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China Sunergy Co., Ltd. (NASDAQ:CSUN)

Q2 2009 Earnings Call

August 27, 2009 8:00 am ET

Executives

Allen Wang - CEO

Richard Gu - VP, Sales and Marketing

Randy Law - Head of IR

Peter Schmidt - Financial Dynamics

Analysts

Lu Yeung - Bank of America/Merrill Lynch

Paul Clegg - Jefferies

Robert Stone - Cowen & Co.

Pranab Sarmah - Daiwa Securities

Arch Pei - JLM Pacific Epoch

Rafi Hassan - FBR

Arthur Freidman - Freidman Asset Management

Operator

Welcome to the second quarter 2009 China Sunergy Company Limited Earnings Call. (Operator Instructions)

I would now like to turn the presentation over to your host for today’s call Mr. Peter Schmidt from FD. Please proceed.

Peter Schmidt

Thank you and welcome to China Sunergy's second quarter 2009 conference call. Before we continue, please note that the discussion today will include forward-looking statements made under the Safe Harbor provisions of the US Private Securities Litigation Reform Act of 1995.

Forward-looking statements involve inherent risk and uncertainties as such our results may be materially different from the views expressed today. A number of potential risks and uncertainties are outlined in our public filings with the SEC.

China Sunergy does not undertake any obligation to update any forward-looking statements expect as required under applicable law. As a remainder this conference is being recorded.

With that, I'd like to introduce Allen Wang, the CEO of China Sunergy. Allen?

Allen Wang

Thank you Peter and welcome everyone to our 2009 second quarter conference call. Joining me today is our Acting CFO, Mr. Guo; our CTO, Dr. Zhao; and the VP of Sales and Marketing, Mr. Richard Gu.

Towards the end of 2008, as the full extent of the financial situation became apparent, China Sunergy has quickly put in place measures to reduce the immediate impact on our operations and financial results while ensuring the potential for a strong recovery when the environment improves.

Although it was impossible to avoid the pressure put on our results during the past quarter, the steps we took at that time blunted the worst of the impact and have benefited China Sunergy over the past quarter.

Although the market recovery is not as substantive as we anticipated earlier in the year. I’m pleased that during the second quarter of 2009, we met or exceeded the financial and operational targets we set for ourselves.

China Sunergy's 41 megawatts of solar product shipment during the quarter slightly exceeds our 35 to 40 megawatt guidance, and our $70 million in revenue marked the increase of 89.5% compared to the first quarter of 2009. Through effective inventory management and cost controls, close customer relationship and a more stable pricing environment, gross margins recovered to 9.7% during the quarter, meaning that we return to profitability with enhanced profit of $1.7 million for the second quarter.

We experienced a steady monthly progress throughout the company, including our focus on future developments, existing and new market opportunities. We continue to move forward with our [impact] cell commercialization and so ongoing improvements across our solar cell products.

Although we realized the challenges that remain on the horizon, we have made important progress and have put in place effective measures that will contribute to our operational and financial performance. While we have seen some more rational price trends develop during the quarter, ASP continues to fall as downstream demand remains [feeble], by customers having difficulty with the financing of solar projects.

We continue our growth in pricing policies undertaken in the first quarter to take advantage of the demand that exists, and strengthened our relationship with our top tier clients. We are therefore able to reach terms with customers that are mutually beneficial for both parties, while maintaining the potential for future growth.

These clients remain geographically diverse and during the quarter we continued to expand our international business [progress], due to the planning of a framework agreement and a sales contract with an Italian solar module manufacturer, and a framework agreement and follow-on sales contract with downstream customer in South Korea.

Due to a [way] execute sale of internal strategies and the moderate recovery of the solar market, we returned to profitability during the quarter. However, as I will outline shortly, the sales environment has not fully recovered. Although we believe that China Sunergy has a greater market share now than a year ago as we are shipping more solar products within a smaller market. We must continue to work diligently to position ourselves for profitable growth with the still challenging marketplace.

I would now like to turn the call to Richard Gu, our VP of Sales and Marketing for a discussion of some important developments. We’ll then review our financial results before we discuss how we anticipate for the next few quarters.

Richard Gu

Thank you, Allen. I would like to take a few minutes to update everyone on some recent channel development. Over the past quarters, we have worked hard to ensure that relationships between China Sunergy and our customers have grown stronger even as we explore new technologies and opportunities across various geographies.

We have expanded our client relationship and business development department to ensure our clients have the dedicated support they decide through sales cycle, and have continued to build out channel development.

We have more aggressively sought out additional US clients and look to open our US office during the fourth quarter. We maintained our European customer base while securing new clients including Renergies Italy by ramping up sales and services within our European office.

We made a progress with existing and potential clients in Asia, specifically Korea and Australia, and have submitted applications for 11 megawatts of future Chinese projects. Acting jointly with our related party, CEEG, we are working to secure an additional 20 megawatts of solar project.

We have further deepened our relationships with key customers during this period of tightened credit market by providing a level of supply credits. This being adapted prudently and with full coverage by the China Export & Credit Insurance Corporation, and will be kept under tight control. This is one step we are taking as we proceed cautiously with regards to our shipment strategy.

There are limits to the supply credit we will offer and if the credit environment remains tight. We may choose to actively limit shipments until a more favorable credit environment exists. Our client relationships have led to another promising trend for our product offerings, as we have had customers and end users requesting the supply of modules from China Sunergy.

Over the past quarters, we have begun to supply customer with modules produced using our solar cells and the OEM arrangements. While we are not producing modules in-house and the volume is limited at this time, we expect these OEM module agreements to become [slight late of credit] to our gross margin levels going forward as contract volumes increase.

With that, I would turn the call over to our Head of Investor Relations [Randy Law] who will talk through the financial results on behalf of our CFO. Randy?

Randy Law

The results that I will be discussing are denominated in US dollars and have been prepared under US GAAP except where noted. In the second quarter of 2009, our revenue increased 89.5% sequentially to $70.1 million. Revenues generated from solar cell sales were $54.5 million, representing a 58.4% increase compared to the first quarter of 2009.

Gross profit for the quarter was $6.8 million, compared to gross loss of $8.8 million in the first quarter of 2009. This negative gross margin of 9.7% compared to negative 23.7% during the first quarter of 2009, which was largely due to improved wafer costs and the better conversion costs due to higher utilization rate.

Blended ASP for the second quarter declined to $1.44 per watt from $1.64 per watt in the previous quarter due to continued decline in sales pricing. In the second quarter of 2009, blended wafer costs declined to $0.96 per watt compared to $1.61 per watt in the first quarter of 2009, as we continue to purchase raw material on the spot market.

Although the spot market continued to provide strong pricing benefit, we have noticed a reason to stabilizing wafer cost due to continuing erosion of ASP. However, we believe that wafer costs will continue to trend with ASP over the long term.

Other production costs which mainly consisted of other raw materials, labor, and utilities were $0.31 per watt compared to $0.37 per watt in the first quarter of 2009.

Wafer costs per watt as a percentage of total production costs per watt declined from 81.4% in the first quarter of 2009 to 75.2% in the second quarter of 2009, largely due to our improved utilization rates during the second quarter.

SG&A expenses in the second quarter of 2009 were $3.6 million compared to $5.1 million in the second quarter of 2008 and $6.1 million in the first quarter of 2009.

G&A expenses in the first quarter included a $1.4 million of bad debt provision for account receivables, while we reversed $0.4 million of provision in the second quarter. Net profit for the second quarter was $1.7 million, an improvement compared to the net loss of $15.9 million in the first quarter of 2009.

Regarding our balance sheet, we remain financially healthy and we have been operationally cash flow positive since the first quarter of last year. As of June 30, 2009, we had cash and cash equivalents of $89.8 million, and the net operating cash flow for the second quarter was $19.5 million.

In the second quarter of 2009, depreciation and amortization was $2.5 million, and capital expenditures was $3.9 million, which included the remaining payments for equipment relating to the company's selective emitter cell lines.

For the remainder of 2009, we will continue to positively manage our balance sheet whilst upholding our commitment to providing mandatory capital to the ongoing advancements we are making to our solar cell product. We have also taken some important proactive financial steps. During the quarter, we have worked closely with [Panasure] to reduce risk of our accounts receivables as we are providing greater levels of supply/credit to our customers.

We also conducted a repurchase of some of our convertible bonds at a reasonable price. We are hedging a portion of our forecasted sales to limit our exposure to currency fluctuations. These all helped reduced potential risks to our financial performance and increased the stability of our company.

Thank you and I will now turn the call back to Allen.

Allen Wang

Thank you, Randy. As we look into the third quarter and full-year, while we will continue to execute the strategies we implemented at the beginning of the year. We still face significant financial challenges, including declining ASP and the resulting pressure on our margin levels. The ongoing recovery of the financing environment was not as robust as we anticipate earlier in the year. It is evident, given the growing demand of supplier credit.

At this moment we believe that the market will continue to recover, however at a more moderated rate, being our previous guidance as being based. We now anticipate shipment growth to remain solid but below previous expectations with third quarter shipment of 48 megawatts to 55 megawatts.

Given the pricing trend and the strong pricing competition we are now seeing for the third quarter, we expect that the third quarter gross margins will be flat from the second quarter of 2009. These margin levels are being impacted by a lower than expected ASP and the higher conversion cost due to lower utilization rates.

We remain confident in our ability to achieve shipments within the announced full-year guidance range of 150 megawatts to 200 megawatts. However, due to our more conservative view of the credit environment recovery we do anticipate shipments being towards the lower end of the range for the 2009 full-year.

In conclusion over the second quarter we effectively managed our business and delivered better than expected results and I continue to believe that China Sunergy has a strong combination of dedicated employees, industry leading technologies and strategic vision.

This concludes our prepared remarks and we will like to open the call for questions, operator.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Lu Yeung from Bank of America/Merrill Lynch, please proceed.

Lu Yeung - Bank of America/Merrill Lynch

I have a question on your third quarter guidance. You basically your utilization is down while your guidance shipment is up and your inventory is slightly down from the first quarter. And also what kind of pricing do you expect from the second quarter going to the third quarter and with your poly, I mean, your wafer cost now probably down to the spot price do you expect split it out from your material cost?

Allen Wang

I think for third quarter we experienced so far the ASP and wafer cost probably drop in the same rate roughly 10% to 12%.

Lu Yeung - Bank of America/Merrill Lynch

And what was that in the orders that sell ASP for you in the second quarter?

Allen Wang

The ASP for sale is 1.44.

Lu Yeung - Bank of America/Merrill Lynch

1.44. And your wafer costs blended wafer costs in second quarter?

Allen Wang

$0.96

Lu Yeung - Bank of America/Merrill Lynch

$0.96. And why do you say utilization is down from the second quarter?

Allen Wang

No. The utilization is up compared with second quarter, but it was not as high as we originally based on our gross margin.

Lu Yeung - Bank of America/Merrill Lynch

I see. Also one follow-up question is, do you have portion of your high performance selective emitter cell shipment in the second quarter?

Allen Wang

Yes, I think. Let me check. We shipped about 45% in high efficiency cell.

Lu Yeung - Bank of America/Merrill Lynch

Do you have the breakdown for selective emitter?

Allen Wang

I don’t have breakdown with me, but I can send out to you. I think right now, we don’t really differentiate that much. Anything over 70% we will consider as a high efficiency cell. So we’ll put all those statistics together.

Lu Yeung - Bank of America/Merrill Lynch

I see. Has there any change in your average conversion efficiency from second two quarter?

Allen Wang

There are some minor improvements.

Operator

Your next question comes from the line of Paul Clegg from Jefferies. Please proceed.

Paul Clegg - Jefferies

Thanks for taking my question. I admit, I got a late start looking at the results this morning here. I see reported ASPs of $1.44 as you mentioned. Your total shipments were 41.5 and if I tally those, I’m getting something like $60 million, but you reported 70 million in revenues. So I apologize if this is in the press release, but what am I missing, where is the additional $10 million roughly coming from?

Randy Law

For this, I guess you may notice the difference in your model and what we disclosed today. Yes, you are right, actually your model, I think your [collected] is right. This time actually, for our total $70.1 million of sales revenue $10.58 million is the sales out of the revenue from our sales of raw material. Okay.

Paul Clegg - Jefferies

Sales of raw material.

Randy Law

Yes. We have come to find to see arrangement, poly.

Paul Clegg - Jefferies

I know that you have done that in the past. Can you just remind us why that occurs, why are you selling raw material and how we could maybe anticipate that in the future, if there is a way to anticipate how much raw material you might sell? Why it is that you are selling raw material?

Randy Law

We got to see something new for this quarter. Actually for this quarter because as far as I know we have some good channel to allow us to produce at a good price of the poly, then we would not do cell. As poly to some of our supplies actually, then we can realize some gross margin from this sale, okay?

The benefits if I do so is that that we can reunite some gross margin and we can take advantage of the chance to buy from a spot market to get us some poly at a very good price and we can have a better control on the quality of the wafers from the suppliers.

Paul Clegg - Jefferies

What kind of gross margin are you getting then on the sale of, is it wafers or is it poly or is it both? What kind of gross margins are you getting in selling them?

Randy Law

Paul I think it’s [neatly] more than 10%.

Paul Clegg - Jefferies

More than 10%?

Randy Law

Yes, 12% for, if I give you preset number.

Paul Clegg - Jefferies

Okay. That was on about 10.6 million and is that mostly poly or is that mostly wafers, or is it both?

Randy Law

Poly.

Paul Clegg - Jefferies

So all poly, okay. I just have one follow-up question. There have been a lot of articles recently focusing on the liquidity levels in the Chinese banking system and it looks like your debt is down a little bit. Of course, your cash is also strong, but can you talk about how much you have under existing bank loans and whether or not you think there has been any sort of noticeable change in the behavior of the banks that you deal with, with respect to their ability and their willingness to lend just to all companies in China?

Randy Law

Sure, Allen, this question is to you.

Allen Wang

You may notice that from last year to this quarter, the balance of our short-term banking loan has reduced, okay. Like first quarter we ended up with $76 million I believe. The reason, I think there were several reasons. Like one of the multiple reasons I guess is we did so, on purpose, which means it must because we cannot secure enough credit from the banks by just cut of the change in the markets. We do not need very significant banking loans to support our business.

So you can see actually at the same time this quarter we still ended up with positive operational cash flow at $19.5 million. That’s evident. On the other hand, this probably means that we don’t want to get enough credit from the banks and actually we have good relations with all our banks, if I start giving updates as of like days ago we had around $170 million of credit and around 20% to 30% is untapped, okay.

Paul Clegg - Jefferies

20% to 30%?

Randy Law

Yes.

Paul Clegg - Jefferies

Okay.

Randy Law

And at the same time we are all, at this stage we are working on possibly another significant [application] and we may be able to see the results, but right now I must have more and because this is not done yet.

Paul Clegg - Jefferies

Okay. I am sorry one more question. You are 100% spot wafers at this point?

Allen Wang

I am sorry, Paul again.

Paul Clegg - Jefferies

If we look into the third and the fourth quarter, are you 100% on spot wafers at this point or do we have some [contracts] …?

Allen Wang

Yes.

Operator

Your next question comes from the line of Rob Stone from Cowen and Co. Please proceed.

Robert Stone - Cowen & Co.

Just trying to go through the gross margin build up a little bit more, if I use a 12% gross margin on other revenue that you just mentioned, then I have to get to a much lower margin on something else. And if I use the wafer and processing costs that you just cited, I end up with an above blended gross margin on cells. I guess the difference might be that you had some higher costs sells to an inventory that would never reflect the wafer and processing costs you just mentioned?

Randy Law

Hey Paul. Sorry Rob this Randy. Yes, for this question, I think you may, let me give you some explanation on the (inaudible) in the gross margin of the raw material sales and the overall gross margin of the quarter, okay. Therefore I think you may not be correct on your calculation or assumptions that if you club in the raw material gross margin, then our gross margin will be lower.

Actually if we take out the [spell] of raw material, our gross margin for the second quarter is around 11.4%, it's actually higher and way for [outcome] and for the, if we do the calculation, we can, you can assume that if we do not adjust this sale of raw material then we can -- right from the spot market to get the wafer and then to you need a full production of the solar cells. In our model, we can take legally out the revenue of raw material out of the gross profit, will still be the same, something like $6.8 million. So you can (inaudible) $6.8 million divided by around $60 million, then you come out 11 point something, 11.3 or 11.4% in gross margin.

Robert Stone - Cowen & Co.

Now I guess, rather than getting confused with what the impact is of the buy-sell transaction. I’m just trying to get a sense of the one question was the gross margin on modules, since you are hoping to ramp up that business and then approximately what the gross margin was on sales that you actually shift in the quarter, we can calculate it for production based on the wafer and other costs that you gave. But what were approximately the gross margin on sales and modules actually shipped in Q2?

Allen Wang

The margin on modules will probably increase our normal margin by 1% to 2%, because those modules are made under the OEM arrangement. So, we won't be able to benefit the full extent of the gross margin based on our internal calculation. If we sell cells versus we sell modules under the OEM, the difference is only 1% to 2% at the moment. But if we have the full grown module sales, well if we make those in-house our self which we do not do right now, then the increase probably will be more than 7%.

Robert Stone - Cowen & Co.

Sure. But, I have to assume that you are -- because you are doing it under OEM arrangements, I'm guessing that your effective gross margin just on the scale of the modules including the pass through cost is somewhere in single-digits, is that not correct?

Richard Gu

I don’t believe so, I think the, well, I don’t have the ratio, but for sure the module sales we made give us additional gross margin in terms of absolute a month, whether you diluted the gross margin ratio which maybe the case.

Robert Stone - Cowen & Co.

You mentioned that Wafer costs were stabilizing in the market, so you'll have an effective decline of 10% or 12% in Q3. Where do you think Wafer costs are going to be in Q4?

Richard Gu

It's hard to predict. Actually we don’t have a good visibility on the Q4 price but we anticipate it will probably continue to drop. While the numbers we got in terms the poly silicon price, we probably are around that $50 per kilo.

Robert Stone - Cowen & Co.

Do you expect to continue reducing the conversion costs, the non-wafer costs in Q3-Q4, what's the trend there?

Randy Law

We continue to expect some reduction in Q3, maybe 3% to 5%.

Robert Stone - Cowen & Co.

With respect to your full year shipment guidance, if I use the 150 megawatts low end of the range that implies down sequential shipments in Q4. Is that the trend you're seeing?

Randy Law

That’s our conservative view. Right now, the visibility, we have some visibility into October and November, but it's still too far away to talk about December. So internally, we are using a smaller number for Q4.

Robert Stone - Cowen & Co.

But it comes into a range of something less than 40 megawatts probably?

Randy Law

We will probably say higher than that.

Operator

Your next question comes from the line of Pranab Sarmah from Daiwa Securities. Please proceed.

Pranab Sarmah - Daiwa Securities

I have a couple of questions. The first one is, those China project 11 megawatt, do you expect any contribution to come by 4Q this year?

Allen Wang

Well, this project is submitted to the government approval. Once it is granted with the permit and we don’t know the timing yet, but probably it will be starting at the end of the year and starting of next year.

Pranab Sarmah - Daiwa Securities

What type of average selling prices you expect on those projects. Those are I guess complete system projects for you, right?

Allen Wang

Well, I guess it depends on the design because the local project they are requiring for BIPV system which is including rooftop and also the other parts of the PV products. So it still depends on the different designing stage.

Pranab Sarmah - Daiwa Securities

Could you also give us your customers' breakdown by geography on Q2 and how you think that will come out on the second half of this year?

Allen Wang

Our major customer is still in European and China market. We maintained a very strong current customer base. Of course, we will further develop the market including in the US and also in the Asia-Pacific. So if you give me the specific number in Q2 for the domestic which remember accounts for 60% out of total revenue and overseas is 40%. In Q2, the European, if we are talking about European alone, is 30% and Asia-pacific accounts for 1.8% and USA plus Australia is 6.5%.

Pranab Sarmah - Daiwa Securities

6.5%. Got it.

Allen Wang

We are seeing that in Q3. We more or less would maintain such kind of trend.

Pranab Sarmah - Daiwa Securities

You already mentioned like your poly prices you expect to come down $60 probably in the 4Q. What is the average poly price you’ve seen on the Q3, $70 or?

Allen Wang

I think we have dropped 60, 70.

Pranab Sarmah - Daiwa Securities

60 to 70. For next year, are you looking any poly quotes below say $50 price for 2010 delivery?

Allen Wang

We don’t have that visibility yet.

Operator

(Operator Instructions). Your next question comes from the line of Arch Pei from JLM Pacific Epoch. Please proceed.

Arch Pei - JLM Pacific Epoch

Yesterday, the State Council of China announced in their meeting that they will try to control the excess capacity building in renewable energy industry in China. Do you think the solar companies in China would be negatively affected by this policy environment?

Allen Wang

We saw the news. I think we are the one, we believe we are the leading technology and our product is in demand. So we don’t see immediate impact to us yet.

Arch Pei - JLM Pacific Epoch

So you don’t think that because you still have capacity expansion plans in next year, you don’t think your capacity expansion plan will be negatively affected?

Allen Wang

No, I think our capacity, we are going to expand next phase of N-type high efficient cells that I don’t think too many people can provide that. So in that sense, that is no oversupply.

Arch Pei - JLM Pacific Epoch

A follow-up question. Do you think your [marketing] costs for N-type cell will be higher or lower than the current [marketing] cost now and because as I said that your N-type cell lines may have higher depleting costs than normal cell lines. So maybe in fact [marketing] costs will be higher?

Allen Wang

We do know that the N-type processing takes you more steps and take a higher CapEx, but we actually also believe that the ASP generated on those N-type will be much higher than their additional costs, even though today we did not really cost the (inaudible).

Arch Pei - JLM Pacific Epoch

All the (inaudible), the people are talking about the NDRC feed-in-tariff plan for a very long time and do you believe that NDRC will issue the (inaudible) and will this stimulate the Chinese domestic, foreign market this year and next year?

Allen Wang

I'm sorry. I didn’t quite a follow your question.

Arch Pei - JLM Pacific Epoch

I mean that the NDRC, feed-in-tariff, FIT program. People are talking about it for a very long time. Do you think it will come out very soon and do you think the Chinese domestic market will be stimulated very soon?

Allen Wang

Well, I think just like everybody, we have our own view. One of the views we heard is that probably towards the end of the year, kind of next year, that probably will me materialized, but that’s just a guess.

Operator

Your next question is a follow-up from the line of Lu Yeung from Bank of America/Merrill Lynch. Please proceed.

Lu Yeung - Bank of America/Merrill Lynch

What will be the tolling percentage for the third quarter?

Allen Wang

I'm sorry, I need to check the number.

Lu Yeung - Bank of America/Merrill Lynch

Do you think that the percentage of (inaudible) will remain roughly the same or you'll have more?

Allen Wang

I think it will probably remain the same, maybe a little bit going up. You are talking about module, right?

Lu Yeung - Bank of America/Merrill Lynch

No, not modules, OEM sales, the [tolling].

Randy Law

OEM sales. Hi, this is Randy, maybe I can try to give you a number. Actually I think we have number in the press release it is almost little less than 1%, okay, over of the total sales in Q2.

Lu Yeung - Bank of America/Merrill Lynch

Right. So, that will remain roughly the same into the third quarter?

Randy Law

Yes, I think Q3, its, the changes will be very minimal.

Allen Wang

Yes. Well within the statement.

Lu Yeung - Bank Of America/Merrill Lynch

How much modules do you ship in terms of megawatt?

Allen Wang

In Q2?

Lu Yeung - Bank Of America/Merrill Lynch

Yes.

Allen Wang

Two megawatts.

Lu Yeung - Bank Of America/Merrill Lynch

Two megawatts and that will remain the same in the third quarter?

Allen Wang

Could be slightly higher.

Lu Yeung - Bank Of America/Merrill Lynch

Okay and also a house keeping questions for your operating expense. Will it remain the same, roughly the same as a percentage or so in the third quarter?

Randy Law

Hi, this Randy. As for the, can you repeat your question again? Sorry.

Lu Yeung - Bank Of America/Merrill Lynch

The operating expense as a percentage of sales in the third quarter?

Randy Law

Yes, okay. You may notice that actually, in Q4 last year and Q1 this year, our OpEx of the total sales is relatively higher compared with the previous quarters in 2008 and that in this quarter it is the best to kind of normal level. And I believe the forecast of the total sales is around 10%, okay. And going forward, we should be able a [run] on this number I guess.

Lu Yeung - Bank Of America/Merrill Lynch

I see. Last question if I may. Any updates on the N-type development?

Allen Wang

I think the project is moving along well. We are continuing our progress and so commercialization.

Lu Yeung - Bank Of America/Merrill Lynch

Okay and would that be increased CapEx in Shanghai?

Allen Wang

Yes, the Board has approved the initial funding of $10 million.

Operator

Next question a follow-up from the line of Paul Clegg from Jefferies. Please proceed.

Paul Clegg - Jefferies

You’ve kind of just answered it, but let me see if I can get a little bit more here. I guess you talked a lot about build up of support in sales channels in Europe and particularly the US as you start to put some hires and people in the US. How does that affect your OpEx as we move forward? Should we model in additional operating expenses as we go into the particularly into the fourth quarter it sounds like as you set up your shop in the US?

Richard Gu

Well as we have intention to establish our US office, but I think at an initial stage it will be just involved with some sales expenses only rather than the other investment or CapEx.

Paul Clegg - Jefferies

Okay. So if we look at your operating expenses maybe it continues to go up whether as a percentage of sales it remains sort of what it is this quarter? Is that a fair way to look at it?

Richard Gu

Yes, more or less.

Operator

Your next question comes from the line of Rafi Hassan from FBR. Please proceed.

Rafi Hassan - FBR

I have a question on the poly price that you said, it's going to go down by about 3% to 5% in the third quarter did I hear that right?

Allen Wang

You told of poly price?

Rafi Hassan - FBR

Yes.

Allen Wang

No, I would say that we had some study; we expect that the poly price were coming down prior to the $50 level.

Rafi Hassan - FBR

And by the year end or by the end of third quarter?

Allen Wang

I think from middle towards the end of the fourth quarter.

Rafi Hassan - FBR

Okay and can you talk about a little bit about your sale expectations. Right now it's 144, where do you see it by end of third quarter and by end of the year?

Allen Wang

Well I think for Q3 we talk about the ASP may have like to 10% to 12% moment downward. We don’t have a good visibility on Q4 yet.

Rafi Hassan - FBR

Your utilization rate, do you expect that to improve from third quarter to fourth quarter?

Allen Wang

I think between third quarter and fourth quarter, we’ll probably stay flat.

Rafi Hassan - FBR

Can you define it in percentage, what kind of utilization rate is there in your operations right now?

Allen Wang

It’s probably about 80%.

Operator

Your next question comes from the line of Arthur Freidman from Freidman Asset Management. Please proceed.

Arthur Freidman - Freidman Asset Management

I have two questions. The first one is, have you applied for any government or local province solar projects?

Allen Wang

Yes. I guess, we just mentioned that we had submitted 11 megawatts of the local projects to the government for their permit, and also we are jointly working with our related party CEEG that they also work on the 20 additional megawatts for those projects.

Arthur Freidman - Freidman Asset Management

Second question is, in terms of your overall business strategy and your position in the value chain, have you looked at partnering with another company to provide, in other words your cells and then module assembly for solar power plants because that’s a big area, that a lot of companies are getting into?

Allen Wang

I think this is well the area we’re looking right now and I think that while we’re working with our related CEEG and those are the projects which will involve those kinds of product.

Operator

Your next question is a follow-up from the line of Pranab Sarmah from Daiwa Securities. Please proceed.

Pranab Sarmah - Daiwa Securities

Thanks for taking my question, a very simple on. On second quarter, what is the average selling price difference for the high performance cell versus non-high below 17% versus above 17% ASP difference?

Allen Wang

Well, in the current market situation, we try to adopt aggressive pricing strategy. The main important is we try to obtain as much as volume we can. So we try to maintain that at competitive level. Am I answering your question?

Pranab Sarmah - Daiwa Securities

Actually not really because what I was looking for is, what is the price difference? Suppose a 15% conversion efficient cell and versus 18% conversion efficient cell.

Allen Wang

Okay, let's say it this way. Just as I mentioned that above 17% we regard as kind of a high efficiency cell and below 17% is relatively low of cost there is a price difference. It depends customer by customer, but roughly like 3 to 5% but if there is efficiency even lower, the gap will be bigger.

Pranab Sarmah - Daiwa Securities

So 3% to 5% is a normal difference, I got it. Okay, thank you.

Operator

At this time, we have no further questions in queue. I would now like to turn the call back over to management for closing remarks.

Allen Wang

Thank you for your attention, and I look forward to updating you on our progress in the future.

Operator

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

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Source: China Sunergy Co., Ltd. Q2 2009 Earnings Call Transcript
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