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

Q2 2010 Earnings Call Transcript

August 6, 2010 8:00 am ET

Executives

Tom Evrard – IR, Financial Dynamics

Stephen Cai – CEO

Marcus Cheng – Senior IR Manager

Richard Gu – VP & General Manager, Sales & Marketing Division

Analysts

Vishal Shah – Barclays Capital

Kelly Dougherty – Macquarie

Sanjay Shrestha – Lazard Capital

Adam Wiseman [ph] – Numis [ph]

Operator

Good day, ladies and gentlemen, and welcome to the China Sunergy's second quarter 2010 earnings conference call. My name is Alika and I will be your operator for today. At this time, all participants are in listen-only mode. We will have a question-and-answer session at the end of the conference. (Operator instructions) As a reminder, this conference call is being recorded for replay purposes. At this time, I would now like to turn the call over to Mr. Tom Evrard. Please proceed, sir.

Tom Evrard

Thank you, operator, and good evening, everyone. Welcome to China Sunergy’s second quarter conference call.

Before we continue, please note that the discussion today will include forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, our results may be materially different from the views expressed today.

A number of potential risks and uncertainties are outlined in our public filings with the SEC. China Sunergy does not undertake any obligation to update any forward-looking statements, except as required under applicable law.

And as a reminder, as the operator said, this conference is being recorded. With that, I'd like to turn the call over to the Mr. Stephen Cai, China Sunergy’s CEO. Steven?

Stephen Cai

Thank you, Tom. And I welcome everyone to our second quarter conference call. Joining me on the call is our CTO, Dr. Zhao; VP of the Sales and Marketing, Richard Gu; and Senior Investor Relations Manager, Marcus Cheng. Due to the health condition of our CFO Siegfried Hsu, he cannot join our earning call today.

I will be reviewing some of the highlights of our operational and financial progress before turning the call over to Marcus who will then provide a deep look at our financials as well as what we are seeing for the third quarter and beyond.

I am glad to announce that the accelerated solar market has been greatly beneficial to China Sunergy performance in the past quarter. And with operational enhancements, the company was able to reach its high end shipment guidance of 20 to 90 megawatts, which was actually 87.3 megawatt during the second quarter, generating a revenue of $117.6 million and a year-over-year growth of 67.8%.

Our outlook for this near term is very encouraging with strong expectations of rubber [ph] industry wide fundamentals.

Our gross margin has risen to 19.8 percentage in the quarter, nicely contributing to the around eight times year-over-year bottom line growth. These results were a primary function of the strategic action taken since the beginning of the year, together with solid market fundamentals. In addition, our success in exploring innovative sales strategies, and in thinking downstream partnership has widened our client scope and opened the door to a number of the value adding relationships.

During the past quarter, our focus on cell refinement in our internal operations has continued to help establish greater efficiencies, allowing us to bring more desirable solar products to our clients. This had helped China Sunergy maintain a stable ASP to most of the domestic clients, including our related parties, while slightly lowering the ASP in Renminbi to certain overseas clients due to foreign exchange losses and different product mix.

Throughout the quarter, we had continued to control our cost base due to higher utilizations of the capacity and high efficiency of 17.7% versus 17.6% in the previous quarter. China Sunergy long term strategic plans are to consume most of the solar cells produced internally with our module business, gradually transferring the company into downstream vertical integration in order to lower cost and enhance profits.

Furthermore, on a long term basis, we plan to expand into the upstream of the solar chain through merger and acquisition, finally being fully vertically integration. In the second quarter of the 2010, China Sunergy reported an operating cash outflow of $17.2 million. The main driver for this outflow has been the increase of the accounts receivable in connection with the sales to related parties as planned by the company’s long term (inaudible) strategy.

These related parties are composed of the two solar module companies, which are currently in the process of being acquired. Although China Sunergy had entered into the acquisition renegotiations, we anticipate an agreement that maximizes shareholder value will be reached by the end of this year.

Regarding the ongoing dispute with REC Wafer, the Norwegian District Court ruled in July 2010 in favor of REC Wafer. In response, China Sunergy is preparing an appeal against the ruling to be filed in August 2010.

In the mean time, China Sunergy’s injunction petition with regard to $15 million bank guarantee was sent back to the court of appeal for a new ruling after the superior court of Norway ruled in the favor of China Sunergy and overturned the court of appeals through the order, which denied China Sunergy’s petition. This result clearly demonstrates our capabilities in taking advantage of current market dynamics and driving growth through continued enhancements in internal systems and operations without losing sight of the company’s long term objective.

I would like to now turn the call over to Marcus for a review of our financial results. Following that, I will discuss what we are seeing for the third quarter and beyond. Marcus?

Marcus Cheng

Thank you, Steven, and hello everyone. I am going to briefly discuss our second quarter 2010 results, which are denominated in U.S. dollars and have been prepared under U.S. GAAP.

I am very glad to announce that China Sunergy reported a revenue of $117.6 million during the second quarter of 2010, representing a 12.8% increase sequentially. Revenue generated from solar cell, sales increased to $113 million, which means 23.2% higher than the previous quarter.

China Sunergy was able to deliver a gross profit of $23.3 million for the quarter, showing significant improvement from gross profit of $16.9 million in the previous quarter. This led to improved gross margin of 19.8%, meaningfully increasing our high end guidance and the market expectations. This high gross margin was primarily by means of higher sales prices, lower conversion cost, and a reduced inventory provision, partially offset by the higher wafer price over the second quarter. Blended ASP for the quarter had increased to $1.31 per watt compared to $1.26 in the first quarter.

We are encouraged by these resilient ASP levels as they have strongly contributed to our bottom line results. China Sunergy will be watchful of ASPs despite a rarely seen solid demand in the current orders for the coming quarter. We expect our blended ASP to remain robust for the third quarter while anticipating potential cost pressure in the second half of 2010 due to increased demand for wafers. However, our conclusion was derived as the completion of industry-wide ramp ups in the fourth quarter will likely offset part of our demand induced pressure.

Turning to the cost side, in the second quarter of 2010, blended wafer cost increased to $0.83 per watt as a result of the recent tight wafer supply environment. Other production cost, which mainly consisted of other raw materials, labor, depreciation, and utilities were 3% lower than the previous quarter. We are pleased to have attained the production goal we have set a year earlier and that was reached by means of significant improvement in production efficiency.

SG&A expense in the quarter were reduced to $4.8 million, resulting from continued improvements in the internal accounting controls.

Our improved gross margin level and effective management policies have positively attributed to China’s Sunergy’s profitability over the past two quarters showing signs of a successful turnaround story.

Net income for the quarter was $13.8 million, demonstrating a tremendous year-over-year and a quarter-over-quarter growth. The company continues to maintain a strong balance sheet. As of June 30th, 2010, China Sunergy had cash and cash equivalents of $127.2 million. We continue to believe the company is in a financially secure position and fully capable of funding ongoing operations and future business plans.

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

Stephen Cai

Thank you, Marcus. With the robust market demand and based on our sales efforts, looking to the third quarter, we expect a strong shipment of 85 to 90 megawatts for the quarter bringing the total shipment to between 320 megawatts to 350 megawatts for the full years of 2010. (Inaudible) estimates we had provided earlier in the year.

Additionally, we anticipate gross margin to be in the range of 15 percentage – I am sorry, 16 percentage to 19 percentage for the coming quarter.

This is concluding our prepared remarks. And we will like to open the call for questions. Operator?

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line Vishal Shah with Barclays Capital. Please proceed.

Vishal Shah – Barclays Capital

Yes, thanks for taking the question. On your third quarter guidance, what kind of ASPs are you assuming and what kind of wafer costs are you assuming for the quarter, and then how do you see pricing in wafer cost strength in the fourth quarter?

And then second question, your guidance for the full year does not include any margin business, is that right?

Stephen Cai

Yes.

Vishal Shah – Barclays Capital

Okay. Can you may be talk about the margin – the pricing and cost assumptions for the third and the fourth quarter please?

Marcus Cheng

Vishal, may be I responding on the ASP side and later on Stephen will responding the margin and wafer cost. We can see the market demand will be still continue strong to mid Q4 so there could be a strong price trend for that. We are seeing that there will be still like the 2% to 3 price increase in the coming quarter.

So, Stephen may help to answer the margin and cost of wafers.

Stephen Cai

Could you please repeat your questions about the margin or wafer costs?

Vishal Shah – Barclays Capital

Yes, I am trying to understand what kind of wafer costs are you seeing in the third quarter. You said $0.83 per watt in the second quarter. Are you looking at $0.85- $0.87 per watt in the third quarter and how should wafer costs look like in the fourth quarter?

Stephen Cai

Okay, so, third quarter – we have this – expect this above $0.86 per watt. But in fourth quarter I just say based on this current situation, may be just have slightly up in fourth quarter of the wafer price.

Vishal Shah – Barclays Capital

Okay. And then can you talk about your plans on the margin business? I mean what’s going on with the negotiation process, what exactly are you trying to negotiate/

Stephen Cai

Okay. Yes, now in third quarter we now so we don’t have this including this margin the modules the revenue and everything. But we are still under negotiation – we are negotiating with the process. We have the plan – to the – to acquire this two module companies and try the best to close the case by the end of this year.

Vishal Shah – Barclays Capital

Okay, and then just one last question. Can you give us some comments on how you think 2011 cell pricing outlook looks like right now? Do you think prices have to come down and what kind of negotiations are you currently working on for 2011? Thank you.

Unidentified Company Representative

Okay. As everybody knows that due to FIT [ph] in some of the major countries like Germany, Czech Republic and Italy, so people foresee see that the market share in Q1 to (inaudible) might be slowing down. So that we try to cope with this. We still diversify our customer bases in the various regions in addition to our partnership with our client for the ongoing projects for the PV business.

Vishal Shah – Barclays Capital

Can you give us a number for ASP in Q1, what kind of outlook are you seeing right now? Are you looking at $1.10 – $1.15 or higher than that? Thank you.

Unidentified Company Representative

Well, just have to say, but based on the experiences we are looking at may be 5% to 10% reduction on the prices.

Vishal Shah – Barclays Capital

That’s great. Thank you so much.

Unidentified Company Representative

Thank you, Vishal.

Stephen Cai

Thank you.

Operator

Your next comes from the line of Kelly Dougherty with Macquarie. Please proceed.

Kelly Dougherty – Macquarie

Hi, thanks for taking the question. I am just trying to understand what happened between March when you made the module acquisition announcement and July when you announced the renegotiation? Did something happen at those companies that adversely impacted the margins or are you just kind of looking at the environment and seeing how strong cell sales are now and you want to just push things back until later in the year? Hello?

Stephen Cai

Okay, yes. The two targeted companies have wide and direct overseas clients, coverage in Europe and Australia, U.S., Korea, Japan and Asia markets. And there is two targeted companies really have with three years working experiences in module business. We already have seen the margins improvement of the two companies starting from July. In terms of agreements on the renegotiations – will be reached and that we think that this will most likely the deal will be closed by the end of this year.

(Inaudible) taken by China Sunergy are to maximize the shareholder value and reflects our dedications to our shareholders.

Kelly Dougherty – Macquarie

Again, I am just trying to understand what happened between March when you made the announcement and July when you decided to renegotiate. Is it just that you saw that you make higher margins, selling more cells and have decided that you are going to defer moving downstream for now or did something happened to the margin profile of these companies?

Stephen Cai

Okay. So, why is this we didn’t acquire these modules if what assumed – was because at least the – we have concern with the foreign exchange losses of the two module manufacturers and to look at this now, this is currently the exchange rate. We have this slight modest confidence to look at this foreign exchange. So we started to think of this and renegotiate where this CEEG for the acquisition.

Kelly Dougherty – Macquarie

Okay. Can you give us an idea of the selling price for CEEG modules relative to some of the other Chinese companies.

Marcus Cheng

Yes, Kelly, I would continue Stephen’s answer. We are still looking at Q3 very strong demand. So for the CEEG modules had wide coverage in the European market. They have a very good reputation among the various customers. We do have a lot of capabilities in Italy and in Czech Republic so that we see that there is a coming orders in the pipelines for the quarters coming. So we do see that we have a strong demand plus that we are able to increase price somehow followed this by market share.

Kelly Dougherty – Macquarie

Okay. But how about relatively, Solarfun just reported earlier this week, they said I think ASPs were $1.65 for the second quarter. How the CEEG sell relative to someone like that? Do they sell at a discount? Do they sell at the same price?

Marcus Cheng

Probably I can't comment Solarfun’s but I think that probably a different company have different business model. May be they have their clients basis. We do have a very wide and direct business relationship with the clients. I don’t know Solarfun. May be they are trading through the distributors or different OEM models.

Kelly Dougherty – Macquarie

Okay. Not just Solarfun though, relative to the other Chinese companies, you have the – CEEG have to sell at a discount to those companies?

Marcus Cheng

Selling to the European clients or the domestic–?

Kelly Dougherty – Macquarie

Yes, generally speaking. Are their ASPs lower than some of the other Chinese companies ASPs who are selling into the same European markets?

Marcus Cheng

Well I will say that we are keeping it consistent.

Kelly Dougherty – Macquarie

Okay. And then can you just tell us how much module capacity – let’s say this closes at the end of the year, how much module capacity they have now and then they may be intending to add?

Stephen Cai

Okay. So, I think module capacity currently we have is about 500 megawatts. Just is the estimate and they have the plans and this discussion is going to 900 megawatt by end of this year. But, yes, that is the now the situation. I have know this yet.

Kelly Dougherty – Macquarie

Okay. Thank you.

Stephen Cai

Thank you.

Operator

Your next question comes from the line of Sanjay Shrestha with Lazard Capital. Please proceed.

Sanjay Shrestha – Lazard Capital

Right, thank you. Couple of follow-up questions on that, guys. Number one, this receivables that you have from the related parties on your balance sheet, is that related to this two module companies or is there anything more to it than that, I just want to make sure what that number exactly relates to. Hello?

Marcus Cheng

Partially, yes.

Sanjay Shrestha – Lazard Capital

Okay, and so the –

Stephen Cai

And I think so – partially yes. I think the credit pertains to related parties was the main driver as we offer large amounts of the credit actually to related parties by supplying more volume due to the strong market demand during this quarter. This is part of the company’s downstream strategy as the China Sunergy plan to consume most of this internal cell mainly for our module operation.

Sanjay Shrestha – Lazard Capital

Okay, okay.

Stephen Cai

We will carefully watch the accounts receivables.

Sanjay Shrestha – Lazard Capital

Okay, okay and–

Stephen Cai

I am sorry, continue.

Sanjay Shrestha – Lazard Capital

So, is there an expectation as to when you might be able to collect on that?

Stephen Cai

Yes, correct. Yes, in third quarter I think so we will have this somehow very good receivable situation.

Sanjay Shrestha – Lazard Capital

Okay, perfect—

Richard Gu

Sanjay, this is Richard. In addition to Stephen’s answer actually with the strong demand in Q3 and there – what we see that they are able to show it in the credit terms. So, actually the Q3 we have to – foreseeable Q3 credit terms would be shorter than Q2.

Sanjay Shrestha – Lazard Capital

Perfect, okay. let’s get to – yes, a few additional question, guys. So you are sitting on a very healthy cash balance and so what do you think is going to be the strategic use of that cash? What’s your cost surrounding the capacity expansion as you go into 2011 and I have two more follow-up questions?

Stephen Cai

You look at this our cash flow is very healthy.

Sanjay Shrestha – Lazard Capital

Yes.

Stephen Cai

And look at our downstream strategy, so we have this very good view to look at this downstream – downstream is the plan we have. In terms of the downstream strategy we have this downstream. We will like to be downstream vertical integration company so the acquisition. Secondly, we will carry the benefit what is the cost of reduction. So that I think it will increasing – that is the acquisition and strategy we will increase our margins in coming future. And most of these solar cell produced internally are mainly for in-house module operations and in terms of the capacity I already shared with other guys minutes ago. Okay.

Sanjay Shrestha – Lazard Capital

Okay, great. Two more questions. Number one, you guys seem to obviously getting a great pricing, which is fair given your high efficiency cells. Now wafer prices also remain relatively good for you guys somewhat even below the spot markets. So, can you give us a sense as to how much of that wafer supply is coming under long term contract, how much are you buying in the spot market?

And as I said one more follow-up on them, I think your response to Vishal’s question about pricing for 2011 down 5% to 10%. Is that your expectation or do you actually have some commitment from the customers that gives you a confidence that that’s what is going to be definite [ph] cell pricing in ’11?

Stephen Cai

That is the complete list of questions. Okay, I will answer individually. The price of the wafer in the coming quarters, I think as the price – as I said this will go up slightly based on the current price. And then (inaudible) suppliers, the supplier – supply, I think so well we have this a better situation versus last quarter. We have more than 20% of the contracted supplier of the wafer and rest of this still regardless [ph] the wafer for market. And totally I think end of this year we will have this 400 capacity of the fab by the end of this year. So, still going back to the strategy. Now we have this –have 400 – we will have this 400 megawatt of capacity by end of this year. Next we still want to go into the – to do more the vertical acquisitions something in the next years. So, in this case we will have this plan to expansion of the fab and module in the next year. But still it’s under discussion.

Richard Gu

Sanjay, Richard again.

Sanjay Shrestha – Lazard Capital

Yes.

Richard Gu

You are asking for more or less that how we do the sales along with the purchases. Actually we – that once we get commitments from the – from our clients then we try to link together with our purchasing suppliers so that we can get both committed from the suppliers and buyers. That’s what we try to do more.

Sanjay Shrestha – Lazard Capital

Okay, okay, terrific. Thank you so much guys.

Stephen Cai

Thank you, Sanjay.

Operator

(Operator instructions) Your next question comes from the line of Adam Wiseman [ph] with Numis [ph]. Please proceed.

Adam Wiseman – Numis

Hey, guys, just wanted to follow-up on one answer you gave. Did you say that you saw wafer prices go into $0.86 in the third quarter and then higher in the fourth quarter?

Marcus Cheng

So would mind repeating your question again. There is some pausing on the line.

Adam Wiseman – Numis

Did you say wafer prices are going to $0.86 in the third quarter and higher in the fourth quarter?

Stephen Cai

Yes I think well they may be slightly above this $0.86 to $0.89 range per watt.

Adam Wiseman – Numis And where do you see them going in 2011?

Stephen Cai

Well plus when people reduce.

Richard Gu

But, okay, seriously looking at the supply-demand with the three major cuts in Germany, Italy and Czech Republic, the total demand might be slowed down in the first quarter. So we foresee that – the supply will be over the demand. And in addition that a lot of our companies that increase their wafer and ingot capacity. So by this two sides probably the supply will be slightly over than the demand either Q1 or 2011.

Adam Wiseman – Numis

Do you see wafer prices dropping more or cell prices dropping more?

Richard Gu

That should be going together. Once the wafer price down then the solar cell price will be down as well.

Stephen Cai

And we of course we also helped to this strategic move to benefit our cost structure, of course.

Adam Wiseman – Numis

Great. Thank you.

Stephen Cai

Thank you.

Operator

The next question is a follow-up from the line of Vishal Shah with Barclays Capital. Please proceed.

Vishal Shah – Barclays Capital

Yes, hi, thanks for taking my question. Can you talk about how many new cell lines you are seeing right now in China – coming on in China and when do you think more cell supply will come online based on your estimates?

Marcus Cheng

Sorry, there is still pause again, would you mind repeating your question again?

Vishal Shah – Barclays Capital

Yes, we’ve been hearing that there was some shortage of equipment to make solar cells and I think that a lot of the equipment is coming on as we speak, so I am trying to understand how many new cell lines or cell capacity is coming online in China as we speak or in the second half and when do you think you could get into that situation where there is a lot more cell capacity? Do you think it’s mostly 2011 or you think it could also be in Q4?

Richard Gu

Vishal, this is Richard, again. Of course, right now we don’t have the statistic number yet. So, we do see there is a capacity increase in China Mainland. So likely that if the ingot and wafer supply is getting ample then those solar (inaudible) probably can catch materials as well. So, that’s why once the demand is coming down, then it will be – have ample supply.

We are looking at a number like 8% growth for the capacity of solar cells supply.

Vishal Shah – Barclays Capital

Thank you.

Operator

At this time, there are no further questions. I would now like to turn the call back over to management for closing remarks.

Stephen Cai

Thank you very much. Thank you, everybody to join the call.

Operator

Ladies and gentlemen, this concludes the presentation. You may now disconnect. Thank you and have a great day.

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