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Suntech Power Holdings Co. Ltd. (NYSE:STP)

Q1 2006 Earnings Conference Call

May 18 2006, 8:00 am EST

Executives

Cindy Shao - Investor Relations Coordinator

Dr. Zhengrong Shi - Chief Executive Officer

Amy Zhang - Chief Financial Officer

Dr. Stuart Wenham - Chief Technical Officer

Yunsheng Jiang - Investment Controller

Analysts

Rob Stone - Cowen & Co.

Ming Yang - Piper Jaffray

David Edwards - ThinkEquity

Tienyu Sieh - Merrill Lynch

Paul Leming - Soleil Securities

Sunil Gupta - Morgan Stanley

Dennis Lim - Horizon Capital

Jesse Pichel - Piper Jaffray

Johan [Kendihar] - Tisbury Capital

Operator

Good day ladies and gentlemen and welcome to the Suntech 2006 first quarter earnings conference call. (Operator Instructions) I will now turn the call over to Ms. Cindy Shao, Suntech Investor Relations coordinator. Ma'am, please proceed.

Cindy Shao

Hello everyone and welcome to Suntech’s first quarter 2006 earnings conference call. My name is Cindy Shao, Suntech’s Investor Relations Coordinator. From Suntech on the call today will be Dr. Zhengrong Shi, Suntech Chairman and CEO who will review some of the Company's business highlights; Amy Zhang, our Chief Financial Officer; Stuart Wenham, Chief Technology Officer. Also, Yunsheng Jiang our Investment Controller, will be participating in the Q&A following Dr. Shi's opening remarks.

Before we continue, allow me to take you through the Safe Harbor policy. During this conference call, we will make certain forward-looking statements in an effort to assist you in understanding the Company and its results. The forward-looking statements will be made under the Safe Harbor provisions of the US Private Securities Reform Act of 1995.

Forward-looking statements involve inherent risks and uncertainty. As such, Suntech’s future results maybe materially different from the views expressed today. A number of potential risks and uncertainties are outlined in Suntech’s public filings with the US Securities and Exchange Commission. Suntech does not undertake any obligation to update any forward-looking statements except as required under applicable law.

As a reminder, this conference call is being recorded and a webcast of the management's prepared remarks will be available on the Investor Relations section of Suntech’s website after this call.

Also, please make note that all figures mentioned during this conference call are in US dollars. I will now turn the call over to Suntech’s Chairman and Chief Executive Officer, Dr. Zhengrong Shi.

Zhengrong Shi

Thank you, Cindy. Hello and thank you for joining us today. We are encouraged by our first quarter results. We exceeded our net revenue guidance by over $10 million, an increase of more than 130% from the same period in 2005, as worldwide demand for our PV products continue to grow, and our production capacity increased significantly.

We also recorded net income of $19.3 million, almost double our results for last quarter as we continue to increase production efficiencies and lower costs. Cost-effective capacity expansion is integral to our strategy of producing low cost, high quality PV products. During the first quarter of 2006, the 30MW solar cell production line that came into operation during the fourth quarter of 2005 reached full capacity and another 30MW line began to ramp production in April.

We believe we are well on the way to reaching our target of 240MW of annualized production capacity by the end of the third quarter of 2006.

Largely driven by government initiatives worldwide promoting the use of solar energy, the demand for solar energy continues to far exceed supply and the increases in our capacity have been quickly absorbed by the market.

Silicon supply is still a challenge to the solar industry, even though we have been operating in the environment of tight silicon supply during the past year, we have managed to rapidly increase our production output. There are several reasons for this:

  • The higher conversion efficiency rates of our PV products and the use of thinner wafers helped to offset higher silicon costs.
  • We are making progress developing the domestic supply chain. We believe we have strong advantages in this regard over our competitors, including financial stability, brand recognition and local knowledge, and established relationships.
  • Our OEM arrangement under which companies bring their silicon supplies directly to Suntech to turn into PV cells and modules continues to be a success.
  • We have been able to successfully pass along silicone price increases. This allows us to continue to grow profitability in an environment of constrained silicon supply.

Additionally, our [branded] silicone sourcing model, in which silicone comes to us from four sources: long-term domestic contracts; long-term international contracts; OEM programs and the spot market -- mean that we enjoy average costs for silicone that is below spot market prices.

In the first quarter, we continue to diversify our customer base and develop sales channels in our target market. Approximately 44% of our sales during the quarter were to customers based in China. However, we believe that much of this has been [inaudible] to export.

Customers based in Germany accounted for approximately 20.4% of our sales during the quarter. Other European countries, including Spain, Italy and Austria are also showing strong potential. We are very optimistic about our opportunities in the United States, where we are seeing a change towards greater government incentives supporting the use of solar power. We anticipate that our sales in the U.S. will increase significantly during the rest of 2006.

Of course, in the global PV industry, the key for becoming the lowest cost provider is having the best technology. So before I have Amy Zhang take you through our financials, I would like to turn the call over to our Chief Technology Officer, Dr. Stuart Wenham, who will give you some technical highlights.

Stuart Wenham

Thank you, Dr. Shi. In our last earnings release, we reported that Suntech's monocrystalline silicon solar cells achieved 17% conversion efficiency rate towards the end of Q4 2005. During the first quarter of 2006, we reaped the benefits of this higher efficiency, which contributed to the increased profit margins compared to the fourth quarter of 2005. Also, our multicrystalline solar cell conversion efficiencies reached 15.4%, up from 15.2% in the fourth quarter of 2005.

During Q1, we continued to expand our pilot production over our 18% conversion efficiency technology that uses standard, solar grade silicon and we expect to begin large scale production using this technology by the end of 2006.

Finally, initial test devices based on Suntech's new generation 20% conversion efficiency technology -- still using standard solar grade silicon -- have performed very well. We will design the pilot production facility for this new, exciting technology ahead of schedule in Q2 and Q3 2006.

As Dr. Shi mentioned, having the best technology is the key to success in the PV industry. Suntech is already a leader in this area, and we expect there will be even more exciting R&D developments ahead, as we strive to stay at the forefront internationally. Thank you. I will now hand over to our CFO, Amy Zhang.

Amy Zhang

Thank you, Stuart. Instead of repeating all of the numbers in the press release, I will provide some highlights on certain key results from the first quarter of 2006, and provide financial guidance for the second quarter.

In the first quarter, we reported net revenue of $89.9 million, representing an increase of 133.5% year-over-year. During the quarter, we shipped a total output of approximately 27MW compared to 26MW in the fourth quarter of 2005. The split of our PV cell output to PV modules was 50-50 in the first quarter of 2006, compared to 39% to 61% for the previous quarter.

Gross profit rose to $27.1 million for the quarter, or 30.1% of net revenue. This sequential improvement in our gross margin reflects higher PV module prices, best cost controls, improvements in conversion efficiencies and less share-based compensation than in Q4 2005.

Operating income for the first quarter was $20.1 million or 22.3% of net revenue, almost double the result for both the first and fourth quarters last year. The sequential increases in operating profit and operating margin are primarily due to the reduced levels of share-based compensation in Q1, as compared to Q4 last year.

Total share-based compensation expenses for the first quarter were $2.8 million. Of this amount, $0.5 million was recognized as COGS; $0.6 million as R&D; and $1.7 million as G&A expenses.

After deducting share-based compensation expenses and increases in raw material costs related to R&D activities, R&D on a pro forma basis was at the same level as in the fourth quarter of 2005.

We ended the first quarter with a strong balance sheet, cash and cash equivalents of approximately $345 million and low accounts receivable. As part of our efforts to secure materials to meet our growing production volume, we continued to strategically deploy our financial strength by building inventories of raw materials and extending advances to suppliers.

Raw material inventories increased from $20 million at the end of the fourth quarter to $31 million at the end of the first quarter. We expect our raw material inventory levels to increase further in the second quarter.

Suntech has established a strong network of relationships with leading international wafer, ingot and silicone providers, including various suppliers based in China. We are providing cash advances to a number of our suppliers to allow them to expand their output, and to ensure preferential allocations of silicone supplies to Suntech.

Advances to suppliers increased from $24 million at the end of the fourth quarter 2005 to $55 million at the end of the first quarter of 2006. These advances are typically expanded against expected, near-term shipments of wafers to Suntech and then rolled over. We have put in place appropriate procedures to monitor credit risks, and to-date there have been no material writedowns of outstanding advances.

With respect to our financial guidance for the second quarter and full year 2006, please note that the following outlook statements are based on our current expectations. These statements are forward-looking, and actual results may differ materially.

Total net revenues in the second quarter are expected to be in the range of $110 million to $117 million, representing year-over-year growth in the range of 163% to 179%. For the quarter, we anticipate total output will be in the range of 31MW to 33MW. For the full year of 2006, we continue to expect total production capacity output will be between 130MW to 140MW.

At this time, I would like to turn the call back to Dr. Shi.

Zhengrong Shi

Thank you, Amy. Solar energy is a global industry that is rapidly coming of age. Today, more and more governments are promoting the use of solar energy and the rapid technological advances are bringing solar energy closer to being competitive with traditional energy sources.

The silicone supply remains an issue that all solar companies must grapple with. But this is a short-term situation, and silicone is in fact the second most abundant element in the earth's crust. As more supply comes on line in the months and years ahead, I believe that we will see solar power become more important to meeting the world's rapidly growing energy needs.

Thank you again for joining us today. I would now like to open the call up for questions. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Rob Stone - Cowen & Co.

Rob Stone - Cowen & Co.

Hello Dr. Shi and everyone, congratulations on an excellent result.

Zhengrong Shi

Thank you, Rob.

Rob Stone - Cowen & Co.

Dr. Wenham, I wonder if you could elaborate a little bit more on the technology? Describe the 20% pilot and the timing to set up larger scale production?

Stuart Wenham

Certainly. We have a new technology already in pilot production that we will be putting into large-scale production toward the end of this year. You are referring to the newer generation of technology. Again, beyond that it is a technology that we have been forecasting our expectation that it will be in large scale production by 2008, but we are now hopeful to have it in large scale production during 2007.

It is a new technology that we are currently designing our pilot production facility for. We can't give too many details yet, just because of intellectual property issues, but we expect to release more information on this over the coming months.

Rob Stone - Cowen & Co.

So if I heard you correctly, in the lab it is testing at 20% efficiency?

Stuart Wenham

We have been making test device structures where we have been evaluating various aspects of the processing of the technology, things like the surface classification metal content [theme], et cetera and the testing we have done so far is indicating that the technology should be able to achieve 20% efficiency on the devices in production.

Rob Stone - Cowen & Co.

And that is with solar grade silicone?

Stuart Wenham

That is with the standard solar-grade silicone that most manufacturers are using.

Rob Stone - Cowen & Co.

Great, well we will certainly look forward to more details when you are able to share them. Just a quick housekeeping question. Capital expenditures and depreciation for the quarter?

Amy Zhang

Sorry, can you repeat your question again? You broke up a bit.

Rob Stone - Cowen & Co.

May we please have the capital expenditure and depreciation for the quarter?

Amy Zhang

The first quarter capital expenditure is $4.2 million. Depreciation -- do you mean the depreciation in Q1?

Rob Stone - Cowen & Co.

Yes.

Amy Zhang

It is $1.4 million in Q1.

Rob Stone - Cowen & Co.

The capital expenditure for the full year of 2006?

Amy Zhang

Full year 2006 CapEx is forecasted at around $40 million to $42 million in the whole year.

Rob Stone - Cowen & Co.

Thank you.

Operator

Our next question comes from Jesse Pichel - Piper Jaffray.

Ming Yang - Piper Jaffray

This is Ming Yang for Jessie. Congratulations on a great quarter, very strong results. On The Street there is a lot of concern on your polysilicon supplies, especially as some of your wafer suppliers are forward integrating. Can you please talk about that? Also, how are you addressing this issue?

Zhengrong Shi

We can't speculate about these rumors or whatever. As we said earlier, for 2006 we have secured all of our silicone material for our projected production volume.

Ming Yang - Piper Jaffray

So I would assume you are possibly looking to allocate it under contract? It is still fairly stable and will allow you to achieve your production?

Zhengrong Shi

Yes.

Ming Yang - Piper Jaffray

Another question on gross margin. Gross margin for the quarter was very strong, despite higher spot prices. So can you talk more about that issue? Why is it higher and what do you expect that to be going forward?

Yunsheng Jiang

This is Yunsheng Jiang. I am the Company's investment controller. For the strong performance in Q1, first of all, we have managed the raw material price very successfully in Q106. The average purchase price only increased around 3% sequentially, even though the silicone market price still increased significantly.

Secondly, we are able to pass the cost increase to our customer. Also, improved operational efficiency and the lack of share-based compensation also helped us on the margin improvement.

Ming Yang - Piper Jaffray

Last question on your revenue upside for the quarter. Is it mainly due to your lines renting ahead of schedule, or is this more about pricing and supply?

Zhengrong Shi

Yes, it is ramped up ahead of schedule.

Ming Yang - Piper Jaffray

Great. Congratulations. Thanks.

Operator

Our next question comes from David Edwards - ThinkEquity.

David Edwards - ThinkEquity

Thanks. Just a couple of questions. First of all, can you confirm what you said the percentage of sales were in China?

Zhengrong Shi

It is 45% in terms of the dollar amount. In terms of the volume output, it is up 50% to the China market in Q1.

David Edwards - ThinkEquity

That significant increase, do you think that is going to be representative of the percentage of sales in China for the rest of the year, or do you expect that to change?

Zhengrong Shi

The Company's strategy -- as we all know, is silicone supply is becoming tighter for every silicone company in the world. Suntech's strategy, in order for us to meet our expansion plan in the future, our strategy is we need to acquire as many silicone wafers in the domestic market, as many as possible. So that is one strategy as to why we increase our silicone manufacturing and shipping in China.

David Edwards - ThinkEquity

Okay. Also the balance between sales and modules changed quite a bit in this quarter as compared to last quarter. How should we think about the trend in terms of the percentage of business in sales versus modules?

Zhengrong Shi

I think with our increased capacity in the coming quarters, we believe the sales in Q2 will reduce about 40%.

David Edwards - ThinkEquity

Great. Thank you very much, that is all I have.

Zhengrong Shi

Thank you.

Operator

Our next question comes from Tienyu Sieh - Merrill Lynch.

Tienyu Sieh - Merrill Lynch

I would just like to know a little bit about the pricing environment. I was surprised to see that the sale price actually declined quarter on quarter in what would be, I guess, a seller's market. Can you just give us a little bit of color on why that is the case?

Yunsheng Jiang

Compared with Q4 '05, our ASP for sales actually decreased only around 2% from $3.12 per watt to $3.05 per watt in Q1 '06. The major reason for the drop of the ASP of cells is our sales is really related to the [inaudible] in China. So we purchase the wafer from our customer and we sell them back cells. For this part of the transaction, we generally use low in, low out/high in, high out and the margin principle to ensure the profitability.

For Q1 '06, our low in/low out customer proportion increased, so our ASPs showed a moderate decrease, only about 2%. But again, we well protect our cell margin above 31%.

Tienyu Sieh - Merrill Lynch

In that respect, as a follow on, can you give us the COGS for the cells and the modules? I think you normally release that later on, but if you have that number handy.

Yunsheng Jiang

Let me answer that in another way. For the total sales, 45% is in the cell sales, and 55% is in the module sales. For the gross margin of cell, it is 31% and for the module gross margin it is around 29%. So you can derive the COGS.

Tienyu Sieh - Merrill Lynch

Thank you very much.

Operator

Our next question comes from Paul Leming - Soleil Securities.

Paul Leming - Soleil Securities

Good afternoon. Could you help us understand, relative to your raw material position [inaudible - technical difficulties].

Zhengrong Shi

He is cut off.

Operator

He must have disconnected his line. Your next question comes from the line of Rob Stone - Cowen & Co.

Rob Stone - Cowen & Co.

Amy, just a quick follow-up please. The stock compensation expense was down from Q4 to Q1. Can you comment on the trend for Q2 and the rest of the year for stock-based compensation?

Amy Zhang

You are talking about the share-based compensation and the P&L impact. In the total year 2006, the total share-based compensation will be around $11 million. We are going to have a straight line, average allocation into the four quarters of 2006. So in each quarter, there will be $2.8 million recognized for the total share-based compensation.

Rob Stone - Cowen & Co.

Thank you.

Operator

Our next question comes from Paul Leming - Soleil Securities.

Paul Leming - Soleil Securities

Hi, can you hear me now?

Zhengrong Shi

Yes.

Paul Leming - Soleil Securities

I was wondering if you could help us understand on your raw material position, just some rough breakdowns on how much polysilicon you actually purchased versus ingot versus wafer?

Zhengrong Shi

We can give you a rough breakdown. Still, I think 60% of our purchase is in wafer format, and 20% is ingot and 20% is in silicone material.

Paul Leming - Soleil Securities

Could you give us any sense you have of how rapidly polysilicon capacity is actually coming online in China? Do you have any estimates of what actual polysilicon production in China could be by the fourth quarter of this year, just as a benchmark?

Zhengrong Shi

Well we can -- there are two sides of the story. The one thing is what we actually are seeing materialize in the production of polysilicon in China. At this moment, it is about 400 tons per year. These manufacturers, as we said earlier, is mainly sponsored by Suntech, they all have long-term supply agreements.

One of these manufacturers, [Luion Silicone] is in the process of expanding their existing capacity to 1,000 tons by the end of 2006, as claimed by them. There are many others initiatives or speculations in China about polysilicon manufacturers this year, next year. It seems reasonable to expect by 2010 there probably will be at least 5,000 tons of polysilicon capacity in China.

Paul Leming - Soleil Securities

That was 5,000 tons?

Zhengrong Shi

By 2010.

Paul Leming - Soleil Securities

Thank you very much.

Operator

Your next question comes from the line of Sunil Gupta - Morgan Stanley.

Sunil Gupta - Morgan Stanley

Hi Dr. Shi, Amy, Dr. Wenham. I have two questions. What was your output in Q1 of '06? I am not sure that I got that number?

Yunsheng Jiang

It was 27MW in Q1 '06.

Sunil Gupta - Morgan Stanley

This is significantly better than what you were expecting and what you had guided for. What was the reason for this improvement and the results being better than what you were expecting?

Yunsheng Jiang

The first line was ramping up faster than we expected.

Sunil Gupta - Morgan Stanley

Can I also ask, what was the average wafer cost on a 5-inch equivalent basis in Q1? What do you expect this to be in Q2?

Yunsheng Jiang

I think as outlined, we have very blended supply sources so we can at this moment, our average blended cost is about $4.03 per wafer, which is based on the 5-inch.

Sunil Gupta - Morgan Stanley

That is in Q1?

Yunsheng Jiang

Yes.

Sunil Gupta - Morgan Stanley

And what do you expect in Q2?

Yunsheng Jiang

In Q2 I think our wafer cost will probably increase to around 5% to 8% from Q1 '06, but accordingly, the ASP will also increase around 3% to 5% compared to Q1.

Sunil Gupta - Morgan Stanley

So a 5% to 8% increase in wafer costs and 3% to 5% increase in ASP?

Yunsheng Jiang

Yes.

Sunil Gupta - Morgan Stanley

And you expect the mix to improve and the percentage of sales to decline from 45% to about 40%, right?

Yunsheng Jiang

Yes.

Sunil Gupta - Morgan Stanley

Thank you very much.

Yunsheng Jiang

A pleasure.

Operator

Our next question comes from Dennis Lim - Horizon Capital.

Dennis Lim - Horizon Capital

Could you break out, if possible, your COGS into depreciation, stock expense and raw material costs? If you have those numbers handy?

Amy Zhang

In the system, we do have the breakdown but we normally don't disclose that down to that detail.

Dennis Lim - Horizon Capital

Is it possible to break out stock expense? I didn't hear the numbers correctly just now, and if you could compare them against the fourth quarter of '05?

Amy Zhang

The fourth quarter of '05 total share-based compensation was recognized as $7 million in Q4.

Dennis Lim - Horizon Capital

What percentage is in COGS?

Amy Zhang

$7 million for the total company. In Q1 '06, $2.8 million recognized for the total company.

Dennis Lim - Horizon Capital

What percentage of the $7 million is in COGS?

Amy Zhang

You mean $7 million in '05?

Dennis Lim - Horizon Capital

Yes.

Amy Zhang

It was 18%.

Dennis Lim - Horizon Capital

18% is in the COGS?

Amy Zhang

Yes.

Dennis Lim - Horizon Capital

And in the $2.8 million, how much of a percentage on the COGS?

Amy Zhang

It is the same. It is related to the same group of people.

Dennis Lim - Horizon Capital

And this $7 million for all of '05, or was it just the fourth quarter?

Amy Zhang

Fourth quarter.

Dennis Lim - Horizon Capital

Thank you.

Operator

Our next question comes from the line of David Edwards - ThinkEquity.

David Edwards - ThinkEquity

Just another question - can you tell me a bit about the foreign exchange impact this quarter? Especially as it relates to sales increasing in China. How does that compare against how your expenses and your revenue are denominated in different currencies?

Amy Zhang

For the increasing volume of sales in China, we closed everything in local currency which is RMB. It is the same with the purchasing contract; we close everything in RMB as well.

Regarding the foreign currency, most of our international sales actually are quoted in U.S. dollar. Only a small volume of the total sales are quoted in euro. We have adopted very efficient hedging policies, starting from the end of December, which actually helped us in a great sense, to minimize the impact to the P&L from the fluctuation of the exchange rate.

David Edwards - ThinkEquity

Okay, and your other expenses other than the raw materials?

Amy Zhang

Other expenses, for example, daily operating and OpEx, a majority of that is also expensed and booked in local currency.

David Edwards - ThinkEquity

Okay, great. Thanks a lot. Thank you.

Operator

Our next question comes from Jesse Pichel - Piper Jaffray.

Jesse Pichel - Piper Jaffray

Yes, good evening. This is Jesse this time and congratulations on the quarter.

What percent of your business is generated through tooling?

Zhengrong Shi

I think for tooling it would be around 20%.

Jesse Pichel - Piper Jaffray

So you don't have to worry about polysilicon supply for that 20%, is that correct?

Zhengrong Shi

This 20% of tooling, that is the contract for the whole year, yes.

Jesse Pichel - Piper Jaffray

And then of the remaining 80%, how much of that is under fixed or known price versus quarterly negotiated price?

Zhengrong Shi

Yearly, fixed price is 40% of the total supply.

Jesse Pichel - Piper Jaffray

40% of total is fixed. But it is actually higher than that, if you exclude the 20% that is under tooling, is that right? It is probably closer to 60% fixed?

Zhengrong Shi

No, it is including tooling.

Jesse Pichel - Piper Jaffray

Including the tooling? Okay. Could you elaborate a little bit more on China? You have an integration business there in China, and congratulations on that. But what type of integration assets do you have on the ground in China? What kind of capabilities do you have?

Zhengrong Shi

You mean the Company?

Jesse Pichel - Piper Jaffray

Yes, the Company.

Zhengrong Shi

In the last several years we have assembled a team of good engineers that have many years of experience to operate an on-grid type of integration. I think for this integration contract we won, about half is off-grid integration and another half is on-grid.

Jesse Pichel - Piper Jaffray

How many megawatts do you think China will purchase over the next year or two? Will that mostly be off grid in Western China or on grid applications?

Zhengrong Shi

There's a very obvious change of increasing on-grid projects. So although majority still comes from such projects, when you look at the scale the project is much larger than before. Like they are talking 300 kilowatt to 1 megawatt type of scale instead of only in the 10s of kilowatts.

Jesse Pichel - Piper Jaffray

In aggregate, what will China represent in terms of megawatts installed, say by 2008? What's your estimation there? Is it a couple of hundred megawatts?

Zhengrong Shi

Long term?

Jesse Pichel - Piper Jaffray

Long term.

Zhengrong Shi

Every year? In yearly installation or long term installation?

Jesse Pichel - Piper Jaffray

Yearly installation.

Zhengrong Shi

Yearly installation, I would say about 2008, you're talking about 60 megawatts per year.

Jesse Pichel - Piper Jaffray

60?

Zhengrong Shi

Yes.

Jesse Pichel - Piper Jaffray

Great. Okay, thank you very much.

Operator

Our next question comes from Johan [Kendihar] with Tisbury Capital.

Johan [Kendihar] - Tisbury Capital

Could you please talk about how you see margin development for the remainder of the year?

Amy Zhang

I'm sorry, can you please repeat your question again?

Johan [Kendihar] - Tisbury Capital

Your margins in Q1 were quite strong, I think. Do you think you would be able to maintain that level of margins for the rest of the year?

Amy Zhang

Across the whole year of 2006, our estimation is still within the range of 27% to 29% in gross profit.

Operator

Our next question comes from Sunil Gupta - Morgan Stanley.

Sunil Gupta - Morgan Stanley

Thank you. I have some follow-up questions for Stuart. Stuart, you mentioned a couple of things about conversion efficiency in terms of pilots that are going on. How about wafer thickness? Could you talk about what's your current mix in terms of wafer thickness, and where do you expect that to be by end of this year?

Stuart Wenham

Yes. With regard to wafer thickness, we've done a lot of work at reducing the wafer thickness that we’re able to handle in our production. We've now demonstrated that we can achieve similarly high yields in our production, using the 210 micron thickness wafers compared to the former 240 micron thick wafers.

Our present mix is round about half-half between 210 micron thick and 240 micron thick. But it’s more the limitation about suppliers of the wafers, that’s limiting us to still using 240 micron thick wafers in our production. We are quite happy now to use 210 micron thickness wafers, knowing that we can achieve similar yields and efficiencies in our production of our product.

Sunil Gupta - Morgan Stanley

Okay, great. In terms of your current input wafer mix between mono and multi, what percentage of your input wafers are approximately mono?

Yunsheng Jiang

70% is mono wafer, 30% is multi wafer.

Sunil Gupta - Morgan Stanley

And on mono, I think I heard you mention that the conversion efficiency is likely to hit 18% by end of this year. Is there going to be a linear progression between where we are right now to 18%, or is this more of a set move as you bring in the new technology?

Stuart Wenham

Well, we reached 17% efficiency at the end of last year so we’re routinely able to achieve that in our production now. The actual move to 18% efficiency, we've got a new technology that’s in pilot production at the moment, that’s going to give us a jump in efficiencies.

Now, with any introduction of new technology there tends to be a ramp-up phase. Both in terms of the volume of production of the new technology, and also tuning in the efficiencies to reach their potential. So we probably will see a gradual increase in efficiencies once we introduce the new technology towards the end of this year.

Sunil Gupta - Morgan Stanley

So would I be right in assuming that for the mono it stays around 17% for maybe another two odd quarters? Probably in Q4 it starts inching as you start ramping up the new technology?

Stuart Wenham

Yes. I think that’s probably the right way to interpret. So, yes, we expect to stay at around about 17% efficiency through the end of next year, and then the efficiencies with the new technology to gradually increase that, towards 18% during the early part of next year.

Sunil Gupta - Morgan Stanley

Great, thank you.

Operator

At this time I show no further questions in the queue.

Zhengrong Shi

Once again, thank you very much for joining us today. Have a nice day.

Operator

This concludes the presentation. You may now disconnect. Good day.

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