A-Power Energy Generation Systems, Ltd. Q2 2009 Earnings Call Transcript

Aug.27.09 | About: A-Power Energy (APWR)

A-Power Energy Generation Systems, Ltd. (OTC:APWR) Q2 2009 Earnings Call August 27, 2009 8:00 AM ET

Executives

Valentine Ding - Grayling

Jinxiang Lu - Chairman and CEO

John Lin - COO

Peter Mak - CFO

Analysts

Sam Dubinsky - Oppenheimer

Pavel Molchanov - Raymond James

Joe Maxa - Dougherty & Company

Brian Yerger - Erica Advisors

Elaine Kwei - Piper Jaffray

Walter Fellow - Turnberry Capital

Louigy Rocco - RBC Dominion Securities

Operator

Good day ladies and gentlemen and welcome to A-Power Energy Generation Systems, second quarter 2009 Earnings Call. My name is [Keisha] and I'll be your operator for today. (Operator Instructions)

I would now like to turn the call over to Mr. Valentine Ding of Grayling. Please proceed.

Valentine Ding

Thank you, [Keisha]. If you have not yet received a copy of A-Power's second quarter 2009 earnings press release, it is currently available on the English version of the company's website at www.apowerenergy.com. A link to the live webcast is also available on the English version of our website.

Before we start, I would like to remind you that managements prepared remarks contain forward-looking statements that are subject to risks and uncertainties, and management may make additional forward-looking statements in response to your questions. Therefore, the company claims the protection of the Safe Harbor for forward-looking statements that is contained in the Private Securities Litigation Reform Act of 1995.

Actual results may differ from those discussed today. Due to such risks as but not limited to inclement weather conditions, construction, manufacturing and development delays on our projects. Outside factors that can influence the development of our wind turbine business, our limited operating history and recent entrance into new markets and wind turbine business, various MoUs we signed with third parties, which may not evolve into definitive contracts. Potential difficulties working with our joint venture partners, potential difficulties completing the acquisition of our intended targets are decreasing the rate of growth of China's industry and the economy and other information detailed from time to time in the company's filings and future filings with the United States Securities and Exchange Commission.

Accordingly, although the company believes that the expectations reflective in such forward-looking statements are reasonable. There can be no assurance that such expectations will prove to be correct. In addition, any projections as to the company's future performance represents' management's estimates as of today August 27, 2009. We undertake no obligation to correct or update any forward-looking statements provided as a result of new information, future events or even changes in our expectations.

Joining us on today's call are Mr. Jinxiang Lu, Chairman and CEO, Mr. John Lin, COO and a Director and Mr. Peter Mak, our CFO. As we will be translating all questions and answers, we ask for your patience at that time. Mr. Lu the Chairman will now deliver his opening remarks. Please go ahead sir.

Jinxiang Lu

[Foreign language]

Good morning and for those in China, good evening. During the 2009 second quarter, we entered two key strategic steps in the forward-looking efforts to build a foundation for [progressive] significant future growth. We devoted more time to upgrading our DG engineering service by creating additional value-added customized designs for biomass-powered micro grid systems, which we believe will be beneficiary for building our track record in this faster-growing biomass sector.

On the new business front, we successfully signed several large scale DG contracts that boosted our customer deposits and paved the way for a significant growth in the near future. We entered into an MoU to construct a large offshore LNG complex and hope to sign definite documents before the end of this year.

We are also continuing to negotiate with Advance Agro Public Co. Limited of Thailand, to expand the PP9 and PP10 DG projects that we started in July 2009. With Shenyang government's declared support for our majority owned DG industry alliance, Shenyang Power Group, we are well positioned to win high-profile contracts for DG systems and micro power grids both in China and overseas.

As for our wind energy business, we are pleased that we have finished the assembly of the first two units of the 2.7MW wind turbines, and are now waiting for government approval of the Daxinglong Mountain Wind farm in Liaoning Province, with installation expected to begin by early September.

We have also secured customers for all of our first 30 units of the 2.7MW wind turbines, a substantial portion of which we anticipate will all shift by the end of this year. In addition, by August of next year, our JV with GE Drivetrain is expected to commence trial production, followed by commercial production to supply into our wind turbine facilities next year, located just 10 minutes away in the Hunnan New District of Shenyang City

Our newly acquired proprietary technology for the 1.5MW wind turbines and our newly established JVs with Jiangsu Miracle to produce low cost of wind turbine components such as blades, hubs and nacelle covers could start adding to our competitive advantages to become a foreign-partner- supported, low cost, vertically integrated supplier of 750 KW to 2.7MW wind turbines in China's hyper-growth wind power market.

Looking forward, we will continue to capitalize on China's faster growing clean energy market and leverage our recent partnerships and acquisitions. According to estimates by HSBC, China is going to spend 34% of its fiscal stimulus to boost its clean energy power generation capacity. This commitment is expected to help China attain its goal of installing 10GW of solar power and 120GW of wind power capacities by the year 2020, compared with just the over 100MW of solar and 12GW of wind for solar and wind respectively at the end of 2008.

In the near term, the Chinese government is subsidizing up to 70% of the cost of developing a large scale solar [station] and is at the same time enabling state-owned power companies to build seven wind farms in various parts of China's [wind part], each with capacities of over 10GW.

Lastly, the government has recognized the crucial issue of technician and is installing new high powered lines in solar and wind abundant regions like Inner Mongolia, Heilongjiang and Jiangsu to connect the solar and wind stations to the grid.

To compete effectively in such a variable macro environment, we will continue to implement the strategy of partnering with the best of technologies in the world. At the same time pursuing vertical integration to be a low-cost of wind turbine producer in China. We anticipate the various partners, and acquisitions we recently started or completed will gradually integrate into a robust business in one of the world's fastest growing wind power market.

With that let me turn the call over to our CFO Mr. Peter Mak to read to you our financial results. After the prepared financial review, I will come back to take your questions. Thank you.

Peter Mak

Thank you, Chairman. Before we start, I’d like to state that all our numbers are presented in US dollars and are unaudited. I will read to you the numbers first then I shall provide some comments on the recent operating highlights and our business outlook.

For the second quarter ended June 30, year 2009, our revenues were $57.5 million compared with $65.7 million in the second quarter of year 2008, if you can was primarily because of the delays in some of the DG projects due to the competitive of the designs customized micro grid electricity generation systems using biomass as fuel. All revenues in the second quarter of year 2009 and year 2008 were from A-Power's DG operations.

Gross profit was $7.7 million, compared with $8 million in the same period of year 2008. Gross margin was 13.4%, a slight increase over 12.1% in the same period of year 2008. Gross margin expanded in second quarter '09 mainly because of higher efficiency derived from cost savings in labor as we undertook larger 30MW-plus DG projects.

Selling, general and administrative expenses were $3 million, compared with $2 million in the same period of year 2008. SG&A as a percentage of revenue was 5.2%, compared with 3% in the same period of year 2008.

We incurred higher SG&A expenses mainly through professional consulting, salaries, stock-based compensation, insurances, office rentals, and other miscellaneous costs, mostly associated with being a public company.

Operating income was $4.7 million, compared with $6 million in the same period of year 2008. Net income attributable to A-Power shareholders was $6.3 million, compared with $6.2 million in the same period of year 2008. Diluted earnings per share, EPS, were $0.14, compared with $0.18 in the same period of year 2008.

For the second quarter of 2009, the weighted average number of shares on a fully diluted basis was $35.3 million as compared to $33.9 million in the same period of year 2008.

Now let me move to review our first half years results for year 2009.

For the first six months of year 2009, we generated revenues of $88.7 million compared with $98.1 million in the same period of year 2008. Gross profit was $11.6 million, compared with $11.8 million in the same period of year 2008. Gross margin was 13.1%, compared with 12% in the same period of year 2008.

SG&A expenses were $5.6 million, compared with $3 million in the same period of year 2008. Operating income was $6.1 million, compared with $8.8 million in the same period of year 2008. Net income attributable to A-Power shareholders was $7.8 million, compared with $9.1 million in the same period of year 2008. Diluted EPS was $0.19 in the first half of year 2009 compared with $0.34 in the same period of year 2008. For the first half of year 2009, the weighted average number of shares on a fully diluted basis was $35 million as compared to $27.1 million in the same period of year 2008.

Now, let me to give fully cash position and cash flows. As of June 30, year 2009, we have cash and cash equivalents totaling $128.7 million compared with $60.6 million as of March 31, year 2009.

Operating cash flow; in the first half of year 2009 was $45.4 million compared with $1.2 million in the same period of year 2008. Capital expenditures in the first half of year 2009 totaled $3.2 million compared with $17.7 million in the same period of year 2008. Total shareholders' equity rose to $168.1 million at June 30, 2009, from $157.5 million at March 31, 2009.

At this point, I would like to turn the call over to our COO, John Lin to share with you our most recent developments and our business outlook. John?

John Lin

Thank you, Peter. On August 21, 2009, A-Power adapted a shareholder resolution at our Annual General meeting holding at Shenyang, China. Among the resolutions proposed and adapted was the issuance of any common shares issuable pursuant to the terms of the A-Power senior convertible notes or the terms of the company warrants, in accordance with the Memorandum and Articles of Association of the company and NASDAQ listing rule 5635(d).

For more detailed information regarding those resolutions, please review the notice of 2009 Annual General Meeting, posted in the Investor Relations section of our website, as well as the SEC website.

On August 18, 2009, we announced a definitive agreement of two joint ventures with the Jiangsu Miracle Logistics System Engineering. The JV will mainly engage in manufacturing and sell key wind turbine components in China.

On August 12, of the year 2009, we announced a memorandum of understanding to acquire 100% of the share of EVATECH of Kyoto, Japan, a 22-years old designer and manufacturer of industrial equipment of LCDs and PDPs. The all-cash transaction is initially valued at $50 million, and is expected to be primarily funded through a combination of the government subsidies and loans.

Government subsidies expect an amount of 40% to 45% of the total purchase price, and auditors in Japan are currently preparing a finance [opening] for the transaction. A-Power expects to sign a definitive purchase agreement with EVATECH in September and close that transaction by the end of November year 2009.

On July 28, year 2009, we announced an agreement with Shenyang Huaren Wind Power Technology Development to acquire Huaren technology and commercially produce and sell 1.5MW grade wind turbines. In addition, A-Power has agreed to fulfill Huaren's back order of 10 units of the same turbine with the customer in China.

On July 27, year 2009, we finished assembling of the first two 2.7 MW wind turbines, which are contract by Daxinglong Mountain Wind Power Generation Plant in Jinzhou City, Liaoning Province.

On July 10, year 2009, we announced that Shenyang Power Group, A-Power majority-owned the local DG industry alliance, has signed a Memorandum of Understanding, MoU with Macau Natural Gas Company Ltd to construct offshore liquefied natural gas, LNG complex import, and store and also re-gasify LNG and distribute natural gas to Macau and elsewhere.

The projects will be an expansion expedition for MNG existing natural gas facility and the total cost of the projects is currently estimated to be $1.5 billion, according to MoU.

On June 24, 2009, we announced the closed our offering of the $40 million principal amount of the Senior Convertible Notes, plus warrants, the several institutional investors. Proceeds from the placement will be used primarily to secure components for A-Power's ramp-up of wind turbine assembly business.

Now let me give you our business outlook. Our reaffirming revenue and after-tax net income guidance for 2009of $320 million and $32 million. Those targets are based on the company's current DG contracts, which are subject to change when the company sign a new DG contracts and/or recognize the revenue from the wind turbine sales during year 2009. We expect that we will from the time to time provide periodic updates when additional major DG contracts and wind turbine sales are confirmed.

With that let me join Mr. Lu and Peter Mak to take your questions. Again we will require you to be patient when we have to translate each question and answers. Operator, please begin the Q&A.

Question-and-Answer Session

Operator

Ladies and Gentlemen please we ask that you limit your questions to two per person. (Operator Instructions). Your first question comes from the line of Sam Dubinsky from Oppenheimer. Please proceed.

Sam Dubinsky - Oppenheimer

Hey guys I have a few quick ones. You mentioned that some projects were delayed in Q2. Could you explain again, the reasons for delay, I just missed it on the call and also were any of these delayed projects canceled or just pushed out into the back half of the year. Then I have a couple of follow-ups.

[Foreign Language]

Jinxiang Lu

[Foreign Language]

Yes in Q1, for Q1 there's some projects in delay due to some other reasons and also due to some policy reasons or financial reasons. Just to say in Q2, some projects already restart and restart the construction. There still some of the projects continue to be delayed. For these delayed projects there is only a small portion of the total projects currently in construction progress.

Sam Dubinsky - Oppenheimer

Could you just discuss the rationale behind the EVATECH acquisitions, and also provide some of EVATECH's recent financial results for instance what were the revenue gross margins and net margin profile the company you are acquiring?

[Foreign Language]

John Lin

Okay this is John. About EVATECH acquisition, we have a process with the government incentive of about 42% to 45% supporting for this acquisition.

Jinxiang Lu

[Foreign Language]

So the EVATECH acquisition, the answer from Mr. Lu is like this. The total purchase price for this acquisition is in the amount of $50 million, and for this just a sum of the acquired, just sum of many, and almost like, say, 45% can be just got support from the various levels of the local governments.

Take example, for the Shenyang Municipal government, there we supported by 20% subsidy. For the Liaoning Provincial government, we provide another 20% in subsidy, in the Hunnan New District, and we provide 5% as subsidy. So, just for this acquisition, because the objects of this EVATECH company, it is a technology based background company. So its gross margin and in the future production can reach like 30%, not only for their products of the solar energy cell, say in the form of thin film.

For this technology and products, we want to apply it into the architecture, and that’s to be detailed to be applied to just a curtain glass wall and as thin film attached to the curtained glass wall, as we called, say, building integrated products.

So, also for this curtained glass wall, this building after attached to the thin film, and this building can also be regarded as a DC business, and we can do the detailings for the tall building. So, from these two levels, and we can provide a complete, just to say, production line by using this solar energy technology we acquired from EVATECH.

Also, if this technology can be applied to the curtained glass wall in the future as building integrated products then currently say the gross margin is 30%, after it is applied to the curtained glass wall it can be further improve the margin by another 10%. So the total will be 40% gross margin.

Also, for this EVATECH, Japanese company, they have two R&D centers and one production facility. Also, they have just a very strong technical force, with the professors from Tokyo University and also Osaka University and currently they are photovoltaic and conversion just a rate. In simple words, that's conversion rate from solar energy to electricity.

The current rate is 8%. In the future, by the further R&D, they promise they can reach as high as 13% to 15% for this conversion rate, and also we have a good partner. This is called Shenyang Power Group, and for all of this products by acquisition of EVATECH the future products and will be applied to the curtain wall we have just mentioned because for Shenyang Power Group they are the world’s number one curtain glass wall producer and the total annual sales can reach as high as $1.5 billion.

So by partnership with Shenyang Power Group, the product from this EVATECH acquisition will be just have a very broad range of use to the building material, and also meanwhile this solar energy technology can be integrated into our DG business as a complete just a service lines to the customers.

Also just to say we are very certain that we can get the parts from the Liaoning Provisional Government for sure for this project, because the governor of Liaoning Province have witnessed the ceremony of this project, and also we can just hold development for such acquisition to be a success. I do think that this low cost acquisition will generate a lot of future benefits to our investors.

Sam Dubinsky - Oppenheimer

Any chance we can get specific revenue guidance for Q3 and may be a 12-month backlog figure for the DG business? Thank you.

Peter Mak

We may consider revising our revenue guidance and so as the [top-line] guidance up on the third quarter earnings call. This is obviously subject to file out confirmation, and that we hope we will be able to revise it, given that our Chairman already announced that we have couple of new developments in the company.

Sam Dubinsky - Oppenheimer

The Q3 typically the peek for the year in terms of revenue, Q4 is typically seasonally weak. In your guidance you don’t include any wind business today. So should we assume that Q3 revenues are the high point for the year, and they decline in Q4 until wind kicks in?

Peter Mak

As I mentioned last time in the earnings call, last quarter, we only provide guidance on yearly basis. So I would not comment on the quarterly results.

Operator

Your next question comes from the line Pavel Molchanov with Raymond James. Please proceed.

Pavel Molchanov - Raymond James

First of all on Macau LNG project, can you specify the role that A-Power specifically will play in developing this project as opposed to the other partners and Shenyang Power Group?

[Foreign Language]

Peter Mak

The Macau LNG projects we just have signed an MoU, and the project like Liaoning GaoKe, which is A-Power subsidiary and ways to Shenyang Power partner will be joint venture with the Macau Natural Gas, it’s a two party will be the joint venture will set up the company and total with another Japanese company will be set up the Macau liquidity natural gas company will be holding this projects. The formal strategy will be announced by or assigned formal contract. Thank you.

Pavel Molchanov - Raymond James

Just as a follow-up on that is A-Power going to participate in the LNG plants construction or just in power plant that will be next to the LNG plant?

Peter Mak

I already answered this, we are joint venture with this project and we are holding this project and also if the projects will be going to power plant and also distribute LNG products also.

Pavel Molchanov - Raymond James

Last question is with regard to the EVATECH acquisition the government subsidies that you mentioned are those grants to A-Power or are they loans?

Peter Mak

They are grants.

Operator

Your next question comes from the line of Joe Maxa with Dougherty & Company. Please proceed.

Joe Maxa - Dougherty & Company

I wanted to get a little more color on the expectations for the second half. Obviously it’s a very back-end loaded with your DG business. Can you give us some color on which projects you are expecting to account for that roughly $230 million over the last six months of the year?

[Foreign Language]

Peter Mak

This is Peter Mak. Basically we have 17 contracts ongoing to date and then in the last quarter, the second quarter, a few of them relates to biomass as fuel project. We're subject to a little bit delay because we want to enhance the design to customize to clients needs and these designs has been completed. So we will be able to catch up with the revenue from these biomass projects. So your question relates to the second half of the revenue, I believe that our existing 17 contracts will continue to provide a basis for us to recognize revenue to achieve the remaining $260 million.

Joe Maxa - Dougherty & Company

How much of the revenue do you expect to come from your Thailand projects?

Peter Mak

Today, for under our revenue guidance of $320, we haven't yet included the revenue from Thailand. So, I don't think I could be able to comment this part in this section.

Joe Maxa - Dougherty & Company

Yet you indicated it started in July, so there may be some.

Peter Mak

I won't make a wild guess.

Joe Maxa - Dougherty & Company

Then I wanted to just talk about, you've mentioned you expect to shift those the majority of the 30 larger wind turbines, but you are not including those in your guidance. Why not?

Peter Mak

There are couple of reasons. First, we haven't yet finalized the revenue recognition policy with our auditors. I know I have mentioned this in our last quarter’s earnings call. Because of a lot of issues, in relation to the interpretation of the rules i.e. the US GAAP. So, I can not conclude today how much revenue that we could be able to generate and recorded in the books towards the end of the year. As our Chairman has mentioned just now, we strongly believe that whole of these 30 units, most of them would be able to deliver to our clients by the end of the year.

Joe Maxa - Dougherty & Company

The concern is you may not be able to recognize them upon shipments?

Peter Mak

Well, there are several factors for us to consider including, whether or not the inspections from our customers would be one of the criteria that we have to take in before we can recognize revenue. So it's not just [true] whether we can make it and ship it out. So it all depends on many factors, which I don’t think I would be able to comment here.

Obviously as a company we would like to do it, we would like to recognize it. I believe in the third quarters' earnings call, I will be able to give you an accurate and solid answer.

Joe Maxa - Dougherty & Company

One more question, you guys increased your authorized share count by 100 million shares. Are you expecting to raise additional capital and why would you need to do that?

Peter Mak

The primary reason is in relation to our 40 million convertible notes that we saw in late June, because we expect that some of these convertible notes would be converted into common shares. Given that our previous authorized share capital is only $15 million and we have already used [33.7] million in the market. So that’s why it's not sufficient to hold this convertible notes into common shares. That’s why we have increase the authorized capital by setting some.

Operator

Your next question comes from the line of Brian Yerger with [Erica Advisors]. Please proceed.

Brian Yerger - Erica Advisors

I just wanted to talk about the wind business real quick. You had mentioned that the first two wind turbines are completed. How long does it take for you to expect that new permit to be issued from the government? Are we waiting a long time or is this going to be finished soon?

[Foreign Language]

John Lin

Okay, this is John. Actually we have shipped to all kind, its (inaudible) have a feasibility study, it’s a 750KW turbines were installed in this area. Now we have 2.7MW to increase the size. So a specific qualification will be getting from the local government and also some like installation requirements. So we take our time not to turn around. We just push up over there. Thank you.

Brian Yerger - Erica Advisors

Since you are starting to ship these turbines, do you have a public pricing mechanism for the 2.7MW turbines?

John Lin

Can you repeat that again?

Brian Yerger - Erica Advisors

Sure. On the 2.7MW turbines, do you have a price estimate that you can release publicly?

Peter Mak

The price is very sensitive now, but we can say, we have first order from the state government of is up to RMB28 million per unit.

Operator

Your next question comes from the line of Jesse Pichel with Piper Jaffray. Please proceed.

Elaine Kwei - Piper Jaffray

Hi. This is Elaine Kwei for Jesse. I am sorry I might have missed a few minutes earlier in the call, but could you confirm what your production schedule looks like on the wind turbines side for the remainder of '09 and 2010?

[Foreign Language]

Jinxiang Lu

[Foreign Language]

Okay. So for the production schedule for this year 2009 for 2.7MW 30 units and 1.5MW 10 units, for 750KW 30 units and for these members we feel very confident because other components we already thought successfully and for next year consult a supplying of the components problem, we are partnering with GE and also with German company in Germany. This is to solve this components supply problem for gear box and other key components. I believe that for next year and even the year after that next year, just to say that the total quantity of product will be raised to vary large extent and say before the components are being just to say fulfilled and with sure figures, we cannot disclose to you the specific figures now. I can tell you that this quantity of products for next year and even the year up to next year could be very high and even as satisfactory as investors may imagine.

Also just to say the components for next year and most of the components can be made in China and say above 80% of the components for complete site of wind turbine should be made in China.

We have taken various kinds of measures, just recently to achieve the goal of made in China for the components for us to lower down the cost as quickly as just what we can do. Also just upgrade our competitiveness. Thank you

Elaine Kwei - Piper Jaffray

If I could just ask one more quick follow-up regarding backlog? Is there anything in there for wind and also the revenue guidance does that not include wind for '09, just to clarify?

[Foreign Language]

John Lin

The answer is yes; our revenue guidance doesn’t include any revenue to be generated from the sale of wind turbine business.

Elaine Kwei - Piper Jaffray

Do you have any sense of who you would expect your primary customers for the wind turbines to be?

[Foreign Language]

Jinxiang Lu

[Foreign Language]

Our primary customers may include just state-owned enterprises such as China Automation Control and also including some other Chinese enterprises which are very stably operated and occupying a certain share of the market share in Chinese market. Our strategic plan is that, we do not want always targeting for one or two key customers. We want you to start distributing our wind turbines to just various kinds of customers to just speed up our reputation in the market and influence in the markets. So although maybe for wind customers they have larger demands just about what we can supply to them, but we still want you to just to cover more customers other than only covering for one or two key customers.

Operator

Your next question comes from the line of [Walter Fellow] with Turnberry Capital. Please proceed.

Walter Fellow - Turnberry Capital

Yes. In response to the question from the woman at Piper Jaffray, you indicated that you had orders for 30 of the 2.7 MW units, and then 10 of the 1.5. You also mentioned that you had 30 of the 750 KW units, but I don’t see anything in the press release about those 750 MW units. Could you explain about that?

[Foreign Language]

Jinxiang Lu

[Foreign Language]

Actually our plan for this type of wind turbine some of them have joined the 50 KW, is to install this type of wind turbines in the wind farm on small island and because it’s a small capacity and so this is inline with the local weather conditions wind power resources, but we do want to produce this type of capacity of wind turbines and before we may not just highlight it, put it in highlight for the price release for this type of winter by production. So but, today I formally announce that for this year we do have the plan for 30 units of 750 KW and as our formal production schedule and we will produce for sure.

John Lin

Addition to that two units 750KW MoU, and not a formal contract yet. If we have singed a formal contract, we'll announce that.

Walter Fellow - Turnberry Capital

One other question I had for you is this. In the press release you state that you have secured customers for 30 of the 2.7 MW units. Given that back in I guess February of last year, you had announced that you would receive MoUs for 380 units. I'm a little concerned that so far you only have 30 secured contracts. Is this something that we need to worry about or is there some innocent explanation for this?

[Foreign Language]

John Lin

This is John. 380 is no change, because this is a two years contract and we have secured the 30 components only this year, so, we only can provide 30 units 2.7MW. We were thinking about next year, there will be fewer capacity for the orders, but we will be have several contract and the customer we need to take care. So, we not only give one customer and we will be giving several customer.

Operator

Your next question comes from the line of [Louigy Rocco] with RBC Dominion Securities. Please proceed.

Louigy Rocco - RBC Dominion Securities

Just wanted to clarify how and when you recognized customer deposits as income when a new contract is signed?

[Foreign Language]

John Lin

Yes, the timing of recognizing customer deposit is basically on cash received basis. Once we sign the contract, we require our customers to pay as deposit for a certain period of time, and then obviously when we received the money we will book it as bank balance.

It's different from the way that we recognize revenue, because on a percentage or commission basis according to the US GAAP, we could only recognize revenue based on the work progress.

So even if we receive deposit today, we may not able to recognize $0.01 until we really started to work, and with our endorsement from the vendor and endorsement from the customers. So this is the way that we recognize revenue.

Louigy Rocco - RBC Dominion Securities

So you maybe able to recognize some customer deposits you received in the second quarter, in the third or fourth quarter of this year.

John Lin

I would look it in a different direction. I would think that we continue to demand customers deposit by means of progress payment. So whenever we incur, whenever the work starts and work progresses, we will keep on building our guidance.

This is different in terms of the timing, in terms of the [matter]. It's different from the amount that we recognize revenue, because the revenue is based on the actual work incurred. Okay? Not in relation to the timing of money received.

So that means today sitting in our book $45 million customer deposit, a certain part of it very likely will be recognized as revenue in the third quarter.

There is no direct relationship between the customer deposit balances with the revenue recognized, because as I said the amount of revenue recognized all depends on the work progress. Thank you.

Operator

With no further question in the queue, I would now like to turn the call back over to Valentine Ding for closing remarks. You may proceed.

Valentine Ding

Thank you, Keisha. Thank you for joining us on A-Power's second quarter 2009 earnings conference call. We look forward to updating you on our third quarter 2009 results. Feel free to get in touch with us anytime if you have further questions, concerns or comments. Thank you everyone and have a great day.

Operator

Thank you for your participation in today's conference. This concludes the presentation, you may now disconnect. Have a great day.

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