Yingli Green Energy Holding's (YGE) CEO Liansheng Miao on Q2 2014 Results - Earnings Call Transcript

| About: Yingli Green (YGE)

Yingli Green Energy Holding Company Limited (NYSE:YGE)

Q2 2014 Earnings Conference Call

August 27, 2014, 08:00 AM ET


Gene Chen - Director, Investor Relations

Liansheng Miao - Chairman and Chief Executive Officer

Robert Petrina - Vice President of Sales and Managing Director of Yingli Americas

Darren Thompson - Vice President of Sales and Managing Director of Yingli Europe

Yiyu Wang - Chief Financial Officer


Philip Shen - ROTH Capital Partners

Vishal Shah - Deutsche Bank

Patrick Jobin - Credit Suisse

Shawn Yuan - RBC Capital Markets

Gordon Johnson - Axiom Capital Management


Hello, ladies and gentlemen. This is Leslie. I will be the operator for this conference call. I would like to welcome everyone to Yingli Green Energy Holding Company Limited Second Quarter of 2014 Financial Results Conference Call. All lines have been placed on mute to prevent background noise. After today's presentation, there will be a question-and-answer session. Please follow the instructions given at that time if you would like to ask a question.

Now I would like to transfer the call to the host for today's call, Ms. Gene Chen, Director of Investor Relations of Yingli Green Energy. Ms. Gene, please proceed.

Gene Chen

Thank you, operator, and thank you everyone for joining us today for Yingli's second quarter of 2014 financial results conference call. The second quarter of 2014 earnings release was issued earlier today and available on the company's website at www.yinglisolar.com. We have already provided supplemental presentation for today's earnings call, which can be found on our IR website. I hope you all had the chance to read it by now.

On the call today from Yingli Green Energy are Mr. Miao Liansheng, Chairman and Chief Executive Officer; Mr. Wang Yiyu, Chief Financial Officer; Mr. Bryan Li, Executive Director and Chief Strategy Officer; Ms. Miao Qing, Vice President of Corporate Communications; Mr. Robert Petrina, Vice President of Sales and Managing Director of Yingli Americas; Mr. Darren Thompson, Vice President of Sales and Managing Director of Yingli Europe; Jason Wang, Financial Controller; and Mr. Zhenhua Fan, Director of Legal Affairs of Yingli Green Energy.

The call today will feature a presentation from Mr. Miao, covering business and operational developments. Mr. Petrina and Mr. Thompson will talk about the development of American, European and other emerging markets respectively. And then Mr. Wang will take you through a discussion of the company's financial performance. After that, we will open the floor to questions from the audience.

Before beginning, Yingli Green Energy's management team would like to remind the audience that this presentation contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 as amended and as defined in the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminologies such as will, expect, anticipate, future, intends, plans, believes, estimates, and similar phrases.

Such statements are based upon management's current expectations and current market and operation conditions and related to events that involve known or unknown risks, uncertainties and other factors, all of which are difficult to predict and many of which are beyond Yingli Green Energy's control, which may cause Yingli Green Energy's actual results, performance or achievements to differ materially from those in the forward-looking statements.

Further information regarding this and other risks, uncertainties or factors is included in Yingli Green Energy's filings with the U.S. Securities and Exchange Commission. Yingli Green Energy does not undertake any obligation to update any forward-looking statements as a result of the new information, future events or otherwise, except as required under applicable law.

Now I would like to turn the call over to Mr. Miao Liansheng.

Liansheng Miao

Hello, everyone. Thank you for joining us today. I'm very pleased to announce that we delivered another quarter of solid rebound. In the second quarter of 2014, PV module shipments increased by approximately 41% to 888 megawatts due to strong demand from China, Japan, US, UK and other emerging markets. The overall gross margin was 15.6%. Both the shipments and the gross margin are well in line with our previous guidance.

In addition, we are extremely proud that at the end of second quarter, Yingli surpassed 10 gigawatts of accumulated PV module deliveries worldwide. The total annual power generated by the modules is equivalent to supplying nearly one-fifth of China's total residential power demand in 2013.

In the second quarter, our shipments to China doubled compared to the first quarter. Even so, the installation in first half 2014 was slower than expected. Our increase was mainly due to success from our downstream business and the build of utility-scale PV projects from large scale utility companies. This slower-than-expected growth in the first half in China was caused by a variety of factors. Primary factors were longer-than-expected implementation and execution of government policies, challenges in securing finance and return of investment, all of which contributed to slow development of distributed generation market.

In effort to accelerate development of DG systems, the National Energy Administration plans to announce new regulations to remove those bottlenecks in order to faster involve scalable DG system investments. DG system will be able to build (inaudible) quarter canopy and enter the area and other available specified line of resources. Furthermore, under new rule, DG systems can be also connected to the grid and collect feed-in-tariff on the same level as local large scale PV plants.

(inaudible) distributed project owners will be able to choose and use all electricity to the grid. These are some of the key changes that will help eliminate various DG system development and will lead to robust growth of large scale DG PV projects. Looking forward, we believe that demand growth in China market will accelerate significantly in the second half of 2014. This is because NEA has announced the goal to connect at least 13 gigawatts of PV power capacities to the grid in 2014. So far, only 3.3 gigawatts of PV plants were connected in China.

Internationally, our shipment and market share in Middle East, Southeast Asia, South America, Africa and Japan continued to increase. In the second quarter, our total shipment volume to this market increased by approximately 18% quarter-over-quarter, while our customer base has doubled compared with the second quarter of 2013. In Japan, our shipments during the first half of 2014 exceeded the total volume for the full year of 2013. Generally speaking, we have achieved outstanding performance in new and emerging markets.

Our brand continued to grow as a result of our product quality and our focus on continued innovation. In June, we announced that Yingli Solar topped as the recognized solar PV module brand in 2013 amongst 75 module brands worldwide according to market study conducted by IHS. Moreover, Yingli was recognized by Fuji Electric as one of its best supplier in 2014 and making only one for Fuji Electric supplier headquarter outside of Japan to receive this honor.

In order to further penetrate the market and capture opportunities of PV downstream business, we have set up 25 subsidiaries at provincial level in China. Currently, Yingli has more than 1.2 gigawatts of utility-scale projects in the pipeline and more than 200 megawatts of DG systems under the power purchase agreement. In the second quarter, we received permission to develop a total of 110 megawatts of utility-scale and 20 megawatts of DG systems. By the end of June, we have a total of 155 megawatts of projects under construction, including a 10 megawatt utility-scale project and a 20 megawatts DG project developed by a joint venture with China National Nuclear Corporation as well as 15 megawatts utility-scale project purchased by renewable energy fund formed with Shanghai Sailing Capital management.

In the third quarter, Yingli plans to start construction of total 168 megawatts of PV projects located in Hebei, Shanxi, Ningxia and other provinces, including a 50 megawatts project developed by joint venture with Datong Coal Mine Group.

Internationally, we have secured first EPC contract for 2 megawatts ground-mounted PV project in Senegal in Africa with a support of a subsidiary in Spain. And recently, we entered into a strategic alliance to co-develop a 13 megawatts PV project in Poland with an experienced local developer. In order to seek a balance between our profitability and shipment volume, we revised our shipment guidance for the full year of 2014 to 3.6 gigawatts to 3.8 gigawatts.

Robert Petrina

Thank you, Mr. Miao. The second quarter in the Americas reflected continued strong demand in the United States, but somewhat overshadowed growing complexities due to the ongoing trade case with China and Taiwan. In Latin America, we are finally seeing the accelerated growth we have anticipated and positioned to take advantage of.

Quarter-over-quarter, sales in the US increased 20%, while this quarter we completed the largest single quarter utility project since inception, thus demonstrating the capabilities to participate in some of the most complex projects out there. Pricing has continued its slight march upwards, given the preliminary countervailing duty decisions released in early June and anticipated levels for the anti-dumping decisions. Importantly, the market is reacting positively and demand looks exceptionally both in the second half and well into 2015 and 2016.

The second quarter was a very strong quarter for Yingli within Latin America and the Caribbean. The company further expanded its operations by establishing a permanent office in Santiago, Chile, which is led by an industry veteran. We added 18 new customers with total orders within the region increasing 124% quarter-over-quarter and 109% year-over-year. The sales were roughly split evenly between distributed generation projects and utility-scale projects.

Looking forward to Q3, market indicators lean towards the strong quarter for Yingli within the region. Orders for utility projects within Central America are expected to increase significantly, while activities within Brazil are trending towards significant market growth there. Leads from our World Cup sponsorship are expected to start converting to sales, while our focused customer support is expected to lead to larger orders from existing accounts.

In an effort to continuously add value to our customers, in the second quarter we expanded upon our landmark third-party lab ongoing quality testing by developing an ongoing durability test program in which we work within the engineers and third-party labs to certify Yingli PV module production to Qualification Plus standards. Qualification Plus is the product of an industry working group sponsored by NREL to standardize quality testing more representative of long-term product reliability and field performance.

On the marketing side, we have an impactful end of the quarter, giving our sponsorship of the FIFA World Cup, which ran from June 12 to July 13 in Brazil. We generated thousands of new business leads globally this quarter, which was 10 times higher than the leads generated in Q2 2013. Additionally, our website traffic more than doubled in that same timeframe. And we gave our customers the once in a lifetime opportunity to attend matches, which many Yingli partners used as incentives for their sales teams.

Looking forward, we are anticipating a solid second half of the year. It is traditionally strongest given the rate at which the first half of the year has grown. We are confident the momentum will continue. The trade case is progressing as planned. And as we mentioned during the last call, as an industry, we are working through the existing conditions as well as one could expect. The overwhelming majority of the industry continues to demand access to high-quality suppliers like ourselves and we are generally united in the front to maintain the free trade of solar products. We will continue to defend ourselves. I am confident we will overcome the current uncertainty and continue to drive the deployment of solar energy across the region.

Darren Thompson will now walk you through our European highlights and projections.

Darren Thompson

Thank you, Robert. In Q2, we grew our shipments to Europe by 39% sequentially and sustained contribution to our global shipments at a level of 18%. The growth can be attributed to traditional season demand increase across Europe in Q2 combined with a strong UK utility-scale project market. German PV system grid connections in Q2 increased by 20% versus Q1, bringing total system installations in the first half of the year to just over 1 gigawatt.

Average monthly installation rate during Q2 was 185 megawatts. And although installations are tracking below the government target of 2.5 gigawatts, the lower volume reduces the monthly feed-in-tariff rate to a lower level of 0.5% stabilizing economic returns.

The solar PV value proposition for rooftops in Germany is now more complex, given kilowatts now are monetized by a combination of feed-in-tariff and electricity bill reductions through self-consumption. This creates new purchase barriers for potential consumer and commercial users alike and the transition to this new model of improved electricity market integration takes time and consequently dampens demand.

However, given our leading brand position was installed in Germany and our high-efficiency PANDA technology, we continue to enjoy a market share in the important rooftop segment of over 10%. The new EEG regulation that started on the 1st of August will continue to provide a stable foundation for Germany to achieve its target of 2.5 gigawatts per annum to ensure the optimum growth trajectory to make legally binding national renewable energy action plan targets with cumulative installations of 52 gigawatts of solar by 2020.

The UK market continues to be the rising star of Europe with a growing rooftop segment supported by feed-in-tariffs, but particularly driven by the utility-scale power plant demand under the 1.4 ROCs incentive. We expect strong demand to continue through the rest of 2014, given the deadline for utility-scale projects under 1.4 ROCs to commence exporting electricity to the grid by the end of March 2015.

This demand is illustrated by Yingli recently being awarded supply contracts for four UK projects totaling 66 megawatts of anticipated fulfillment during Q3 and Q4. Looking forward, we continue to see positive demand development by the European region and is reflected in our order book for the balance of 2014.

In July of this year, Yingli announced that it had entered into a strategic partnership with a local project developer in Poland to co-develop 13 megawatts of solar projects. In this strategic alliance, the partners will jointly work on co-developing a diversified project portfolio of 1 megawatt scale projects to be ready for inclusion into the Polish auction system in mid-2015. The auctions will be conducted separately for planned renewable installations below and above 1 megawatt with only pre-qualified and ready-to-build projects allowed to participate.

Within the framework of the agreements, our local partner will fully develop the projects with the strongest support from Yingli throughout all project stages. The closure of this strategic partnership endorses one small Yingli strategy of identifying strong local partners in key regions of the world to secure and execute early-stage project opportunities.

Outside of Europe, our support for our European customers entering into other regions combined with support from our local regional teams has paid off in winning supply with a Spanish partner for a 31.6 megawatt project in Japan. In Africa, Yingli is in the process of cooperating with the state-owned utility of Senegal to deliver a 2 megawatt power plant near Dakar. The project will supply clean energy to the new international conference center in Dakar and will be the centerpiece during a high-profile 15th Francophonie summit that would take place during November 2015. This project illustrates our commitment to diversify into emerging markets, particularly in the sunbelt regions with growing demand for clean and affordable energy.

In South Africa, during Q2, Yingli continued to execute on business opportunities in the commercial rooftop segment, securing supply for another rooftop system of 400 kilowatt peak on a warehouse in Johannesburg. In addition, our local team continues to make progress on accessing distribution channels for both on and off-grid with the signing of two new supply contracts with a home-built material on water pump manufacturers respectively.

In Australia, the federal government is conducting a review of the renewable energy target, which continues to generate headwinds for utility-scale development, leading to uncertainty for investors. As a consequence, the Australian market continues to be residentially focused with an emergence of the commercial segment. Yingli has capitalized on the emerging commercial segment combined with a local presence by installing 284 kilowatt peak of a high-efficiency PANDA modules on the headquarters of Australia post in Sydney.

Additionally, Yingli in cooperation with a leading building construction partner was awarded module supply for 1 megawatt polycrystalline system on an IKEA rooftop in Sydney with expected completion in September.

Now I'll hand over the call to our CFO, Mr. Wang Yiyu.

Yiyu Wang

Thank you, Darren. Thanks to everyone to join us for today's conference call. I'm pleased to report the result of this second quarter of 2014. During the second quarter, Yingli once again delivered a solid performance across a number of key operation metrics. In particular, the overall gross margin in Q2 was $85.8 million, significantly above $67.8 million in the first quarter of 2014, demonstrating a positive trend for second half of 2014.

As Mr. Miao mentioned, our total PV shipments increased by 41% quarter-over-quarter to 887.9 megawatts in Q2, including 1.8 megawatts shipment for our own power plants in China. This increase in PV module shipment was primarily due to the stronger demand in the global PV market, especially from Japan, UK, China and other emerging markets. More importantly, we also achieved a significant historical milestone with global cumulative PV module shipment exceeding 10 gigawatts at the end of second quarter of 2014.

In the second quarter, while the average selling price of PV module in each individual market remained relatively stable from Q1, the overall global ASP in Q2 decreased slightly by nearly $0.01 due to the increase of portion of sales in China in Q2. We will continue to optimize our geographic distribution by focusing our attention on higher-priced market.

Our cost, thanks to the unwavering focus on technical improvement and upgrades, our in-house silicon cost per watt peak was $0.40, which significant decreased from $0.42 in Q1 2014. Our gross margin was 15.6% in Q2 comparing to 15.7% in Q1 2014, and that's up from 11.8% in Q2 of 2013. Although ASP remained relatively stable and overall cost of PV module decreased significantly, our gross margin remained relatively flat from Q1 due to preliminary anti-dumping and countervailing duty imposed by US Department of Commerce for our sales in US.

Moving down to the operating line, operating expenses were $99.6 million in Q2 compared to $88.5 million in Q1 2014. The increase of operating expenses was mainly due to the increase of selling and marketing expenses, in line with company's increased PV module shipment in this quarter and also partially offset by the decrease of G&A expenses of Q2.

Overall, operating expenses as a percentage of total revenue were 18.1% in second quarter, a decrease from 25.5% in Q1 2014. In the following quarters, we will continue to control our operating expenses strictly. In Q3, we expect to lower the operating expenses as a percentage of total revenue by 200 basis points to 300 basis points due to significant decrease in once-off marketing expenses occurred in Q2 and the continued effective expenses control efforts we will put in Q3 and ongoing in 2014.

The interest expenses in Q2 were $37.5 million, reflecting a slight decrease from $40.5 million in previous quarter. The average interest rate of the company borrowing was slightly lower than 6.42% in Q1 to 6.25% in Q2.

By the end of Q2, the company has an aggregate of $2.4 billion of bank borrowing and the medium-term notes, at similar levels with that in Q1. Foreign currency exchange gain was $0.5 million in Q2 of 2014 compared to foreign exchange loss of $2.2 million in Q1. The foreign exchange gain was mainly due to the increase of company's US dollar dominated liabilities and the appreciation of RMB against US dollar in this quarter.

Income tax expense was $0.2 million in Q2 of 2014 compared to an income tax benefit of $3 million in Q1. The income tax expense in quarter mainly resulted from the main operating subsidiary of the company turned to profitable.

EBIT was $46.5 million in Q2, showing a meaningful growth from $35.7 million in Q1 2014. Net loss was $46 million in Q2, a decrease from $55 million in Q1. Loss per ordinary share per ADS was $0.26 compared to $0.35 in Q1.

Now let's move to our balance sheet. As of June 30, 2014, our cash and cash equivalents was $158.2 million, a decrease from $204.8 million at March 31, 2014. As of June 30, 2014, our restricted cash was $240.8 million compared to $277.7 million as of March 31, 2014.

At the end of Q2, our accounts receivable increased to $805.2 million from $742.6 million at the end of Q1 2014. Days sales outstanding decreased from 155 days in previous quarter to 132 days in this quarter. Inventory was $369.1 million end of Q2 compared to $342.6 million at March 31, 2014. Inventory turnover days were 72 days in Q2 compared to 85 days in Q1. We will continue to improve our operating efficiency through reaching the terms of cash collection and inventory turnover.

Accounts payable was $873 million at the end of June 30, 2014, compared to $869.2 million at end of Q1. Days payable outstanding was 170 days in Q2 compared to 215 days in Q1 2014. As of today, we have approximately $5.8 billion unutilized short-term line of credit and roughly $2 billion committed long-term facility that can drawn down in near future.

Though actively implementing the strategy of downstream business of development, we are about various business model to release our pressure on active investments such as launching the renewable energy fund with Shanghai Sailing Investment Fund in the second joint venture with two large state-owned enterprises, which is China National Nuclear Corporation and Datong Coal Mine Group Company Limited. The cooperation will not only help to integrate resources from both parties, but also expand the finance channels for both parties.

Now I would like to discuss our guidance for Q3 and full year 2014. Since the mid of this year, we have seen substantial pick-up in the demand from new emerging markets such like Middle East, Africa, Latin America and also traditional markets especially Japan, US and China. Our distributed generation PV project will increase significantly in the second half of the year.

We expect around 34% of total shipment will come from China, 10% from America, 16% from Europe and around 40% from the world. As Mr. Miao mentioned, the National Energy Administration, NEA in China has strengthened its policy by moving bottleneck and that enabled a quick and more scalable deployment of distribution market in China. However in the first half of 2014, a 3.3 gigawatt total installation in China has been lower than expected installation amount in the first half of this year. However, the government has committed its 13 gigawatts in China for the full year 2014. Therefore, we expect to see the China market will pick up very strongly and substantially through the second half of 2014.

But in order to maximize our margin contribution in the second half of 2014, we will still fully renew our in-house facility, but we will decrease our third-party module OEM volumes based on original plan. As a result, we revise our shipment guidance for full year of 2014 to 3.6 gigawatts to 3.8 gigawatts. Therefore, we expect our PV module shipment in Q3 2014 will be in the range from 900 megawatts to 1 gigawatts including an estimate amount of 550 megawatt shipment to our own PV module projects.

We will continue to enhance our profitability through optimization for the customer portfolio and a more diversified peak distribution of shipments, more effective control on the cost through technical innovation and improvements. Meanwhile, we will continue our efforts in the downstream business, will bring extra margin contribution to our overall business. Therefore we expect we will continue to improve our overall gross margin to the range of 15% to 17% in the third quarter of 2014, and we expect we will return to positive profit operating income and quarter-over-quarter in the EBIT through Q3 2014.

Now I would like to open the call for questions. Operator, please proceed.

Question-and-Answer Session


(Operator Instructions) We have the first question from the line of Philip Shen.

Philip Shen - ROTH Capital Partners

Given the revised 2014 guidance and your implied external shipment guidance in Q4 suggests very little quarter-over-quarter growth, just 1% by our calculations. Can you help us understand why the quarter-over-quarter growth in Q4 is still low, especially given your commentary of strong China demand in back half as well as demand in general? Is this related to the fact that you're decreasing the usage of third-party OEM facilities?

Yiyu Wang

I think at this moment, we expect we will fully run our factories through the second half of this year. Our current capacity at the module level of the order should be around 4 gigawatts to 4.2 gigawatts through the whole year and roughly 1 gigawatts to 1.05 gigawatts through quarter-by-quarter. In the second half, we expect we will fully run our in-house factory. However, given the China pickup is slower than people expected and much of the demand will be squeezed in the second half of the year, especially through mid of Q3 until year-end, even gradually throughout next Q1.

Therefore, after we fully run our factory, we needed to search for third-party OEM module facilities to catch up those demand in China. However, given the current market price in China for the module shipment versus the OEM cost, which will be higher than our internal cost, in order to maximize the margin contribution, we've decided to limit our exposure of volumes through OEM in Q3 and Q4, but try to find a way to maximize our operational efficiency. These are the main reasons why we lower our overall guidance for 2014.


We have the next question from the line of Vishal Shah.

Vishal Shah - Deutsche Bank

Can you explain what your margins are in some the different regions, particularly in the US in light of the recent actions? Are your margins comparable to the corporate average or lower than the corporate average in the US? And also, you talk about 200 basis points to 300 basis points of operating leverage improvement in the second half of the year, can you talk about how you plan to do that? Are you looking at reducing cost in the regions or closing offices?

Yiyu Wang

Regarding the margin contribution for sales in US, on one side, the module cost is through by Taiwanese sales by paying Taiwan or through China sales by paying the China currency. The cost will be higher in Q3, Q4 compared to Q2. But on the other side, given our sales force's success in US and our marketing, branding impact, but also given the US market price has been able to increase compared to Q2 level. So all in all, our net margin by for sales in US should be maintained at the same level compared to Q2, even slightly higher. So the margin contribution in US won't be negatively impacted by the tariff announced recently for the second half of the year.

Regarding the increase in our operating margin, first we have some one-off marketing events and expenses in Q2 mainly relating to our marketing events in South America and Brazil through the World Cup. These kinds of one-off expenses won't be occurred in US. On the other side, our sales force in those mature markets like Japan, China, US and Europe has been already enough to support a growing year-by-year demand without the need to expand further marketing expenses. In the meanwhile, our company will be doing further expense control events and efforts to further lower the fixed portion of the SG&A, trying to maximize our scales including marketing efforts, increased operational efficiency by controlling those fixed portion of operating expenses to gradually increase the operating margin and continue to lower the operating expenses over revenue quarter-by-quarter.


We have the next question from the line of Patrick Jobin.

Patrick Jobin - Credit Suisse

First, just on the gross margin again, what's driving the margin higher in Q3? Is it correct to assume that as price increases in Q3, did I hear that correctly, more than offsetting the tariff? And I think you mentioned a positive contribution from system sales expected in Q3, just reconciling that with the gross margin report in Q2, maybe you could help us understand the magnitude and gross margin expectations. And then a quick follow-up on the amount of capital and equity interest in the 400 megawatts to 600 megawatts of projects this year.

Yiyu Wang

Regarding the gross margin trends, the first thing is that Q2 ASP was slightly below Q1. Q3 2014 will also be slightly below Q2 level, which is in the range of slight below $0.01 quarter-by-quarter. Even though we increased our sales volumes in China quarter-by-quarter and as a result the sales to China as a percentage of total revenue will be increased in Q2 based on Q1 and maybe slightly increased in Q3 again. However, we also try to selectively select the customer in China by approaching those high-quality customers.

On the other side, we're keeping our efforts in the other markets like Europe, Japan, for those higher-priced market, try to increase our volume in these markets to offset the sales volume increase in China. On the other side, our internal module cost will continue to be decreased quarter-by-quarter and the speed will be fast than the ASP decrease speed. This is why the overall gross margin in Q3 will be slightly above the Q2 level. Based on the current gross margin expectation, we did not include any additional potential contribution from downstream business.

Regarding the downstream business, at this moment, we have been trying to selling the projects through our pipeline. Our target is not to hold the projects, but try to sell as much as we can. And this is our strategy. Therefore, the total investment will be only limited to those joint venture like Sailing Fund, which we sell the pipeline through the joint venture and the Fund. We are searching for third-parties to acquire projects through the early stage or when the project is almost done.

If you want to know the number, I think theoretically, you have to prepare roughly 25% of the total investment for the 400 megawatts to 600 megawatts. But given we expect to sell at least over 60% of the pipeline, for the remaining 40% we will also continue to sell them. That's why we don't think equity too much into our pipeline, but just kind of a temporary investment and will cash out when the project is developed and sold to third-party.

Patrick Jobin - Credit Suisse

Do you have the volume target for project sales in your downstream business in the second half of the year?

Yiyu Wang

I am expecting we will sell our project around 60% of the 400 megawatts to 600 megawatts not only through the existing joint venture structure, but also selling them to additional third-parties through development stage. And the remaining 40% may be held through the year-end, given the grid connection and the financial close, et cetera, will be finished through the year-end. But for the remaining 40%, we're also expecting we will sell main portion of them and we'll only put a very limited portion of the total 400 megawatts to 600 megawatts on our balance sheet after all these projects are developed.


We have the next question from the line of Mahesh Sanganeria.

Shawn Yuan - RBC Capital Markets

This is Shawn Yuan asking for Mahesh. This was quarter, there was $9 million revenue from downstream projects. How many megawatts are there? And right now, there are about 155 megawatts projects under construction at the end of June. And when do you expect the completion and the timing of completion of revenue recognition for those projects?

Yiyu Wang

Regarding to the systems revenue recognized in Q2, this is merely relating to those small roofing systems and small off-grid systems, which is not from the grid projects we are developing in China. Relating to those projects we developed at the end of June 2014, we expected to gradually recognize this revenue as a main portion at least over 60% of that through the second half of this year.


We have the next question from the line of Gordon Johnson.

Gordon Johnson - Axiom Capital Management

I'm just looking at your balance sheet. You cash balance looks pretty low here, the lowest it's been since the third quarter of 2008. And I'm looking at your expectations for funding of the projects. Should we be at all concerned here, given your debt balance at $2.4 billion and your high level of interest expense? Should we be at all concerned if the Chinese market doesn't recover that there could need to be a capital raise or potentially a credit event?

Yiyu Wang

Regarding our own operating cash flow improvement, I think the Q2 operation cash flow was slightly decreased compared to Q1, given we shipped more module and we produced some in Q2 and will collect back in Q3 and ongoing. We expect in Q3, our total operating cash flow will increase again based on Q2 level. So relating to the downstream project, as I mentioned, our strategy is to limit our exposure in the equity portion investment of the project and try to sell the project as much as we can.

And on the other side, for those joint ventures, we are working with those strong partners in China, which will be helping us to enhance the project finance for those projects we're developing together. So at this moment, we don't expect that we'll need big cash in the project development through the end of this year.

Regarding your second question, at this moment, we've seen continuous improvement from operating results and cash flow. And also our module shipments gross margin is all recovering quarter-by-quarter. At this moment, we don't see any near-term necessity to raise money or fund or any extra financing in the market. However, we will be actually looking for finance facilities and options to continuously enhance our total operational and financial facility.


We have the next question from the line of Krish Sankar.

Unidentified Analyst

This is Andrew on for Krish. I just have one question on system gross margins and then a bit on the strategy. So just quickly, what drove exactly the strong decline in PV system gross margin in Q2 and what sort of levels we should expect going forward? I think it was 18% last quarter and only about 4% this quarter. So how to think about the rest of the year?

Yiyu Wang

First, the system revenue in Q2 is for those small off-grid systems and small residential systems, which is not a benchmark of gross margin contribution for the ground-mounted projects developed in China. In China, when you develop projects, generally you can expect roughly 10% gross margin all in all to develop and sell to the final end customer. So you can use this as a rough idea to model a potential contribution from the project development business.

Unidentified Analyst

You've been pretty clear that the strategy with the projects you're developing in China is to sell them. I'm just curious what is the strategy behind that decision, why not retain them as some of your peers have done either in China or other places around the world?

Yiyu Wang

The first thing is at this moment, our company's strategy is to accelerate the cash for any kind of segments in order to continuously enhance our cash flow and enhance our financial facilities. Second thing is China just started its policies in the first quarter of this year and end of last year. At this moment, to hold a big volume of projects on the balance sheet is subject to a continued project finance for all the projects developed, but also subject to a continuous refinancing program through the downstream business, which currently in China is to take time to get a mature mechanism.

On the other side, we try to sell as much as project we have for those projects we're developing this year. But we are also looking actually for those chances and options, how to refinance the projects and what to do once it's developed. When we see the chances ready and we will conclude a strategy whether we should increase the portion of the project to hold our balance sheet compared to what we are selling them now.


We have the next question from the line of Patrick Jobin.

Patrick Jobin - Credit Suisse

Just wanted to understand the equity ownership level you anticipate on the projects. So of the 400 megawatts to 600 megawatts, roughly 60% recognized this year, what's your share of those projects, given your partners?

Yiyu Wang

For those joint ventures we have now with our partners, we hold a minority shareholder of the whole company JV, which is roughly from 30% to 35%, 40%. So in China, typically you need to prepare equity around the 20% to 25% of the total investment, which you can use this to model our total investment through the joint ventures. However, currently the project we are developing through our joint venture partner or through Sailing Capital is also a portion of the project we are developing now. We are searching for additional parties, which will acquire the whole project and let us fully cash out our investment through the equity during the development and cash out them when the project is developed.

Patrick Jobin - Credit Suisse

So it's not consolidated and you anticipate 30% to 35% of the economics on the downstream project sales, is that correct?

Yiyu Wang



And that concludes our call today. I would now like to transfer the call back to Ms. Gene for closing remarks.

Gene Chen

Thanks for joining us today. If you have any further questions, please do not hesitate to contact us. Thanks, everyone.


Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.

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