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Executives

Elaine Li - Senior Investor Relations Manager

Stephen Cai - CEO

John Wong - Financial Controller

Aihua Wang - VP & General Manager of R&D

Analysts

Rob Stone - Cowen & Company

Dan Ries - Collins Stewart

China Sunergy Co., Ltd. (CSUN) Q2 2011 Earnings Call August 19, 2011 8:00 AM ET

Operator

Welcome to China Sunergy Second Quarter 2011 Earnings call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question and answer session. Ms. Elaine Li, Senior Investor Relations Manager, you may begin your conference.

Elaine Li

Thank you, operator and welcome to China Sunergy’s second 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 Vice President of Technology, Dr. Aihua Wang, Acting CFO, Mr. Yongfei Chen; and Financial Controller Mr. John Wong.

Today before the market opens, the company issued a press release announcing our second quarter financial results, annual guidance update for the third quarter and full year 2011. This press release is also available on the investor section of China Sunergy website at www.chinasunenergy.com. In addition we have posted a PowerPoint presentation for this call on our website.

Today, we will be closely following and referring to that presentation in our prepared remarks. Stephen will first present an overview of our second quarter results and discuss the growth strategy and John will be doing our financial result in more detail and offer updated guidance for year 2011. Dr Wang will also discuss technology development. Finally we will take questions.

Before I turn the call over to Stephen may I remind all the listeners that management prepared remarks 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. As a reminder again, this conference is being recorded.

Now I would like to turn the call over to Mr. Stephen Cai, China Sunenergy CEO. Stephen.

Stephen Cai

Thank you Elaine and let me thank everyone for taking the time to join us today. Particularly since we know there are some other companies reporting at the same time. As you aware, the second quarter of this year was very challenging for the Solar PV industry. Sun solar module makers including our self, we should revise guidance before the call ended and finally reported disappointing results.

At the same time, we and others are forecasting a rebound in the demand in the second half of this year. Today, we’re not explain our result, but also why we are optimistic about the future. And believe this is beginning of the turning point for China Sunergy.

Please refer to the slide six. In the second quarter of this year, we shipped a total of 89.3 megawatts, 98% of which were more modules. Nearly 70% of which were made with the cells produced inhouse. Our total shipment volume of 89.3 megawatts is significant less than our latest guidance of 100 to 110 megawatts.

However, a short fall can be explained by the fact that 11.2 megawatts of the module shipments were shipped in June, but remaining shipped at end of this quarter. These sales were recognized in July. Total revenue for the quarter were $144 million, a 22.4% increase year-on-year but at 13.1% sequential decline. The average just selling price for our solar modules was $1.64. However, it is common knowledge that ASP continues to fall. Our gross margin in the second quarter was 2.6% higher than the recent guidance of 1% but still far from ideal. We incurred a loss in the quarter of $16.9 million. This resulted in a net loss for ADS of $0.42.

On surplus; it won't be easy to jump to the conclusion that our business is in a declining chain, but we believe our long-term prospects for gaining global market share are bright and we know our margins will improve. As we are making investment proposition, we believe our stock offers good value for long-term investors. However second quarter results do not yet capture and that we have actually diversified beyond our traditional markets in Europe to develop new business in United States and India.

In addition, our home country of China is starting to present promising opportunities for solar modules. Until recently, the market for our products in all three of these markets has been modest. However, potential demand from these three populous countries is huge and the market will reward the companies who are well prepared and are ready to act with high turns.

Now, please refer to slide seven which describes our growth strategy. In our view, there are three critical elements for long-term success in solar PV market. Number one is the ability to manage cost in the time of low prices. Clearly, solar module prices has to be low enough to drive, sustained long-term demand and then naturally, raw material prices will also have to drop before low prices can be sustained and they may fluctuate widely before stabilizing. For this reason, it will be imperative that we minimize the cost of the wafer and the non-silicon cost and also that we optimize our capacity utilization. We’re very focused on this course.

Number two; successful companies have to be on the large enough scale to be economically competitive. China Sunergy must persist in these efforts to make enough cells for its own needs even if it leads to over capacity in short-run. We’re working towards the day when our cell supply meets our modules manufacturing capacity and we must expand ahead for newer markets, because we won’t gain significant market shares without significant economies of the scale.

Number three, the only solar companies who can survive in long-run are those with good (inaudible) technology. In this industry that means developing the most efficient solar cells and then scaling production to commercial levels. We will commercialize the modules incorporating the Quasar sales in the second half of 2011 with a try launch of about 7 MW starting from September. Now we will rev up mainly multiples of that next year.

Gross profits on the Quasar volumes could be $0.02 to $0.04 higher per watt compared to our current modules. This technological advantage is hugely important including our gross margins in the immediate and the long term. Later I will ask our shareholders to be with us as there are no quick fixes.

Now let me say a few words about our international expansion and our capacity expansion and how they fit into our growth strategy.

Please turn to slide eight. Our breakdown by region for the second quarter is 80% to Europe and the 20% to markets other than in the world. Markets in Italy and Germany are picking up again. However for the second half of the year, we expect to gain market share in new markets like US, India and China.

Most of you will know that in July of this year we have opened our US headquarters in San Francisco led by Mr. Willis here. We are just actively recruiting local sales people, pursuing sales leads and are working on that ability in the US.

Installed KV capacity in the US more than doubled last year due to strong consumer demand and the financial incentives from the federal and the state government. In India, we have achieved more important progress including the sale of 6 megawatts in Q2 and a Q3 top line of over 40 megawatt. We believe that this initial contract will lead to more sales. As for China, the country announced a new feed-in tariff at the end of July.

We view China’s solar market as the one big market this year and our two bigger marketing to (inaudible). China Sunergy has an edge in this market due to our leading technology and our good knowledge of the Chinese utility industry. We’re remodeling our sales effort to measure market in the second half of 2011.

Now an update on our capacity expansion. Please refer to slide 9, in the Powerpoint presentation. As we have announced that in late June, China Sunergy is investing a total of RMB 1.8 billion in what will be a 1 gigawatt solar cell expansion project, in Yangzhou city, Jiangsu province. This year we will expand our sale capacity by 200 megawatts and by the end of next June our capacity will increase by another 500 megawatt.

Most of them which will be Quasar sales. By the end of [0:02:05], our module capacity stood at 560 megawatt. They were increased as a total to 800 megawatt by the end of Q3 and to 980 megawatt by the end of the year. Yes we are deliberately growing our capacity faster than ourselves to meet future demand, but we are being very careful about our present. This investment in the future requires serious funding which we will execute.

On Wednesday we announced the signing of a new loan from the China Development Bank to help fund our growth. This $160 million facility includes one, three and a six-year terms in US dollar as well as (inaudible) line of the credit. [GPB] one of the most inferential state-owned banks clearly sees the long term potential in China Sunergy’s business and technology.

Despite our challenging short-term results, the bank knows that industry demand will be strong in the future and they want Chinese solar manufacturers to be well financed. Now while we are sure for me to say that everything is rosy, I am here to report that we are proactively tackling challenges and I still feel very optimistic about the future. And with that I will turn the call over to our Financial Controller, John Wong, who will provide more insight into our technical and financial results and announce our updated guidance. John?

John Wong

Thank you, Stephen. I am going to briefly talk about our second quarter 2011 results which are prepared under US GAAP and denominated in US dollars. Please turn to slide twelve, where you will find our quarterly financial highlights. Stephen has already reported and discussed our total revenue, ASP level and gross margins. I would like to provide those in detail.

Gross margin in the second quarter was 2.6%. The major reasons of the low margins are one, our high inventory costs going forward. Two, decline in ASP, and three, increased consolidation costs.

R&D expenses amount to about $1.5 million demonstrating our continued investment in technology.

SG&A expenses in the second quarter were $13.5 million compared to $8.5 million in the first quarter. The increase was mainly due to two things. One, an increase of $2.1 million in sales and marketing expenses related to a new market entry and development of new customers. And two, from $8 million of that acquisition.

In all, operating expenses were $15.1 million for the second quarter of 2011, but standing 10.5% of total revenue. We expect the percentage will fall in the coming quarters.

Interest expenses in the second quarter were $3.8 million resulting from increased bank loan. Because of higher exchange rate, the company incurred from $2.5 million net loss on foreign currency. This was offset by the higher level of ASP due to higher Euro.

Now let’s look at the balance sheet on slide 14. I would like to provide further details on some of these items. The inventory at the end of the second quarter decreased 20.3% over the previous quarter to $98.9 million, which includes about $7 million net dollars in provisions. Accounts receivable at the end of the second quarter reached $133.9 million, a 14.3% increase over the first quarter.

Our capital expenditures during the second quarter were $27.9 million. On top of that, to cope with our expansion plans, our capital expenditure in the second half of 2011 is four times at $157 million. Operating cash inflow in the second quarter was $37.3 million. On June 30th, the company had cash and cash equivalents of $117.4 million.

Now a few words on wafer procurement and our supply chain strategy. Wafer prices averaged $0.79 in the second quarter. We foresee the price will continue to fall. The company is not encumbered by long-term supply contracts. We evaluate procurement and negotiate prices on a weekly basis. We can also then secure more competitive pricing as our scale increases.

Finally, I would like to provide our guidance for the third quarter and to update our guidance for the full year. Please refer to slide 15.

In the third quarter we are forecasting shipment to about 140 to 160 megawatts. Gross margins are expected to be around 4% and 5% and we expect a loss in the third quarter. For the full year 2011 we revise at the basis total shipments to 470 to 500 megawatts compared to our previous guidance of 580 to 600 megawatts.

At this point, I’ll turn the call over to our VP in Science and Technology Dr. Aihua Wang. She is joining the call today on behalf of our CTO Dr. Jianhua Zhao, who is in India right now discussing our technology with clients. Dr. Wang?

Aihua Wang

Thank you, John. Ladies and gentlemen please refer to slide 18; I would like to update you on the progress in construction and operation of our R&D Center in Nanjing. We now expect that our R&D Center will be launched by the end of this year. It will have a 30 megawatt pilot increase crystalline cell line that should be capable of achieving efficiencies up to 20%; to increase our growth in a very tough and competitive way with low (inaudible) and regular wafers.

As always, we have committed continued investments in R&D to maintain our technological edge. As for efficiency, I can recall that the average multi cell efficiency was at 15.4% in Q2 and this is effective to drive towards 15.7% by the end of the third quarter. Average mono crystalline cell efficiency was at 17.9% in Q2 and is expected to rise to 18.1% by the end of the third quarter.

Quasar cell production is currently 6,000 pieces per day and the highest capacity efficiency has reached about 18.6% with effective cell efficiency up 18.9%. Later this month, we will start to produce around 20,000 pieces of Quasar cells per day. We will launch Quasar modules to the market by the end of the year as it takes time to certify the module product.

Another new product, the bifacial module should be commercially produced and provided to the market earlier next year. We believe these two new module products will make big impact in the market (inaudible).

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

Stephen Cai

Thank you, John and Dr. Wang for your good explanations. Now, I am sure our analysts and investors have further questions. I will just say in closing that we take our responsibility as a public company very seriously and then we always try to protect the interest of our shareholders and create value for them. We’ve realized that our guidance prediction have not been the most accurate recently. We want to continue to improve our quality of guidance, cost clarity and a 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

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

Rob Stone - Cowen & Company

Hi, Stephen and John. A couple of questions if I may. First of all, you’re looking for a pretty substantial sequential shipment growth in Q3, and a fairly strong quarter in Q4 as well implied in the full year guidance. Can you just comment on your level of visibility on shipment in the third and fourth quarter, how much is already under some form of agreement with customers? Thank you.

John Wong

The shipments, I think in the third quarter, totally the sales top line, are 140 megawatts to 160 megawatt. But in the second half of this year as total I had a look is 200 megawatt, is the top line.

Rob Stone - Cowen & Company

Well that implies that you still need to identify quite a bit of your fourth quarter shipment.

John Wong

Yes correct.

Rob Stone - Cowen & Company

Yes and on average selling prices, you expecting them to be down quite a bit from your second quarter blended ASP, can you tell us what the trend looks like now, are prices continuing to drop so we can wait and do you have any sense of where you will land in the fourth quarter.

John Wong

From the general look we have, ASP of the module, continue falling down. In my forecast for the ASP of the module in the third quarter is about from a $1.22 to $1.25. And by the end of this year my view is about $1.15 to $.20.

Operator

And your next question comes from the line of Dan Ries representing Collin Stewart.

Dan Ries - Collins Stewart

Just one short question on the operating expense, I saw this quarter, it will be higher than the first quarter. can you give us a status how we are looking, what operating expense as a percentage of total revenue, do you have target I believe it’s a little bit high this quarter that way?

Stephen Cai

Based on our forecast on actual in this coming quarter will be around 7.25% and for the fourth quarter around 8.5%.

Dan Ries - Collins Stewart

Thank you. Another question is for the total shipments that you give us 89.3 megawatts I guess you have both module and the cell, majority should be module, can you give us detailed breakdown between module and the cell shipments and some guidance on the cell shipments, I guess you probably have some long-term contract into 3Q and 4Q?

Stephen Cai

We will have a very, very high percent of the module, the module itself.

Dan Ries - Collins Stewart

Right.

Stephen Cai

So I think John, could you share with us, way and about the numbers.

John Wong

In a 53 module and cells.

Dan Ries - Collins Stewart

Yes.

John Wong

We basically don’t tell cell any more.

Operator

(Operator Instructions) Your next question comes from the line of Kelly Dougherty representing Macquarie. Please proceed.

Unidentified Analyst

Yes, hi. This is [Diana Schwartzman] on behalf of Kelly Dougherty. Can you please tell us a little bit more about what utilization level you are running at now and what do you think it will be in the third and fourth quarter?

Stephen Cai

The utilization for second quarter was a bit low. For cell, it was 74.5%, mainly because at some point we switched our production to manufacture a smaller size cell. We loss some production capacity on that, but effected as a decrease in utilization and that's part of the reason. And another part of the reason is that, at certain point in time we do not want to hold so much inventory on hand, so we did scale out our production rate during the early months of this quarter. But in this coming quarter right now, we are running at full capacity and we expect this to continue for most of the second half of the year now.

Unidentified Analyst

And just a quick follow-up, how much of inventory is finished goods right now, finished modules right now and when do you expect to work through that?

Stephen Cai

We have inventory breakdown in (inaudible) okay, about 55 megawatts of module and as you understand, we actually already mentioned, we saw a difference of that already in July. That was what we planned for June actually because it was in the fee already, okay. So actually 55 is not the high but that’s the reason. Our cells inventory is about 12 megawatts, which is roughly one week of production and so is the wafer of 7 megawatts and what we want in production.

Unidentified Analyst

Okay, thank you. And just a follow-up to that, I just want to understand if you have about, I guess, 44 megawatts of modules left with and you expect to run on the full capacity for the remainder of the year?

Stephen Cai

Yes. Basically, we’re at a stage where we are almost having, we were pressing to make enough cells. The only reason as you see, we have lots of problem we’ve had, actually customers are putting the final LTE into us on-time, so actually its not that we constitute those things. It’s that we don’t want them until we got the security on hand.

Currently, the financing from our customers are poor. So we are very careful about releasing the build of (inaudible) which is basically what have -- yeah, so it’s not like that we have -- we would sell cells it might we sell to as we are comfortable in netting goal rather than the other way round that they cancel the order of wafer. It’s mainly especially problem with the customer is not laying out the financing time or things like that. So that’s what we worry more than we are able to sale and have the order.

Operator

(Operator Instructions) At this time, there are no further questions. I would now like to turn the call over to CEO, Stephen Cai for closing remarks.

Stephen Cai

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

Operator

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

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