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Suntech Power Holdings Company Ltd. (NYSE:STP)

Q4 2006 Earnings Call

March 12, 2007 8:00 am ET

Executives

Steven Chan - Vice President of Business Development

Zhengrong Shi - Chairman and CEO

Stuart Wenham - CTO

Amy Zhang - CFO

Boxun Zhang - Financial Controller

Analysts

Paul Leming - Soleil Securities

Sunil Gupta – Morgan Stanley

Jesse Pichel - Piper Jaffray

Tien Sieh - Merrill Lynch

Kevin Monroe - Thomas Weisel

David Edwards - ThinkEquity

Rob Stone - Cowen

Angelo Chan - Credit Suisse

John Mark - Goldman Sachs

Paul Clegg - Natexis

Julie Chen - Brean Murray

Jeff Osborne - CIBC World Markets

Cheryl Param - Goldman Sachs

Robin Sing - Lehman Brothers

Chang Qiu - Forun Technology Research

Mark Fleischer

Michael Carboy - Signal Hill

David Smith - Longbow Capital

Bernab Samma - Divor Securities

Presentation

Operator

Good evening, and thank you for standing by for Suntech’s fourth quarter and full year 2006 earnings conference call. (Operator Instructions) I would now like to turn the meeting over to your host for today’s conference, Steven Chan, Suntech’s Vice President of Business Development.

Steven Chan

Thank you. Hello everyone, and welcome to Suntech’s fourth quarter and full year 2006 earnings conference call. My name is Steven Chan, Suntech’s Vice President of Business Development. From Suntech on the call today will be Dr. Zhengrong Shi, Suntech’s Chairman and CEO; Amy Zhang, our Chief Financial Officer; and Stuart Wenham, our Chief Technology Officer. Also, Boxun Zhang, our Financial Controller, and I will be participating in the Q&A following Dr. Shi’s closing remarks.

Before we continue, allow me to take you through the Safe Harbor policy. During this conference call we will make certain forward-looking statements in an effort to assist you in understanding the company and its results. The forward-looking statements will be made under the Safe Harbor provisions of the U.S. Private Securities Reform Act of 1995.

Forward-looking statements involve inherent risk and uncertainties. As such, Suntech’s future results may be materially different from the views expressed today. A number of potential risks and uncertainties are outlined in Suntech’s public filing with the U.S. Securities and Exchange Commission. Suntech does not undertake any obligation to update any forward-looking statement except as required under applicable law.

As a reminder, this conference call is being recorded and a webcast of management’s prepared remarks will be available on the Investor Relations section of Suntech’s website after this call. Also, please make note that all figures mentioned during this conference call are in U.S. dollars.

I will now turn the call over to Suntech’s Chairman and CEO, Dr. Zhengrong Shi.

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Zhengrong Shi

Hello, and I thank you for joining us today. It is my pleasure to review with you our fourth quarter and full year 2006 results. Overall, we had a tremendous year in 2006, and the fourth quarter was no exception. I want to quickly take you through our key results and highlights for the last quarter, and I’ll tell you a little bit about our plans for the future.

Our core business really finished up strong in the fourth quarter of 2006. Net revenues for Suntech, excluding MSK, grew 114% year over year to $190 million, exceeding our original guidance by over $20 billion. This strong performance was due to a few key reasons.

Firstly, in the third quarter, we installed two production lines and we were able to ramp these ahead of schedule.

Secondly, we grew our module sales much quicker than our solar cell sales.

Thirdly, due to our multi-faceted silicon sourcing strategy, we were able to secure all the silicon that we need to increase our product output.

Finally, we upsized our sales in Spain relative to other regions, which helped to preserve our ASP at the high level.

In the fourth quarter, we continued to do a good job of locking down our silicon needs for 2007 and beyond. Our ability to acquire large amounts of silicon in a tight market environment has been central to achieving and exceeding our capacity and output targets.

In the fourth quarter, we strengthened our position by signing multi-year supply agreements with IEC, Comtech and the Sunlight Group on top of our arrangement with MEC and other channel suppliers. We have now procured enough additional silicon to allow, last month to this year’s target output to [300] megawatts from 250 megawatts.

We would have market price silicon supply carried over from 2006 and expect that our silicon supply from our long-term supply contract will not become a majority of our silicon supply until the second quarter of 2007. At that time, we will see a greater impact from the low cost of long-term silicon contracts on our results as compared to the first quarter of the 2007.

One of our biggest success stories was our remarkable ability to diversify our international presence and build scale rapidly as demonstrated by our initiatives in our international market. In Germany where many in the industry have ASP declines and inventory build up in the second half of last year, Suntech was unaffected by this trend with continued sequential increases in average selling prices and volume.

Not only is this due to our growing international brand recognition and product quality, it reflects our ability to quickly establish effective sales networks. Led by our 23 MW project, which will be the largest solar farm in the world to date, Spain is quickly emerging as a leading solar market in Europe. We made sizeable growth in Spain in 2006 with particularly strong growth in the fourth quarter where our Spain sales were roughly similar to our Germany sales. This is a remarkable result that demonstrates our ability to rapidly adapt and take advantage of opportunities in new emerging markets. This sales diversity has enabled us to improve our ASP sequentially over 2006.

In addition, the establishment of Suntech America has really helped us to making inroads into the U.S. market. We spent 2006 closing on some deals, but more importantly, building an impressive top line of contracts for 2007 and beyond. Based on orders booked so far, we think our year sales in 2007 can increase at least threefold over 2006, placing us among the top in terms of solar market share in the U.S. in 2007.

We also had a great year at home here in China. In our home province alone, we won 100 projects which is a milestone in China. We also won the Solar Power Plant project in Shanghai. More recently, MSK was instrumental in our award of 800 kilowatt BIPV supply contract for the Wuxi airport. We also established Shenzhen contact system integration business and have met twice in the [inaudible] built and our research and development facilities in Shanghai.

With demand for solar power booming worldwide, or sales diversification has enabled Suntech to be one of the few companies in the industry not to have seen any quarterly ASP decline in 2006, where our ASPs were up each quarter last year. It will also enable Suntech to temper ASP decline pressure better than many in the industry. We expect to see our blended average ASPs to decline by 5% to 7% from 2006 to 2007, which we believe to be on the low end that our peers are seeing in the industry.

As you all know, we acquired MSK in August of last year with the core strategic goals of gaining entry into the market, adding its leading-edge BRT technology to our product fit, and utilizing its sales channels, especially those in Europe which make up 80% of MSK sales and the way MSK has been selling their product for 20 years.

In order to better address MSK’s relative high Japan-based production costs and the third-party sales procurement costs in line with our ASPs, we are pleased that MSK’s remaining selling shareholders agreed to amend and close out the one-year own-out period on the transaction so that we could immediately execute upon our strategic goal to close on MSK’s Japan-based production and refocus MSK on our three core objectives that we just mentioned.

Last month we initiated more aggressive restructuring of MSK and expect this to be completed in the first half of 2007. We think that by closing MSK’s Japan-based production we will be able to leverage our low-cost manufacturing capability and allow MSK to focus on its core goals. We believe that the financial result of this action will, on balance, be positive both in the short and long term. In the near term, MSK-related revenue, which was nearly all standard module revenue, was reduced to the point where it is below 5% of Suntech’s overall revenues.

Finally, I think it is important to point out that the fourth quarter was also an exciting one on the R&D front. We are moving forward with silicon-based thin film solutions. Many have seen the research and development scientists, including Dr. Stu Wenham and myself, have had many years of experience in this area of thin film so we feel that we are unique positioned to capture this opportunity. We feel that thin film is not a replacement product for traditional silicon products, but rather that there are complementary sales opportunities such as with the MSK’s BIPV product.

Our core product, we expanded our agreement with the University of South Wales through 2010, which allows us to continue to take advantage of their world-class solar research. We believe this achievement put us way ahead of peers in terms of bringing new product and high efficiencies to the market. Ji will speak more about this shortly.

Suntech’s growth over all four quarters in 2006 really demonstrated that our company has what it takes to be the leading solar producer in the world. We are focused on leading solar product innovation, rapidly expanding our capacity to take advantage of economies of scale and taking an active role to promote the adoption of solar energy worldwide.

Now, I would like to turn the call over to our Chief Technology Officer, Dr. Stu Wenham, who will give you update on our technology.

Stuart Wenham

Thank you, Dr. Shi. In our Q3 earnings release, we gave an overview of our five silicon solar cell technologies that form the basis of our R&D activities and our expected future production. I’ll now give you an update on the three of these technologies that have either recently gone into live-scale production at Suntech or else are expected to go into live-scale production in the near future.

The first of these is our semiconductor finger technology that we developed jointly with the University of New South Wales. We are pleased to announce that we commenced production of this technology on the first of our lines during Q4 and will be progressively retrofitting our other lines with the technology during 2007. A particular strength of this new technology is the performance enhancement it achieves with low quality, low cost silicon that would normally be rejected by most manufacturers. Efficiencies greater than 17% are routinely achieved by Suntech with this low-grade material on its new line, a performance level greater than what most manufacturers can achieve with premium grade material.

Perhaps ever more excitingly, Suntech’s latest technology will be implemented into pilot production ahead of schedule during Q1 2007. This is another technology developed in conjunction with the University of New South Wales with construction of the pilot line having been completed towards the end of Q4 2006. We have been discussing this new 20% efficiency technology since our IPO in late 2005 as part of our technology road map and we are pleased to announce that our patent applications for protecting this new technology have been filed.

Now the devices based on this technology indicate that pilot line efficiencies of 18 to 19% of efficiency will be achievable by the end of 2007, increasing to about 20% efficiency during 2008. Just as importantly, our analysis shows that not only do we get the benefits of increased sale performance with this technology, but the cost for making such solar cells is actually less than our current production technology.

The third technology I wish to just briefly discuss is our new thin film silicon technology. We originally forecast that we would commence thin film pilot production in 2008 to enable us to evaluate the technology. However, with the growing demand for our BIPV products and the benefits of the thin film technology for this type of application, we have decided to build a 40-megawatt thin film facility during 2007 with expected corresponding product sales in 2008 of 40 megawatts.

I’ll now hand over to our CFO Amy Zhang to cover our financials.

Amy Yi Zhang

Thank you, Stuart. Instead of repeating all the numbers in the press release, I’ll provide some highlights on certain key results for fourth quarter and full year 2006, and provide guidance for the first quarter and full year 2007. Please note that certain measures that I will talk about are non-GAAP in nature. We believe that these measures are more reflective of the operating dynamics of the company and we’ll provide these measures in the future.

Specifically, these measures exclude $3.8 million of share-based compensation expenses and $0.3 million net income impact related to amortization expenses regarding the acquisition of MSK Corporation. You can find a reconciliation of these measures in the financial tables at the end of our press release.

Additionally, we also present both Suntech core and MSK standalone results. As Dr. Shi noted, we have re-focused MSK on our three key strategic goals. Last month we agreed to accelerate the first year earn-out period and finalize the purchase price of the remaining shares of MSK at the floor price of $53 million.

As part of this agreement, we have halted their Japanese-based module production and initiated aggressive restructuring last month. We will retain a majority of their third party PV cell suppliers. Based on our current view we see that the financial impact of these actions going forward will be a lower revenue contribution balanced by higher margins and profitability with efforts from the third party cell suppliers is more reflective of the Suntech core business.

Today I will discuss Suntech’s performance focusing principally on the numbers that exclude MSK because at least for the near future, its contribution to Suntech’s consolidated business will be relatively small, less than 5%. Due to the accelerated integration and MSK’s relatively small contribution to Suntech’s consolidated business, we would not continue to report separate results or give separate guidance for MSK in the future.

Exceeding the top end on our revenue guidance, Suntech net revenues excluding MSK’s for the fourth quarter of 2006 were $190.3 million, representing an increase of 130.8% year over year. Excluding MSK, we shipped at total of 48.6 megawatts of PV products during the quarter. In the fourth quarter of 2006, PV modules accounted for approximately 95% of our total net revenues and PV sales accounted for approximately 5%. The percentage of PV modules sales is up significantly compared to the historical quarters when the module-to-sales ratio was closer to 70 versus 30. This is a healthy trend and it means that Suntech is able to sell more directly to customers as opposed to sell customers who are often module makers and our competitors.

Our margin on both types of products is comparable, but we are capturing 15% plus higher revenues on module sales. We expect the trend of our module-to-sales ratio of 90% or 95% to 5% or 10% to continue in 2007.

Suntech’s non-GAAP gross margins, excluding MSK, increased marginally during the quarter to 26.2% from 26% in the third quarter of 2006. Our average silicon wafer costs increased slightly to $5.45 for 5-inch wafer from $5.32 in the third quarter of 2006. We believe that the cost of silicon for us reached a peak in the fourth quarter and expect that the cost will begin to fall in early 2007.

Total share-based compensation for the fourth quarter of 2006 were $3.8 million. Of this amount, $0.4 million was recognized as cost of revenue; $0.2 million as selling expenses; $1.5 million as R&D; and $1.7 million as G&A expenses. This was slightly higher than third quarter share-based compensation as our annual equity incentives were granted to employees in November.

Non-GAAP operating margin, excluding MSK, was 20.3%. The operating margin decreased sequentially mainly due to the higher G&A expenses as we have been transitioning to using more lines of credit and wire transfers as a sales settlement instrument. We have had higher accounts receivable and had to make responding general GAAP provisions and incurred additional bank service charges. We also had some mark-to-market foreign exchange losses during the quarter.

Turning briefly to the consolidated Suntech Group including MSK. Even though MSK is currently still under an integration process and the company made around $2.7 million loss attributable to Suntech in the fourth quarter of 2006, Suntech Group still achieved strong growth. We recorded total net revenue $217.9 million in the fourth quarter representing an increase of 144.8% year over year.

Non-GAAP operating profit and net income increased to $34.2 million and $35.5 million receptively, representing 14.9% and 8.3% sequential growth respectively. Looking at the full year 2006, consolidated Suntech Group net revenue were $598.9 million, an increase of 165% year over year.

Gross margins increased to 24.9% in 2006 from 30.3% in 2005. This was primarily due to the rising price of silicon in 2006 and MSK’s low margin manufacturing business. Operating margin was 17.2% in 2006, down from 18.9% in 2005. We expect to see a slight gross margin decline in the first quarter of 2007 as we will have carryover stock market priced silicon supplies from 2006 and our silicon supply from our long-term supply contract will not become a majority of its silicon supply until the second quarter of 2007. Aside from this, we expect that our gross margin in the core business should stabilize throughout 2007 as our long-term contracted silicon ramps up delivery over the course of 2007.

Net income attributable to holders of ordinary shares for full year 2006 was $106 million, representing a 275.6% increase from the previous year 2005. Diluted income per ADS was $0.68 in 2006 compared to $0.26 in 2005.

Moving now to our balance sheet, as of December 31, 2006 we had cash and cash equivalent of approximately $225.5 million. Accounts receivable rose to $98.9 million from $44.8 million as of September 30, 2006 as we increasingly employed letters of credit and TT to settle international transactions. Our inventory balance and advances to suppliers rose as we increased production and our purchases of raw materials during the quarter.

The increase in other non-current receivables was related to an interest-free loan MEMC. The outstanding loan will be gradually repaid within the next two years. The $132.3 million recognized as long-term prepayment was mainly due to the share-based compensation expenses related to warrants granted to MEMC. Of this amount, approximately $118 million will be amortized according to the contract delivery schedule, which begins in 2007 and lasts for the next ten years.

As noted in the release, short-term debt rose to $288.2 million as we leveraged the banking facility to support expanding production and the capital expenditures and address ongoing cash flow management needs related to foreign currency controls. The balance also included the bridge loan of $100 million for the MSK acquisition, which we expect to repay out of our convertible-bond proceeds.

Capital expenditures, which were primarily related to production after the expansion were $15.3 million in the fourth quarter of 2006 and $52.3 million for full year 2006. Depreciation and amortization expenses were $4.9 million in the fourth quarter of ‘06 and $11.9 million for the full year ‘06.

With respect to our financial guidance for the first quarter and full year 2007 please note that the following outlook statements are based on our current expectations. These statements are forward-looking and actual results may differ materially.

For the first quarter 2007 total production output is expected to be in the estimated range of 60 megawatts to 62 megawatts, and the total net revenue are expected to be in the estimated range of $220 million to $228 million. This guidance takes into account the assumption that total cell production capacity will remain constant at 270 megawatts until second quarter of ‘07 when additional capacity is expected to become operational.

In addition, the first quarter 2007 guidance also takes into account the short-term month of February and the Chinese New Year holiday.

For the full year 2007, we have raised Suntech’s total PV cell production output target from 250 megawatts to 280 megawatts, and Suntech’s total PV sale production capacity target from 390 megawatts to 440 megawatts. This target takes into account third-party PV sale purchases of around 5% originally contracted by MSK that Suntech now is assuming.

For full year 2007, capital expenditures are expected to be in the estimated range of $80 million to $100 million. Briefly, I’d like to mention that we are in the final stage of the management testing of internal control over financial reporting after one-year implementation of the procedures and practices across all functions in the company and we currently do not expect any material weakness.

The implementation of the ICFR and ongoing compliance has been supported by the SAP RP system across its various locations and functions as part of this corporate governance project.

At this time, I’d like to turn the call back to Dr. Shi.

Zhengrong Shi

Thank you, Amy. Once again, thank you again for joining us today. I will now open the call up for questions.

Question-and-Answer Session

Operator

Your first question comes from Paul Leming - Soleil Securities. Please proceed.

Paul Leming - Soleil Securities

Good morning. I wanted to ask a question on your average wafer cost. Could you sketch out in rough terms, what you think your average wafer cost will be in Q1 and in Q2 of 2007, relative to the $5.45 you disclosed for the fourth quarter?

Amy Yi Zhang

We actually foresee that the wafer cost in terms of dollar for piece of wafer decreased by 3% to 4% annually in Q1 ‘07.

Paul Leming - Soleil Securities

Any view at this point as to how much further they might come down in the second quarter?

Amy Yi Zhang

It will be gradually declining across the quarters in ‘07. We still need lots of time to verify the detailed percentage quarter by quarter.

Paul Leming - Soleil Securities

If I could ask a follow-up question, your inventory levels on your balance sheet have increased significantly over the last couple of quarters. Could you just give us some color as to how much of that increase is in raw material versus work in process versus finished goods? Thank you.

Amy Yi Zhang

There are 3 major items covered under the item of inventory: raw materials and WIP and goods in transit. I would say that it’s 50/50 between raw material and WIP and goods in transit.

Paul Leming - Soleil Securities

Thank you very much.

Operator

Your next question will come from Sunil Gupta - Morgan Stanley.

Sunil Gupta – Morgan Stanley

Thank you. I just wanted to understand your guidance for Q1 ‘07 better. It looks like based on your shipment and your revenue numbers you introduced a very sharp decline in ASP. Could you explain what’s driving that and possibly also comment on the pricing environment that you’re seeing?

Zhengrong Shi

This is unfortunate. I think the ASP from our revenue guidance is based on the management’s prudent estimation and also it considered the blended ASP from the PV sales and the PV module sales. For the next quarter, ASP, we foresee that the ASP will drop around 3% to 4% from the Q4 level which is around $3.91 per watt.

Sunil Gupta – Morgan Stanley

Gross margin guidance for Q1 of ‘07 is expected to go down slightly. Is that based on the 3% to 4% decline in ASP?

Zhengrong Shi

Yes, correct.

Sunil Gupta – Morgan Stanley

Thank you.

Operator

Your next question will come from the line of Jesse Pichel - Piper Jaffray.

Jesse Pichel - Piper Jaffray

I’d like to ask how much of your 280 megawatts of production for 2007 is under sales contract and how the prices there are negotiated? Is that monthly or quarterly or every six months? If you could just give us an idea of pricing by geographies; are you experiencing a greater price degradation in Europe versus the U.S. and Spain? Thank you.

Zhengrong Shi

Yes, I think that with this 280 megawatt production projection, around 80% has been contracted with fixed price across the whole year and we do want to reserve some volume for contingency sales.

Jesse Pichel - Piper Jaffray

And the price is negotiated?

Zhengrong Shi

No, the price is fixed and the contingency sales means that we do believe that demand in USA is higher. That’s why we want to keep some volumes for strategic sales for the rest of the year.

Jesse Pichel - Piper Jaffray

Understood. And the pricing is fixed for the entire year or is that six months?

Zhengrong Shi

Entire year. The customer actually don’t worry too much about the price. They don’t worry about the price coming down. They actually worry about the price going up. Demand is strong.

Jesse Pichel - Piper Jaffray

Great, thank you very much.

Operator

Your next question comes from the line of Tien Sieh - Merrill Lynch.

Tien Sieh - Merrill Lynch

Hi. I was just wondering if you could share with us what is your CapEx budget for your thin film line and if you have any preliminary indications on products expected from this line?

Zhengrong Shi

I think we’re going to install one production line which we expect to start attuning in about 12 months’ time. The capacity can be up to 40 megawatts. So we believe next year, we will fully produce around 10 to 20 megawatts. The manufacturing cost is probably around $1.20 per watt.

Tien Sieh - Merrill Lynch

CapEx for the entire 40 megawatts is approximately how much again, sorry?

Zhengrong Shi

40 megawatts is total capacity. So it would gradually ramp up into 2008.

Tien Sieh - Merrill Lynch

What’s your investment in that and how much money would you invest again?

Zhengrong Shi

I think we are investing about $45 million.

Tien Sieh - Merrill Lynch

All right thanks. Thank you very much.

Operator

Your next question comes from the line of Kevin Monroe - Thomas Weisel Partners.

Kevin Monroe - Thomas Weisel

Good morning. I was just wondering if you could give some color on the gross margin lines? There’s a couple of moving parts, so what do you expect your net consolidated gross margins to do through the course of ‘07? It sounds like it might come down a little bit in the first quarter and then stabilize to going up. Just what are your ‘07 gross margins targets?

Amy Yi Zhang

As what we gave regarding the guidance of Q1 there will be a 1% decrease compared to Q4 of ‘06, which is mainly due to the 3% to 4% decrease on the ASP as well as 3% to 4% decrease of the wafer costs. Going forward in line with the ramp up delivery of the long term supply contracts we expect that the average blended wafer costs will be decreasing 3%. So even though we probably will still have the pressure of the declining of ASPS, we’ll be able to maintain the gross margin at a healthy level across the whole year ‘07.

Kevin Monroe - Thomas Weisel

And what’s that target of healthy level?

Amy Yi Zhang

We will give guidance on a quarter-on-quarter basis.

Kevin Monroe - Thomas Weisel

You had a significant increase in the G&A line this quarter, up to the $11 million to $12 million range. Is there anything unusual in that or is this the level we should expect to see going forward?

Zhengrong Shi

I think like Amy mentioned in her speech, the increase of the G&A is mainly due to the increase of the general provision. We are increasing the letter of credit and TT wire transfer and also this relates to the bank service charge and foreign exchange gain or loss increased during the fourth quarter of ‘06 and there is no unusual transaction in the G&A.

Kevin Monroe - Thomas Weisel

Does that mean we can expect that this is a run rate going forward?

Zhengrong Shi

Yes, I think if you consider the G&A total operating expenses as a percentage of the total revenue we are still assessing the operating expenses as a percentage of revenue in the Q1 of ‘07, around 5% to 7%, 5% to 6% of the total revenue.

Kevin Monroe - Thomas Weisel

Thank you.

Operator

Your next question will come from the line of David Edwards - ThinkEquity.

David Edwards - ThinkEquity

Hi, wondering if you could get into a little more detail on the geographic distribution? I know it has gone up in Spain and in California, but can you talk about what the breakdown was for this quarter and also what you’re expecting for that breakdown to be in 2007?

Zhengrong Shi

In Q4, as we just reported, the sales into the Spain market is around 40%; sales into U.S. market is around 5% to 6%, and that is basically what is the geographic breakdown in Q4. Looking to 2007 I think our sales into German market probably around 35%; the Spain market is around 25%. The U.S. market is around 15% and to the rest of the world about 15% and in China.

David Edwards - ThinkEquity

Great, thank you very much.

Operator

Your next question will come from the line of Rob Stone - Cowen and Company.

Rob Stone - Cowen

Hi, just a quick follow-up. I wanted to make sure I heard correctly what you said. Amy, did you say gross margins would decline by 1 percentage point? Because previously it was just referred to as slightly.

Then could you repeat the total OpEx percentage comment, Boxun, for Q1? And is that inclusive or exclusive of stock-based compensation? Thank you.

Amy Yi Zhang

The OpEx from Q1 ‘07 will be remaining as a percentage of total revenue around 5% to 6% excluding share-based compensation.

Rob Stone - Cowen

Okay, and gross margin down 1 percentage point?

Amy Yi Zhang

Yes, 1%.

Rob Stone - Cowen

Thank you.

Operator

Your next question will come from the line of Angelo Chin - Credit Suisse. Please proceed.

Angelo Chin - Credit Suisse

Could you tell us about your share-based compensation expectations for 2007?

Amy Yi Zhang

Share-based compensation contains two parts: the equity incentive granted to employees and also the awards given to the external proprietors who have very strategic proprietary relationships with Suntech. Given that we need to do mark-to-market evaluations quarter by quarter, in line with the grants, especially granted to external proprietors, we will give the range of share-based compensation on a quarterly basis as well.

Angelo Chan - Credit Suisse

Could you tell us, based on the shares that you have already awarded, anything in 2006 that may become effective in ‘07 and so on? What might we be looking at?

Zhengrong Shi

You mean for the internal people?

Angelo Chan - Credit Suisse

For internal as well as external. For the ones that you have already offered.

Zhengrong Shi

I think it will stay at the similar range of what we have already recognized in Q3 ’06, maybe between the range of $4 million to $5 million per quarter.

Angelo Chan - Credit Suisse

$4 million to $5 million U.S.?

Zhengrong Shi

Yes.

Operator

Your next question will come from the line of John Mark - Goldman Sachs. Please proceed.

John Mark - Goldman Sachs

Hi. I just wanted to get some clarity on the polysilicon supply. As I understand you have secured more than your production target at this point. What happens to the excess polysilicon supply? Is it take or pay on a fixed contract for this year that you must take the supply?

Secondly what is your rough estimate at this point of the effective capacity for 2007, given your increase in the ramp up? Thank you.

Zhengrong Shi

Yes I think for the silicon purchase, we sign long-term contracts, all long-term contracts, for MEMC for example is a take or pay type of contract and for others, there’s no such term included and yes we secured more than enough silicon for this year’s production.

To answer your second question, in our annualized production capacity we’ve reached 420 megawatts by the end of the year. So delaying our production volume it still is capacity limited because it takes time for it to ramp up in the production line.

John Mark - Goldman Sachs

On the second point, is effectively, if demand continues to remains strong, how much capacity do you think you’ll have available for 2007?

Zhengrong Shi

280. Because 420 is the capacity but because we have to add some on during the year, so that’s why we cannot produce the 420 megawatts.

John Mark - Goldman Sachs

Understood, so effectively if you’re producing 280, beat your target this year, then you’re producing 100% capacity?

Zhengrong Shi

Exactly.

John Mark - Goldman Sachs

Okay, thanks.

Operator

Your next question comes from the line of Paul Clegg - Natexis.

Paul Clegg - Natexis

Hi, good evening. Since you have more than enough silicon to hit your new targets, a mitigating factor for you nearer term just seems to be how fast you can bring on new lines. Can you talk about what sort of constraints you’re seeing there? Any difficulty accessing new equipment? Getting labor trained more quickly? That sort of thing.

Zhengrong Shi

Yes, you are right. I think the lead time for equipment supply is fairly long and we all have to do the new building, manufacturing and building. So we have the same feel in the company, the speed of manufacturers building is not fast enough so we’re really, we need to speed up this expansion plan to meet our market demands.

Paul Clegg - Natexis

Any follow-up on getting subsidies at the provincial level in China? Any new movement there?

Zhengrong Shi

From a market point of view I think yes, At the provincial level we already get one for the first bid in [inaudible] for the system we installed and we expect both central governments and local governments will give us some subsidies, some time in the year. Some guideline for subsidies during the year.

Paul Clegg - Natexis

During 2007?

Zhengrong Shi

Yes.

Paul Clegg - Natexis

Great, thank you.

Zhengrong Shi

Thank you.

Operator

Your next question comes from the line of Julie Chen - Brean Murray.

Julie Chen - Brean Murray

I’d like to just clarify in terms of the growth in China, particularly for BIPV how should we be looking at it?

Zhengrong Shi

Well I think growth in China, China is the world’s biggest market too. And a renewable energy law has been active about one or two years ago so at this moment I just mentioned the central government and the provincial government, they are working on a detailed incentive program. So to give you a little bit of color, it’s more likely with a subsidy at the installation stage and also there’s a tariff. That would be the combination on top of our incentive programs being issued in China. So at the moment, we can feel more and more people become aware of these environment issues, energy quality issues, so it looks like the market will take off in the near future.

Julie Chen - Brean Murray

At the People’s Liberation Congress, one of the items that came up is that the environmental clean-up in addition with the renewable energy is going to be about 5% to 10% of the GDP for the up and coming year.

Zhengrong Shi

Yes.

Julie Chen - Brean Murray

How big a percentage would Suntech be able to benefit from it?

Zhengrong Shi

Well really, the difficulty in answering the question quantitatively. Suntech is in the best position to capture endless of opportunities. That’s why we formed Suntech Shenzhen to really build the work and the relationships. So if anything is materially happening, we are there.

Julie Chen - Brean Murray

Thank you.

Operator

Your next question comes from the line of Jeff Osborne - CIBC World Markets.

Jeff Osborne - CIBC World Markets

Good evening. I was wondering if you quantify please, the delta you’re seeing between German pricing, Spanish pricing and U.S.? Clearly you’ve had some upside in ASPs in ’06 with the Spanish becoming a sizable piece of the mix, it’s been aiding it. I was just trying to get a quantification on that.

Lastly for Amy, if she could just talk about tax rates for ‘07, any moving parts there.

Zhengrong Shi

I think you’d be talking the delta of ASPs in different countries. Spain has the highest ASP this month, about 5% higher than German markets. The U.S. market is pretty much similar to German market. That’s the situation at this moment.

Jeff Osborne - CIBC World Markets

Thank you. And then, the question on the tax rates?

Amy Yi Zhang

Yes. Clearly, Suntech is still within the tax special treatment period and enjoys 7.5% of corporate income tax through the end of ‘07. Also, all the new entities that we have set up in different cities, similar high-tech zones have been granted with the same tax treatment with two years exemption and at the end of the fifth year paying 7.5%. I don’t foresee any change of corporate income tax rate until the end of ‘07.

Jeff Osborne - CIBC World Markets

Very good, thank you.

Operator

Your next question comes from the line of Cheryl Param - Goldman Sachs.

Cheryl Param - Goldman Sachs

Can I have some colors on the product mix between the 5-inch and a 6-inch in Q4? What is the outlook in ‘07?

Zhengrong Shi

The 5-inch PV cell sales account for around 75% of the total PV cell sales. The 6-inch wafer accounted for around 25%.

Cheryl Param - Goldman Sachs

This is the Q4 data, right?

Zhengrong Shi

In Q1 ‘07, the 6-inch PV cell sales will gradually pick up, but I think it’s still around 30%. In addition to that, across the whole year of 2007. 6-inch to sales would be around 40% to 50% of the total production.

Operator

Your next question comes from the line of Robin Sing - Lehman Brothers.

Robin Sing - Lehman Brothers

I would like to ask a question with regards to MSK. Because of closing down the operations in Japan, how much additional cost does management expect to incur because of moving operations to China?

The second thing is what kind of sales contribution should we expect from MSK in 2007 and what kind of profitability that we should expect? Thank you.

Zhengrong Shi

First of all, we are in a process of restructuring. We are not ready yet to give you a report on the restructuring cost, and when it becomes available, we’ll report to you later.

Secondly, as we just mentioned, we are not giving separate guidance for MSK sales and the production in ‘07. So that means we’re not able to give you this number in the future.

Operator

Your next question comes from the line of Sunil Gupta - Morgan Stanley.

Sunil Gupta – Morgan Stanley

Thanks for taking my question. I have a question for Stuart Wenham on technology and production. Stuart, you mentioned earlier that you’re looking at testing the technology already in production on the lines in Q4 and you hope to achieve 70% or more efficiency. By end of 2007, what percentage of your output do you think would be coming from this, you know, based on the similar testing and technology?

Stuart Wenham

What we intend to do is progressively retrofit our ten lines that we have in existence at the moment progressively throughout 2007. One of the interesting situations we have here is that we also had our newer technology again coming online in pilot production during Q1 at the moment, and it’s a particularly exciting technology. We’re taming some flexibility in terms of the decision with regards to our lines whether in fact we retrofit them with our semiconductor fingertip technology or, in fact, jump straight to our next technology which will be higher efficiency again.

But our expectation at the moment, that we have been forecasting over the last six months or so the semiconductor finger technology will gradually be retrofitted on to our ten production line throughout 2007.

Sunil Gupta – Morgan Stanley

Okay. Perhaps maybe I can ask by end of this year, say Q4 of ‘07, what would be the output mix on your semiconductor technology, this new high conversion efficiency technology that you’re also trying to bring online and your traditional manufacturing that you have in place? I’m just trying to get a rough feel for this.

Stuart Wenham

With regard to our expectation by the end of 2007, is that we’ll make very little product based on the conventional type of screen printed technology that most manufacturers are still using. So that’s the technology that we will be phasing out over the next 12 months. So the question more is whether we will be producing the semiconductor finger technology or whether we’ll be jumping straight to the high performance technology and that decision will depend, not only on the performance levels of the two respective technologies, but also our ability to obtain the equipment necessary for retrofitting the two lines. In both cases both technologies can be retrofitted onto our existing lines, which makes it easier in many respects but they have different changes that have to be made to the two respective technologies so updated visions that we’ll make throughout 2007.

Sunil Gupta – Morgan Stanley

Okay, thank you.

Operator

Your next question will come from the line of Jesse Pichel - Piper Jaffray.

Jesse Pichel - Piper Jaffray

Yes, Dr. Ji, your Q4 and your guidance from Q1 are benefiting from greater sales in Spain and in particular from the extra Mundo projects. Now if your sales in Spain decline as a percentage of sales now that the extra Mundo project is about done your ASPs may come down much more than the 5% to 7%, and you haven’t announced anything in Spain beyond extra Mundo. So what gives you confidence there that this level of sales to Spain will continue? Are there any particular projects there that you haven’t announced? Or are they just selling into the distributor channel?

Zhengrong Shi

This year we are still targeting 280 megawatts. We cannot do a press release of all the 280-megawatt projects so our press release was selective and we cannot release all projects now, they are competitive and all of our customers because that’s actually confidential information.

Secondly, in Q4 if you look at the percentage in savings it’s quite high. But in ‘07 25% of our total production is not small. You can count on 280 megawatts, 25% of it is quite a high number so I think yes, I think the guidance I gave you is within our expectations.

Jesse Pichel - Piper Jaffray

Is that mostly projects or will it be selling into the distributor channel?

Zhengrong Shi

Mostly projects.

Jesse Pichel - Piper Jaffray

Mostly projects, okay. I’d like to ask you just another question there about your silicon supply, and now with your higher production targets your ‘07 production will consume an entire polysilicon plant valued at about $400 million in CapEx investment. What are your thoughts longer term there about perhaps vertically integrating there and owning this piece of the supply chain, which is dragging down the industry margins?

Zhengrong Shi

Well I think, all said, there’s no change. We always try to secure silicon by forming partnerships with upstream suppliers. As you said, one bigger silicon manufacturer cannot supply us enough so that means we need to team up with 10 or 20 or 100 of them in the future. That is our strategy to really make sure we have very tight relationship with our upstream suppliers.

Jesse Pichel - Piper Jaffray

Are you seeing any improvement from the polysilicon production coming out of China? Because it was pretty widely documented there that some of the plants had problems ramping and they even have design problems with reprocessing some of the non-critical gases back into the loop. Have those problems been worked out? What’s your expectation there for polysilicon products from within China?

Zhengrong Shi

Look, there are more announcements than [inaudible] in revenue. We do believe in the next year or two there will be about five or more polysilicon manufacturers in China, and as I always say manufacturing polysilicon is not a rocket science. There could be some teething problems in the beginning, but we do believe polysilicon will be manufactured in China very soon in large quantities.

Jesse Pichel - Piper Jaffray

Great. Congratulations on your outlook. Thanks.

Zhengrong Shi

Thank you.

Operator

Your next question will come from the line of Chang Qiu - Forun Technology Research. Please proceed.

Chang Qiu - Forun Technology Research

One question is what is the average wafer thickness for Q4? Also what is it by the end of 2007, what’s the thickness by then?

Zhengrong Shi

For Q4 the average wafer thickness is around 200 microns, and for Q1 this year we expect a thickness around this level and gradually reduce it to about 100 micron towards the end of the year.

Stuart Wenham

If I may add a little bit to that, in our last earnings release we did announce the results of work we had been doing to adapt our technology for thinner wafers, and we did report that in 180-micron wafers we were able to achieve extremely high yields. So we don’t actually get any yield drop-off in going to the 180-micron thickness. Our current work is looking at thicknesses of 150 to 160 microns, and we expect in the near future to be able to achieve similarly high yields with those thicknesses as well.

The challenge for that is to get the supplies of the silicon material to actually provide us with silicon wafers that are that thin. So we believe we have the technology ready to be able to use those thicknesses when the material can be readily provided.

Chang Qiu - Forun Technology Research

What is your view for the use of the metrological grade silicon to produce sales, maybe any work in progress, your view whether that works?

Zhengrong Shi

I think people have been doing research on purifying silicon and they call it physical method instead of chemical method. Of course there are some results, sure. This technology is promising. So far we haven’t seen any large-quantity manufacturing, a commercial-manufacturing product yet although there are a few companies that have been announcing. We are really eager to see if this product is available, especially at really a cheaper price because more people claim the cost would be lower.

By reading all the technology, resulting in more of a benefit of melting and solidification so that means also is going to consume a lot of energy. So one thing we believe is if it works is that CapEx for manufacturing could be lower than the current method. But all in all we also expect this technology will be successful; that means when it is successful Suntech will also have access to this low-cost material.

Just as Dr. Stu Wenham said, even if material purity is worse than the sand that’s in the polysilicon purity, Suntech probably can take better advantage of under-developed material technology which works better for poor-quality silicon material.

Chang Qiu - Forun Technology Research

Yes. That’s great. Thanks.

Operator

Your next question will come from the line of Mark Fleischer. Please proceed.

Mark Fleischer

On just the pricing environment now you gave some indications. If you could just clarify a little bit, you said Spain is about 5% higher than Germany and the U.S. What I’ve just heard from some of your competitors, I’ve heard about $3.80 in Spain and $3.60 in the U.S. and Germany. Are those prices about right?

Boxun Zhang

Yes, probably more or less they’re within that range. Yes.

Mark Fleischer

Okay. And then looking out further out for ‘07, given that you have about 80% of the 280 megawatts under contract, and talking about 3% to 4% decline in Q1, 5% to 7% over this year, can you just give us a sense as the trends that you’re seeing, how much to sign these longer contracts? How much of a price decline are people needing out in the latter part of 2007?

Zhengrong Shi

The contract, the prices are fixed. There’s no change across the year. The reason the Q1 ASPs are higher than the rest of the year, don’t forget, there’s some contracts which is actually rolling from last year and the price is higher. That’s why the Q1 for PV are higher price than the rest of the year.

Mark Fleischer

And just one clarification on gross margins, because you’re no longer going to be breaking out MSK gross margins, for Q1, when you say about a 1% decline, you’re talking about a 1% decline, are we comparing Q1 ‘07 versus a core gross margins for ’06 or is that a comparison we should be making?

Zhengrong Shi

I think to compare with gross profit in the fourth quarter ‘06.

Mark Fleischer

Which was closer to what, 20% to 23%?

Zhengrong Shi

In the fourth quarter ‘06, the non-cap gross margin is around 23.5%.

Mark Fleischer

Okay. So we should be looking at gross margins in Q1 somewhere around 21.5% and then stabilizing and growing from there? Is that accurate?

Zhengrong Shi

Yes.

Operator

Your next question will come from the line of Michael Carboy - Signal Hill.

Michael Carboy - Signal Hill

Good evening, ladies and gentlemen. Amy, first for you, with regard to this DSO issue and account receivable and the bank charges. Was there any factoring that was going on in the quarter?

Amy Yi Zhang

Sorry. Can you repeat your question again? I missed what you said.

Michael Carboy - Signal Hill

With regard to the increased DSOs and the increased bank financing charges you had referred to, was there any factoring or sale of receivables during the quarter?

Zhengrong Shi

To explain that is our current period, accounts receivable balance increased to around $100 million and from accounts in progress we just accrue 0.5% on provision even though most of the accounts receivable is specced by the level of prices, there is no collection risk. So this kind of increase of the better provision really accounts for $1 million increase of the G&A.

Also, in order to facilitate Suntech expansion, we discount some accounts receivable. So that accounts for some bank charges. So the pretty much, the normal rate, there is no additional cost or one-time charge on that.

Michael Carboy - Signal Hill

All right and Stuart, with regard to the finger technology you’ve been referring to, could you enlighten us a little bit on what sort of gross margin advantages might arise directly from that, if you could quantify some basis points, that would be helpful.

Stuart Wenham

From a performance perspective, we’re expecting between 5% and 10% performance increase through the use of the semiconductor finger technology. That’s to date what we’re finding. Yields are fairly similar, slightly lower yields for the technology for that change. So from a cost perspective, it doesn’t add a great deal to the cost of actually manufacturing the cell and that’s because the silicon wafers greatly dominate the cost of producing each solar cell. So the actual processing cost will go up by a few percent, but as an overall cost of making the cells I think we’re probably expecting around about 5% increase in the margin as a result of using that technology.

Michael Carboy - Signal Hill

Amy, you have referred to gross margins stabilizing and I just want to make sure that there’s no confusion here in ‘07 with regard to stabilizing and increasing, or stabilizing?

Amy Yi Zhang

Just stabilizing.

Michael Carboy - Signal Hill

Just stabilizing.

Amy Yi Zhang

Yes.

Zhengrong Shi

Q1 ‘07, because of the long-term supply such as from the MEMC, Sunlight, RUC only account for around 35% of our Q1 supply. Whether we think these kind of long-term supplies only come up in the second quarter and after quarters. So I think the decline in the Q1 gross margin will be resolved by the Q1 and further. So I think from the second quarter and onward, the gross margin will show slightly increase, and stabilize from Q2 to Q4.

Michael Carboy - Signal Hill

All right, thank you very much.

Operator

Your next question comes from the line of David Smith - Longbow Capital.

David Smith - Longbow Capital

Hi, guys. A couple of quick questions, first of all on the cash on the balance sheet, after the offering that just occurred, can you just give us a broader sense of how cash use unfolds over the next maybe two or three years? And then, remind us again what the CapEx price per watt is? Lastly, can you just give us an idea of where the grams per watt of silicon use is right now?

Zhengrong Shi

To answer your second question first, in terms of our gram per watt, as at the moment, we consume about 10 grams of silicon 4.

David Smith - Longbow Capital

Where does that go to over time?

Zhengrong Shi

Well when the efficiency reaches 20% and particularly when it compounds over 150, I think it would be around 6 grams per watt.

David Smith - Longbow Capital

Great.

Zhengrong Shi

We just completed 500 million [ADRs] they will be operating in February 2007. So the net proceeds is about $487.5 million and of the amount of proceeds about $100 million will be used for the repayment of loans used for the MSK acquisition and the rest of the proceeds will be used for two purposes: One is the CapEx and then secondly, the prepayments.

David Smith - Longbow Capital

Okay so if I look at the CapEx side of it then, can you just give us an idea of what the CapEx is per watt? Is there a rough idea of how much we should be in terms of mega-watt capacity, factoring over the next two to four years in terms of increases?

Zhengrong Shi

Generally for the 30-megawatt PV rationalized the CapEx cost is around $8 million.

David Smith - Longbow Capital

$8 million?

Zhengrong Shi

Yes.

Amy Yi Zhang

Yes, that’s just mainly for the main stream technology or silicon-based cell manufacturing. It does not apply to the thin film.

David Smith - Longbow Capital

Okay, and is there any rough idea over the next two to four years of what we should be factoring into our models in terms of capital spending or mega-watt increases?

Zhengrong Shi

In our region by 2010 our production capacity will be in excess of 1 gigawatt.

David Smith - Longbow Capital

Thanks.

Operator

Your last question will come from the line of Bernab Samma - Divor Securities.

Bernab Samma - Divor Securities

Thank you for taking my question. My first question, this output guidance of 280 megawatt, that includes 10 to 20 megawatts of thin film output as well, that’s correct?

Zhengrong Shi

No.

Bernab Samma - Divor Securities

It’s not. So if you produce another 10 to 20 megawatts more, that means your output could reach to 290 to 300 megawatts this year?

Zhengrong Shi

No, this year we’ll not produce anything there. Like we will start to ramp up thin film manufacturing next year. This year we are building a factory for thin film.

Bernab Samma - Divor Securities

Okay. The 10 to 20 megawatts previously guided was like you might have output of 10 to 20 megawatts?

Zhengrong Shi

That is next year, not this year.

Bernab Samma - Divor Securities

Not this year, okay. Could you give a little bit of linearity of your output over the next three quarters? Like starting with 60 megawatt, how should I model it out for the next couple of quarters?

Zhengrong Shi

Wait for a while, once our production line because so far this 60 megawatt is based on 270 megawatt capacity, originally last year. So we are in the process of expansion. So we’d rather give you a more comparable figure at a later stage.

Bernab Samma - Divor Securities

Okay, that means are we going to probably see more increase, sudden increase sometime in third quarter rather than second quarter? That is safe to assume?

Zhengrong Shi

First quarter already 60 megawatts. Second quarter should be around 60, between 60 maybe to 80. Then the third quarter maybe something like gradually ramp up.

Bernab Samma - Divor Securities

My last question is on your conversion efficiency. The average conversion efficiency on the fourth quarter is how much? And what do you think you can reach by the end of this year?

Zhengrong Shi

I think it is important, fourth quarter 95% of our sales is in module format. I’ll give you some of the efficiencies, we should give you the module power output.

Bernab Samma - Divor Securities

That could be slightly complicated because then you have to give the module size.

Zhengrong Shi

If we give you the efficiency, monocrystalline silicon efficiency is around 17% to 17.3%, and multicrystalline silicon efficiencies are about 15.5%.

Bernab Samma - Divor Securities

Thank you very much. Have a good year ahead.

Operator

We are now approaching the end of this conference call. I would now like to turn the call over to Suntech’s Chairman and CEO, Dr. Zhengrong Shi, for his closing remarks.

Zhengrong Shi

Thank you. Again, thank you for joining us today. If you have any further questions, please do not hesitate to contact any of our Investor Relation representatives. We hope to see many of you at our upcoming Analyst and Investor Day in Hong Kong on March 26th. Thank you.

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