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China Sunergy Company Ltd. (NASDAQ:CSUN)

Q4 2012 Earnings Call

April 12, 2013 8:00 AM ET

Executives

Elaine Li – IR

Stephen Cai – CEO

Yongfei Chen – CFO

Analysts

Rob Stone – Cowen & Company

Paul Strigler – Esplande

Philip Lee – Mangrove Partners

Chris Rathke – Arcane Capital

Operator

Welcome to China Sunergy’s Fourth Quarter and Full Year 2012 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session.

Ms. Elaine Li, Senior Investor Relations Manager, you may begin your conference.

Elaine Li

Thank you, operator. And welcome to CSUN’s Fourth Quarter and Full Year 2012 Earnings Conference Call. This is Elaine Li speaking, CSUN’s Senior Investor Relations Manager. We have posted a presentation for this call on our website, and during today’s discussion, we’ll be closely following and referring to.

With us today are CSUN’s CEO, Mr. Stephen Cai; and CFO, Mr. Yongfei Chen. Their photograph can be seen on slide three of the presentation.

Today, before the market opened, the company issued a press release announcing our fourth quarter and full year 2012 financial results and our guidance for the first quarter and the full year of 2013. This press release is also available on the Investors section of our website at www.chinasunergy.com.

To start, Stephen will present an overview of our fourth quarter results, a quick review of the solar industry in 2012, and the important developments at CSUN during the past year. Then our CFO, Mr. Chen, will explain our financial results in more detail. Following that, Stephen will return to provide a technology update on behalf of our CTO, Dr. Jianhua Zhao, who’s traveling on business today, and then close with guidance for 2013. Afterwards, they will all be available to take your questions.

Before I turn the call over to Stephen, may I remind our listeners that management’s prepared remarks include forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risk and uncertainties. And as such, our results may be materially different from the views expressed here today.

A number of potential risks and uncertainties are outlined in our public filings with the SEC. CSUN does not undertake any obligation to update any forward-looking statements, except as required under applicable law. As a reminder, this conference is being recorded.

Now, I’d like to turn the call over to CEO, Mr. Stephen Cai. Stephen?

Stephen Cai

Thank you all for joining in today’s conference call. As you may recall from our conversation on the third quarter conference call at the end of this November.

In our view, 2012 was the toughest year in the solar industry. Although overall demand grew to roughly 28 megawatt – gigawatts in 2012, the industry persistently struggled with the oversupply, with a global total of 50 gigawatts to 60 gigawatts which was double that of the total demand. As a result, even though many of the weakest manufacturing had exited or dramatically downsized, the competition in the industry remains fiercely unpriced driven for the ASP declines.

As summarized on slide five, our ASP for the fourth quarter of 2012 was lowered to $0.64 per watt, a sequential decrease of nearly 10% from the $0.71 in the previous quarter. Overall, we shipped the total of the 78 megawatts, and that generated a revenue of $54 million in the fourth quarter.

The ASP downward trend directly caused a growth loss during the quarter. And even though we successfully met or beat our conversion cost over reduction target, our closing or cost faring were not enough to fully offset this lower ASP. Consequently, our gross margin was negative 3.7% in the fourth quarter.

In 2012, though Europe contribute to lead in terms of demand, Asia have quickly gained to become the second largest market in the world, with a strong demand growth coming from China and Japan. As you can see on the slide six, during the fourth quarter of 2012, Europe with the overall revenue contribution of 77%, remained the largest of destination for our product. Meanwhile, we have built a more balanced end market, with the revenue contribution from Germany, Italy and the France of 29%, 12% and then 11%, respectively.

China and the Japan also become important markets with revenue contribution of 10% and 8%, respectively. As illustrated on the slide, in 2013, we plan to further penetrate into emerging markets in order to diversify our customer base and mitigate concentration risk. Driven by strong growth in China, Japan and other emerging market, we estimate that our European revenue concentration will decrease from 71% of the total revenue in 2012 to roughly 60% in 2013.

Looking back, the fourth quarter clearly demonstrated the tough overall year in 2012. And with this kind of a backdrop, it will be a nature to want to raise both hands up in the air and just give up. However, when we objectively evaluated CSUN in terms of the priorities that we set a year ago, we believe that we have made great strides with our strategy and the conversion cost roadmap, which should improve our position when the market eventually turns around.

Let’s together take a close look back on the year. At the beginning of 2012, as the slide – the list on slide seven, we communicated with you that our four major priorities for the year were, first, expand our QSAR efficiency; second, invest in downstream projects; third, improve operating cost; fourth, enhance our global sales force.

As we had previously shared with you, we have made notable progress in QSAR cells efficiency in 2012. The batch average efficiency of the QSAR cells remained high at 19% in the quarter and topped 19.7% in the lab. We upgraded our existing QSAR production lines in the fourth quarter. And then we began operating QSAR II production lines in January of this year.

As of the end of March, the average efficiency of the QSAR II production lines achieved a new record of 19.2% and a peak deficiency surpassed 20%. We targeted to reach an average of 19.5% for QSAR II production lines in 2013. And then we will share more later in the technology update discussion.

Next, please turn to the slide eight for updates on our progress in downstream project. We’re committed to invest into the solar project globally as we believe downstream projects provide higher returns on investment and the best profit margins. In November, we announced that we had invested in two solar projects totaling 10 megawatts in UK. A 5-megawatt project that has been successfully connected as of March 31, and then we’ll start generating revenue from the second quarter of this year. The other one will be connected later this month.

We have also established a very solid pipeline. We won commercial rooftop projects totaling 22 megawatts from China Golden Sun project, which we intend to complete in the second half of this year. We are negotiating for another 30-megawatt project in UA – in UK, sorry, and, in addition, making great progress on the 40-megawatt project in China Xinjiang province, now that we expect to soon receive the final approval. At the same time, we hope to further accelerate downstream strategy with the hiring of an established professional team in Germany that we believe possess valuable knowledge of the local market and the governmental requirement as well as their comprehensive skill set in project handling, financing, technologies and sales.

As such, we are confident that we can achieve our 2013 goal after generating roughly 20% of the total revenue from the downstream projects, highlighting a steady evolution in our business model to capture high margins. We look forward to making more announcements regarding the downstream project in upcoming quarters.

Now let’s turn to slide nine for the review of our improvement in cost savings. From the technology perspective, our conversion cost met or beat our 2012 target. This quarter, conversion cost of the cells and the modules manufactured were at $0.15 and the $0.20 per watt respectively, which improved by 35% and 26% from $0.23 and $0.27 per watt respectively in the same period of the last year.

Continuing on the momentum, we are now targeting by middle 2013 to improve cell and the module conversion cost to $0.13 and $0.18 per watt respectively. We aim to gain additional production efficiency, optimize global supply chains and achieve higher capacity utilization rates.

Next, please turn to slide 10. In late December 2012, we also began manufacturing at our Turkey facility in partnership with a leading Turkish solar system provider, developer and installer. We view this as additional comparative advantage as we currently are the first and only Chinese solar producer that has a production site in Europe. We believe that having a production site in Turkey enhances our global supply chain as we benefit from the high feed-in tariff when adopting the local manufacturing cell and the modules.

Moreover, Turkey may serve as a buffer against the potential negative impact from the possible anti-dumping rulings in the U.S. and EU or elsewhere. We expect Turkey to become our second largest manufacturing base after China. And in addition to producing PV cells in the modules there, we will also seek downstream activities in Turkey as well as its neighboring countries.

Our first 120-megawatt solar module line in Turkey has already begun producing panels in January and then we plan to initiate a 100-megawatt solar cell production line around May and, again, another 180-megawatt solar module production line in July.

Lastly, as displayed on slide 11, we would like to share some updates on our global sales force. Rather than increasing the number of the sales staff, we have the strategic play focused on enhancing our sales force by hiring locally to quickly update our local market knowledge and expertise. During 2012, we established the six sales offices in Mumbai, Rome and Tokyo. And as we had previously communicated, more than 50% of the sales forces has been localized in Germany, France, Italy and the U.S. We have established an EMEA sales team in Paris, Frankfurt and Rome.

As you can see, despite the tough macro challenges, we made solid progress in 2012 and established a good foundation for 2013 and beyond. In the future, we will continue to diversify our global presence in order to minimize the concentration risk. Again, UK, China and the U.S. will be important strategic markets for CSUN in 2013.

According to the market expectation, China is set to become the largest single solar market in the world in 2013. And then Japan is set to grow by 50% in 2013 to become the fourth largest PV market in the world. However, due to the irrational pricing competition in China in 2012, we did not aggressively expand and decided to carefully establish a solid foundation to selectively capture profitable sale and the module opportunities in China.

In 2013, as of January, anticipated industry consolidation is now under way, which should improve demand-supply balance. We view the timing is right to aggressively expand. And we expect greater sales in the Mainland this year.

Looking ahead, we are seeing ASP begin to rationalize year-to-date. We believe this is a natural adjustment of the recent unsustainable lower ASP, as well as the rebound in demand. We certainly hope that this trend will continue. Having said that, the reality is that there are still many challenges and uncertainties that solar market must face in the near future. This includes a global oversupply, trade disputes between China and the Europe, policy changes in different countries, and competition from other renewables.

As such, although we believe that the solar industry offer a great long-term potential, the industry short-term correction would not be easy or quick.

Overall, we remain confident that with our dedicated team, secured loan facilities, efficient products, advanced manufacturing, diversified end-use market, and a global supply chain, CSUN is well positioned to weather this current industry turmoil and benefit from the long-term industry recovery.

Now, I like to turn the call over to Yongfei Chen, our CFO, to go through the numbers in detail.

Yongfei Chen

Thank you, Stephen. From the financial views, our fourth quarter and full-year 2012 results were obviously tough. And as a result, we will require to make tough adjustments and to include increasing budget provisions and the run-offs. We also streamlined our operations and diligently remunerated market and customers in terms of policy and payment risks.

However, as Stephen just discussed, we are cautiously optimistic that the industry is beginning to rationalize. And we believe that with absorbed cash balance and the secured bank financings, we have upgrade financial resources to not only weather the near-term challenges but also capture long-term potential profits in the fast-changing solar industry.

Let me now provide you with the details of our fourth quarter and full-year 2012 financial results. Please turn to slide 12 of the PowerPoint presentation. In fourth quarter of 2012, we shipped a total of 78.4 megawatts, a decline of 5% over the third quarter of 2012. For the full year 2012, we shipped a total of 391 megawatts compared to 421.3 megawatts a year ago.

Our revenue this quarter was $54.4 million, down 8.3% sequentially due to a decrease in both shipment volume and ASP. Our module ASP at $0.64 per watt was $0.07 lower than the previous quarter caused mainly by an imbalance of supply and demand and the decreasing raw material prices. Revenue for the full-year 2012 was $292.7 million, a decrease of 48.3% from the prior year.

In 2012, module ASP was $0.74 per watt compared to $1.36 in the prior year. Due to the lower revenue level and ASP decreasing at a faster rate than cost reduction recorded gross losses of $2 million in the fourth quarter and $1.2 million for the full year.

Gross margin was negative 3.7% and a negative 0.4% for the fourth quarter and full-year 2012, respectively. Excluding the inventory provision of $1.2 million, non-GAAP gross losses were $0.8 million and non-GAAP gross margin was negative 1.5% in the fourth quarter. However, on a cash basis, fourth quarter gross margin was a positive 2.5%. During the quarter, we’ve further evaluated our receivables and determined that it was burdened to record a bad debt provision of $26.1 million, mainly related to our provision of $28 million from an Italian customer, offset by collections. This Italian customer was one of our budget partners that is constantly going through bankruptcy. Although we believe that we may eventually receive a meaningful portion of the receivable, we consultatively rolled off the entire amount at this time.

These one-time items combined with our ongoing expenses resulted in total operating expenses of $40.3 million and operating losses of $42.4 million in the fourth quarter. Accordingly, net loss was $70.5 million for the fourth quarter and $133.6 million for full year 2012. Non-GAAP net losses were $43.2 million for the fourth quarter and $87 million for the full year 2012. Net loss per ADS was $5.27 in the fourth quarter and $9.99 for the full year 2012. Non-GAAP net loss per ADS was $3.23 in the fourth quarter and $6.51 for full year 2012.

Going into our balance sheet items on slide 13, our inventory increased to $83.9 million as we made more advanced purchases in anticipation of higher spot prices in January 2013. As always, we will strive to maintain inventory at a reasonable level by planning production according to orders and purchase plans.

Net account receivables decreased to $77.2 million at the end of the fourth quarter compared with $121.1 million last quarter. This reflects our focus on customer selection and tighter credit controls.

CapEx were $60 million mostly for the continued expansion of our R&D center to produce ever higher efficiency QSAR products. The construction of the R&D center expansion is expected to be completed and operational within the second quarter of 2013. Our CapEx spending in 2012 of $44 million were mainly to construct our new R&D center, establish our manufacturing plant in Turkey and expand high-efficiency production lines. This quarter, we’ve had operating cash outflow of $41.1 million, primarily due to operating losses, increased inventory purchases and paydown of payables. Despite of the outflows, we maintained a solid cash position with $410 million of cash and restricted cash at year-end.

Equally important, we have already secured sufficient funding from local banks to support our working capital needs for the foreseeable future.

Let me now return the call back to Stephen to provide you with our technology update and the guidance.

Stephen Cai

Thank you, Mr. Chen. On behalf of Dr. Zhao, I would like to update you with our recent technology achievement. As we’ve recently announced, our Dr. Zhao Jianhua; and Technology Vice President, Wang Aihua were co-awarded the Advanced Global Australian Award 2013. We congratulate Mr. Zhao – Dr. Zhao and Dr. Wang on these well-deserved recognitions. And we sincerely thank them for their continued contribution to CSUN. With their strong leaderships, we continue achieving new milestones in our R&D efforts and have made solid progress during the quarter. Please turn to slide 14.

As mentioned earlier, the first of our QSAR II production line has been launched and that we will have to reach a new high in average efficiency to 19.2%, while our average module output was between 265 to 275 watt per piece. This QSAR II product showcased a very outstanding PID-free feature. And we have shipped around 4 megawatt thus far.

Another evidence of our strong technology is our high rank in and independent test of the module by Fortune. In its latest report issued in February, Fortune ranked the CSUN QSAR module number five in terms of the yield in kilowatt hour per square meter. This is better than all other Chinese peers. We continue to view our innovative technology as the comparative advantage and we aim to deliver the best and the most efficient products to our customers and end users.

Next, on slide 15, last quarter, we mentioned Waratah, our new type of the multi-crystalline cell using a new pattern design. The average efficiency of this, the new cell, is now 17.4%. And then we have shipped around 10 megawatt to date. We have already been awarded a patent for this new technology in China and now – and are currently applying for similar patents in other countries. We have also trademarked then Waratah.

Let me now provide you with our guidance, which you may refer to slide 16. In early 2013, we saw the overall global market begin to rationalize in terms of the supply and the demand as well as the pricing. Also, we witnessed that selective market such as China and Japan are improving, and as such, we will continue to target opportunities in these growing markets while diligently managing our cash position.

Though we believe that oversupply in the global solar market will likely persist through the year. We are hopeful that as supplier pay down fixed asset, the industry practical capacity will significantly improve, leading to a higher utilization of the cell capacity, cost improvement, and ultimately best profit margins at CSUN. For the upcoming first quarter of the 2013, we expect the shipment to be in range of 100 to 110 megawatt. We expect the gross margin to remain at the similar level to that of the fourth quarter of the 2012. This is the best on average euro-U.S. dollar exchange rate in March.

For four years 2013, we currently estimate total shipments will range between 550 to 600 megawatts, of which approximately 20% will come from project. This guidance is based on the current market conditions and then replace our current and primarily estimate our operating conditions and the customer demand which are all subjected to change. Should these conditions vary materially, we will update you accordingly.

At this time, we like to take your questions. Our Senior Investor Relations Manager, Elaine Li, will facilitate this session and assist the management in answering questions. If you have additional questions after this call, please do contact us afterwards.

Operator, you may begin with the first question.

Question-and-Answer Session

Operator

Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions) Your first question comes from the line of Rob Stone from Cowen & Co. Please ask your question.

Rob Stone – Cowen & Company

Good evening, gentlemen. A couple of questions, if I may. With respect to your shipment outlook for this year, Stephen, and 20% from projects, can you give us a little sense of how that’s expected to come in between the first half and the second half of the year? And will the project business be concentrated more in the second half or the – versus first half?

Stephen Cai

Okay. Rob, well, so, in this – first half of this year’s – I think, well, approximately, the total sales revenue still is coming from the traditional business, so from this module business. We’re talking about this 20% of revenue possibly, just the roughly estimated, will come from this probably second half this year.

Why do we that – why we are saying that is because depends on the pace of the project in oversea and in China. So, of this estimated, the 20% revenue of the project will happen in the second half of this year.

Rob Stone – Cowen & Company

Okay. With respect to your higher average cell and module efficiency, do you have a sense of how much of an ASP premium you were able to command versus a typical module?

Yongfei Chen

Yes, based on this the traditional modules, ASP, if we’re going to sell QSAR modules, we should mix of a premium. So, that’s the different gap between – will be above just the – will be above the $0.05 or $0.08 per watt.

Rob Stone – Cowen & Company

Okay. And finally, with respect to some of your expense and cost trends, you mentioned that you had purchased additional inventory in anticipation of better spot prices than this year. What’s the trend you’re – you’ve seen year-to-date in terms of wafer and other material costs?

Yongfei Chen

Rob, you are talking about the wafer costs?

Rob Stone – Cowen & Company

Well, yes, you – in other words, frequently when companies have higher inventories in a down pricing environment, you end up with additional inventory write-downs because prices and costs keep coming down. It sounds like you’re suggesting that the prices are relatively more stable for modules at the moment. I’m just wondering if you did manage to get better pricing in December for inventory that you were buying versus things that you might be buying now.

Yongfei Chen

Yes. If you look at this trend, as you know, that at least as far as the December from November, end of December last year, the wafer cost, I think that slightly dropped down but in the – from this January, end of February because of the some of the supply chain change. So, now, today, the wafer costs are close to $0.22 per watt.

Rob Stone – Cowen & Company

Okay. And finally with respect to your operating expense trends, that was a little higher than we were thinking in the fourth quarter. Excluding the write-downs and other one-time items, can you say about what you expect operating expenses will be in the first quarter?

Yongfei Chen

It means – that is – first of all, it’s about the $15 million.

Rob Stone – Cowen & Company

Okay. Thank you.

Yongfei Chen

Thank you, Rob.

Operator

Thank you for your question. Your next question comes from the line of Paul Strigler from Esplanade. Please ask your question. Please ask your question.

Paul Strigler – Esplande

Sorry, I was on mute. Hey, guys, can you just quickly talk about sort of ASP trajectory for 2013, what you think, where it’s looking for Q1 and how we should think about it for Q2 through Q4?

Stephen Cai

Yes. We could not just give the exact number. We’ll just a range. Could you – could I do that, Paul?

Paul Strigler – Esplande

Perfect. That’s great.

Stephen Cai

Okay. That depends on the different geography, but so far, you look at these are some things because of some of this external change, by policy change, by production’s perspective change. So, I think we will give you some – a little bit of detail about the ASP prediction from the – for these different countries. Such as the Europe now, about – for second half this year, which is let’s say second half this year, we expected that this will be $0.65 to $0.75 – to $0.70 per watt.

In the first half this year, that depends on different – the strategy of the company, which the difference is the ASP strategy, such as that some of these companies in this – in first half this year, some company said that the – that they will take the risk to – risk to again trying back the process. And some of these companies don’t want to take the risk. They just – they sell the product at CFY – CIF, FOB terms. So, that depends on. So, we are not to give you so very firm ASP in the first half this year.

And U.S. now still will remain just standing ASPs like $0.65 to $0.75 ASP. Japan, as you know, that this year, this is a high ASP we expected. So, whole year, as average, the ASP I think is above the $0.70 per watt.

Paul Strigler – Esplande

Just to clarify. So, you’re saying you think prices strengthened in the second half of the year?

Stephen Cai

Yes, of course, and – but if we’re talking about the U.S. and Japan, I think that ASP will remain steadily.

Paul Strigler – Esplande

Okay. That’s certainly different than what some of your peers are saying, but that’s certainly a bullish data point for sure, and...

Stephen Cai

I already covered our peers’ expected – expectations.

Paul Strigler – Esplande

And does that $0.65 to $0.70 in the back half, does that incorporate more high efficiency module sales? Is there some sort of premium sort of baked into that number?

Stephen Cai

Yes, I think – yes, that is blended, I think. We cannot just separate that exactly.

Paul Strigler – Esplande

And how much visibility do you have? Are we talking – do you have any contracted volume or at least sort of MOUs for the back half or is this just sort of budgeting at this point?

Stephen Cai

Yes, that’s the budgeting. And we cannot say that we can. Some contract just like a middle-term contract such as MTUs the third quarter or fourth quarter of this year, but we just look at the short term – we look at this account with the short-term moment. So, we’ll just be budgeting something.

Paul Strigler – Esplande

Okay. And then just on your project business, so just to clarify, you expect to recognize revenue from the sale of projects or from electricity sales on those projects in...

Stephen Cai

Yes, based on the sale project.

Paul Strigler – Esplande

Okay. And so, do you have buyers lined up for your UK and Chinese projects?

Stephen Cai

Yes, for sure. Yes. Correct.

Paul Strigler – Esplande

Okay. So, you’re pretty confident that you can recognize revenue this year on the sale. And so, what kind of margins do you think you can achieve, project business?

Stephen Cai

So far, it’s now under construction. So, we couldn’t share with you the exact numbers, the net profit or gross margin because this is a process totally different, the traditional our business. So, we will look at a similar results, which will happen in the second half of this year.

Paul Strigler – Esplande

Well, it’s certainly – or I guess, is it fair to say it will be greater than your current manufacturing gross margin and will certainly be positive, correct?

Stephen Cai

Yes. Correct. Yes, for sure. That is why we focus on balancing the market to get the high profit.

Paul Strigler – Esplande

All right. Great, guys. Thank you so much.

Stephen Cai

Thank you, Paul.

Operator

Thank you for your question. (Operator Instructions) Your next question comes from the line of Philip Lee from Mangrove Partners. Please ask your question.

Philip Lee – Mangrove Partners

Hello. Just on the downstream project business, what sort of margin have you targeted, and where do you see industry margins going for the project business as other players try to enter?

Stephen Cai

Regarding the downstream project, we now – based on our assessment, the levels, we just look at as a total project, that project, the project margin with this 20 or 25 investment period. But if you’re talking about the project’s net profit which depends on what kind of way to operate the project such as ours, after construction, immediately, you are going to sell the project. That means the profit – we just look at this net profit. Possibly, some of the project, net project – the profit, maybe some of the project I saw that is the 8% net profit, some is 15% profit. That depends on different geography, different project type. So, we – so far, we don’t have the exact numbers for that. This is all – we will look at the result, which should happen in second half this year.

Philip Lee – Mangrove Partners

And what sort of size of projects are you going after?

Stephen Cai

So, in our pipeline that – in our pipeline on hand in the China project – in China project we had, it’s about from the 10-megawatt to 40-megawat. (Technical Difficulty)

Operator

Ladies and gentlemen, your speaker is currently experiencing some technical difficulties with their line. Please stand by while we address the situation. Your lines will be placed on music hold until the conference resumes. Thank you for your patience.

Philip Lee – Mangrove Partners

Hi. Hello.

Yongfei Chen

Operator?

Elaine Li

Hello?

Operator

Hi, sir. This is the operator. You’re currently live. And Mr. Philip Lee from Mangrove Partners, his line is open as well. Please proceed.

Philip Lee – Mangrove Partners

Sorry. You were cut out when you were talking about the size of projects that you are targeting.

Stephen Cai

Yeah. In the China, the project size, the farm is 5 megawatts to 40 megawatts. But in overseas projects, normally above the 10 megawatt, we will look for. So, the size is like that.

Philip Lee – Mangrove Partners

Okay. Are there a number of projects in that size or do you have to get to above 100 megawatts in order to get any meaningful volumes?

Stephen Cai

Yes. In China, we already have this over 300 megawatt of the pipeline on hand. But in the overseas, we just look at – we’re now – we’re just looking for the 40 megawatts, the pipeline. But we are – we’re not finalized to be going to buy that. But we’re now under assessment for CSUN.

Philip Lee – Mangrove Partners

Okay. Thank you.

Stephen Cai

Thank you, Philip.

Operator

Thank you for your question. Your next question is a follow-up question from the line of Rob Stone from Cowen & Co. Please ask your question.

Rob Stone – Cowen & Company

Hi, Stephen.

Stephen Cai

Yes.

Rob Stone – Cowen & Company

I wanted to ask a question about the manufacturing in Turkey, you’re adding capacity. Can you say how you think your cost of production compares there versus China?

Stephen Cai

Yes. At the moment, we are now running 120 megawatts for module now. But in May, we will start to run our 100 megawatt of sale production lines. In July, we will have additional 180 megawatts the module operation. So, that is total – that’s the fast one, fast one is the project at all. Like fast one projects. And in terms to cost, I think the – just roughly estimated is – because this year is just the start. Roughly we got this some of these cost analysis that Turkey operation cost will be higher than China at about $0.02 or $0.03 per watt.

Rob Stone – Cowen & Company

So, given the fact that you can get some higher feed-in tariffs for local content, does that translate to equivalent, or maybe better margins eventually than shipping from China?

Stephen Cai

Yes. We got this message from the government official number that if – depends on different level of the component percentage in the module which will give you different incentive level, such as if 100% material or 100% made in Turkey, and just the last percentage component made out of Turkey, you will gather it’s a very high percentage – higher percent incentive such as the – one of the developer taught me that if that in this case, the ASP will be about $0.80 per watt of the module.

But if the module, our business model in the Turkey such as we will buy cell from Taiwanese and part of the cell will be made in Turkey just like a combination together roughly estimated the SSP of the module will be $0.70 per watt. That’s just the rough numbers we have now.

Rob Stone – Cowen & Company

Okay. And with respect to your shipment target this year, can you say approximately how much of that you might make in Europe? It sounds like maybe a third or something might be feasible based on capacity, or is it going to be less than that?

Stephen Cai

Yes. I think so well, Europe shipment will be – Europe shipment will occupy our 60% of this total shipment in this year.

Rob Stone – Cowen & Company

Yes. I understand the shipments into Europe. I’m wondering how – are you planning on producing everything for Europe out of Turkey, or will some of that still come from China?

Stephen Cai

Most – first half this year, most of the shipments came from China. But of this, I think if – I just assume that anti-dumping happens 100%, and then the total ship will come from the Turkey manufacturing, yes.

Rob Stone – Cowen & Company

Okay. So, if there is an anti-dumping, you’re at least well prepared for it?

Stephen Cai

Yes. Correct.

Operator

Thank you for your question. (Operator Instructions) Your next question comes from the line of Pete Chou from Global Sun Trust. Please ask your question.

Unidentified Analyst

Hi, Stephen. I don’t think we have talked before but just a few questions. In the event that you have to liquidate what you have construction-wise regarding the downstream business, I saw the balance sheet says the construction asset is roughly $4.76 million, is that in the event that you do have to sell this project out? So, is the liquidation value roughly similar to that?

Stephen Cai

Higher than that.

Unidentified Analyst

Right. Approximately how much higher would sort of a market price for such a piece of asset base?

Stephen Cai

Yes. Because now we announced the – all the projects that are now under construction. So far, we cannot provide the exact numbers for that. And if possible, I think in the third quarter or even in the fourth quarter, we could provide you some exact numbers, sorry for that.

Unidentified Analyst

And it’s not a baseline. And also just sort of a more logistical one. So, in the event that the book value which is roughly, I think, $6 million for the quarter, in the event that it does hit negative even when the business is – continue to be running be it through shareholder loans or whatever, is there any logistical sort of bottom line for the SEC on a delisting or that – or can you sort of continue even with negative equity?

Yongfei Chen

That is a question that we don’t have just any more comment for that. Sorry for that.

Unidentified Analyst

It’s fine.

Stephen Cai

Thank you.

Operator

Thank you for your question. Your next question comes from the line of Christopher Rathke from Arcane Capital. Please ask your question.

Chris Rathke – Arcane Capital

Yes. This is Chris Rathke from Arcane. Hi.

Stephen Cai

Hi, Rathke.

Chris Rathke – Arcane Capital

Just a question – I mean, you mentioned this continued irrational pricing there in China, continued oversupply. I mean, you are quite close to the situation in Jiangsu province there and Xinjiang province. How do you see this consolidation crisis now developing? I mean, there was a huge cluster of companies, probably more than 100 manufacturers – module manufacturers there in your neighborhood. I mean, how many of those do you see disappearing now?

Stephen Cai

Okay. So, that’s the big challenge for me to predict this how many company will disappear. So, still I just – generally speaking, I think we should clarify and recognize this key criteria of the company who could survive until end of this year, such as we should ask the questions about these, the sort of companies, whether they have this technology to be innovative. And the second done, they should provide some more confidence for Chinese bank, which is we’ll continue to support the growth in terms of technology and cost – cost down, this capability and the globalized base, the marketing and the sales.

And the third one, we should ask a question, so whether we have this capability to continue gather the financial support from the different way. So, I think totally, in end of this year, as my estimate, there will be less than 20 companies of the module left in end of this year. It’s my personal view to look at it.

Chris Rathke – Arcane Capital

Modules, does that include cell companies? Because, obviously, it’s much easier to produce modules than cells.

Stephen Cai

Yes, yes. I just think of modules. If this is some company, originally the business – key business came from cell. But now, you look at some of the company started to go into this downstream. They all started to already head down this module business. Even though they have the bigger cell capacity, but still they are starting to run this module business. So, I say that’s something – it’s like a module.

If now there’s one company which only do cell business in the PV industry, that could be – that’s high risk and that they’d not be survived in end of this year. So, they already changed the strategy to focus on the modules.

Chris Rathke – Arcane Capital

Right. We hear that this Golden Sun program there, which is supposed to help the industry, in some ways, is actually quite counterproductive because low-quality manufacturers, they can also use their modules because it doesn’t depend so much on the power output there, the quality of your module. So, instead of reaccelerating the consolidation, it’s slowing it a bit down. Is that how you see it, too?

Stephen Cai

That is – we don’t have this – we have don’t have this comment for that.

Chris Rathke – Arcane Capital

Yes.

Stephen Cai

Yes, we don’t have the comment for that. But I think CSUN will just only provide just qualified product to support all of the projects. Otherwise, we will lose our reputation and the credit. That’s for sure.

Chris Rathke – Arcane Capital

Yes. And finally, one question on Japan. I mean, Japan, obviously, has been an attractive market, high-priced market, and a lot of companies have been trying to get into that market. However, recently, the yen has gone down dramatically just within two months, 20%, 30%. So, I mean that should also expand into your margins, right? Or can you try to increase your prices then to offset the currency effect?

Stephen Cai

Yes. That’s just so we should separate the segments for this Japan market. You still look at just the residential rooftop project, this still comes with a highest incentive from the government. If you’re talking about this 20% or 30% dropdown, this incentive percentage, I think just to look at this, the Guangdong project.

So, the Guangdong project in this year still – even though after the job done with so much but the power rate and the incentive, the FIT is still high. It’s like $0.38 per watt. This is the highest incentive in the world. But even though they’re still lower than versus $0.49 and $0.48 is the FIT before, but $0.38 per watt is still the highest in the world. So, that’s not a big impact to the – to this day of gross margin for whole of the industry. But, of course, a part of the loss that should be – that is what happened, but this is still a profitable project in Japan.

Chris Rathke – Arcane Capital

Okay. Thank you.

Stephen Cai

Thank you.

Operator

Thank you for your question. There are no further questions at this time. I would now like to hand the conference back to the management. Please continue.

Stephen Cai

Thank you for participating in today, this quarterly earning call. We look forward to speaking with you again, so thank you.

Operator

Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.

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