

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