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JA Solar Holdings, Co., Ltd. (NASDAQ:JASO)

Q4 2011 Earnings Call

March 20, 2012 8:00 am ET

Executives

Dr. Peng Fang – Chief Executive Officer

Min Cao – Chief Financial Officer

Ming Yang – Vice President

Martin Reidy – Brunswick Group

Analysts

Jesse Pichel – Jefferies & Co.

Karen Tai – Piper Jaffray

Brandon Heiken – Credit Suisse

Kelly Dougherty – Macquarie Research Equities

Lu Yeung – UBS (US)

Richard Grace – RBC Capital Markets

Pavel Molchanov – Raymond James

Brian Gamble – Simmons & Co.

Nipun Sharma – Mirae Asset Securities

Operator

Hello, and thank you for standing by for JA Solar’s Fourth Quarter and Full-Year 2011 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the management’s prepared remarks, there will be a question-and-answer session. Today’s conference is being recorded. If you have any objections, you may disconnect at this time.

I would now like to turn the meeting over to your host for today’s conference, Martin Reidy of Brunswick Group.

Martin Reidy

Thank you. Welcome to JA Solar’s fourth quarter and full-year 2011 earnings conference call. Joining us from the Company today are Dr. Peng Fang, CEO; Mr. Min Cao, CFO; and Mr. Ming Yang, VP of Business Development and Corporate Communications.

As stated in the press release, the oversimplified transition of CNY into U.S. dollars, which is set at 6.2939 RMB to the dollar, is made solely for the convenience of the audience. References to dollars are the lawful currency of the USA.

The press release published today provides detailed financial tables for the conversion from CNY to USD. On this call, Dr. Fang will begin with an overview of our Q4 2011 results covering the business and market developments and outlook. Following that, Min will provide details of the Company’s financial performance. After prepared remarks, we will open up for questions for the remainder of the call. We expect the entire call to last approximately one hour.

Before we begin the formal remarks, I would like to remind you that certain statements on today’s call, including statements regarding expected future financial and industry growth, are forward-looking statements that involve a number of risks and uncertainties that could cause actual results to differ materially. These statements are made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995.

Factors that could cause actual results to differ include general, business and economic conditions in the solar industry; government support for the development of solar power; future shortage or availability of the supply of high purity silicon; demand for user-end products by consumers and inventory levels of such products in the supply chain; changes in the demand from significant customers; changes in demand for our major markets; changes in product mix, capacity utilization, level of competition, pricing pressures, and decline in average selling prices; delays in the introduction of new product lines; continued success in technological innovation; shortage in supply of raw materials; availability of financing; exchange rate fluctuations; litigation and other risks as described in the company’s SEC filings, included in its Annual Report on Form 20-F filed with the SEC.

Although the company believes the expectations reflected in the forward-looking statements are reasonable, it cannot guarantee future results. You should not place undue reliance on these forward-looking statements. All information provided on today’s conference call speaks as of today’s date, unless otherwise stated, and the company undertakes no duty to update such information, except as required under applicable law.

I will now turn the call over to Dr. Peng Fang, CEO of JA Solar.

Dr. Peng Fang

Hello everyone and welcome to today’s call. We appreciate your interest in JA Solar. 2011 was a challenging year for the entire solar industry, but as our performance in the fourth quarter demonstrates we are making progress with our strategy to taking advantage of future growth in our industry and to position JA Solar as a key long-term winner in the solar sector.

During the quarter, we took several key steps to improve our company’s fundamentals and the balance sheet. First, we have managed the cash flow proactively, and as a result, operating cash flow turned strongly positive in Q4 to a positive $86.6 million, up from a negative $45 million in the third quarter. We were also able to achieve free cash flow during the quarter, which positions the company well for the sustainable future growth.

Second, despite a challenging business environment, we achieved a positive gross margin during the first quarter, which is a noticeable improvement from a gross margin of negative 4.3 in the third quarter.

Third, our sales volume and inventory levels during the fourth quarter remained healthy. As we focused on customer service and technology to maintain marketing share, while actively managing receivables and inventory level. We successfully implemented a number of incentive initiatives, including stringent inventory and receivable management, while maintaining healthy sales volume. Our inventory level decreased from $193.1 million in Q3 to $116.1 million in Q4. While our accounts receivables decreased from $241.8 million in Q3 to $197.8 million in Q4.

Fourth, we continue to focus on customer development globally, particularly in new markets, we have built important partnerships with leading players around the world, most notably with utility companies and independent power producers in key markets, like China, U.S. and Japan.

Naturally, we have made important cost improvement in our manufacturing process, while carefully managing spending, and we continue to lead the industry in terms of technology. By successfully executing on this strategy, we achieved fourth quarter shipments significantly above our guidance, as well as very healthy operating cash flow and a strong balance sheet.

Let me give you an update on our shipments for the quarter and our view of global solar market. In the fourth quarter, we shifted approximately 398 megawatt, which is well above the high end of our previous guidance of 330 megawatt. The German market remained the most important market in Europe and JA Solar was well-positioned to benefit from the robust demand there.

Our European sales team is headquartered in Munich, and we have a strong sales force on the ground in Germany, that has viewed very successful partnerships with most important market players. We expect the German and Italian market to continue to be among the most important global markets on a gigawatt scale.

In this market, we were continued to work with our local customers and the provided high quality and high efficiency products with this market demand. We have increased our focus on the rapid growing U.S. market, which is the forecast to double in size to our 3.5 gigawatt of installations in 2012. We have established that the sales contract with several of the top tier project developers and IPPs in the USA. Our primary partners are largely focused on Utility Scale Project, but are also expanding to distribute the generation.

In Q4 of 2011, we closed our agreements for shipments over 50 megawatts to better supporting our U.S. customers, we have opened a new office in Silicon Valley and have chosen the RFAs and operations team to better supporting the growing demand in USA and in Canada. We are however concerned about the strength of tariffs which maybe introduced by the U.S. Department of Commerce were disrupted with China where into 2013.

Our U.S. customers are looking for certainty on cost and deliveries. We have secured a sales contract with several new customers in Q4 2011, which are amounted not just the developers and IPPs in the United States.

We have taken a conservative approach to dealing with the strength of tariffs and from Q1 2012. We are making efforts to ensure that the majority of our products that we shipped to U.S. are compliant with U.S. DoC requirements.

The Japanese market is very promising, and we see improved regulatory support for the solar industry, which should lead to a meaningful increase in size of the overall market. A new feed-in tariff program that will boost the industry use of renewable energy is expected to be implemented this summer. Given the low cost of financing and abundant liquidity, we expect the Japanese market to grow into a multi-lingual market this year.

Consistent with our long-term strategy of working with local customers and partners we are cultivating the Japanese market carefully by providing high-quality, high-power product that meet Japanese standards.

We are very optimistic about our potential in Japan for a number of reasons. We expected that a lot of demand in Japan will come from the rooftop market, which is really a sweet spot for us, thanks to our high-efficiency module offering.

Japan also requires a high level of attention to detail in terms of product quality and appearance and our past experience of working with world-leading OEMs means that we are able to provide a high standard product that meets those stringent requirements.

And lastly our unique business model based on the partnering with leading players in each market ensure that we don’t have any channel account factor with our partners in Japan because we are not competing with them directly. This is an important differentiator for JA Solar that help us win contacts.

I’m pleased to note that we are making very good progress in Japan. We have already signed a number of sales agreements for 2012, and in February, for example, we hit a new record of shipment to Japan. We are now focused on building out our partnerships with the leading project developers and other players in solar value chain, and we believe that we have positioned ourselves well.

Similarly in India, the solar industry is already performing well, and our prospective there are good. As in Japan, our strategy is to partner with the major players in value chain and I’m encouraged with that. We can now count most of the Indian top solar companies among our partners. Finally, we continue to build our presence in the China market. We’re seeing an encouraging increase in installation within China as the Chinese government FiT program kicks in, and we are expected to see sustained growth in demand in 2012.

We want to spend a couple minutes to talk about the integrated approach we’ve taken to the China market, which including partnering with leading utility companies and EPCs, engaging in utility-scale project development and participating actively in rooftop projects. We have gained a lot of traction in China and in our other major markets from partnering with utility companies who are looking to increase their renewable portfolio and with EPCs who are not only relied on our product quality and the technology, but also benefit from leveraging our global experience in solar installations.

So in China, for example, we partnered with Datang Power on a 23 megawatt utility-scale project in Ningxia province. Other major domestic independent power producers in China, including China Power Investments and the Huadian are also key customers of JA in the local China market.

By partnering with this utility and the EPC leading companies, in an early stage and working with them to build their solar capability, we established strong partnership that should reap benefit for JA Solar as these companies increase their installation activity in the coming years.

Alongside this we have also engaged in project development to expand our presence in the Chinese market. For instance, we signed a frame agreement with the local government of Jiuquan, Gansu province to develop, construct and operate utility-scale solar project.

We expect to see project installations totaling 100 megawatt per year for next several years, in Jiuquan region along. We have also agreed to build a local module manufacture facility with an initial capacity of 100 megawatt to supporting those projects in that region.

Naturally, we have been proactively participating in the Gold Sun program. We believe that demand in the rooftop segment in China will continue to grow in the coming years, especially as far as government incentives kick in. For example, in last quarter, we signed an agreement with Hefei Golden Sun to supply 10 megawatts of solar modules for use in rooftop installations.

In summary, we are very optimistic about this integrated strategy in China, because we are able to secure a strong pipeline of projects. This strategy has delivered a good result in 2011 and there will be an important area of focus for JA Solar in the years ahead.

On technology, in 2011, we introduced our breakthrough SECIUM and MAPLE solar cell technologies and the response so far from our customers has been great. We’ve made good progress with these technologies, converting efficiency recently hit a new record of 19.5% for our high-efficiency SECIUM sales and 18.6% for our optimized spend of the monocrystalline solar cells.

This improves the efficiency of solar cells will allow us to produce modules in 60 cells formats with output of 265 watts or more, which is substantially higher than the industry standard for modules and makes this product particularly attractive in terms of ROI.

In 2012, our focus will be on reducing the manufacture cost of this product while continuing to grow our market share. We expected this new high-power product will help us to capture further market share in key markets where convention is important and at the same time offer a higher ASP than conventional product. Ming will give you more updates on the details regarding our technology a little later.

Looking to the quarter ahead, we are realistic about the challenges facing the industry given the current regulatory uncertainty. However, we are confident that our strategy of forecasting on cost reduction technology customer development, and differentiated geography market segments will ensure that JA Solar is a long-term winner in the solar industry.

The first quarter of 2012 we expected the shipments to be in the range of 320 megawatt to 350 megawatt, which is approximately 12% to 20% below the Q4 level. We believe this is consistent with overall industry strength in light of seasonality and the recent regulatory uncertainties in the European market. In this fourth year, we currently expected the shipments to be approximately 1.8 gigawatt to 2 gigawatt.

Now, let me turn the call over to Ming who will give you an update on our operations and our financials.

Ming Yang

Thank you, Dr. Fang and thanks to everyone for joining today’s call. As Dr. Fang has highlighted, in the fourth quarter, demand for JA Solar cells and modules were stronger than anticipated. As market demand recovered last quarter, we saw that one of the key reasons our partners chose to work with JA Solar is because they recognize the quality and value that we provide, and I’m pleased to note that in the fourth quarter we made some important progress on both technology and cost management fronts.

Looking first at technology, we’ve made good progress with both our standard and high-efficiency products over the last quarter, which has helped us to maintain our market share. We are particularly encouraged to see that demand for our module is growing quickly with modules now accounting for more than 45% of shipments and 56% of our revenue in the fourth quarter.

We now offer standard multi-crystalline modules within power output of 245 watts to 250 watts, which is approximately 5% above standard product offerings from our peers. Our high-efficiency products are also well ahead of competing products. Our MAPLE modules are reaching 255 watts to 260 watts per module, while our SECIUM modules now offer output of 260 watts to 265 watts in commercial production.

Customers are choosing these products because they offer a better return on investment than our competitor’s offering. For example, in the fourth quarter, we delivered 10 megawatt of our proprietary MAPLE Solar modules for power utility company, which is rapidly expanding its portfolio of renewable energy power generation and as we continue to improve our product offering, we expect the modules to exceed 50% of shipments in 2012.

Our high-power module products also give us a better pricing power. For example, ASPs for SECIUM and MAPLE modules in the fourth quarter were 5% to 10% above prices for conventional modules. In terms of average conversion efficiency in mass production, over the fourth quarter, we achieved 18.5% efficiency for MAPLE cells and 18.8% efficiency for SECIUM cells. We are confident that we can continue to make improvements to these technologies and we have a very clear R&D roadmap to achieve 20% efficiency.

To support these R&D efforts, we recently announced two exciting partnerships with TUV and Intertek. Our in-house laboratory has been certified by both organizations and we are working with TUV and Intertek on a number of initiatives that will further improve our R&D capability, reduce the cost of testing and approval, and most importantly reduce the time it takes for us to analyze and adopt new materials and reduce time to market. Thanks to our partnership with Intertek, for example, we now have the ability to conduct accelerated lifetime testing outside of our production facility. This enables us to optimize the materials that we use to achieve improvements in both the lifespan and production cost of our modules.

The cost improvement efforts complement our prudent inventory and cash management strategy. Before I discuss the financial details, I want to highlight a couple of very important financial indicators for the quarter, which illustrates how our strategy to maintain JA Solar’s healthy financial position is yielding results.

While we recorded an operating loss for the quarter, we successfully reduced inventory levels quarter-over-quarter by $77 million. As a result, we have successfully increased cash and cash equivalents to $617.9 million, which is an increase of $104.6 million quarter-on-quarter.

Our operating loss for the fourth quarter was $77.5 million, compared to operating loss of $43.9 million in the third quarter. Excluding a long-lived asset impairment of $48.2 million, operating loss would have been $29.3 million.

With that, I would like to walk you through our financial results for the fourth quarter and full year 2011. In Q4, we shipped 398 megawatts of solar power products, above our full year guidance, representing a decrease of 10.6% sequentially and a decrease of 14% year-over-year.

Solar cells accounted for 52% of shipments, cell tolling accounted for approximately 3% of shipments, and modules including modules made with customer supplied wafers accounted for 45% of shipments.

Full year shipments grew to approximately 1.69 gigawatts, an increase of 15.8% from 1.46 gigawatts in the fiscal year 2010. Over the last year, we have significantly increased the focus on our module sales and achieved a substantial growth in module shipment volumes.

In Q4, the geographic breakdown of shipments was approximately 53% in China and 47% in overseas market. To break down our international shipments further, our European shipments were 30.7%, and rest of the world including U.S. accounted for 16.3%.

Total revenue for Q4 was $309.1 million, a decrease of 21.4% sequentially. 2011 revenue was $1.71 billion, compared with $1.87 billion in 2010, representing a year-over-year decrease of 8.7%. Q4 gross profit was $1.4 million or 0.5% of net revenue.

Full year gross profit was $73.3 million or 4.3% of net revenue. For comparison our 2010 gross profit was $404.6 million or 21.7% of net revenue. The year-over-year decrease of gross margins was primarily due to a decline of average selling prices for solar cells and modules.

Total operating expenses in the fourth quarter were $78.9 million, a sequential increase of $51.9 million from the third quarter. Total quarterly operating expenses represents 25.5% of total revenue, compared with 6.9% in the third quarter. The increase in operating expenses was primarily due to an impairment of long-lived assets of $48.2 million related to the company’s multicrystalline wafer manufacturing facility in Donghai.

Also included in operating expenses is a receivable production of $3 million. For the full year, our total operating expenses were $140.1 million or 8.2% of net revenue, compared to $90.4 million in 2010.

Quarterly loss from operations was $77.5 million in Q4. This compares with a loss from operations of $43.9 million in Q3. For the full year, loss from operations was $66.8 million compared to an income from operations of $314.2 million in 2010.

Interest expense in Q4 totaled $18.7 million, slightly up from $18.4 million in Q3. For the full year, we incurred interest expense of $59.4 million, compared to $35.1 million in 2010. The year-over-year increase in interest expenses was primarily due to a increase in short-term and long-term borrowing.

Other income in Q4 was $33.2 million, compared to a loss of $2 million in Q3. The sequential increase in other income was primarily due to a one-time non-cash gain of $29.8 million recognized in the acquisition of Solar Silicon Valley, due to the fixed share consideration and the decline of JA Solar’s share price between the date of the definitive agreement and the date of deal consummation. For the full year, other income was $44.5 million compared to other income of $43.2 million in 2010. Our net loss for the fourth quarter was $68.3 million and loss per diluted ADS was $0.39 compared to loss per diluted ADS of $0.36 in the third quarter of 2011.

On the balance sheet side, our cash and cash equivalents at the end of 2011 was $617.9 million compared with $513.3 million at the end of Q3, and $363.8 million at the end of 2010. Accounts receivables at the end of Q4 were $197.8 million compared with $241.8 million at the end of Q3 and $150.2 million at the end of 2010.

Days of sales outstanding at the end of Q4 were 58 days compared to 55 days in Q3. Total inventories at the end of Q4 were $116.1 million, a significant decrease from $193.1 million at the end of Q3 and $214.1 million at the end of 2010. Inventory turnover days in Q4 were 34 days compared to 42 days in Q3.

Total prepayments to suppliers were $300.1 million, slightly down from $358.9 million at the end of 2010. The cash and cash equivalents were $617.9 million and total working capital of $696.5 million at December 31, 2011. Total short-term bank borrowings were $84.2 million. Total long-term bank borrowings were $690.7 million, among which $140.6 million will be due in one year.

The total face value of outstanding convertible bonds due 2013 was $222 million at December 31, 2011. The Company generated a positive operating cash flow of $86.6 million in Q4. For the entire year, the Company generated $59.7 million of cash flow from operations.

Our total capital expenditure for 2011 was $350.2 million, including $48.9 million incurred in Q4. Our annual 2011 CapEx was higher than the $261.6 million in 2010, primarily due to the ramp-up of our capacity in Fengxian and in Hefei to support our module capacity expansion. Our Q1 full year 2011 shipping guidance was provided by Dr. Fang earlier.

And with that, we’ll open the call for questions, operator?

Question-And-Answer Session

Operator

The question and answer session of this conference call will start in a moment (Operator Instructions). Your first question comes from the line of Jesse Pichel from Jefferies. Please go ahead.

Jesse Pichel – Jefferies & Co.

Hi, good evening gentlemen. Thank you for taking my questions. Can you give us an outlook for your manufacturing costs in 2012? Specifically, what were your wafer costs and cell processing costs in Q4 and how should that trend for the first quarter and through 2012? Thank you.

Ming Yang

Hi, Jesse, this is Min. Good to hear from you. So, in terms of manufacturing costs, we expect that to reduce significantly for 2012. And in terms of the actual wafer processing costs, I believe that’s what you were looking for. I think our own production of wafer as a percent of what we use is now fairly insignificant. It’s probably less than 20% of our overall shipment mix.

So in terms of wafer processing costs, we’re probably in the high-teens cents range, which I believe is competitive for the scale that we have. In terms of cell processing, I think what we’ve disclosed is somewhere in the $0.20-ish range. So I believe that’s where we are in terms of Q4. And looking out to 2012, we believe that can be reduced to 20% to 25%, and in fact, we are already seeing very significant progress on that in Q1. Does that answer your question?

Jesse Pichel – Jefferies & Co.

Not wafer processing costs. Yes, can you hear me?

Ming Yang

Yeah go ahead. Go ahead.

Jesse Pichel – Jefferies & Co.

If I could be more specific, wafer costs not necessary wafer processing costs.

Ming Yang

Okay. So with that you mean is the specifics, okay. So Q4 average wafer cost was down approximately 35% from Q3 levels. Then in Q1, we saw another about 20% to 25% drop in Q1; that’s our expectation and we expect it to trend slightly down throughout the year based on poly price trends.

Dr. Peng Fang

So our wafer supply majority of that is from the market, as you know. Our internal wafer manufacturing is a small portion of that. So we are taking advantage of low wafer costing in the market in run up.

Jesse Pichel – Jefferies & Co.

Great, thank you very much. I will go back into the queue.

Dr. Peng Fang

Thank you.

Operator

Thank you. And your next question is coming from the line of Ahmar Zaman from Piper Jaffray. Please go ahead.

Karen Tai – Piper Jaffray

Hi, everyone this is Karen calling on behalf of Ahmar. Thanks for taking my question. So, I noticed that your shift in strategy is to expand more modules rather than cells. Can you talk about the breakdown for CapEx? I didn’t hear you clearly for your CapEx in 2011 as well as 2012?

Ming Yang

For 2011, we spent about $350 million in CapEx, of which approximately $49 million was in Q4. Yeah, and then so, we did not break out specific as to how much of that is related to modules.

Dr. Peng Fang

In general as you know, the module CapEx is much less than the solar cell is about per watt basis power is about 20% of solar cells investment. So I think in the 2011, we have some ramp up from the previously payments to our cell capacity and our expansion in 2011 is mainly forecast on the module capacity.

However, the module CapEx is not that heavy and in 2012 we’re continuously expanding our module capacity. So currently, we have about 1.2 gigawatt module capacity operational and by middle of this year we’ll have 1.7 gigawatt module. So looking forward through this year, we probably have over 2 gigawatt of module capacity to respond to our customer demand.

Karen Tai – Piper Jaffray

Okay, great and given your successful launch of your higher power and higher efficiency products, what is your expectation in percentage of megawatt shipments of these type of products to be sold in 2012?

Dr. Peng Fang

Breakdown by percentages, we probably will have 50% of our module product whereas the high powered the product from the mono and also the multi.

Karen Tai – Piper Jaffray

So 50% of your module shipments in 2012 will be the higher powered and higher efficiency MAPLE and SECIUM based modules?

Dr. Peng Fang

Yes.

Karen Tai – Piper Jaffray

Okay, great. And how, one last question for me, how much additional processing cost does it require for you to manufacture these higher efficiency or higher power products?

Dr. Peng Fang

It’s very minimum, so most likely the compatible with our currently equipment effect and with very minimum of [AD] in process or equipment.

Karen Tai – Piper Jaffray

Can you give a sense of a couple of cents per watt increase or some guidance around how should we think about it?

Dr. Peng Fang

From a solar cell point of view, probably it’s less than $0.01 to $0.02 per watt.

Karen Tai – Piper Jaffray

So $0.01 to $0.02 additional cost for processing these higher efficiencies cells

Dr. Peng Fang

Yes, roughly.

Ming Yang

That’s correct.

Karen Tai – Piper Jaffray

Okay, great. Thank you very much.

Operator

Thank you your next question comes from the line of Satya Kumar from Credit Suisse. Please go ahead.

Brandon Heiken – Credit Suisse

Hi, this is Brandon Heiken speaking on behalf of Satya Kumar. I was hoping you could clarify the price cost and maybe growth expectations for the EPC projects in China. Thank you.

Ming Yang

So you’re talking about the price of the modules, and then what?

Brandon Heiken – Credit Suisse

Yeah, I understood that there’s a framework agreement with Jiuquan to develop, construct and operate utility projects, and I think you said 100 megawatts per year. I was wondering how that might grow maybe in other regions and what price and cost we should assume for those projects?

Ming Yang

So the price for the projects will very much be dependent on the FiT – by the project when it’s approved. So currently, we’re expected to be probably in the $1.60 to $2 type of range for semi type of system. In terms of costs typical percentage in China can be constructive for less than $1.50 per watt.

Brandon Heiken – Credit Suisse

Okay. And do you expect other agreements or really just 100 megawatts, is it for 2012 and ongoing or how do you expect that to grow in future years?

Ming Yang

It’s more than 100 megawatts per year for multiple years. So this is one site that we’re working on, and then there is other sites in the future as well that we would look to develop.

Dr. Peng Fang

Okay So, that 100 megawatts…

Brandon Heiken – Credit Suisse

Okay, thank you.

Ming Yang

Thank you.

Operator

All right, thank you and your next question comes form the line of Kelly Dougherty from Macquarie, please go ahead.

Kelly Dougherty – Macquarie Research Equities

Hi, everyone thanks for taking the question. Just a few questions on the module strategy. Just wondering through the partnerships that you’ve set up, how much visibility you have into such a significant increase in module shipments in 2012 versus what seems to be a relatively flat market or maybe have a different perspective on that?

And then, we’ve heard some of your publicly traded peers talking about module ASPs $0.80, and in the low 80s for the first quarter. So maybe if you could give us a sense of what your pricing looks like as well? Thanks.

Dr. Peng Fang

For the Q4, I think it is the first time our module revenue already passed, but it’s fair revenue. We expect that in this year 2012, our module shipment in volume will be more than sales in terms of megawatts measurement.

In terms of pricing, we see the modules there continuously coming down the price from the Q4 level, about 15% to 20%, but we’re starting to see this price hopefully has levered up. So, last few years we see the module or upper stream of the solar chain price significantly come down, but we were expected that in the future the price change the [downstream] will be slowed down because we are approaching through with [parity].

Ming Yang

And Kelly just to answer your questions on visibility, we believe we have fairly good visibility to the growth of our module business, I think, primarily due to our strategy of working with leading utility companies and project developers and EPCs. So that gives us more confidence. And also our focus on markets such as China, U.S. and Japan, which we believe we have a differentiated product offering, also a different strategy from most of our Asian peers. So that’s helping us a lot to grow our market as well.

Kelly Dougherty – Macquarie Research Equities

Okay great, thanks, just one quick clarification then. The 15% to 20% ASP decline, is that what you’re expecting for the first quarter or you’re saying that’s what you experienced and now you expect things to start to level out?

Dr. Peng Fang

It is first quarter compared to Q4 last year.

Kelly Dougherty – Macquarie Research Equities

Okay and then just one last one. You’ve talked about the different markets you’re targeting. Can you give us a sense of what the geographic mix may look like within the module business this year?

Dr. Peng Fang

Our module shipment, I think, in the – we were have for Europe and some of it’s the U.S. but the new emerging markets whether it’d be in Japan, China and maybe Southeast Asia, and other regions and also in Europe where this (Inaudible) to German and also Italy and East Europe and other regions we also see the module shipment over there.

Kelly Dougherty – Macquarie Research Equities

But any kind of quantification of how much goes to each market or each region at least?

Ming Yang

So if we look at China, for example, believe China can represent 30% or more of our module shipments and then Japan is probably 15% to 20% and then U.S. is 20% and more and then Europe is somewhere on the order of 20% to 30%.

Kelly Dougherty – Macquarie Research Equities

Great, thanks very much guys.

Ming Yang

Great, thank you.

Operator

Thank you. Again, next question comes from the line of Lu Yeung from UBS. Please go ahead.

Lu Yeung – UBS (US) (US)

Thanks for taking my question. As you build out your module capacity, how should we think about strategy going forward? Are you trying to know JA Solar branded modules in the future? Then I have a follow-up.

Dr. Peng Fang

Yeah, so currently, we offer both JA Solar’s brand and also the OEM brand depends on the customer. So we enter into the module business really is in the response of some large customers and they required the OEM support over there. By meantime, we have some customers like JA Solar’s brand because we can provide long-term guarantee for modules and also they like to see a company like, public company like JA Solar has a strong balance sheet to behind this type of quality and the financial back-up for modules.

Lu Yeung – UBS (US)

I have also one follow-up to your in-house wafer manufacturing. So you talk about the portion of your in-house production where else would be small. So how should we think about that in the future or do we ever see any write-downs of your wafer asset in the future?

Ming Yang

I think we already wrote down a significant portion of our wafer assets which in light of current market conditions. So, we will balance between what we can procure on the market in terms of wafer pricing versus what we can produce. And generally, in terms of cash cost, what we can produce is very competitive with what the market provides. So, we believe that that’s a write-down that will make our manufacturing costs for our wafer facility much more competitive versus what’s available on the stock market.

Lu Yeung – UBS

As you promote your JA branded modules in different markets, do we expect you to incur higher operating costs as a result?

Ming Yang

Let me just add more color to that. Okay so, it’s very much dependent on specific geographic markets, and then also, the competing dynamics in the market. So, I’ll give you an example. For the Chinese market okay in particular, it’s almost a 100% JA Solar branded product for the Golden Sun program and also for the feed-in tariff program, where the projects are supplied to independent power producers. And that strategy is also quite similar for the U.S., where we partner with primarily independent power producers and utility companies or private developers.

What they are looking for is a very competitive pricing, a strong brand, and a large balance sheet from the manufacturer that can support the product warranty to the system with bankability and bank financing. If you look at the Japanese market for example, a majority of the products delivered into that market are not a JA Solar brand. It’s actually more than likely that they’re not a Japanese brand, so that the product is viewed as a Japanese product with Japanese quality. With very stringent requirements, particularly to appearance, Japanese are very sensitive to appearance, and there is also other factors that would contribute to the success of that market, the service network that our partners provide to the local installers for example, so it varies by market-to-market.

Dr. Peng Fang

Let me add some color here. So, you’re right. Compared to the module cells market, our cells costs were increased than before, however, compared to our competitors, our cells costs (inaudible) than them because we are focused on OEM large customer markets, so it’s a B2B, more a B2B type of business, so our maintenance, our sales supporting costs will be very concentrated. And as a result, we don’t need much staff and infrastructure to do that. So compared to our peers, our S&G cost still be lower in this area.

Lu Yeung – UBS (US)

Thank you, guys.

Ming Yang

Great, thank you.

Operator

Thank you. Your next question comes from the line of Mahesh Sanganeria from RBC Capital Markets. Please go ahead.

Richard Grace – RBC Capital Markets

Hey, thanks guys. This is Richard Grace here for Mahesh. Did you write-down the inventory in the quarter?

Ming Yang

There was no inventory write-down during the quarter.

Richard Grace – RBC Capital Markets

Okay.

Dr. Peng Fang

If you take the [closer] month.

Ming Yang

Go ahead, Go ahead.

Richard Grace – RBC Capital Markets

Have you disclosed your module conversion costs?

Ming Yang

We believe it’s competitive. It’s probably similar to most of our peers.

Richard Grace – RBC Capital Markets

Okay. And where do you see the module mix exiting 2012?

Ming Yang

Over 50% of our shipments will likely come from modules. That’s our plan right now.

Richard Grace – RBC Capital Markets

Okay, thank you guys.

Operator

Thank you. Your next question comes from the line of Pavel Molchanov from Raymond James. Please go ahead.

Pavel Molchanov – Raymond James

Thanks very much. I remember in the past one of your core strategies was to shift away from Chinese customers, and it seems like you’re now reversing that and talking about your leverage to the Chinese market. I mean, can you talk about what prompted that?

Dr. Peng Fang

I think in the past two [quarters] speaking is, our 50% of solar cell is fair to Chinese market, which is consistent with all the leading module manufacturers in China. It’s very diversified customer base. We’re not intentionally turning away from them.

However, in this year, since China’s domestic system or project the market will become significantly increase in size, and we also are re-adjusting our strategy. We’re supporting these directives with China’s IPPs and EPCs, which is no overlap with previous customer base, and it’s a new type of market with large SOEs and also they are EPC companies. So it’s not actually an overlap over there. It’s a new customer group.

Pavel Molchanov – Raymond James

Understood and are ASPs for those new Chinese customers comparable to your sales overseas?

Dr. Peng Fang

So far as you know, it’s very dynamic. It’s a Chinese market in the price but in general early in this quarter it is slightly higher than international markets, but [recently] probably slightly lower than international market in terms of market price.

Pavel Molchanov – Raymond James

Understood, thanks.

Ming Yang

Great, thank you.

Pavel Molchanov – Raymond James

Yeah

Operator

Thank you, and you next question comes from the line of Brian Gamble from Simmons. Please go ahead.

Brian Gamble – Simmons & Co.

Hi, guys, couple of things. On the guidance for full-year, 330 shipments Q1 is simply at the mid-point, 1.9 for the full year, implying in the due north of 500 in Q3, Q4. How backend loaded should that be? I mean, clearly you pulled some stuff from Q1 into Q4, so maybe through Q1 run rate is a little bit higher, but how should we trend it for the rest of the year to get to that guidance range?

Dr. Peng Fang

So, we can see in Q1 is seasonally low shipment in terms of megawatt for us and we expected in second half of the year, the volume will pick up more primarily due to the some new markets like Japan and also China’s domestic market. There were large projects coming up in Q3, Q4 timeframe.

Ming Yang

In particular, I think, if you look at normal seasonality for solar, normally the first half constitutes about 30% to 40% of the overall annual volume and then the second half will be about 60% to 66%. If you look at the normal construction cycle, particularly for the U.S. and China for the large scale utility projects, most of the construction will begin in the second half and that’s where we’re seeing where the volume growth would come from.

Brian Gamble – Simmons & Co.

I mean, you mentioned, you wanted to make sure that everything you ship to the U.S. was compliance. Given the tariff issues that are going on, how do you ensure that? What steps you’re taking to make sure that everything shipped over is appropriate for the market? You mentioned your specs for shipment things to Japan and how that’s specific, but maybe you can walk through the same analogy for the U.S. market?

Dr. Peng Fang

For U.S. market, basically, we have some large customers and by year-end, they provided a very sizable order, and also with relatively periods of financial conditions. But we controlled our commitment over there and based on the commitment, our strategy to pursue the commitment was first getting to the market.

However, for the signed contract, we tried to arrange most of the shipment from the non-China manufactured basis, through our partners or through our supply chain. And also we are actively developed the non-China manufacturer base, and we were expecting a more stable, large volume non-China manufacturer base will be in place, starting from the Q3 timeframe.

Brian Gamble – Simmons & Co.

Great, is there any significant difference, you mentioned your expectation for ASP declines in Q1 from Q4. Any meaningful deltas between markets either China versus rest of world or Europe versus China or how do you want to break it out, any differences there?

Ming Yang

We believe in average selling prices should be relatively stable to decline slightly throughout the rest of the year and at the same time different markets for the premium. For example, Japan has significant premium over the rest of the market, but at the same time there, there is very stringent requirement to be able to participate in the market.

And then the same is also will be true in the U.S., that’s what we believe. A significant portion of the low-cost manufacturing base globally will no longer – could possibly not be able to supply the U.S. market, which I guess everyone is expecting U.S. market to be flat or even increase as a result of that. And then for China and for Europe, certainly I think a lot it is dependent on regulatory policies. So for example, for China, we expect the pricing should be relatively stable from now to the end of the year.

Brian Gamble – Simmons & Co.

Thank you, guys.

Ming Yang

Okay, thank you.

Operator

Thank you. Your next question comes from the line of Nipun Sharma from Mirae Asset Securities. Please go ahead.

Nipun Sharma – Mirae Asset Securities

Yeah, thanks for taking my question. Just a quick clarification. I could not hear your shipment mix for 2011 and also your CapEx guidance for 2012. Could you please tell me that? And I have another question afterwards.

Ming Yang

2011 our total shipment is 1.69 gigawatts.

Nipun Sharma – Mirae Asset Securities

Perfect. The mix between cells, cells tolling and module?

Ming Yang

Okay, so, we’ve provided it for Q4, okay.

Nipun Sharma – Mirae Asset Securities

Sorry, I meant Q4, yes that’s right.

Ming Yang

So, for Q4, I think cells was 52%, tolling was 3% and the modules were 45%.

Nipun Sharma – Mirae Asset Securities

Okay. And could you also please tell me the CapEx guidance for 2012?

Ming Yang

So, the current capital expenditure budget for 2012 is approximately $160 million. Of course, half of it is for module capacity expansion and then the other half is for maintenance, equipment upgrades, and for R&D.

Nipun Sharma – Mirae Asset Securities

That’s great, $116 million?

Ming Yang

160 actually.

Nipun Sharma – Mirae Asset Securities

160, okay. The other question I had is, you’ve spoken a lot about your module strategy and you’ve explained it very well. I was wondering if you could talk to us a little bit about your sales strategy. It’s still going to account for around 40% of the overall shipments. How has that changed in light of in the changing market dynamics and has your customer mix changed somewhat? Could you give us some color on that?

Ming Yang

Yeah, the TA is known as a cell technology leader in the past, and also last year, we indeed introduced some leading high volume manufacture technology in both mono and multi area.

So, this year our cells strategy is focused on continue expanding our customer base. However, in turn, it was focused on reduce the cost of this studio technology. As our increase in volume our cost of this technology sale were, significantly reduced. As we see in the – I think we mentioned in the first quarter, we already see the cost of cell reduced in the 20% to 25% range. So, in other words our cells technology will be very cost competitive plus the high efficiency this year.

Nipun Sharma – Mirae Asset Securities

Okay, and could you give me an indication of kind of gross margins, the module sales and (inaudible) for the fourth quarter and your expectations for gross margins for the group for first quarter and also 2012? Thank you.

Ming Yang

So, it’s actually our policy not to provide gross margin guidance.

Nipun Sharma – Mirae Asset Securities

Okay, thank you.

Ming Yang

Great, thank you.

Operator

We are now approaching the end of the conference call. I will now turn the call over to Ming Yang, Vice President of JA Solar for closing remarks.

Ming Yang

Thank you, everyone for joining us today. We appreciate your interest and support of JA Solar. If you’d like to arrange a meeting with us or if you have any further questions, please contact or e-mail our IR firm, Brunswick Group and they will be happy to assist you. Their contact information is on today’s press release. Thank you again for your continued support and we look forward to talking with you in the coming months.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Good day.

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