Suntech Power Holdings Co., Ltd. Q4 2008 Earnings Call Transcript

Feb.18.09 | About: Suntech Power (STP)

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

Q4 2008 Earnings Call

February 18, 2009 8:00 am ET

Executives

Rory Macpherson – Director of Investor Relations

Dr. Zhengrong Shi – Chairman & Chief Executive Officer

Amy Yi Zhang – Chief Financial Officer

Steven Chan – President Global Sales/Marketing & Chief Strategy Officer

Boxun Zhang – Director of Business & Financial Analysis

Analysts

Burt Chao – Simmons & Company

Robert Stone – Cowen and Company

Kelly Dougherty – Macquarie Research

Sanjay Shrestha – Lazard Capital Markets

John Hardy – Broadpoint AmTech

Paul Leming – Soleil Securities

Shalis Jetli – Nomura Securities

Jonathan Hoopes – ThinkEquity Partners

Paul Clegg – Jefferies & Company, Inc.

[Vishwa Lurie] – Credit Suisse

Lu Yeung – Bank of America/Merrill Lynch

Vishal Shah – Barclays Capital

Sunil Gupta – Morgan Stanley

Charles Yonts – CLSA

Jeff Osborne – Thomas Weisel Partners

Operator

Good evening, and thank you for standing by for Suntech’s Fourth Quarter and Full Year 2008 Earnings Conference Call. At this time all participants are in listen-only mode. After management’s prepared remarks, there will be a question-and-answer session. Today’s conference is being recording. If you have any objections, you may disconnect at this time.

I would now like to turn the meeting over to your host for today’s conference, Mr. Rory Macpherson, Suntech’s Director of Investor Relations. Please proceed.

Rory Macpherson

Hello everyone and welcome to Suntech’s fourth quarter and full year 2008 earnings conference call. My name is Rory Macpherson, Suntech’s Director of Investor Relations. From Suntech on the call today will be Dr. Zhengrong Shi, Suntech’s Chairman and CEO; Amy Zhang, our Chief Financial Officer. Also Chief Strategy Officer, Steven Chan and Director of Business and Financial Analysis, Boxun Zhang will participate in the Q&A following Dr. Shi’s closing remarks.

Before we continue, 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 U.S. Private Securities Reform Act of 1995.

Forward-looking statements involve inherent risks and uncertainties. As such, Suntech’s future results may be materially different from the views expressed today. A number of potential risks and uncertainties are outlined in our earnings release issued today and our SEC filings. Suntech does not undertake any obligation to update any forward-looking statement, except as required under applicable law.

As a reminder, this conference call is being recorded and a webcast of 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 U.S. dollars.

I will now turn the call over to Suntech’s Chairman and CEO Dr. Zhengrong Shi.

Zhengrong Shi

Thank you, Rory. Hello and thank you joining us today. In the first three quarters of the year, we achieve strong sequential growth and cemented our leading position in key European markets, while moving sweetly into emerging markets.

In the fourth quarter, the unprecedented global economic weakness and a limited availability of credit, post challenges for our industry. Nevertheless, as a result of strong customer recognition of Suntech’s brand, a broad product portfolio, and expensing of our global infrastructure.

We shipped close to the 500-megawatt in 2008, and achieved 1 gigawatt of sale and the module manufacturing capacity. This generated revenue growth of 43%, bringing full year revenues to nearly $2 billion. We also performed better than expected in the fourth quarter reaching our revenue guidance by over 15% and achieving of adjusted non-GAAP gross margin of 13.1% excluding the provision for inventory and the purchase commitments. This is compared to our original projection of break-even gross margin.

Today, I will discuss the key elements of our strategy. That’s we believe positions us for substantial growth in 2009. Amy will then report our fourth quarter and the full year financial performance and present our first quarter and the 2009 outlook.

During 2008, we extended our position as a leader in the solar industry, as we are successfully executed on our growth strategy. Simply put our strategy encompasses, one global sales infrastructure, two, a broad product and a solar solution portfolio, three, diversified and a flexible silicon sourcing, four, large scale manufacturing with stringent quantity process. And the five, cutting edge technology development.

I’ll now discuss our progress on all these fronts. The Suntech brand has a reputation for quality. Based on the strength of our brand and the reputation of our solar products, we have been able to establish strong footholds in new markets and the capitalized on the global demand for solar, for example. We’ve recently supplied 5-megawatt to a solar plant that we power Masdar City, the world’s first carbon neutral city being built in Abu Dhabi. The solar system is being built and it designed by leading Abu Dhabi based solar power system integrator, Enviromena Power Systems.

In terms of our global footprint, during the year, we opened offices in key solar markets around the world, including Italy and Spain, in addition to Australia, Germany and in South Korea. On the back of attractive incentives, we’re seeing particularly strong demand in France, Italy and Japan, in 2009. We are also gaining taxing in the United States, where we have multi-pronged strategy to service all levels of solar demand, including residential rooftop, commercial rooftop, and the utility scale projects.

Our system integration business, Suntech Energy Solutions has the promising pipeline, and Gemini Solar our JV with MMA is making excellent headway in this for utility scale projects that should lead to revenue generation in 2010. Lastly, our dealer network is really starting to mature and that make in-roads into the residential rooftop market.

I’m pleased to report that we have successfully expanded from around 30 dealers after the end of the third quarter of 2008, to over 100 dealers currently. We’re targeting to triple our sales in the U.S. to approximately 120-megawatt in 2009. And I expect to see even more opportunities with a resonant passage of the investment tax credit last fall and the newly approved economic stimulus pack, which contains numerous provisions for build-out of alternative energy infrastructure.

The project financing environment continues to be the main variable in the solar industry. However, we believe there are sings that this was so along with the winter in Northern Europe and improved throughout the year. Firstly, the order flow is beginning to pick up. We have around 700-megawatt of orders for 2009, and our pipeline of 200-megawatts that we are pursuing. Secondly, all levels of the solar value chain are becoming more familiar with the new environment, and as the challenge is outsourcing and financing.

For instants some customers on breaking large projects into smaller pieces, to speed up the financing. We believe that financing will continue to improve as the market adapts to this new environment. The challenging environment is also helping to accentuate the differentiation in the industry, leading to ply to quantity. Essentially, Suntech customers realize the value in buying quality modules, they can trust from a largest scale provider that has strength and the stability to backup the 25 year power output guarantee, while there is greater product competition, we find that quality, technology, brand, credibility, project history and the customer service are increasingly important elements, influencing the division making process and a leading more people to by Suntech. From a product perspective, we believe we are the most comprehensive solar offering and continue to target additional segments of solar demand. For example, recently we added two new BIPV products to our portfolio through license agreements with Applied Solar formally Open Energy.

The SolarEze tile products and the SolarBlend membrane product, we are still targeting new sales channels such as roofing and building products segments. And it should begin to generate meaningful revenue in late 2009.

To mange our polysilicon costs, we moved decisively over the past couple of years to diversify our polysilicon supply through signing long-term silicon supply contract, and making selective investments in polysilicon polymers. For instance in 2007, we signed a $1.5 billion contract with Asia Silicon with the very attractive prices that decline on annual basis. In fact, the price of silicon costs in our contract is below $40 per kilogram, which we believe is one of the most competitive silicon contracts around.

The early 2009, we summit this relationship by taking a minority stake in Asia Silicon for $8.1 million based in Shanghai in Western China, Asia Silicon has secured excess to very low energy prices, which is the key factor in determining cost leadership in silicon production.

They also have invested in state-of-the-art, manufacturing equipment and our way on way to rent into 2000 tons of capacity. The recently initiated poly production and that we expect to receive silicon before end of the quarter. With polysilicon price is declining, we have also entered into negotiations with some silicon supplies. All supplies value Suntech’s partnership and we have successfully renegotiated particularly higher price, short-term contracts.

In addition, we recently amended our 10-year supply agreement with one of our major supply MEMC, to increase the volume at a lower price. Cumulatively, this contract renegotiations coupled with new lower cost polysilicon contract should reduce our silicon costs by more than 30% in 2009 and it enable us to become to improve our profitability.

Moving to our scale and operations, after the end of 2008, we reached 1 gigawatt of PV sale and the module capacity. This scale gives us the flexibility to ramp production as demand picks up. For the time being, we were maintain our capacity at 1 gigawatt. However, we will continue to monitor the demanding environment and are adjust our expansion plans to suite.

In the interim, our efforts will be dedicated to optimization of our production processes and a supply chain management, as we have continued investment in transferring our high efficiency Pluto technology onto production lines. Our CTO, Dr. Stuart Wenham couldn’t join us today, Stuart will also discuss our progress on the technology fronts.

I would like to emphasize the strength of Suntech’s technology development team. We have over 250 professionals in R&D spending four countries. And the technology is essential element of our strategy to drive the cost of solar towards grid parity without incentives. The exceptional performance of our Pluto technology demonstrates our R&D capability. We are consistently producing Pluto Monocrystalline sales with conversion efficiencies of close to 19% and the multicrystalline sales close to 17%. This is up to 12% above average efficiencies using conventional screen-printed technology of 16.5% and the 15.5% are mono and the multi sales respectively.

Currently, we have the fully operational 34-megawatt of Pluto PV cell line and are in the process of adding another 68-megawatt of Pluto capacity. We should receive industry certification for Pluto modules in the second quarter of 2009, and the target to ship at least 50-megawatt of Pluto modules in 2009. As we progressively transfer to Pluto this will differentiate Suntech product and our cost structure.

Our thin film plant using the equipment installation phase, and then we target 15 to 20-megawatt of shipments this year, which we are mainly be in the second half. We look forward to sharing progress on this in the coming quarters. We have been working diligently over the past few years to build a globally recognize and a respected brand with a supportive infrastructure.

Localized customer service, and a highly comparative cost structure, we ended 2008 with a presence in all key solar markets globally. A vast network of local partners, broad comparative contracts with our supplies and the technology roadmap that’s we are further differentiate us from our competitors and our reduce costs.

Despite of the highly challenging environment, we believe we are very well positioned to expand market penetration and achieved grid parity.

Now I’d like to turn the call over to our CFO, Amy Zhang for review of our financial performance for the fourth quarter and full year. Amy?

Amy Yi Zhang

Thank you Dr. Shi. Hello to everyone on the call. Today I’ll provide some color on Suntech’s results for the fourth quarter and full year 2008, and provide guidance for the first quarter and full year 2009.

I will discuss Suntech’s performance focusing principally on non-GAAP numbers, which we believe provides a clearer picture of the operating dynamics of the company. Specifically, for the fourth quarter of 2008, non-GAAP measures exclude $2.8 million of share-based compensation expenses, $2.0 million of net income impact related to the amortization expenses of the MSK, KSL Kuttler and Suntech’s Energy Solutions acquisition, and $17.7 million expenses from a loss of $48.8 million on investment impairments. And $31.1 million gain on convertible notes repurchase. You can find a reconciliation of these measures, in the financial tables, at the end of our press release.

Net revenues for fourth quarter were $414.4 million, a 4.2% increase over the year-ago period, and 15% higher than the top of our guidance for the fourth quarter of 2008. Our core PV module business accounted for 92% of the total revenue in the fourth quarter of 2008, compared to 88% in the third quarter. Other revenue includes direct sales of PV cells, system revenues, and revenues from KSL-Kuttlers printed circuit board business.

Non-GAAP gross margin was 0.9% in the fourth quarter, compared to 21.8% in third quarter of 2008.

Gross margin decline from the third quarter was primarily due to a sequential decrease in the average selling price of PV modules and a provision for inventory and purchase commitment of $50.7 million, which impacted gross margin by 12.2%. For comparison, we only accrued around a $4.5 million provision for inventory and purchase commitments in the third quarter of 2008. We incurred the increased provision primarily because of the record decrease in the market price for silicon and modules in the fourth quarter.

Excluding the provision for inventory and purchase commitments, adjusted non-GAAP consolidated gross margin in the fourth quarter was 13.1% well above our guidance of break-even gross margin. Total share-based compensation expenses were $3.8 million. Of this amount, $1.6 million was recognized as cost of revenue, 0.1 million as selling expenses, $1 million as R&D, and $1.1 million SG&A expenses.

On a non-GAAP basis, operating expenses increased from $37.1 million in the third quarter of 2008 to $41.9 million in the fourth quarter, which is equivalent to 10.1% of total net revenues. The increase was mainly due to an increase of provision for doubtful debt and incremental compensation expenses for employees acquired from Suntech Energy Solutions.

Non-GAAP loss from operations for the fourth quarter was $38.2 million, compared to income from operations of $92.6 million in the third quarter. Non-GAAP operating margin was negative 9.2% in the fourth quarter, compared to positive 15.6% in third quarter of 2008. Net interest expense was $8 million in the fourth quarter, compared with net interest expense of $7.9 million in the third quarter.

Starting from January 2009, we adopted a new accounting standard for convertible debt instruments, that maybe settled in cash upon conversion, which is accounting standard FSP APB 14-1. We are currently assessing the impacts of adopting the standard, which we believe will be material to our results of operations.

Please note that while this will result in increase in our interest expenses related to our convertible notes that we recognized on the P&L. The cash outlay show remain the same, as the coupon rate, on the convertible notes, which are 0.25%, for the $406 million convertible senior notes, due in 2012, and 3% for the $575 million convertible senior notes due in 2013. Foreign currency exchange loss was $3.2 million in the fourth quarter of 2008, compared to loss of $16.6 million in the third quarter. The decrease was primarily due to a revaluation gain from the depreciation of net liabilities, denominated in Chinese yuan in the fourth quarter. The exchange gain was largely offset by a revaluation loss resulting from the significant depreciation of net assets, denominated in euro, in the fourth quarter.

In the fourth quarter, we incurred a $48.8 million expenses related to the impairments of our investments in Nitol Solar and Hoku Materials. This impairment was mainly due to the significant decline of the price of silicon and the difficult financing environment, both of those companies are making steady progress in plant construction. And we are still very confident that they will be becomes reliable silicon suppliers to Suntech in the future.

During the fourth quarter of 2008, we took the opportunity to repurchase some of our 0.25% convertible senior notes, which are due 2012. As at December 31, 2008 we had repurchased $93.8 million aggregate principal amount of the convertible senior notes for a total cash consideration of $61 million. As a result, we realized a net gain of $31.1 million. We are very pleased with this result, especially considering that we will able to simultaneously conduct the buyback and increase our cash balance at the same time.

Due to combined result of the loss from investment impairments and gain from the convertible notes repurchase, net other expenses increased to $19.7 million in the fourth quarter of 2008 from $3.2 million in the third quarter.

Moving to our tax status, until we received Nitol active approval December for our Wuxi subsidiary to use the preferential high tax rate. We had been a accruing tax at a higher rate. Once the approval was received, we applied a new rate resulting in the reversal of some of the previously accrued corporate income tax expenses. Non-GAAP net $42.4 million or negative $0.27 per diluted ADS, compared to a non-GAAP net income of $60.3 million or $0.35 per diluted ADS in the third quarter of 2008.

Now I will summarize our GAAP results for the quarter. Gross margin was 0.6%, GAAP operating expenses were $46.2 million or 11.1% of the total net revenues. Loss from operations was $43.8 million and operating margin was negative 10.6%. GAAP net loss was $65.9 million, or negative $0.42 per diluted ADS, with a $155.9 million shares outstanding. Capital expenditure was $109.1 million in the fourth quarter. Depreciation and amortization expenses were $11.6 million.

Before moving on to the balance sheet, I’ll briefly go through our numbers for the full year 2008. Net revenues were $1.92 billion, an increase of 43% year-over-year. Total shipments were 497.5-megawatts, compared to 364-megawatts in 2007.

Non-GAAP gross margin was 18.2% in 2008, compared to 21.1% in 2007. Non-GAAP operating margin was 10.7% in 2008, compared to 16% in 2007. non-GAAP net income for the full year 2008 was $149.7 million, or $0.89 per diluted ADS, compared to 2007 non-GAAP net income of $201 million, or $1.19 per diluted ADS.

The effective tax rate for 2008 was approximately 3.4%. Summarizing our full year GAAP results. gross margin was 17.8%, GAAP operating margin was 9.5% and GAAP net income for the full year 2008 was $111 million, or $0.66 per diluted ADS.

For the full year 2008, capital expenditures were $347.9 million and depreciation and amortization expenses were $39.3 million.

Moving now to our balance sheet, in the fourth quarter of 2008, we centralized our cash management, liquidated some of our short-term investment and accelerated the connection of some VAT recoverables. As a result, our cash and cash equivalents amounted to $508 million as of December 31, 2008, and increase of $113 million from $395 million as of September 30 2008.

We also succeeded in reducing our debt levels due to the repurchased of our convertible senior notes. Our convertible note balance was reduced from $1.075 billion as of September 30, 2008 to $981 million as of December 31, 2008. We also reduced our bank borrowings by $67 million in the fourth quarter of 2008. As a result, our net debt level declined materially from $1.39 billion as of September 30, 2008 to $1.12 billion as of December 31, 2008.

I would like to highlight that in addition to our cash balance, we also have restricted cash of $70.8 million and value-added tax recoverables of $75.7 million as of December 31, 2008. We believe that we will be able to convert a portion of these relatively liquid assets in to cash if necessary.

As of December 31, 2008, we also have around $2.4 billion of approved credit facilities of which we have already drawn down around $1.2 billion. These credit facilities all have specific use associated to them, including fixed asset purchase, working capital, or trade financing.

We believe that with the strong support from the banking community, particularly in China, we are well positioned to ride out this market downturn. Inventory decreased from $247.9 million as of September 30, 2008 to $231.9 million as of December 31, 2008 due primarily to the provision for the inventory, inventory turnover was 53 days compared to 49 days in the prior quarter.

We’ve reduced our accounts receivable balance from $232.8 million as of September 30, 2008 to $213.1 million as of the end of the year. Day's sales outstanding were 46 days in the fourth quarter of 2008 compared to 36 days in the third quarter. Based on current operating conditions, we expect to generate revenues of $340 million to $380 million for the first quarter of 2009, assuming an exchange rate of $1.28 to the euro in the first quarter 2009. We expect our silicon cost to fall faster than the ASP decline in the first quarter, leading to our GAAP gross margin projection of 12% to 15% for the first quarter of 2009.

Now turning to full year guidance, considering the backlog we have in place and substantial pipeline that we are pursuing. We’re maintaining our shipment guidance of more than the 800-megawatts for 2009.

Turning to CapEx, we increased slightly our CapEx projection to 100 million for 2009, from our previous projection of 80 million. We will continue to hold PV cell production capacity at 1 gigawatt in 2009 onto the visibility in the credit market improves.

This concludes our prepared remarks for today. At this time, we will now open the call up for questions. Operator, please go ahead.

Question-and-Answer Session

Operator

Thank you, the question-and-answer session of this conference call will start in a moment. (Operator Instructions). And our first question will come from the line of Burt Chao with Simmons & Company. Please proceed.

Burt Chao – Simmons & Company

Good evening, thanks for taking the questions. I guess the first question I have is regarding the 800 plus guidance that you’ve given. As of Q3 you’d mention that you had about 600-megawatts under contracts, I am wondering if there is any update or progression on that number, and also what is the margin profile if you have that visibility, it look like into 2009? Do you get better margins to the back of the year, or do you think that, 12 to 15 numbers something that you can hold constant through next year.

Zhengrong Shi

Okay. And just give you idea about that 600-megawatt, we signed in Q3, and we went back to all customers and review all this situations. And especially tech, the financial situation and projects, look for Suntech we have two group of customers, one group is distributed mainly for rooftop markets, another group of customers they are in mainly for projects. So, and this numbers is actually – what we call consolidated the numbers. So, fairly confident this number or we ahead, so, on top of that we saw additional about 100-megawatts and now we around 700-megawatt orders being signed and we also have 700-megawatts in pipeline and which our [Inaudible] the customer or waiting customer are getting the permit are fully [Inaudible]. So, that’s why we are still maintaining our 800 plus megawatt guidance. Regarding the full year, gross margin, I will turn the question to Amy.

Amy Yi Zhang

Hi, as we communicated the Q1 margin definitely will be within the range on GAAP basis between 12% to 15%. Given that, we definitely still foresee going into Q2 till the end of the year, our long-term contracts silicon price will be further going down slightly compared to Q1, given that the current ASP has been not only affected by the silicon and manufacturing cost, but also exchange rates between euro and U.S. dollar and our majority of revenues due has been euro denominated. So I would say we definitely would achieve something better than Q1 in the starting from Q2 towards the end of the year, but currently we would still like to keep that until we have more visibility on the financial market side.

Burt Chao – Simmons & Company

Okay great, and my follow-up question just concerns polysilicon with those contracts. How much of the 30% decline is great for next year and over 30%, how much of that is depended on those price concessions that you got from MEMC, and how much is it dependent on mixing in the lower cost polysilicon say from Nitol or HOKU or to even Asia silicon, so to get to that minus 30% year-over-year?

Zhengrong Shi

Look, before we enter into long-term contract and we already project the price for each year, has to be quite reasonable. So I think I told you guys before, and for the contracts for each year we sign, we basically all within maybe in 3 to 5 years time, we’ll have to reach grid parity. So, that’s the price we signed for long-term contracts.

Burt Chao – Simmons & Company

Okay. Great, thank you so much.

Operator

And our next question will come from the line of Bob Stone with Cowen and Company. Please proceed.

Robert Stone – Cowen and Company

Hi, my first question Amy, you has to do with expenses in Q4 and how we might think about the run rate for Q1. Can you say how much of the Q4 expenses on a GAAP basis might have been to bad debt provision, and what should we think about the expense ratio for Q1 and this year?

Amy Yi Zhang

So, you’re talking about the operating expenditure, right.

Robert Stone – Cowen and Company

Yeah, that’s right.

Amy Yi Zhang

That’s. Currently, the average run rate should be quite flat compared to Q4 in ’08, which is around 45 million, 46 million. Definitely in terms of percentage against the net revenue, the percentage will decline in line with the growth of the top line if we have more to achieve from the downstream side. But if you really want to have a relatively fixed number, I would say keep that as flat as Q4.

Robert Stone – Cowen and Company

The impact of the acquisition wasn’t felt for a full year in Q4, and that would offset one-time bad debt provisions in Q4.

Amy Yi Zhang

I think, bad debts, as well as the other so called, relatively extraordinary increase on the total operating expenditures would definitely be still staying relatively flat. We are going to adopt the same strict rule on the evaluation on those accounts receivables and everything else and advanced payment. Currently, I would say, especially for Q1, $45 million on the operating expenditures would just be around the same spending on the operating expenditure side.

Robert Stone – Cowen and Company

Great. Thanks very much

Operator

And our next question will come from the line of Kelly Dougherty with Macquarie. Please proceed.

Kelly Dougherty – Macquarie Research

Good evening, everybody. Thanks for taking my question. I know you don’t give exact ASP information. But I'm just wondering, if you could walk through what happens in the third quarter to the fourth quarter. I know, you had previously mentioned about a 17% decline from the euro and the currency. And since the revenue number was much higher. I’m wondering if we should expect something less happened in the quarter?

Zhengrong Shi

Okay. I think for the fourth quarter. The revenue is going up [as we got it] because our increased shipment. And also the ASP dropping is was only about 5 to 10% and euro and the U.S. dollars is about 8%. So altogether is about, I think about 15%. So, because of the ASP dropping is less than we expected and also the shipping is higher than expected. So, that’s why the revenue in the fourth quarter is higher.

Kelly Dougherty – Macquarie Research

Okay, great. Thanks. And then I'm just wondering how you are expecting ASPs to trend this year. Are you expecting a big drop-off in the first quarter and then kind of moderating as we progress throughout the year or moreover study decline. Any kind of color you could provide around that would be helpful.

Zhengrong Shi

Actually I think the first quarter compared to the fourth quarter will be still around 10% ASP decline. And we do see the price being stabilized this movement and, but again giving current dynamic situation. So, its hard to say what’s ASP trend in the future.

Kelly Dougherty – Macquarie Research

Sure. And just one quick clarification that 10% decline in the first quarter is that in euro terms or in dollar terms?

Zhengrong Shi

In dollar term.

Kelly Dougherty – Macquarie Research

Okay, great. Thanks very much.

Operator

And our next question will come from the line of Sanjay Shrestha with Lazard Capital. Please proceed.

Sanjay Shrestha – Lazard Capital Markets

Great. Thank you. I have couple of points of clarification guys. So, when you talk about that 800-megawatt plus and you said that you have 700-megawatt in contract. How much of that 700-megawatt already has secured financing and in that 700-megawatt number, what type of the ASP trend you are seeing quarter-over-quarter and Dr. Shi, is it stabilizing even in the contract on Q1 to Q2 and you’re saying, what you’re saying, is that what it is?

Zhengrong Shi

If you want to talk detail. I will turn this question to Steven Chan

Steven Chan

Sure.

Sanjay Shrestha – Lazard Capital Markets

It’s Sanjay, Steve.

Steven Chan

How are you?

Sanjay Shrestha – Lazard Capital Markets

Good, how are you? So, I think with the ASP that they’re relatively stable at this point. Given when you factor in the ASP guidance that Dr. Shi just gave. Some of the contracts are for ASPs over the entire calendar year, some are for the first half of the year. In terms of credit, I would say that, there is certainly more of request for credit from our customers. And then there is also the issue with project finance being a little bit more challenging for customers to either acquire or the turns being a bit tougher which we saw sort of peak in terms of like the worst of it happening probably in December and maybe early January. But we are starting to see the light at the end of the tunnel on that. And then we are starting to see a healthier amount of shipments towards the later part of Q1, which sort of reflects that credit is starting to loosen up.

Sanjay Shrestha – Lazard Capital Markets

Okay.

Steven Chan

And then I do think that Suntech is somewhat unique in the fact that, we’re among the tier module companies that are considered highly bankable, which we saw to a large degree with European Banks with the large project finance projects in Europe last year, and so I think we’re sort of on the leading edges of this trend.

Sanjay Shrestha – Lazard Capital Markets

And that’s color what I was trying to get. So are you guys being able to command up to a modest price premium even in this enjoinment versus some of the other of your peers/ competitors out of Asia?

Zhengrong Shi

Yeah, I mean what we’re seeing is this sort of consolidation, which is I’d say you know frankly it’s painful for all us.

Sanjay Shrestha – Lazard Capital Markets

Go ahead.

Zhengrong Shi

But I think relatively speaking Suntech is probably benefiting a bit relative to some of the peer companies that you refer to. I do think that now customers are really looking at this, there is not really may like a commodity products so to speak, but they are really kind of scrutinizing to really be comfortable that the company that they buy a modules from, it’s certainly going to be around for the 25 years to honor the warranty. And then they definitely recognize that some of the positive attributes of our module in terms of like the technology or some like the power tolerance specs and things like that. So we’re definitely seeing a flight to quality, so to speak. And Suntech has definitely been a beneficiary of that.

Sanjay Shrestha – Lazard Capital Markets

Along those lines one more final clarification Steve. So for you guys then in terms of that 800-megawatt number, but the visibility is, if the credit market does not get worse than what it is right now, you should be able to get that, but the only sort of the varying factor that would change that numbers, because I’m trying to get out the fact that what level of confidence do you guys have and we should have on that 800-megawatt number given the environment we’re in. So if credit wouldn’t get worse and maybe there is risk to that number, if the credit were to stay the way it is or improve modestly then we should be – there should be no risk to that 800-megawatt number?

Steven Chan

Yeah, I think that’s a fair way to summarize it.

Sanjay Shrestha – Lazard Capital Markets

Okay, then one last question guys. So, when we think about the margin profile, I’m surprised you guys aren’t saying that you can get back to 20 plus percent gross margin because from what I'm hearing you renegotiated MEMC Asia Silicon eventually gets to $40 they start to ship in Q2, you’re renegotiating everything, pricing is falling, what its falling, but silicon is falling faster, you’re reducing your non-silicon cost. Why can’t you get to 20 plus percent gross margin by Q3 and Q4 of 2009.

Steven Chan

Well, I mean I think that we can, but I would defer that to Amy. I think she would know in more detail.

Amy Yi Zhang

Right, in the end of to get a lower cost of silicon is not really for the outlook target of expansion of gross margin. In the end, we still would like to build strength bringing down the total cost. Its not only dollar per watt any more I think Suntech has been viewing the dollar per kilowatt hour at the total integrated level.

Sanjay Shrestha – Lazard Capital Markets

Okay.

Amy Yi Zhang

And see whether we can help the downstream people more in the overall integrated system side instead of only on the module side. So we definitely still foresee whether we can spare part of our strength to help the downstream people as well. So, I would say toward the end of the year probably it will swing back to the 20% level, but if you look at the total year result. I would say definitely it will be slightly improved from Q1 and I can't guarantee that total year would be 20%.

Sanjay Shrestha – Lazard Capital Markets

Fair enough. So then you guys are going after potentially market share gain, helping your downstream customer rather than this preserving the margin and focus on volume in '09?

Zhengrong Shi

Yeah. I think the point that Amy is making is at this moment, as you say if you know, the market could go up, could go down, right, the financial situation.

Sanjay Shrestha – Lazard Capital Markets

Yeah.

Zhengrong Shi

So that could affect the ASP.

Sanjay Shrestha – Lazard Capital Markets

Okay. That's true.

Zhengrong Shi

So we will capable for this way, at current ASP.

Sanjay Shrestha – Lazard Capital Markets

Yeah.

Zhengrong Shi

And if we achieve 800 plus megawatt, I think planned that gross margin should be definitely over 20%.

Sanjay Shrestha – Lazard Capital Markets

That’s what I was trying to get at. Thanks a lot guys.

Zhengrong Shi

Yeah, thanks.

Operator

And our next question will come from the line of John Hardy with Broadpoint AmTech. Please proceed.

John Hardy – Broadpoint AmTech

Good evening, everyone. Thanks for taking my call. Outside of the MEMC renegotiation how are the other renegotiations going and are you pushing out volumes from your new entrant suppliers in favor of that increase supply from MEMC?

Zhengrong Shi

Look, as I've said earlier in all Suntech's long-term contract has a very competitive price. So even MEMC's prices is also not bad. So as such we are not in a position where we have to really renegotiate a lot of long-term contract. We are basically like only a few in a small volume contract and that are probably one year type supply contract we'll need to negotiate and as we said earlier our supplies all values Suntech in a position in the industry. So, they all see the important to work together with Suntech. I mean I think there's never any problem to renegotiate down the price for the small volume short-term contracts.

John Hardy – Broadpoint AmTech

Okay, thank you. And then I had a question for Amy on the treatment of the convert throughout through the first six or seven weeks of this year. Have you guys been actively repurchasing the convert this year as well and where does that balance and there if you have been?

Amy Yi Zhang

No, we're still in a blackout period right.

John Hardy – Broadpoint AmTech

Okay got it. And then one more quick question if I may I was wondering what you think the margin structure will look like on the 15 to 20-megawatts of thin film you're expecting to ship in the second half of this year?

Amy Yi Zhang

See with income side we're still in the process of getting the thin film equipment installed and then testing will be started at the beginning of Q2 and we hope to commence operation of the one line 120-megawatt thin film line toward the end of Q2. In terms of the margin, given that the facility that we're building can accommodate 5 to 6 lines the same equipment. So starting from the commencement of the first line we're going to have the full depreciation of the whole facility. We definitely – was forecasting according to the current price, we get from downstream side by providing the full production of 20-megawatt and while we get the outputs of 20-megawatts thin-film we probably will be able to achieve a marginal break-even at gross margin level.

John Hardy – Broadpoint AmTech

Okay, so is there – is some of that full depreciation, is that sort of what’s helping to drag on the second half of ‘09 relative to the guidance you gave, based on the implied increased utilization rates from the 800-megawatt shipments.

Steven Chan

We’re getting that is only a very small quantity.

Amy Yi Zhang

It’s very small volume of depreciation.

Steven Chan

Yes, so that shouldn’t be too much of impact.

Amy Yi Zhang

I don't think it will have any significant influence or impact on the total consolidated cost of good sold.

John Hardy – Broadpoint AmTech

Understood, thank you very much guys.

Operator

And your next question will come from the line of Paul Leming with Soleil Securities. Please proceed.

Paul Leming – Soleil Securities

Good evening and thank you for taking my question. I was wondering if you could give us an update on some specific on how the production ramp at Asia Silicon, Shunda, and Glory Silicon are proceeding?

Zhengrong Shi

Okay, that Asia Silicon has initiated production of polysilicon in December. So, they’re altogether, I think as they have four reactors. And at this moment I believe 6 reactors are already producing silicon in a smooth way. And turn to Shunda, Shunda started to produce silicon in October. So they have obtained in a big reactor. I think it’s 18 pairs reactors. Now, I think they have six to eight reactors running in a way ramping, gradually ramping to ’10. So I would 60 to 70 ramp of the full-scale production. Glory, I believe now they have £50 megawatt capacity and running rate is about 90%, because another 10% is because equipment just arrived in the process of installation.

Paul Leming – Soleil Securities

As a follow-up, could I just ask as Glory Silicon slowed down the – it’s expected ramp of capacity for 2009. And just a follow-up on Shunda, are they delivering and I can’t remember Shunda delivers probably…

Zhengrong Shi

Shunda deliver wafers.

Paul Leming – Soleil Securities

Wafters, but…

Steven Chan

Yes, they can deliver wafter.

Zhengrong Shi

And Glory Silicon, of course, they hold their expansion for this moment, but all their building and infrastructure is ready. So when the financial market and visibility improves then we will decide to what to do next.

Paul Leming – Soleil Securities

And just on Shunda, are the deliveries of wafers to you by Shunda proceeding on the ramp you envisioned when you signed the contract last summer.

Zhengrong Shi

Yes.

Paul Leming – Soleil Securities

Thank you.

Zhengrong Shi

Yes.

Operator

Our next question will come from the line of Shalis Jetli with Nomura. Please proceed.

Shalis Jetli – Nomura Securities

Hi, thanks. Firstly, if you could provide some estimates on unsold module inventories at the end of the quarter in the channel?

Zhengrong Shi

You mean through the [all of the] channel in the whole industry.

Shalis Jetli – Nomura Securities

That’s right.

Zhengrong Shi

Well, Steven could give some color.

Steven Chan

Sure. I think this is going back to what I said earlier a bit. We do have to make a distinction in terms of modules from which type of module vendors. We had heard rumors that there are container loads of modules that are in port in Europe from lower tier module vendors that are unable to get sold even at a very low ASPs that are much lower, even on that magnitude of order of, like 10%, 15% below what we would ordinarily charge, because those module vendors are feared by customers to being a module vendors that might not survive over the next several years. And it's our understanding that potentially 50 plus percent of module vendors, small private ones and others in China, last year versus this year are no longer producing modules. And so, there is some inventory in the channel there, but I think among the top tier players such as Suntech and a handful of others we don't seem to have that problem. And so, we’ve had a good ability to increase sales even though it's been moderate relative to our initial expectations. We are still increasing shipments in this Q1 versus Q4 of last year in the face of this.

Shalis Jetli – Nomura Securities

I understand, would you be able to quantify that inventory regards, if I would assume right the unsold inventory based on the industry numbers right, could be somewhere in the range of 500 to 600-megawatt do you think that would be a fair assessment.

Zhengrong Shi

No I don’t think so. I think what do you heard just what Steven mentioned that, what we heard is no way near that.

Shalis Jetli – Nomura Securities

Understand and one follow-up question if I may, regarding your Pluto Technology. I think the last time you mentioned about third of your capacity you’re targeting to migrate to this Pluto by end of the year. Is there any changes in that target, or do you still stick to the same target?

Zhengrong Shi

We still retain to the same target.

Shalis Jetli – Nomura Securities

Thank you very much.

Zhengrong Shi

Or better.

Operator

And our next question will come from the line of Jonathan Hoopes with ThinkEquity. Please proceed.

Jonathan Hoopes – ThinkEquity Partners

Thank you. Dr. Shi during your prepared remarks you mentioned a target of 120-megawatts of shipments into the U.S. for 2009. I was hoping that you could share your expectations and estimates of the size of the U.S. market in 2009, and compare that on balance to Suntech’s global shipment distribution. Specifically at 120-megawatts out of your 800, it looks like 15% of your products is going to the U.S., is that 15% allocation inline with your belief of how large the U.S. market will be relative to the global market?

Zhengrong Shi

Steven, your turn. Please.

Steven Chan

Sure, we look at the U.S. markets out there as about 400 to 700-megawatts, it’s a little bit hard to predict, and it also sort of depends on when some of the bailout package initiatives that relate to solar starts to take effect. The global market, we too look at it is being 5 plus gigawatts. And so, we actually have put in place a very strong foundation for the U.S. business last year. So, we have for example the Gemini Solar development JV with MMA and we preliminarily are on the short list to win a 30 plus megawatt project with Austin Energy for that. And then we have the purchase of Suntech Energy Solutions and we have good traction there. And then we’ve also more than tripled the dealer network that we have with the goals to expand that much further during the year, as well as ramping commercial sales. So, even with say like a 100 plus megawatt target for the U.S., we feel that relatively speaking, we’re very well situated now. And I think we shipped a little bit 40-megawatts last year, we already have a pipeline of signed contracts or to be signed contracts of 80 plus megawatts for this year in the U.S. And so we actually feel that the foundation we set in place for the U.S. is starting to bear fruit even though it’s a challenging market.

Jonathan Hoopes – ThinkEquity Partners

Great. If I could just follow on to that, at this 80-megawatt contract outlook, are you expecting about a two-thirds commercial utility versus maybe a one-third through the distributors to the rooftop. Is that kind of how you expect that to break down. And as far as, the linearity, is it fair to say that you’ve got more than 60%, 70% of that coming in the last two quarters of the year, as far as how that’s going to ramp.

Steven Chan

Yeah, I would think that both of your assumptions are quite accurate in terms of the two-thirds, one-thirds split as well as the linearity.

Jonathan Hoopes – ThinkEquity Partners

Great. Thank you very much.

Steven Chan

Thanks.

Operator

And our next question will come from the line of Paul Clegg with Jefferies. Please proceed.

Paul Clegg – Jefferies & Company, Inc.

Hi, good evening and thanks for taking my question. I was hoping you might be able to give us an update on your thinking on how you will deal with the convert issue specifically the quarter points to 2012 and that put feature that’s out there? And you’ve obviously been taking out some of that convert, but there is still another roughly 400 million left, have you approached anyone about potentially trying to do an exchange offer or some other type of restructuring of that note? And then I have a follow up.

Zhengrong Shi

Amy will give you answer.

Amy Yi Zhang

Yeah, as I’ve said, we are still in a blackout period. So, initially we can’t approach anybody to have more repurchase or whatever. And secondly, I think the options available for the early retirement of this long-term liability, I think it’s a well known – there are well know solutions available and I think you are even more or better expert probably than me. We are accessing all these available options, trying to balance between or among three main key aspects; liquidity, and the dilution, and also financing cost we need to bear for finding the solutions. And it could be one of them being more favorable to a balance these three aspects in order to help us to achieve the early retirement of this long-term liability, and it could be a combination of few solutions together, we are still in the process of accessing the possibility and pros and cons of different options.

Paul Clegg – Jefferies & Company, Inc.

Okay, can you…

Zhengrong Shi

And in addition to that, and we still have, like $500 million in cash and bank balance sheet and we believe that we should be able to generate more cash this year. So, I think even we have to pursue the options as Amy just outlined I think it’s not going to be a big portion of it.

Paul Clegg – Jefferies & Company, Inc.

Okay and if I may a follow-up on your bank agreements. Can you just walk us through how much of the $2.4 billion in commitments has to be renewed before the end of 2009? And then roughly how much of those commitments can be used for CapEx versus working capital and trade financing?

Amy Yi Zhang

Normally, this short term renew is done on annual basis. So if we get the ground for ‘09 it won’t be expired, until or towards the end of ‘09. And as what the bankers always do, when they do renew they review your total size of the business and total plan and normally as what we have experienced previously. The facility had been renewed with an incremental facility added to the previous year, a facility as well. For example last year, our facility was only around $1.6 billion in total and this year we’ve got more $800 million more. So, it’s pumped up to 2.4 billion.

Paul Clegg – Jefferies & Company, Inc.

Okay.

Amy Yi Zhang

That’s just a formality of us submitting our projections, our business plan, expansion plan. And the utilization of the facilities normally has been allocated to fixed assets purchasing, working capital and trade financing. Given that we have already slowing down our CapEx expansion plan. So we don’t expect that we will utilize the cap – the fixed asset portion that much. Instead we will be able to shift the same facility to the trade financing side. So, I think if you really want to have ballpark split, I would say 10% on fixed assets just in case, and the rest would be half, half between – separated between working capital and trade financing facility.

Paul Clegg – Jefferies & Company, Inc.

Okay, but let me to be clear, the renewals of those facilities take place at staggered intervals during the year, because it’s multiple different facilities that makeup the 2.4 billion, correct?

Amy Yi Zhang

On normally always down on calendar year basis.

Paul Clegg – Jefferies & Company, Inc.

Okay. So it’s at the end of 2009 that we would see that happen.

Amy Yi Zhang

It’s normally, the renewal and then reevaluation of the facility grant will be down sometime in the first week of December.

Paul Clegg – Jefferies & Company, Inc.

Okay. Thanks very much.

Operator

And our next question will come from the line of Satya Kumar with Credit Suisse. Please proceed.

Unidentified Analyst

Yeah. Hi, this is [Vishwa Lurie] for Satya Kumar. Actually a question on gross margins. Have you written down your wafer cost inventory to approximately the same levels of your procurement costs for wafers in Q1?

Zhengrong Shi

Could you, Boxun. Could you answer this question?

Boxun Zhang

Yeah. Hi, this is Boxun. We normally evaluate our inventory based on the period and the market price. So, the any inventory cost higher than the benchmark market price will write down the inventory provision to the market price level.

Unidentified Analyst

So, if spot prices for wafers decline some more even you have to take inventory write-offs in Q1 then?

Boxun Zhang

I think, when we look at our Q1 inventory cost. We believe, we enjoy a very good cost benefit. So, we don’t think there will be any material inventory provision unless the market changes significantly again.

Unidentified Analyst

Okay. And as a follow-up, quick question on Pluto. Can you give us sense of how to think about your cost of conversion for your higher efficiency Pluto cells as compared to cost of conversion for your mainstream cells?

Zhengrong Shi

[Inaudible]

Unidentified Analyst

[Inaudible]

Unidentified Company Representative

[Inaudible] Okay. Per watt will be less.

Unidentified Analyst

Less per watt.

Zhengrong Shi

You got it.

Unidentified Analyst

Okay. Yeah, thank you very much.

Zhengrong Shi

Yes.

Operator

And our next question will come from the line of Lu Yeung with Bank of America - Merrill Lynch. Please proceed.

Lu Yeung – Bank of America/Merrill Lynch

Hi. Can I get a sense of what you think about the Korean market? Obviously some of the depreciation of bonds also what’s going on in Spain and…

Zhengrong Shi

Could you speak loudly, I couldn't hear you properly?

Lu Yeung – Bank of America/Merrill Lynch

Sure. Could you comment on the Korean market that may be impacted by the depreciation of won and also Spain market there might be some issues with the order?

Lu Yeung – Bank of America/Merrill Lynch

Okay. Steven could you comment on that please?

Steven Chan

Sure. On the Korean market, that’s one of our smaller market, but we do feel that we are probably, in terms of market share, top five. We would target about 20 megawatts of sales into Korea, certainly the one had a negative impact at some point towards the latter half of last year, but we’ve readjusted. So I think with the reductions in our ASPs globally, Dr. Shi has said earlier on the call that’s certainly did helpful with that. And then the second part of your question, I just couldn’t hear it. Do you think you can repeat that please?

Lu Yeung – Bank of America/Merrill Lynch

Spain market.

Steven Chan

Okay. So for Spain, we do have a very healthy pipeline there of over a 100 megawatts. I mean I think with the incentives being a bit unresolved, that’s little bit on hold right now. We do have customers who have basically done everything on their project including building out the racking systems for the tracking all they are doing is awaiting the resolution of that before they install our modules. And so, we feel that that will come through at some point later in the year, and so we do feel quite optimistic about that. So it’s just the timing of when that will be delivered we’re just not too sure about.

Zhengrong Shi

I just want to add, two comments on this, regarding Korea market that we still have very good number of orders from Korea, even in Q1 delivery in this quarter. And for Spanish, we do have many Spanish customers, so how we believe our customer do have business in other part of the country. So I believe in Q4, 20% of product actually delivered to Spanish customers.

Lu Yeung – Bank of America/Merrill Lynch

A one more for follow-up is what has your trends been you are seeing in terms of shipments from Q4 last year to Q1 or is just fair to say that your Q1 shipments should mark the bottom of this year.

Zhengrong Shi

I think he – hear clearly, Steven did you?

Steven Chan

So in terms of bottom you're referring to that in terms of volume shipments.

Lu Yeung – Bank of America/Merrill Lynch

Yeah volume

Steven Chan

Yeah, so we do feel that Q4 of last year was the bottom in terms of volume shipments. We're up a bit in terms of volume shipments probably and to 20% in Q1. And then we did feel that will continue to move up from there. So, I think the solar industry traditionally has some seasonality were Q4 and Q1 or slow in each year, and then Q2 and Q3 are stronger. And so I think that was matched by the silicon supply shortage in the past several years. I think going forward your probably see, for us in the industry probably stronger Q2s and Q3s, as opposed to Q4s and Q1s...

Lu Yeung – Bank of America/Merrill Lynch

All right thank you.

Steven Chan

Okay.

Operator

And our next question will come from the line of Vishal Shah with Barclays Capital. Please proceed.

Vishal Shah – Barclays Capital

Yeah, thanks for taking my question. Could you help me understand what percentage of your 2009 supply will be from long-term contract especially with the MEMC renegotiation. And what would your average polysilicon cost be as of Q4 in the inventory?

Zhengrong Shi

Okay. I will answer the first question and financial people can answer the second question. And for 2009, our silicon supply in the long-term and for market purchase. I think long-term is about 80% and for market purchase of about 20%.

Vishal Shah – Barclays Capital

Okay, great. And what was your inventory cost as of Q4?

Amy Yi Zhang

Hi, Vishal. We normally don’t disclose the information into that great detail. And it’s the same with the average purchase price of wafer or silicon for Suntech as well.

Vishal Shah – Barclays Capital

Okay, great. I just wanted to clarify Steve’s previous comment. Steve, I believe you said your Q1 shipment would be up 20% sequentially, did I hear that correctly?

Steven Chan

I think if you sort of, our goal is to have it being up by 10% to 20%.

Vishal Shah – Barclays Capital

Okay, 10% to 20% great. So, and then just a clarification on the Spanish market. You said 100 megawatts of products in Spain is that included in your 800-megawatt guidance.

Steven Chan

In the pipeline.

Vishal Shah – Barclays Capital

Okay, great. And just also can you help me, can you clarify what’s your product exposure will be in terms of BIPV market. You have this new product, you said [inaudible] you see meaningful revenue from late 2009. Can you may be help me understand, whether you've already signed customers for that, what kind of ASPs you're seeing in that market and how much, what kind of shipments are you looking at, maybe 40 megawatts or more or less.

Zhengrong Shi

Yes. And yes, we do BIPV market actually with the increase being quite meaningfully this year, that's mainly because we see Japanese market is coming back, mainly is roof top, which as you know is the love and BIPV roof-top product. And in Europe we look at French market and Italian market, the feed-in tariff for BIPV project is much higher than the ground mounted projects. So that’s why people prefer – many people will prefer to use BIPV products for their roof projects.

Vishal Shah – Barclays Capital

So do you expect to ship less than 50 megawatts…

Zhengrong Shi

Okay, just give you example, we just completed 4.5 just roof product BIPV product for one of our French customer. So, I think similarly we deliver, we attracted lot of more BIPV orders in a year.

Vishal Shah – Barclays Capital

Okay, very good, thank you very much.

Operator

And our next question will come from the line of Sunil Gupta with Morgan Stanley. Please proceed.

Sunil Gupta – Morgan Stanley

Thank you, thanks for taking my questions. Boxun and Amy I just wanted to understand a little bit more about your inventory. You took quite a bit of write-off in Q4 and yet your dollar inventory amount did not reduce. Can you help me understand in terms of what you have on the books how much is wafers versus work in progress and finished goods and why is this inventory so sticky why you are not able to bring it down fast enough?

Amy Yi Zhang

I will give my bit first and maybe Boxun can make it up. In the ends when we do the provision our inventory provision are riding down of the value. We can’t just say completely take reference of the spot market price in order to achieve 12% to 15% gross margin as we guided for Q1. Deloitte has got certain rules and we need to standardize that rules for provision, written-down provision as well. It’s not a one-off thing, as long as we change in Q4, we are going to follow the same rule for the rest of period until the market situation changes significantly, and then probably we need to sit down and fix the new rules. In the end, the ultimate target for written down the value of the inventory and as you know, majority of the inventory actually comes from raw material instead of working progress, instead of finished goods, as always. And we actually wrote – did this writing down based on the principle that, we would not make significant loss with the written down value in Q1 and carry forward from previous quarters. So, that’s the principle we had agreed with the Deloitte auditors on the U.S. GAAP. And Boxun, do you have any thing, you may comment.

Boxun Zhang

Yeah, just to answer your question regarding the inventory balance. In the fourth quarter, it’s normally a slow quarter for the Solar Company. The Solar company have some inventory and we normally have a better shipment in the fourth quarter of the coming year. And so, we believe we will gradually absorb the inventory in the year 2009. And regarding the breakdown of the inventory, we have very minimum working progress, and the split between the raw material and the finished goods. It’s normally about 50-50.

Amy Yi Zhang

And also you can see that the inventory total provision is with large amount, but a certain part of the writing down was actually made against not the actual inventory, but our purchase commitment. So, for that portion we can’t really have a quick deduction on the inventory balance, but have to book that provision, we will record that provision as a liability account.

Sunil Gupta – Morgan Stanley

Okay. So, can you help me breakdown of the $51 write-off that you have taken, how much is on account of physical inventory and how much is on account of purchase commitments?

Amy Yi Zhang

I think…

Steven Chan

It’s about 43 million booked in the inventory provision balance and another 7 million is booked under the other current liability account.

Sunil Gupta – Morgan Stanley

Okay. So, I guess what I am trying to really understand is the pricing on the inventory has come down, you've taken a significant write-off of more than $40 million and the dollar amount of inventory has gone up that’s means the physical amount of inventory has actually gone up very substantially, it’s gone up by 30% to 40% in terms of megawatts, does that sound right?

Amy Yi Zhang

Why In megawatt measure?

Sunil Gupta – Morgan Stanley

Or whichever measure, number of wafers that you have. I am just trying to figure out the physical inventory, because the pricing on that inventory is lower, the dollar amount is up. Is that…

Boxun Zhang

Sunil, I will continue this discussion may be off the line.

Sunil Gupta – Morgan Stanley

Okay, sure. So, but….

Boxun Zhang

Thank you.

Sunil Gupta – Morgan Stanley

May be where you could help me is, I am trying to understand how quickly can you change your purchase contracts or delayed procurement of materials that you may have earlier agreed upon, because it seems like you bought more in Q4 than what you consumer, then should we be expecting the same thing in Q1, Q2 because of what you've already committed to or you think you can alter that profile?

Boxun Zhang

I think in Q4 because that we all know, these are very sudden change. So, even to our suppliers, they are also facing sudden change and we just tried to accommodate some of the typical [limit] and I think in the last couple of months the volume has all been in Korea, based on the current situation. So, again in other words we don't have obligations to purchase additional the volume we obligated.

Amy Yi Zhang

Yeah, Sunil. One more thing to add, as what everybody else is doing, in the end what has passed and what is down to Q4 is down. And we don't expect this has become a recurring adjustment or provision to be made going forward. The reason why we do this is simply because that our actual gross margin before the provision was much better than our guidance that's why, as most of, what other people are doing, we took this opportunity to do something that we are to do that will lead our business to a better direction starting from Q1 this year.

Sunil Gupta – Morgan Stanley

That's great. Thank you.

Operator

And our next question will come from the line of Charles Yonts with CLSA. Please proceed.

Charles Yonts – CLSA

Yes, thank you. Now, a couple of questions, first the new Japanese subsidy system program begins in March I believe. Could you give us a little update on your outlook for Japan and have you seen any new order uptick yet?

Boxun Zhang

Yeah. We have already signed some good contract with Japanese customers.

Charles Yonts – CLSA

So, about what size are you looking for the Japanese market to be in 2009?

Boxun Zhang

We believe probably around 400 to 500 megawatt.

Charles Yonts – CLSA

Okay. Thank you. And the one other question was your long-term prepayments were flat at around 250 million in fourth quarter. Now, I realized this should be for silicon delivery over 12 months out, but is there any room for you to bring some of these prepayments in and improve your cash flow in 2009?

Amy Yi Zhang

Yeah, as you can see, the balance of long-term prepayments actually has not changed, from Q4 compared to Q3 right. It’s always been fixed at 250. As part of the as one of the trends, which we had already renegotiated, it’s not only for the price, definitely people have realized that the market has changed to a demand-driven market, and it’s not only related to the prepayment arrangements, and we definitely have been able to rearrange that as well, and it’s also related to the early cash outs and offsets of the paid advance payment to the suppliers as well.

Charles Yonts – CLSA

Okay. So would there be any room for you to bring that number down in 2009?

Zhengrong Shi

Yes. What Amy said is actually we have successfully amended, quite a lot of this prepayment issue with some of our suppliers. So and other changes to some other arrangement and so on so, I think in general our prepayment obligation in '09 is quite limited.

Charles Yonts – CLSA

Okay. Thank you.

Boxun Zhang

And just one thing to add, I think the long-term prepayment reduction will be ongoing process, But you can see some very good progress in our current at a long-term supplier balance from the Q3 to Q4. Our long-term supplier current quarter actually reduced by $21 million. That is for the short-term for market purchase.

Charles Yonts – CLSA

Right, right. Thank you.

Operator

And our next question will come from the line of Jeff Osborne with Thomas Weisel Partners. Please proceed.

Jeff Osborne – Thomas Weisel Partners

Yes, good evening. Amy, just two quick questions. What type of tax rate should we be assuming for 2009 and also maybe for Boxun or Amy just of the 497 megawatts that’s you shipped in 2008. What percentage of that was in cells in the other revenue category?

Amy Yi Zhang

I think the blended average corporate income tax rates for ’09, I think to keep it prudent and safe, you can just use 9% to 10% blended average at corporate consolidated level. So 9% to 10%.

Jeff Osborne – Thomas Weisel Partners

Okay. And any sense on the megawatts and cell-only business that’s you did in ’08 and how we should think about that for 2009?

Boxun Zhang

I think, in the year 2008 our PV cells shipment was around 35 to 40 megawatt and the remaining majority of the shipments are actually in the PV module format. And in the year 2008, the shipment for the PV cells are very limited.

Jeff Osborne – Thomas Weisel Partners

Very good, thank you.

Operator

We are now approaching the end of the conference call. I would now like to turn the call over to Suntech’s Chief Executive Officer, Dr. Shi for closing remarks.

Zhengrong Shi

Thank you all for joining on the call today. I'm sorry we couldn’t get through everyone’s question. Afterwards we will try to get back to everyone after the call. Thank you.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Good day everyone.

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