Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Tom Evrard – IR, Financial Dynamics

Stephen Cai – CEO

John Wong [ph] – Finance Controller

Analysts

Anthony Kit – Barclays Capital

Rob Stone – Cowen & Company

Kelly Dougherty – Macquarie

Christine Hersey – Wedbush

Vishal Shah – Barclays Capital

Sri Nadesan – Lazard Asset Management

China Sunergy Co., Ltd. (CSUN) Q4 2010 Earnings Conference Call March 24, 2011 8:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the Q4 2010 China Sunergy Company Limited earnings conference call. My name is Michael, and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of today’s conference. (Operator instructions) As a reminder, this conference is being recorded for replay purposes. I will now turn the presentation over to your host for today’s conference, Mr. Tom Evrard. You may proceed.

Tom Evrard

Thank you, operator. And everyone, welcome on behalf of China Sunergy. Our fourth quarter and full year 2010 earnings results were released earlier today and are available on the company’s website as well as on those newswire services. On the call from China Sunergy are Mr. Stephen Cai, CEO; Dr. Jianhua Zhao, CTO; Mr. Yongfei Chen, Finance Controller; and John Wong [ph], also Finance Controller.

Before we continue, please note that the discussion today will include forward-looking statements made under the Safe Harbor provisions of the US Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risk and uncertainties. As such, our results may be materially different from the views expressed here 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 again, this conference is being recorded.

With that, I’ll turn it over to our CEO, Mr. Stephen Cai. Stephen?

Stephen Cai

Thank you, Tom. And let me welcome everyone to our fourth quarter and full year 2010 conference call. Before I begin by discussing our quarterly and full year results and the overall comparative strategies, I would like to introduce John Wong, who will provide us a more in-depth look at our financials. John recently joined as the core Financial Controller alongside Yongfei Chen. He brings with him 24 years of international financial experience, including the global manufacturing companies, PricewaterhouseCoopers and Ernst & Young. Following the financial highlights and overview by John, I will discuss our outlook for the first quarter and our vision for 2011.

I’m pleased to report that the demand for our products remains strong and our fully integrated strategy is working. Our results reflect the dramatic improvement from what we saw at the end of 2009. It is important to note that it is the first time we are reporting results, which reflect a shift in our business model. The cell and the modules businesses were combined beginning November 1st. For the quarter, we remained at full capacity utilization, reporting record shipments, revenue, gross profit, and net income. They reflect our ongoing improvement.

Our shift to in-house module manufacturing following the acquisitions of the CEEG Solar Science and Technology Company in Shanghai and the CEEG New Energy Company in Nanjing has already had a positive impact as demonstrated by continued momentum that we saw through this fourth quarter, helping us end the year with solid results.

Shipment for the fourth quarter was 97.9 megawatts. This is including the 60.6 megawatts of the solar modules, 33.9 megawatt of the solar cells and a small volume of the OEMs. Full year shipment was 347.8 megawatt, of which 277.2 megawatts were solar cells and 67.2 megawatts were solar modules.

Q4 revenue was $169.6 million, representing cell sales of $51.1 million and module sales of $116.8 million, an increase of 34.8% sequentially and 73.8% year-on-year. Full year net revenue was $517.2 million, 81.5% increase from 2009. Gross profit for the quarter was $27.1 million, which led to a splendid gross margin of 16% and increased the margin of the 18.7%. Gross profit for the year was $92.3 million, with gross margin of 17.8%.

Net income in the fourth quarter was $15.4 million compared to the net loss of $3.6 million and net income of $15.4 million in the fourth quarter of 2009 and the third quarter of 2010 respectively. Blended cell ASP during the fourth quarter was $1.51 per watt. Blended module ASP during the fourth quarter was $1.93 per watt, representing a premier over the industrial level.

Our objective of becoming vertically integrated has already started paying off. This is giving lot of opportunities as strategic formations last quarter, which we will continue to execute. They include increasingly the sales and marketing approach. The company has to yet make up expansion plans and our strong results and development capability. More specifically, the two module manufacturers we acquired have marked a critical strategic state to move downstream while advancing our commitment to becoming a vertically integrated manufacturer.

Most of the solar cells produced are now consumed internally through our module business. Not only have we applied module capacity of 480 megawatts, but also a strong diversified sales network within Italy, Eastern Europe, Germany, United States, and Asia Pacific. Our sales and marketing efforts are focused on both end user and the distributors, as we see market potential in both growths. In the fourth quarter, our sales from the end user accounted for about 70% of the total sales. And we have established brand equity in certain markets.

Looking to this year, we expect a bigger contribution from our distributor partner in some countries. For example, Italy, Germany, and the United States where more rooftop project opportunities are emerging. We plan to expand both cell and module capacity in 2011 to continue capturing opportunities from the growing demand on our module product.

Our annualized cell capacity is 400 megawatts now, which will be increased to 750 megawatts by the end of this year. Our annualized module capacity is 480 megawatts now, which will be increased to 1.2 gigawatt by the end of this year. By now, we have secured about 650 megawatts of solar module contract for 2011.

In terms of raw material supply, our long-term contract with wafer supplies, including CEEG, our biggest partner; GCL; Green Energy Company; and a contract company, have allowed us to meet our own short-term lease. Given the middle and long-term outlook of the downward pricing trend on the raw material, our strategy is to have more flexible pricing terms with most difference in the supplies compared to our competitors.

Collectively, this strategy has allowed us to manage us the European incentive program of adjustments promoting oversupply concern. We remain confident that the European demand for our products will remain strong as Europe continues to be a key buy of this global solar product.

In 2010, we have improved our average polycrystalline and monocrystalline cell efficiencies from 15.9% to 16.5% and from 17.5% to 17.9%. We expect to further improve this to 17.1% and 18.3% by the end of this year. In the meantime, we have taken efforts to improve this automation of our new production lines and reduce labor and conversion costs.

In addition, we are investing $20 million to build a new R&D center in Nanjing with state-of-the-art facilities. This will include high efficiency pilot cell and module lines. This new research center, which we expect to grow online in the third quarter this year, will provide us with high efficiency and reliable cell and module product, as well as reduction in production cost. We have been and will continue to build on our strength by focusing on technological results and research and development.

In summary, our ongoing vertically integrated strategy, which works on this enhanced sales and marketing, capacity expansion initiatives, and R&D leadership, should make us well positioned for sustainable growth in the coming years.

I will now pass the call to John for a review of our financial results in more detail. Following that, I will discuss what we are seeing in the first quarter and beyond. John?

John Wong

Thank you, Stephen. I’m going to briefly discuss our fourth quarter and full year 2010 results, which is prepared under US GAAP and denominated in US dollars. We achieved a record in the fourth quarter with revenues reaching $169.6 million, representing $51.1 million in cell sales and $115.8 million in module sales, an increase of 34.8% sequentially and 73.8% year-on-year.

Total net revenue for 2010 was $517.2 million, an increase of 81.5% from 2009. Quarter four gross profit was $27.1 million, an 8.4% increase sequentially and 150.6% increase year-on-year. Gross profit for 2010 was $92.3 million, a 456% increase from 2009, but our gross margin was 17.8% for the year. This was primarily due to very less market demand, higher cell prices and help my merging module plans towards the end of the year.

Blended cells ASP during the fourth quarter was $1.51 per watt. Blended module ASP during the fourth quarter was $1.93 per watt. Both have strongly contributed towards our bottom line growth. Blended wafer cost has increased to $0.99 per watt in the fourth quarter of 2010. Over the past year, our sales conversion costs had reduced by approximately 20%, reaching our goal set a year earlier. Significant improvement in production efficiencies and technological awareness has helped to drive the tests here.

Operating expenses were $8.8 million for the fourth quarter of 2010 and $26.3 million for 2010, representing 5.2% and 5.1% of net revenue respectively. Control over operating costs had positively contributed to our profitability over the past quarter, demonstrating continued improvement in operational and financial management.

Net income was $15.4 million for the quarter and $51.7 million for the year. During the fourth quarter and the year 2010, we had generated positive cash flow of $5.1 million and $32.8 million respectively. As of December 31, 2010, we had cash and cash equivalents of $106.5 million.

With that, I would like to turn the call back to Stephen who will provide our outlook in the first quarter and beyond. Stephen?

Stephen Cai

Thank you, John. Through a combination of the factors including the ongoing demand and the strategic sales approach, we expect a strong shipment of 98 to 110 megawatt in our solar modules for the first quarter. For the full year of 2011, we expect to ship total 670 to 690 megawatts of the solar product. We expect the overall gross margin to be 9.0% to 10.5%, and integrated margin to be 14% to 15% in the first quarter. We are confident that we will maintain the gross momentum in first quarter and throughout 2011.

Thank you. We will now like to open this call up for questions. Operator?

Question-and-Answer Session

Operator

(Operator instructions) And your first question comes from the line of Vishal Shah of Barclays Capital. You may proceed.

Anthony Kit – Barclays Capital

Hi. This is Anthony Kit taking in for Vishal Shah this morning. Just a couple quick questions. First question is, do you provide the direct geographic breakdown for the quarter in 2010? And what do you guys expect in 2011 moving forward?

Stephen Cai

Yes. I think it’s totally – in 2010 the geography of – sales by geography is totally 70% from Europe and 30% from the rest of the world. Specifically, it’s – totally I think especially in Q4, 51% from Europe and 36% from China because some of (inaudible) Q4, we will have this combination of the business from the cell and the modules. So that’s the total for Q4. And in 2011, because we have this full module business, estimated that we will have 70% sales from Europe and 10% from United States and 20% from the rest of the world.

Anthony Kit – Barclays Capital

Okay. That’s very helpful. And then also, do you have any clarity on second half ASPs for 2011?

Stephen Cai

Okay. Second half ASP of the modules, I just will say that the price will be downward trend in this year, but not so much clear picture we look at.

Anthony Kit – Barclays Capital

Okay. And then lastly, in Q4, have you seen – I guess in Q4 and then 2011 moving forward, have you guys seen any cancellations since the Italian uncertainty began?

Stephen Cai

We don’t have – we still have the SKU of these orders. We are already talking about the totally – 650 megawatt in this year. We cannot just cancel. Some of these big contracts is under rate negotiation and will delay to the second quarter, but we’ve secured the order.

Anthony Kit – Barclays Capital

Okay. Do you know how many more percent of the contracts earlier were being renegotiated?

Stephen Cai

That’s very low percentage.

Anthony Kit – Barclays Capital

Okay. Thank you so much.

Operator

Your next question comes from the line of Rob Stone of Cowen & Company. You may proceed.

Rob Stone – Cowen & Company

Hi, guys.

Stephen Cai

Hi.

Rob Stone – Cowen & Company

In the quarter, could you say what amount of the modules were produced with in-house cells?

Stephen Cai

Okay. That is the in-house cells use – it is 65% in-house in Q4. And in next year, our in-house cells used will reach to 70%.

Rob Stone – Cowen & Company

Okay. So in the first quarter, are you still expecting to have external cell sales and some OEM cell processing or is it going to be a 100% module going forward?

Stephen Cai

I think first quarter I’m sure 100% module with our own brand, without any OEM.

Rob Stone – Cowen & Company

Okay. And any external cell sales in Q1?

Stephen Cai

No.

Rob Stone – Cowen & Company

Okay. So what accounts for the big decline in gross margin if your in-house capacity is 400 megawatts and the lower end of your range for shipments is about 98 megawatts? What should be able to make most of the production at that sort of 14% to 15% internal margin? What makes your blended margin as low as 9.5% to 10.0%?

Stephen Cai

Could I turn this to John? John?

John Wong

Yes. This first quarter of 2011 is a transition time because the raw material has been going up and then down, as you know, and the price was decreasing. And during this period, we have experienced a time that we had purchased some raw materials at high price and asking to convert these and sell at a lower price. It’s a combination of both. And we are not seeing that for the rest of the year because we are now seeing the falling of price for the raw materials.

Rob Stone – Cowen & Company

Okay. Where do you expect the ASPs will be for modules in the first quarter?

John Wong

The first quarter is still difficult to – about – I think it’s about $1.70 per watt.

Rob Stone – Cowen & Company

Okay. And finally, with respect to your expansion plans, can you say what your expected capital expenditure will be for the expansion you mentioned?

Stephen Cai

That is around $130 million.

Rob Stone – Cowen & Company

$130 million, okay. John, I had one more question for you. In the Q3 call, I think the expectation was that you would have a higher tax rate for the year, something like 16%. And so we were assuming a much higher fourth quarter tax rate. And then it came in quite low. Could you just comment on what happened with the tax rate in the fourth quarter and what tax rate you expect to be paying this year? Thank you.

John Wong

Okay. For the fourth quarter, because we are consolidating for the first time, a lot of amount of deferred tax came in and this brings the overall tax rate down, everything go in the first time, this time. But going forward, we would be seeing about 16%, 18% rate.

Rob Stone – Cowen & Company

16% to 18%?

John Wong

Yes.

Rob Stone – Cowen & Company

Okay. Thank you.

Stephen Cai

Thank you.

Operator

Your next question comes from the line of Kelly Dougherty of Macquarie. You may proceed.

Kelly Dougherty – Macquarie

Hi. Thanks for taking the question. I just wanted to follow up on the first quarter gross margin guidance. Can you help us think about what your expectations are for wafer pricing? And then again, just walk us through the difference between the 14.5% – 14% to 15% and then to the 9.0% to 10.5% gross margin. You are not making any wafers internally, correct?

Stephen Cai

Yes. We have (inaudible).

Kelly Dougherty – Macquarie

Okay. So what are you paying for wafers in the first quarter?

Stephen Cai

We have this very highest cost of labor cost. So, John, could you please share with us?

John Wong

We are expecting the average for the first quarter to be around $0.92.

Kelly Dougherty – Macquarie

I’m sorry. You said 92?

John Wong

Yes, $0.92.

Kelly Dougherty – Macquarie

Okay, thanks. And then, so I guess when you talk about an integrated margin, it’s from the cells that you are making into modules?

John Wong

Correct.

Kelly Dougherty – Macquarie

Okay. So – and then I –

John Wong

We are using our own cells to make the modules, yes.

Kelly Dougherty – Macquarie

All right. So the difference then between 9.0% and 10.5% and the 14% to 15% is outside third-party cells you are buying?

John Wong

9.0% to 10.5% is the overall gross margin. 14% to 15% is for this quarter. We will have people know how – if we buy – if we use all the cells and in our production that we make ourselves, that would have been the margin. That’s all.

Kelly Dougherty – Macquarie

So the difference then is that 30% of cells that you have to buy externally? Is there something else like systems business or anything else included in that?

John Wong

I believe that’s correct.

Kelly Dougherty – Macquarie

Okay. So what are you paying for cells then?

John Wong

I think it’s about $1.22 per watt.

Kelly Dougherty – Macquarie

Okay. And how do you expect – do you have any kind of contracts you have in line or discussions that you had with your suppliers? How do you expect those wafer and cell class to trend as we move throughout the year?

Stephen Cai

That’s an interesting question. Yes, we have this – talking about the spot markets and our long-term contract pricing, long-term contract pricing, as you know, is very low. It’s more comparative. But the spot market is still uncontrollable, as the up and down. And then we see the pricing – price decreasing trend in Q1 2011, and the downward pricing trend is likely to sustain this year. This is my view.

Kelly Dougherty – Macquarie

Okay. And how much do you have under contract, I guess, on wafers? How much do you have under long-term contract and how much are you buying in the spot market?

Stephen Cai

We have the long-term contract to be signed with few partners such as GCL and CEEG. The total, I think, is based on outsourcing is about this 50-50. But some of these contracts is the flexible pricing negotiations quarterly, not a year fees.

Kelly Dougherty – Macquarie

Okay. So about 50% of your wafer needs are under quarterly renegotiated contracts.

Stephen Cai

Yes, correct.

Kelly Dougherty – Macquarie

Lower than spot pricing.

Stephen Cai

Yes, correct.

Kelly Dougherty – Macquarie

Okay. Do you have – I mean, we’ve seen many of your peers actually backward integrating into their own wafer capacity to try to protect gross margin. Do you have any plans to go that route as well?

Stephen Cai

Yes. We always have this one of the options such as participate in polysilicon venture or something [ph] and always keep our eyes open for these opportunities. But actually there is not any target in the top line in this year. And we want to be – we still want to be a vertically integrated solar product provider, but still production spend, we don’t have yet. But we start to considerations for that.

Kelly Dougherty – Macquarie

Okay. I know you didn’t start shipping modules until the fourth quarter as China Sunergy, but can you help us think about how many megawatts of modules CEEG and China Sunergy, I guess, combined shipped in 2010? I guess I’m trying to get a better understanding for what kind of year-over-year growth you are expecting on a comparable basis in your module shipments.

Stephen Cai

Last year, I think some – last year, of course, mostly it’s the module shipment from CEEG previously. Totally it’s slightly above 300 megawatt module shipments.

Kelly Dougherty – Macquarie

Okay. So for the first three quarters of 2010, CEEG, and then China Sunergy modules were about 300 megawatts in 2010, and you are going to increase them to 670 to 690 in 2011? Is that all modules?

Stephen Cai

Yes, correct. This year target is doubled shipments versus last year of the module business.

Kelly Dougherty – Macquarie

Is that 670 to 690 all modules?

Stephen Cai

Yes, of course.

Kelly Dougherty – Macquarie

So, can you just help us think about incrementally are you shipping twice as much to current customers or did you get a significant amount of new customers? Can you just help us think about how you increase your shipments more than double in a market that’s not going to grow merely that significantly?

Stephen Cai

Yes. We already – we already see expanding of customer base and also see that we already got us new opportunity not only in Europe, but also in the US and Asia Pacific. And such as the – we also have this very diversified customer base. In Europe total is the 70% prepayment number is about – Italian market is about 25%, Germany is 20%, French is more than 10%. Specifically, North America brings more opportunity, which is about 10% of our total shipments in this year. So that is why we reached with this number. And we also have the potential in some of these emerging markets such as India and China.

Kelly Dougherty – Macquarie

Okay. Just one more for me on the modules. Can you help us think about the cadence as we move throughout the year? I mean, do you expect the sequential increase in every quarter or because you are looking to ship about 70% into Italy – I'm sorry, into Europe, you think that the first quarter will be strong – the first half will be strong and then something less than that in the second half? Can you maybe just think about the cadence?

Stephen Cai

Yes. For sure, that is how these shipments will grow dramatically in coming quarters, based on our first quarter number.

Kelly Dougherty – Macquarie

So, the second quarter will be higher than first, third quarter will be higher than second, every quarter will be higher?

Stephen Cai

I think so.

Kelly Dougherty – Macquarie

Okay. Thank you.

Stephen Cai

Thank you, Kelly.

Operator

Your next question comes from the line of Christine Hersey of Wedbush. You may proceed.

Christine Hersey – Wedbush

Thanks. Thanks for taking the question. Can you just talk a little bit more about your branding strategy and building out distribution in the European market? It just – it seems like it’s going to be very competitive market this year and you have some of the large Chinese manufacturers talking about a split between the established tier one brands versus less mature brands. I was just wondering if you could give us a little more color on what your strategy is to strengthen your brand and to try and preserve ASP throughout 2011 and then maybe a little – also a little bit about your bankability at this point in time? Thanks.

Stephen Cai

Yes. Thank you, Christine. I think a lot of this report – a few points I want to share with you about this. Firstly, I want to share with you about the sales and marketing strategy in Europe and other regions. Based on how the results we got, so is the acquisition. European markets, we will maintain the European market. We will maintain this – our key is the customers as the previous numbers. But still we try our best to expanding out these high valued customers in Europe market. Additionally, we are not only focused on the end user customer base, we have also put a lot of time and effort for expanding our distributor network in Europe.

So in Europe, we are not only focused on end user, but also starting to put more percentage in the top line in the marketplace. So like the last year, total module business end user – end user number is 70% of this end user numbers of the total, 30% from the distributors. But in this year, the percentage changed half and half for both growths. So – why so? We can expand our customer base. And in the US, the strategy is we begin to set up this sales network to – network with this local distributor system, and also we are going to look at some of the opportunities with our partner for solar pronged projects in end user market. So that is why we have more opportunities in the US market. So in terms of this ASP, still we look at this downward trend of the module ASP in this year. So still we have high confidence to get us more and more customer base expansion.

Christine Hersey – Wedbush

Okay, great. So, in that environment, can you just remind us what your targets are for the cell and module processing costs?

Stephen Cai

Okay. John, could you help me to answer the question directly?

John Wong

Okay. The cell, about – the processing cost is what we call the non-silicon cost. Right? And currently, for the first quarter, we are expecting the cost for the cell is $0.22 and the other cost for the module is $0.41. And as we go forward, we expect to still save a few cents over the rest of the quarter.

Christine Hersey – Wedbush

Okay. So when you look at reducing those processing costs, the opportunities derive mostly from scale or do you see other opportunities through conversion efficiency or other areas to try and lower the costs?

Stephen Cai

The key driven to cost down has come from the operational efficiency. Secondly, it’s the raw material of the non-silicon such as silver pace. And the third thing is some of the spare parts’ cost.

Christine Hersey – Wedbush

Okay. Since you mentioned silver pace, when you are expecting cost to come down from that, is that because you expect additional supply coming online? I mean, I think it’s over just like a 31-year high as a metal. Is that something you think that high cost is going to be extended or do you think that will come down in the next couple of quarters?

Stephen Cai

I know. That is the silver price, the market price is the uncertainty. That is currently the change that could not be expected. But we still have this way to do that such as we still – we will develop new sourcing supplier and to compare not only quality but also the pricing – competitive pricing. So we have the variety of ways to control our costs.

Christine Hersey – Wedbush

Okay. And then just one final question. Given you module sales into Europe for 2011, can you just talk about your hedging policy and maybe give us an idea if your European contracts are denominated in euro or if any are denominated in US dollar?

Stephen Cai

John?

John Wong

Okay. Currently, we are actually hedging possibly the contracts at the sales. But in the coming year, we see we will be hedging at a higher percentage. And we are also looking at other metrics of hedging such as natural hedging. And when we retained the money to Dubai, foreign currency product, for example, and using the network to control our currency.

Christine Hersey – Wedbush

Okay. Thank you.

John Wong

Thanks.

Operator

Your next question is a follow-up from the line of Vishal Shah of Barclays Capital. You may proceed.

Vishal Shah – Barclays Capital

Yes, hi. Thanks for taking my question. Can you maybe talk about pricing in Q2? I know you said pricing will be down, but can you quantify that, please? Thank you.

Stephen Cai

We still cannot see more precise pricing to share with you.

Vishal Shah – Barclays Capital

Would the magnitude of decline be the same as Q1? I mean, Q1 price –

Stephen Cai

Q1, we can share with you. For Q1, it’s 1.70, about 1.70. Q2 is, I think we look at as it’s still downward.

Vishal Shah – Barclays Capital

There was a $0.29 reduction for Q1 price. Are we talking about $0.10 to $0.15 in Q2 or more than that?

Stephen Cai

I think it will slightly decline.

Vishal Shah – Barclays Capital

Okay. So less than $0.10 to $0.15?

Stephen Cai

Yes, about. Yes. Thank you.

Vishal Shah – Barclays Capital

About $0.10 to – okay. What about your margins for the integrated business for Q2? You said 14% to 15% for Q1. Are we looking at double-digit margins or are the margins going to be high-single digits?

Stephen Cai

I think we can confidently only forecast the first quarter, but –

Vishal Shah – Barclays Capital

Okay. I mean, for deliveries in April, you already have contracts for deliveries in April, don’t you? I mean, what about your inventory levels?

Stephen Cai

Inventory levels, we would have about over a month inventory.

Vishal Shah – Barclays Capital

Okay. Okay. So basically it sounds like visibility in the second quarter is still very limited, both on the cost side and on the pricing side. How about volumes? You gave guidance, which is great. Can you maybe quantify what percentage of that will be in the second half versus first half?

Stephen Cai

We’ve already said our sales will go up every quarter. So you can pick a guess.

Vishal Shah – Barclays Capital

Okay. Would you –

Stephen Cai

(inaudible) yes.

Vishal Shah – Barclays Capital

Okay. You provided some mix, 20% to 25% of the business will be in Italy. Do you expect the same kind of mix in the second half as in the first half or the mix will be very different in the first half?

Stephen Cai

We expect it to normalize the market chain once the policy uncertainty is removed. And I think as well the pricing has been impacted as well currently, but Italy is the more attractive market for us. It still is the more attractive market for us. So whatever happens in this Italian market, we still look at is strong demand from this big Italy market.

Vishal Shah – Barclays Capital

Okay. Okay, great. Maybe one last question. I apologize if this is already asked. Can you maybe talk about your procurement strategy for cells and wafers? Are you looking to procure all of the volumes for your 2011 delivery? And are you able to make any prepayments? Have you been opting for prepayments and are you making them? Thank you.

Stephen Cai

Yes. We have already signed some of these – we already signed a long-term contract with GCL. Yes, for sure, we are paying this down payment for them for it. And the strategy there is we will combine the raw material sorting from the both long-term counter and spot market, which will put us in a good position in rest of this year.

Vishal Shah – Barclays Capital

Great. Thank you very much.

Stephen Cai

Thank you.

Operator

Your next question comes from the line of Kelly Dougherty of Macquarie. You may proceed.

Kelly Dougherty – Macquarie

Hi, thanks for taking the follow-up. Can you just help us think about your cell production in the fourth quarter? If you ship 97.9 megawatts, 60.6 megawatts for modules, I think you said you use 65% of your own cells in those modules, is that correct?

Stephen Cai

Yes, correct.

Kelly Dougherty – Macquarie

So that’s about 40 megawatts. And then you shipped about 34 megawatts of cells directly. That gets me – and then some OEM modules. That gets me to about 77 megawatts of cells produced in the fourth quarter, which is lower than the third quarter. Am I thinking about that correctly?

Stephen Cai

Yes. First quarter, I think we have the – some days are big holiday in China. And there still may be a little bit of slowdown of this producing capacity. So total sales little bit less than the fourth quarter in the first quarter.

Kelly Dougherty – Macquarie

Okay. But if there’s a bounce-back in the first quarter, how many megawatts of cells are you going to produce then in the first quarter?

Stephen Cai

Totally I think the first quarter is 91 megawatts. And the third quarter is 87, yes. This capacity –

Kelly Dougherty – Macquarie

So you produce 87 in the third quarter, correct. You produce about 77 in the fourth quarter. And then in the first quarter you said you’re going to produce about 91. Is that correct?

Stephen Cai

91 is the fourth quarter of last year.

Kelly Dougherty – Macquarie

The fourth quarter.

Stephen Cai

Yes, yes. 87 is the third quarter of the last year, yes.

Kelly Dougherty – Macquarie

How does that work then? If you put 65% of your sales for the modules at 40 megawatts, you sold 33.9 megawatts. So they are at 75-ish.

Stephen Cai

Totally it’s about that.

Kelly Dougherty – Macquarie

The total is about –

Stephen Cai

We also have some of these inventory levels, something, yes. So, so far we cannot calculate it precisely. But Kelly, if you need more information, we will provide you directly later on.

Kelly Dougherty – Macquarie

Okay, okay. Can you also help us think about the relationship with CEEG? I think they are primary shareholder. Did you mention that they have a poly plant and they have some other own ingot and wafer capacity? How are you – are you benefiting from that? And how much do you get from them? And can you help us think about maybe what the pricing might be in that relationship?

Stephen Cai

Okay. CEEG, the Chairman is also the China Sunergy Chairman, but (inaudible). And also this CEEG, they have owned this polysilicon manufacturing. So this year, they will provide us this polysilicon and we will make some of the polysilicon into this wafer to supply us directly. So CEEG, they have the polysilicon manufacturing and wafer manufacturing. So that’s why we previously signed agreements with CEEG for oxygen [ph] supply.

Kelly Dougherty – Macquarie

So that’s one of your contracts right now, and the 50% that you have under long-term contract, part of that is with CEEG already?

Stephen Cai

Yes, yes, of course. We have the supplies, not polysilicon supplies, yes.

Kelly Dougherty – Macquarie

Okay. And what kind of pricing is associated with that?

Stephen Cai

That is the quarterly pricing that’s negotiable.

Kelly Dougherty – Macquarie

Okay. So you don’t get necessarily any kind of more pricing?

Stephen Cai

I think still we can get more competitive price.

Kelly Dougherty – Macquarie

Okay. Thank you.

Stephen Cai

Yes, thank you.

Operator

Your next question comes from the line of Sri Nadesan of Lazard Asset Management. You may proceed.

Sri Nadesan – Lazard Asset Management

Hi. So to clarify, we have CapEx for the remaining CapEx – you said CapEx is going to $130 million. Is that for – does that also includes the fourth quarter CapEx of about $55 million? Is that right?

John Wong

Sorry, I didn’t catch that.

Sri Nadesan – Lazard Asset Management

You said earlier that your total CapEx is going to be $130 million. Does that include the fourth quarter CapEx of about –? You spent about $53 million, I think, right, in the fourth quarter? So, is that $130 million for full –?

John Wong

The $130 million is for 2011. The fourth quarter you mentioned – you were referring to the fourth quarter of 2010, right?

Sri Nadesan – Lazard Asset Management

Correct.

John Wong

No, no, no. The $130 million is for the year 2011.

Sri Nadesan – Lazard Asset Management

Okay, okay. And how do you plan to finance that?

John Wong

We are planning to finance that substantially from long-term bank loan.

Sri Nadesan – Lazard Asset Management

In the fourth quarter, it looks like on your balance sheet you are showing the long-term debt of about $30 million which you didn’t have before. So, is that the long-term bank debt that you’re talking about? So, already some of that has come on your balance sheet?

John Wong

Actually the question you just asked is how I financed 2011 CapEx, but the curtain you will follow on is how we finance the fourth quarter of 2010. 2010, the debt acquired was both from the acquired group and also additional debt. I don’t have the figure right now to give you a clear picture, but it will be a combination of both.

Sri Nadesan – Lazard Asset Management

So the $30 million that shows up in your fourth quarter balance sheet, that is because of the acquisition that you did in the fourth quarter? Is it right?

John Wong

You’re referring to the fourth quarter –

Sri Nadesan – Lazard Asset Management

The fourth quarter of 2010. That is the fourth quarter of 2010. So the $30 million is because of the acquisition that you did?

John Wong

Yes, correct.

Sri Nadesan – Lazard Asset Management

Okay. And what is the term of that? When does that mature?

John Wong

It was a two-year term.

Sri Nadesan – Lazard Asset Management

It’s a two-year term. So that matures in 2012?

John Wong

2011, 2012, yes. Sometime in 2012.

Sri Nadesan – Lazard Asset Management

So, when exactly – is it first half of 2012 or is it second half of 2012?

John Wong

Second half.

Sri Nadesan – Lazard Asset Management

Okay. And so the $130 million of CapEx for 2011, so you said you’re going to be using bank debt – long-term bank debt. What type of maturities are we talking about here? Is it going to be short-term bank debt, long-term bank debt?

John Wong

Long-term bank debt.

Sri Nadesan – Lazard Asset Management

Long-term. So what type of maturities? Five-year? Seven-year?

John Wong

Six to eight, around that.

Sri Nadesan – Lazard Asset Management

So, do you have commitments for that already?

Stephen Cai

Not firm commitment, no.

Sri Nadesan – Lazard Asset Management

Not yet. When do you expect to get that?

Stephen Cai

Soon.

Sri Nadesan – Lazard Asset Management

In the second quarter, you think, of 2011?

Stephen Cai

We expect second quarter, yes.

Sri Nadesan – Lazard Asset Management

Okay. And is there also a thought that your short-term bank borrowings rose that it more than doubled in the quarter sequentially? Is there any movement towards moving some of the short-term bank borrowings into long-term debt?

Stephen Cai

We – actually what we’re planning is for the first term loan to finance (inaudible). Medium-term loans, we will consider next year. But that is to be over. And for projects, we definitely will be using long-term debt. And that’s the best way we manage the different type of needs.

Sri Nadesan – Lazard Asset Management

Sorry. If I understood it right, the short-term bank borrowings will remain short-term with the medium-term?

Stephen Cai

Let me clarify. Because we merged the business and we will actually take on some of this short-term debt from our module business, and for trade purposes, we will use some short-term debt (inaudible). Okay? We borrow during the year and we pay during the year for different transactions. But that’s how we finance our normal activities. But the investments, like the acquisition, we definitely will be using long-term bank loan.

Sri Nadesan – Lazard Asset Management

Okay. So how much of the short-term bank borrowings that increased from the third quarter of 2010 to the fourth quarter of 2010, how much of that was because of that merger?

Stephen Cai

I don’t have the figures right now.

Sri Nadesan – Lazard Asset Management

But is that most of it or some of it?

Stephen Cai

Yes.

Sri Nadesan – Lazard Asset Management

Most of it?

Stephen Cai

Yes. Let me check. Yes, correct. Most of it.

Sri Nadesan – Lazard Asset Management

Most of it is because of that?

Stephen Cai

Yes.

Sri Nadesan – Lazard Asset Management

Okay. Thank you.

Operator

Your next question is a follow-up from the line of Rob Stone of Cowen & Company. You may proceed.

Rob Stone – Cowen & Company

Hi. Just a couple of housekeeping questions for John. One is on operating expenses, now that you will have a full quarter of the combined businesses, how should we think about the run rate of operating expenses in Q1? And do you have a target operating expense ratio for the year?

John Wong

The operating expenses for the fourth quarter of 2010 was around $8.8 million. And this is slightly slower, because for the fourth quarter, the business had one month of cell business and two months of module business in it. Okay? We would normally expect the percentage to be 6% compared with the 5.2% we sold because of this reason. Going forward – and I’d like to add, this 6%, we regard this quite low compared with the competition. So going forward, we will be looking for maintaining this advantage. I’m sorry, your question?

Rob Stone – Cowen & Company

Yes. Do you have a figure in dollars for Q1 that you expect the OpEx amount to be or range?

John Wong

Not right now.

Rob Stone – Cowen & Company

Okay. And my last question is, you never have some intangible assets as a result of the acquisition. Can you say what the quarterly amortization will be against that balance?

John Wong

The intangible, we said over two to three years.

Rob Stone – Cowen & Company

Two to three years, okay. Thank you.

Operator

There are no further questions at this time. I would now like to turn the call over to Stephen Cai for closing remarks.

Stephen Cai

Okay. Thank you for participating in today’s quarterly earning call. We look forward to speaking with you again on our next earnings call. If you have follow-up questions, please do not hesitate to contact us. Thank you, and have a nice day.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: China Sunergy CEO Discusses Q4 2010 Results - Earnings Call Transcript
This Transcript
All Transcripts