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Solarfun Power Holdings (SOLF)

Q4 2006 Earnings Call

March 7, 2007 8:30 am ET

Executives:

Keith Fleming – VP, IR

Yonghua Lu - Chairman and Chief Executive Officer

Kevin Wei - Chief Financial Officer

Xihong Deng – VP, International Business Development

Hanfei Wang – Chief Operating Officer

Analysts:

Jeff Osborne – CIBC World Markets

Tien Yu Sieh – Merrill Lynch

Cheryl Pang - Goldman Sachs

Jay Leopold – Legg Mason

Angelo Chen – Credit Suisse

James Flash - Dialetics

Samuel Cider - Renaissance Capital

Jon Fitzborn – Dialetics

Charles Lang – Billing Assets

Presentation:

Operator

I would like to welcome everyone to Solarfun Holdings fourth quarter 2006 earnings conference call. All lines have been placed on mute to prevent background noise. After the presentation, there will be a question and answer session. Please follow the instructions given at that time if you would like to ask a question. A broadcast replay of the call will be available for three months at the website of the company at www.solarfun.com.cn.

A telephone replay of the call will be available through 8:30am ET, Thursday, March 8th.

To access the replay, please call 888-266-2081 or 1-703-925-2533 if you are calling from outside the US, the access phone will be 1044116.

Now I would like to transfer the call to the moderator, Mr. Keith Fleming.

Sir you may begin.

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Keith Fleming

Hello everyone, I'm please to welcome you to Solarfun's fourth quarter earnings conference call.

The company announced its results about two hours ago.

Today your speakers will be Yonghua Lu, Chairman and CEO, and Kevin Wei, CFO.

After they have finished their remarks we will leave time for you to ask your questions.

With us also here today are Xihong Deng, EVP and Hanfei Wang, COO.

Before we continue, please bear with me as I take you trough the copy of our ST-Harbor policy. The discussion of today will contain forward looking statements made of the ST-Harbor vision for the US-118 Security and Exchange format 1995. Forward looking statements involve apparent risks and uncertainties; as such the results may materially differ from the views expressed today. There are a number of potential risks and uncertainties are outlined in our copies on our website on the US Security Exchange Commission.

Solarfun does not undertake any obligation to update any forward looking statements except as required by the law.

As a reminder, this conference call is being recorded.

A replay of this conference call will be available via webcast at the company's website.

Now allow me to turn the call over to our chairman Yonghua Lu.

Yonghua Lu

Thank you, Keith.

Welcome everyone and thank you for joining our first earnings conference call at the company. It is my pleasure to review with you our fourth quarter and the full year 2006 results. I'll try to keep my comments short so you can leave more time for Q and A.

Now I would like to start up with some additional perspective on our results and then throw the call over to Kevin Wei, our CFO.

Overall, our successful year 2006 led to (inaudible) of performance to our core business resulting in strong revenue and growth. Explosive growth for our module business was the primary reason for our results due to strong demand for our product.

The fundamentals of our industry remain quite strong. Heightened awareness about the environment and the growing concern of supply destruction of fossil fuels has motivated many to look at the solar energy as a steady alternative to conventional sources. Furthermore, growing adoption of government incentives has also been quite beneficial for us.

We believe we have been very successful exploiting this opportunity to exploit new markets for our products.

He attempted to try to capture as much as 50 men as possible.

We extended our solar cell production capacity to 60 megawatts by end of the year, which doubled what we had at end of year 2005. As a result of our hard work over the year we're able to almost quadruple our PV module shipment from 5.2 megawatts in year 2005 to 19 megawatts in 2006.

In addition, to show the market that we're also extended and have a diversified customer base especially in the area of (inaudible), we also have a number of other views in the pipeline as they come closer to completion.

Additionally, over the past few months, we have continued to strengthen our management team where we have brought on professionals with extensive experience in management, finance, R&D, and international business.

And lastly, the highlight of the year was clearly our successful listing on NASDAQ.

Now I'd like to turn the call over to our CFO, Kevin who will give you an overview about our financial operating performance in the fourth quarter and full year of 2006.

Kevin Wei

Thank you Chairman and thank you, Yonghua Lu.

Yonghua Lu

Good morning to the people calling in from the US and good evening to those who have joined from China.

I will start with the summary of our financial results for the fourth quarter as for the full year of 2006, and I hope you all had a chance to see our press release issued earlier today.

2006 was a record year for us.

Revenue for the fourth quarter of 2006 was hardly 2002's $144.7 million. Gross netting came in at a 33.9% quarter-over-quarter increase, from the RMB 182.8 million in the third quarter of 2006 and a 207% year-over-year increase from the RMB 79.7 million in the fourth quarter of 2005.

Possibly 99.8% of our total net revenue came from PV products for the fourth quarter. The increase in our total revenue due to the increase in our sales volume of our solar modules was a result of growth in solar modules as a result of strong demand in European countries which resulted in an increase in 2006 from 2005.

During the fourth quarter of 2006, our total shipments were 7.9 megawatts which was comprised of 7.8 megawatts of solar modules and 0.1 megawatts of solar cells.

This represents a 29.5% increase from the 6.1 megawatts in the third quarter.

Bills from our European customers accounted for approximately 96% of our total revenue.

Gross profit for the fourth quarter was RMB 65.6 million, representing an increase of 326% from the RMB 16.4 million in the first quarter of 2005 and an increase of 26.4% of RMB 51.9 million in the third quarter of 2006.

The gross margin increased to 28.8% from the 19.3% in the first quarter of 2005, and increased slightly from the 28.4% in the third quarter of 2006.

This slight increase was largely attributable to an increase in the cost of silicon waivers and a decrease in the ASP price in the first quarter of 2006 from a $4.04 in the third quarter to $3.96 in the fourth quarter.

Income from the operations for the fourth quarter was RMB 35 million, 14.4% of the total net revenue, which compared with RMB 11.1 million or 13.9% of the total net revenue in the fourth quarter of 2005, and RMB 30.2 million or 16.5% of total revenue in the third quarter of 2006. The year-over-year increase was primarily due to the higher gross margin. Its sequential increase in operating profits was mainly due to the increased PV module shipment and was offset in the decrease in gross margins, higher styling expenses, and higher general administrative expenses as a result of continued business growth.

Our R&D expenditures for the fourth quarter totaled RMB 3.8 million or 1.6% of the total revenue. The share based compensation expense for the fourth quarter amounted to RMB 2.9 million, which is related to the employee share option plan.

The interest expense was around RMB 4.5 million for the quarter, compared to RMB 2.1 million in the third quarter of 2006. The increase was due to the increase in the short term borrowings that were needed to go over to support our growing (inaudible).

Net income for the fourth quarter was RMB 30.1 million which represented the 224.5% increase on the RMB 10.2 million, that income in the same quarter of 2005 at a sequential increase of 36.6% of RMB 22 million in the third quarter of 2006.

Intake earnings per ADS for the fourth quarter was $0.17 compared to $0.11 for the same quarter in 2005. For the full year result, our total net revenue increased 239.7% to our RMB 630.9 million from RMB 666.2 million in 2005.

We estimate approximately 95.8% of the total revenue of our solar modules, 1.1% of the solar cells, and 3.1% from solar cell processing. During the year, we shipped a total of 22.6 megawatts compared to 5.2 megawatts in 2005. Gross profit for the full year of 2006 was RMB 184.4 million representing a year-over-year increase of 601%.

Gross margin increased to 29.2% compared to 15.8% in the previous year. Operating costs in 2006 increased by about 604.2% to RMB 113.8 million, probably due to the increase in overall sales volume, but also because we were able to reduce a larger majority of our internally produced sales for our model production. Total R&D expenditure for the year was $6.5 million representing around 1% of the total revenue.

Net income for full year 2006 was RMB 1.59 million, which is 635.1% higher than the net income from 2005 where the net income was $14.4 million. Basic earnings per ADS were $0.16 in 2006 compared to $0.17 in 2005.

Our other financial positions as of December 31st 2006: the company has cash and cash equivalents of RMB 1 billion, $137 million and working capital of RMB 1 billion and $482.7 million. Total bank borrowings amounted to RMB 410.9 million of which RMB 15 million were long term bank borrowing. Oh wait, we had an expenditure in 2006 which amounted to RMB 237.8 million and an appreciation expense which was around $6.5 million a year.

Next section, I want to highlight briefly on the technology in R&D. We are going to start with priming strategic areas that we’re focusing on. First, we’re making continuous effort to improve the conversion efficiency of our model and monocrystalline silicone cells. As many of you know, this is the key technical benchmark for our solo company and we think we already have an early start on the process.

At present, the majority of our products are 5 inch monocrystalline cells which already have a conversion efficiency ratio of approximately 16.4-16.5% and we think an almost sustainable range for us is between 16 and 17%. In addition, we have been focusing on attaining Underwriters Laboratories’ certificates or UL certificate for short. We are happy to announce that just in the past few days we have received notification from UL that we officially received the certificate for 20 of our PV modules.

We are confident that UL certification will help us broaden our target market and expose us to further opportunities in a number of different regions around the world including the US. We will continue our efforts to enhance overall cell conversion efficiency, raised protection, and moving (inaudible) waivers.

From an operational point of view, we had a better year despite some of the challenges inherent in the industry. On the other hand, we increased our total install PV cell capacity in our Sichuan facility to 60 megawatts from 30 megawatts at the end of 2005. In addition, we just finished installing and wrapped up production on our third and fourth production line of PV cells, which have effectively added another 16 megawatts annualized PV cell production capacity.

According to our current plan, we will install another four PV cell production lines by the end of 2007. Looking ahead, we plan to have approximately 240 megawatts of installed capacity of PV cell productions by the end of 2007, and 360 megawatts by the end of 2008. This, of course, is subject to change based on the rapidly evolving market.

In terms of the sales event, Germany and Spain remain our largest market, but equally Lebanon and the US are big prospects for us in the coming year. We will also continue the expansion of developing the market in our home country of China to condition us to be one of the future market leaders in the Chinese solar sector.

From a procurement perspective, we have also made good progress. Silicon waivers are the most important raw materials for manufacture of parts and an industry wide shortage of silicon and silicon waivers have not improved significantly. The result has been strong pricing pressure. Since we expect this situation to continue for some time, we have entered into a number of supplier agreements to help us cope with this situation, and we’re currently working on many others.

For 2007, we expect to close some other contracts, approximately cover 2/3 of our production requirements for silicon with the process of (inaudible) and we expect this number to rise over the course of the year. We are also working with our oversea potential silicon producers/suppliers regarding the potential strategic losses, while securing long term silicon supply.

One project we would like to give you an update on, is our relationship with the Emay semiconductor factory in China.. In short, this agreement states that we will be branded exclusive rights to buy Emay silicon products at a discount to prevailing market products for five years starting 2005. There are new manufacturing facilities which will have an expected annual production capacity of 500 tons of silicon products. As it currently stands now, it looks like the facility will be completed starting March, 2008.

However before the new facility can become operational, we also have an agreement with them to provide us silicon from the existing facility. It is mainly from this that we have contracts to get 60 tons of 5 inch model waivers in the fiscal year 2007. And once the new facility opens, this supply will jump up to 340 tons in 2008 and 500 tons from 2009 until 2000 tons, at full capacity.

We recently signed a three year, 140 megawatt sales agreement with UB Garanty SL in Spain and the others are in the pipeline. We will continue to concentrate on securing other contracts as the situation opportunity continues to rise. As we mentioned in our earliest release, we are expecting another very strong year in 2007 on an annual basis, though we’ll probably see some weakness in the near term.

Based on a current operating and other conditions, Solarfun backs a total 2007 fiscal year net revenue of $265 million to $285 million representing a year-over-year growth of 228% to 222%. In addition, the company estimates total PV product shipments will be in the range of 80-90 megawatts representing a year-over-year growth of 254% to 298%. Lastly, as we have mentioned, we plan to increase our annualized PV cell production capacity from 60 megawatts at the end of 2006 to the 220 megawatts by the end of 2007.

To sum up, as a newly public company, we’re very serious about and looking forward to trying to increase the long-term value for our shareholders. Our management team will be happy to take your questions. Operator?

Question-and-Answer Session

Operator

Thank you. Ladies and gentleman, if you have a question at this time, please press the number one on your telephone. If your question has been answered or if you wish to remove yourself from the queue, please press the pound key. One moment for our first question.

Again, if you do have a question at this time, please press the number one key on your touch-tone telephone.

Our first question comes from Jeff Osborne of CIBC.

Mr. Osborne, your line is open.

Jeff Osborne – CIBC World Markets

Thank you, good evening. I just had a few questions on the pricing environment in Q1. It looks like based on the revenue guidance, that you’re going to see a significant decline in pricing in 2007, and now that we’re well along our way in the March quarter, if you could just update us in terms of megawatt shift and the ASP assumptions for Q1? That would be appreciated.

Yonghua Lu

Jeff, this is Yonghua Lu. We expected the pricing from the market…the ASP is declining. It is happening this year, actually since the 1st quarter of last year, because of the new term, we think there’s going to be above 5% of the average ASP dropped in a quarterly basis from the fourth quarter to the first quarter due to the seasonality and also to the uncertainty of the market.

Overall, we expected for the whole year that the price drop would be in the range of 5-10%.

Jeff Osborne – CIBC World Markets

OK, I was calculating something a little more. If you were doing 80 megawatts at the low end at $2.65, it seems like your prices would go from roughly $4.00 down to $3.50 or so. Is that not correct?

Kevin Wei

Jeff, this is Kevin. As you may be aware, we have a different product mix than in the past and we will probably continue to have a different product mix in 2007. We record our PV cell profits on a net revenue basis and a certain part of the overall annual guidance of 80-90 megawatts. It is likely that some of those will be produced under PV cell processing, as such those revenue numbers will be much smaller.

Jeff Osborne – CIBC World Markets

OK, do you have a sense of how many megawatts of cell processing you would expect in ’07?

Kevin Wei

We don’t have all the specific data on that, but it’s probably going to be something not very meaningful.

Jeff Osborne – CIBC World Markets

OK, and shifting over to the silicone topic, I think you mentioned that you’re entering into negotiations to have 2/3 of ’07 secure. Did I hear that right or do you already have 2/3 of ’07 secured at the moment as we speak now?

Kevin Wei

Actually it’s confirmed already that we have the 2/3 of the production requirement secured.

Jeff Osborne – CIBC World Markets

Great, and then can you just update us on the silicone topic? What’s your cost of waivers to have been…where do you expect those to go…and the associated impact on gross margins? You’re ending in the release says there would be a decline in gross margins. I’m just trying to get a sense of scope.

Kevin Wei

I think that as we look at the market now, pressure on the margin will probably mainly come from the ASP as we currently estimate it.

The waiver cost for us based on what we have locked in…as we mentioned 2/3 of our contracts with the waiver suppliers does not appear to have too much of a significant increase year-over-year compared with 2006.

Jeff Osborne – CIBC World Markets

OK, very good and there’s just two quick modeling questions. Should we still be assuming about a 12% tax rate in ’07?

Kevin Wei

It’s probably going to be less than that, based on certain potential tax benefits that we may be entitled to. But again, like many other tax regulations in China, until we get final approval from the tax authority after our applications are in, it’s very difficult to pin down an exact percentage of the tax rate, but it should be below the standard tax rate that we have disclosed before.

Jeff Osborne – CIBC World Markets

Very good. And then since the IPO is at the end of the quarter, do you have a sense of what the ADS share count would be when you report March 31st results?

Kevin Wei

It should remain the same.

Jeff Osborne – CIBC World Markets

OK, very good.

Operator

Our next question comes from Tien Yu Sieh of Merrill Lynch.

Tien Yu Sieh – Merrill Lynch

Hi, I was just wondering if you might be able to give us the historical geographic breakdown of sales and whether you have any indication as to what your geographic mix might look like in 2007?

Kevin Wei

For fiscal period…thank you for your question…for 2006 our geographic allocation of our module sales mainly is around 33% in Germany, 32% in Italy, and around 28% in Spain. The remaining were China, a few other markets, etc.

Maybe I’ll try the second part of the question in terms of the 2007 allocation of our geographic customers.

Yonghua Lu

We expected that the German market will be lower than last year’s income of market share, given the fact that the incentive program is to be reviewed. But, we do expect the Spanish market share to remain at a similar level as last year and other countries from the rest of Europe, like Italy and France, will pick up. We expect also that we got around 20% of the market share from the U.S. and Asia.

Tien Yu Sieh – Merrill Lynch

Right, and so with the higher market share from the U.S. and Asia, would that effectively be somewhat dillutive to your blended average selling prices?

Yonghua Lu

In the U.S. it is, because in the U.S. the incentive program in not as attractive as in Europe but we do view the U.S. market as a potential larger market for the next three years. So strategically, we have penetrated the market and particularly last week we received a U.S certificate, so we are making the U.S. strategically a very important market for next three years.

Tien Yu Sieh – Merrill Lynch

In terms of your earlier comment of about 5-10% ASP decline year-over-year, would that be reflective of mix change or is that just in terms of apples to apples comparison for each market?

Yonghua Lu

This is what we observe in the general market trend.

Tien Yu Sieh – Merrill Lynch

OK, so that will not take into account mix changes?

Yonghua Lu

Right.

Tien Yu Sieh – Merrill Lynch

Thank you.

Operator

Our next question comes form Cheryl Pang of Goldman Sachs.

Cheryl Pang - Goldman Sachs

I was wondering if you can walk us through your expectations of the waiver cost trend in ’07 in terms of a percentage change?

Kevin Wei

Your question is just on the waiver cost trend?

Cheryl Pang - Goldman Sachs.

Yes, in ’07 compared to Q4 on average of ’06?

Kevin Wei

As we’ve had to (inaudible) before, based on what we have locked in on the 2/3 of our current production plan, the price that we have locked for 2006 does not have a high increase. It's below 1%. Obviously, the remaining amount of the production needs that we'll be making, require continuous efforts on sourcing. The pricing will come as a result of our negotiation with future potential suppliers, whether it's domestic or international.

Cheryl Pang - Goldman Sachs

OK, thank you.

Kevin Wei

Thank you.

Operator

Our next question comes from Jay Leopold of Life Mason.

Jay Leopold – Life Mason

Hello. Could you give us a few more details on the new five-year supply agreement beginning in March 2008, in terms of how much of your production in '08 it might be able to cover, and possibly, how much it might cover in '09, even though you haven't talked about '09 that much yet?

Yonghua Lu

Jay, thanks for your question. The primary times (inaudible) project for the product per year for the project, as we see, only represents a not-so-significant portion of our 2008 manufacturing needs. The question that may be left may be basically megawatts which is worse off than the silicon waivers that actually we can't use.

I'm not sure…does that answer your question? I mean, we've disclosed a little bit about how the things worked, in terms of the five-year plan, by paying RMB 220 million as a profit advanced payment to the buyer.

Jay Leopold – Life Mason

Great. And then you said the prices were going to be at a discount to what is available at that time?

Kevin Wei

Yes, the then-market rate.

Jay Leopold – Life Mason

OK, so you're going to need more of these types of arrangements for '08 and beyond.

Kevin Wei

This is the one that had a multi-year commitment, and obviously, going through 2008 and onwards, that we'll continue to seek the opportunity either through some short term, i.e. one-year contract, or some multi-year contract.

Jay Leopold – Life Mason

Thank you.

Kevin Wei

Thank you, Jay.

Operator

Again, if you have a question at this time, please press the one key on your touch-tone telephone.

Our next question comes from Dan Thorne of Noble Partners.

Dan Thorne - Noble Partners

Hey, good morning, or good evening. I think I have substantially the same questions I hear a lot of the other people asking. So I apologize if I'm just repeating. But it's not completely clear to me, your pricing.

Your guidance seems to imply dramatically lower pricing than the 5-10% that you're talking about. And I understand there's both product shift and geographic shift, but it seems, even given that, it seems a little more dramatic, I don't know if there's anything else you can say that would help clarify that for me.

And then, the second question I had was on the waiver costs, that you had two thirds blocked in at approximately the same rate. And just a point of clarification, is that kind of equally spread through the year for '07? Or is that front-loaded, where your first two-thirds of '07 you have your waiver supply, and then down in the back half you (inaudible) through the year how that worked? Thank you.

Yonghua Lu

Let me clarify the pricing trend. When I talk about the price of 10% that we observed on the market, and it's also in different markets, the price is quite (inaudible). In Germany, we do see the average market price is lower than in other countries. And so, related to our own business, the rate is not tied up to this 5-10%.

And our product makes, as Kevin mentioned, we are half the market sales with a sort of OEM processing. So this does not mean we will expect a 10% drop in our own ASP.

Kevin Wei

Maybe I can add a little more clarification. We require our PV cell processing…Part of our business is on a net revenue basis, i.e. if we take a waiver and produce that into a cell, or actually in the future, a module, we will only charge the supplier/customer a processing fee as a revenue.

And so the ASP, I guess, pretty much depends on the general market condition. As well, we see in this market if the price is dependent on the pressure, obviously our company will be subject to a general decline in the environment. When we actually are in the production plans, we will have a potentially different product mix, dependent on the customer need. And so it depends on the product mix that we estimate a range of our revenue at this point.

Dan Thorne - Noble Partners

OK, can I just ask: the PV-filled processing that you do, if you were processing cells for someone else, does that count in your megawatt output number?

Yonghua Lu

Yes, you're right. It does count. And in terms of our quality-related stats of megawatt shift.

Dan Thorne - Noble Partners

OK, but you're not capturing the full economics of it, as you would for your in-house production?

Yonghua Lu

Yeah, we would recognize that the product (inaudible) portion, so we may even have a pretty high gross margin for services. Back in 2006, early on actually, we did provide services to utilize our capacity.

Maybe to answer your second question, you inquired about silicon consumer contracts. It was pretty much spread out throughout 2007. Of course with more of a meaningful concentration on the first half of the year to be sure that our near-term production covered.

Dan Thorne - Noble Partners

Thank you.

Operator

Our next question comes from Angelo Chen of Credit Suisse.

Angelo Chen – Credit Suisse

Oh, thank you. Good evening. Can you please give us some indication on the technology, the Research and Development effort, what kind of technological improvement you're looking to implement on a cell-design level, or your production level that might help you cut costs, or reduce waiver thickness, or improve energy-conversion efficiency, or just increase your productivity? Thank you.

Hanfei Wang

First of all, we have a product line which we never utilized to conduct our R&D efforts, and to test out the manufacturing process improvements before we adopted and implemented them on our regular PV cell production line.

You know, one of the areas that we're working on is improvement on the PV-CVD part of the process. It has shown a pretty good result, and we have tended to utilize our results in the sixth line.

We have also made progress in our etching process, to change from a plasma-based to a laser-based process. We have adopted that on lines three and four.

And based on our so-far satisfactory result on our R&D pilot-line test results, we believe this particularly along with our new production line installation.

Angelo Chen – Credit Suisse

Thank you very much. If I just may ask the following question, if these plans are indeed completed smoothly on time, what might be the 2010 targets, let’s say on waiver (inaudible) or energy conversion efficiency, what effects will it have on your productivity? What kind of improvements will we be looking at?

Thank you.

Yonghua Lu

As we have discussed previously that we still intend to accomplish our technological objectives including 17.4%, or module the system itself and the dell thickness, we are hoping to produce at a mass quantity of 180 micros in the end of 2007.

Angelo Chen – Credit Suisse

Thank you very much.

Operator

Again if you have a question at this time, please press the one key on your touchtone telephone. Our next question comes from Samuel Cider of Renaissance Capital.

Samuel Cider - Renaissance Capital

Hi guys. I arrived on the call a little late here, so hopefully I am not repeating anything. In terms of capital cost per watt, with your expansion plan, do you guys have a metric for that? If not, just kind of how much you plan to spend over the next couple of years on past the expansion?

Yonghua Lu

Since the (inaudible) indicator, we spent around $6 million per 30 megawatts in a capacity line and we placed it to $2 per watt.

Samuel Cider - Renaissance Capital

$2 per watt?

Yonghua Lu

Yes sir.

Samuel Cider - Renaissance Capital

Ok. And then so you have 2/3 of silicon…what you would say for 2007? It looks to me like a pretty significant ramp you can have from 2007 to 2008. Do you have any kind of feel for the supply picture there? I know you are looking at long term contracts, but what’s kind of the likelihood that globalization could get hurt that you don’t have enough poly-silicon feed stock?

Yonghua Lu

In terms of year 2007, as we indicated before, over 2/3 of our silicone waivers have been supplied with a big surprise. On an ongoing basis, in addition to this email project we already engaged, we are also continuing to go over with a 15 waiver supply for this year and going over to next year. That will provide a significant portion to support our waiver supply for next year on an ongoing basis.

In addition, we already have very active closed discussions with overseas silicon waivers suppliers as well as with the discussion with United Alliance with Upstream Silicon Production, particularly a few new green projects.

Samuel Cider - Renaissance Capital

OK, thanks. And one last question if I can.

Yonghua Lu

In addition, we will continue to improve our technology which continues to reduce the units, the silicon usage per watts. We already reduced our silicon usage from 7.2 grams to 6.8 grams per watt by improving our technology. We expect that this will be continued in the next few years.

An alternative approach to maintain our utilization ratio is that we also have many kinds of OEM processes, so that will also reduce our usage for the short term sequence supply.

Samuel Cider - Renaissance Capital

OK. My final question if I can. Just in the press release you mentioned…and certainly regarding renewable energy policies in some countries. Can you just give some color on what countries you are mentioning and what you are seeing there?

Yonghua Lu

May you repeat the question regarding the market view about the different countries?

Samuel Cider - Renaissance Capital

You mentioned in the press release uncertainty regarding energy policies in some countries. I just want to know if you can give a little more color on that.

Yonghua Lu

It’s mainly related to expansion in the Italy market. Actually, by the end of February, the Italian government already finally gives a new incentive program which has kind of settled uncertainty and exaggeration on this market. We like the new policy even though the city tariff is lower than the previous policy. The uncapping of the total volume installed and other incentives, makes the market here quite attractive.

Spain still remains uncertain and given the fact that people expected the new incentive program would be released in last December and they keep on postponing due to the internal bureaucratic process and we heard from the market that the final settlement for the new incentive program will be set up hopefully in April this year. So that is causing some kind of speculation and uncertainty about this market.

Samuel Cider - Renaissance Capital

OK, thanks a lot.

Yonghua Lu

You’re welcome.

Operator

Our next question comes from Jon Fitzborn of Dialetics.

Jon Fitzborn - Dialetics

Yes hi, I was wondering if you can talk about the different margin expectations between the cell business and the module business. I know you recognize the revenue differently so just in general, perhaps this year and next year, because the capacity editions are different in the various segments, if you can discuss that briefly and then I have a follow up.

Yonghua Lu

A majority of our module business will focus on continuously going forward. As well, as we have disclosed, our forced module of 2006 has been enjoying continued growth for the first half of a year and high 20’s overall. So, our skeleton in terms of solar cell processing is to recognize our net revenue basis and we don’t have the high crises silicon so the force margin will be most likely much higher only with proper materials, dark labors, etc…So this could be a historical experience which will be higher than 50%.

Going forward, it depends on the ability to negotiate, and we've already talked about the pricing pressure on the margin, which itself already may also translate to the PV cell process is this, well, we don't have any committed contract, so I cannot elaborate too much on that.

In addition to that, actually, we've also had the potential opportunity to sell PV cells directly to the customers who are willing to put in the module and the cell on their own, and the project with such service, the category, again, will be different based on the marketing price.

Jon Fitzborn - Dialetics

I guess to rephrase the question, what I'm trying to get at is, I'm trying to understand where the pricing pressure is greater. Is there more pressure coming in from the module business or in the cell business? So that, I guess, where are you going to feel more margin pressure and have a greater ability to keep margins higher, with respect to those two businesses? Or are they similar?

Kevin Wei

What we see is obviously, there is in China a lot of PV module producers, and there certainly increased the number of PV cell manufacturers this fall. So maybe it's a little hard to tie your question directly to this observation. The pricing pressure may not necessarily come from just the PV cell manufacturers or PV module manufacturers. Instead it's probably more driven by the market demand in those European countries, or the U.S., entirely or heavily influenced by the government spending programs and financing schemes, etc.

Certainly the supply situation will also contribute to the pricing situation.

Yonghua Lu

Yeah, just to make some extra comments. We do see the numbers of demand, as far as the supply, is catching up. When we looked at the price dynamics this year, one of the major driving forces was definitely coming from Germany, because there are 5% incentive reductions per year. And that worked back and pushed up the price in those countries around 3.7, or around that kind of range. But we do see in the Italian market that the prices went up above that level, like between $3.8-3.9, even further out of the range.

So, provided that the country dynamics, which we feel are very clearly different countries…and so 5-10%...that kind of observation is the German-market reduction that we also see like in the U.S. market because of incentive programs, which are even less attractive than the German market. So in the U.S. Market we expect that the price will be around $3.5-3.6 per watt. That is our market observation.

Jon Fitzborn - Dialetics

My last question is, if it seems the industry forecast for growth for the total solar industry…that you're around 30-40% at the high end, and it seems like most solar companies like yourselves are looking for triple-digit growth in their revenues.

Could you help me understand where the discrepancy is, and who is losing a share to allow some of the new companies to grow so rapidly?

Yonghua Lu

Well, this is proportional from the demand point of view. We do see that the Spanish market and the Italian market, and even in France and in Greece, was growing. Germany remained the biggest market, which is going to be 800-1,000 megawatts this year, whereas Italy and Spain will each be around the 100-megawatt kind of range, or even higher.

The U.S. market, I think, is going to be around 100-200 megawatts. So we see that the highest emerging market to come from the demand side. And from the supply side, we see, as Kevin mentioned, some existing margins to price, countries in expansion, as well as some of the nuclears from China and other countries.

So basically, we see the balance of the kind of demand and supply, but it's very important for whomever to focus on the quality of service, and we will be winning the market share, which is our target for our strategy this year.

Kevin Wei

Maybe just one comment to add to that is, to maybe be helpful and try to answer your question, you know, we're still a fairly smaller company versus the larger players. So for us to have this triple-digit growth in terms accomplishing the target of 80 megawatts, let's say it’s still a fairly small number in terms of the market demand in these countries, like we talked about Germany, and even Spain, as we speak.

Yonghua Lu

Yeah, in terms of international market share in Spain last year, we were taking over 10-15% in store (inaudible) the market in Spain. We're also, as we are already discussed in our prospectus, we secured megawatt from a power project in China, and we expect that there are more such projects coming this year. So we believe that our market share, as well as our market worth, will increase.

Jon Fitzborn - Dialetics

Thank you very much. Good luck.

Operator

Our next question comes from Jeff Osborne of CIBC.

Jeff Osborne - CIBC World Markets

Thank you. I just had two quick follow-up questions. Kevin, the sell-processing ASPs used to be about $0.60-0.70 per watt. Is there any rationale that it would be deviating from that in '07?

Kevin Wei

We have not gotten any concrete indication yet, in terms of any potential customer deal. So we cannot really give you any indication, unfortunately, at this stage.

Jeff Osborne - CIBC World Markets

OK, but you are including some cell processing revenue in our revenue guide, is that correct?

Kevin Wei

Yeah, we anticipate that part of that will be part of the OEM for the cell-processing services.

Jeff Osborne - CIBC World Markets

Very good. And then just the last question. The 80-90 megawatts of guidance, how much of that is actually locked up under contract on the sales end?

Kevin Wei

On the sales end?

Jeff Osborne - CIBC World Markets

Yeah, with your sales force, of the 80-90 megawatts that you're guiding, how much of that is already under contract?

Kevin Wei

It's around 50 or more.

Jeff Osborne – CIBC World Markets

OK, thank you.

Operator

Our next question comes from James Flash of Dialetics.

James Flash - Dialetics

Hi. I have a couple of questions. I guess the first is, of your 2008 expected megawatt shipments, what percentage of that is under a supply agreement right now?

And I have a follow-up.

Kevin Wei

Are you talking about the supply contract that was secured to meet our sales target?

James Flash - Dialetics

Right. So, in other words, in 2007 two-thirds of your expected megawatt shipments, you have supply agreements for. I'm wondering what that number is for 2008?

Kevin Wei

2008? Actually, unfortunately, we cannot give any guidance on 2008, at this point.

James Flash - Dialetics

Alright. The other question is, it seems like even in regards to 2007 year-expected megawatt shipments, it's the sense of “If we build it, they will buy it”. You just mentioned that somewhere above 50% of your expected megawatt shipments in 2007 are already contracted for and obviously this industry is going to reach the point where,” if we build it, they might not demand it”. And I'm wondering, with an increasing number of cell and module suppliers in China and in the rest of the world, and others attracted to this industry, why such confidence that, “if we build it, they will come”?

Kevin Wei

We haven't actually shared a little more information on our prospectus in terms of some of our key strengths. That's where Solarfun has been quite proud of our history of our chairman, who has had a successful business experience running another related company in the electricity meter business for over ten years. So a lot of the management team have long years of manufacturing experience, in terms of quality, R&D, and manufacturing processes as well.

You know, to keep people from the industry players that we have working, the company likes to look at thumbtack and other China based PV companies. So for us, one of the key attributes is quality of our product and we have been very focused on to continue to build good quality on our PV cells and PV modules. We believe that long-term, that customer would still want the best product out of China so that’s one of our key drives and I guess maybe to just elaborate a little more on what’s your concern.

It’s certainly a valid question, if the fallacy is supply and demand, and from what we see, all the demands may not always be just evenly distributed to the proprietor or even existing manufacturing sources, China certainly is the country that provided opportunity for product use manufacturing companies like us to capture this opportunity to become a manufacturing base. I guess in the longer term, a lot of these manufacturing focuses would be shipped to Asia or China.

So, if we also remain confident that demands will still come through China as a quality provider of PV products with the technical strength and getting the right relevance certificate in the respective market, we still remain very confident that we can grow in higher percentages.

James Flash - Dialetics

Yeah, so I guess to be more specific there is a seeming contradiction which I hope you could resolve for me between two things you said.

One is, you’re seeing more aggressive price declines in this year than maybe you’ve seen in the past or maybe that’s not true. In any case, we are going to see ASP declines.

And two, you mentioned that the near term might be weak due to those ASP declines but also to some extent to seasonality. I guess what I’m wondering if there is the sense in the solar industry that anything we can produce…we can sell ASP degradation, and seasonality shouldn’t be issues yet they are issues. Those are issues you mentioned before on the call, so I was wondering, hoping you can kind of resolve that seeming contradiction.

Kevin Wei

I mean seasonality is an issue in certain countries where the winter season is probably much more difficult for installation for the project to capital for steam commencement and maybe this is not as obvious as you even mentioned in the past.

Maybe two years where the demand was so high that such seasonality may not be so obvious where people would just want to buy out because there is shortage of the office supply. They may have build out an even terrain for the future project and its from what we see, maybe it’s a seasonality issue could be a temporary problem that we’ll become a little more stabilized in terms of the industry. The business side will get a little more normalized business module where you do have to go through this on a regular basis.

The plastic decline is much more a global issue, so we have to really put some teeth in terms of other areas such as the quality, customer service etc…

James Flash - Dialetics

Thank you.

Operator

Our final question comes from Charles Lang of Billing Assets.

Charles Lang – Billing Assets

My question is about the utilization of the man who just called, I have the same question, I'm not clear exactly how much production capacity that’s already in now and the ones that you intend to add in the future, how much were added that will not be fulfilled?

Yonghua Lu

We have four production lines at the full capacity with an annual nominal production of 120 megawatts.

Throughout the rest of the year we plan to build (inaudible) as we mentioned giving us a total annualized capacity of 240 megawatts.

Just quickly, on the nominal capacities as a reason to be nominal which means we produce a six inch waiver and at a certain extent assume the commercial efficient rate at 24/7 we will reach the annualized 30 megawatt or close to 30 megawatt, so as we currently speak, we produced majority of our product are actually five inch waivers, so the yield that the industry generally describes translates into not necessarily, our idle but much more in the actual output…the difference between the actual output and the non-real capacity.

But maybe to try to help to answer your question is, it’s not necessarily what we come up with in nominal terms, we will only roll out the new line once we see the strong demand which justifies further investment.

Charles Lang – Billing Assets

OK, so for (inaudible) sidelines, you expect full capacity, I mean what exactly is the difference between the actual and nominal capacity?

Yonghua Lu

It's around 30%

Charles Lang – Billing Assets

Ok, thank you.

Operator

There are no further questions at this time. Please proceed with any concluding remark.

Keith Fleming

Thank you all for joining us today, if you have any further questions, please don't hesitate to contact us directly and again a replay of this conference call will be available on Solarfun's website.

Thank you again for joining us today.

Operator

Ladies and gentlemen thank you for you participation in today's conference, this concludes the program you may now disconnect.

Thank you and have a great day.

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