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China Sunergy Co., Ltd. (NASDAQ:CSUN)

Q4 2011 Earnings Conference Call

March 16, 2012 8:00 AM EST

Executives

Elaine Li – Senior IR Manager

Stephen Zhifang Cai – CEO

Yongfei Chen – CFO

Analysts

Rob Stone – Cowen & Company

Min Xu – Jefferies

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the China Sunergy Fourth Quarter 2011 Conference Call. At this time, all participants are in a listen only mode. There will be a presentation followed by a question-and-answer session. (Operator Instructions) I must advise you that this conference is being recorded today, 16th of March 2012.

I will now like to have the conference over to your first speaker for today, Ms. Elaine Li. Ma’am, please go ahead.

Elaine Li

Thank you, operator, and welcome to China Sunergy’s Fourth Quarter and Full Year 2011 Earnings Conference Call. This is Elaine speaking, China Sunergy’s Senior Investor Relations Manager. With us today are China Sunergy’s CEO, Mr. Stephen Cai; and CFO, Mr. Yongfei Chen.

Today, before the market opened, the company issued a press release announcing our fourth quarter financial results and our guidance update for the first quarter and the full year 2012. The press release is also available on our Investors section of the China Sunergy website at www.chinasunergy.com. In addition, we have posted a presentation for this call on our website.

Today, we’ll be closely following and referring to that presentation in our prepared remarks. Stephen will first present an overview of our first quarter and full year results and discuss our 2012 strategy, and then our CFO, Mr. Chen will explain our financial results in more detail. Afterwards, they will be available to take questions.

Before I turn the call over to Stephen, may I remind our listeners that management’s prepared remarks include forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties.

And as such, our results may be materially different from the views expressed here today. A number of potential risks and uncertainties are outlined in our public filings with the SEC. China Sunergy does not undertake any obligation to update any forward-looking statements except as required under applicable law. As a reminder, this conference is being recorded.

Now, I’d like to turn the call over to our CEO, Stephen. Hi, Stephen.

Stephen Zhifang Cai

Thank you all for joining. I like to pass an apology from our CTO Dr. Zhao who is travelling on business and therefore not joining today’s call. I would also like to mention that Bob Rice who joined the last quarter’s earnings call had left China Sunergy due to personal reasons.

First of all, I would like to offer my brief comments on the industry at large. As we are all aware, 2011 was an incredibly tough year for the PV industry. Market demand was soft while oversupply was a huge problem and the pricing levels fell dramatically. In the first half of this year, the uncertainty over fill-in tariff in Italy and the subsidy cuts in many key markets, led us to an inventory pile up on the one side, and a faster drop in ASPs on the other. Many players have a high level of the high cost inventory which dented margins.

In the second half, there was an increase in market demand, but this was volatile and it became clear that manufacturers have to reduce costs to survive. Meanwhile, the day’s situation in Europe made it a lot harder for end users to obtain project financing. Today, the oversupply situation is improving, as weaker players have ceased to operate in China and the West. The strongest Chinese manufacturers are leading the world in high-tech, cost-effective solar panel manufacturing.

As per our result, solar is moving closer to the grid parity, and a solar energy is becoming more economically viable for end-users, however, demand is still soft, because the sector continues to rely on subsidies, and a larger market in the world today, Germany, is about to be cutting subsidies dramatically.

Other markets, like China, India and the U.S., will pick up the slack, but this will take some time. We can foresee that China could overtake Germany as the world’s largest solar market in the near future, which is of course, very positive for Chinese suppliers who can hold on through the transition period.

I would now like to comment on our fourth quarter and full-year results. Please refer to slide four. In the last three quarters, I told you we will work hard to make more accurate guidance for projections, and I’m pleased to announce today that our largest – our latest guidance for both the fourth quarter and the full year was in-line with our performance. Our shipments in the fourth quarter were 116.8 megawatts, exceeding our guidance slightly.

Gross margin, forecast to be at breakeven levels, exceeded our expectation by 20 basis points and due to the strong sales in Q4. For the full year our total shipments of 420.3 megawatts also slightly exceeded the guidance. Demand was a bit stronger than I hoped and then we made good progress in clearing inventory levels. The bad news is that we suffered and that will also $49.6 million in first quarter and then 94.3 million for the year.

However, the quarterly and annual of non-cap net loss was 35.8 million and then 79.5 million, respectively. But our operational efficiency is clearly improving. Our cash position remains strong and that we are focused on technology improvement. We have much to be optimistic about long term.

Now, I would like to clearly lay out some season strategy for the year. Please see the slide 5, we have four major priorities. One, we will continue to invest in building up our QSAR capacity in a few of our production lines. In the first quarter, we’ve operated 65% of the sales capacity and then shipped our three old lines last unit to improvement and the renovation. But that doesn’t mean we are not building capacity for the future. We will continue to focus on our high-tech, high-efficiency products going forward.

Two, we will continue to focus on our engaging into advancing the projects. In 2012, we are hoping to have opportunity to invest in about 100 megawatts of the downstream project worldwide financed by Chinese and the local banks. We aim the work close with our EPC partners to locate and identified most suitable projects. To investing in such downstream projects alongside with the bank will help CSUN increase market share, strengthen our brand and mostly importantly, improve our profitability.

Three, we will continue to focus on any initiatives, which can bring down operating cost. For example, renovating old equipment to increase our production efficiency, working with strategic suppliers to introduce new materials and applications and reduce material costs, bring down labor cost through reorganizations of work shifts and reducing energy and water consumption in the manufacturing process. In all these initiatives, we will explore every avenue to optimize our cost structure and achieve a higher margin.

Four, we will continue to beef up and localize our sales force around the world. We have increased our sales force in Asia by 60% to 70% this year. In France and Germany, we are almost totally localized. Our growth in the overseas markets are to be 80% local, 20% Chinese. Our growth in Asia including China is for our sales force to be 20% international, 80% Chinese. We are setting up sales offices in Mumbai, Rome and Tokyo this year to be closer to our customers. I would like to talk about the breakdown of our sales and the demand outlook going forward by region.

See slide 6. In the first quarter, Germany made up 31.8%; China represented 17.5%; Italy was 11%; France, 10.8%; Belgium, 10.1%; in Asia and other countries, 6.5%; and Australia 3.3%. As we all know, Europe was first already to embrace solar energy and is relative mature market.

Although it represent a lot of percentage of sales to date, it is very important already for China Sunergy Europe has also opposed lengthening payment cycles and some credit risk, we can say. We will be looking to penetrate other areas in order to diversify our customer base and then mitigate any concentration risk.

We are especially interesting in building our business in places that is relying less on some cities relying less on subsidies such as Holland, and so we have the success case, and in targeting particularly credible customer segments. Australia is one of these markets as is Japan. Another big opportunity for us is the India market where we’re starting to gain real traction there.

I recently spoke at the second Indian Solar Energy Summit in New Delhi, where CSUN was lead sponsor. We shipped 35 megawatts to India in 2011 and pledged to double the number in 2012 by working with our established partners and channels there. We have been very successful so far, and India is a really important market to us going forward.

The U.S. solar market is also hugely important to CSUN, although it is taking time to show results. The Department of Commerce has now delayed this preliminary determination of whether or not to impose anti-dumping duties to May 17. We are working with an overseas OEM partner to make modules to supply the U.S. market, and we plan to establish the module plant in the U.S. specifically to cater to the local market. This U.S. assembling plant could start production as early as the third quarter of this year. Our goal is to sell up to 50-megawatt in U.S. in 2012. We will report to you next quarter on the progress there.

Another critical market for us going forward is China. Out of the global demand forecast of 25-gigawatt, China expected to make up the 4-gigawatt of 5-gigawatt. So up to one-fifth of the global demand this year. According to 2012, five-year plans for renewable energy development from 2011 to 2015 targets for the installed capacity are expected to be set up the 10-gigawatt by 2015 and the 50-gigawatt by 2020.

While these targets are national, not local, we will benefit from this government encouragements currently, we are working with the – whether those large and the credit worthy utility and the great companies in many provinces and the cities. China Sunergy confidently expect that China market will make up around 15% to 20% of our shipments in 2012.

Moving on in technology, let me speak on Dr. Zhao on behalf about recent highlights. Please see slide 8, QSAR efficiency has been averaging 18.4% but often topped 19.1% Also, we are now testing mono-like wafers last month. We produced a mono-like modules with averaging efficiency of around 17.7%. We haven’t really opened one line this month for mono-like production and that we are ready to sell these products into our customers.

I want to close my part of this script by saying a few words on industry consolidation. First, it is commonly known that many smaller players are shooting down production. These are ultimately good for industry and for China Sunergy.

The supply side was far out stripping demand and creating hills imbalances in the market. At the same time, the strongest the company and especially the ones with the leading technology are cautiously proceeding with plans to ramp up to meet the future demand in China and elsewhere, that including China Sunergy.

We have a strong financing in place to weather the evolution of this industry in the belief we can remain independent. The all-strategic decision of this nature however, we will keep shareholder value in mind. We believe that the sector is still unvalued and that we appreciate your faith in our long-term business prospect.

We are prepared for the factor that the first quarter may not bring a huge amount of the relief and the environment may not improve right away. However, with a strong sales top line and a cyber-strategy in place, we are optimistic that CSUN is well-positioned for the future. In 2012, we are aiming for a market split of the half to Europe and a half to the rest of the world.

Now, I will turn the call over to Mr. Chen, CFO, who will explain our fourth quarter and our full-year results in much more detail.

Yongfei Chen

Thank you, Steven. I will begin with our fourth quarter results and move on to full year 2011 results. Please turn to slide 9.

In the fourth quarter of last year, we shipped a total of 116.8 megawatts, exceeding guidance predictions of 95 to 110 megawatts. Demand increased moderately in the last quarter due to factors including reduced supply from Chinese manufacturers, a milder winter in Europe, and a growing momentum in new markets including India, China and Australia.

We incurred a net loss of $49.6 million, versus a net loss of $31.3 million in Q3 2011. Non-cash net loss was $34.8 million for the fourth quarter of 2011. The net loss to ADS was $3.71 on both basic and diluted basis. As you know, China Sunergy did a 3:1 ADS, there’s a change in December. So this number is comparable to $2.34 net loss to ADS in the third quarter.

Our ASP in the fourth quarter was also about $0.02 better than expected at $0.94. Lower selling prices are slightly lower than some competitors particularly in the fourth quarter for the purpose of clearing all the inventories. At these ASP levels, our gross margin came in at 0.2%. That goes to our guidance of breakeven at gross margin level. ASP will drop further in Q1 2012.

Our operating cash inflow in the first quarter was $27.9 million and we aimed the year with cash and cash equivalents of $209.5 million. Our credit facilities and relationships with China Development Bank and others are in good standing to see us through until we get back to positive earnings. We made good progress in clearing old entries in the fourth quarter. Entry levels decreased $40.9 million or 48.2% of third quarter of 2011 to $44 million in the first quarter.

Now, a word on sale and the model commercial spots. In the first quarter, our sales commercial costs would include chemical and raw materials such as silver-based label depreciating and running costs were $0.23, down from $0.24. Our model commercial costs decreased to $0.27 from $0.30 due mainly to cost reductions in past EVA and PVT. These reductions were achieved as part of careful cost management strategy which the company will drive to improve upon in 2012.

I’ll go now to provide more clarity on a few areas of operating expenses in the first quarter. As you can see, our SG&A costs were high, totaling $36.9 million compared to $16.2 million in the third quarter of 2011. This figure includes a charge of $14.8 million for impaired goodwill and patent provisions of $9.3 million mainly occurred for longer credit terms and the specific provisions for certain customers.

Europe is responsible for most of the bad debt. Our accounts receivable turnover was at 131 days for third quarter. And we are determined to improve this drastically. Our strategy is one, to reiterate and redirect our customer base, two, to tighten our contour of the customers’ credit terms. And three, to leverage finance partnering services.

Our target for the second quarter is to reduce the turnover days to below 100. In other expense areas, sales and marketing expense was $5.8 million which is mainly caused by the increase of shipment related expense adjustment for the previous quarters. This level is expected to decrease in Q1 2011.

Our interest expense levels were substantial in the first quarter reaching a quarterly high of $9.5 million. Interest expense to decrease in Q1 2012, as we retire sun fate. In terms of raw materials, our wafer costs at $0.38 are still high and we’re working on reducing them. Poly costs, while having fallen dramatically last year to $25 per kilogram, bounced back this year to $30 per kilogram and are hopefully stabilizing.

Moving onto the full-year results, here are some highlights. Our total annual shipments were 420 megawatts in 2011, representing a year-on-year growth of $0.208, in terms of total megawatts, and six times 2010 module shipments.

The total shipments exceeded our full-year guidance of between 395 to 420 megawatts. For comparison, full-year module shipments from China Sunergy, CEEG Shanghai Solar Science & Technology Corporation and CEEG Nanjing Renewable Energy Corporation, totaled 300 megawatts including SST and NRE shipments before and after the acquisition in November 2010.

Still, this level is much lower than what we hoped for at the beginning of 2011. But our experience mirrors almost all the other firms in our industry. For the year, we achieved revenues of $566.3 million and a net loss of $94.3 million versus a net income of $51.7 million in 2010. The loss for ADS was $7.05. Our non-GAAP net loss was $79.5 million, representing a $5.94 loss for ADS.

Finally, I would like to turn the call over to Stephen for our 2012 guidance. Stephen.

Stephen Zhifang Cai

Thank you. I will close with guidance prediction for the first quarter of 2012. Please refer to the slide 12. It’s very close to the end of the quarter now and that we are fairly confident that our module shipments will reach around 70- to 80-megawatt. Gross margin are expected to be around 1% and that we expect a net loss in the first quarter.

What I need to communicate at this point are the several reasons why we are giving a relatively low shipment guidance figure for Q1 2012. One, we are in a period of restructuring our customer base to deliberately want more with large high-profile, credible working partners in large projects. Two, we are in the face of reorganizing our sales team globally, a new staff is sometime to get into the position. Three, to hedge the risk the traditional markets, we are shifting to new markets such as China, India, Japan. These new markets are still unpredictable and that we need time to build up a stable and a consistent clientele. All these lead factors related to our lower Q1 shipment guidance but our good preparation will position China Sunergy well for the quarters ahead.

For the full year 2012, we are looking at shipping around 500 to 550 megawatts. Now, on behalf of all our executives who are present today, I will open the call up for questions. Our Senior Investor Relations Manager, Elaine Li, will facilitate this station and assist Mr. Chen in answering questions.

If anything does not get answered satisfactorily on this call, please do contact us afterwards and we will be glad to engage with you and attempt to answer your questions. Operator?

Question-and-Answer Session

Operator

Certainly, sir. We will now begin the question-and-answer session. (Operator Instructions) Your first question comes from the line of Mr. Rob Stone from Cowen & Company. Please ask your question, sir.

Rob Stone – Cowen & Company

Hi, Stephen. About the Q1 outlook, you are expecting prices to go down further but gross margin to improve a little bit, can you give us a little more help in terms of what you’re expecting on a sequential price change and which of your cost items are going to that change, please?

Stephen Zhifang Cai

Okay. Even though this shipment prospection of this Q1 2012 is slightly lower, and – but we still have this gross margin around 1%. And in terms of the cost, I think as you all know it’s the first quarter, our – the ASP is about $0.85 or $0.84, but we have a cost. We were decreasing to $0.32 per watt and the sales conversion cost will be $0.20 or below the $0.20 for the sale, CC, conversion cost. And the module, I think will still continue decreasing to $0.25 per watt. Okay, Robert?

Rob Stone – Cowen & Company

In terms of your capacity, you’ve purchased some cells in the past and made cells internally and I think mentioned retiring some older lines. So could you just review where you stand on internal cell and module capacity and if you plan to be purchasing cells in 2012 or will you make all of your cells internally this year?

Stephen Zhifang Cai

Yeah. I think in terms of this outsourcing sale, yes, in Q4, we have about 20% shipment of modules, module shipments, sales from this outsourcing. And we did this purchase because we cannot quite meet that demand. In 2012, we will continue to do the purchase according to our sales plan only when the supply cannot deal with the demand.

We will force on our internal cells production, of course. And capacity, in terms of the capacity, in Q1 of the 2012, our cells capacity is 400 megawatts, but by end of the 2012 our capacity will be 780 megawatts. (inaudible) the module, I would say that module capacity, I think this is currently above 900 megawatts, but we will vary, we will cultivate the expansion plan to 1.1 gigawatts in end of this year, we will do.

Rob Stone – Cowen & Company

And finally just a housekeeping question, there was another expense item for about $7.2 million that wasn’t mentioned in the prepared remarks, can you say what that was?

Stephen Zhifang Cai

Now, I should turn this to the CFO, and let Ms. Elaine to translate that.

Elaine Li

(Foreign Language - Chinese)

Yongfei Chen

(Foreign Language - Chinese)

Elaine Li

That would be loss from the exchange rate.

Yongfei Chen

Exchange rate.

Rob Stone – Cowen & Company

So foreign exchange loss? Okay, thank you.

Stephen Zhifang Cai

Thank you, Robert.

Elaine Li

Thank you.

Operator

Thank you, sir. (Operator Instructions) Your next question comes from the line of Mr. Min Xu from Jefferies. Please ask your question.

Min Xu – Jefferies

Good evening, Stephen and team, thanks for taking my question. My question is related to your QSAR and PSAR module. And what do you expect the ASP premium and the cost premium will be in 2012, and what do you expect the capacity will be by the end of 2012?

Stephen Zhifang Cai

Okay, hello, good morning, Mr. Min, and you have two questions. The first question is how could I make a premium on the price because we have this new product?

Min Xu – Jefferies

Yes, exactly. That’s right.

Stephen Zhifang Cai

Yes. And actually, the QSAR, QSAR, the cost of this module, I don’t think we will have so much cost went up when, during the – even with the production, but we wanted to add value, all of these are new products. So we will make up this $0.05 to $0.10 per watt as the ASP, as the premium, both as the – both at average market price.

The PSAR, I think we will always be – have this – we will follow this marketing price, it’s like competitive price in the market, into this market. And capacity, these are, QSAR, I think so we are now just started to several start second production lines in coming quarters and the PSAR will now just start one production line now. But in coming quarters, we will gradually expand into another production line because this is – PSAR cell technology could be duplicate easily in the other current production lines.

Min Xu – Jefferies

Great. A quick follow-up. Now you are expanding your sales force basically in Asia, how do you expect the OpEx to trend in 2012?

Stephen Zhifang Cai

Just a moment.

Elaine Li

(Foreign Language - Chinese)

Yongfei Chen

(inaudible)

Stephen Zhifang Cai

Okay. (Foreign Language - Chinese)

Elaine Li

Min, We’ll tighten our expense control to make sure we spend the least. And I have a number for Q1. Actually our Q1, we’ll spend around $30 million OpEx, which is less than Q4 and Q3...

Min Xu – Jefferies

So what was target OpEx as a percentage of the total sales?

Elaine Li

The target will be below somewhere between 15% for the whole year.

Min Xu – Jefferies

Thanks. Okay, got it, thank you.

Elaine Li

Okay.

Stephen Zhifang Cai

Min, I need to give additional comment on that, how do you control this OpEx in terms of sales expansion. We now already control the few – we have the control of this organization such as there are just only a few executing level VIP people in the sales team and the marketing team, but we expand on the low-level and the mid-level, management and salesperson. That’s the way we include this to control our budget. And other thing is the way we not setup this – the process that is high-efficiency traveling policy. So in this way, we still could control the budget before the sales and marketing expense.

Min Xu – Jefferies

That’s great. Good to hear that.

Elaine Li

Okay.

Operator

Thank you for the question, sir. (Operator Instructions) Excuse me, sir, there are no further questions at this time. Please continue.

Stephen Zhifang Cai

Yeah, thank you for your participating in today’s quarterly earning call. We look forward to speaking with you again on the next earning call or in between the calls. Thank you.

Operator

Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may now all disconnect.

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