LDK Solar Co., Ltd. Q4 2009 Earnings Call Transcript

Executives

Pia Kristiansen – IR, The Blueshirt Group

Jack Lai – EVP, CFO and Secretary

Xiaofeng Peng – Chairman and CEO

Xingxue Tong – President and COO

Yuepeng Wan – Chief Technology Officer

Analysts

Edwin Mok – Needham & Company

Lu Yeung – BofA-Merrill Lynch

Rob Stone – Cowen & Company

Paul Leming – Soleil Securities

Sunil Gupta – Morgan Stanley

Hendi Susanto – Gabelli & Company

Marianne Dolan – Moon Capital

LDK Solar Co., Ltd. (LDK) Q4 2009 Earnings Call Transcript March 30, 2010 8:00 AM ET

Operator

Ladies and gentlemen, welcome to the LDK Solar’s fourth quarter earnings call on the 30th of March 2010. Throughout today’s presentation, all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions. (Operator instructions) I would now hand the conference over to Pia Kristiansen. Please go ahead.

Pia Kristiansen

Good morning and thank you for joining us on today’s conference call to discuss LDK Solar’s fourth quarter 2009 financial results. This call is being broadcast live over the web and can be accessed on the Investor Relations section of LDK Solar website, www.ldksolar.com, for 90 days.

On today’s call are Xiaofeng Peng, Chairman and Chief Executive Officer; Jack Lai, Chief Financial Officer; Xingxue Tong, Chief Operating Officer; and Dr. Yuepeng Wan, Chief Technology Officer.

Before the market opened in the US today, LDK Solar issued a press release discussing the results for its fourth quarter 2009. We also filed a press release on Form 6-K with the US Securities and Exchange Commission. This press release is accessible online at the company’s website as well as the SEC’s website, or you can call The Blueshirt Group at 415-217-4961 and we will fax or e-mail you a copy.

We would like to remind you that during the course of this conference call, LDK Solar’s management team may make projections or other forward-looking statements providing future events or the future financial performance of the company made pursuant to the Safe Harbor provisions of the US Private Securities Litigation Reform Act of 1995.

Although LDK Solar believes that the expectations reflected in such forward-looking statements are based on reasonable assumptions, such statements are subject to risk and uncertainties that could cause the actual results to differ materially from those projected. We refer you to the documents that LDK Solar filed from time to time with the SEC, specifically the company’s most recent Form F-20 and any Form 6-Ks. These documents identify important factors that could cause the actual results to differ materially from those contained in our projections or forward-looking statements.

Now I’d like to turn the call over to Mr. Jack Lai, Executive Vice President and CFO, to go over LDK Solar’s fourth quarter 2009 financial results. Jack?

Jack Lai

Thank you, Pia. Good afternoon and thank you for joining us to discuss the results of LDK Solar for the fourth quarter of 2009. Net sales for the fourth quarter were $304.6 million, up 8% from $281.9 million in the third quarter. Wafer shipments, including our processing service business, increased 6.2% sequentially to 340.4 megawatts from 320.5 megawatts in the third quarter.

Wafer sales, which exclude the processing service business, increased from 257.6 megawatts in the third quarter to 288.1 megawatts in the fourth quarter. The average selling price was $0.83 per watt. Sales returns made in the fourth quarter of 2009 were $2.3 million. OEM shipments were 52.3 megawatts in the fourth quarter.

Module shipments were 23.2 megawatt in the fourth quarter, up from 9.4 megawatt in the third quarter. By geography, revenue in the fourth quarter was 37% generated from China; 39% from Asia-Pacific, excluding China; 20% from Europe; and 4% from North America. Our top 10 accounts in the fourth quarter accounted for 63% of total revenues, with the top three accounts combined accounting for 25%.

Gross margin in the fourth quarter was 9.9%. Our gross margin in the fourth quarter was primarily due to lower than anticipated ASPs in the fourth quarter. However, we would like to note that we have seen an improvement in ASP trends year-to-date.

Our wafer conversion cost was $0.32 per watt, and the average cost of polysilicon we consumed was $69 per kilogram. Operating expenses were $33.7 million in the fourth quarter, up from $19.5 million. Fourth quarter operating expenses included $12.2 million associated with the settlement of our class action lawsuit and associated (inaudible). Our share-based compensation expenses were approximately $2.4 million in the fourth quarter.

Operating margin in the fourth quarter was negative 1.1%. Government subsidies were $9.5 million. Net loss for the fourth quarter was $7.3 million, and loss per diluted ADS was $0.07. Depreciation and amortization was $18.8 million for the fourth quarter. Capital expenditures were $121.7 million in the fourth quarter, of which $35.5 million was for wafers and the remaining for the polysilicon.

Our wafer manufacturing capacity at the end of the fourth quarter was 11.8 gigawatts, and we achieved totaled installed polysilicon production capacity of 11,000 metric tons. Following the capital intensive investments over the past two years, we expect capital expenditures to be more modest going forward. We expect capital expenditure to be in the range of $200 million to $300 million in 2010. Company headcount was 13,448 at the end of fourth quarter.

Now turning to the balance sheet. We ended the fourth quarter with $384.8 million of cash and cash equivalents and $68.9 million in short-term pledged bank deposits. We continue to operate with negative net working capital. Accounts receivable declined to 63 days. Our payables were equivalent to 67 days.

Inventories increased slightly to $443.1 million, including a $10.9 million non-current portion. This includes slurry that we are storing for future use while we ramp up the capacity of our slurry recovery system. We believe this is more cost effective than procuring materials from third-party providers. Our polysilicon inventory at the end of fourth quarter was approximately 2,931 metric tons at an average cost of approximately $70 per kilogram, reflecting procurement of materials during the fourth quarter under previous purchase commitment.

We expect the cost to trend lower, as we saw small material at spot prices and realized the benefit of in-house production. Total debt was flat at approximately $1.8 billion, including $980.4 million of short-term bank borrowings and $799.7 million of long-term bank borrowings. We are working with our China-based banks to replace short-term loans with long-term loans.

Within the fourth quarter, we refinanced around $94.5 million short-term loans with long-term loans. We continue to be focused on improving our working capital and cash balance. As announced in our last call, on November 20, we completed the sale of 15% minority interest in the company the holding the 15,000 metric tons polysilicon project to Jiangxi International Trust and Investment for the equivalent of $219.7 million. We completed a follow-on offering in the fourth quarter to provide the company with $110.1 million in proceeds.

We will continually evaluate private and public financing opportunities for all polysilicon business, as we achieve operational milestones. We will also continue to concede having additional short-term and long-term funding sources for LDK Solar.

Now let me turn the call to Mr. Peng, our Chairman and Chief Executive Officer. Mr. Peng?

Xiaofeng Peng

Thank you, Jack. Thank you again for your interest in LDK Solar. We were encouraged to see solar industry dynamics continue to strengthen during the fourth quarter as well as over the last few months. During the fourth quarter, we continued to see improvement in wafer demand, and we recorded total sales in the higher end of our guidance range.

We made significant progress in strengthening our financial position through several initiatives such as solar energy interest to our -- in our poly plants and our poly (inaudible). These initiatives combined with higher sales results in increasing our cash position by more than $300 million in the quarter. We are working diligently to further improve our cost structure through increasing our wafer manufacturing efficiencies and reducing our raw material costs through our in-house poly production.

As our poly production continued to ramp, we are seeing the cost of production decline and we expect to reach approximately $75 by the end of 2010. We saw anticipated cost reduction combined with the better pricing environment we are experiencing. We expect to see an improvement to our profitability in the first quarter.

As we have previously indicated, we have seen growing demand for modules in Asia, Europe, and North America. In (inaudible) growing these of our customers, we recently acquired Best Solar’s crystalline module manufacturing facility. By bringing crystalline module manufacturing in-house, we will expand the scope of our vertical integration and strengthen our competitive and cost advantage within the sector.

We remain committed to diversify our business and increasing industrial collaboration to explore new markets and geographies. We continue to see demand from (inaudible) growing strongly in various countries and regions, including Nordic countries in Europe, the US, Canada, Japan, China, and other countries in Asia.

Let me now turn the call to Xingxue Tong, our President and Chief Operating Officer, to provide the manufacturing operation update. Xingxue?

Xingxue Tong

Thank you, Chairman Peng. I will first provide an update on our wafer business and then discuss our poly plant business. Demand levels continued to be healthy fourth quarter. We remained focused on improving our cost structure by optimizing productivity, yield, material cost, and realizing economic soft skill. Our manufacturing cost in the fourth quarter of 2009 has declined to approximately $0.32 per watt.

We remain on track towards our goal of reducing wafer converting cost to as low as $0.25 per watt in the next eight quarters. We reached 1.8 gigawatts wafer manufacturing capacity at the end of the fourth quarter of 2009. We expect to reach 2 gigawatts capacity in the second quarter of 2010. We will expand our wafer manufacturing facilities by minor investment and equipment update in the context of demand levels and balance sheet constraints.

I would like to discuss our progress in our polysilicon business. Our 1,000 metric ton capacity facility continued to ramp up production. During the fourth quarter, we produced 180 metric tons of poly. We anticipate that the facility will produce approximately 240 metric tons in the first quarter of 2010. Our principle goal is to continue to optimize the process to bring the production cost down to a reasonable level.

We ended production at the first 5,000 metric tons of a larger facility in the fourth quarter. Currently, we are in full closed loop system production, starting from the HCL and TCS production down to offset [ph] recovery. Our target is to ramp up to full capacity production in the second quarter of 2010 for the first train, and the second train will commence production in the middle of 2010. We anticipate that approximately 430 metric tons of poly will be produced in the first quarter of 2010.

Now let me turn the call to Dr. Wan, our Chief Technology Officer. Dr. Wan, please.

Yuepeng Wan

Thank you, Xingxue. I’m delighted to provide you with an update on our research and development programs. First, the jointly developed multi-crystalline silicon ingot growth machines were successfully transferred into large scale production, which enabled significant reduction of the cost for ingot production and increased the ingot production throughput by about 5%. The production ingot weighed 480 to 500 kilograms.

Second, a new preheating technology for Siemens reactor startup has resulted in significant reduction of reactor startup time. The total startup [ph] time is reduced by about 5%. Third, we have made significant progress in developing crucible coating technologies to improve the quality of multi-crystalline silicon ingots, reduce the consumption of coating materials, and to utilize new coating materials.

A selection of these new technologies will be implemented to optimize our production process during 2010. We have been granted three new patents and submitted another seven new patent applications during the fourth quarter of 2010 [ph]. Lastly, we continue to work on the development and commercialization of high quality wafers for the production of high efficiency solar cells. We are establishing a 60 megawatt R&D line for high efficiency solar cells.

As part of our effort, we are pleased that we have added two new hires in our technology standard, Dr. Dee Hequa [ph] as our new Vice President of Technology in charge of cells and modules, and Mr. Fred Rin [ph], new Vice President in charge of high efficiency solar cells. Both have expansive experience in solar cell and module manufacturing and technology. We are confident that these new colleagues will bring more R&D results to our company.

I will now turn the call back to Jack Lai.

Jack Lai

Thank you. Based upon current business conditions, we expect all first quarter 2010 wafer shipments to be in the range of 370 megawatts to 400 megawatts and module shipments to be in the range of 25 megawatts to 30 megawatts. We expect revenues for the fourth quarter 2010 to be in the range of $310 million to $330 million.

And now we would like to open the lines for questions. Operator?

Question-and-Answer Session

Operator

Thank you very much, sir. (Operator instructions) Thank you. The first question is from Edwin Mok. Please state your company and then your question.

Edwin Mok – Needham & Company

Great, thanks. I’m from Needham & Company, and thanks for taking my question. I guess the first question, you guys mentioned that you expect better profitability in the coming quarters. Are you guys expecting the coming quarter to be profitable or probably down?

Jack Lai

Yes. And we expect in gross margin, we will be improving in the next few quarters. And also we see the demand is very strong, and also we see the wafer ASP also start increasing from March. And as pricing seems increase -- ASP increasing month-by-month. So we see that gross margin will be improving quarter-by-quarter in the next few quarters.

Edwin Mok – Needham & Company

Great. That was helpful. So talk about wafer price, like you mentioned with some comments (inaudible) company as wafer price started to increase in the month of March. Do you expect that trend to continue during the second quarter? So would that imply that second quarter will have a better -- actually higher ASP versus the first quarter sequentially?

Jack Lai

Yes, and we have almost sold out everything in quarter two, and ASPs higher than Q1 because the price starting to increase from end of February, early March. So there are some -- the price of January is similar to quarter four. And so the quarter two ASP should be higher than quarter one.

Edwin Mok – Needham & Company

Great. And then I have a follow-up question regarding Best Solar. Now that you guys bought Best Solar, can you update us in terms of how much capacity -- module capacity you have there, and also do you have any cell capacity there? And finally, now that you actually own that piece rather than being formally a towing [ph] partner, would that help you in terms of your cost or in terms of your module margin? Would that help you in the module margin?

Xiaofeng Peng

Certainly, we will bring the crystalline module production in-house having receiving our towing cost. And currently, the better facilities have more than 500 megawatts capacity. I think we will be -- we have also gotten it ramping up to much bigger capacity in the near-term because the CapEx for the module is very, very limited. And we see very, very strong demand for module (inaudible) module, and also we also supply towing service for the module for our European and American customers and towing service demand also very, very strong. So after acquiring the Best Solar in March, I think we will see significant increase in module shipments from quarter two and of course increasing quarter-by-quarter especially and we will see it increasing from quarter two for the module shipments.

Edwin Mok – Needham & Company

Great. Just to clarify, do you guys have any cell capacity at that facility?

Xiaofeng Peng

At the moment, we procured cells or towing the cells from our customer or third party, and we are starting to establish a 60 megawatt R&D line for high efficiency solar cells. So at the moment, most (inaudible) are buying from third parties.

Edwin Mok – Needham & Company

Great. And then one question regarding the polysilicon. I think Jack mentioned that your average cost is around $70 or $69 per kilogram, right? But I think market spot price is quite a bit low. Is that just because of historical inventory that you guys have build and the higher cost? And how do you look at that going forward in the first and second quarters?

Xiaofeng Peng

The average selling cost of inventory, we (inaudible) both. And also we have some company purchase agreement with the long-term contract (inaudible). And we see the average silicon inventory cost is going down every quarter. And also this benefits from our spot purchasing and also from our in-house production. So our average silicon cost will be trending going down every quarter.

Edwin Mok – Needham & Company

Great. One last question, just quickly on the project side, you guys had a project that you did with Q-Cell. Do you guys plan to do more of that this coming year or should we expect any project revenue this year?

Xiaofeng Peng

(inaudible) project of 42 megawatts is in Germany, and this project is already (inaudible). So we are planning -- in processing cell project and we are now planning to do more projects and thus we get our money back. And this is just for a special project for 42 megawatt. So we have no intention to do more projects in 1Q [ph].

Edwin Mok – Needham & Company

Great. That’s all I have. Thank you.

Xiaofeng Peng

Thank you.

Operator

Thank you. The next question is from Lu Yeung. Please state your company and then your question.

Lu Yeung – BofA-Merrill Lynch

Hi, this is Lu Yeung from BofA-Merrill Lynch. Thanks for taking my question. Jack, based on your CapEx guidance for this year, $200 million to $300 million, can you break out what kind of capacity you are looking at to extend your wafer, poly modules and for -- by the end of the year?

Jack Lai

We are looking at the maturity of the cost to try to complete our silicon production where we will optimize our wafer capacity with minor investment and also to upgrade some equipment to increase the capacity, as we need to meet the demand. We anticipate that $200 million to $300 million will be adequate for 2010. And some more module capacity also will increase as well.

Lu Yeung – BofA-Merrill Lynch

Do you have a capacity target by the end of the year?

Xiaofeng Peng

I think our target now -- our wafer capacity will reach 2 gigawatts in maybe -- very soon, in the second quarter. So I think we will become (inaudible) 200 megawatts to 2.2 gigawatts at the end of the year. And for coating plants, we have already installation capacity 11,000 tons. So we are going to have all this facility to 11,000 by the end of the year and we will see what’s going on. We are ramping up our schedule and to see how to ramping at last to last this phase -- 5,000 tons. So this is still not decided yet. It depends how the growth of the second line of ramping up. We are expecting our foreseen installation capacity is still 11,000, and probably ramping maybe middle of 2011 to 16,000 tons for the polysilicon plants. Our module capacity, we are expecting to ramp up approximately 1.5 gigawatts end of the year for module capacity. And currently, we also will start planning to do 60 megawatts solar cell in-house production.

Lu Yeung – BofA-Merrill Lynch

So you have 1.1 gigawatt of module capacity by the end of the year?

Xiaofeng Peng

1.5 gigawatts module capacity. But this is most of the capacity we will be using for the towing service for our customers.

Lu Yeung – BofA-Merrill Lynch

1.1 gigawatt, right?

Xiaofeng Peng

1.5.

Lu Yeung – BofA-Merrill Lynch

1.5. And what was it now?

Xiaofeng Peng

500 to 600.

Lu Yeung – BofA-Merrill Lynch

Okay. I see. Also, the question for Jack is, of course, do you have reclassified -- I mean, the refinance from the short-term debt to long-term, I just want to get your thoughts on what kind of initiatives you are going to do with your balance sheet and all that. And how should we think about the interest expense for this year?

Jack Lai

At the present time that we are already entering cash flow positive on operations. In Q4, actually our operating cash flow was very, very good, and -- I think generally more than $100 million from operations. So with the additional investment on the equity offering that we had, we are coming with positive cash flow of more than $300 million. I think in each year, pretty much the same that -- one, we’re going to continually improve our profitability to improve our gross margin and continue to upgrade with the positive operating cash flow and try to limit our CapEx. And (inaudible) we still continue on keeping alternatives in terms of getting private and public financing sources so that we can get additional funding, and with the continued efforts working with our banks to convert the short-term debt to longer term borrowings so they can improve our balance sheet along the way.

Lu Yeung – BofA-Merrill Lynch

I see. Last question from me is, in terms of your conversion cost, it looks like in the fourth quarter you didn’t really improve much from the last quarter. And I think last time it was approximately $0.81. And how should we think about processing cost in Q1 and going forward?

Jack Lai

Well, currently, our range of processing cost is probably somewhere between $0.30 to $0.32, and from time to time that we see that range. Our objective is to reduce it by about $0.01 on a quarterly basis. So hopefully that by the end of the year, we will see about $0.27, $0.28 by the end of 2010.

Lu Yeung – BofA-Merrill Lynch

I see. And why is the processing cost didn’t really include with your higher shipment in the fourth quarter?

Jack Lai

Well --

Xiaofeng Peng

In the fourth quarter, our ASP was going down from third quarter $0.91 going down to $0.83 in the fourth quarter.

Lu Yeung – BofA-Merrill Lynch

Okay. All right. That’s all the question I had. Thank you very much.

Jack Lai

Thank you.

Operator

Thank you. The next question is from Rob Stone. Please go ahead with your question and also stating your company.

Rob Stone – Cowen & Company

Cowen & Company Good evening, gentlemen.

Xiaofeng Peng

Good evening.

Rob Stone – Cowen & Company

I wonder on ASPs, you’ve commented you expected gross margin improvement throughout the year. Do you have much visibility on ASP for wafers beyond the second quarter?

Xiaofeng Peng

Yes, we see the demand for the third quarter to be also very, very strong. And so in -- of course, third quarter, there is no doubt. So we already see the visibility on quarter three.

Rob Stone – Cowen & Company

But that’s strong unit demand, but what about pricing given the pending reduction in subsidies in Germany? Most people seem to expect that there will be pressure on module prices in the second half. Do you expect wafer prices to trend lower in the second half, stay the same, or go up?

Xiaofeng Peng

I think at least we see the quarter three, the ASP should be similar to quarter two. And of course, in Q4, the visibility is not there yet. But at least we see that quarter four would be similar to quarter two.

Rob Stone – Cowen & Company

Okay. A couple of questions, if I may, with respect to your poly cost and the impact of your internal production, how much influence on the Q4 gross margin came from the cost of internally produced poly?

Xiaofeng Peng

In Q4, the internal producing -- production was only 180 metric tons. So the production volume was very limited, very small. So there is not too much impact on us.

Rob Stone – Cowen & Company

Okay. So, on your expected cost improvement with the goal towards $35 or so, do you see that happening as sort of a smooth progression through the year or should there be some step function improvement, for instance, when the second train starts to ramp up?

Xiaofeng Peng

Yes, they didn’t say this is based on the second train in almost full production in end of the year, and this will have the cost going -- moving to -- target to $75 dollars.

Rob Stone – Cowen & Company

Okay. Jack, can you comment on the trend for operating expenses? I know there were some one-time items in there in Q4. Can you say roughly what the OpEx level dollars should be in the first quarter and roughly the trend for the year?

Jack Lai

At the present time, our run rate for OpEx is around $19 million, maybe up to $20 million level, which -- we continue to say it’s probably somewhere about 6%, 7% range of our total revenues. And we invest more money. However, our revenue also grew in the same time. So we believe that 6% to 7% average is still a very good measurement for our OpEx.

Rob Stone – Cowen & Company

Okay. My final question also for you, Jack, is the range of $200 million to $300 million is fairly wide. Can you say what it is that would drive you to the low end or the high end of that range?

Jack Lai

Well, at present, (inaudible) control, which primarily we’re going to continue to build out our polysilicon, which we may spend as much as $200 million in the same time that we used to spend some minor improvement, also to increase some capacity for our wafer to about 2.2 gigawatts. And we still put some more money to increase our module business. So that will be the bulk part of our CapEx budget for this year. I think $300 million is a very good estimate at the present time.

Rob Stone – Cowen & Company

So the difference between $200 million and $300 million isn’t necessarily incremental capacity. It’s just a range of possible outcomes and you finish off the poly plant. Is that the main driver of variance?

Jack Lai

Because when we ramp up the second train, they have some parts and some control watts and some associated equipment parts that we may still need to buy. And of course, that would take as much as six months -- three to six months to go through. So (inaudible) range that we need to live through. So we anticipate that probably as much as $200 million will be spent there. And so that’s the reason we give -- and of course, our capacity for margin for wafer is primarily mainly by the demand. The demand really increased and certainly was spent through high end side [ph] of the CapEx. If the demand stays at the current level, then we may not spend all the money.

Rob Stone – Cowen & Company

Okay. Thank you very much.

Jack Lai

Thank you.

Operator

Thank you. The next question is from Paul Leming. Please state your company and then your question.

Paul Leming – Soleil Securities

Soleil Securities. First, could you give us an indication of what you expect capital -- expect depreciation to be for 2010?

Jack Lai

Currently, our quarterly run rate is about $20 million. So this year we’d probably going to be north of $100 million, maybe to $150 million depending on how fast that we would run our polysilicon facility.

Paul Leming – Soleil Securities

Second question, can you – could you give us an update on how the first train of the polysilicon plants is operated for the first quarter? And specifically, are you currently producing all of the TCS with the 5,000-ton train or is that 5,000-ton train working predominantly on purchased TCS?

Xiaofeng Peng

Yes, we have already in four closed loop system production in our 5,000-ton trains. And we are starting to ramping up a -- so these already have in-house HCL, TCS production. And now we are producing this quarter of approximately 430 metric tons in quarter one and especially in the late second part of the first quarter. So we anticipate -- we expect we will be full production in the first train sometime in the second quarter. So the first 5,000-ton is very successfully ramping up, and especially we see we have every run [ph] produced average of about 4 metric tons per run (inaudible) reactors. And although we see a very good result of electricity consumption, we see very good results from the first quarter run rate. So this is already 5,000 tons with closed loop run will be (inaudible) production in sometime second quarter.

Paul Leming – Soleil Securities

Was that 430 tons you indicated for the first quarter just for the first train -- the 5,000-ton train or is the 430-ton both for the smaller 1,000-ton train production as well as (inaudible) in the first train?

Xiaofeng Peng

This is only for the 5,000 tons train. There are more poly plants. We have produced 240 metric tons. So both poly metric tons together, we have produced approximately 670 metric tons.

Paul Leming – Soleil Securities

Okay. Thank you. And final question, as I look at your guidance for the first quarter, you appear to be guiding toward an ASP for the first quarter of about $0.75 per watt. If I take out of your revenue guidance a modest amount of revenue for modules in the first quarter and then just divide remaining revenues by shipments, the ASP number actually comes out somewhat below $0.75. Could you just qualify what’s going on there? I thought I heard you say earlier that Q1 pricing was flat with Q4. Your guidance seems to imply a decline in the first quarter to be just help us reconcile those numbers.

Jack Lai

They have couple of things in the first quarter that might impact the ASP even though we experienced back in March that price was up. First thing is OEM business could be a little bit lower in Q1 because customers really asked for help. They are very, very impacted. They have some silicon that bring in an effort to process for them that impact the ASP. And secondly, we have some of the products that we produce actually is a chemical that we sell at low prices because the characteristics of those products actually has deeper applications. So we provide it to some of the special customers with lower prices, which is a sale that could impact the overall ASP. So you may see the impact from this point of view.

Paul Leming – Soleil Securities

Maybe the best way to clarify, Q1 gross margin, you expect to be flat with the fourth quarter? Just to kind of understand the mix in business, will gross margin in Q1 be flat, down, up versus the fourth quarter?

Jack Lai

At the present time, we believe that Q1, our gross margin should be higher than Q4 of 2009.

Paul Leming – Soleil Securities

Okay. Thank you very much.

Jack Lai

Thank you, Paul.

Operator

Thank you. The next question is from Sunil Gupta. Please state your company and then your question.

Sunil Gupta – Morgan Stanley

Hi, this is Sunil Gupta from Morgan Stanley. Good evening, Mr. Peng, Jack, and everybody else from the management team, Sam [ph] and others. I just want to follow up on your polysilicon plant. In the past, Mr. Peng, you had mentioned that you are exploring other options to sell minority stakes in polysilicon plants, and I was just wondering if you could provide us with an update as to how those conversations are going and what should we be expecting.

Xiaofeng Peng

Good evening, Sunil. So -- we have some indicated countries with VMS and also we are also talking with other. So this is -- everything is moving, and when we have continued to do -- doing some (inaudible) our polysilicon plant. So everything is moving as expected schedule.

Sunil Gupta – Morgan Stanley

Okay. And in the polysilicon plant, I guess the 15,000-ton plant, and this is more for Jack, you have sold minority stake. So I guess you must have formed that as a separate company. Could you help us understand how much of your total corporate debt is in that polysilicon plant company?

Jack Lai

Well, at this moment that we are doing some restructuring, most of the money was injected from the LDK wafer company to the polysilicon. And I think (inaudible) we are still restructuring that we would try to attribute some of the debts into the polysilicon unit. But this is also associated with various banks. So we must negotiate also with the bank to be able to allocate accordingly. So, still in the process to do so.

Sunil Gupta – Morgan Stanley

Okay. So the transaction that you have done with Jiangxi Investment Trust, is there a understanding since they have agreed on the amount as to what is the maximum amount of debt that that company -- the polysilicon company is allowed to have?

Xiaofeng Peng

No, not in that part of the agreement. No. There is no other restrictions that we have.

Sunil Gupta – Morgan Stanley

And the price that they are paying of $219 million that is irrespective of whatever the final debt structure than thought to be?

Xiaofeng Peng

Well, that will be in a process that we will continue to negotiate with the banks, then we communicate with our investors to communicate. And of course, we have some other financing proposals maybe going through associated with the polysilicon business, including like a spin-off and go for potentially ideal. But at this point in time that we still try to exploring different opportunities that we can enhance the value of our business.

Sunil Gupta – Morgan Stanley

Okay. And then finally, Jack, I had a question on inventory, you mentioned from number for inventory that I could not write down fast enough. If you could just help me break down the dollar amount of inventory into how much is polysilicon, how much is finished goods, and other work in progress and materials?

Jack Lai

Okay. Just give me a second. I'll get that if we have.

Sunil Gupta – Morgan Stanley

Sure. Sure.

Jack Lai

Okay. The raw material -- total raw material was about $200 million.

Sunil Gupta – Morgan Stanley

Okay. In finished goods?

Jack Lai

Let me see it, the work in process was $66 million and the finished good was about $87 million.

Sunil Gupta – Morgan Stanley

Okay. And I presume finished goods is all wafers and no modules, right?

Jack Lai

About 60% wafers and 40% modules. So $55 million wafers and $32 million modules.

Sunil Gupta – Morgan Stanley

Okay.

Jack Lai

And the remaining --

Sunil Gupta – Morgan Stanley

Thank you very much.

Jack Lai

-- of that would be like the supplies -- like in all of the part that goes forward like very --

Sunil Gupta – Morgan Stanley

Understood. Thank you very much.

Jack Lai

Thank you.

Operator

Thank you. The next question is from Hendi Susanto. Please state your company and then your question.

Hendi Susanto – Gabelli & Company

Hi. Gabelli & Company. Thank you for taking my questions. Jack, I have a question on the processing cost that you mentioned, the $0.30 to $0.31 per watt. Does that include depreciation and association? And may I know how much depreciation and amortization and shipment on a per-watt basis?

Jack Lai

Okay. On processing cost, primarily for the supplementary material at Kusbo [ph], slurry and wires, those are 85% to 90%. Like a labor, depreciation, electricity is only about 1% to 2%, and overhead is 1% to 2%. So the total indirect material is close to 90%.

Hendi Susanto – Gabelli & Company

Okay. So that amount includes depreciation and amortization?

Jack Lai

Correct

Hendi Susanto – Gabelli & Company

Yeah. And then second question is when do you think your polysilicon will match the spot grade?

Jack Lai

Well, at the present time that we are making very good progress from months to months. They are run [ph] by the looks pretty good back in a small plant where we reached 240 tons in Q1 this year, which we believe that should be very close to the spot market price. For the first 5,000, once we reach more -- right now we are about 40%, 50% range. Once we get into capacity like 5,000 by mid-year to the 5,000 run rate, I think we will be also very close to the spot market rate. So I think both plants are doing quite well. And by the end of the year that once we reached to 11,000 metric ton run rate, we believe we can go to as low as $35 which at that -- at that time, we should be lower than the spot market.

Hendi Susanto – Gabelli & Company

Okay. And may I know whether your module ASP is at the market rate or below or above?

Xiaofeng Peng

Yes, because we’re selling module based on euro price, so then euro price is up and down, but average in dollars is around probably 80. It depends on the euro price, sometimes a little bit up, a little bit down.

Hendi Susanto – Gabelli & Company

Okay. Thank you.

Operator

Thank you. And the final question is from Marianne Dolan. Please state your company and then your question.