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Executives

Paul Combs – VP of Strategic Planning

Gareth Kung – CFO

Peter Xie – President

Analysts

Gary Hsueh – Oppenheimer

Burt Chao – Simmons and Company

Josh Baribeau – Canaccord

Jay Greenflower [ph] – Barclays Capital

Dan Ries – Collins Stewart

Christine Hersey – Wedbush

Edwin Mok – Needham

Dylen Liu – Pacific Epoch

Michael Sumetsky [ph] – American Capital

Pranab Sarmah – Daiwa Capital

Vishal Shah – Barclays Capital

Mark Bachmann – Auriga USA

Solarfun Power Holdings Co., Ltd. (SOLF) Q1 2010 Earnings Conference Call May 26, 2010 8:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the first quarter 2010 Solarfun Power Holdings Co., Ltd. earnings conference call. My name is Erika and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference.

(Operator Instructions)

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

Paul Combs

Good morning, everyone. Welcome to our call and thanks for your continued interest in Solarfun. Joining me today on the call are my colleagues Peter Xie, our President and Gareth Kung, our Chief Financial Officer.

Before we continue with our formal commentary, I need to take a moment and remind you of the company’s Safe Harbor policy. This call will contain forward-looking statements, which are subject to risk and uncertainties. Actual results may differ from those discussed today, and therefore we refer you to a more detailed discussion of the risk and uncertainties in the company’s filings with the SEC. In addition, any projections about the company’s future performance represent management’s estimates as of today, May 26, 2010. Solarfun assumes no obligation to update these projections in the future as business and market conditions change.

Gareth will open with the financial review of the first quarter just announced followed by Peter’s review of our progress on several key strategic objectives and our outlook for the second quarter and the remainder of the year.

Before we begin the formal commentary, I would like to announce that Solarfun will hold an analyst meeting in New York City on Monday June 14 from 4 PM to 6 PM followed by informal reception from 6 PM to 7 PM. Six of our senior executives will be presenting in addition to Peter and Gareth, our Vice Presidents of manufacturing, technology and both European and U.S. sales. We believe this will be a good opportunity for us to outline our strategy going forward and for you to be exposed to a broader number of people from our senior management team. Keep an eye out for more formal details to follow.

I will now turn the call over to Gareth for a summary review of our quarterly results.

Gareth Kung

Thanks, Paul. Good morning. As you see from our release, we recorded strong continued year-over-year shipment growth. ASP declines were in line with our guidance. More importantly, our net income grew well above market expectations and returns on equity continued to improve. Revenues for the first quarter reached $216.2 million, the highest level in company’s history. This represents a 17.8% quarter-over-quarter increase from the fourth quarter of 2009 while ASP declined from $1.95 to $1.76 during the same period. Total shipments grew 35.9% to 150.6 megawatts in the first quarter of 2010 as compared to the fourth quarter of 2009 when we shipped 110.8 megawatts.

It is important to highlight that our module processing services contributed only 7.8% of the overall total revenue in the first quarter of 2010, which was relatively constant as compared with the fourth quarter of 2009. So our OEM and brand businesses are growing nicely as a percentage of total shipments.

Our shipments by geographic region reflect the cooling Germany ahead of the anticipated reduction in feed-in tariffs. Excluding our module processing business, German based customers accounted for 81% of our total PV module revenue up from 57% in the fourth quarter of 2009. We anticipate that the contribution from non-German customers will increase in the second half of 2010 as most of our shipments to customers outside of Germany have been pushed out to the third and fourth quarters of 2010.

Other markets of note in the first quarter included Australia, Italy, Portugal and Spain, which collectively accounted for about 15% of total module revenues. On a U.S. GAAP basis, gross profit was $39.9 million and gross margin was 18.5%. Despite the decline in ASP, we have managed to maintain gross margin around the same level as the previous quarter due to improvements in our cost structure. The blended COGS per watt excluding module processing services was $1.42 in the first quarter representing a 9.6% reduction from $1.57 in the previous quarter. The blended COGS takes into account the processing cost, both silicon and non-silicon, using internal wafers, purchase cost and additional processing cost of the externally-sourced wafers and cells, as well as freight costs. Later Peter will further elaborate on our cost roadmap.

Operating profit increased to $27.7 million, which represented a 12.8% operating margin as compared to 10% in the fourth quarter. The improvement in operating margin was primarily due to tight control over operating expenses. Operating expenses as a percentage of total net revenues decreased to 5.7% in the first quarter as compared to 8.8% in the previous quarter. Specifically, selling expenses as a percentage of total net revenues declined from 3.7% in the fourth quarter to 2% in the first quarter of 2010 in spite of an expanded sales force, largely as a result of eliminating several non-recurring items from the fourth quarter. G&A expenses as a percentage of total net revenues declined from 4.1% in the fourth quarter of 2009 to 2.6% in the first quarter as we continue to tightly manage our overhead costs. At the same time, we have increased R&D expenditures 24% quarter-over-quarter in the first quarter as we continue to invest in the development of new product technology and new products.

Interest expenses remained constant with the prior quarter. Our net exchange gain this quarter was around $0.5 million as compared with a net exchange gain of $0.1 million during the fourth quarter because of the recent fall in the Euro and a speculation of a potential RMB revaluation. I would like to touch on the impact of both. First, approximately 85% of our sales in the first quarter was denominated in Euro. We think this percentage will decline in the second half of 2010 as our sales to both China and U.S. become a larger percentage of their total. We actively hedge approximately 50% of our Euro exposure with six months forward contract on a consistent basis. Nonetheless despite our hedging activities of which the result is reflected at the non-operating items in income statement, the decline in the Euro will impact our gross margin. Currently we estimate that for every 100 basis point boost in the Euro, our gross margins are impacted by 0.4% assuming all other factors to remain the same.

About 85% of our operating expenses and 30% of our capital expenditures are denominated in RMB. As mentioned earlier, we do plan to grow our RMB revenues as the market expand in China and this would help to offset some of the impact from RMB appreciation. In addition, more than half of our debts are in U.S. dollar, for which we will benefit from an appreciating RMB.

On a non-GAAP basis, net income attributable to shareholders for the quarter $23.2 million, a 64.9% increase from the preceding quarter. Net income per diluted ADS on a non-GAAP basis for the first quarter was $0.4, which represented 63.9% growth over the fourth quarter.

Turning to the balance sheet and cash flow highlights, as of March 31, 2010, we had a healthy cash and cash equivalents balance of $137.2 million and net working capital of $289.8 million. Total short-term borrowings stood at $136.3 million as compared to $72.5 million at the end of December 31, 2009. The increase in short-term bank borrowings was because we drew down some additional short-term bank borrowings in anticipation of the financing needs as we expand our capacity and R&D capabilities to meet the robust demand.

Total long-term bank debt stood at $143.2 million, comprising both bank loans and convertible bonds. The first maturity of our convertible bonds is not until 2015. We believe our debt maturity profile compares favorably to most of our peers.

Return on equity is the key area of focus for management and annualized ROE on a non-GAAP basis increased from 17.4% in the fourth quarter to 26.6% in the first quarter, which we believe compares favorably to our peers as well.

Accounts receivable increased to $124.4 million, which was in line with the rise in shipments and revenues. Days sales outstanding was 47 days in the first quarter, which is consistent with the last quarter.

Inventories were down slightly to $105.6 million as we continue to see high demand going into 2010. Days inventory outstanding decreased from 71 days in the fourth quarter to 57 days in the first quarter as we continue to improve our supply chain management.

Capital expenditures were $9.5 million in the first quarter of 2010. As Peter will further discuss, while we intend to expand capacity in 2010, we will be focused on maximizing ROE and therefore will be prudent in which manufacturing stages we invest.

I would now hand the call to Peter who will update our progress on number of strategic initiatives and how we see the remaining 2010 developing. Peter?

Peter Xie

Thank you, Gareth. As I mentioned on our last conference call, we will focus on five key strategic initiatives in 2010; expansion, customer service, production cost, product differentiation and shareholder returns. I will touch on our progress in a few of these areas as well as highlight our OEM strategy. Also I am going to touch on some significant yet early progress on the cell efficiency front.

First we plan to reach module capacity of 900 megawatts by August this year, up from our earlier plan to reach 700 megawatts and expand internal cell capacity to over 500 megawatts by July of this year. We recently purchased a 25 megawatt cell line from SMIC, which enabled us to add more cell capacity immediately and reduce our needs to purchase external cells. You will note that we are not expanding ingot, wafer capacity as quickly as cell capacity nor are we expanding cell capacity as rapidly as module capacity. This is explicitly being on purpose for a number of reasons. A portion of our module capacity is allocated to our module processing business.

In addition, we would like to have large module capacity to be able to meet periods of peak demand while fully utilizing our cell and ingot wafer manufacturing capacity, which carries considerably higher CapEx per watt. This more flexible approach through vertical integration will enable us to achieve higher ROE in a fully vertical integrated model. This strategy seems to bear out in our result. As you may have noted that our – we have been seeing a steady improvement in ROE over the past few quarters to a now healthy 26.6%.

Second, while we have already invested considerably in sales and marketing, we also intend to focus on improving our customer breadth in the geographic diversification. Several key hires have already been made in the U.S., Europe, and China. Now, that we have expanded the total number of customers, we service to over 40 per quarter. We intend to solidify partnership with the larger ones and take an increasing share of their total module needs. In addition, we will continue to focus on geographic diversification by increasing our penetration in high growth markets. Our efforts in China, Italy and the U.S. will bear fruit in the second half of 2010 as we target to ship at least 85 megawatts to these three markets combined in 2010.

Overall we are transforming into a more customer focused organization by setting up our efforts to improve our product quality, customer service, and the technical support to meet the increasing quality and reliability demands of our customers. We believe this efforts in the long run will differentiate us from run-of-the-mill panel manufacturers.

Third, we continue to steadily reduce our blended cost of goods sold per watt to $1.42 for the first quarter. This is down from $.157 the prior quarter and then we target to reach our target of approximately $1.75 by year end. This number includes processing cost using internal wafers but silicon and non-silicon as well as the purchase and the processing cost of externally sourced wafers and the cells and the freight charges. Then using our own internally manufactured wafers, our module production cost in the fourth quarter was $1.19 per watt, a 7% decline from $1.28 per watt in the preceding quarter. We believe that our cost structure is now as competitive as our peers, our average cost of our poly silicon that hit our income statement in the first quarter was $55 per kilogram.

We intend to continue reducing manufacturing cost through a combination of efficiency gains and the reductions in wafer breakage rates, ingot casting losses and the consumable costs. We have made significant progress in reducing our grams per watt usage of poly silicon. The current figure is approximately 5.2 grams per watt for monocrystalline cells and 6.1 grams per watt for multicrystalline cells. The principal factors contributing to our progress are cell efficiency improvement, breakage rate reduction to below 1%, (inaudible) cell improvement on pieces per kilogram of ingot, ingot process improvements including repurification of recycled silicon and ingot line yields.

As an indication of process improvements, we plan to expand our annual ingot production capacity from 300 megawatt to 360 megawatt and the annual wire sawing capacity from 300 megawatt to 400 megawatt by May 31, 2010. This is being achieved primarily through improvements in production techniques without incurring any significant CapEx. Cell efficiencies currently are 17.5% for mono cells and 16% for multi cells. We are currently working on introducing selective a major technology by the end of this year, and we have demonstrated the cell efficiency in the lab and then our pilot line of 18.5% for mono cells and 16.7% for multi cells.

We plan to increase our R&D staff by 30 people this year to support this and the future efforts to reduce costs, improve manufacturing efficiencies and enhance product features and the performance. As you saw from your 1Q financials, we are investing more money to support this effort. I would like to spend a moment highlighting our OEM business strategy where I believe we are the largest OEM player in the solar space. Note, this is not the same as our module processing business. Think of it as a private label business where manufacturing modules cradle to grave, to meet a specific customer specification and rigid quality standards. These customers have well trained engineers on site in our factory 24/7 and then require the highest standards in product quality and the testing. This raises a quality bar for all what we do. And importantly, and the continued – and the counter to common perception, this volume is competitively priced and it contributes good margins.

Some advantage of our OEM business model are as follows. It offers a stable and a predictable revenue stream, limited sales and marketing expenses, broaden the distribution channel as many of our OEM customers focus on the retail market where they have better brand recognition than we do, improved overall quality through R&D and co-product development opportunities.

Finally, let me provide you with some colors on our expectations for the second quarter and the full year. We expect shipment for the second quarter to be in the range of 160 to 170 megawatts. Module processing service will account for approximately 35% of the total shipments. We expect that ASP will remain flat with the fourth quarter levels in constant currency. However, if you consider the Euro depreciation, we would expect about 6.5% decline in ASPs as compared to the fourth quarter on the assumption that Euro remains approximately 1.25 against the U.S. dollar for the rest of the quarter. Our capacity is currently fully utilized including our ingot and the wafer making facilities where we continue to see strong demand and good visibilities through most of 2010. As a result, we are raising our 2010 target from 600 to 650 megawatt with potential upside, which represents a more than doubling of 2009 shipments. Processing services should represent approximately 25% to 30% of the total shipments.

Fundamentally our company has never been stronger. Shipments are projected to more than double this year, margins are holding firm in spite of declining ASPs earlier in the year. Our profitability is exceeding expectations. Our cost structure is competitive and it continues to improve. Our progress in technology and new product announcements are exciting. We are penetrating important new growth markets and our management team is firmly in place and highly motivated to increase shareholder value.

With that, we will be happy to take your questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Gary Hsueh of Oppenheimer. Please proceed.

Gary Hsueh – Oppenheimer

Just looking at the model here and what happened in Q1, it looks like in terms of a swing factor, you saw module processing margins really swing down in Q1. Obviously, it wouldn’t be a big shock but first of all, could you confirm that the big swing factor in terms of suppressing margin expansion in Q1 was module processing? And what’s your expectation for module processing margins in Q2 and for the rest of the year? Is there not that much more downside risk coming from further compression in module processing margins? And I have a quick follow-up.

Peter Xie

Yes, I think – yes, module processing, I think where you did see – we did have some reduction in the margin from Q1 2010 from Q4 2009. And we can now expect further erosion in the module processing margin. This we expect to stay pretty constant.

Gary Hsueh – Oppenheimer

Just a quick follow-up question here. A lot of companies are kind of mulling over whether or not to renegotiate contracts that are Euro- denominated to U.S. dollar-denominated, for at least the near term. What are your view? What’s Solarfun’s strategy here on attacking the Euro exposure at the revenue line?

Peter Xie

I think actually there are several strategies. First one, we are actually trying to expand into other geographic regions. As we said earlier, we expect we have lot of shipment into regions other than Europe, mainly China, Australia and U.S. Those are not denominated in Euro, those are denominated in U.S. dollars and RMBs. The second we have actively hedging programs, as you see in our hedging results, actually it showed – those are actually showing a pretty good results. And thirdly we are actually doing case by case with our European customers. In some cases, we (brought our) currency exchange protection schemes, namely if it’s currency change, we do have price adjustment mechanism to adjust the price accordingly.

Operator

Your next question comes from the line of Burt Chao with Simmons and Company.

Burt Chao – Simmons and Company

Just to follow up on the global questions asked earlier, when you look at your exposure outside of Germany going forward, specifically in the U.S. and China, what do the ASPs look like? Historically, I know they’ve traded at a bit of a discount and sold at a discount. What do you see that progressing like going forward?

Peter Xie

Yes, right now actually I think the Euro depreciating heavily right now, we do not see much of discount at all right now. I think this moment, in some cases actually, surprisingly both in China and the U.S., we actually see a premium outside Europe.

Burt Chao – Simmons and Company

Okay. So on a constant currency basis back to Solarfun, even Chinese projects right now are as profitable as – or Chinese sales are as profitable on the module level as they would be in Europe right now?

Peter Xie

Well, for the order we signed before may not be, but the new order would expect to be as profitable as Europe.

Burt Chao – Simmons and Company

And then when you look at the rest of Europe, so you highlight some pretty robust sales outside of Germany going forward, how do you think about the current situation with the Southern European economies, with Greece adopting austerity measures, with the countries really looking to cut spending in general? How do you see that going forward in concerns with spending on Solar and where do those opportunities lead you, post-German feed-in tariff decline?

Peter Xie

Yes, I think this is a very good question. I think the market will improve itself. I think right now we are taking very precautious approach as we try to diversify outside Germany. We are actually getting through – we are going to see, as you can see we are actually travelling to U.S. and China and between U.S. and China, Italy, the three countries alone, we are going to do at least 85 megawatt approximately in second half then plus Australia, Korea and Japan, right, as you see, we are actually diversifying out of Europe. And we do actually see Europe as a strong market even though we are diversifying off because the opportunity – there are a lot of opportunities outside of Europe.

We still believe Europe is still going to be a very strong market. But right now the customer projection we have, we still have very strong demands from second half of this year and some of the customer, even plan demand for Q1 2011 and Q2 2011. So we are continuing to see strong demand through – maybe there is delay factor, but so far we haven’t seen that yet, we still continued demand. We can really satisfy 20% of our customer demand so far.

Burt Chao – Simmons and Company

And then one last quick question. You said your target by the year end for processing costs is sorry, COGS, you said that includes wafer and processing costs, is $1.25, which includes external and internal wafer. Your current cost is $1.19 a watt with internal wafer. Do you have a target as to how low you can get that $1.19 by the end of the year?

Gareth Kung

I think we will be going down to about $1.15.

Operator

Our next question comes from the line of Josh Dorsheimer with Canaccord.

Josh Baribeau – Canaccord

This is Josh Baribeau for Jed. Thanks for taking the question. Could you give us a little bit of color about what you are expecting in the second half of year about ASPs on a constant currency basis, if you could?

Peter Xie

ASP in constant currency is we actually expect Q2 will be actually compared with Q1 (inaudible) flat, maybe a little bit, and Q3 may be up a little bit from Q2, then Q4 we expect – actually the price will hold pretty firm until probably October, maybe mid-October, then November, December, where actually we think maybe because of year-end effect, maybe you will see the price start to – starting to see the 2011 effect. So the price maybe even start going down from November.

Gareth Kung

In Europe, yes, in Europe.

Josh Baribeau – Canaccord

And can you provide just a little bit more on your hedging strategy, maybe the percentage of your revenues or costs – not costs, your revenues this quarter that are hedged or rather, for the rest of the year that are hedged? Or if you don’t break it out like that, maybe what the exchange rate that we should model going forward, would be?

Gareth Kung

In terms of our hedging strategy, we do on a rolling basis, we hedge up to about 50% of our Euro revenue on a rolling basis using six months forward.

Josh Baribeau – Canaccord

And just a follow-up to that, the exchange rate we should be using to model going forward?

Gareth Kung

Right now average, right now our hedging is around about – right now we hedge up, okay, we do on a rolling basis, right now we hedge up to about, now it’s May, so we hedge up to about November revenue up to 50% and right now our average exchange rate about $1.35.

Josh Baribeau – Canaccord

I know I missed this in the prepared remarks. What was the percentage of sales denominated in Euros?

Gareth Kung

In Q1, 85%, but as we said going forward we think that this percentage would decline because we are going to expand the revenue – (we have got expansion) into U.S. and China and Australia. So it should decline in terms of percentage.

Peter Xie

I think our non-Euro sales probably will be somewhere around second half of this year may be around 25% to 30% outside Europe.

Operator

Our next question comes from the line of Vishal Shah with Barclays Capital.

Jay Greenflower – Barclays Capital

Hi, guys. This is Jay Greenflower [ph] on behalf of Vishal. A couple of quick questions for you. First, in terms of OpEx, I know there was a change in the OpEx this quarter. How can we think about OpEx going forward for the rest of the year?

Gareth Kung

In Q1, about 5.7%. I think for the rest of the year I would suggest to model about 6%.

Jay Greenflower – Barclays Capital

And then, for Germany, I know you said that you expect it to decline in the second half. How can we think about Germany in terms of your total shipments in Q2?

Peter Xie

Actually we do not see a demand from Germany actually going down in second half. When we say in second half, the German customers do have very strong demand but since many of our German customers they are actually – they are very global companies, they are actually going to start making some of deployment outside Germany.

Jay Greenflower – Barclays Capital

And what percentage in Q2 do you expect to ship to Germany?

Peter Xie

In Q2, I think in Q2 – in Q2, roughly maybe the same and then turn to Q3, we will actually receive substantial declining because Q2, we still have July effect, right. So the Germany still have a high priority. And in Q3, we will see substantial volume actually going out of Germany but Germany still have a lot of demand.

Jay Greenflower – Barclays Capital

And then one last question. The cell and wafer pricing, how many cells and wafers do you expect to purchase for the rest of the year, and at what prices?

Peter Xie

How many cell and wafers?

Gareth Kung

I am sorry, can you repeat your question again?

Jay Greenflower – Barclays Capital

Yes, sure. So, I know that you guys don’t manufacture all your own cells and wafers. So what percentage of shipments do you expect to be using third-party cells and third-party wafers and how do you see the cell and wafer market shaping up in terms of prices for the rest of the year?

Gareth Kung

Okay, for Q1, about 76% of shipment, excluding the module tolling business, about 76% of shipments are using internal wafers, and then about 18% of that shipment using external wafers and then about 5% using the external cells. So we think that going forward probably the external cell portion would decrease because we are going to expand our cell capacity going forward.

Peter Xie

In terms of pricing, maybe you can make comments. On the cell price, I think we believe in second half, actually we see lot of cell capacity coming on line. We believe that we will see – less outside pressure from the cell price. We are probably going to stay steady, we also maybe see a little bit downturn on the cell price. Now on the wafer, near term actually we see wafer actually supply become very tight. So wafer, actually the price is pretty firm but we will expect maybe toward the end of Q3, maybe early Q4, the wafer price start relaxing as well because there are a lot of capacity that we can bring on line.

Jay Greenflower – Barclays Capital

But for Q2 you think that pricing for both cells and wafers will be roughly the same as where they were in Q1?

Peter Xie

I think so, yes.

Operator

Your next question comes from the line of Dan Ries with Collins Stewart.

Dan Ries – Collins Stewart

A few of my questions were just asked, but maybe I could ask this. You say that you’re going to reduce your exposure to the German customers in the back half of the year, but I think you then indicated that the German customer orders will still be strong. Are you choosing, then, to just to reduce your sales to some customers and then favor Italian customers and U.S. customers? As you do that, is that the source of why your ASP may rise a bit in local currency terms in the back half of the year?

Peter Xie

Yes, what we said, well, our strategy is actually – as we are increasing capacity, we actually start giving our increased capacity to many of our non-German customers. Actually we are signing up many substantial customers outside Germany. So we can – unfortunately we cannot disclose the names but we are signing up some really substantial customers in U.S., in China as well in Italy and in Australia. So those are continuing support, give us strong demands in the second half. So not only from German customers started deploying into U.S. and rest of the world, but also other customers from outside Germany.

Dan Ries – Collins Stewart

Okay. And in your guidance, because you mentioned that 35% of shipments may come from services or what I call tolling, that implies, I guess, the growth from may be 150 megawatts in the first quarter to 165 megawatts, give or take, in the second. Am I correct that almost all of that is tolling, and is that just due to capacity constraints at this point? It doesn’t seem like you’re guiding for additional standard module shipments.

Peter Xie

For second half?

Dan Ries – Collins Stewart

No, for second quarter, yes.

Peter Xie

Second quarter, I think compared with fourth quarter, I think our module processing business, I don’t think there is an increase. It’s actually pretty steady with Q1, right, increase slightly?

Dan Ries – Collins Stewart

Maybe I will follow up because my numbers are showing almost 40% increase if – do you have 35% of the 160 to 170 being service. I can follow up offline if that’s okay.

Peter Xie

Yes, actually I think we also expect our module also increase in Q2 as well and also for tolling as well. So both will increase in terms of the shipments in Q2 relative to Q1.

Dan Ries – Collins Stewart

Are the tolling increasing faster? Maybe I could ask it that way.

Peter Xie

I would say almost the same or slightly high in terms of tolling business.

Operator

Next question comes from the line of Christine Hersey with Wedbush.

Christine Hersey – Wedbush

Could you just talk about pricing for Q3? I know you’re expecting ASPs to possibly be up on a constant currency basis over Q2. But can you give us some idea of how much of the volume that you expect to ship in Q3 you already have firm pricing for, and then maybe also for Q4?

Gareth Kung

Right now I think we have over 300 megawatts firm commitment from customers in second half. That is including both Q3 and Q4. The Q3 price is pretty firm and the Q4 also. So I think the only visibility we have less clear is in November, December. So those are actually we are seeing customer demand mostly coming from Asia customers because there is still – because logistic, we can still shift to Asia, where they are still be accounted as 2010 installations. But for Germany and other part, those – people start considering 2011.

Christine Hersey – Wedbush

And, I’m sorry, could you just clarify, did you state already what the percent of shipments from tolling was in the first quarter?

Peter Xie

Think it’s 20 –

Gareth Kung

We disclosed, in terms of revenue, is about 7.2%.

Christine Hersey – Wedbush

Okay, but not in shipment numbers?

Gareth Kung

Actually we don’t disclose shipment number because just to protect our customers in terms of giving too much information on pricing.

Christine Hersey – Wedbush

And then one of your competitors this week mentioned that they were looking for 2011 global PV demand to be maybe flat, and they were just expecting increased barrels over market share. Are you expecting 2011 PV demand to be up or flat, or what’s your outlook?

Peter Xie

Well, there are a lot of theories of which way this goes. Right now I think the visibility is not very strong. I think we believe other countries are going to be – actually grow very robust especially U.S. and China, Australia, and France and Italy. But I think Germany is really the big because Germany by far the biggest market. So there many different theories on how Germany will be. I hear different theories, Germany may still continue to be strong. If Germany even to be flat compared with 2010, we will still expect a growth here. If Germany is going down, then I think depends on how much goes down. Right now we do not have a clear visibility yet.

But from a customer forecast so far, they are still projecting a growth but I think it is yet to be seen after we see this feed-in tariff reductions.

Christine Hersey – Wedbush

And then just finally, in the U.S. for your opportunity there, are you pursuing like the residential or small commercial installations, or are you looking to partner and do larger scale projects, or I guess what’s your strategy?

Peter Xie

I think that’s a very good question. Actually we are pursuing both. For the residential customers, actually we are – many a time we are working with our partners because we do have a lot of people on the ground and more better distributions and more brand recognitions. So for those in residential, we partner with our partners and for our ground mounted system for large scales, customer are more sophisticated, they actually like to deal directly with us. So we are working – actually working on both fronts.

Operator

Next question comes from the line of Edwin Mok with Needham.

Edwin Mok – Needham

Let me first ask, can you clarify what do you expect your processing business as a percentage of total sales for the second quarter?

Peter Xie

In terms of shipment wise, the tolling business, we think are about 35% of our overall shipment.

Edwin Mok – Needham

And then if I can ask, if I look at my model, it’s look like your processing business or your tolling business prices actually came down a little bit sequentially. Is that in line with your overall ASP decline for the last quarter and how do we look at that going forward?

Peter Xie

Our ASP, I don’t think that – well, the processing, I don’t think – they are going to decline much and actually probably going to be steady, maybe slightly up in the second quarter in Q3.

Gareth Kung

I think in terms of ASP for processing business in Q1, it has come down a little bit compared to Q4. But as what Peter mentioned, I think we expect the pricing will stay firm or maybe up a little bit going forward.

Edwin Mok – Needham

And then can I ask what was your poly cost for the first quarter and the blended basis that you’re reporting your cost (increase)? And then also how much do you guys actually pay to buy poly and do you see that cost going up in the second quarter?

Gareth Kung

Yes, poly cost reflected in Q1 is about $55 per kg and then we are buying poly at about $50 to $55 per kg, so it’s pretty close.

Edwin Mok – Needham

So basically whatever high cost poly inventory that you had, you have already worked that down?

Gareth Kung

That’s right, that’s right.

Edwin Mok – Needham

And then lastly, I think, Peter, you have talked about it several times before, that you believe you guys have the lead on OEM business, right? Of the shipment of 150 megawatts shipment, can you quantify how much of that was OEM module business versus selling either your own brand, or at least as a brand? Is there any way you can quantify that and how you look at that going forward as well?

Peter Xie

Yes, excluding our module processing business, our OEM business with our own brand is about half and a half, fluctuating month on month but roughly I think half and half. Going forward I would expect that the OEM business will continue to grow, but our own brand may grow faster in the long run.

Edwin Mok – Needham

Yes. Then in terms of regional, is that a difference, meaning that are you more focusing a brand in certain regions of the world?

Peter Xie

We see actually, in the new region, the emerging market, actually our own brand actually growing very fast. Actually much faster than the OEM brand.

Edwin Mok – Needham

I see. So your strategy is, at least for your own brand, is to focus on the emerging markets?

Peter Xie

Yes, I think what happens in the emerging market, they are not a lot of incumbents like in Europe. So that’s maybe why there are not as many of OEM opportunities per se. It’s just not because we have a change of strategy. We didn’t have any change of strategy. We still want to support our OEM customers going (inaudible) with OEM and also our own brand. I think this two actually complement each other. But in the new market I just see there are less OEM opportunities because there are not less incumbents like in Germany for example.

Operator

Next question comes from the line of Dylen Liu with Pacific Epoch.

Dylen Liu – Pacific Epoch

Actually, you mentioned that your Q2 ASP will decline about 5%, 6% just because your Euro-denominated price will flat or increase a little bit. I’m just wondering can you renegotiate the price with your clients and why your competitors say the U.S.-denominated price will be flat in Q2 versus Q1.

Peter Xie

I think that’s a very good question. I think it depends on – I think the sword has double edge. So it depends which customer you are dealing. With your long-term customers, you will have this stability, right, at the same time you also have commitment. The long-term customers, they are also signing contracts for six months or a year. For a customer like that, you do not like to change the price more often because the firm commitment when the market is down they actually appear at a higher price. When the market is up they will expect your support at the same time.

However for our customers which we have quarterly business reviews, then you have a chance to adjust the price every quarter. So we have a combination of both that we will be able to adjust price, which we will have our customers – we like to have a long-term commitment which we do not adjust price as frequently as we like, right. I think this is just the benefit and also a disadvantage. We cannot have the benefits of both.

Dylen Liu – Pacific Epoch

Okay. For the 300 megawatts commitment for the second half of this year, is this a firm price or a negotiable on the price?

Peter Xie

Most of them are pretty firm price.

Operator

(Operator Instructions) And our next question comes from the line of Michael Sumetsky [ph] with American Capital.

Michael Sumetsky – American Capital

Good afternoon guys, a great quarter. I have one question. Maybe others have forgotten or are aware of something I’m not, but in September of 2009 Solarfun announced the letter of intent to develop the two solar projects in Inner Mongolia totaling 600 megawatts. Is that still on your blackboard or could you give us some color on that?

Peter Xie

Yes. I think in China right now there is some policy changes in the Chinese central government. So we are actually watching them very closely on how that policy is going to affect, whatever we –so many others, not including – not only us, many other of our peers have also signed bigger contracts, right. I think the policy of the Chinese government, I think right now we see some changes right now. For example, they are actually putting eight bigger projects to be on bid, so to determine in the feed-in tariff maybe for starting in 2011.

Now based on that, maybe that the contract everybody signed, and maybe up for reallocation, if that’s true or not, we don’t know but there is a possibility. So, so far it’s still on our blackboard but also we are anxiously waiting for the Chinese government policy, especially central government policy on how they do the feed-in tariff, what’s the regulations and how they are going to allocate the land. So all of that will maybe have impact on provincial government because bear in mind the contract we have signed with provincial or city governments. Those are subject to regulation from the central government. So I think we are waiting to see what can happen with the central government policy.

Michael Sumetsky – American Capital

So, if anything, it’s going to be in the beginning of 2011 or when they announce that national set policy?

Peter Xie

Yes, when they announce the set policy I think we will have more clarity on what’s going to happen to the contract we sign.

Michael Sumetsky – American Capital

All right. Anyway, however they turn out, great quarter, guys, and I wish you luck in the future.

Operator

Our next question comes from the line of Pranab Sarmah with Daiwa Capital.

Pranab Sarmah – Daiwa Capital

Hi, good afternoon, this is Pranab from Daiwa Securities. A few questions. Can you give us some breakdown of your shipment mono versus multi on the Q1?

Peter Xie

Roughly we have about 20% for mono, 80% for multi.

Pranab Sarmah – Daiwa Capital

20% and 80%. You are making all your wafer in-house multi. So mono wafer, basically, you are outsourcing now, right? You’re getting –

Peter Xie

No, we also make in-house mono wafer as well.

Pranab Sarmah – Daiwa Capital

Okay, and capacity you have. And how many percentage of your in-house capacity is mono?

Peter Xie

Which is about 20%, 25%, which is mono and the rest is multi for the year ingot wafering.

Pranab Sarmah – Daiwa Capital

Given the high conversion efficiency in the mono, what are you seeing? Are you seeing a bigger demand on the mono wafer – mono cells now or the multi cells from your customers?

Peter Xie

From the customers like we, so for the customer demand we are seeing strong demand on poly but some markets, actually they require exclusively mono. So overall, we still see larger demand on poly and lower demand on mono. Now, bear in mind that mono has a little bit of higher processing cost. So going for poly, there are cost differentials.

Pranab Sarmah – Daiwa Capital

And for your capacity expansion plan, how much CapEx you have allocated altogether for this year?

Gareth Kung

About $95 million U.S. dollar just for the whole of 2010.

Peter Xie

So this $95 million actually will also include not only for capital equipment but also includes some of the downstream project investments and also includes some infrastructure deals like we are building some large buildings. For example we are building a big campus, cell buildings, which will allow us to accommodate 500 megawatt cell, expansion if we choose to do so. And also another module lines, module buildings which allow us to expand additional 1.2 gigawatt if we decide to do so.

Pranab Sarmah – Daiwa Capital

If I take out the money you put for the project development for building and machinery, how much you are going to put in out of $95 million?

Peter Xie

For just pure capital equipment, right?

Gareth Kung

About $40 million to $50 million.

Pranab Sarmah – Daiwa Capital

One question is your guidance for the second half looks like you are just 50-50 sort of thing. You are going to hit about 320 megawatts in the first half and you are guiding for 650 megawatts, means another 320 megawatts for the second half. And you are also adding capacity on the second half majority. Then depreciation expenses also kick in. How are you going to maintain the margin in that environment?

Gareth Kung

Yes, but we are actually, as mentioned by Peter, we are looking at our blended cost of goods sold is going down from currently at $1.46 down to about $1.25 by the end of the year. I want to make a correction, just now. I think when an analyst asked about in terms of internal wafers, our current cost is $1.19 and what’s the target by the end of the year, I think it should be about $1.10 instead of $1.15. So I just want to make a quick correction.

So with that cost reduction, actually we should see, we should be able to hold the margin quite well for the second half.

Peter Xie

Yes, just let me make another comment for second half, we are forecasting 650 megawatt. I think the reason being is we have good visibilities through October and November, December we have little bit less visibilities. Even November, December prove to be as strong as October, then you will see potential upside from 650 megawatts.

Pranab Sarmah – Daiwa Capital

And my last question is you mentioned that you have got some equipment from SMIC that is a 25 megawatt cell processing line.

Peter Xie

That’s correct, we acquired that in May.

Pranab Sarmah – Daiwa Capital

And what is the price you paid for that?

Peter Xie

I am sorry, we cannot disclose that details because it’s considered as confidential under the agreement.

Pranab Sarmah – Daiwa Capital

Okay. But just to understand, like SMIC is probably those equipments are pretty old equipments. Why you decided to buy old equipment, not buy some new equipment?

Gareth Kung

Actually the line that we acquired from SMIC is the new line, which I think they just bought mid of second half last year. So there are a number of reasons why we acquired the line. First of all, that give us an immediate expansion in capacity. Usually right now for the cell equipment, there is a lead time of about three to six months. So we buy the line from SMIC, already operating so we can have immediate access to the capacity. And secondly, the equipment is pretty good. I mean the new – relatively new line for us.

Peter Xie

Less than one year old, and if you look at the cells, the purchase procurement, external cells. Right now the current price is anywhere between $1.25 to $1.35. Now if you look at our internal module cost, that’s much lower than that than the cell. So it will give you clear reason why we want to procure external – procure the cell equipment because it will certainly save you a lot of cost.

Operator

(Operator Instructions) Our next question comes from the line of Vishal Shah with Barclays Capital.

Vishal Shah – Barclays Capital

Just a quick question on the processing. You said $1.19 processing cost. Is that the cost of turning poly into modules?

Gareth Kung

The $1.19 is assuming that we start with our own ingots and then write to the – we buy poly and manufacture ingots and then write to modules. It includes both silicon and non-silicon cost for Q1. And as I mentioned, by the end of the year, we should be looking at reducing that number to about $1.10.

Vishal Shah – Barclays Capital

I know you guys purchased some of the cells and wafers. Could you disclose what the cost from wafer to module and from cell to module?

Gareth Kung

You mean how much we paid for the –

Vishal Shah – Barclays Capital

No, the processing costs.

Gareth Kung

Processing cost, okay. In terms of non-silicon cost, for the ingots and wafer, it is about $0.30 and for the cell is about $0.18 and for the module processing, is low 30s.

Vishal Shah – Barclays Capital

Low 30s, okay. And then one other point of clarification. So you said that you had a 300 megawatts of ingot and wafer capacity currently, right?

Peter Xie

Yes, but it will increase to 360 for the ingots and 400 for the wafer by end of May.

Vishal Shah – Barclays Capital

Right, by end of May?

Peter Xie

Right.

Vishal Shah – Barclays Capital

Okay, so is it fair to say that you could produce more than 75 megawatts of wafers in Q1? 75 megawatts being the quarterly capacity, that is 300 megawatts divided by four? Is it fair to assume you could do more than that?

Peter Xie

75 times four, yes, that’s right, yes.

Gareth Kung

Wafers in Q1 should be more than 75, it’s about 85.

Vishal Shah – Barclays Capital

Okay.

Peter Xie

About 85.

Vishal Shah – Barclays Capital

85 megawatts you said?

Peter Xie

For the quarter.

Operator

Our next question comes from the line of Mark Bachmann with Auriga USA.

Mark Bachmann – Auriga USA

I just wanted to go back over those cost figures that you were just giving. If I take a look at your $1.19 and assume $55 per kg, I come up with roughly $0.86 in non-poly manufacturing costs. And if I break those down, wafer at $0.30 and cell at $0.18, I actually come up with a module cost then closer to $0.38, which is in the high 30s, not the low 30s. I’m just wondering if you can kind of explain that discrepancy. And, again, I used $55 per kg on that. And then the second part of this follow-up is, breaking those same numbers down, how do you get to $1.10 then at the end of the year?

Gareth Kung

Okay, I think in terms of module cost, actually for us, we do both the mono and multi, and also do standard or non-standards. The cost, there is some variance there. So on a blended basis, it’s about $0.35, $0.36, rough, right. But in terms of the standard, multi module will be in the low 30s.

Mark Bachmann – Auriga USA

And I had that at about – that the mono cost premium was about $0.10 a watt. Is that about right?

Gareth Kung

What’s that?

Mark Bachmann – Auriga USA

The mono cost premium, the monocrystalline cost premium then is about $0.10 per watt. Is that a fair estimate?

Gareth Kung

It’s close, not $0.10 but close.

Mark Bachmann – Auriga USA

And then can you please break down then on those same cost figures, the wafer, cell and module? How do you plan to get to $1.10 at the yearend if poly were to stay flat here at $55 a kilogram?

Gareth Kung

We are seeing – actually we expect to make progress in all the different stages. I mean we expect lot of ingots and wafer costs to come down as we expand the capacity. And then we are going to continue to make improvement in terms of the cell and module processing cost as well. So we think (inaudible).

Mark Bachmann – Auriga USA

Okay. But there’s no way to say wafer’s $0.30 now, then it goes to $0.28, cell declines and module declines. Do you have any more specific numbers that we could use on those cost figures?

Gareth Kung

Relatively maybe the cost reduction could be more in the ingots and wafer side. But we are going to make improvement in all stages.

Operator

Our next question comes from the line of Dan Ries with Collins Stewart.

Dan Ries – Collins Stewart

Just one quick question about the line that you’ve purchased from SMIC. Are you going to run that as a lone line of 25 megawatts at some plant away from your other plants, or are you moving the equipment into your own plant?

Peter Xie

Yes, right now we have no near-term plan to move them because they are running operation – they are operational and they are running very smoothly. In the future, we will consider moving that in the future. Right now it’s only 30 miles away from our main facility. So no big deal.

Gareth Kung

Well, just as Peter mentioned that we are building two new campus in (inaudible) area. We have two new buildings. The huge one now hosting the module and the cell. So once the building is up then, we are going to relocate the line back to (inaudible).

Dan Ries – Collins Stewart

You mentioned that the margin maybe on the tolling customers fell a little bit. Is that primarily due to the price that they pay you being in Euros, where your costs are more in RMB and Dollars, or was there a renegotiation that led to that lower margin?

Gareth Kung

Actually, the tolling business is in U.S. dollar, so they are not affected by Euro. So with some renegotiation in Q4, the prices were adjusted down slightly but that is going to go back up slightly again. So I think we are doing alright in terms of margin.

Operator

Your next question comes from the line of Pranab Sarmah with Daiwa Capital.

Pranab Sarmah – Daiwa Capital

My first question is on your hedging side. You had hedged at $1.35 against Euro. Is there any particular down limit? Like if the Euro falls at $1.20 or somewhere your hedging will get to (inaudible) that level or is there any floor on that or -?

Gareth Kung

I know you are talking about those (inaudible), we don’t do that. So basically, all this hedge in place will stay in place.

Pranab Sarmah – Daiwa Capital

Okay, but the hedging costs going forward probably will be quite expensive in that case. Whatever you have done so far is done, right?

Gareth Kung

No, what I mentioned to you, $1.35 based on the portfolios that we have hedged so far which is still outstanding. Of course, our hedging program is on the rolling basis. So right now we hedge forward, the price we get will be lower than our – the price I mentioned, at $1.35.

Pranab Sarmah – Daiwa Capital

And one more question, I think you’re – on first quarter 7.2% of the revenue you said is coming out from the tolling business.

Gareth Kung

7.8%, I am sorry.

Pranab Sarmah – Daiwa Capital

Sorry?

Gareth Kung

No, 7.8% of the revenues.

Bernard Jamal – Daiwa Capital

Okay, 7.8%. And volume wise probably it is quite around 33% to 34% sort of range or --? Because you said that volume wise you say it will increase $1.51 to $1.60, like 4% or 5% increase, so that is what, quite similar right?

Gareth Kung

Volume rise for Q1 is less than 30% actually in terms of the tolling business.

Pranab Sarmah – Daiwa Capital

Volume rise on Q1 is less than 30% QonQ?

Gareth Kung

Yes.

Operator

We have no further audio questions at this time.

Peter Xie

Okay, with that we will thank you for turning into the call and for your questions. Any of you that have follow-up questions, feel free to call us. We will be glad to help the best that we can and another reminder analyst day, New York City, June 14, 4 PM in the afternoon. Thank you very much. Good night.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. Everyone have a great day.

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Source: Solarfun Power Holdings Co., Ltd. Q1 2010 Earnings Call Transcript

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