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Executives

Peter Xie - President

Paul Combs - Vice President of Strategic Planning

Terry McCarthy - Board Member & Interim Chief Financial Officer

John Breckenridge - Managing Director & Operating Partner

Analysts

Burt Chao - Simmons & Company

Paul Clegg - Jefferies

Jenny Wu - Lazard Capital Markets

Dan Ries - Collins Stewart

Jake Greenblatt - Barclays Capital

Arch Pei - JL McGregor

Solarfun Power Holdings Co. Ltd. (SOLF) Q1 2009 Earnings Call May 19, 2009 8:00 AM ET

Operator

Good day ladies and gentlemen and welcome to the first quarter 2009 Solarfun Power Holdings Company Ltd. conference call. My name is Chanelle and I’ll be your coordinator for today. At this time all participants are in listen-only mode. We will be a facilitating a question-and-answer session towards the end of this conference. (Operator Instructions)

I would now like to turn the presentation over to your host for today call, Mr. Paul Combs. Please proceed.

Paul Combs

Thank you and good morning everyone. Welcome to our call and thank you for your interest in Solarfun. Joining me today are my colleagues Peter Xie, President; Terry McCarthy, Board Member and Interim CFO and John Breckenridge, Managing Director and Operating Partner of our larger shareholder Good Energies, and member of our management committee.

Before we continue with the formal commentary, I need to take a moment and remind you of the company’s Safe Harbor policy. This call will contain forward-looking statements which are subject to risk and uncertainties. Actual results may differ from those discussed today and therefore we refer you to a more detailed discussion of the risk and uncertainties in the company’s filings with the SEC.

In addition, any projections about the company’s future performance represent management’s estimates as of today May 19, 2009. Solarfun assumes no obligation to update these projections in the future as business and market conditions change.

As you saw from our release, Harold Hoskens will leave Solarfun in late June. We will first ask John to address Harold’s departure. John will be available for any questions you might have following our formal remarks. John.

John Breckenridge

Thanks Paul for the opportunity to make some brief remarks and good morning everyone. I understand it’s unusual for a representative of a large shareholder to participate in this type of forum, but we felt this was important given the transition in management and my active role as the member of the management committee.

I’ve been actively involved with Solarfun as the principle representative from Good Energies for the past 18 months and during that period we’ve been working very closely with Harold on a daily, weekly basis. From my own technical and management background and experience as an Operating Partner for six years at J.P. Morgan Partners in Asia and New York, on region we’ll be positioned to understand the issue facing Solarfun.

First, the management committee was formed and approved by the Board of Directors, to provide a decision making body, in order to promote the performance of the company. The committee includes our President, Peter Xie and me. We believe this provides the best mechanism to combine the experience and skill sets of all the parties, to exercise the key business decisions, to develop strategic direction and to melt Eastern and Western business practice inherent in this type of costs cultural ownership structure.

Let me turn to Harold’s resignation. Harold has chosen to pursue other interests and will depart Solarfun on June 30. His tenure at Solarfun has been relatively brief, but he’s made many important contributions. On behalf of the Board and all employees at Solarfun, we wish him the very best and thank him for this contributions and dedication to building the company.

We understand that management turnover is always a concern; however, we have built and will continue to build a strong management in all levels in Solarfun. We are fortunate to have someone like Peter Xie’s caliber and experience in place, have the attention of our Chairman and Founder and to be able to leverage his talent and experience within China and to have the support of my organization, Good Energies, which is committed to the long term enhancement of shareholder value and of course of the strength of Solarfun. Despite Harold’s departure, we are confident that Solarfun will continue its ongoing development and success.

I’ll now pass the call over to Terry, who will run though a brief summary of the first quarter financial highlight. Terry.

Terry McCarthy

Thanks John and good evening everyone. We trust you had a chance to review the numbers that was released and will therefore we focus on some, but not all of the key metrics. The key points we tried to leave with you last call, were that Q1 shipment volumes would decline from the previous quarter, ASPs would continue to fall, our raw material cost would improve and we would see some return to positive gross margins. I believe that you’ll find our Q1 results to be pretty much inline with our comments and comes as no surprise.

We expect the first quarter will prove to be the low point in demand for this year. Our revenues for the first quarter reflect both lower volumes and lower prices. Revenues of $100 million declined 43% year-over-year and 39% quarter-to-quarter. PV module shipments reached 35.7 megawatt, a decline of 11.5% from last years Q1 and a 25% drop from Q4 of last year. Average selling price declined to $2.78 from $3.37 last quarter. We expect prices to decline further throughout the reminder of the year, that are less the severe rate than the last six months. Peter will add some color on that point later.

Based on the invoice data, our largest Q1 shipments were Germany, 73% and Portugal, a new market for us at 11%. Interestingly, other new markets such as Korea, Australia and the U.S., each accounted for 3% to 5% of sales. Spain, once a significant market just a few quarters ago saw no volume. I should remind you this data comes from where we invoice the customer, not were the module is installed. So the percentages in Germany overstated for sure and some new markets in the Middle East and North America are not even statistically reported.

In spite of lower shipment volumes and lower ASPs, we’ve been able to return deposit of territory on the gross profit line. Gross profits of $7.2 million were down 74% from Q1 2008, but relative to the $55.4 million gross margin loss last year, we had a nice swing to the positive. Gross margins improved to 7.2% and we expect further improvement from here.

We have begun to enjoy lower polysilicon related material cost which declined 25% quarter-to-quarter and the benefits of vertical integration, albeit still small with room for improvement; help on the margin as we build scale. The profit for lower cost is ongoing. It’s a combination of reducing higher inventor costs, renegotiating old supply contracts, purchasing spot materials, declining prices and executing our internal wafer manufacturing as we build volume and become more efficient.

Our operating expenses as a percentage of sales were at a normally high level, above 10%. This is simply a function of expenses being spread against fewer revenue dollars and shipments and prices were lower as previously discussed. We continue to maintain a tight rein on organizational cost during this downturn and demand and as volumes build, this category will return overtime to more normal levels of 5% to 7% of revenues.

Other categories of note were interest expenses, which gained slightly from Q4, as we increased short term borrowing and had additional interest expense from a new accounting treatment for our convertible debt. We also continued to benefit from our hedging strategy and recorded a net currency gain of $5.6 million. We made a big swing towards returning to profitability, but fell just shy with a recorded loss of $1 million and a loss of $0.03 per ADS.

Let’s now return our attention to the balance sheet. We ended the first quarter with an increased cash balance totaling $68 million. This is because we had an incremental $48 million in bank borrowings, which now totaled $210 million outstanding. The lending environment in China remains competitive and we have secured good relationships with nearly ten domestic banks. We have recently renewed our large lending agreement and in fact, remain comfortable with our liquidly and our ability to fund operations through 2009.

We ended the Q1 with $231 million in working capital and continue to keep a tight focus on working capital management. We reduced receivables by $17 million and although our DSOs rose a little from the prior quarter to 35 days, they are still very healthy relative to year ago and to most of our peers.

Total inventories remained fairly constant at $109 million, but importantly our inventory of raw materials, with rapidly declining market prices was cut in half. We continue to believe our inventories are adequately provisioned to reflect these market conditions. Capitals outlays were $31 million for the quarter; about half of which was for the final acquisition payment of our ingot manufacture LYG.

Spending for the remainder of the year should be quite low. We have previously communicated nearly $70 million in supply prepayments due in 2009. These will now be substantially adjusted or eliminated. So, the amount will likely turn out to be much lower.

I’ll now turn the call over to Peter Xie, who will give you a flavor of current business conditions on what we see for the remainder of the year and review our management priorities. Peter.

Peter Xie

Okay. Good morning every one. As you know I’d been at Solarfun for just few months and I have not had the opportunity to visit before. There will be a change over time and I look forward to interacting with you about Solarfun in the very near future.

The current marketing environment remains soft and these recoveries are some what unpredictable in the near term. Channel inventors are lower, but still high. Overcapacity exists in almost all parts of the food chain. Financing for solar projects remain high and the selling prices and the raw material costs continue to fall. These conditions require active management in real time, and a real change in the operating environment in which we compete in the next up cycle.

It is imperative first to weather the downturn, and second, to reduce our cost structure in order to compete going forward. To better position the company for the future, we are launching a global realignment effort. We have a planned focus on the following type areas; namely customers, liquidity, downturn supply contracts, inventory and the product process innovation.

Our first priority is to focus on our customers. We have worked with our strategic customers and to strengthen our relationships by performing strategic alliance in both market development and the product development. We are also looking to expand our geographic presence into a newly developed market, notably in U.S. and China.

Much has been read about in the potential for solar energy in China and we are encouraged by the steps taken by the Chinese government to promote the supply to support renewable options. Although M&A details remain, we are actively bidding on some early projects and believe we are well positioned to capture share.

As you may remember, we also already have a footprint downstream in China with our systems integration and installation subsidiary in Shanghai. We anticipate that potential market in China to approach 250 megawatt or more this year and could reach a gigawatt within a few short years. Adequate funding and liquidity are key as Terry indicated. We feel secure in that regard.

In the period of Oshkosh capital, Chinese companies, including us, have a relative competitive advantage. Just being a Chinese company is no guarantee, so we work hard to partner with a number of banks here and have developed a number of very strong relationships. These credit opportunities combined with cash generated from inventory reduction efforts, should be more than adequate to meet our expected spending needs.

On a supply side, one of our key focuses near term is to work with our strategic suppliers, to develop win-win solutions for both parties. This discussion should allow us to step down our raw material costs and align them with current market prices. We also hope that will benefit our supplier in the long run.

Currently it’s a buyers market. Poly prices on the spot market are approximately less than $70 per kilogram. We see them folding further, potentially to level the approaching $50 per kilogram. We of course are below $1 per watt, and continue to work through higher cost inventories and to actively negotiate with our suppliers, to eliminate prepayments and the adjusted volumes and the pricing. We have made some significant progress here and as we noted, our raw materials cost dropped 25% from the proceeding quarter. Our goal is to have revised two-thirds of a formal contract by the end of the second quarter.

As Terry mentioned earlier, we are prepared for prepayments already made, in order to better align our cost structure going forward. Our inventory reduction effort has also helped us generate additional cash to fund ongoing capital needs. We are implementing profit that’s in control in the organization, to better manage inventory as we transition from an environment that is supply constraint to demand constraint. We expect that our inventory will reduce to a more manageable level in the next two quarters.

The other key ingredient to our global realignment effort is process and the product innovation. By leveraging our growing vertical integration upstream to the ingot wafer level and optimizing profit steps, we expect to reduce our cost structure substantially. By mid year we’ll have wafer capacity approaching 250 megawatts and will expect internal wafers to account for more than approximately 60% of our total wafer needs in 2009.

This experience and this skill we hope will further reduce cost, to levels that are competitive with what is available in the spot market, and to have better control over quality and the reliability of the delivery.

Our ability to vertically integrate may also allow us to optimize each of the profit steps to realize high conversion efficiency at a much reduced cost. Our product development effort in 2009 will focus on high power, high conversion efficiency in the low lag induced degradation.

Our global realignment initiatives should result in further improvements to gross margins going forward. Excluding any potential of further provisions, we would anticipate gross margins gradually improving quarter-to-quarter and reaching mid-to-high teens by year end.

We think the first quarter will be the low point of demand for us and for the industry. At this point, we would expect volumes to improve in the second quarter now underway. There are still six weeks remaining, we still have some uncertainty, but they would be surprised if volume did not improve at least 15% to 20% from last quarter.

The second quarter shows the successful start of production of modules for Q-Cells. We expect shipments to reach 100 megawatts for calendar year 2009 or approximately 35 megawatts per quarter. This is an important step to build a strong relationship with a world class customer and should enhance our profitability.

There remains enough uncertainty in market demand and we’re refraining from making specific shipment projections for the full year. As previously indicated, we have secured 200 megawatts in orders, but would remind you that volumes, pricing and the timing of the delivery is excluded.

We have a good traction with our key customers and once downstream inventories are reduced and the funding becomes more available, we expect to see accelerated demand. At this juncture, we anticipate the second half of 2009 to be better than the first. A rough guess will be 60% to 70% of our annual volume being recorded in the third and the fourth quarters.

2009 is clearly a year of transition for the industry and for Solarfun. Our focus is on managing our way through a rapidly changing cost and a pricing environment, and to maximize cash profitability. At current market prices, we see the elasticity of our market demands to be unleashed once funding becomes more available.

In many markets this current incentive in place has already approached great clarity. The cost deferential between PV post [Inaudible] is narrowing. The U.S. and China are in the early stage of explosive demand. Our long term optimism for PV Solar is high and we remain diligent in positioning Solarfun for future growth.

This concludes our formal comments and we’ll be happy to respond to any questions you may have.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Burt Chao - Simmons & Company.

Burt Chao - Simmons & Company

I guess my first question is, can you reconcile I guess the funding and maybe give out what you expect you need? I know you don’t have any additional large capital expenditures here in 2009, but what you expect for and if you made up what your expecting to spend in the rest of this year versus what you’ve got on your balance sheet right now?

John Breckenridge

I think actually the balance sheet will be pretty consistent with the rest of the year and so we’ll be turning over our assets at pretty much the current level or starting to work down our inventory a little bit more.

Burt Chao - Simmons & Company

Just as a follow-up to the overall situation with management and Solarfun in general; with Harold’s resignation and departure from the company, is it your intent to find somebody else from the solar industry and bring them in or will it be something similar to when Harold first came on and your looking for a CEO maybe with some other industry experience, that Good Energies could potentially bring on or somebody else of that nature?

John Breckenridge

I think we’re not prepared to comment on the specific direction. We may or may not go with a replacement for Harold. I guess I would just like to reiterate though that I think with the management committee formation here, which just includes me and Peter; we think we are in a very stable environment right now. So, we are in a situation where we feel that we can do the right thing for the company at the right time, but that’s as far as we can comment at the moment.

Burt Chao - Simmons & Company

Just one last quick question on, I guess margins going forward, without actually talking to a specific margin. You said that you fully expect ASPs to decline in the back half of the year, but that decline should be outpaced by reductions in polysilicon pricing?

With polysilicon about $70 a kg right now, can you give me a rough sense of what you think ASP is relative to where they are today; will decline with by the end of this year and also how quickly you think your spot pricing?

I know spot pricing may not necessarily be a direct proxy for what your cost of goods are sold to, but where do you think poly can go by the end of this year and where do you think ASPs and the market will go?

John Breckenridge

Yes, so the poly price is at less than $70 a kilograms. So we see that price trend continue to go, so we expect towards the end of the year, maybe towards $50 per kilogram, easily you can see that, maybe even further down more than that.

The ASP declining I think is very hard to project, but we would expect we’ll see a slight erosions in the second quarter, maybe a 10% to 15% ASP decline, but in Q3 and Q4, as many people predict, there will be a rebound in demands. So I think it’s very hard to project the ASP declining. So we would expect maybe a soft decline.

Terry McCarthy

So in general, just taking from your comment that we haven’t hit a bottom, we’re getting pretty close or we’re kind of around there at this point, right.

John Breckenridge

I guess we’ll say that it feels like we’re not in the free fall that we were in.

Operator

Your next question comes from Paul Clegg - Jefferies.

Paul Clegg - Jefferies

You sound optimistic about the visibility on volumes improving and I was wondering if you might be able to share with us, how much volumes were up in April versus March or perhaps year-to-date May versus April? Then I have a couple of follow ups.

Paul Combs

Paul, we’re not in a position to make month-to-month volume. I think, what we’re prepared to say at this point is that, the second quarter at this point appears to be better than the first. The order of magnitude of that is yet to be determined over the next six weeks, but I think as Peter said in his formal comments, something in the up 10% to 15% at the minimum is a reasonable expectation at this point.

Peter Xie

Those come from production. From the perspective, we see our production in the beginning of the quarter was running not at full capacity, but we’re running busier and busier towards the end of Q2. So the demand is pretty much backend loaded.

Paul Clegg - Jefferies

Okay, and on your contract renegotiations, I think one thing I’m trying to understand here is, when you talk about ASP declines being offset by lower poly pricing and the expectation of better gross margins, does that anticipate that your renegotiations that are ongoing are successful of existing contracts, and on that same point should we just assume that you don’t have any additional prepayments at this point?

Peter Xie

Yes. I’m glad to say that made significant progress in contract renegotiations; actually in the forefront, both in prepayment amortization and the volume and the book price. So in terms of prepayment I think we’ve substantially reduced our payment obligations; more than two-third of the payment obligations has been reduced or eliminated.

In terms of the price, right now about 70% of our purchase is at market price; we still have a small amount of purchase at above market price. We are still in very constructive negotiations with all our suppliers. The volume also has been negotiated down, so our anticipation is by the end of Q2, two-third of our supplier contract will be fully renegotiated.

Paul Clegg - Jefferies

I guess it’ll probably make more sense to talk about what your non-poly cost towards this quarter, your processing cost and where you grams per watt were?

Peter Xie

I can comment on that. Right now our shipping cost is less than 40% of our total cost. Non-silicon cost right now is more than 50%. So right now, here from the market projections, the non-silicon cost, the back-up cost is around $1 per watt and we’re not too far apart from that.

Paul Clegg - Jefferies

Non-silicon cost is a little more than $1 per watt.

Terry McCarthy

We just projected the numbers. I think depending on Jeff’s definition, some rate is below $1, some rate is above dollar. So, I would say just rough numbers around $1. We are not too different from that.

Paul Clegg - Jefferies

Does that include the in-house component of wafering?

Peter Xie

Yes. We expect as I stated earlier, our in-house production of wafers to approach 250 megawatt in mid year. So we expect more than 60% of our supply of wafers will come from in-house and our in-house rental cost is competitive; you can buy it from the spot market. Right now the polysilicon price is very low, so it can be very competitive.

Paul Combs

In terms of grams per watt, we’re comfortably below seven.

Paul Clegg - Jefferies

But when you talk about that dollar per watt of non-silicon costs, what percentages of your wafers are internal when you look at that cost?

Peter Xie

Right now with the cost projected from the spot market, what I’m referring to is assuming 100% from internal.

John Breckenridge

If I can just add a comment on this and we understand that we’re all trying to get to some clean analysis here; the trick that we have is of course, these contract negotiations, they’re still ongoing and so we have to be careful about how we talk about them, number one.

The second thing is, if even once we negotiate these contract, there’s often the tale of business either that’s already in our warehouse or coming in or what have you, so that the way that it shows up in our earnings maybe trailing.

Then the third point is that, after all the focus on polysilicon, it was up to 90% to 95% of our cost at one-time. Now that that’s changed, there’s a huge focus on non-silicon costs, and so those numbers aren’t going to start to move. So it’s a very dynamic environment. We appreciate how difficult it is for you guys to try to forecast it all, but we’ll try to be as helpful as we can.

Operator

Your next question comes from Sanjay Shrestha - Lazard Capital Markets.

Jenny Wu - Lazard Capital Markets

This is Jenny calling for Sanjay. I have a question regarding inventory. At the end of Q1, it looks like your inventory hasn’t reduced significantly. I just wanted to know what’s the reason there, and also in terms of the breakdown of finished good and work-in-process, can you give us roughly an estimate of the inventory?

John Breckenridge

Basically, there is a couple of pieces; one, as John mentioned, there is some trailing inventory coming in that we were taking as we went through the quarter. Number two; we did have a couple of shipments that got postpone right at the end of the quarter that make-up for a piece of that also. So, we actually would have expected to be down quarter-over-quarter.

Jenny Wu - Lazard Capital Markets

Also, in terms of your raw material usage, can you give us a sense, how much are used from your existing inventory and how much from your long term contract and how much you purchased from the spot market during the quarter?

Paul Combs

Can you repeat the question again?

Jenny Wu - Lazard Capital Markets

Sure. During Q1, I wanted to have a sense of the raw material you used. How much are used from your inventory? Is it existing inventory? How much are used from the long term contract you had and also how much are used from the spot market purchase?

John Breckenridge

Well, first of all, if you took our beginning inventory, we would basically have come close to turning that for the quarter, but then we have additional purchases coming in. Off hand I don’t know the split on the contract, but we don’t sort of tie specific purchases to specific modules, so when a wafer comes in, what’s from one purchase and directly into the finished goods is not always a one-to-one connection.

I think the important thing is that, many of our contracts, the way they have either been negotiated in the past or are negotiated now, are essentially market price contracts. So even though it’s a contract purchase, it’s at spot price and so as the quarter and months have gone on, more and more of our contracts, the vast majority at this point are no longer at an above market price, they are at spot market. Now some of those maybe under contract and some of those maybe actual spot purchases, but that’s a very significant trend that’s going on in our purchasing.

Jenny Wu - Lazard Capital Markets

I think what I wanted to get is, during the first quarter are you still digesting your inventory or you’re purchasing a lot from the spot markets; and also what do you expect in the year, like the second quarter?

John Breckenridge

To Terry’s point, we basically purchased just about as much as we used in the last quarter. So, we saw a relatively flat inventory; some of that’s from finished goods that we do expect to ship. As the volume picks up and our negotiations go far, we will expect to see inventory declining.

Terry McCarthy

Yes, one of the things I should have added on that is, the other pieces of that is, if you look at the composition, we have more cell inventory at the end of the quarter, than we did at the beginning of the quarter, so we were actually manufacturing cells ahead. So, the raw material component is less than half of that total inventory.

Operator

Your next question comes from Dan Ries - Collins Stewart.

Dan Ries - Collins Stewart

Of the $200 million of prepayment from the balance sheet, can you say roughly what portion would be for wafers, what portion for polysilicon, what portion for say equipment and then whatever else is in there?

Terry McCarthy

Its part 50/50, none of it’s for equipment. So the rest is split, about a third for poly and the other portion for wafers.

Dan Ries - Collins Stewart

So the contract with wafers, is that the limiting factor why the purchase wafers will remain at something like 40% for the year? Like if you could start from a blank sheet of paper, would you prefer to do it all self produced or…?

John Breckenridge

Well the short answer to that is, yes, but the longer answer is, there are certain instances for certain specifications or other issues where we may like to buy a particular wafer, but in the long run, we want to fill up our in-house capacities first.

Peter Xie

Yes, actually if you look at our long term supply contract, last portion of that is polysilicon, but we are still buying a large amount of wafers as we start using our LYG facilities. So as we’re renting up our LYG facilities, we expect to buy some external wafers, but over the long run, towards the end, I would expect to buy less and less wafers from the spot market than more polysilicons, so we can utilize our LYG wafer facilities.

Dan Ries - Collins Stewart

If I were to try to back into, I know this is theoretical, but the average polysilicon cost of what was embedded in the cost of goods sold for this quarter, would it be closer to $200 a kilogram for the first quarter or $150? Since they reflected to start inventory purchase in late 2008?

Peter Xie

No, I don’t think its $200 a kilogram. If it’s $200 kilogram, the module price will be well above the cost. So we’re not going to able to make one of the margins, so it’s much less than that.

Operator

(Operator Instructions) Your next question comes from [Inaudible].

Unidentified Participant

I have two questions, the first one basically on the inventory side. Could you let us know whether there is any inventory write-off in the first quarter and since that poly prices are still falling quite rapidity and wafer prices are also falling rapidly, do you think that you may have to take some inventory write-off in the second quarter?

John Breckenridge

As price drops, even though you’re rolling over the inventory that you had a reserve on, if at the end of the quarter you have inventory, that is still above five. Just because of when you purchased it, you have additional inventory reserves and we are continuing to mark-to-market as you kind of get down that fair step until we get to the bottom and so, yes there is and then we hope that in another quarter, we roll through this and we start leveling out.

Peter Xie

Yes, maybe I can add a little bit more color to this. As I just mentioned earlier, right now the silicon cost only accounts for less than 40% of the bomb cost. So even as the price declines further and mostly that polysilicon price decline further, so with the impact our inventory write down become less as we already provisioned a big part of our inventory.

For example, if the silicon price drops 10% right, you need a 10%, hence 40%, that’s only 4% of the total drop right, if you do the inventory provisions. So I would expect that the impact going forward would be less.

Unidentified Participant

Next one is on the market side. You are seeing some improvement on the demand on the second quarter. Can you give me some color like from which market you are seeing more demand and at second half of ’09, when you’re seeing that there could be significant improvement on the demand, are you actually seeing that some market is finally giving you some order or some financial, even in some of the markets?

John Breckenridge

I think in general the market that will see income, back with some orders in Q2 and accelerating into Q3 is Europe in general, all across Europe. The U.S. market, we’re seeing a lot more activity, although I think for us it has not led to a lot more business yet, maybe just the state of our particular sales efforts there which are growing, but it’s primarily Europe.

As far as that the second quarter and third quarter goes, we do have significant, I was going to say the word commitments, but we do have significant indications from our customers, as to how much they are going to buy in Q3 and Q4.

However, I think the whole market has changed and the fact is that customers actually commit to orders as they need it, even though they have given you visibility. So, we have some which we have some level of commitments; we have others which we have customers have indicated and it’s a sort of combination at this point.

Unidentified Participant

What about China demand, are you shipping anything, any modules for China system makers at this point?

Peter Xie

Yes, we are currently shipping modules in the Chinese market. We see the market has started accelerating in the second half. As you may know, the Chinese government has announced several initiatives in April. So, we have participated in the early biddings of some of the projects. So the first wave of project is under review. The second phase will be around August time frame. So, we are actively engaged with all the conversations and activities.

If I look at it projection wise, look at the Chinese government, the funding level they have, that should be able to fund anywhere between 250 megawatts to 500 megawatt solar projects. So how much money they can fund is still very uncertain. So we are kind of actively engaged and watching the monitor.

Unidentified Participant

250 megawatt to 500 megawatt every year or for 2009 and 2010 combined?

Peter Xie

Just for 2009, but the information I gather is that 2010 still remains to be seen.

Operator

(Operator Instructions) Your next question comes from Vishal Shah - Barclays Capital.

Jake Greenblatt - Barclays Capital

This is Jake Greenblatt on behalf of Vishal. Just a quick question for you; you mentioned at the end of the quarter there were a few push outs that made the inventory level a little bit higher than you expected. Do you have any more color on those push outs? Have those orders shipped yet; do you expect them to ship soon or anything around those?

John Breckenridge

One of them is partially shipped, the other one has not.

Operator

Your last question comes from Arch Pei - JL McGregor.

Arch Pei - JL McGregor

I just want to ask, how much of your revenue comes from OEM business in Q1, as well as in the next few quarters; and regarding OEM business, do you have any major OEM customers other than Q-Cells?

Peter Xie

Yes, as you know Q-Cells we have not started producing Q-Cells in Q2. So most of our revenue are not coming from OEMs. In Q2, I think the OEM will be 20% to 30%.

Arch Pei - JL McGregor

You mean OEM will contribute to 20% to 30% of shipment or 20% to 30% of revenue?

Peter Xie

Revenue.

Arch Pei - JL McGregor

Also I have some follow-ups. First is that, many of your peers are joining in system installation business and the solar project is developing in China and many of them have built their own system installation entities. Do you have any plans or ideas to joining the system installation business in China?

Peter Xie

Yes, so we are actively reviewing the strategies and as you may have known, that we have in the system installation experience before and they have done that assuming the project is a megawatt project. So, they have that experience and it’s our belief that the value has shifted from upstream to downstream, so we’re actively engaged in looking into what’s the best way to benefit from the trend. So we have plans, but at this point we are not ready to disclose it yet.

Arch Pei - JL McGregor

One final question is, it seems that your restricted cash in banks there was a lot in [Inaudible] Can you explain why did you pledged more of the restricted cash with banks?

Terry McCarthy

We just had some banks drafts. There is nothing particularly long term about it that will turn over.

Operator

That concludes the Q-and-A session. I would now like to turn the call back over to Mr. Paul Combs.

Paul Combs

Okay. Thanks everybody for your attention. We appreciate your continued interest in Solarfun and have a great day. Thank you very much.

Operator

Ladies and gentlemen, that concludes the presentation. Thank you for your participation. You may now disconnect. Have an excellent day.

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Source: Solarfun Power Holdings Co. Ltd. Q1 2009 Earnings Call Transcript
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