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Executives

Paul Combs - VP, Strategic Planning

Gareth Kung - CFO

Ping Peter Xie - President and CEO

Analysts

Jesse Pichel - Jefferies Sam Dubinsky from Wells Fargo

Vishal Shah - Barclays Capital

Edwin Mok from Needham & Co.

Dan Ries - Collins Stewart

Mark Bachman - Auriga

Kelly Dougherty - Macquarie

Josh Baribeau - Canaccord

Solarfun Power Holdings Co., Ltd. (SOLF) Q3 2010 Earnings Call November 9, 2010 7:00 AM ET

Operator

Good day, ladies and gentlemen and welcome to the Solarfun third quarter earnings conference call. My name is Madge and I’ll be your coordinator for today. At this time, all participants are in a listen-only mode. We will be conducting a Q&A session towards the end of this conference. (Operator Instructions) As a reminder this conference is being recorded for replay purposes.

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

Paul Combs

Thank you and good morning everyone. Welcome to our call and we appreciate your continued interest in Solarfun. Joining me today are my colleagues, Peter Xie, our President and CEO, Gareth Kung, Chief Financial Officer. And (inaudible) Managing Director of Hanwha Chemical Corporation.

Before we continue, I’d like to remind you that you can download a PowerPoint file that will accompany this presentation on our IR website. If you are on a mailing list, you should have received this file in conjunction with our earnings release. I need to take a moment and remind you of our Safe Harbor policy, which is also included in the earnings release and posted in its entirety on slide two of the slide package.

Gareth will open with the financial summary of the third quarter just announced, followed by Peter’s review of some of the key elements of our progress including an outlook for the remainder of the year. Mr. Lee will conclude with some formal comments introducing Hanwha and address several questions we commonly received including why Solarfun, what does Hanwha bring to the table, and how do we plan to work together.

Now Gareth will walk us through the details of another outstanding quarter for Solarfun.

Gareth Kung, Chief Financial Officer

Thanks Paul, good morning. As you can see from our reported results, our business momentum and financial performance came in ahead of our expectations and continues to show steady improvement. If you’re following along the presentation file, slide three to seven cover the third quarter review.

We recorded good gains in year-over-year and quarter-over-quarter shipments. And ASPs improved largely due to a recovery of the euro as well as strong market demand. Gross margins rose in spite of increased raw material costs. The company continues to generate strong net earnings and EPS growth as well as achieve our return equity, well above most of our peers.

Revenues for the third quarter achieved another quarterly record, reaching 226.7 million. This represents a 24.7% increase from the second quarter of 2010, while ASP increased from $1.65 to $1.75 during the same period.

Total shipments, including module processing services, rose 9.4% to 223.9 megawatts in the third quarter 2010 as compared to the second quarter of 2010, when we shipped 204.6 megawatts. Module processing services accounted for approximately 6.9% of total revenue for the quarter.

As shown in the pie chart on slide five of our presentation, we are quite pleased with the traction we have achieved in important new growth markets, especially in Italy, in US and China. Based on the shipment data and excluding module processing, for the third quarter of 2010 Germany declined from 63% to 53% of shipments compared with the second quarter. Italy rose from 9% to 15% and US from 3% to 7%. China remained constant at 5% of total shipments. Other important markets were Australia and Belgium at 6% and 5% respectively.

Gross profit increased 34.6% quarter-over-quarter to 74.2 million. And gross margin improved to 22.7%. This margin improvement was largely driven by the increase in ASP. Raw material supplies from poly to module components remained tight and we needed some price increases during the third quarter. This resulted in a slight increase in blended COGS per watt, excluding module processing services, from $1.31 in the second quarter to $1.35 for the quarter just reported.

The blended COGS takes into account the production cost, both silicon and non-silicon, using internal wafers, purchase costs and additional processing costs of externally sourced wafer and cells as well as freight costs. For modules made with internal wafers, we experienced an increase in cost per watt to $1.16 from a dollar trough in the second quarter, primarily due to the high cost of polysilicon. Peter will provide some further comment on our expectation for the manufacturing costs and gross margins in the future.

Operating profit increased 45.5% quarter-over-quarter to 58.6 million, which represented a 17.9% operating margin as compared to 15.4% in the second quarter. We continue to take a disciplined approach to watch managing the operating expenses while investing in our brand, sales and marketing and technology. Low operating expenses as potential revenue relative to our peers is one of our continued benefits of our OEM business model.

Operating expenses as a percentage of total revenue declined quarter-on-quarter to 4.8%, which was way below our guidance of 6%, largely due to higher shipments and revenue. Interest expenses stayed flat at around US $6 million. Our current hedging strategy remains consistent with above 50% of our euro exposure hedged six months ahead. With euro rising relatively to a dollar during the third quarter, we experienced a net foreign exchange loss of 4.8 million. On a non US GAAP basis, net income attributable to shareholders for the quarter was 40.9 million, an 18.1% increased from the preceding quarter.

Net income for basic ADS on a non-GAAP basis for the third quarter was $0.69, which represented a 15.6% increase over the second quarter. That number will lower due to the coming shipment for the changing of fair value of the conversion features of the company’s convertible bonds.

On a GAAP basis, we recorded net loss attributable to shareholders of 2.8 million, a net loss of basic ADS of $0.06. Again, we’d like to remind you that fluctuation in the fair value of the convertible feature of our converted bonds are primarily due to changes in our share price which we obviously can not control.

On slide seven, we provide some details about our balance sheets and returns. Return on equity is an important focus for the management team and we continue to compare preferably to our most of our peers. For the third quarter, annualized ROE on a non-GAAP basis reached 35.3%. As of September 30, 2010, we’ve maintained a healthy cash balance of 193.6 million and net working capital of 400.8 million. Net debt to equity remains below 21% and our debt maturity profile continues to compare favorably with our peers with a potential put on our convertible bond not due until 2015.

Accounts receivable increased to 192.8 million in the third quarter, in line with shipments and revenue growth. Day’s sales outstanding improved from 48 days in the preceding quarter to 46 days. Inventories increased about 16 million quarter-to-quarter to 103.1 million. We continue to improve our overall supply chain management. Days inventory outstanding saw good progress quarter-to-quarter reaching 75 days for the third quarter, down from 43 days last quarter. Inventory management is an area of continuing management focus and we are pleased with the progress during the quarter.

Capital expenditure was 17 million in the third quarter and totaled 57.8 million for the first nine months of 2010.

Peter will now focus on the key area of strategic focus for the company as well as provide our outlook for the remaining of 2010. Peter.

Ping Peter Xie

Thanks, Gareth. As you can see from our results, we continue to make considerable progress in a number of areas including profitability, shareholder returns, working capital management and the geographic diversification. We remained optimistic about the reminder of the year and for 2011.

If you are following along in the presentation file, slides eight through ten cover my remarks. In addition to the integration with Hanwha, the main areas of focus for us are, one, expanding our geographic footprint outside Germany; two, increasing production skill; three, reducing manufacturing costs; four, pushing technology advancements.

As you hopefully noted from Gareth’s comments, our efforts to broaden our business outside Germany are well on track and you can expect to further improve that in the fourth quarter. We believe Germany will fall well below 50% of our 4Q shipments. The new markets like Italy, US and China will each account for 10% or more of shipments. Each of these three new markets are anticipating to double next year and reach 100 megawatts or higher.

Other market such as Australia, France and the Netherlands look good in 4Q and we will register our first sale to Greece as well. In the US and in Europe, we are already working together with Hanwha team investigating downstream project opportunities with our customers with a project pipeline of over 1 gigawatt.

In Southeast Asia and China, we’re establishing our own EPC capability and we’ll start and complete our largest 8.1 megawatt EPC project in China for the Chinese Golden Sun Initiatives.

Our manufacturing strategy has been based on a concept that we have labeled an inverted pyramid whereby our low capital costs volume capacity exceeds our relatively higher capital cost cell on the wafer capacity which ensures that fully utilized our high capital costs share of the wafer capacity. That being said, we currently experience a $0.15 per watt cost penalty for not being been fully vertically integrated. And as you have seen from our recent announcements, we are working at closing that gap with a doubling in both wafer and cell capacity in 2011.

Slide eight shows that by year-end 2011, we expect to have 1.3 gigawatt of cell capacity and 800 megawatt of Ingot and wafer capacity. These will at least double our 2010 year-end wafer and cell capacity.

As mentioned previously, the supply chain for raw materials remains tight and increasingly expensive from polysilicon to a variety of other material used in the production of sales in the modules. This was reflected in our 3Q cost data, where we experienced small increases in blended and vertically increment cost per watt. While we believe these are short-term in nature, we do not expect the pressure to abate until early next year.

Moving to slide nine, we’re on track to convert 160 megawatt of existing cell capacity to high efficiency cell capacity by implementing selective emitter technology. We expect to achieve cell efficiencies exceeding 18.5% from monocrystalline and the 17.0% for multicrystalline cells on this line. We’ll convert these lines using both externally purchased tools as well as our own unique in-house sequencing technology. Importantly, we have accomplished this at low capital cost with limited additional physical space and by efficiently leveraging increasing equipment and employee skills.

Now let me conclude with the specific targets for the fourth quarter and the full year 2010. You can also find this on slide 10. The regional full year shipment guidance from 760 megawatt to 785 megawatt. For 4Q 2010, total module shipments are expected to be 205 to 215 megawatt of which 25% to 30% will be for module processing services.

We should note that the quarter-to-quarter shipment volume will be reduced slightly for two reasons. One, some or our cell capacity will be shut down temporarily as we retrofit selective major technology. And two, we will likely reduce the purchase of increasingly more expensive external wafers in the cells in order to maintain our margins. For the fourth quarter’s ASPs, excluding module processing services are expected to rise slightly from the third quarter assuming that euro/ US dollar exchange rate remains at approximately 1.35. We’re targeting gross margins of around 20%, assuming the average euro exchange rate is $1.35 for the quarter.

I have intentionally kept my comments brief in order to allow adequate time for (inaudible) from Hanwha to introduce you to our partnership with Hanwha. We are working well together and are increasingly confident about the benefit these new strategic investors bring to Solarfun. (inaudible).

Unidentified Company Speaker

Thank you, Peter; good morning everyone. If you are following along the presentation, I’ll be going through slides 11 to 13. As you know, Hanwha Chemical now maintains a 49.99% ownership position in Solarfun and has three of seven board seats including the new chairman, Mr. Ki-Joon Hong, who is CEO of Hanwha Chemical.

In the brief time we have today, I would like to introduce you to Hanwha Group, explain to your our commitment to the solar business and to Solarfun and outline for you how we believe we can collectively grow this business into an industry leader.

First, Hanwha Group is a large, well-capitalized, Korea-based conglomerate with a long history of business application and achievement. We have a global brand with a diversified business mix and strong balance sheet. We will record approximately US $27 billion in revenue this year and have assets of over US $85 billion.

For Hanwha Group, solar is a major future growth opportunity. We expect to be active throughout the solar value chain, both upstream and downstream, and view Solarfun as our selected vehicle for executing this strategy. We will be focused, aggressive and disciplined in reaching our goal to become a top three solar player by 2015.

We believe the combination of Hanwha and Solarfun provides the unique mix of business skills and expertise to accomplish this goal. Between the two entities we will become a virtual vertically integrated business with scale and low cost structure.

Let me share with you, how we think this looks in the future. Under the direction of the current management team, Solarfun has already become a leading PV module producer. Solarfun has a rapidly improving brand, a much reduced cost structure and attractive shareholder returns. What’s needed, furthermore, is expanded manufacturing scale, better access to low cost raw materials, and further vertical integration to reduce costs. It will require both financial and management resources and Hanwha is here to contribute and help Solarfun by sharing both business risk and capital.

First, Hanwha actively is looking at it’s opportunities to become a major manufacturer of polysilicon. We are the second largest petrochemical company in Korea and have the resources and skill set to execute on this strategy.

Next, we will actively develop a downstream business including EPC, project management and project finance. Our existing two main businesses, engineering and construction and financial services, will provide both management expertise and financial resources to become a large downstream player.

We’ve already began this process together with Solarfun. We’re actively reviewing strategic opportunities while at the same time we’re building teams and expertise both upstream and downstream. And the accelerated capacity expansion plans that Solarfun just announced is a strong indicator of our long-term commitment.

So let’s jump forward a few years and take a look what Solarfun might look like at this point. More gigawatts, low cost, vertically integrated scale, access to high-quality polysilicon at competitive price, and a partner whose downstream business will provide captive demand for its volumes; thus a true virtual vertically integrated company and a leader in the global solar industry.

Today, this is a vision and a business plan that we have. Now, we understand the proof is in application. But please rest assured that we are mutually committed to deliver results. Our management teams are focused on further refining our joint strategy and pushing hard to achieve our goal of becoming a top three global player in the solar industry by 2015.

Thank you for the opportunity to introduce you to Hanwha and allow me the chance to outline our goals. I’ll be happy to answer our any of your questions during the Q&A session of the call. Now I’d like to turn the call back to Paul.

Paul Combs

Thank you, (inaudible). Before we answer the Q&A period I would like to inform you that we have just announced the intention to raise US $67.8 million before a 15% green shoe under our existing self registration. Contingent upon the close of our public offering, Hanwha will subscribe to an equal amount in a Reg S private placement in order to maintain their 49.99% pro rata ownership.

Using Solarfun as its flagship vehicle, Hanwha is focused on becoming a top three global player and solar by 2015. In order to accomplish this goal we need scale and further vertical integration to improve our cost structure. This requires additional capital which therefore, in part, explains this offering.

With that we’ll now open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions). And our first question comes from the line of Jesse Pichel from Jefferies. Please proceed.

Jesse Pichel - Jefferies

My question is on October 12th you raised your capacity on ingots and cells to 510 and 820 and today you’re raising it to 801.3 gigawatts. So my question is really what’s changed in a month? And also given that you’re doubling your capacity for next year and polysilicon capacities only going up production is only going up about 25% to 30%, where do you intend to get the extra polysilicon supply for 2011? Thank you.

Gareth Kung

When we announced our first expansion about a month ago, that was basically using the proceeds that have raised from Hanwha (inaudible) that we use it for the first phase expansion. Actually, at that time we have already and bear in mind that we’re going to have further expansion for 2011. And today because we’re also announcing public offering, so this is the time that we announced the additional phase expansion for 2011, so that’s what we did.

Ping Peter Xie

The reason we do just maybe complement Gareth’s question. The reason we are seeing additional capacity expansion because we are seeing a strong demand from our customers and we want to meet that demand.

Number two, for your question on the poly supply side, you know, we have been talking to a few major suppliers. So we believe that about 60% to 70% of poly has been locked in long-term contracts.

Jesse Pichel - Jefferies

May I ask one follow-up on the poly question is on the Hanwha slide, Mr. Lee, you mention polysilicon as a potential business opportunity. When might Hanwha be in the business of supplying polysilicon to Solarfun?

Unidentified Company Speaker

We actually have a stake currently in a small, private poly capacity in China. And along with that, we are deliberately looking into the opportunity to make either an invest or start from the greenfield in Korea.

Given that the usual timeframe that we need for the new capacity is over two years, we are expecting as early as 2013 it’s possible to produce. Nothing is yet 100% confirmed yet but, as I told you before, we are deliberately looking into multiple business opportunities.

Ping Peter Xie

Just one more comment on the poly purchase, as we mentioned, actually the second phase expansion is only come online in the second half 2011, so actually this increase in poly purchase will happen towards probably the second half or towards the end of 2011. You know actually we have already have planned to secure supply over the period of time.

Operator

And your next question comes from the line of Kelly Dougherty from Macquarie. Please proceed.

Kelly Dougherty - Macquarie

Just want to follow up little bit more on the expansion. I’m wondering how much its going to cost to get to the 800 megawatts of wafers, 1.3 gigawatts of cells and then 1.5 gigawatts of modules and what the cadence is for adding the new capacity for next year. Should we assume it’s relatively linear from the second quarter through the fourth quarter for all three steps?

Gareth Kung

Just to respond to your question one-by-one. In terms of expansion next year, the total CapEx is about 400 million, but just on the equipment alone for expanding capacity is about 365 million. And in terms of as mentioned actually this expansion is by phase, and capacity will come into place over a period of time. So if I can explain to you in terms of expansion by phase.

Kelly Dougherty - Macquarie

Okay. I guess the question that I’m really trying to get at is how much production do you think you can get from this capacity as it moves on through next year?

Gareth Kung

Yes. Okay actually I’m going to try and explain to you in terms of the growth in capacity for ingots and wafer and cells over the course of next year. We target to reach for ingots and wafer, we target to reach about 40 megawatts capacity by March, end of March 2011 and the ingot wafer capacities go up to 640 megawatts by June, end of June 2011 and goes up to 800 megawatts by end of September 2011. And then also maintain the same by December, end of December 2011.

In terms of cell capacity, it should go up to about 680 megawatts by end of March and then 960 megawatts by end of June and 1.1 gigawatts by end of September and 1.3 gigawatts by end of December. And in terms of module, our target capacity by end of March is 1 gigawatt, increase to about 1 increase to over 1.2 gigawatts in June and 1.3 gigawatts in September and 1.5 gigawatts in December.

Kelly Dougherty - Macquarie

That was very helpful. Thank you. And then I guess just to follow-on, do you have any sense of how much you can actually produce from them or maybe a question is how long it will take you to ramp each of these lines so that we can back into how much production you may actually get from them next year?

Gareth Kung

Okay, I’ll get back to you on this question. I’m looking at the data right now.

Kelly Dougherty - Macquarie

Okay.

Gareth Kung

Yes.

Kelly Dougherty - Macquarie

Okay. And then one other question maybe while you’re looking for that is on the SG&A expenses and the R&D expenses, there were some pretty big changes from one quarter to the next. SG&A went up, R&D went down; maybe if you could walk us through what was going on there?

Gareth Kung

R&D expenses actually went down because what happened is that into R&D actually we have some wafer and cells that we can also sell to the market and actually because of this very tight market situation in Q3, we managed to sell a lot of these R&D wafer and cells to the market. And in terms of accounting, there’s been triggered by a credit to R&D for R&D costs which led to a reduction in the R&D expenses.

Kelly Dougherty - Macquarie

Okay. And is that a level we should assume going forward or was that kind of one-off credit in...?

Gareth Kung

This is one, like a one-off kind of situation.

Kelly Dougherty - Macquarie

Okay.

Gareth Kung

Well, I think we continue to target about 5.5% to 6% OpEx against revenue.

Operator

And your next question comes from the line of Sam Dubinsky from Wells Fargo. Please proceed.

Sam Dubinsky from Wells Fargo

Couple of quick housekeeping questions. Given higher levels of integration 2011, what do you think the target gross margin will be for silicon? And I have a couple of follow-ups.

Gareth Kung

Actually, as I understand it gross margin will depend by a few variables, including the euro exchange rate, including the poly costs. But we do think that as we continue to become more vertically integrated, we think our margin should go up. As you can again, understand from our Q3 earnings release our internal wafer cost is about $1.16 with our blended COGS cost about $1.34, so there’s a gap of about $0.15 here that we can actually capture as we become more fully vertically integrated. So I would think that with our expansion next year assuming euro stay relatively strong and our the poly market becomes stabilized and trend down to what we had in early part of 2010, we should target a gross margin maybe close to or north of 25%.

Sam Dubinsky from Wells Fargo

And then did you mention what gross margin would be in Q4?

Gareth Kung

Yes, we are targeting a gross margin around 20% in Q4.

Sam Dubinsky from Wells Fargo

And then how do you seen input costs trending into 2011? Could you just maybe break it out in terms of cells, wafers and poly?

Unidentified Company Speaker

Yes, in terms of our forecast, we are forecasting poly to be about average cost to be about 0.75; and then the wafer cost is about $3.50 per piece and then the cell price is a little more expensive, about $1.47.

Sam Dubinsky from Wells Fargo

$1.47. What are your input suppliers, what are they saying about the first half of 2011? Is this pricing supposed to stay stable, go up, go down?

Ping Peter Xie

So from what we hear from suppliers, they’re saying that the prices are stable and they go down gradually; so that’s what we have been saying. We are already seeing some slight down movement on the poly.

Sam Dubinsky from Wells Fargo

And then what should we model for diluted share count assuming a secondary and with the Hanwha transaction?

Gareth Kung

I’m sorry?

Sam Dubinsky from Wells Fargo

What should we model for diluted share counts?

Gareth Kung

For Q4?

Sam Dubinsky from Wells Fargo

For Q4 and next year.

Gareth Kung

Q4 next year.

Ping Peter Xie

Up to secondary.

Sam Dubinsky from Wells Fargo

For next quarter and next year, Yes.

Gareth Kung

I don’t have a number right now but I can get that to you separately.

Sam Dubinsky from Wells Fargo

And my last question, just on tax rate. You said tax rates were a tiny bit higher in Q3. What’s the tax rate for next year?

Gareth Kung

We’re still targeting to about 15% to 20%.

Operator

And your next question comes from the line of Vishal Shah from Barclays Capital. Please proceed.

Vishal Shah - Barclays Capital

Yes, hi, thanks for taking my question. So you guys have a slightly higher exposure to the German market and its sound like the German market has slowed down recently. Have you seen any slowdown in your business with some of your German customers? And then secondly, your receivable levels in advance of suppliers went up in the quarter; can you talk about that as well?

Gareth Kung

Okay, I’ll just answer the first question regarding the German market. So what we have seen in our German market exposure has been continuously going down from starting from Q2 and we see that trend will continue. It’s getting to Q1 we do see the German market is become slowing. I think a lot of customers on the sideline on waiting mode. Even though we have slowed down our first Q production capacity, but we see German customers actually on a waiting mode.

Ping Peter Xie

In terms of the ...

Vishal Shah - Barclays Capital

Does this happen Q4 or is this for Q1?

Gareth Kung

What?

Vishal Shah - Barclays Capital

In Q4?

Gareth Kung

Q4 is still down, and Q4, actually, the German market is still very strong. I think for November, and like second half of November, you know, December delivery, most of that are not to German market, those are to other markets.

Vishal Shah - Barclays Capital

Okay.

Ping Peter Xie

I think the question on the ... So just to get to the question on AR, actually we increased this, saw in line with our increase in revenue, but if you look at our DSO, actually it saw a decline slightly. So it seems that we are still okay with our AR management.

Vishal Shah - Barclays Capital

So nothing to read too much into it. And your gross margin guidance, 20%, what kind of assumptions you’re making on pricing for that guidance?

Gareth Kung

As mentioned by Peter, we are forecasting a slight increase in the ASP base on the exchange rate of $1.35. So that is how we now forecast gross margin.

Vishal Shah - Barclays Capital

Are you able to provide any color on Q1 pricing at this point?

Ping Peter Xie

Yes, Q1 pricing we are expecting to be slightly down from Q4 levels, assuming an exchange rate of 1.35.

Vishal Shah - Barclays Capital

And down less than 5%?

Ping Peter Xie

Less than 5%, Yes, definitely less than five, Yes.

Operator

And your next question comes from the line of Edwin Mok from Needham & Co. Please proceed.

Edwin Mok from Needham & Co.

So my question is regarding your production costs, given that you guys are ramping these new capacity, and it appears 3Q production costs went up a little bit internally. How do we kind of think about that for 4Q and maybe how do we kind of think about it for 2011 as that gap between your reported costs and your production cost close?

Gareth Kung

Actually, as mentioned by Peter, the production cost went up in Q3; it’s primarily because of the increase in the raw material cost. As a matter of fact, our non-silicon costs have come down Q3 against Q2. As mentioned by Peter, we see that supply market could remain tight for Q4 and so no there is some uncertainty there in terms of, you know, the supply markets.

Ping Peter Xie

Yes, so our expectation for the cost is Q4 may be we’re going to slightly up a little bit and in terms of production costs because many of the price increase is started playing into effect into Q4 even though you will start seeing the prices start declining, right, because the material buying in September and October are going to be into your costs of Q4. We’re expecting in 2011 the cost will start to come down. And as I speak, we expect to be it will still be tight in Q1 but start going down pretty fast in Q2.

Edwin Mok from Needham & Co.

Great. That was helpful. Just quick follow on that. What was your conversion costs in the third quarter and what do you expect it to be in the fourth quarter for your internally produced wafer?

Gareth Kung

I’m sorry, can you repeat your question again?

Edwin Mok from Needham & Co.

Sorry, so you mentioned that the increase on production was for, at least for internal wafer piece, was mainly coming from an increase in raw material cost. I was wondering what was the cost excluding the raw material, a conversion cost number that you had on the third quarter?

Gareth Kung

Yes, on the branded basis our non-silicon cost from Q3, $0.78, which is two penny below second quarter. Actually, let me comment; actually, even the non-silicon costs, actually there are some part of it has gone up for some of the critical parts inside that, so they have moderated the decline in the non-silicon cost in Q3 compared to Q2.

Operator

And your next question comes from the line of Dan Ries from Collins Stewart. Please proceed.

Dan Ries - Collins Stewart

Could you give us a sense for what portion of the module production was from purchased cells during 3Q so that’s coming down in 4Q? And what portion of your 2011 1Q target is now under purchase order as opposed to framework agreement? And lastly, what portion of your things like glass, frames, juncture boxes do you purchase under contract versus under spot or shorter term contract?

Gareth Kung

Okay, Dan I will respond to you on the first question regarding external cells purchased and I’ll let Peter respond to you on the other questions. For Q3, actually we brought about 23 megawatt of cells purchases externally.

Ping Peter Xie

Yes, so Dan, in Q4 I think our projection is external sales purchase will be less as I explained in early in my script. We expect the trend to continue so we’re not planning to purchase additional external cells because the margins on those are slim. Now into our Q1 you’re talking about customer orders I would say except one maybe two customers, they are still under a framework contract. Most of that are already being signed, sealed and pre-payment.

Dan Ries - Collins Stewart

Would it be like 70% of what you think you’ll ship in 1Q is under purchase order or would be higher than that?

Ping Peter Xie

Yes it would be 70% and up.

Dan Ries - Collins Stewart

Okay and then last just things like glass and frames and back sheets, they’ve all seemed to have gone up. Do you have long-term contracts for those things or ...?

Gareth Kung

Yes, so typically for those related materials we have multiple suppliers and we give them annual forecast so we’re signing an annual contract and then we do a quarterly business review to adjust.

Operator

And your next question comes from the line of (inaudible). Please proceed.

Unidentified Analyst

I had a question on slide 13 of your presentation. When we look at sort of this virtually integrated model, what are some of the target markets where we should to expect to see some of the benefits of this model, especially as it relates to EPC and project finance capabilities?

Ping Peter Xie

So right now, as I mentioned earlier in my script, that actually we are looking very aggressively, especially in U.S., as well as in Europe on some of that EPC, but downstream opportunity mostly project development. I think that Hanwha has a team already on the ground in the US. So we’re looking jointly together we’re over a gigawatt potential pipeline in that. So we’re willing to expand that further.

Now in terms of Southeast Asia, we already have teams and also Hanwha has a team engineering and construction in Korea. We have a team in China. We have been doing EPC in China, our team has been doing that for number of years. Now this year we expect to close our first big EPC contract, about 8.1, megawatt and we expect that trend to be continue. So (inaudible), do you want to add?

Unidentified Company Speaker

Yes. To add Peter’s comments on that, with Hanwha is extensively looking the opportunities in the downstream market either in US and Southeast Asia, and of course China, because we believe that China and US will provide a very good opportunity going forward. After there, the European market.

Operator

And your next question comes from the line of Mark Bachman from Auriga. Please proceed.

Mark Bachman - Auriga

Question on slide six on your production costs. You reported $1.16 for Q3, you’ve also made some comments, some qualitative comments that this will be up in Q4. Can you give us an idea where this $1.16 goes to in 4Q of this year?

Gareth Kung

Yes. It’s going to go up mainly because of the poly cost and we see it probably go up to above $1.20 and will closer to $1.24, 25; Yes.

Mark Bachman - Auriga

Okay. And then if I took some other comments that you also made you expect that to trend down a little bit in Q1. Is that just from the poly side of the business or are there other things that we should consider in there?

Ping Peter Xie

Yes. I think right now our best case is that you think that the poly cost should come down slightly in Q1 and that will have an impact on the production costs.

Mark Bachman - Auriga

Okay. And then if I kind of piece all of this together now, you also suggest that there will be ASP declines in Q1. If I assume that you still have these let me just get straight to the question here is, you’ve guided gross margins down in Q4, up of Q3; do you expect gross margin to decline again in Q1?

Ping Peter Xie

Okay. I think on the basis that the euro maintained at 1.35 level and the poly costs, it’s going to develop, now base on our best case scenario it will come down slightly. We do think that we can maintain relatively stable margin in Q1.

Mark Bachman - Auriga

Okay. So another 20% gross margin is ideal then for Q1 for you.

Ping Peter Xie

Yes, based on a number of assumptions, yes.

Mark Bachman - Auriga

Okay. And then lastly, what do you expect to price the secondary that was announced?

Ping Peter Xie

Obviously, we just announced the deal and I think we’re going to do some marketing and then depending on the market demand and then we are going price the transaction accordingly.

Mark Bachman - Auriga

Okay. So does that mean this week, does it mean next week? Are you going to sit on it for a while? How do we get an idea here for the share count to put in for Q4?

Ping Peter Xie

Well, actually we intend to do this marketing and we’ll put, you know, we’ll price the transaction after market closing tomorrow.

Operator

And your next question is a follow-up question from Kelly Dougherty from Macquarie. Please proceed.

Kelly Dougherty - Macquarie

I just wanted to follow up on the downstream question, especially as you work also with Hanwha. Can you give us any sense for what percentage of your shipment next year would go to internally developed or projects that you do the EPC work for? And then maybe how do you avoid the perception that you’re competing with your customers? Is there any kind of friction there?

Ping Peter Xie

Okay; that’s a very good questions. Right now in our internal plans we have not planned any of these downstream projects, you know, so in our projections. Now in terms of competing customers I think that I do not see that yet because what we do is actually we are looking together with our customers. Give you an example, running fund customers or project developers, they’re looking to high volume of primary investors and also they look at secondary investors. So potentially we can be the secondary investors both in terms of capital financing as well as construction financing from module perspective. So have this partnership in the computation.

Kelly Dougherty - Macquarie

And then just one another question; $0.78 in non-silicon costs in the third quarter. Can you give us an idea do you have a target for next year’s how low that can go?

Gareth Kung

Yes. That’s a very good question so if you look at our models, actually multi polysilicon you know now silicon costs $0.76. Now 80% of our blended cost multi in the model is 78; now in going towards next year’s net 80% our non-silicon cost are kind of depends on the mature cost. Now we’re targeting to reduce those costs towards $0.70 toward end of 2011.

Kelly Dougherty - Macquarie

And then how much of multi as a percentage of your overall capacity? Did you say 80%?

Gareth Kung

Yes, 80% of multi and 20% of mono.

Operator

And your next question comes from the line of Jed Dorsheimer from Canaccord. Please proceed.

Josh Baribeau - Canaccord

Couple of because most of mine have been answered. You talked about Q1 visibility a little bit. Can you talk about the rest of 2011 in terms of what is either a pre-payment type of purchase order or versus a framework agreement?

Ping Peter Xie

Yes. Okay I do not have a exact numbers but so far we have 700 megawatts or so are pretty firm contracts and 900 megawatt maybe in the final stage of signings. Additional 300 megawatt in the different stage of discussions. Hopefully that....

Paul Combs

Yes, Josh, just to clarify, that’s 700 under contract; an additional 200, taking it to 900. And then the incremental three under negotiation.

Josh Baribeau - Canaccord

And then sort of a similar question on supply, mostly poly and wafers, as poly becomes a bigger part of your purchasing is anything locked up there or are you still mostly playing in the spot market or how do we think about that in 2011?

Unidentified Company Speaker

Yes, so Poly, we have signed up a number of suppliers both domestic and also overseas suppliers. So we expect 70% of our poly from a long-term contract, then the rest of spot. Now in term of wafer suppliers, most of our poly wafers under long-term contract and we have, the monos, we have a number of suppliers supplying our mono wafers, but there’s less on mono wafers.

Operator

And your next question comes from the line of (inaudible). Please proceed.

Unidentified Analyst

This is (inaudible) Just a couple of questions. The first one is basically on your strategy; you want to become top three solar player by 2015. What type of capacity you are targeting to become top 15 top three player by then?

Ping Peter Xie

Yes, that’s very good question. So, here, I know, I think lot of it depends on the market forecast. Right now I think I see different analyst forecast for example 2011, the number is 15 gigawatt and 2012, the number become 20 gigawatt and going beyond. Now I think to be top three, we plan to be above 10% total in the market. So it depends on what your forecasts are for 2015, then our number will be there. It can be 3 gigawatt or beyond.

Unidentified Analyst

It can go beyond ... okay, got it. And then second one on your guidance for the 4Q looks like you are giving a declining shipment guidance. Any particular reason like why your output will be lower in 4Q?

Ping Peter Xie

Yes, okay. Yes, so what I’ve previously announced when we do in the retrofitting our existing cell lines, with the selective emitter technology so during that December they’re probably going to shut down a few lines to put new equipment in so that will impact our cell capacity. Our initial forecast is probably going to have impact of a 5 megawatt reduction on our internal cell supplies, so that contributes the most to our shipment, you know, reductions and the further we will limit our external cell purchase. As you know, in Q3 we did over 20 megawatt of external cell purchase. So we will limit our number so that resulting in reduction of shipment.

Paul Combs

I think a key point here is in no way should it be interpreted as a softness in demand. We could have sold out full capacity if we would not have converted this.

Unidentified Analyst

And facility capacity, I think you initially targeted for 160 megawatt by year end, right? And that is still valid or....

Paul Combs

I think the number we said is by Q1.

Unidentified Analyst

Q1 yes.

Ping Peter Xie

But we’re going to complete that in the retrofitting.

Unidentified Analyst

So that 160 megawatt by Q1, right?

Ping Peter Xie

Yes. By end of Q1, you know.

Operator

(Operator Instructions) And your next question comes from the line of Mark Bachman from Auriga. Please proceed.

Mark Bachman - Auriga

Yes, hi gentleman thanks for the follow up. Paul, if I heard you correctly, when this secondary here is done you are going to issue an equal number shares to Hanwha. Is that correct? In order to maintain their level of equity ownership?

Paul Combs

That is correct.

Mark Bachman - Auriga

Okay. So if I just kind of back of the envelope this it looks like that Q1 then the full impact of the share count will be roughly 14 million shares, is that about right? Assuming the over allotment?

Paul Combs

We’re doing a quick calculation here; hold on, Mark.

Ping Peter Xie

Sorry, we need to get back to you on this question. We need some we need to do some calculations.

Mark Bachman - Auriga

Okay. Thanks so much, gentlemen.

Operator

And you have no more questions in the queue. I would now like to turn the call back over to Paul Combs for closing remarks.

Paul Combs

Okay. Thanks everybody. I know you’ve got another call you want to jump to. I just want to let you know, you’ve obviously seeing the transaction. As you heard, we are going to be marketing for few days. Our access, and mine in particular, will not be as good as normal so I’ll appreciate your patience in that regard. Thanks and have a great day.

Operator

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

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