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Yingli Green Energy Holding Company Limited (NYSE:YGE)

Q3 2011 Earnings Call

November 23, 2011 8:00 a.m. ET

Executives

Arthur Chen - Director of Legal Affairs

Miao Liansheng - Chairman and Chief Executive Officer

Bryan Li - Executive Director and Chief Financial Officer

Miao Qing - IR Director

Darren Thompson - Managing Director of Yingli Green Energy Europe

Robert Petrina - Managing Director of Yingli Green Energy Americas

Yin Tong - Financial Controller

Wang Yiyu - Chief Strategy Officer

Analysts

Jesse Pichel - Jefferies

Lu Yeung - UBS

Dan Ries - Collins Stewart

Mark Bachman - Avian Securities

Vishal Shah - Deutsche Bank

Satya Kumar - Credit Suisse

Mahesh Sanganeria - RBC Capital Markets

Tim Arcuri - Citi

Sanjay Shrestha - Lazard Capital Markets

Pranab Sarmah - Daiwa Securities

Aaron Chew - Maxim Group

Amy Song - Goldman Sachs

Colin Rusch - ThinkEquity

Dan Ries - Collins Stewart

Operator

Hello, ladies and gentlemen. This is Andrea. I will be your operator for this conference call. I would like to welcome everyone to Yingli Green Energy Holding Company Limited Third Quarter 2011 Financial Results Conference Call. All lines have been placed on mute to prevent background noise. After today’s presentation there will be a question-and-answer session. Please follow the instructions given at that time if you’d like to ask a question.

Now I would like to transfer the call to the host for today's call, Arthur Chen, Director of Legal Affairs for Yingli Green Energy.

Arthur Chen

Thank you, operator, and thank you everyone for joining us today for Yingli's third quarter 2011 financial results conference call. The third quarter 2011 earnings release was issued earlier today and available on the company's website at www.yinglisolar.com. We have already provided supplemental presentation for today's earnings call, which can also be found on our IR website. I hope you all had a chance to review it by now.

On the call today from Yingli Green Energy are Mr. Miao Liansheng, Chairman and Chief Executive Officer; Mr. Bryan Li, Executive Director and Chief Financial Officer; Mr. Wang Yiyu, Chief Strategy Officer; Mr. Miao Qing, IR Director; Ms. Yin Tong, Financial Controller; Mr. Darren Thompson, Managing Director of Yingli Green Energy, Europe; Mr. Robert Petrina, Managing Director of Yingli Green Energy Americas.

The call today will feature a presentation from Mr. Miao, covering business and operational developments. And then Mr. Li will take you through a discussion of the company's financial performance. After that, we will open the floor to questions from the audience.

Before beginning, Yingli Green Energy's management team would like to remind audience that this presentation contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as a mandate and as defined in the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminologies such as will, expects, anticipates, future, intends, plans, believes, estimates and similar phrases.

Such statements are based upon management’s current expectations and the current market and operating conditions, and relate to events that involve known or unknown risks and uncertainties and other factors, all of which are difficult to predict and many of which are beyond Yingli Green Energy's control, which may cause Yingli Green Energy's actual results, performance or achievements to differ materially from those in the forward-looking statements.

Further information regarding these and other risks, uncertainties or factors is included in Yingli Green Energy's filings with the U.S. Securities and Exchange Commission. Yingli Green Energy does not undertake any obligation to update any forward-looking statements as a result of new information, future events or otherwise, except as required under applicable law.

I'd now like to turn the call over to Mr. Miao Liansheng. Please begin.

Miao Liansheng

[Interpreted]

Hello, everyone. Thank you for joining us today. First, I would like to share with you our achievements in the third quarter of 2011, then Mr. Bryan Li, our CFO, will take you through our financial results. I’m pleased to say that Yingli emerged stronger under the challenging market condition in the third quarter with PV shipments increasing by 21.9% over last quarter. We have marked another record of quarterly shipments.

During the quarter we cemented exciting partnerships and developed new to maintain a leading presence in Europe by leveraging our brands, (inaudible) quality high performance ratio of our product and long term customer relations. In October, we officially opened R&D and after service center near Madrid in Spain which will enable us to provide our European customers with an array of services, including comprehensive product evaluation and testing. The center will also function as a logistic hub to allow us to address our customers’ demands in a more flexible and efficient manner.

The China market is booming with announcements of feed-in tariff and accelerated reduction of PV system cost. Through our continued efforts in China, we have quickly increased our market share and have established solid business relations with major utility companies. In the third quarter, our committed volumes to China represent around 40% of our total shipments exceeding our cumulative shipments as of the second quarter of this year. From June to August, we delivered 110 megawatts of PV modules to Huanghe Hydropower for two of their projects in Qinghai province.

In addition to our product quality and on time delivery, our customers are very impressed with our after-sales services and the technical support. Outside of utility segment, we have been actively involved in Golden Sun program, to which we supplied approximately 20 megawatts in the third quarter. We have setup ten branch offices throughout China as of today. This will help us better support and drive the development of our domestic market. After conducting a year’s strategic layout, we are confident to further enhance our sales network and market position in China.

In the U.S., results from third quarter were in line with our plans. In July will opened R&D facility in South San Francisco that will provide comprehensive product testing and evaluation services to our customers. Several days ago we announced a financing partnership with CIT Group Inc. Under terms of agreement, CIT Vendor Finance will provide various financing options to our U.S. customers. Our goal is to facilitate project financing to our customers and later focusing on meet the increasing demand of solar energy projects.

Concurrently, we are markedly increasing our activity level in Latin America. We have established operating subsidiary in Brazil, Chile and Mexico. And we’re going forward with (inaudible) operations as the market activities continue to increase. Recently, we have supplied 165 kilowatts of Panda modules to the first rooftop project for a soccer stadium in South America. Once completed, the project will be second largest solar installation in Brazil and a great symbol for the market potential in this region. We have also completed delivery on 24 megawatts of module to the first utility scale energy project in Puerto Rico.

The solar industry will continue to be challenging given the incentive degradation, financing constraints, and generally difficult macro conditions. We will continue to find opportunities in this challenging environment by accelerating technology innovation, tirelessly controlling costs and growing Yingli’s solar brand into a premium solar product supplier.

With respect to cost control, we have continued to optimize our manufacturing process and enhance production management. Furthermore, we have been actively renegotiating our suppliers to reduce material costs. From June to November, our average purchase price of raw materials has dropped by around 30% in which polysilicon price reduction by around 40%. And our ancillary material crucial for multi-crystalline ingot casting and (steelware) have experienced the biggest decline of more than 50%.

On R&D side, average cell efficiency of PANDA reached 18.9% on commercial production lines. As an extension of Project PANDA, in earlier September we launched a research project with ECN and Amtech Systems on the N-MWT PV cell and module technology. Our of this joint projects we are targeting to improve our cell efficiency towards 20% and module efficiency about 18%.

Thank you. I will now hand the call over to Bryan.

Bryan Li

Thank you, Mr. Miao, and thank you to everyone for participating in our earnings call. I will now take a few minutes to highlight our third quarter financial results and the guidance for next quarter and the full year of 2011. You may also refer to quarterly financial presentation on our IR website. During the past quarter, the solar industry was marked with continued volatility caused by a weaker than expected demand in Europe and a continued decline in the average selling price, but we have been successful in achieving a resilient earnings performance.

Looking at our third quarter financials, you can see that our PV module shipments volume increased by 21.9% over the previous quarter, reaching a historical high and our gross margin for in-house PV module, excluding a non-cash inventory provision was 19%. Now let’s start to go through the details of the financial performance in third quarter. Total net revenue was RMB 4.3 billion, equivalent to US$667.7 million in Q3, compared to RMB 4.4 billion in Q2. The slight decrease quarter-over-quarter was due to a decline in the average selling price. Partially offset by the significant increase to PV module shipments that was attributable to diversified the customer portfolio geographically.

Supported by our strong position in China market, approximately, 40% of the PV module sales were generated from China market in this quarter. We expect that our China market will continue to contribute significantly to our growth. Gross profit was RMB 458.5 million, equivalent to US$71.9 million in Q3, compared to RMB 970.1 million in Q2. Overall gross margin was 10.8% in Q3 compared to 22.1% in Q2. The decrease in overall gross margin quarter-over-quarter was primarily due to a decline in the average selling price and a non-cash inventory provision of RMB 258.6 million, equivalent to US$40.6 million. Excluding this non-cash inventory provision, our gross margin for in-house PV module would be 19%.

It’s also worthwhile to mention our achievements on cost savings. As Mr. Miao mentioned that our average purchase price of raw materials dropped by 24% from June to November as a result of our active renegotiations with our suppliers. In addition, we further reduced the unit material consumption through continuously production process streamlining and research and development efforts. Excluding a non-cash inventory provision our blended cost on polysilicon for in-house PV module decreased to US$0.37 per watt in Q3, a reduction from US$0.50 per watt for the last quarter.

Our blended non-silicon cost for multi and mono PV module in Q3 was approximately US$0.66 per watt, a reduction from US$0.72 for the last quarter. We expect to further enhance our industry leading cost position through the increased availability of low priced polysilicon and improve the production process of Panda modules. Ramp up and continuous improvement on production process of Panda modules helps accelerate cost reduction on a blended basis. We expect that there is a meaningful room for further cost reduction in the modules in the next few quarters.

Operating expenses were RMB 464.1 million, equivalent to US$72.8 million in Q3 compared to RMB 443.7 million in Q2. This quarter, we have recognized a non-cash bad debt expense of RMB 41.9 million, equivalent to US$6.6 million, which was included in operating expenses. Excluding the non-cash bad debt expenses, our operating expenses were RMB 422.2 million, equivalent to US$66.2 million in Q3, a decrease of 4.9% from Q2. Our selling expense declined by 8.8% quarter-over-quarter, primarily attributable to the better cost control and the lower insurance and transportation expenses per watt, resulted from increased shipments in China market.

The non-cash bad debt expense recognized in this quarter mainly related to customers who failed to perform its payment obligations due its bankruptcy filing. And we are currently seeking legal advice on the options to protect our interests. Given the fact that a majority of the total amount of these receivable was insured, we’ve provided in non-cash bad debt provision to cover the remaining balance of the receivables, which we may or may not be able to recover in the future periods. We have been taking more stringent measures in reviewing customers’ credit profile and are putting more efforts in assuring and shortening cash collection cycles to mitigate collection risk of receivables.

Operating expenses as a percentage to total net revenue was 10.9% in Q3, compared to 10.1% in Q2. Excluding the non-cash bad debt expense, our operating expenses as a percentage to total net revenue will be 9.9%. Our operating loss in Q3 was RMB 5.5 million, equivalent to US$0.9 million, compared to an operating income of RMB 526.4 million in Q2. The operating margin was a negative of 0.1% in Q3, compared to operating margin of 12% in Q2. Excluding a non-cash inventory provision and a non-cash bad debt expense, operating expense would be RMB 295 million, equivalent to US$46.3 million, and operating margin would be 6.9% in Q3.

Interest expense was RMB 156.4 million, equivalent to US$24.5 million in Q3, compared to RMB 157.8 million in Q2. As of September 30, 2011, we had an average of RMB 13.8 billion, equivalent to US$2.2 billion borrowings, an increase of 13.7% for RMB 12.1 billion as of January 30, 2011. The weighted average interest rate for these borrowings was 6.19% in Q3. It decreased from 6.44% in Q2. Foreign currency exchange loss was RMB 153.2 million, equivalent to US$24 million in Q3, primarily attributable to the appreciation of the euro and the U.S. dollar against the RMB, compared to a foreign currency exchange gain of RMB 35.5 million in Q2.

Income tax benefit was RMB 34.4 million equivalent to US$5.4 million in Q3, compared to income tax expense of RMB 73.5 million in Q2. Income tax benefit in this quarter was primarily the result of a deferred tax benefit recognized in connection with the net operating losses incurred in the quarter. As a result, of all factors discussed above, net loss was RMB 180.5 million equivalent to US$28.3 million in Q3, compared to net income of RMB 375.6 million in Q2. Diluted loss per ordinary share and per ADS was RMB 1.14 equivalent to US$0.18 in Q3, compared to diluted earnings per ordinary share and per ADS of RMB 2.34 in Q2. On an adjusted and non-GAAP basis, net income was RMB 142.7 million equivalent to US$22.4 million in Q3 compared to RMB 354 million in Q2. Adjusted non-GAPP diluted earnings per ordinary share and per ADS were RMB 0.89 equivalent to US$0.14 in Q3 compared to RMB 2.21 in Q2.

Now a quick review of our balance sheet. As of September 30, 2011, we had RMB 5.9 billion equivalent to US$929.2 million in cash and restricted cash, compared to RMB 7.1 billion as of June 30, 2011. We have been taking active and effective cash flow management initiatives in recent quarters, including working capital efficiency improvements, flexible capital expenditure plan and a productive financing strategy. Supported by our healthy cash position, we launched a share repurchase program in this quarter. We will we repurchase up to US$100 million worth of our issued and outstanding ADS from time-to-time over the next 12 months. This plan reaffirms our confidence in our long-term growth and that demonstrates our commitments to enhancing shareholders value.

As of September 30, 2011, inventory was RMB 2.6 billion, equivalent to US$414.2 million, compared to RMB 2.6 billion as of June 30, 2011. As of September 30, 2011, accounts receivable were RMB 3.3 billion, equivalent to US$524.1 million, compared to RMB 3 billion as of June 30, 2011. These sales outstanding were 71 days in Q3 and compared to 61 days in Q2. As of September 30, 2011, accounts payable were RMB 3.6 billion, equivalent to US$567.4 million, an increase from RMB 3.2 billion as of June 30, 2011. Days payable outstanding increased to 86 days in the third quarter of 2011 from 83 days in the second quarter of 2011. As of the day of this press release, we had approximately RMB 6.7 billion in unutilized short-term line of credit, and RMB 3.1 billion approved long-term facility that can be drawn in the near future.

Looking to the next quarter Q4 2011. We expect shipments to decrease by low to mid 20ish percentage over this quarter, and our gross margin will get close to approximately 10%. Based on the performance of the first three quarters and the outlook for the fourth quarter of 2011, we revised our annual PV module shipment targets to be in the estimated range of 1.58 gigawatts to 1.63 gigawatts for fiscal year 2011, compared to company’s previously provided guidance of the range between 1.7 gigawatts to 1.75 gigawatts

Lastly, we hosted our second global Investor Day event on October 18 in Dallas, U.S., in conjunction with the Solar Power International Conference. The event was well attended by over 60 investors and analysts. On behalf of the Yingli management team, I would like to express our sincere appreciations to your continuous attention and support.

Now I would like to open the call to the questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Jesse Pichel of Jefferies.

Jesse Pichel - Jefferies

And initiated by the big four Chinese banks in addition to the central government’s desire as outlined in the 12th five-year plan? Thank you.

Bryan Li

Sorry, Jesse. The first part of your question was cut. Can you repeat your question?

Jesse Pichel - Jefferies

Can you talk about forced industry consolidation that’s initiated by the big four Chinese banks in addition to the central government wishes as outlined in the 12th five-year plan?

Bryan Li

Thanks for the questions. Recently, and through our communications and the discussion with top four Chinese banks plus the two policy banks in China. And we understand the banks are slightly more focus on the solar sector because of, one, it’s rated by the Chinese government as part of the -- as one of the encouraged industry in the 12th five-year plan. But secondly, it’s also recent shakeup of the solar market and the recent attention and concerns to the top Chinese banks.

So, we understand, and pretty much all of the four Chinese banks, plus two policy banks has determined internally the list of the solar companies that they are willing to cooperate with in the next few quarters. But they certainly want to see the industry consolidations happen and to eliminate those tier 2 and tier 3 players and lift the market shares and leave a big stake for the tier 1 players. And also, they want to see after the consolidation, the existing tier 1 players will emerge as the bigger players and it’s important for the future growth in China and out of China.

Operator

(Operator Instructions) Your next question comes from the line of Lu Yeung of UBS.

Lu Yeung - UBS

Yes, thanks for taking my question. I just want to know, based on your shipment guidance in the fourth quarter, how much would that be coming from China and I want to know what your strategy will be going forward in terms of your sales to Europe?

Unidentified Corporate Participant

I think roughly we will ship around the 20 -- slightly below 25% to China in Q4, and slightly above 60% to Europe. And we expect for next year, I think, we may maintain the same level of percentage to China and to Europe, but we also expected we may slightly increase our percentage in U.S. markets.

Operator

Your next comes from the line of Dan Ries of Collins Stewart.

Dan Ries - Collins Stewart

Yeah, maybe I could follow that. Do you target a market share in China, or are you just bidding on a project by project basis. And then, how would you expect the margins in China to compare with those available to you in North America and Europe at this point?

Bryan Li

I think first is the China market including both industry roofing and the Golden Sun in program and also the large economic projects in the west or north provinces. Because recently China NDRC has officially announced a fixed feed-in tariff for (inaudible) project. And also based on our understanding from the government, we believe that the China market will keep growing significantly in 2012.

So based on our existing marketing position and our customer portfolios in China, this is how we get our expectation for our exposure in China for next year. Then regarding to the gross margin, also the margin contribution compared between China market and U.S. market, in China market I think, definitely the China market contributed a little bit lower gross margin than we can export of goods. But I think we are trying to find a balance between short-term and mid-term margin contribution versus the long-term market share for such kind of important long-term market in the world.

Operator

Your next question comes from the line of Mark Bachman of Avian Securities.

Mark Bachman - Avian Securities

Thank you. Bryan, just two quick questions for you. One is, what have you embedded in your gross margin guidance? Is there any inventory charges there that you’ve anticipated for Q4? And then the second one is, if I just do the simple math on your interest expense, you disclosed that you have over $2.2 billion in debt right now with an average rate of 6.19%. Simple math tells me you should be reporting about $35 million in interest expense per quarter, but you’re only recording $25 million. What’s the difference there?

Bryan Li

Mark, thanks for questions. For you first question, okay, we don’t expect there is an inventory charge in the fourth quarter. So that’s number one. And for your second question, I think your calculation is right, the message is right. There is a -- when we record there is a -- the interest expense was accounted for in two categories. Addition of the expense was capitalized in the projects, and when we are -- and if there is a project ongoing and based on the weighted average assets and required by the accounting standards. So, if you aggregate them together, look at the cash portion of the interest expenses, and that will get our number.

Operator

Your next question comes from the line of Vishal Shah of Deutsche Bank.

Vishal Shah - Deutsche Bank

Thanks for taking my question. Can you talk about the U.S. market for fourth quarter? Some of your competitors are talking about shipping into the fourth quarter, but not recognizing shipments or revenue until the first half. Are you guys seeing some of that as well? And secondly, what is your expectation of the China market demand for next year? Thank you.

Unidentified Corporate Participant

Okay. Robert, can you take the first part of this question? Thank you.

Robert Petrina

Yeah, Vishal, can you just repeat the first part of the question with respect to the U.S. market?

Vishal Shah - Deutsche Bank

Yeah. Some of your competitors are selling modules ahead of the cash grants expression and not recognizing -- I mean they are recognizing them as inventories to shipments. Are you guys doing that as well? Is that the reason why your shipments are down sequentially in the fourth quarter?

Robert Petrina

Well, I think, the cash grant play is pretty straightforward. I don’t think people are shipping or holding inventory to do so into next year. From our standpoint we view it as just a normal part of our business where companies can opt to take deliveries physically by the end of the year and pay for it on terms. Or pay for it at the end of the year and take delivery at a later time in the first quarter. So it depends on each company’s strategy as to how they want to do that, but our business in the U.S. is stable and moving forward in line with expectations. So, we’re not deviating from our plan there, Vishal.

Bryan Li

So for the second question, we expect that 2012 China market should be in the scale at around three gigawatt.

Operator

(Operator Instructions) Your next question comes from the line of Satya Kumar of Credit Suisse.

Satya Kumar - Credit Suisse

Yeah, hi. Thanks. A couple of things, just to follow-up on the China point. I was wondering if you could clarify whether you meant to say that your percentage of shipments to China will be the same for Yingli next year or you expect to maintain the same market share in China. And a quick question on ASPs, what were they down in Q3 and what do you expect them to be down in Q4? Thanks.

Unidentified Corporate Participant

[interpreted] For the China market share, we expected -- we roughly occupied close to 30% market share of 2011, and we believe we can maintain this kind of market share for 2012.

Bryan Li

You know we currently see a mid to high-teens percentage of declining on the ASP from Q3 to Q4. And from Q4 to Q1 next year we’ll be expecting a mid to high single-digit decrease quarter-over-quarter.

Operator

(Operator Instructions) Your next question comes from the line of Mahesh Sanganeria of RBC Capital Markets.

Mahesh Sanganeria - RBC Capital Markets

Thank you very much. I have a question on your debt becoming due. Can you talk about your cash needs for the next year or so in terms of debt payments and how do you plan to fund that?

Unidentified Corporate Participant

Sorry, we didn’t get your question. Can you just quickly repeat?

Mahesh Sanganeria - RBC Capital Markets

Yes. The question is, when is your -- you have a debt payment due in 2012, and how do you plan to fund that debt payment?

Bryan Li

Yeah. As of September 30, and we have RMB 8.5 billion short-term debt and RMB 5.2 billion long-term debt. And for the long-term debt portion, it has a three to five years tenance. So, I don’t see pressures for the long-term debt in next year regarding repayments. And for the short-term debt, it’s a lumpy repayment schedule, and about most of the short-term debt are the trading and working capital in nature, and that will be renewed and also extended and once it’s expired based on the discussion with the bank. And we have been in touch with the bank and also keep constant communication with the banks every week. And so far we haven’t seen any problems on the renewal of those working capital loans. But in the next year, it’s our top priority is to preserve the cash and also try to find a balance between the preservation of the cash and the financial burden of those loans. So, we’ve tried to hit that. We are trying to achieve a balance between the cash balance and also the financial burdens. So, we will consider next year to reduce to some extent working capital loans if we feel the cash position is -- our forecasted cash position is safe. Thank you for your question.

Operator

(Operator Instructions) Your next question comes from the line of Tim Arcuri of Citi.

Tim Arcuri - Citi

Yes, good morning, gentlemen. I was just wondering if you could give a little color on the decline in non-poly cost in the quarter. Was it kind of concentrated in the wafers, cell or module side of the business?

Bryan Li

Sure. As we have hit US$0.66 for the non-poly cost in Q3 and we will be expecting another $0.02 to $0.03 cuts when we move to Q4 ‘11. In the first half of 2012, we will be expecting $0.61 - $0.62 for the non-poly processing costs. In the second half, I’m expecting sub-60 for the non-poly processing cost.

Operator

Your next question comes from the line of Sanjay Shrestha of Lazard Capital.

Sanjay Shrestha - Lazard Capital Markets

Thank you. Two quick questions, guys. When do you expect to get the full benefit of what’s happening to the spot poly market here? Is that in Q1 of next year, is that in Q2 as you sort of work through your existing inventory? And second part of my question is, sort of goes back to I think what Jesse was asking. So if Chinese government are committed to only supporting few large companies, does that mean that you would actually have more of a normal rational market and pricing actually would be pretty healthy in China even compared with some of the European markets where the competition is pretty brutal?

Unidentified Corporate Participant

I think for your first question, we’re expecting our blended poly cost can be close to the market price during Q2. And for the second question, I think here we want to say I think -- I don’t think the China government is going to do something soon. The political influence in those sort of company because it’s a pure market driven business. And from the banking, even from strategy level, they would like to support renewables like solar and wind, given the background is kind of very, still young industry with a future potential. But in each case, when they ask that which company they could assess or support, it’s purely based on a risk factor and reward just like every bank when they assess what kind of loan they should provide and what’s the risk, what’s the security, etcetera, they believe they can get back. That’s why, (inaudible), it’s a pure market driven decision even from all the China banks.

Bryan Li

And two more points to further supplement. As I responded earlier to Jesse’s questions. The Chinese governments do want to see a healthy solar market in China, and if there is a consolidation required and the Chinese government won't interfere the consolidation. But they want -- but the consolidation must be done -- can only be done through market activities instead of a political influence. And that’s not what the Chinese government is doing. And we haven’t seen any type of preferential treatments or even the financial subsidies given by the Chinese governments to Yingli and the other Chinese companies, at least I haven’t heard of that. And to your another question, I think the poly cost it’s accounted through a weighted average method.

Sanjay Shrestha - Lazard Capital Markets

Exactly. Yeah.

Bryan Li

Yeah. The poly cost will reflect the weighted average of the opening inventory plus the current quarter’s purchase. And as currently the presentation for the poly and the non-poly component of the cost of goods sold is on a module front. So you should reasonably consider and the poly cost and we’re talking about, or even for the non-poly component we’re talking about, will be a result of the weighted average between the opening and the closing.

So it takes quarters for the input cost to move down from the book inventory cost and to the spot market purchase. So, I will expect the poly cost they will be reduced gradually, gradually quarter-over-quarters. But it won’t be a steep drop from one quarter to another. But I think it will take two to three quarters for the absorption of the book value of the inventory before we start to see the cost get to the similar level of the spot market purchase.

Sanjay Shrestha - Lazard Capital Markets

Got it, guys. On that China question, though, if I may, I just want to follow-up real quick. If the government’s goal is to keep the market rational and healthy and the only way that happens is if a lot of the excess capacity sort of gets out of the market. And the only way they’ll get out of the market is when they start to lose money and they can keep on accessing relatively inexpensive debt, right. So, have you started to see that happen where the support is kind of getting weak from the local government side and there is, let’s say, x number of companies over 100 megawatt that have actually mothballed or shut down, and this is a permanent shutdown and not a shutdown that’s going to come back again in two quarters. Have you seen that?

Bryan Li

Actually, we too heard there are some companies, some small low tier sort of companies have been facing operating issues by either significantly slowdown or idled capacity, or some of them have to even shut down. But again, I think as we come into such kind of activity a decision is made purely based on a kind of fair market benchmark decisions between banks and the company. So, we really don’t see like the China government wants to influence or even whatever control or limit such kind of activity.

Operator

Your next question comes from line of Pranab Sarmah of Daiwa Capital Markets.

Pranab Sarmah - Daiwa Securities

Hi, good afternoon. Thank you for taking my questions. My first question is on polysilicon plant. Could you give some update on the business, and given that polysilicon price will be substantially below where your production cost is, what is your long-term plan with this polysilicon plant? Are you going to -- trying to close down this plant at some point? Secondly, if you can give some color on your share buyback program, Mr. Bryan, you have just mentioned like cash preservation is the primary requirement, but share buyback what type of value-add you are going to give to the investors at this point?

Unidentified Corporate Participant

Sir, I didn’t catch second part of your question, regarding share repurchase buyback?

Pranab Sarmah - Daiwa Securities

Basically, you are still a net cash negative company and cash preservation is the first priority for you. In that case, why you should go for the share buyback program? Share buyback will definitely drain out your $100 million cash.

Unidentified Corporate Participant

I think for this question, I think the first is, Bryan already commented, with more and more new spot price poly we purchased, gradually our blended cost will be very close to the spot price in the next two to three quarters. And I think from the long-term poly contract, I think we have already agreed with majority of the long-term contracts, poly supplies to be reasonably adjusted price to reflect a reasonable spot market price instead of, say, stick to the price we agreed a few years ago.

Pranab Sarmah - Daiwa Securities

My question was....

Unidentified Corporate Participant

And of course polysilicon is moving to the final stage of the -- sorry, are you raising questions?

Pranab Sarmah - Daiwa Securities

My question was, your own polysilicon plant, what are you going to do with your own polysilicon plant given your production cost is significant?

Unidentified Corporate Participant

Yes. I’m responding to your questions. Yes, I am responding to your questions.

Pranab Sarmah - Daiwa Securities

Thank you.

Unidentified Corporate Participant

Yeah. We are at the final stage before the commercialization of the plant and as we scheduled in the previous quarters and we are quite close to the commercialization in early part of -- in first quarter of next year. And so based on our current expectation and the production cost for internal poly plant in the first quarter will be around $45 per kilo. And then the cost will also trend towards $35 per kilo in the second half of the year. So we know there is -- so we see there our own poly plant will bring us extra charge in the first half of the year. But given the volume is also increasing months over months following the rental process in the first half of next year.

So I think the volume is not significant and also the extra charge won’t be significant to the total acquisition cost of the polysilicon for the company in the first half of next year. But this gap will get close, will be narrowed in the second half of next year. And we will do another round of evaluation when we’re moving to the late part of December of this year to further determine the programs and we will report to the public as we get more information in the next quarter.

And regarding your share buyback, yes, we’re at a net cash generation in this quarter. But since we think it’s not -- the negative cash generation is temporary phenomenon. It’s not a permanent pattern. We expect the cash will turn -- the operating cash flow will turn positive in the first quarter of next year. And so, we think that the current temporary situation won’t restrict us to seek the actions which we think will be in the best interest of the shareholders. And secondly we believe our company stock was deeply undervalued in comparing to the intrinsic value of the company stock.

And currently we are traded at $0.30 over $1 and then based on the expectation of the growing market into next year into 2012 and also based on the competitive strength or the competitive advantage, Yingli has currently possessed including the thought leadership, technology leadership and also the (inaudible) leadership. And we believe to take advantage of the lower valuation of the company’s stock to repurchase to the extent our Board has authorized the company to do, will be in the best interest of the shareholders. Thank you.

Operator

Your next question comes from the line of Aaron Chew of Maxim.

Aaron Chew - Maxim Group

Good evening, thanks so much for taking my questions. Two quick ones, if I may. First, I wondered if you could just clarify the calculation on the normalized gross margin in the press release. Just because if I took your module revenue of 659 in the module cost in the press release of -- it translates into a gross margin of about 17.8%. So, just wondering what accounts to the difference between the 17.8% and the 19%. Were there external wafers or cells purchased in the period? And just as another follow-up, wondering if you could just maybe help us understand how to look at OpEx next year. Should we think of this holding flat at 10%, OpEx to sales ratio? Do you think there’s some room for improvement on OpEx in 2012, just given the gross margin outlook on a quarterly basis? Is it something we should think of as closer to 60 million or 70 million? Thanks so much.

Bryan Li

Thanks for the questions. For the normalized gross margin calculation you need to exclude the cost of the outsourced PV sales from your calculations and then you will get the right numbers. We did outsource of PV cells in the third quarter in anticipation of the orders as we agree to ship to our customer in the third quarter. And for the OpEx into 2012, we control the exact number of the OpEx for next year. So despite the bigger scale and the bigger capacity into 2012, we want to control the OpEx under US$60 million on a quarterly basis for next year.

Operator

Your next question comes from the line of Amy Song of Goldman Sachs.

Amy Song - Goldman Sachs

Hi. Thank you for taking my questions. I have two questions. First of all, what is your utilization rate right now, and how do you expect it coming to December and also next quarter?

Unidentified Corporate Participant

Sorry, Amy, I can’t hear you clearly.

Amy Song - Goldman Sachs

Yeah. First question is about utilization rate, and the next question is about CapEx.

Bryan Li

For this quarter, Q3, our utilization rate was close to 100%. And for the next quarters the expected utilization will be -- will get close to 85% to 90%, in our existing facilities. And by the way, we will reach 1.7 gigawatts in nameplate capacities in Q4 this year. So, that will help you with the calculation. And therefore the CapEx, for next quarter we expect -- for Q4 we will spend roughly US$200 million. And as we explained earlier, in this situation our top priority for the company is to preserve the cash. So, we have already decided in last quarter to pause all the future expansion projects in 2012. We will only go with the existing projects which we have already started in this year. And so, those CapEx is associated with the existing projects we have in the year.

Amy Song - Goldman Sachs

Okay, so what will be the maintenance CapEx for next year. Can you give us a guidance?

Bryan Li

For the maintenance, it won’t be a big part. That will be somewhere in between $50 million to $100 million, depending on the new processing technology we will apply to the existing facilities. That should be somewhere between $50 million to $100 million, based on the rule of thumb.

Operator

Your next question comes from the line of Colin Rusch of ThinkEquity.

Colin Rusch - ThinkEquity

Good evening, gentlemen. How does the quality of polysilicon impact your Panda product? And can you talk about how many domestic wafer poly suppliers can actually supply the appropriate quality? And then, just to follow up, is your full equipment set converted to Panda and how much of that additional CapEx is needed to complete the conversion?

Bryan Li

For the poly cost of Panda, it’s a few cents higher than the multicrystalline modules. I would say $0.03 to $0.04 higher than multicrystalline. And also, I will require your attention to the non-poly processing costs for Panda, it’s also higher. It’s also a couple of cents higher than the multicrystalline because we started in large scale ramp up since late second quarter of this year. And so it takes -- as it’s a new technology and also it takes time to ramp up the Panda production line to reach the economy of this scale. So, we believe in next year as we continuously improve the processing of the Panda module facilities, that part will contribute a meaningful cost reductions to the total cost of productions next year.

Colin Rusch - ThinkEquity

I’m sorry, I may have misspoken here with the question, but I’m actually trying to get the quality of the polysilicon for the Panda process. If you can actually source that polysilicon domestically within China? Is that possible at this point?

Unidentified Corporate Participant

Yes, we can.

Colin Rusch - ThinkEquity

Okay. Then how many suppliers are there domestically?

Unidentified Corporate Participant

Are you asking about how many polysilicon suppliers are specific to Panda poly suppliers?

Colin Rusch - ThinkEquity

Yeah, within China?

Unidentified Corporate Participant

Yeah, I think the key, the core reasons why Panda can generate a high efficiency compared to standard module is not from the quality of the poly. Of course if the poly has been, say the purity is higher as much as possible, it will be generally to both benefit for multi and the mono. So, quality from the wafer ingot and the cell processing technology should generate high efficiency. This is why a standard quality poly can be used for both multi and Panda, which won’t generate a significant difference. Which means the poly is the same as we use for multi.

Operator

Your next question comes from the line of [Paul Kleg of Thomson Asia].

Unidentified Analyst

Hi. Thanks for taking my question. I have an accounting question for you actually, Bryan. The minority interest this quarter absorbed a lot more of your loss than we’ve seen historically, and I know those percentages vary. But if we were to use something closer to historical percentages, you would have lost more money. So what I’m trying to get at is to understand the mechanisms that determine those variations and what level of control you have over when you book a higher or lower amount to those entities?

Bryan Li

Yes, thanks for the questions, Paul. I know it’s a good catch. The higher minority interest percentage in this quarter is because of the netting off effect amongst few of the operating subsidiaries. Because in this quarter there’s a few subsidiaries incurred a loss and that the other few operating subsidiaries incurred a profit. So, when you look at denominators for the minority interest calculation, actually the denominators becomes smaller because of the netting off effect. And so the MI is picked up based on the percentage -- based on the MI percentage and applicable to the loss before the MI and for that subsidiaries.

So that made the percentage become bigger. And we actually don’t control the profit allocation or let’s say we don’t decide the price amongst the different operating subsidiaries. It’s based on a first-in, first-serve basis. And also, each of the subsidiaries is located in a different place, and so they will have the different cost structures and also they have the different skills will cost the different economy effect. So that’s just something that’s really happened in Q3.

Unidentified Analyst

Okay. But you don’t control the allocation of the volumes, though, out of those different plants, either?

Bryan Li

We don’t. We do proportional and that is our principal. And we -- if we achieve 95% utilization and we will try to allocate 95% to each of the plants instead of allocate 100% to one plant and 90% to another plant, we don’t do that.

Operator

Your next question comes from the line of Jesse Pichel of Jefferies.

Jesse Pichel - Jefferies

Thank you for the follow up. I’d like to follow-up on Colin’s question. It looks like you’re targeting higher Panda efficiency of 17% in 2012, if I extrapolate that from the cell efficiency you target. What’s the cost profile of Panda relative to the $0.66 processing you’re reporting today? And do you expect to convert more lines over to Panda? I know Colin asked that, but I didn’t catch the answer. Thank you.

Unidentified Corporate Participant

Jesse, I think the efficiency level of Panda has been reached at 18.9% level, not 17%. But if you translate it to module level, maybe close to that, because normally around 2% will be deducted if you translate the cell efficiency to the module efficiency. So, I think this is the -- to your first question, I think regarding to the all strategy of achieving a percentage portfolio of Panda and standard multi, I think we will be assessing where we decided our next expansion, but generally, we see a very strong market demand, but also a very significant potential of the high efficiency. Given the high efficiency cell or panel is not only the effective way to lower our all the fixed costs that we are using to produce the module but also help the downstream players to absorb and diversify the fixed portion of the BOS. This is why this will be a very helpful and competitive product in the future market. But anyway, I think we will consider a mix but the precise percentage, we will consider when we decide our next expansion.

Operator

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

Dan Ries - Collins Stewart

Just a quick one. You have nearly 1 billion in cash. Do you target a cash level like -- is there a level of cash that you’re just not comfortable running the company with less than that, because it seems like 950 million is a pretty big number. What’s your thoughts on your cash balance?

Bryan Li

Yeah. We have a -- we will feel safe if our cash level can satisfy a internally determined safe cash level plus the working capital required to turn around the inventory for one quarter. So basically, when we look at the cash balance so we add these two things together and to get a level we feel comfortable. And the current level as of the end of third quarter is the level we feel comfortable in the current scale.

Operator

And that concludes our call today. I would now like to transfer the call back to Ms. Miao Qing for closing remarks.

Miao Qing

Thank you, everyone. If you have any additional questions, please feel free to contact Bryan, myself, or anyone else from our Investor Relations team. Happy Thanksgiving to everyone. Bye-bye.

Operator

Thank you for your participation. This concludes today’s conference. You may now disconnect.

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