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LDK Solar Co., Ltd. (NYSE:LDK)

Q2 2011 Earnings Call

August 29, 2011 8:00 a.m. ET

Executives

Ellen Davis - The Blueshirt Group, Investor Relations

Xiaofeng Peng - Chairman and Chief Executive Officer

Jack Lai - Executive Vice President, Chief Financial Officer

Xingxue Tong - President, Chief Operating Officer

Yuepeng Wan - Senior Vice President, Chief Technology Officer

Analysts

Edwin Mok - Needham & Company

Sanjay Shrestha - Lazard Capital Markets

Colin Rusch - ThinkEquity

Karen Tai - Piper Jaffray

Philip Shen - Roth Capital Partners

Sam Dubinsky - Wells Fargo

Jesse Pichel - Jefferies

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to LDK Solar Company’s Second Quarter 2011 Earnings Conference Call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions)

This conference is being recorded today, Monday, August 29, 2011. At this time, I’d like to turn the conference over to Ms. Ellen Davis with The Blueshirt Group. Please go ahead, Ms. Davis.

Ellen Davis

Thank you. Good morning and thank you for joining us on today’s conference call to discuss LDK Solar’s second quarter 2011 financial results. This call is being broadcast live over the web and can be accessed on the Investor Relation’s section of LDK Solar’s website at www.ldksolar.com for 90 days.

On today’s call are Xiaofeng Peng, Chairman and Chief Executive Officer; Jack Lai, Chief Financial Officer; Sam Tong, Chief Operating Officer; and Dr. Yuepeng Wan, Chief Technology Officer.

Before the market opened in the U.S. today, LDK Solar issued a press release discussing the results for its second quarter 2011. We filed the press release on Form 6-K with the U.S. Securities and Exchange Commission. The press release is accessible online at the company’s website as well as on the SEC’s website.

We would like to remind you that during the course of this conference call LDK Solar’s management team may make projections or other forward-looking statements regarding future events or the future financial performance of the company made pursuant to the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995.

Although, LDK Solar believes that the expectations reflected in such forward-looking statements are based on reasonable assumptions, such statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected.

We refer you to the documents that LDK Solar files from time to time with the SEC, specifically the company’s most recent Form 20-F and any Form 6-Ks. These documents identify important factors that could cause the actual results to differ materially from those contained in our projections or forward-looking statements.

And now I’d like to turn the call over to Mr. Jack Lai, Executive Vice President and CFO to go over LDK Solar’s second quarter 2011 financial results. Jack?

Jack Lai

Thank you, Ellen. Good morning and thank you for joining us to discuss the results of LDK Solar for the second quarter of 2011. Net sales for the second quarter were $499.4 million, down 34.8% from $766.3 million in the first quarter. Wafer sales decreased to $281.7 million from $526.5 million. Margin sales decreased to $101.8 million from $183.7 million. Polysilicon sales increased to $76.1 million from $8.6 million. OEM sales for wafer decreased to $0.6 million from $3.6 million. OEM sales for module decreased to $6.0 million from $6.8 million.

During the second quarter LDK Solar had an inventory write-down of $52.9 million due to the significant drop in market price for wafers and modules during the quarter. As a result gross margin and operating results were negatively impacted. By geography, net sales in the second quarter were 44.4% generated from China, 30.7% from Asia Pacific excluding China, 24.7% from Europe and 0.2% from North America. Our top ten accounts in the second quarter accounted for 51.5% of total revenues, with the top three accounts combined accounting for 25.8%.

Wafer shipments, including our processing business decreased to 429.2 megawatts from 631.5 megawatts in the first quarter of 2011. Wafer shipments which exclude the OEM business decreased to 427.8 megawatts from 623.6 megawatts in the first quarter of 2011. The average selling price for wafers was $0.66 per watt in the second quarter of 2011. Sales returns reserve in the second quarter of 2011 $2.0 million. OEM shipments decreased to 1.4 megawatt from 7.8 megawatt in the first quarter of 2011.

Module shipments, including our processing business, was 79.4 megawatts in the second quarter of 2011, down from 118.7 megawatts in the first quarter of 2011. During the second quarter all module sales were impacted by lower demands stemming from policy changes in Europe.

Gross margin in the second quarter was 2.2%, compared to 31.5% in the first quarter. Our gross margin for all water business was 5.3% in the second quarter which decreased from 38.0% in the first quarter of 2011. Gross margin for our polysilicon business decreased in the second quarter to 34.0% from 58.2% in the first quarter of 2011. Gross margin for our module business decreased to negative 31.7% in the second quarter from a positive 15.6% in the first quarter of 2011.

Overall, the significant sequential decline in our gross margin in the second quarter was due to price erosion which was significantly steeper than anticipated. And the inventory write-down taken during the second quarter, in recent weeks we are seeing ASPs beginning to stabilize. Based on the current business environment, combined with a expected reduction in our overall manufacturing cost, we expect to improve our gross margin during the second half of this year.

However, recent market trends have prompted us to revaluate our target margins. Going forward we believe a reasonable target gross margin will be in the mid-teens.

Our wafer conversion cost was $0.26 per watt and the average cost of polysilicon we consumed was $61.8 per kilogram in the second quarter of 2011. Operating expenses were $58.9 million in the second quarter of 2011, up from $45.5 million in the first quarter of 2011. The increase in operating expenses was mainly attributable to the incorporation of our recently acquired SPI operations which amounted to approximately $7 million, and our emphasis on R&D to reduce our manufacturing costs.

Our share-based compensation expenses were approximately $2.5 million in the second quarter of 2011. Operating margin in the second quarter was negative 9.6%, down from positive 25.6% in the first quarter. Net loss attributable to our shareholders for the second quarter was $87.7 million and loss per diluted ADS was $0.62. Approximately 140.7 million shares were used in computing the fully diluted EPS.

Depreciation and amortization was $58.5 million for the second quarter. Capital expenditure was $241 million in the second quarter which includes $47.9 million for wafers, $154.9 million for cells and modules, and $36.8 million for polysilicon. Our wafer manufacturing capacity reached 3.7 gigawatt in June and we achieved total installed polysilicon production capacity of 12,000 metric tons, which is in full production.

With the positive feedback from our global customer base, we will continue our integrated business model and we will continue to ramp up our cell, module and polysilicon manufacturing capacity. We will also tightly manage the capital expenditure requirements for continued wafer capacity expansion which will continue to primarily to be done through equipment upgrades and debottlenecking. Wafer expansion will also focus on mono wafers and other higher efficiency wafers which typically have higher margins.

Going forward, we anticipate that CapEx of approximately $80 million to $100 million in the third quarter of 2011 and $700 million to $750 million in fiscal year 2011, to expand our wafer, polysilicon, cell and module capacities.

On June 27,2011 we had announced $110 million share repurchase program. During the month of July and August we had bought back approximately 18.7 million ADS with an average share price of $5.90. Therefore, this repurchase program has been completed. Company headcount was 27,406 at the end of the second quarter, an increase of 382 from the prior quarter.

Now let's turn to the balance sheet. We ended the second quarter with $636.4 million in cash and cash equivalents, and $515.3 million in short term pledged bank deposits. We experienced an operating cash outflow of approximately $392 million during the second quarter mainly attributable to an increase in our inventory level. Inventory increased to $818.8 million due to our prolonged manufacturing process for downstream module business, inventory in PV projects and deferred payments in module sales.

Our turnover days of our accounts receivable was increased to 89 days, while payables increased to a 101 days. We do expect several PV projects in the final stage of completion which will be sold in the next couple of quarters. Our polysilicon inventory at the end of the second quarter was approximately 1,727 metric tons at an average cost of approximately $58.4 per kilogram.

Total interest bearing borrowings were approximately $3.4 billion at the end of the second quarter, including $2.2 billion of short-term bank borrowings, and $1.1 billion of long-term interest bearing borrowings. Following the closing of the private equity investment in the polysilicon business which we announced last quarter, we will continue to explore potential spin-off plan for this business.

Now, let me turn the call to Mr. Peng, our Chairman and Chief Executive Officer. Mr. Peng?

Xiaofeng Peng

Thank you, Jack. Hello and thank you for joining us. The second quarter was a challenging period for the entire solar industry. European policy revision reduced demands, lowered pricing across the supply chain and resulted in oversupply conditions in the industry. We were not immune to the impact of these challenging industry dynamics. ASP erosion, which was much steeper than anticipated and the impact of inventory write-down affected our financial results for the second quarter.

While our wafer and module business were the most significantly impacted by these factors, we continue to benefit from our vertical integration strategy in the down market. As Jack noted, sale of polysilicon made increased contribution to our quarter results. In recent weeks, we have seen ASPs begin to stabilize and order patterns improving. We expect that the outlook for the second half of 2011 where numbers of key PV market is improving. We believe that the lower pricing levels for module have made the IRR more attractive and we expect this will be from recovery in some markets such as Germany.

In China, solar project installation part is going to be boosted following the government’s recently announced first ever national feed-in tariff program of RMB 1.15 per kilowatt-hour, for projects approved before July 1, and are connected before end of 2011. And RMB 1 per kilowatt-hour for projects completed in 2012. LDK Solar will be significantly benefitted by this policy as we have established strong market position in our (major) markets.

We continue to expand our presence in China’s growing PV market as evidenced by recent module supply contracts. These two leading electric power company in China and an EPC agreement for PV project in Shanghai province. In the U.S., we have established a sales and marketing operation which give LDK a truly global marketing infrastructure. We have already begun to see success in winning large module contracts and enhancing our presence in North America. We continue to believe that the key markets will be Germany, Italy, U.S., India, Japan, China and France. We are getting traction in a number of emerging markets such as India, South Africa, Australia and Middle East.

We remain encouraged by long-term positive factors that we see during these PV end-markets. In closing, we remain focused on continuing to improve our cost structure, strengthening our balance sheet and growing our market share. While we anticipate some continued near-term market challenge. We are confident that our continued focus on improving our cost structure, reducing our debt and in building market share, we have positioned us well to capitalize on the long-term growth opportunities.

We continue to leverage our technology advantage, strong global customer relationships and cost effective manufacturing capabilities, particularly in light of the solar industry environment. We believe that our large scale vertical integration with low manufacturing cost is critical to success. Despite the recent market challenges that have effected all solar companies, we have been making progress on our long-term strategy and we remain encouraged about our prospects for continued growth and success.

I will now turn the call over to Sam Tong, our President and Chief Operating Officer to provide the manufacturing operation update. Sam?

Xingxue Tong

Thank you, Chairman Peng. I will provide an update on our wafer, module, cell and polysilicon operation. Our wafer processing costs in the second quarter was $0.26 per watt. We continue to work towards our goal of reducing our wafer conversion costs to as low as $0.20 per watt over the next few quarters. Instead of going on strictly lower costs, we are focusing on delivering higher quality wafers to our customers.

In this highly competitive market, our focus on quality will influence to retain our long-term loyal customers base. As mentioned earlier on the call, we reached 3.7 gigawatt of annualized wafer capacity at the end of the second quarter. We’re able to achieve our wafer expansion plans with minimal investments.

Due to the current market trends we are closely managing our wafer expansion plan with a focus on adding capacity for higher efficiency wafers. As our efforts, we have started producing mono GBL wafers by modifying our current furnaces with minimal capital expenditure. As such, we now expect that our wafer capacity will be approximately 4 gigawatts by the year-end.

We have continued to scale our module operations vertically to anticipate higher shipment in the second half of 2011. While remaining focused on enhancing our cost structure, we also pay attention to the quality of our modules. The installation of our cell manufacture line is progressing as planned. In addition to providing a steady supply of cells for our modules, we expect that our integration of R&D efforts, our polysilicon, wafers, cells and modules, will continue to drive down the total cost of modules in the next few quarters.

We reached a manufacturing capacity of 1.2 gigawatt at the end of the second quarter and we produced 123 megawatts of solar cells at a processing cost of $0.23 per watt during the second quarter of 2011. Total polysilicon production was on track at expected levels during the second quarter and approximately 2,774 metric tons of polysilicon was produced.

In our Xiacun plant, we produced approximately 287 metric tons of polysilicon, and in our Mahong plant, we produced approximately 2,487 metric tons of polysilicon during the second quarter. Starting in June 2011, we have switched to use natural gas to replace diesel which will help us to further reduce our overall polysilicon production cost by about $3 per kilogram.

Combining production from both plants, we expect to produce between 2,600 metric tons and 2,700 metric tons of polysilicon in the third quarter of 2011. During the second half of 2011, we will focus on manufacturing cost and quality with minimal capital expenditure. As a result of delayed investments from the private equity partners which was received in early June, 2011, we now estimate that our polysilicon capacity to reach 17,000 metric ton by the end of 2011 and 25,000 metric ton in the middle of 2012.

Now, let me turn the call over to Dr. Wan, our Chief Technology Officer, who will provide you with our R&D efforts. Dr. Wan?

Yuepeng Wan

Thank you, Sam. I would like to provide an update on our research and development programs. We have been undertaking several projects towards reducing the cost of production and consumables by commercialization of our proprietary technology. First, we finished the pilot (inaudible) commercialization project. This new production line converts low cost high purity silicon fine powder in the easy to charge material for ingot production.

We also completed a silicon nitride recovery line by implementing our silicon nitride recovery technology. This line is recovering more than 25 kilograms silicon nitride a day. We successfully developed a new crucible coating technology. This significant simplification of the conversion of silicon nitride coating process – the new process will save energy consumption during the crucible coating.

During this quarter we were granted one new patent and ten additional patent applications were submitted. To-date, a total of 82 patent applications have been submitted and 20 of them have been granted patent rights. I'll now turn the call back over to Jack.

Jack Lai

Thank you Dr. Wan. Based upon current business conditions for the third quarter of 2011, LDK Solar estimates its revenue to be in the range of $630 million to $680 million, with gross margin to be in the range of 11% to 16%. We anticipate wafer shipment of between 350 megawatt and 400 megawatt. Module shipments between 250 megawatts and 300 megawatts, in-house polysilicon production between 2,600 metric tons and 2,700 metric tons, and in-house cell production between 200 megawatts and 220 megawatts.

For fiscal year 2011, LDK Solar estimates its revenue to be in the range of $2.5 billion to $2.7 billion with gross margins between 15% and 20%. We anticipate wafer shipments between 1.8 gigawatts and 2.0 gigawatt. Module shipments between 750 megawatts and 800 megawatts. In-house polysilicon production between 10,000 metric tons and 11,000 metric tons, and in-house cell production between 600 megawatts and 700 megawatts.

And now we will like to open the lines for questions. Operator?

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) And our first question comes from the line of Edwin Mok with Needham & Company. Please go ahead.

Edwin Mok - Needham & Company

Hi, thanks for taking for my questions. So the first question is on operating expense. It increased quite a bit sequentially and Jack you mentioned part of it comes from consolidating SPI, but even by excluding SPI it still increased by 13 million. I was just wondering what other factors contributed to the higher OpEx?

Jack Lai

And as you know that we are making efforts to build the sales and marketing infrastructure both in Europe and in North America. In the same time the China business actually is doing quite well. We have been fairly aggressive getting into the North Western part of China regions. My colleagues are going to Qinghai, Kan-su, even Inner Mongolia, Xinjiang. So we are opening smaller offices across the China region which increased our sales and marketing presence and of course higher expenses. In the same time we also make efforts to reduce our manufacturing cost, to increase our quality, so our engineering expenses also increased during the course of the quarter.

Edwin Mok - Needham & Company

I see, it’s very helpful. So, actually that ties to my next question. Related to the China business, I was wondering if you can quantify that a little bit. Are you guys going to start actually development projects in China and start to have project development business and revenue there. And then in terms of how do you kind of look at your opportunities for the second half of this year in China and also in 2012?

Xiaofeng Peng

Yeah, China market is growing very much recently and we get there a lot of module order and also EPC contracts from local market, especially from leading utility power company in China. And we have got a lot of module orders for delivery in quarter three and quarter four. We see the China market will be a growing market, one of the biggest market very soon, probably next few years. And therefore this year we expect the market will be growing maybe 1.2 to 1.5 gigawatt market, and this is almost more than double than expected a few months ago. Next year we see the China market maybe more than double again, may be more than 3 gigawatts, and might get even more than that. So, we see this market is really, we are across this market in China this year and going forward.

Edwin Mok - Needham & Company

I see. In terms of second half module shipment, how much of that is contract? Do have any idea of how much module you expect to ship into China in the second half?

Xiaofeng Peng

I think, we are getting a lot of contracts in recent weeks from China market, for delivery in quarter three and quarter four. I think we are still negotiating several big contracts we will be delivering this year. So we will get very big module, an all EPC contract for China market. The number is still increasing. Now, we have already got more than 100 megawatts both module and EPC contracts from China market. And this number will keep increasing probably every week.

Edwin Mok - Needham & Company

So, the increase in module shipments from second to the third quarter, part of it has come from the Chinese pickup then, is that correct?

Xiaofeng Peng

Currently, our business, wafer is 43%. Normally in case of wafers for China market. And if you add in the module business to the China market, I think our revenue, probably more than 50% will be coming from China in both wafer and module business totaling in the second half of the year.

Edwin Mok - Needham & Company

Great. Very helpful. One last question and I'll let the others ask questions. So, related to polysilicon business and carry-over inventory level, so I'm just wondering what was your polysilicon production cost for the second quarter? And your guidance suggests that you'll have a lower production in the third quarter, just wondering why? And finally, what was your end of quarter polysilicon inventory again? Thank you.

Xingxue Tong

Our manufacturing cost of polysilicon is still tracking at around $40. For the most recent efforts, we are very much focusing on our quality and also for our industry safety. So we are being very, very being careful ramping up in the factory. At the end of the quarter, I think we have around 1700 tons of silicon inventory and we should consume them invariably within about a quarter’s time.

Edwin Mok - Needham & Company

So you actually, potentially reduced the purchases from outside and rightfully, because obviously you produce more than that level and also you probably sold, between what you use and what you consume, it sounds like you actually purchased – you didn’t repurchase a lot of poly during the quarter. Is that correct?

Xiaofeng Peng

Yes, we are still having a business model that probably going to sell about 50% of our produced virgin silicon. In the same time, of course, we still buy some from external resources and also we still are doing the recycle efforts to contain the cost.

Edwin Mok - Needham & Company

Great. Sorry, one last question just quickly on poly production. Why you planned for production to come down in the third quarter?

Jack Lai

We have guided a similar production range like in the second quarter. So our second quarter produced 2,700 ton, so the third quarter is similar production for volume.

Edwin Mok - Needham & Company

Great. That’s all I have.

Jack Lai

Similar to second quarter.

Edwin Mok - Needham & Company

Great. That’s all I have. Thank you.

Operator

Thank you. And our next question comes from the line of Sanjay Shrestha with Lazard Capital Markets. Please go ahead.

Sanjay Shrestha - Lazard Capital Markets

Great. Thank you. Good evening guys. A couple of questions. First on your module shipment guidance side. Two part question. One, what is your cost of module production on a fully vertically integrated basis at this point? Where do you expect that to be by the end of the year? And second, it seems like a lot of that module is going in to China, but is there other markets that you could talk about. And what do you see the level of confidence that you guys can really get to that run rate of 1 to 1.2 gigawatt on an annualized basis?

Xiaofeng Peng

Okay. Currently, our vertically integrated manufacturing system, the most important part is ramping of the in-house cell production. Right now, we are sitting at about 1.2 gigawatt of cell production, which means that potentially we can produce somewhere between 250 to 300 megawatt on a quarterly basis. Probably by end of the year, that 1.2 will be reaching probably 2 to 2.2 gigawatt. And that will be the ballpark of where our module production will be.

Sanjay Shrestha - Lazard Capital Markets

Okay. But what's your fully integrated cost of module production and how are you guys pricing your module to clearly gain traction in a lot of different markets on a global basis?

Xiaofeng Peng

Based on our cost model, we should be able to achieve $1 and below for our end module cost.

Sanjay Shrestha - Lazard Capital Markets

And what about the pricing strategy for you guys?

Xiaofeng Peng

Well, at present time, the price very much we're seeing is about $1.20 to $1.25, very popular, about €0.85 to €0.90. We believe that price now kind of stabilized. And our cost model is around that target or maybe less. So, that's our cost model at this present time.

Sanjay Shrestha - Lazard Capital Markets

Two more questions, if I may. When I look at the balance sheet here and especially your short-term debt, somewhere north of – with the total debt almost at $3 billion now. And you guys at some point have to do something about spinning off your poly business, right? But with poly prices coming down in the market and your poly cost still at about $40 a kilogram, how confident are you about being able to spin-off the poly business to essentially de-lever the balance sheet, given where the debt is?

Jack Lai

Okay, certainly the company is still very much focused on building this poly business, and while we are reducing our cost, I think, it’s again very important we have our quality of the silicon produced very, very good. And also to ensure that we have a very safe production. I think, the cost, certainly, that we’d like to reduce to about $30 level before too long. And that will keep our poly business at much better position to go a spin-off, which we believe is on track. And I think from a balance sheet point of view the company will continue to work on different alternatives to de-leverage and also to ensure that we can achieve more than a mid-teen gross margin to generate good bottom line, also to help the cash flow, which will help us to improve our balance sheet situation.

Sanjay Shrestha - Lazard Capital Markets

Okay. One last question from me then guys. In terms of your short-term borrowing capabilities with the central bank in China, and there already you have some $8.9 billion. How much can you still take right now? What are some of the restrictions that is there that you can use that money for and with now your balance sheet being where it is, is there any credit covenants or any sort of terms that have been posed to you guys that actually limits you from being able to borrow more money, and you then would actually really have to spin-off the poly plant to reduce your debt on the balance sheet?

Xiaofeng Peng

Well, there are two parts of these borrowings. One part is the commercial loans that at the present time, we still have somewhere about $1.1 billion approved line of credit, which can be drawn for our operating purposes. In the meantime that we still have this CDB of about $9 billion to $10 billion approved financing that is today good for our project financing. But I think we identify probably a opportunity of about $1 billion. So, from the project financing point of view, that CDB line of credit is still widely available. We still can support probably this 2 to 3 gigawatt of business down the road, if we use in the next couple of years.

Sanjay Shrestha - Lazard Capital Markets

Okay. Well, so, on the poly side, coming back to it, with some of your peers talking about their poly prices being what $22 per kilogram and you guys sort of targeting $30 a kilogram. What do you think is the biggest delta there as to why they are getting to $22 versus you talking about the $30 target?

Xiaofeng Peng

Well, certainly, that we don't know. We are a U.S. GAAP company, and everything that we do is using the U.S. GAAP accounting, depreciation and everything being related that we will count as manufacturing cost. And also, I think from a company perspective, that we also have a plan to reduce our manufacturing cost to be somewhere below $25, if the factory is fully ramping up. But at this point that we're only half way through our ramping up. Hence the costs still are kind of high, but once we reach 25,000 tons than actually we're going to be in the mid 20s.

Sanjay Shrestha - Lazard Capital Markets

Okay. That’s great. Thanks a lot guys.

Xiaofeng Peng

Thank you, Sanjay.

Operator

Thank you. And our next question comes from the line of Colin Rusch with ThinkEquity. Please go ahead.

Colin Rusch - ThinkEquity

Thanks so much. Jack, can you just clarify the share repurchase program. Your comments indicated that you are done buying back shares. Is that correct?

Jack Lai

Yes, we bought back 18.7 million shares over the last two months.

Colin Rusch - ThinkEquity

And I know there's a lot of investors concerned around the note in the 20-F around the change in control provision related to the Chairman’s shares. Can you just walk us through the key points on where the share price needs to be for those change of provisions or change of control provisions not to be triggered? Just so we have some clarity on that?

Jack Lai

Our Chairman is still on about 49% to 50% of the company. So his personnel wealth is still much higher than the loan, the relative loan. So I think that’s still a long shot before I get to that point. So, at this moment; it's not really a concern.

Colin Rusch - ThinkEquity

Okay. And then as you look at the convertible notes that you signed with the China Development Bank, how much room do you have to potentially renegotiate that as you approach the end of the year and buy yourself a little bit of extra time as you think about spinning out the poly plant?

Xiaofeng Peng

Well, certainly, we have some of the conditions to assure that we are profitable and also we will keep our efforts in IPO process which is our milestone. I think that those things will kind of just easily go away. So, I think, that at this moment we will just focus on to make sure that our polysilicon is making good profits and making good progress and also making efforts to prepare for IPO and that will be helpful for the entire process.

Colin Rusch - ThinkEquity

And then one, just final question. With your product business, have you tried to start on doing any EPC work or develop sales channels into India, other parts of the Middle East, probably Saudi Arabia or in Australia?

Xiaofeng Peng

Yes, for EPC we already have the platform established in China, also in North America and also in Europe. And at present time we have project pipelines from China, of course, from North America we have more than probably 200-300 megawatts, primarily done by SPI. At Europe, we have a company called SGT that is working on primarily projects in Germany and in Italy. In the same time we are getting a lot of inquiries from Middle East and also South Africa and India and also Australia. So the pipeline are abundant and we are working very, very hard to capitalize those opportunities and hence that can consume most of the cells and modules that we will produce in the next couple of years.

Colin Rusch - ThinkEquity

Thank you, so much.

Xiaofeng Peng

Thank you, Colin.

Operator

Thank you. And our next question comes from the line of Ahmar Zaman with Piper Jaffray. Please go ahead.

Karen Tai - Piper Jaffray

Hi, Chairman Peng and Mr. Lai, Mr. Tong. This is Karen on behalf of Ahmar. My question is regarding your mono wafer ramp up plans. You indicated that your CapEx has now increased from $500 million to $700 million for the full year. Can you elaborate what percentage of that will go towards your monowafer R&D and ramp up plans? Thank you.

Jack Lai

The CapEx in the mono is still really small. Our spending this year primarily attribute to the cell line increase in our Hefei plant. Which today is about 1.2, and to the end of the year I think we’ll be somewhere between 2 to 2.2 gigawatt, that’s a majority of our spending this year for CapEx.

Karen Tai - Piper Jaffray

Okay. Thank you. And can you elaborate about your progress for next year in terms of the monowafer. Do you expect that to take a larger percentage of your entire production?

Xiaofeng Peng

Well, currently we have used our multi to the upgrade the GBL wafer, it’s a more mono like wafer. So use our current casting furnace. So this is how we’re doing upgrades. So, this volume will be increasing next year. And in the mean time our mono – currently we have our mono capacity ramping up. I think the capacity will be ramping up to 600 megawatt probably next year, end of this year and mid of next year, for mono.

Karen Tai - Piper Jaffray

Okay. Thank you. And also I noticed your government subsidies decreased from last quarter to this quarter. Can you let us know why that’s the case?

Xiaofeng Peng

I think there is accounting timing, I think the government maybe need a little bit time to do the accounting. They receive a document, it needs to be reviewed and the payment will be made. It’s our kind of practice, so we don’t book that covenant until we receive cash in hand. So a little bit delay, but I think definitely that money will come in.

Karen Tai - Piper Jaffray

Okay. Great. Thank you very much.

Operator

Thank you. And our next question comes from the line of Philip Shen with Roth Capital Partners. Please go ahead.

Philip Shen - Roth Capital Partners

Good evening. Thanks for taking my questions. My first question is related to the credit agencies. And I was wondering if you can help us understand what is happening with the coverage with the agencies. Last week, Fitch and Moody's withdrew their ratings, and then S&P placed you guys on negative credit watch. I am imagining part of the actions were due to, or rationale was due to the postponement of your bond issuance earlier this year. From your perspective, just give us a sense for what's going on with them and why Fitch and Moody's withdrew?

Xiaofeng Peng

We had planning to issue bonds in May, and because of market change the bond issuance was delayed. And because we do their rating only for the bonds, because the bonds is – in the current market it’s not possible to use this bond, so the rating for the bonds is not necessary. So, for the company to save in – it’s not saving the cost. There is no need to maintain a rating for that. Because no bond is used for us, so no more yields. So for this China market, I think, maybe it's not necessary in the current market.

Operator

Thank you. And our next question comes from the line of Sam Dubinsky with Wells Fargo. Please go ahead.

Sam Dubinsky - Wells Fargo

Hey, guys, couple of quick ones. Just to follow-up to the prior question regarding a margin call related to Chairman Peng’s shares being offered as collateral for LDK loans. I believe, this information is somewhat material, or should be disclosed. I was just wondering what share price would trigger a margin call, and are there any other debt covenants that would trigger a margin call regarding these shares, so if you can disclose the share price?

Jack Lai

Yeah, first of all, that Chairman owns about 49% to 50% of our company’s shares. Based on its price, probably somewhere close to $500 million. My other thinking is his financing based on this instrument was relatively small, hence that there's no need to worry about the margin call or like.

Sam Dubinsky - Wells Fargo

Okay. So, there's no share price that would trigger a margin call?

Jack Lai

Well, I just told that we don't have that concern, no.

Sam Dubinsky - Wells Fargo

Okay. And then excluding your commercial business, in your discussion with banks, are there any signs that short-term credit won’t be extended? And when is the short-term debt due? How often do the local banks do credit analysis, they come in and they sort of analyze the debt. So, how often does this debt get rolled over?

Jack Lai

Okay, we have been in business for six years and we're dealing with the local banks for six years and we have, around the year we have different profile, coming different maturity profile. And we've managed, each and every one of those deals are being properly processed and payback or renewed. So for six years we are not seeing any bridges or any violations of covenants. We are doing a good job. And of course that with the profile of our maturity, I think any quarter we’ll have loans coming, and we have a team of, maybe 40 people to manage these bank relations. And so far we are doing a good job.

Sam Dubinsky - Wells Fargo

Okay. Just my last question. I know the markets are in flux, so it's not completely your guys fault. But in the past you reiterated guidance after quarters closing, that was Q1, and then you gave Q2 guidance, I think, when the quarter was two-thirds closed, and there was a sizable mix in both quarters. Can you discuss why there's been so much volatility when I think the quarter has either been closed or close to being closed. Had there just been a lot of returns or is it been an issue with just some of the customer payments that didn’t come in on time? Could you just explain what's been going on there?

Xiaofeng Peng

Well, there are several things that are happening and I think, number one that our customers, they had more inventory on hand than they had anticipated there. Hence, somewhat their orders were somehow delayed. And also the price drop was way over beyond our expectation. For instance, from like $1.55 to $1.20 for the module, and that's also reduced the revenue. And of course, somewhat the orders were pushed out for the second half of the year and that's also impacted our – and those are not things that we saw when we provided guidance.

Sam Dubinsky - Wells Fargo

Okay. Great. Thank you.

Operator

Thank you. And our next question comes from the line of Jesse Pichel with Jefferies. Please go ahead.

Jesse Pichel - Jefferies

Good evening, Chairman Peng, Sam and Jack. First question is, have you been successful at getting the Chinese banks to put up debt on any western project, either in Europe or the U.S. And could you give us some details around that?

Xiaofeng Peng

Yes, we have already success on many projects, already successful in getting the funding from China bank to the European projects, and many projects succeeded. And also we will get the funds for the U.S. project very soon and also other projects in other areas also very soon. We're working on that. We've already success in getting project approved in China, in Europe and U.S., and also now in other markets.

Jesse Pichel - Jefferies

That’s very interesting, Chairman Peng. Can you tell us, what is the interest rate or the terms that the Chinese banks are looking for with respect to the western projects?

Xiaofeng Peng

In Europe now we get around €5 because we’re dealing with different currency. We're seeing euro around 5 point something percent. Depending on how many years (inaudible) you have. And also we're getting some in R&D, also get some in dollar. So in the different currency, the euro and dollar it’s different, from 5 some percent difference.

Jesse Pichel - Jefferies

And of the 250 megawatts of modules that you’re guiding to for the following quarter, can you just break that out for us, maybe Jack. Where are you going to sell that and how much of that is covered under Chinese debts on projects?

Jack Lai

For this 250 to 300 megawatts, many shipment to Europe and also a big portion shipped to China market. And also in quarter three we have several contract in U.S. So, also now we have very good market from India, Australia, and also other emerging markets. So, this 250 to 300 megawatts a major from China and Europe, and also we see also a lot the original market from – from other market like U.S., Australia, India, and other Asian markets.

Jesse Pichel - Jefferies

Chairman, does your CapEx budget, that Jack mentioned on the call, include hydrochlorination? And do you think hydrochlorination is required to keep pace with GCL, and also Daqo just announced a hydrochlorination program?

Xiaofeng Peng

Yeah, we are working on that and we're already in the progress. So this is why you see our capacity, we are ramping up from original 15,000 tons capacity to – improve in two factories to 25,000 tons capacity mid of next year. So, after fully ramping up our cost will be below $25 range in mid of next year.

Jesse Pichel - Jefferies

On the wafer side, your processing cost is $0.26, and GCL is saying $0.21. Outside of the depreciation differences between the two companies, what do you think is the competitive edge that they have? Is that the fact that they use Chinese equipment or is it something else?

Xiaofeng Peng

I think, just as Jack mentioned, they have a different accounting as against our U.S. GAAP. And also that processing cost for the (inaudible) is different. Like LDK still have a lot of the capacity, selling and recycling capacity, and most of our competitors have now this selling and recycling capacity. So our cost improving in selling and recycling cut cost and also other cost. So, the different company processing cost and processing way is different. So, if you will come to compare to the processing cost, you'll compare to April to April. And if you compare – even company – because of different outcome, different GAAP, different process. Cost is normally different.

Jesse Pichel - Jefferies

My last question is, you mentioned that you're going to expand the mono ingots. And I'm just wondering, why are you doing this because virtually all the other companies are claiming that the seed assisted crystal growth, also known as quasi-mono, is just as good. Do you agree with the statement or why are you expanding mono in light of mono, pseudo-mono or see this as a crystal growth?

Xiaofeng Peng

Yeah, we are doing a lot of efforts to the mono like in GBL wafer. And we already expect this to move into this chance and starting to more and more customer accessing new products. In the meantime, we have always our mono production ramping up and they also have different markets for the mono wafers and currently mono wafers stand very well to our customers, compared to our total product mix. So we have a GBL wafer, mono wafer, multi-wafer, so that we kind of supply more demand to cover – or different demands around the market.

Jesse Pichel - Jefferies

My last question is, Chairman, can you give us an update on the LED sapphire wafer business. I mean, has this been pushed out or if not, when are you expecting to ramp that business?

Xiaofeng Peng

LED wafer business will be ramping up as scheduled and we just received the equipment and we are starting the installation from this quarter and I think we're starting to have some revenue probably from end of this year and probably next year. That's our original expectation.

Operator

Thank you. Ladies and gentlemen, that concludes today's question-and-answer session. At this time, I’d like to turn the call back over to management for any closing remarks.

Xiaofeng Peng

Thank you for participating in today's quarterly earnings call. We appreciate your continuous support to LDK Solar. Wish you all have a nice day.

Operator

Thank you. If you’d like to listen to a replay of today's call, please dial 1-800-406-7325, or 3035903030. Enter the pass code 4463854. That does conclude today's LDK Solar Company second quarter 2011 earnings conference call. Thank you for your participation. You may now disconnect.

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