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

Q1 2011 Earnings Conference Call

May 23, 2011 8:00 AM EST

Executives

Elaine Li – Senior IR Manager

Stephen Cai – CEO

John Wong – Financial Controller

Jianhua Zhao – Cofounder and CTO

Analysts

Rob Stone – Cowen & Company

Kelly Dougherty – Macquarie

Dan Ries – Collins Stewart

Gordon Johnson – Axiom Capital Management

John Segrich – Gabelli & Company

Sri Nadesan – Lazard Asset Management

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Q1 2011 China Sunergy Company Limited Earnings Conference call.

My name is Steve, and I will be your operator for today.

At this time, all participants are in a listen-only mode. We will be conducting a question-and-answer session towards the end of today’s call. (Operator instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Ms. Elaine Li, Senior Investor Relations Manager.

Elaine Li

Thank you, operator and welcome to China Sunergy’s first quarter 2011 earnings conference call. This is Elaine Li speaking, China Sunergy’s Senior Investor Relations Manager. With us today are China Sunergy’s CEO, Mr. Stephen Cai; Cofounder and Chief Technology Officer, Dr. Jianhua Zhao; Acting CFO, Mr. Yongfei Chen; and Financial Controller Mr. John Wong.

Our first quarter 2011 earnings results were released earlier today and now available on company’s website as well as on newswire services. Our website also contains Q1 2011 earnings PowerPoint presentation to which you may refer to during or after this call. Before I turn the call over to Stephen, may I remind our listeners that management prepared remarks include forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. And as such, our results may be materially different from the views expressed today.

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

With that, I’d like to turn the call over to Mr. Stephen Cai, China Sunergy’s CEO. Stephen?

Stephen Cai

Thank you, Elaine. And let me thank everyone for taking the time to join today. I am pleased to have been leading the company for over one year now and I think we have come a long way. In tough market conditions and uncertainties, especially the delay in policy changes in Italy, China Sunergy is pleased to say that it exceeded guidance on gross margins and the module ASP in the first quarter. During which time we shipped a total of 98 megawatt meeting our shipment guidance.

We achieved a gross margin of 10.7% despite some misprediction that margin was slipping to the single-digit. And our module ASP was $1.74 per watt, better than industry average. Before we go into the details of our financial performance, we want to talk to you today about our strategy. I feel it is important to bring investors up-to-date on our long-term business strategy following quite a significant transition in 2010. Late last year when we acquired two module manufacturers, we changed from the predominantly cell to a predominantly module business. We made this change for two main reasons.

One, we wanted to capture more of this value chain and become more vertically integrated. Vertical integration offers stability, scale and the cost saving advantages. Two, we feel it was time to invest in our brand name and sell our own branded module products rather than being a component part of the others. We wanted the China Sunergy name to stand for cutting-edge technology and end-to-end solutions. By producing both cells and modules, we can now sell directly to end-users and participate fully in international markets. In short-term, this shift has posed a few temporary challenges. For example, we haven't been able to fully meet our module biggest demand for solar cells in-house.

And instead had to buy cells from other companies, which cut into our margins. However, our goal is to be sales sufficient with cells, and we are planning for the day probably next year, when our cell capacity will meet our module capacity. In our transition, we’ve also had to induce some of the structural changes to our balance sheet such as increased accounts receivables which we highlighted last quarter. Going forward, we actually have a lot of the confidence in our business model.

Short-term challenges do not deter us from our long-term goal of setting high efficiency, cost effective solar products, just because we cross sell our module business, does not mean that we are not focusing on cells. In fact designing high efficient cells is our clear expertise and our clear priority. Later on I will ask our CTO, Dr. Zhao to elaborate our average 18.35% batch efficiency we recently achieved in our high efficiency pilot cell line. A rate well above industry average.

In summary, we’re investing in our own technology and in-house capacity expansion, both of which will help us control costs. We are confident that we will return to high margins in the third quarter, and we know that it is our shareholders number one priority. If high margins are the goal, we are of course aware that there are different ways to achieve that goals and that you may ask why do – why we do not have immediate plan to aid internal wafer capability. Although, we want to roll this out, we will need to evaluate the short-term benefit against the cost and the long-term implications.

Cells, non-ingots and wafers are our core expertise. Currently upstream in wafer costs are decreasing faster that downstream in module prices. We strongly believe it makes sense for China Sunergy to push always building high efficiency cell lines and building out a sales force to sell CSUN branded modules. We are actively working on the substantial financing contracts to enable all the capacity expansion and we look forward to enhancing that sometime in the future.

With our confirmed sales top line for the year, we believe we are on target to reach or exceed full-year shipment to levels of 670 to 690 megawatts. Now that the Italian situation is clear, this will steadily spill over into other European markets. And we think sales will pickup at the end strongly from June onwards. Our capacity expansion targets of the 750 megawatt of the cells and 1.2 gigawatt of the modules by the year-end remain unchanged. In order to plan – in order to plan for this growth, we are aiding to our local sales teams around the world in some of the European countries, one out of every four sales people are locals and in U.S. our idea goal is to be 90% local.

Speaking of the U.S., we have just setup this company in San Francisco. China Sunergy U.S. Clean Tech Inc, that will serve as our U.S headquarters. We are working hard and confirming bankability in U.S. and we are close to naming someone to head up our U.S. operations. We are also recruiting both, senior management at our China headquarters. It is important to our Chairman, to me, and to our Cofounder, and CTO, Dr. Zhao, we find qualified committee people who will sit with the company for the long-term.

And with that I will turn the call over to our Financial Controller, John Wong, who will go through the first quarter financial results in detail. John?

John Wong

Thank you, Stephen. I am going to briefly reveal our first quarter 2011 results which are prepared under U.S. GAAP and denominated in U.S. dollars. First, I should mention that because of the two acquisitions last November, Q1 2011 is not entirely comparable with either Q1 or Q4 of 2010, although comparisons are given to provide context.

Our total revenue in the first quarter totaled $165.7 million, a 58.9% increase year-on-year but a slight decrease of 2.3% against quarter four of 2010. Total shipment volumes in the first quarter were 98 megawatts including 92.1 megawatts of solar modules which is within the company’s previous guidance. The basic geographic breakdown for the first quarter is 75% to Europe and 25% of sales elsewhere in the world.

For the full-year, we expect sales in Germany, France and North America to increase at the proportion of the total. And we also expect India to be a significant contributor. Average selling price for the company solar modules was $1.74 per watt versus guidance of $1.70 per watt, and compared to $1.93 per watt in the fourth quarter of 2010. The economic of the industry are changing and we are following and preparing for this trend. We basically do not sell cells anymore, less than 5% of total shipments are cells and those are only cells with lower performance ratings.

China Sunergy’s gross profit increased year-on-year to $17.8 million in Q1 2011. The 5.3% increase year-on-year but a 34.3% decrease against last quarter. Our gross margin was 10.7%, higher than the company’s previous guidance of 9% to 10.5%. In-house gross margin was 14.6% which is within management’s previous guidance. We are confident that the current market weakness will not last, sales will accelerate in June and gross margin will begin to recover after that.

As for our net income, it decreased 77.3% over quarter four of 2010, to $3.5 million, primarily due to quicker decrease in ASP in comparison to raw material costs. But this trend is reversing now. Our net income per ADS was $0.09 on both the basic and diluted basis, compared to $0.18 per ADS on both basic and diluted basis in Q1 of 2010 and $0.38 on the basic and $0.37 on the diluted basis in Q4 2010. Operating cash outflow in the first quarter was $92 million, partly due to higher inventory levels as a result of slower than expected sales and to extended credit terms for certain long-term customers, all factors being related to the uncertainty over the Italian solar policy.

Now that the Italian solar policy has been clarified, we are confident that our inventory and receivables levels will return to normal. As of March 31, 2011 the company had cash and cash equivalent of $79.6 million. Now a few words on wafer procurement. The company will maintain a strategic balance between our exposure to the spot market and the stability offered by long-term contracts. When the prices of wafer keeps to certain level and becomes more of buyer market, the company is expecting to sign more long-term contracts.

In the past when wafer prices were very high and we did not have many long-term contracts in place, we suffered temporarily but now that prices are falling and the fact that we have significant exposure to the spot market might actually prove to be an advantage. We evaluate procurement and negotiate prices on a quarter-by-quarter basis and we will weekly.

At this point I will turn the call over to our Cofounder and CTO, Dr. Zhao to talk about technology, research and development.

Jianhua Zhao

Thank you, John. Ever since, I’ve been at China Sunergy, which was founded in 2004, I have been pursuing mass commercial productions of high efficiency cells. In 1999, at the University of New South Wales, I led a team that set the world record of 25% commercial efficiency for crystalline silicon cell. That record still stands today.

At China Sunergy, we have been working tirelessly to translate those results in research labs into mass production. And we are making good progress. As Stephen, mentioned earlier, we have built a pilot line for new Quasar cells which achieved a highest efficiency of 18.58% and a batch average efficiency of 18.35% which is encouraging result.

The pilot line has now started production last week and we expect that the average efficiency to be over 19% in the third quarter. Meanwhile I can report that in the first quarter, our average multi-crystalline and mono-crystalline cell efficiency are 16.5% and 17.8% respectively. By Q2, we are determined to improve multi-crystalline and mono-crystalline cell efficiency to about 16.6% and 18.05% respectively. Our efficiency targets for mono-crystalline cells at the end of the year are even higher at least 18.3%. The construction of our $20 million R&D Center in Nanjing is well underway and we will be installing a pilot cell line and a pilot module line here.

We welcome you to come to Nanjing to learn more about our technology advantages and meet our R&D team. Under my leadership with the support of our CEO, our Chairman and Board, China Sunergy is committed to continue the investment in R&D to maintain its technological edge.

Now I will turn back to Stephen, who will summarize the outlook and open the call up for questions. Stephen?

Stephen Cai

Thank you, John and Dr. Zhao for your good explanations. For second quarter guidance, we expect to ship between 120 to 130 megawatts of the solar products because we must have sell through our current higher value inventory. We expect our overall gross margin to be 7.5% to 8.5%, and in-house margin to be 12% to 13% in the second quarter. We’re still targeted to ship 670 to 690 megawatts in 2011 as we previously guided.

Now I am sure our analysts and investor has further questions, I want just to say in closing that I feel confident that, as far as challenges of the young sector and predictable in the industry dynamics. China Sunergy is the one of the solar companies that have real staying power. We are walking towards the day when alternative clean, renewable energy will be a viable option for countries around the world who are thinking to reduce their dependence on traditional sources of energy.

This including our home country China where we have just completed delivery of our modules to the new Nanjing Rail Station project, one of the largest of single BIPV projects in the world. I also want to say that we take our responsibilities as a public listed company very seriously and we strive to protect the interest of all the shareholders and to continuous create value for them. We want this to continuously improve our quarterly guidance, cost clarity and visibility with the investors and analysts.

We invite you to have a closer dialog with us in the future. Now we will take your questions. Operator?

Question-and-Answer Session

Operator

Certainly sir. (Operator Instructions) And your first question comes from the line of Rob Stone with Cowen & Company.

Rob Stone – Cowen & Company

Good evening gentlemen. Stephen, I wonder if you could comment on, where you see the ASP trend in the second quarter and for the balance of the year? And the recovery you're expecting on gross margin is that predicated principally on wafer costs, and if so could you comment, on where you see wafer costs this quarter going forward? Thank you.

John Wong

Let me take the answer. Firstly, the ASP for the second quarter would be around $1.55 to $1.65. Wafer costs would be around $0.75 but that is the wafer cost of the – of our purchases rather than cutting – taking into account from solar [ph].

Rob Stone – Cowen & Company

So you’ll use – you have to use up some higher cost inventory?

John Wong

That’s correct, because of course our inventory purchase a month ago on average that’s…

Rob Stone – Cowen & Company

Okay. And my follow-up question is, if you could just comment on the CapEx and depreciation in the quarter and CapEx for the year?

John Wong

CapEx for the quarter is not much – it’s only $6.8 million this quarter. CapEx for the year would be around $138 million.

Rob Stone – Cowen & Company

Depreciation in the quarter?

John Wong

Depreciation and amortization is around $4.2 million.

Rob Stone – Cowen & Company

4.2. Thank you.

John Wong

Yes.

Operator

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

Kelly Dougherty – Macquarie

Hi, thanks for taking the question. I’ll just follow-up on the last one quickly, just wondering if you can help us think about how you intend to finance the CapEx, I know you mentioned of getting to self sufficiencies for cells next year. So just wondering, how you are looking forward to expect the finance CapEx this year and next?

John Wong

We think that we have the support from a certain Chinese bank but we cannot name it which we are hoping to finalize the contract soon.

Kelly Dougherty – Macquarie

Okay, can you help us think about what the – what kind of interest rates might that carry?

John Wong

That will be a Chinese bank published rates, or thereabout.

Kelly Dougherty – Macquarie

Okay. And then can you help us think about how much of your inventory right now is finished modules, and then what kind of production level you are actually thinking about for this second quarter as you have to work through that inventory?

John Wong

Second quarter, basically the overall inventory account for including the batteries and wafer that we have in stock, okay, would be 89 megawatts. And then the production purely from new wafers will be 70 megawatts?

Kelly Dougherty – Macquarie

Okay. That's well below –

Stephen Cai

[inaudible].

Kelly Dougherty – Macquarie

I'm sorry.

Stephen Cai

Is that helpful?

Kelly Dougherty – Macquarie

I'm sorry, that's well below, what I think your capacity is. So can you help us think about the margin impact of under utilization?

Stephen Cai

We actually are going to produce roughly 100 megawatt during this quarter. So it’s quite high.

Kelly Dougherty – Macquarie

I'm sorry. I didn't understand that.

Stephen Cai

We are working through, okay, 30 megawatts of batteries and wafer plus another 70 wafer purchase from the outside. So we’re working through about 100 megawatts this quarter.

Kelly Dougherty – Macquarie

Okay. So that's well lower than your current capacity. So how does under utilization impact your gross margin?

Stephen Cai

That’s – so the impact is roughly about $0.02 in the module CCE [ph] and roughly $0.01 in the cell CCE.

Kelly Dougherty – Macquarie

Okay, thank you.

Operator

(Operator Instructions) And your next question comes from the line of Dan Ries with Collins Stewart.

Dan Ries – Collins Stewart

Hi, thanks for taking my question. Stephen, I'm wondering how the current market environment is, if you could give us a little bit more color on the current market environment, you've said that pricing $1.55 would be the second quarter average, we hear that the market environment has gotten very tough, your guidance calls for a nice sequential uptick in shipments and roughly a 200 basis point decline in margins. Did – has the current environment affected that like the – how did that – how did this differ from what you were expecting maybe two or three months ago?

Stephen Cai

So from the beginning of the year this quarter, everyone knows that it is the key markets, the Italian market got some impact caused by their tariffing policy delay. And but still promising us China Sunergy the strategy for Eastern market is that we still will focus on our technology development and secondly, we’ll focus on our branded investments.

And in the market, our top industry market in the first quarter is where in Eastern Europe, Italian markets and other European countries because the 70% of our first quarter shipments is – that came from the European markets so that is the – we are focused on the Eastern European also, but for the whole year we are looking at about 70% still the 70% from Europe and the 10% from the North America, 50% Asia-Pacific which including India, China, Australia etcetera and Pakistan as well.

And in North America, financing is the more challenging. So we may invest some big equity in some of the projects ourself in order to become bankable more quickly. Another strategy that we may explore is to what work is the local EPC, as a local partner and act purely as the supplier. The U.S. like turnkey low risk projects. We will – also we’ll focus, local banks are now – are reluctant to lend money unless they can see strong cash flows. So that means – so talking about these back to the first quarter Eastern market.

In Italy, there is a positive policy that has been announced. I think the market will be back in June. And from this long-term view still remains a major market with reasonable growth. Specifically, the market will be in favor of this rooftop market. And so in our total sales, that the current market still be around 20% to 30% of our total sales.

For Germany, we expect a minor decrease in it from July 1st. And on other hand, based on this current price level, the invested return rate there will be quite reasonable and the market will pickup quickly in second quarter, the later of second quarter or early of the third quarter.

Talking about the Eastern Europe, we still will now focus on the Slovakia and Bulgaria markets. So that will bring more sales in first quarter. So that is the general and briefly introduced the market background.

Dan Ries – Collins Stewart

All right, thank you. Maybe one just quick, Eastern Europe has been an important market for you, how would you – in the last few weeks has that market been stable, is it improving, is it deteriorating, just maybe some color since you are somewhat over exposed or had good exposure to the Eastern European space?

Stephen Cai

Yes, as everyone know that as the Czech Republic markets almost [inaudible]. And while still we focus on the Slovakia and Bulgaria. Slovakia’s policy is still there and look at this change are still stability and in Bulgaria it’s just the beginning and lot of this year project now has come out. So we quite – we are quite confidence to say that still we have higher market share there in Bulgaria market. So in this year, still we have, we believe that we can get some of the market share from this Bulgaria and Slovakia market.

Dan Ries – Collins Stewart

Great.

Stephen Cai

Thank you.

Dan Ries – Collins Stewart

Thank you.

Stephen Cai

Yes.

Operator

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

Kelly Dougherty – Macquarie

Hi, thanks for taking the follow-up, just wondering as you are moving into selling modules, I imagine your CapEx is going to have to increase especially, if you talk about localizing your sales force. So can you give us an idea if you have a target dollar amount per quarter or a percentage of, revenue that we should assume for OpEx?

John Wong

Okay. OpEx For the full-year we expect to be around 5.1%. Did that help?

Kelly Dougherty – Macquarie

I'm sorry. You said 5.1% of revenue?

John Wong

For the year.

Kelly Dougherty – Macquarie

Okay. That's a lot lower than most of the other module companies. Can you just help us think about maybe, if you have your sales force setup differently or what you're doing differently, than some of your other module peers?

John Wong

Maybe because we are still building up our sales team with our selling expenses of revenues we expected it to be around 1.9% but because of the timing if we’re building up our sales team to go in at the end of the year rather than right now if that explain something.

Kelly Dougherty – Macquarie

So basically it should increase as we move forward? Is that how you think about it?

John Wong

Yes and also another point to think about is we are still confident in doubling our sales, okay and perhaps our peers are not doing the same range of growth in sales.

Kelly Dougherty – Macquarie

But do you have a dollar amount that you have targeted for the full year? Hello.

John Wong

Okay. It’s roughly selling expense is $2 million, G&A $2.5 million and R&D 0.8 million.

Kelly Dougherty – Macquarie

Okay. So that's on a quarterly basis?

John Wong

For the full-year, I just have got split out – it was $20 million, $25 million and $8 million.

Kelly Dougherty – Macquarie

Okay, thank you. Just one more quick question then, any kind of update on the CFO search. Do you have kind of a shortlist of candidates and any kind of expectation for when you may have someone permanently in place?

Stephen Cai

We currently have Chen Yongfei look out the Acting CFO supported by John Wong as the Financial Controller. Company has no issue over finance and accounting management, but however we are still looking for the ideal CFO candidate to work with them. And we have now some candidates to be interviewed in this quarter and even some next quarter. But we still be try our best to get CFO as soon as possible.

Kelly Dougherty – Macquarie

Okay, thank you.

John Wong

Thank you, Kelly.

Operator

(Operator Instructions) And your next question comes from the line of Gordon Johnson with Axiom Capital Management.

Gordon Johnson – Axiom Capital Management

Thanks for taking my question. I just had a couple of questions specifically on the guidance for 2Q. Can you give us some indication of how many of those orders, you actually have, I guess firm contracts on, and maybe how many of those orders are variable, and then a couple of follow-ups.

Stephen Cai

Currently our confirmed sales top line is for yearly 415 megawatts but that we are still focusing on the 670 to 690 megawatts.

Gordon Johnson – Axiom Capital Management

Okay, and for Q2 of your 120 megawatt guidance, can you give us some indication of how much of that has actually been shipped thus far, given that we're almost at the end of May. Would you say that more than half of that has been shipped or are you still expecting that to be more backend loaded?

John Wong

So we already set out almost the 70% of the total contracts, total shipments. So that means this we can't reach the target 120 to 130 megawatts in second quarter.

Gordon Johnson – Axiom Capital Management

Okay, so I just wanted to make sure I heard that correctly you said 70% of that has been shipped?

John Wong

Sure.

Gordon Johnson – Axiom Capital Management

Now I understand that even though some of the product is shipped I think you guys recognize, sale on shipment not on actual cash collection? So is there any potential risk that some of that product maybe is not taken if markets are a little weaker than some of your customers expect?

Stephen Cai

Yes, we have these – we have the receivable numbers but we still have a discipline for the receivable policy. That means we have this very lower risk for the receivable because we use the sum assured [ph], we use the LC [ph] and so far we don’t have the issues for the receivable.

Gordon Johnson – Axiom Capital Management

Okay. And then lastly just looking at your balance sheet, I noticed a pretty significant uptick in both receivables and inventories, I just remember back to 2009, when there was some headwinds in the industry, this was something that was caught in place in a lot of solar companies. If indeed things do not get better, is there any potential risk of receivable or inventory write-downs? And I think you guys mentioned some write-downs in this quarter, can you help me understand what those write downs, at least a mention of them was specifically related to? Thank you.

John Wong

Give me just a moment. Okay, the write-down was about $500,000.

Gordon Johnson – Axiom Capital Management

No, I understand what the write-down amount was but can you help us understand what that was related to?

John Wong

It was mainly related to the field [ph] rather than to actual customer defaulting.

Gordon Johnson – Axiom Capital Management

Okay, and then on your receivables and inventory balances, if indeed things do not pick up, do you see any potential risk of write-downs on either receivables or inventories?

John Wong

We don’t currently see that because a lot of sales were through sum assured [ph] and of course 80% of that was insured, but if we don’t actually expect customer that we insure and the sum assured to default, because once they’ve defaulted they basically they cannot get the sum assured anymore. So we normally work around or we’re encouraged to wait a little bit but we don’t expect that to be full.

Gordon Johnson – Axiom Capital Management

Okay, thanks again guys.

Operator

Your next question comes from the line of Rob Stone with Cowen & Company.

Rob Stone – Cowen & Company

Hi guys, two quick follow-ups. What was the ASP for the cells that were sold during the quarter?

John Wong

It was $1.74.

Rob Stone – Cowen & Company

No, cells.

John Wong

Cells. Let me first clarify the answer first, we had mention the unit cells which are below our normal performance, okay. The answer you want is actually $1.00 but if you have to take that into account if not normal weighted cells.

Rob Stone – Cowen & Company

Sure.

John Wong

Okay.

Rob Stone – Cowen & Company

And could you comment on your expected conversion cost trends, where do you hope to be by the end of the year?

Stephen Cai

Yes. By the end of this year our target, the non-silicon cost for cell is $0.20, for module, it is $0.30 or even below $0.30. For Q2, for cell the non-silicon cost is $0.24, module is $0.31.

Rob Stone – Cowen & Company

Thank you.

John Wong

Thank you.

Operator

(Operator Instructions) And we do have a question from the line of Morise Paul [ph] with Gabelli.

John Segrich – Gabelli & Company

Hi guys, its John Segrich here from Gabelli. Yes, I just want to come back to Gordon's questions. A lot of the discussion that you gave was that you're hoping for a pickup, kind of looking out at three weeks and that really just seems to be the same thing everyone has been saying for the past couple of months, and yet there is never really been much of a pickup, so may be can you help me out and understand how you guys plan to maybe raise some cash let's say, in the next 90 days if there's not a pickup because it certainly, looks like if inventories keep growing and receivables keep growing you'll probably run out of cash, within the next one to two quarters, so how do you plan raising more money?

Stephen Cai

We already have the secured credit line, also let me clarify when you say credit lines in China they don’t pay for – they don’t have to pay for facilities fees, but we have – so we are promised from the banks that we are good for those credits, okay. And we have much more – much bigger lines than we actually use at the moment. Although we are not actually going to see – we are not expecting our cash situation to go worse in any sense.

John Segrich – Gabelli & Company

So much do you think the banks are just going to be willing to lend you as you guys lose money and just keep building and building more capacity?

Stephen Cai

If you were talking about building capacity, you mean CapEx rather than our operator, right. Let me clarify your question. Hello.

John Segrich – Gabelli & Company

Yes sir.

John Wong

I just want to clarify your question. You were talking about CapEx or you were talking about normal operations? Hello.

Operator

Hello, Mr. Paul [ph], are you there?

John Segrich – Gabelli & Company

Yes.

John Wong

We just want to clarify the question. Are we talking about CapEx or are we talking about operation costs?

John Segrich – Gabelli & Company

I meant both actually, both CapEx and OpEx throughout the year.

John Wong

CapEx we do our financing through the normal routes talking to banks and we are about to sign – finalize the arrangement, okay. And as I already said in terms of operating cash flow, we have a much higher facility [ph] than we actually take in at the moment. Is there anything, any specific point that you’re not clear that I can include here.

John Segrich – Gabelli & Company

No, that's fine. I guess from your point of view then the banks are just going to keep lending money to this sector even if people just continue to lose money.

John Wong

We’re not looking at losing money.

John Segrich – Gabelli & Company

But if you did, the banks would just lend you more money?

John Wong

Because the credit lines I am talking about is already promised for this year. Normally in China the banks looks who – how much to lend to each corporation right at the beginning of the year. So now we are in May of course I can give you certain confidence that at least for this year we’ve built a line.

John Segrich – Gabelli & Company

Got you. Okay, thanks a lot for your help.

Stephen Cai

Thank you.

Operator

(Operator Instructions) And we do have a question from the line of Sri Nadesan with Lazard.

Sri Nadesan – Lazard Asset Management

Hi, a quick question, I think you mentioned this earlier but I did not catch it, the – what is your total CapEx guidance for the year?

John Wong

About $138 million.

Sri Nadesan – Lazard Asset Management

And so I think you were guiding to that amount even previously, correct? So that there has been no change to that?

John Wong

No change. Any changes will be timing of the projects, because actually some projects will happen between this year and next year. We’re not saying by the end of the year, we actually complete the all the projects we started.

Sri Nadesan – Lazard Asset Management

So is that $130 million for the full year or is that for 2011 and 2012?

John Wong

For the year, for this year only.

Sri Nadesan – Lazard Asset Management

Okay, so that could be more in 2012?

John Wong

That is correct.

Sri Nadesan – Lazard Asset Management

And how much is that?

John Wong

At the moment, we haven't finalized the plan, because of course well certain production line we can add in more as we need it.

Sri Nadesan – Lazard Asset Management

Just to follow up on the earlier question.

John Wong

Yes.

Sri Nadesan – Lazard Asset Management

In terms of your bank facilities that you have secured at this point, right. How much is remaining in that facility?

John Wong

For the facility, for the longer term ones there are certain ones under discussions, okay. But for the short-term loans, we have another $200 million on hand. But we are not saying we’re going to use it but we have that in permanent [ph].

Sri Nadesan – Lazard Asset Management

So that's $200 million remaining in the short-term facility?

John Wong

Yes. and we have more, it could even be more.

Sri Nadesan – Lazard Asset Management

It could be more than that?

John Wong

Yes, but we are not planning to take out that much.

Sri Nadesan – Lazard Asset Management

No, I understand. I'm just looking to see how much room you might have, how much flexibility you might have. And the long-term loans.

John Wong

Yes.

Sri Nadesan – Lazard Asset Management

Is that likely to be finalized in the near-term, I know you've been talking to the banks for a little while, can you give us a little bit more color on that?

John Wong

Yes. Although we are not allowed to name the banks though, but yes we are confident.

Sri Nadesan – Lazard Asset Management

So it's going to be finalized in this quarter or second quarter?

John Wong

Just around June or probably afterwards.

Sri Nadesan – Lazard Asset Management

And what's the likely size of that?

John Wong

It will be combination of longer term and shorter term.

Sri Nadesan – Lazard Asset Management

All right. So what is the size of the long-term loans?

John Wong

The size of the long-term, okay, the real long-term loans will be $60 million roughly.

Sri Nadesan – Lazard Asset Management

Six zero?

John Wong

Yes, six zero.

Sri Nadesan – Lazard Asset Management

Okay. So when you finalize the long-term loan size, would that cut into the – would that lower the short-term loan amount, that you currently have remaining or is that two separate banks?

John Wong

It’s new, is that’s what you mean to.

Sri Nadesan – Lazard Asset Management

Yes, is that additional to the $200 million?

John Wong

$200 million is short-term loan.

Sri Nadesan – Lazard Asset Management

Right.

John Wong

$209 [ph] million is we have.

Sri Nadesan – Lazard Asset Management

Yes, I understand or I'm trying to understand is that, if the banks give you – grant you the long-term loans.

John Wong

Yes.

Sri Nadesan – Lazard Asset Management

Does the size of the short-term loans go down because you had – you said you have about $200 million plus remaining in the short-term loans, right? Or is it that they are two separate loan facilities and therefore even if you get the long-term loan of $60 million that will not reduce the amount of the short-term loan availability?

John Wong

This will not reduce the amount of short-term loan as you can see we are planning to increase CapEx by $138 million this year and when we’re only borrowing $60 million so actually – we are actually a bit short in terms of long-term loan with that respect but that is our current situation we are facing. We are of course wishing to borrow the long-term loans with CapEx and then short-term loans are for normal operating finances and then that is the type of planning we should have in financing. However, we just not able to get too much of the long-term loans versus our investments.

Sri Nadesan – Lazard Asset Management

Right.

John Wong

Does that make sense?

Sri Nadesan – Lazard Asset Management

Yes. So year end, right, so December – fast forward to December 2011, what do you expect your total bank borrowings to be short-term and long-term?

John Wong

Okay, hang on. I have got figures on that, is working.

Sri Nadesan – Lazard Asset Management

Yes.

John Wong

Is that in long-term loan including two years loan and five years loan, okay, we will increase by $100 million

Sri Nadesan – Lazard Asset Management

Will increase the $100 million from current levels of $30 million ish, or $30 million U.S.?

John Wong

Yes because we also have – because long-term $60 million that is for around five or six years, right. We also have certain two years loan. So that amount makes up to be just around $100 million, okay. In terms of short-term, sort of trade finances and similar, we only expect it to increase by from the beginning of the year because I am looking at the annual situation rather than from Q1 onwards.

Sri Nadesan – Lazard Asset Management

Right.

John Wong

We’ve increased by roughly $15 million.

Sri Nadesan – Lazard Asset Management

One five, or five zero?

John Wong

$50 million, five zero.

Sri Nadesan – Lazard Asset Management

So at end of last year you had about $140 million. So that should go to $190 million?

John Wong

Yes, because we actually currently we have $209 million.

Sri Nadesan – Lazard Asset Management

Right.

John Wong

Of this inventory and the creditor, our current receivable being slightly longer. So we expect to improve this, yes.

Sri Nadesan – Lazard Asset Management

So then, short-term loan amounts should go down from the current level of $209 million to about $190 million?

John Wong

Yes, that is if we meet our budget and all these other things going according to my assumptions and costs.

Sri Nadesan – Lazard Asset Management

Right. Okay, thank you.

Operator

And you do have a follow-up question from the line of Kelly Dougherty with Macquarie.

Kelly Dougherty – Macquarie

Hi, just one more for me, I know you previously said that your interest rate should be around, the Chinese bank loan rate but can you be a little bit more specific, and maybe help us think about the difference between the interest rate on the short-term and the long-term piece?

John Wong

Hang on, Kelly. Let me have a look at the figures.

Kelly Dougherty – Macquarie

Okay.

John Wong

The short-term is typically around 5.33%. The long-term would be around 6% because the short-term – the long-term we haven't finalized the contract. So it would be around 6%.

Kelly Dougherty – Macquarie

Okay. And then the short term 5.3% is that – do you expect that to increase as we've seen certainly rising interest rates in China?

John Wong

In China maybe because of the Chinese inflation, but nobody able to tell accurately.

Kelly Dougherty – Macquarie

Okay. And that 6% then or whatever it may actually be when it's finalized that would be a fixed rate for the long-term?

John Wong

It will be the published rate and then it will be up to when we reveal annually.

Kelly Dougherty – Macquarie

For annual review. Okay, thank you.

John Wong

Thank you.

Operator

And that concludes the Q&A portion of today’s conference. So I would now like to turn the call back over to Mr. Stephen Cai for closing remarks.

Stephen Cai

Thank you for participating in today’s quarterly earning call. We look forward to speaking with you again on our next earnings call or in between the calls either in on the phone in person or during our road show. If you have follow-up questions after today’s call, please do not hesitate to contact us Thank you.

Operator

And thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect.

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