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Executives

Martin Reidy - Brunswick Group

Peng Fang - CEO

Anthea Chung - Outgoing CFO

Ming Yang - VP of Business Development and Corporate Communications

Min Cao - CFO

Analysts

[Ming Chu] - Jeffries

[unintelligible] - Credit Suisse

Vishal Shah - Deutsche Bank

Kelly Dougherty - Macquarie

Edwin Mok - Needham & Company

Sanjay Shrestha - Lazard Capital Markets

Dan Ries - Colllins Stewart

Colin Rusch - ThinkEquity

Liu Yong - UBS

Pavel Molchanov - Raymond James

Nitin Kumar - Nomura Capital

Sam Dubinsky - Wells Fargo

JA Solar (JASO) Q2 2011 Results August 18, 2011 8:00 AM ET

Operator

Hello and thank you for standing by for JA Solar’s second quarter 2011 earnings conference call. [Operator instructions.] I would now like to turn the meeting over to your host for today’s conference, Martin Reidy of Brunswick Group. Please proceed.

Martin Reidy

Thank you. Welcome to JA Solar’s second quarter 2011 earnings conference call. Joining us from the company are Dr. Peng Fang, CEO; Ms. Anthea Chung, CFO; and Mr. Ming Yang, VP of Business Development and Corporate Communications; and Mr. Min Cao, who will assume the role of CFO from August 19.

As stated in the press release, the oversimplified translation of CNY into US dollars, which is set at CNY6.4635 to the U.S. dollar is made solely for the convenience of the audience. References to dollars are the lawful currency of the USA. The press release published today provides detailed financial tables under conversion from CNY to USD.

On this call Dr. Fang will begin with an overview of our Q2 2011 results, covering business and operational developments. Following that, Ming Yang will discuss technology developments and cost saving initiatives. Then, Anthea will provide details of the company’s financial performance. After prepared remarks we will open up for questions for the remainder of the call. We expect the entire call to last approximately one hour.

Before we begin the formal remarks, I would like to remind you that certain statements on today’s call, including statements regarding expected future financial and industry growth, are forward-looking statements that involve a number of risks and uncertainties that could cause actual results to differ materially.

These statements are made under the Safe Harbor provisions of the US Private Securities Litigation Reform Act of 1995. Factors that could cause actual results to differ include general business and economic conditions in the solar industry, governmental support for the development of solar power, future shortage or availability of the supply of high purity silicon, demand for end-user products by consumers and the inventory levels of such products in the supply chain, changes in demand from significant customers, changes in demand for our major markets, changes in product mix, capacity utilization, level of competition, pricing pressures and declines in average selling prices, delays in the introduction of new product lines, continued success and technological innovations, shortage in supply of raw materials, availability of financing, exchange rate fluctuation, litigation, and other risks as described in the company’s SEC filings, including its annual report on Form 20-F filed with the SEC.

Although the company believes that the expectations reflected in the forward-looking statements are reasonable, it cannot guarantee future results. You should not place undue reliance on these forward-looking statements. All information provided on today’s conference call speaks as of today’s date unless otherwise stated and the company undertakes no duty to update such information except as required under applicable law. I will now turn the call over to Dr. Peng Fang, CEO of JA Solar.

Peng Fang

Hello everyone, and welcome to today’s call. We appreciate your interest in JA Solar. I will start today with an overview of our second quarter results. Q2 was a challenging period for the entire industry, and JA Solar was not immune. However, I’m pleased to note that we made our shipment guidance with shipments of 481 megawatts. This is an important metric, because it indicates that, despite the market disruption, we retained our market share and saw sustained demand for our products.

As you know, many of our peers have struggled with demand over the quarter, so we are encouraged by this continued demand for JA Solar’s products and believe that this illustrates how the market recognized our strength in terms of technology and cost.

[unintelligible] in the second quarter, both our gross margin and our bottom line were affected by a decline in ASPs that was steeper than anticipated, as we [unintelligible] the impact of high-cost inventory provisions. In terms of ASPs, the sharp drop in installation level in Germany, combined with uncertainty in Italy, resulted in a sudden and severe market disruption. Because of this, we saw average solar cell price dropping more than 20% quarter over quarter and average wafer price dropping in the low teens percentage range, quarter over quarter.

But while this ASP decline for the sales and the modules began in April, price for materials including wafer and [poly] did not decline until middle-May. This was a lag of approximately 6 weeks in the middle of the quarter. This timing difference between when the product prices started to decline versus when the material prices started to decline means that cost of goods sold was abnormally high this quarter. This resulted in a [unintelligible] impact to our gross margin and net income. In recent weeks, we have begun to see material price bottoming out and the product ASPs stabilizing.

Looking to the quarters ahead, let me first spend a few minutes to update you on what we are seeing and hearing from our customers across some of our most important markets. In Germany, from January to May, installations were below our expectations. Based on available market research information, total installations declined by 38% year over year to 1.1 gigawatts compared to 1.7 gigawatts in the same period of 2010. Particularly rough was the period from March to May, when the total installations reached just [unintelligible] megawatts or approximately 50% less than the same period of 2010.

In June we saw significant product movement though we believe that most of this was drawdown of channel inventory at the distributor and installer level. [unintelligible] as a result of this product movement we saw improved product sell-through in June, with monthly shipments above the level in April and May.

The outlook for the second half of the year in Germany is more positive. Because installation volumes were low for March through May, there was no middle year [unintelligible] costs so with module price now significantly lower, the IRR in Germany is looking very attractive once again.

Currently we are seeing order recovery and shipments are picking up, and we have already signed several contracts for products with delivery from August through to the fourth quarter of the German end market. We expect the German installation activities to recover in the third quarter and believe that we will see healthier customer order flow from the end of the third quarter and into the fourth quarter. JA Solar is well-positioned in Germany thanks to our diverse customer base and we believe we’re well placed to benefit from market recovery once installation activity resumes.

After Japan’s nuclear crisis in March, Germany’s coalition government announced a reversal of policy that will see all of the country’s nuclear power plants phase out by 2022. Germany is the biggest [unintelligible] market today. We believe this policy of phasing out nuclear will boost solar energy’s portion of total electricity generation in Germany, and the German [unintelligible] market will be sustainable over the next several years. This will help the global [unintelligible] sustain its growth along with the U.S. and China, and the market picking up in the years to come.

Turning now to Italy, after government suddenly changed its subsidy policy in March, we saw quite a lot of disruption in this market and a significant reduction in installation levels. However, Italy is gradually becoming a rooftop market and we are working with our customers there to prepare their market entrance strategy. We produce a number of cell and module products that are particularly suitable for rooftop installations, particularly our high-efficiency products, which are ideally suited for constrained spaces. So we are well pleased to help our customers adapt to this change.

Looking at the USA, we are very encouraged by developments here. We are seeing promising signs of an increase in installations and order activity and from talking to our customers we believe that the U.S. market is set for significant growth in the second half of this year. Independent third-party research is currently suggesting that the U.S. market will reach 2.5 gigawatts for the year, up from just 1 gigawatt last year. This would likely make the U.S. one of top tier markets globally.

As with Germany, the drop in module price is making the IRR on projects very attractive in the U.S. market. So a lot of projects are moving forward to installation. We also believe that the financing environment for U.S. projects remains healthy. The tax [unintelligible] investors and the financial institutions have a strong appetite for qualified projects. Many of our customers have big plans in the United States for the second half of this year and we are receiving more and more interest from key developers and installers in working with JA Solar.

We are now in active discussions with new and existing customers to grow our share of the market and believe that we can build a significant pipeline here. The U.S. market especially favors high-efficiency, low-cost suppliers with large manufacturing scale. This will benefit JA Solar.

Finally, as you are aware, China’s NDRC recently announced its national feed-in-tariff program for the solar industry, which is the first of its kind. China is currently experiencing a boom in solar project installations. In the second half of the year, between 500 megawatts and 800 megawatts of PV installations are taking place in Qinghai province alone.

The feed-in-tariff is very attractive for the western regions of China like Qinghai, Gansu, Tibet, and Xinjiang, where radiation is high. Located on a high plateau, there are large open areas for PV project installations. China’s PV market is expected to be more of a utility-scale project market and it is believed that large [unintelligible] on the power generation companies will play a major role in China’s solar installation.

JA Solar is currently working with leading Chinese independent power producers who have chosen us as a key partner for solar product supplies to help grow the Chinese market. An example of this is our recently announced partnership with Huanghe Power, a subsidiary of China Power Investment Group, where we will deliver more than 20 megawatts to a large-scale PV projects in Qinghai in Q3.

Also of note is that where some state-owned enterprises have module manufacturing capacity, most of them do not have the capability to manufacture high-efficiency, cost-effective solar cells. This is an area where JA Solar has a big advantage as China’s largest high-efficiency solar cell supplier with dominant market share and reputation.

As China's largest solar cell producer, JA Solar is well-positioned to capture local solar cell demand from state-owned module manufacturers and in fact we are already working with module manufacturing subsidy of leading state-owned power producers to provide the cells for their module manufacture needs.

As such, we expect JA Solar to be a major beneficiary of China’s market growth. Regarding the potential size of the Chinese market, from talking to our Chinese partners, we believe China has the potential to reach 1.5 gigawatts of installations this year and can grow to become a 3-5 gigawatt market within a few years. As I discussed above, JA Solar is well-positioned to benefit from Chinese PV market growth.

Now I will turn the call to Ming, who will discuss more details about our technology and other initiatives.

Ming Yang

Thank you Dr. Fang. Hello everyone. I will provide an update on JA Solar’s recent technology development efforts.

Looking first at our conventional multi-crystalline solar cells, our latest results from the end of July show that our average conversion efficiency has broken the 17% barrier. This is better than other products commonly available on the market, so we are confident that our products are superior to our peers’ offering and believe that this is reflected in the sustained demand for our products despite market volatility.

We’re also very encouraged by demand for our high-efficiency products, SECIUM and MAPLE. SECIUM is our high-efficiency mono-crystalline product with current conversion efficiency in the range of 18.8% on average. More than half of our mono-crystalline solar cells and module customers have started to adopt our SECIUM solar product, and SECIUM cells now account for approximately 20-30% of our total mono-crystalline cell shipments.

We also unveiled our high-efficiency MAPLE product in February, and since then we have received very positive feedback from the market. MAPLE utilizes [quasi-mono] technology and JA Solar is a pioneer and leader in this technology, offering high efficiency with low manufacturing costs.

The current average conversion efficiency for MAPLE is above 17.6%. We are now focusing on developing strategic customers for MAPLE and expect demand to increase dramatically in the coming quarters. MAPLE capacity is expected to reach 200 megawatts by the end of 2011.

Because of their higher conversion efficiencies versus conventional products, both SECIUM and MAPLE are attractive to installers because they enable form factors that maximize power output and reduce installation costs. So we believe that this positions us very well to take advantage of trends in the market.

While we believe that technology will be a key differentiator going forward, we continue to focus on optimizing our cost base and I’m pleased to say that our R&D efforts have enabled significant progress in this regard.

Our process engineering and R&D team have developed a new process which we call SBD. This process enables us to reduce the amount of silver paste we use in producing solar cells by 20-30% and we expect that this will enable us to reduce processing costs by between 10% and 15% in the coming quarters

Production of new solar cells utilizing this innovative new process has already begun, and we have enabled this technology on all of our production lines in Yangzhou and about half of our lines in Hebei. As we roll this process out, we expect to further reduce our overall cell processing costs in the longer term.

We’re also making progress in achieving our cost reduction targets. Recently we’ve seen reduction in key raw material costs including polysilicon, wafer, EVA, glass, and other consumable materials. This reduction, along with process improvements and manufacturing effect gains will help us to reduce our manufacturing costs even further.

On our module operation, we’ve continued to focus on key partnerships with leading global OEMs and project developers. We are working to develop key relationships with various stakeholders including project developers, project owners and investors, insurance companies, and leading project financing banks.

Our panels have been installed in major solar projects globally, including Europe and other regions. Our products have been accepted by Tier 1 end market customers, project developers, and leading financial institutions.

Now I will turn the call back to Dr. Fang to discuss our outlook on the market.

Peng Fang

Let me conclude by stating again that we believe Q2 represents the bottom of the particularly challenging cycle of the solar industry and in the second half of 2011 we expect to see the market recover. Despite the tough market conditions, JA Solar has emerged from the second quarter in good shape, especially with respect to liquidity.

At the end of Q2 we have cash on hand in excess of $600 million. We are well-positioned for the market recovery in the second half of this year, with better technology and an improved cost structure.

Looking ahead, we saw encouraging signs of recovery in key markets including Germany, the United States, China, and other regions such as India and Japan, and we believe that JA Solar is well-positioned to take advantage of this recovery because we are entering the second half of the year with better technology and an improved cost structure.

We are confident that the strength of our long term relationships with the major players across the solar [value chain]. The strength of our industry leading technology and the strength of our business model will ensure success for JA Solar for the rest of 2011 and beyond.

With that, let me update you on our guidance for the rest of the year. In light of the current market conditions, we expect the Q3 shipment to be in the range of 450 megawatts to 470 megawatts. Our current expectation for shipments for the full year is approximately 1.8 gigawatts. This compares to our previously announced guidance of 2.2 gigawatts.

With that, I turn the call over to Anthea.

Anthea Chung

Thank you Dr. Fang, and thanks to everyone for joining today’s call. In Q2 2011 we shipped a total of 401 megawatts of cells and modules which was in line with our previous guidance. Our year over year shipment growth was 28.9%. Compared with Q1 2011, this represents a decline of 11.1%. This decline was due to the challenging market conditions previously discussed by Dr. Fang.

Our Q2 shipment mix was 69% solar cells, 11% [unintelligible], and 20% module shipments. The geographic breakdown of our second quarter shipments was approximately 52% China and 48% international.

Total revenue for the second quarter was $413 million, representing year over year growth of 12.1%. Compared with Q1, revenue declined 26.7%. The decline in revenue was mainly due to approximately 20% of decline in average selling prices of solar cells from Q1 to Q2, plus approximately 11% of sequential decline in shipments.

Q2 gross loss was $11.1 million compared with Q1 gross profit of $97.5 million. The decline was primarily due to a decline in shipments and product ASPs as well as the higher inventory provision reported in Q2. During Q2 we recorded inventory provision of $27.7 million which was reflected in our cost of sales. This provision was recorded due to the decline in ASPs and reduced our gross margin percentage by approximately 6.7%.

Total operating expenses in the second quarter were $20.1 million, representing 4.9% of net revenue. This compares to the $13.1 million or 2.3% of net revenue in the first quarter. As mentioned in our previous call, we recorded a reversal of provision for prepayments of $4.4 million in Q1. Including this adjustment, our total operating expenses for Q1 would have been $17.5 million or approximately 3.1% of net revenue.

Q2 operating expenses increased by $2.6 million due to an increase in professional fees related to our acquisition of Solar Silicon Valley, additional investments in sales and marketing, as well as investments in R&D to improve our technology.

Interest expense in Q2 totaled $11.9 million compared with interest expense in Q1 of $9.8 million. Interest expense in Q2 and Q1 included a noncash interest expense of $3.5 million and $3.9 million respectively, representing accretion of discount to convertible bonds.

Included in other income of $4.6 million was $3.1 million of noncash gain from changes in fair value of derivatives related to our convertible bonds. The remainder was comprised of foreign exchange gain and interest income.

GAAP loss per diluted ADS in Q2 2011 was $0.22. The new customers inventory provision recorded in Q2 had a negative impact of $0.17 per diluted ADS. The total diluted weighted average number of ADS outstanding was $164.5 million in Q2.

On the balance sheet side, our total recovers at the end of Q2 stood at $159.4 million, $20.9 million less than the Q1 balance of $180.3 million. Our days sales outstanding for Q2 was 35 days. Total inventories at the end of Q2 were $250.9 million compared with $192.1 million in Q1. Average inventory turns in Q2 stood at 53 days.

Total prepayments to suppliers were $385.3 million, slightly up from $374.3 million at the end of Q1. We expect to utilize $77 million of prepayments or approximately 20% of total prepayments over the next 12 months.

JA Solar continues to maintain a strong liquidity. The company had $616.9 million of cash on hand at June 30, 2011. This represented an increase of $189.2 million from the end of Q1. Working capital at the end of Q2 was $872.4 million. Total long term loans outstanding was $632.9 million. Additional cash on hand will be used to support our future growth and operational needs.

I do want to highlight that while the Chinese government has tightened the monetary policy, financial institutions remain strong supporters of JA Solar.

As many of you already know, I will be leaving JA Solar to pursue other career interests. I would now like to introduce you to Mr. Min Cao, JA Solar’s new CFO. I have a lot of respect for Mr. Cao and have greatly enjoyed working closely with him in the past few weeks.

Mr. Cao has more than 10 years of capital markets experience, much of that focused on the clean tech sector. From 2006 to 2008, he served as vice president of finance at Solarfun. Since 2008, he has served as managing director of JL Capital, an investment firm under Jinglong Group. This role brought him in close contact with JA Solar on a regular basis, so he knows the solar industry and our business well. You will be hearing more from Mr. Cao in future calls.

Finally, before I conclude, I want to thank the teams of analysts who have been covering JA Solar for a long period of time. Many of you are on the call today. I enjoyed working with you and thank you for your continued support of JA Solar.

This concludes our prepared remarks. I will now open the call to questions. Operator?

Question-and-Answer Session

Operator

[Operator instructions.] And our first question comes from the line of Jesse Pichel of Jeffries. Please proceed.

[Ming Chu] - Jeffries

Hi, this is [Ming Chu] for Jesse Pichel. Regarding your full year shipment guidance, can you give us some color on where is the weakness? Is it because of the module business or [unintelligible] business or across the board?

Ming Yang

Thank you for your question and your support. Regarding our full year guidance, I think we want to provide a number that we believe is realistic in light of the current market conditions. So as you know I think currently there’s some uncertainty in the market and certainly we believe there’s a lot of potential for the market to recover significantly in the second half, particularly for Germany, for the U.S., and for China and some other regions like India and Japan. But I believe given what has happened in Q2 and what we saw in July and August, we want to provide a number that we believe is achievable and realistic to the market.

[Ming Chu] - Jeffries

Okay, that’s helpful. Can you also give us some color on your shipments in China in the second half and also in 2012 given the recent feed-in-tariff announcement and your win in Qinhai?

Peng Fang

This year, before the end of the year, we expect to ship the 60-80 megawatts and next year we expect maybe double or triple this number.

Ming Yang

By the way, that is only for modules that are going directly to [projects]. It does not consist of cells that we ship to, for example, state-owned enterprise module manufacturing companies. That goes to their projects as well.

Operator

And our next question comes from the line of Satya Kumar with Credit Suisse. Please proceed.

[unintelligible] - Credit Suisse

This is [unintelligible] calling for Satya. I had a quick question regarding your China shipments. How much do you see your shipments to the local state-owned utilities module-making companies, for yourself?

Peng Fang

Right now in Q3, as we announced, we shipped about 20 megawatts of modules on very short notice to the project in Qinghai. Actually we’ll follow up with more in Q4. Our unit costs for this [unintelligible] underpriced. Their module factories, actually we’re already working with quite a few of the module companies owned by the state-owned enterprise. They also have power production facilities, you know. But we do not distinguish how much is actually shipped to their end market at this moment. But we do see the increase of the order and also the activities. They have much more inquiry about our cell price and the volume.

Operator

And our next question comes from the line of Vishal Shah of Deutsche Bank. Please proceed.

Vishal Shah - Deutsche Bank

Can you talk about the pricing environment right now for your modular business, particularly for sales in China? And also if you talk to your customers, particularly in Europe, what kind of discount are they asking for your product versus, say, Tier 1 module manufacturers?

Ming Yang

We would like not to give specific pricing for delivery for competitive reasons, but for this particular project in Qinghai it was down to a competitive bid and JA Solar actually won the bid. We actually had a very comparative price to them. But I think in general the module price we’re selling to the Chinese projects right now is not materially different from what’s in the current market pricing today.

And then in terms of our pricing versus Tier 1 manufacturers I assume you’re talking about Chinese companies? So I think we’re generally in line to slightly below their pricing. But not materially below.

Vishal Shah - Deutsche Bank

Are you seeing further pressure on the pricing front, particularly as you look into September orders? Are your customers, as they come back from the holidays and start placing more orders, do you expect them to ask for further discounts? And [unintelligible] prices as low as $1.10 per watt. Can you comment on that?

Ming Yang

I think $1.10 is kind of like a wishful price from large project customers for the U.S. market and Indian market, for example. I think if [unintelligible] to such a price we can certainly move a lot of products in Q4, but I think that’s a price that generally comes with very little profitability, at least based on today’s poly pricing. So I think it’s still to be determined what pricing looks like for that period.

Peng Fang

Actually the module right now, sales to China, is higher than the price you just mentioned.

Ming Yang

So I think the current market price, where the products are going right now, is certainly above that, much above that.

Vishal Shah - Deutsche Bank

But do you expect pricing to continue to come down in September and the fourth quarter?

Ming Yang

It really depends on the market demand. Like we said, the market demand will be very strong. We’re certainly seeing order activities. So I guess to the extent when do people place orders and how much product they need, and to the extent that companies like us - if demand remains weak, let’s say through October, I think that’s a realistic price. But if demand recovers significantly, like what we saw in 2009, where I think module price between October and November versus September actually inched up maybe $0.10 to $0.20 in that period.

Peng Fang

Also, for the medium and long term, we expect the price [unintelligible] come down because of the greater parity and also the entire supply chain is actually getting more cost competitive. However, the cost will also come down accordingly.

Ming Yang

It’s no longer our issue. Whether modules are $1.10 or $1.20 or $1.30, the installers will install these projects, because the ROI is really high. But I think they want to have as low a module price as they can possibly get.

Vishal Shah - Deutsche Bank

Are you shifting your products to some warehouses in Europe in order to meet the short lead times from your customers? Or are you going to have to ship your products from China?

Peng Fang

We do have a warehouse in Europe, so we can ship to the local customer with a few days to one-week notice.

Vishal Shah - Deutsche Bank

And how does the revenue recognition work? Do you recognize revenue on shipments or on receipts?

Ming Yang

Until it’s sold from the warehouse to the customer in that scenario. It depends.

Anthea Chung

They are processing the warehouse in Europe remains our inventory.

Ming Yang

But I know, we ship a lot of of our products, say, from our Chinese manufacturing operation to Europe and when those have secured orders then we can recognize revenue.

Operator

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

Kelly Dougherty - Macquarie

Just to kind of follow up on the other side of Vishal’s question, if you could help us think about margins. Obviously they’ve got to improve from where they are in the second quarter, but can you help us get a sense of the magnitude so we kind of have an idea of a pricing. Maybe if you could talk a little bit about what’s going on with the cost side and then if you think we’ve got a new lower-level sustained going forward for your gross margin?

Ming Yang

We certainly think gross margin will recover from the second quarter. We think that marks a bottom for us, particularly because of inventory provision as well as the timing lag between when solar cell prices came down versus when the wafer price came down. So I’ll just give you two kind of data points to illustrate what we’re seeing margin is, but without giving specific gross margin guidance. So if you look at quarter-over-quarter cell pricing, it came down approximately 20%, actually north of 20% like we indicated. At the same time our quarter-over-quarter wafer price on average only came down I guess in the 10-15% range. But we look at what’s going to happen in Q3, we think cell pricing - ASP - is probably down in the mid-teens percentage for cells, but for wafers we’re seen maybe up to 30% decline from an ASP perspective in Q2. So we think that allows for margin recovery in that scenario.

Kelly Dougherty - Macquarie

Do you have kind of a new target in mind in a different pricing environment now? Is it mid-teens? Is it 10%? Is there any kind of way you think about that?

Peng Fang

We are not ready to give the guidance to margin at this moment.

Ming Yang

We want margin to be as high as possible but I think we have to be reflective of the current market conditions in terms of selling prices. At the same time also raw material cost reductions and things like that will continue to reduce our cost of goods sold in Q2 and Q4.

Kelly Dougherty - Macquarie

Do you still think the margin on the modules will be higher? And is that more of your focus now?

Ming Yang

It’s difficult to tell at this point. It’s very dynamic, the current market.

Operator

And our next question comes from Edwin Mok with Needham & Company. Please proceed.

Edwin Mok - Needham & Company

Just a quick follow-on to the last question. Do your conversion costs actually increase in the second quarter? And how do you look at that in the coming quarter?

Anthea Chung

The conversion cost has remained quite flat compared to Q1.

Edwin Mok - Needham & Company

And then Ming, you mentioned wafer prices eventually down 30%. Does that go into inventory or do you actually expect to see that 30% reduction in wafer costs start benefit you in the September quarter?

Ming Yang

We believe it will start to benefit starting in Q3, in the September quarter.

Edwin Mok - Needham & Company

I see. And then last question, just kind of related to price, if I look at what you guys reported, it seems to imply a smaller decline in module prices than the 20% you talked about in the June quarter. Do you expect module price decline to accelerate in the coming quarter, just kind of catch up to how much cell has declined? How do you think about that as you look into the September quarter?

Ming Yang

We don’t know if it will catch up to how much cell has declined, but certainly in our models we are expecting module price SP quarter-over-quarter to decline more than cell SP declines.

Operator

And our next question comes from the line of Sanjay Shrestha with Lazard Capital Markets. Please proceed.

Sanjay Shrestha - Lazard Capital Markets

In terms of your lower shipment guidance from 2.2 to 1.8 gigawatts, how should we think about JA Solar sort of targeting market share gains versus profitability? And what does that imply in terms of new target margins for the company?

Peng Fang

Okay, let me comment on that. The original guidance in Q1 of 2.2 gigawatts was before to Italy government changed the policy. So for the whole industry this year there’s certain growth built in. But we’re already past the first half of the year. The total market installation is much smaller in terms of percentage compared to last year. So in the second half we expect they are going to increase. However, we are trying to be realistic and so we adjusted the shipment [coordinates]. Even with that, I think our market share will increase.

Sanjay Shrestha - Lazard Capital Markets

And then if you could touch on the margin question in terms of not, per se, an unprofitable business, how should we think about target margins where you would pursue new business?

Peng Fang

Well, like we said, the margin is certainly going to recovery based on what we can see right now. And also in Q3 we see the price drop, not just as a percentage of price drop that will come from wafer. And then the module is the second and the cell maybe is the third in terms of drop in percentage. In that case, we should improve our margins as well.

Operator

And our next question comes from Dan Ries with Collins Stewart. Please proceed.

Dan Ries - Colllins Stewart

It’s obviously a tough market, there’s a lot of capacity out there and not really as much demand so far this year. In taking your guidance down, it looks like you’ll have some idle capacity during the year. Can you help me understand how you make the decision to idle capacity? Is it when a line goes below a certain target good morning that you then idle that line? Are you more likely to idle a mono or a multi line? And does the age of the line impact the decision whether it will run or be idled?

Peng Fang

Let me comment about that. Overall, we do actually not idle the entire line. We’re doing a few things to handle our capacity. The first, as you see, we spend much more time on the capacity to do the technology development and also ramp the new product, which we didn’t have time to do last year. So this year we have much more time and room to introduce the new product. That’s number one. The second thing is we certainly see customer demand and supporting our customer and in the meantime we’re looking at the margin generated by each type of product.

Dan Ries - Colllins Stewart

Maybe just one last quick one. One of your customers, competitors, whatever they are, indicated that they had several wafer suppliers shipping them wafers below $0.50. Are you seeing similar?

Ming Yang

I think that’s in the right ballpark, yes.

Dan Ries - Colllins Stewart

Would that be for just multi? Or can you get mono at that level as well?

Ming Yang

It’s primarily multi. Mono is higher.

Operator

And our next question comes from Colin Rusch with ThinkEquity. Please proceed.

Colin Rusch - ThinkEquity

Can you give us an update on the number of customers you’re shipping to in China? And how do you see that trending going forward?

Ming Yang

Do you mean for the Chinese end market? Or our Chinese solar cell customers?

Colin Rusch - ThinkEquity

The 52% number, the cell market.

Ming Yang

There’s a lot. Maybe 50 to 80 in general.

Colin Rusch - ThinkEquity

And how do you see that trending going forward? Is there some consolidation happening?

Ming Yang

We think there will be consolidation happening longer term.

Peng Fang

But our top 10 customers take up about 50% of our shipments. So we do ship to the large volume Chinese customers and also we ship to medium sized customers as well.

Colin Rusch - ThinkEquity

Okay, and just one followup on Dan’s question around utilization. Where are you at right now in terms of utilization of the factories?

Peng Fang

We’re about 80% enabled.

Operator

And our next question comes from Liu Yong with UBS. Please proceed.

Liu Yong - UBS

Can you remind me what your capacity target is by the end of the year in terms of modules, cell, and wafers? And what kind of capex for this year and next year?

Ming Yang

We will add capacity based on market conditions and customer demand just based on our previously planned capacity addition program. So as of now, we’re still planning approximately 3 gigawatts of solar cells. So about 600 megawatts of [unintelligible] wafers, but that excludes the Solar Silicon Valley acquisition, and about 800 megawatts of module capacity by year end.

Liu Yong - UBS

And the capex you’re going to spend this year?

Ming Yang

The planned capex is about $400-450 million, but again, that is based on market conditions and we have some flexibility to push out some capex to next year.

Peng Fang

Our strategic for capex expansion is basically we do the facility first and according to market conditions we can [store] the capacity in the short term. So we still expect that the volume of the solar industry will increase in coming years so we are adjusting the equivalent installation according to the marketing demand. But do the facility first, which is spending less capital. And so we are going to be ready when the volumes come up.

Liu Yong - UBS

Based on your third quarter shipment guidance, how much is coming from tolling and modules?

Ming Yang

Right now we expect module to be about 20-25% of total shipment and currently tolling is about less than 10% of shipments.

Liu Yong - UBS

Do you have a full year target for modules this year?

Ming Yang

I think it would be in the 20-30% range.

Operator

And our next question comes from Pavel Molchanov with Raymond James. Please proceed.

Pavel Molchanov - Raymond James

The company historically has tried to maintain a very clean balance sheet and of course with the recent borrowing, debt to capital has increased to 43% as of June 30. Is that a level you’re comfortable with? And if not, would you look to pay down some of that debt heading into 2012?

Anthea Chung

I think it very much depends on the capital needs and operational need in the next few quarters. So basically internally we review our cash forecast. We do a rolling forecast for four to six quarters, and then it depends on our cash needs and then the exact cash. That is a possibility that we would pay it down, but it very much depends on the cash needs at that moment.

Pavel Molchanov - Raymond James

So you’re comfortable with the balance sheet as it currently is?

Anthea Chung

Yes, we are, at the current level, compared to some of the competitors in the industry. I think that level is still on the lower side.

Operator

And our next question comes from the line of Nitin Kumar with Nomura Capital. Please proceed.

Nitin Kumar - Nomura Capital

In Q2 could you give us a breakdown of how much was cells and how much was modules?

Peng Fang

About 70% is cell and about 20% is the module. And also about 10-11% is the tolling.

Nitin Kumar - Nomura Capital

And in terms of tolling, are you seeing better gross margins there? Or have the tolling margins also collapsed shortly?

Peng Fang

In general, tolling has better margins we think.

Ming Yang

Yes, tolling has much better margins than the rest of our business, but it’s a much smaller percentage of our revenue.

Nitin Kumar - Nomura Capital

And one question on the longer term strategy. If you could go forward, and it seems that the overall module ASPs don’t seem likely to go up any time. How would you want to change your strategy or continue with your strategy to either increase profitability or become a bigger, better, stronger player in the market?

Peng Fang

We actually think one of our biggest advantages is our cost structure. So that’s harder, as you know, to eliminate due to supply chain management, or inventory management. So moving forward, we see the upper stream supply chain costs were getting much more reasonable in favor of the cell makers. And in time, we will expand our business into, for example, the module, and with some OEM and leading customers we built since last year, we will continue executing this strategy. And meantime, we will try to control the cost and make ourselves one of the most competitive in cost, especially in the supply chain.

Nitin Kumar - Nomura Capital

Do you intend to actually get into your own brand, or into your own system project development?

Peng Fang

We are closely working with a lot of systems development companies and we are looking at all the opportunities, but right now we don’t have anything to announce.

Operator

And our last question comes from Sam Dubinsky with Wells Fargo. Please proceed.

Sam Dubinsky - Wells Fargo

What is wafer processing and poly cost in Q2? And where should they go in Q3?

Anthea Chung

Compared to Q1, the wafer cost dropped roughly 10-11%.

Sam Dubinsky - Wells Fargo

What was the processing portion of that? Your wafer conversion.

Ming Yang

We don’t disclose that level of detail. But you can assume that we’re at a similar level to our competitors.

Sam Dubinsky - Wells Fargo

What was poly cost for you then?

Ming Yang

We don’t have specific poly costs, because most of our procurement is wafers. But I think in general, I believe Q2 was maybe between $55-60.

Sam Dubinsky - Wells Fargo

Based on where external wafer purchases are today, I know you guys are ramping a lot of your own internal wafer capacity, some of it via acquisition. Do you think it really makes sense to expand your own wafer capacity? Because in theory you get wafers cheaper externally. Doesn’t your own wafer capacity make you less cost competitive?

Peng Fang

The wafer capacity we acquired mainly is mono wafer processing capability. The [unintelligible] capacity outside of the multi is much more available, and the mono capacity is more close to our new technology, like SECIUM and other mono technologies.

Sam Dubinsky - Wells Fargo

But based on where mono ASPs are today and where they’re going, you’re saying your internal mono capacity won’t be more expensive than purchasing it externally?

Ming Yang

Definitely not. We know where mono wafer pricing is. They’re very high. They’re much, much higher than multi-crystalline wafers currently, which is what you guys are familiar with.

Sam Dubinsky - Wells Fargo

What is a mono wafer? $0.60? Or is it higher? Lower?

Ming Yang

If you’ve got it at $0.60 we’ll buy it from you today. 50 megawatts. I’ll send you a P.O.

Sam Dubinsky - Wells Fargo

[laughter] Okay, thank you. And just one last question. It seems like there’s a lot of companies that have much higher cost structures than your company does, particularly in Taiwan. What are your thoughts on the issue of consolidation, and do you think we’ll see any companies exit the business next year?

Ming Yang

You’re already seeing industry consolidation of higher cost players. I think you already saw a player in the U.S. exit the market. I think you will continue to see European players exit the market. I think certainly the Taiwanese are kind of next in line. They come in waves.

Operator

We are now approaching the end of the conference call. I will now turn the call over to Ming Yang, vice president of JA Solar, for closing remarks.

Ming Yang

Thank you so much everyone for joining us today. We appreciate your interest and support of JA Solar. If you would like to arrange a meeting with us, or if you have any questions, please contact or email our IR firm, Brunswick, and they will be happy to help you. Their contact information is on today’s press release. Thank you again for your continued support and we look forward to talking with you in the coming months.

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