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Suntech Power Holdings Co., Ltd. (NYSE:STP)

Q3 2007 Earnings Call

November 15, 2007 8:00 am ET

Executives

Rory Macpherson - Investor Relations Manager

Dr. Zhengrong Shi - Chairman of the Board, Chief Executive Officer

Dr. Stuart R. Wenham - Chief Technical Officer

Amy Yi Zhang - Chief Financial Officer, Director

Steven Chan - Chief Strategy Officer

Boxun Zhang - Financial Controller

Analysts

Sanjay Shrestha - Lazard Capital

Paul Clegg - Jefferies & Company

Robert Stone - Cowen and Company

Jeff Osborne - Thomas Weisel Partners

Angello Chan - Credit Suisse

Lu Yeung - Merrill Lynch

Vishal Shah - Lehman Brothers

Satya Kumar - Credit Suisse

Adam Hinckley - CIBC World Markets

Cheryl Tang - Goldman Sachs

Carrie Liu - JP Morgan

Peter Peng - ThinkEquity Partners

Pranab Kumar Sarmah - Daiwa

Paul Leming - Soleil Securities

Mehdi Hosseini - Friedman, Billings, Ramsey

Charles Yonts - CLSA

Pavel Molchanov - Raymond James

Carl Richter - Susquehanna

Elaine Clee - Signal Hill

Adam Krop - Ardour Capital

David Peck - Jefferies & Company

Glenda Shay - Citadel Investment Group

John Thomas - Jayhawk Capital

Operator

Good evening and thank you for standing by for Suntech's third quarter 2007 earnings conference call. (Operator Instructions) I would now like to turn the meeting over to your host for today’s conference, Rory Macpherson, Suntech's Investor Relations Manager. Please proceed.

Rory Macpherson

Hello, everyone and welcome to Suntech's third quarter 2007 earnings conference call. My name is Rory Macpherson, Suntech’s Investor Relations Manager. From Suntech on the call today will be Dr. Zhengrong Shi, Suntech's Chairman and CEO; Dr. Stuart Wenham, our Chief Technology Officer; and Amy Zhang, our Chief Financial Officer.

Also, our Chief Strategy Officer, Steven Chan, and Financial Controller Boxun Zhang, will participate in the Q&A following Dr. Shi’s closing remarks.

Before we continue, during this conference call we will make certain forward-looking statements in an effort to assist you in understanding the company and its results. The forward-looking statements will be made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, Suntech's future results may be materially different from the views expressed today.

A number of potential risks and uncertainties are outlined in our earnings release issued earlier today and our SEC filings. Suntech does not undertake any obligation to update any forward-looking statements except as required under applicable law.

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

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

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Dr. Zhengrong Shi

Hello and thank you for joining us today. I am very pleased to report another outstanding quarter, with record output, total revenues and earnings. Exceeding our output guidance, we shipped over 100 megawatts PV cells and modules for the first time in a single quarter and generated total net revenues of $386.7 million, a 137% increase compared to the quarter one year ago.

With these results, we are tracking around 40 megawatts ahead of full year 2007 output guidance and Amy will give you an update on this later in the call.

In addition, we improved both our growth and operating margin as we leveraged our scale and enhanced our production efficiency and we delivered bottom line growth of 87% year over year to $61.2 million on a non-GAAP basis, a record $0.36 per share.

Our performance was driven by tremendous demands for Suntech PV modules in all our key markets, and outstanding execution by our operations team. We are continuing to execute on our core strategies of rapidly expanding manufacturing scale, securing reliable, low-cost silicon supply, and diversifying and solidifying our downstream channels. These initiatives are all focused on our key objective of reducing cost of solar to grid parity.

I will now take you through some of our main developments for the quarter and give you an update on our key initiatives.

From a demand perspective, we continue to see extensive demand for Suntech branded PV products in all of the major solar markets worldwide. In fact, we have already locked in over 450 megawatts of PV module orders for 2008, which is almost three times our total sales for 2006.

This gives us great visibility on ASPs in the next year, which are better than expected and slightly higher than this year.

In Europe, Germany and Spain continue to be the key demand drivers with over 80% of our product shipped to those two countries in the third quarter. Our customers in both countries are extremely pleased with the value proposition that Suntech offers -- a combination of high efficiency, reliability, guaranteed performance, and speedy supply.

For example, we recently completed a 23-megawatt project with Atersa and Elecnor in Spain, and since this initial collaboration, which began in 2006, we have signed additional contracts for the supply of more than 50 megawatts of PV modules for delivery both in 2007 and early 2008.

We are also seeing very positive indications for demand in other parts of Europe, including Italy, Greece, and France, with mulit-megawatt projects and contracts. We are confident that there is significant [inaudible] demand building in all of these markets and expect this to become increasingly apparent as the system integration and financial infrastructure builds in these countries and great quantities of low-cost silicon become available.

In Asia, Korea is the fastest growing market. We recently completed the first phase of our 3-megawatt project for WEPCO, which is a subsidiary of the largest power company in South Korea. WEPCO has the exceptional capability to influence the growth of the domestic PV industry and we expect that this relationship will lead to further projects in 2008. For 2007, we expect that we will have about 10 megawatts to South Korea.

We are accelerating our penetration of the North American market with a new product, expanded team and the establishment of our U.S. headquarters in San Francisco. We are confident that we can achieve our sales target of 100 megawatts in the U.S. in 2008, which is about three times larger than our U.S. sales in 2007.

We launched several new products in direct response to the U.S. solar market needs. This includes the U.S. market’s most powerful standard, 72 solar cell module and a new all black solar module for the residential market. We have seen significant interest in this product since we introduced them at the solar power 2007 conference in Long Beach in September.

Since we acquired MSK in 2006, we have significantly strengthened our BIPV product offering, which we at this point believe is the broadest portfolio of BIPV solutions.

In addition to our existing BIPV product, we co-developed and we are producing customer value-added BIPV product for companies such as Open Energy, Akeena Solar, and Lumeta.

Suntech's deep product development expertise and diversified manufacturing is critical to the success of this product. This initiative also helped to significantly reduce the cost structure for some balance-on-system components, which are essential to the overall reduction of solar costs.

For example, Akeena’s Andalay solar panel, we are reducing installation time by up to 50%, which can contribute directly to over $1 per watt of balance-of-system savings.

Turning to manufacturing, I am pleased to announce the completion of our new, one-gigawatt PV cell production facility. We believe this will be the largest single PV cell fab in the world and it is an important milestone in Suntech's progression to multi-gigawatt production.

The new facility is designed specifically to enable us to quickly evolve to our next generation. Greater automation in both PV cell and module manufacturing, and our new Pluto technology that we believe can take up to 20% [complete efficiency] mono-crystalline PV cells.

In addition, this facility will also allow us to accelerate our capacity expansion to hit one-gigawatt capacity at the end of 2008 and achieve even greater economies of scale. This target is two years ahead of our previously announced goal. We believe that this combination of improved technology, more automation, and great scale will give us substantial leverage to reduce our cost base towards grid parity.

Finally, I wanted to give a quick update on silicon procurement, which is an area where we have made tremendous progress in this past quarter. Despite the industry shortage, we have been able to successfully transform Suntech's silicon supply through leveraging our scale, market leadership, and a strong relationship with upstream supply.

For the long-term, we believe that this new contract marked a defining moment in the solar industry and they will provide us with silicon that can take us to our projection for grid parity module pricing.

In particular, our contract with Asian silicon [leads to pricing] below $40 per kilogram, is a milestone for Suntech and the entire PV industry. This new contract will enable Suntech to expand future margins and production output more quickly than we previously expected.

For 2008, we have already procured enough silicon to produce 530 plus megawatts. We expect to grow upon this between now and the end of 2008.

In summary, we just closed the strongest quarter in the company’s operating history and the future is bright on many fronts.

I will now turn the call over to our CTO, Dr. Stuart Wenham, who will provide an update on our technology.

Dr. Stuart R. Wenham

Thank you, Dr. Shi. We are pleased to announce that our commercialization of the Pluto technology is progressing on schedule. We have recently taken delivery of the first of the two unique pieces of equipment designed specifically for the large scale manufacture of this technology and for which patent protection is being sought. This equipment has been commissioned and is currently being evaluated as part of our upgraded pilot line facilities.

We expect to announce in the near future the details of our corresponding new range of high-powered Pluto modules. Based on the modules currently being made using our upgraded pilot line facilities, the new high-powered modules are expected to be on average about 20 watts higher in power output than our standard screen printed cell modules, and about 10 watts higher than the modules using the high performance semiconductor finger technology, which is predominantly in the 180 to 190 watt range.

Perhaps more importantly, our latest analysis indicates that due to the low manufacturing costs for the Pluto technology, it’s use is expected to lead to a 10% to 12% increase in gross margins relative to our standard screen printing technology.

Construction of our thin film plant is also progressing well and we expect to commence manufacturing on our 50 megawatt line in the second half of 2008. Once this facility is operating at capacity, we expect to have production costs close to the lowest in the industry. We expect there will be strong demand for this product, particularly when employed in our leading BIPV products.

I will now hand over to our CFO, Amy Zhang, to cover our financials.

Amy Yi Zhang

Thank you, Stuart and hello to everyone on the call. Today I will provide some color on certain results from the third quarter 2007 and provide guidance for the fourth quarter 2007, full year 2007, and full year 2008. I will discuss Suntech's performance focusing principally on non-GAAP numbers that we believe give a clearer picture of the operating dynamics of the company. Specifically, these measures exclude $6.6 million of share-based compensation expense, $0.8 million of MSK restructuring costs, and $0.5 million net income impact related to amortization expenses of the MSK acquisition.

You can find a reconciliation of these measures in the financial tables at the end of our press release. Please note that from this quarter onward, we will not report MSK standalone financials as MSK has been fully integrated into the Suntech group.

In the third quarter, we cleared the majority of MSK’s slow-moving inventories and the remaining balance is trivial.

Net revenue for the third quarter were $386.7 million. This is about 137% higher than the year-ago period. Our wafer-to-module business accounted for approximately 80% of total net revenue.

As a result of excellent operating execution and a strong sales effort, we shipped over 100 megawatts of solar products in the third quarter. Due to higher production efficiency, we achieved a non-GAAP gross margin of 21.4% compared to 21.1% in the second quarter of 2007.

The gross margin expansion is particularly significant considering that the spot market price for silicon wafers continued to increase in the third quarter while ASPs were relatively flat.

The non-GAAP gross margin for our wafer-to-module business improved to 24.4% in the third quarter from 23.9% in the second quarter.

Total share-based compensation expenses were $6.6 million, slightly lower than the second quarter. Of this amount, $2.8 million was recognized as cost of revenues, $0.3 million as selling expenses, $1.4 million as R&D and $2 million as G&A expenses.

Looking at our operating expenses, we are pleased to see a marked improvement from the second quarter. Non-GAAP operating expenses as a percentage of revenue decreased from 6.7% in the second quarter of 2007 to 5% in the third quarter of 2007. The decrease was mainly due to currency exchange gains, tighter control of our expenses, and an improvement of credit control. The bad debt expenses in the third quarter decreased by $1.4 million from the second quarter.

[I’m also pleased] to highlight the improvements in our operating margin, which reflect our increasing economies of scale, improved gross margin, and lower operating expenses. Non-GAAP operating margin improved to 16.4% compared to 14.4% in the second quarter of 2007.

Our non-GAAP net income was $61.2 million for the third quarter or $0.36 per dilute ADS. Capital expenditures, which were primarily related to production capacity expansion and the construction of the Wuxi and Shanghai production facilities, were $41.8 million in the third quarter, and depreciation and amortization expenses were $5.5 million. We expect the CapEx to be around $50 million per quarter in the coming quarters.

Moving now to our balance sheet, over the past few quarters we have made a concerted effort to improve our cash flow management and in the third quarter, we achieved a positive operating cash flow for the first time since our IPO. As of September 30, 2007, we had cash and cash equivalents of $588.6 million, an increase from $520 million as of June 30, 2007.

At the end of third quarter, our inventory balance decreased 17.2% from the balance at June 30, 2007, and the inventory turnover improved from 70 days in Q2 to 53 days in Q3. Inventory management has been another key focus of ours and this significant improvement reflects our efforts in this area.

Accounts receivable rose to $236 million from $225.8 million as of June 30, 2007. Although the balance slightly increased sequentially in dollar terms, our DSOs improved substantially from 64 days in Q2 to 55 days in Q3, which reflect our tight credit control as well.

Turning to our guidance, based on our current operating and other conditions, we expect fourth quarter of 2007 total sales volume to be in the range of 109 megawatts to 111 megawatts, and the full year 2007 to be in the range of 363 megawatts to 365 megawatts. Non-GAAP consolidated gross margin in the fourth quarter of 2007 is expected to improve by 50 to 100 basis points from the third quarter of 2007.

As Dr. Shi noted, we have secured enough silicon to produce more than 530 megawatts in 2008. Based on this level of silicon supply, we expect revenues to be in the range of $1.9 billion to $2.1 billion for the full year 2008.

Due to the accelerated installation of production lines within the newly opened one-gigawatt facility, we have raised the year-end 2007 PV cell production capacity target from 480 megawatts to 540 megawatts. We also raised the year-end 2008 PV cell production capacity target from 600 megawatts to one-gigawatt, two years ahead of the previously announced one-gigawatt PV cell production capacity target at year-end of 2010.

Now at this time I would like to turn the call back to Dr. Shi.

Dr. Zhengrong Shi

Thank you, Amy. As reflected in our production and capacity guidance, we expect that extremely strong demand for our PV products will continue. We intend to build on our year-to-date success with powerful growth in 2008. We are expanding our capacity and growth to address strong sales outlook and our vastly improved silicon procurement that can support 100% of our 530-plus megawatt current output target.

That concludes our prepared remarks for today. I will now open the call up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Sanjay Shrestha from Lazard Capital Markets.

Sanjay Shrestha - Lazard Capital

Thank you. Good evening, guys. Congratulations on a great quarter and a great outlook here, first of all. A quick question, two-part, if I may; in terms of the revenue guidance for next year, that is really based on the silicon that you have available today but based on your capacity ramp, is it fair to assume that if you have more silicon available for 2008, that number is clearly going up?

Dr. Zhengrong Shi

To answer your question, first of all, you are right. At this moment, our guidance given is based on the procurement of the silicon today. Secondly, our one-gigawatt capacity by the end of next year is gradually installation. It is not like we install all these one-gigawatts overnight.

Sanjay Shrestha - Lazard Capital

Okay, that’s fair, and a quick follow-up on that then is you were talking about a firm pricing. Is that based on your continued positive outlook in the Spanish market, German market, up-tick in the U.S.? Are you starting to see markets like Italy -- I heard that on the conference call of another company yesterday -- is really starting to pick up on a large scale project, do you expect to start to see some incremental sales going into that market, giving you a level of confidence on that pricing?

Dr. Zhengrong Shi

I think so, yes.

Sanjay Shrestha - Lazard Capital

Okay, perfect. Thanks a lot guys. I’ll hope back in the queue.

Operator

Your next question comes from the line of Paul Clegg from Jefferies & Company.

Paul Clegg - Jefferies & Company

Congratulations on a great quarter. You had a lot of companies announce major production announcements and new silicon contracts. I was wondering if you could just talk about the ASP outlook for 2008.

Dr. Zhengrong Shi

Could you repeat the question again?

Paul Clegg - Jefferies & Company

All the new production announcements, how do you think they will affect ASPs in 2008?

Dr. Zhengrong Shi

From all the contracts we signed and the indication we have received so far, we believe ASP of solar modules for 2008 is fairly strong and slightly better than this year.

Paul Clegg - Jefferies & Company

Better than this year? And could you just mention how you did on ASPs in this quarter versus the last quarter?

Dr. Zhengrong Shi

Well, our ASP compared this quarter to last quarter, as indicated in the call, is relatively flat, with a little bit improvement.

Paul Clegg - Jefferies & Company

Okay. Thanks very much.

Operator

Your next question comes from the line of Robert Stone from Cowen and Company.

Robert Stone - Cowen and Company

Dr. Shi, I wonder if you could give us a sense of how your silicon costs on a blended basis may change in 2008 versus 2007, based on it looks like a higher proportion of contracted material.

Steven Chan

The silicon costs for 2008 will go down slightly relative to 2007 on a blended basis, although the contracted silicon percentage will start to go up, and that’s a trend that we expect to maintain and sort of accelerate in the years going forward, particularly in 2009 when we see a lot of sub-$100 per kilogram really come online as part of various long-term contracts taking effect, so we remain quite optimistic about our silicon procurement situation.

Dr. Zhengrong Shi

In addition to Steven’s comment, we believe in the first half of next year, the ASP silicon price remains high but for second half, we believe will further be reduced.

Robert Stone - Cowen and Company

Okay, so given the slightly higher pricing, you are looking for somewhat lower silicon costs as the year unfolds and greater efficiencies in your larger capacity. I assume it’s fair to expect rising non-GAAP gross margins in 2008 versus this year?

Dr. Zhengrong Shi

We will give you an update at a later stage when we have more consolidated information together.

Robert Stone - Cowen and Company

I’m not asking you for a specific number but it sounds like ASPs are up and silicon costs are down, unless I’m missing something, margins should improve, right?

Dr. Zhengrong Shi

Can you see our faces smiling?

Robert Stone - Cowen and Company

Okay, good. Thank you.

Operator

Your next question comes from the line of Jeff Osborne from Thomas Weisel Partners.

Jeff Osborne - Thomas Weisel Partners

I was just wondering if you could talk about, if Stuart could talk about the Pluto technology, if you could just briefly describe when that would flow through and any details on what exactly it is, and the two pieces of equipment that you require to do it.

Dr. Stuart R. Wenham

Starting with the new pieces of equipment, in developing that new technology, we did so specifically to try and utilize as much of the existing equipment that we have for our standard screen printed production process. And we have managed to develop the new technology so that it uses more than 80% of the existing equipment.

There are two key pieces of new equipment that we need for the new technology. I still can’t give you too many details about them because we are seeking patent protection for them but those two unique processes, one of them we’ve had the equipment already designed and developed and produced for us for evaluation purposes, and that’s now commissioned and working well.

The other piece of equipment is less modification from standard existing equipment and it’s also equipment that we are currently using as part of our semiconductor finger technology, and so there is less of a challenge associated with the development of that equipment. But most of the rest of the equipment is all existing equipment.

In terms of timing, we expect to commence production on that technology in the middle of 2008 and we’ll initially retrofit one of our existing production lines and then a second, and then progressively, based on how well the technology is performing, we’ll then progressively retrofit our other production lines.

Jeff Osborne - Thomas Weisel Partners

Great, and then just on the same topic, the 10 to 12 points of margin that you mentioned -- I think on the call Amy said you are at 24 and change. Is it 10 points on the gross profit? We’re not talking about 35% gross margins -- we’d be talking about 26, 27?

Dr. Stuart R. Wenham

-- an absolute increase, so whatever the margins would be for the screen-printed technology, we are looking at a 10% to 12% increase in margins in absolute terms as a direct comparison with the use of that technology, if nothing else changes.

Jeff Osborne - Thomas Weisel Partners

Very good.

Operator

Your next question comes from the line of Angello Chan from Credit Suisse.

Angello Chan - Credit Suisse

Congratulations, Dr. Shi. Can you give us a bit more guidance on your third quarter average waiver costs for Suntech versus the second quarter? And also, how much [tolling] did Suntech do in the third quarter in megawatt terms? Thank you.

Dr. Zhengrong Shi

I will take the second question and refer the first question to Amy to answer. Our core business is wafer-to-module manufacturing and from time to time, we have some [tolling] but it is very insignificant.

Amy Yi Zhang

The blended average wafer cost per piece for Q3 is a little bit higher than $5 a piece in Q3.

Angello Chan - Credit Suisse

That’s per wafer?

Amy Yi Zhang

Yeah, per piece of wafer.

Angello Chan - Credit Suisse

Thank you very much.

Operator

Your next question comes from the line of Lu Yeung from Merrill Lynch.

Lu Yeung - Merrill Lynch

Congratulations. [inaudible] -- moving margins [over] next year, how would you manage your top line shift in your net income going forward?

Steven Chan

Could you repeat the question? You dropped out a lot.

Lu Yeung - Merrill Lynch

Sorry. Given that you are [building] some kind of margin defer, margin improvement in 2008, how would you manage that [inaudible] to increase your top line or share gains [inaudible]?

Dr. Zhengrong Shi

Okay, I think if I heard correctly, because we are building our capacity, how do we manage to improve the top line. Is that your question?

Lu Yeung - Merrill Lynch

Right. Would you try to maintain a [inaudible] as 2007 and maximize your top line, or how should we think about -- what is your strategy going forward?

Dr. Zhengrong Shi

Well, the top line guidance we are giving today is based on the procurement of silicon orders, silicon on the contracts.

Lu Yeung - Merrill Lynch

Is there like a margin target that we should be thinking about? Or given that if you -- will you be sourcing higher priced polysilicon just to increase top line and try to maintain your margin and [this sort of thing] -- how about your strategy?

Dr. Zhengrong Shi

Our general strategy, we should, if we have capacity we should try to source more silicon to fulfill our demand because we cannot keep the demand of our customers. There is huge demand of Suntech products from our customers. We will try to do everything to satisfy customer demand, because especially in this critical situation of polysilicon supply, if we can expand our market share rapidly, Suntech is going to benefit from this in the long term.

Lu Yeung - Merrill Lynch

Would you try to satisfy demand and make [inaudible] some of your margin expansion gain?

Dr. Zhengrong Shi

We don’t know. It’s too early to predict.

[Multiple Speakers]

Steven Chan

One thing -- just to provide clarity, I think that the light is really at the end of the tunnel in terms of silicon supply shortage with respect to us, because we have a lot of long-term contracts that are taking effect in 2009 with the sub $100 pricing. So we don’t think that, even as we grow as rapidly as we are, we don’t think we’ll need to sacrifice margins to accomplish that because it’s really -- it’s a benefit to the Suntech model with some of the technology improvements that Stuart described, with the possible 10% to 12% improvement in gross margins that’s taking effect, as well as things like expanding economies of scale associated with the large production base.

So we think it’s something that we can manage.

Lu Yeung - Merrill Lynch

Okay, one more question, if I may; what should we expect the cell-to-module business going forward in 2008?

Dr. Zhengrong Shi

Well, 2008, our product mix, the majority will be -- I think over 95% will be wafer-to-module product.

Lu Yeung - Merrill Lynch

Okay, thank you. I’ll get back into the queue.

Operator

Your next question comes from the line of Vishal Shah from Lehman Brothers. Please proceed.

Vishal Shah - Lehman Brothers

Good evening, guys. Congratulations on a great quarter. Can you please provide me some details on shipments from the U.S. market in 2007?

Dr. Zhengrong Shi

In the third quarter, shipments to U.S. market is about 8%.

Vishal Shah - Lehman Brothers

And for the full year, what are you expectations in terms of shipments?

Dr. Zhengrong Shi

I think about 35 megawatts in total.

Vishal Shah - Lehman Brothers

And then your target for 100 megawatts, I assume you’ve already booked most of it, given that you have visible --

Dr. Zhengrong Shi

Yes.

Vishal Shah - Lehman Brothers

Okay. And then just in terms of your recent announcement on the polysilicon supply contract for the Korean company, can you provide some more details in terms of size of the contract and expected supply in 2008 versus your total target?

Steven Chan

I think there are several -- there are two contracts with the Korean vendor. One is for silicon that accounts for maybe single digits in terms of percentages of our needs for 2008. And then 2009, a new contract takes effect which will probably account for less than 10% of our silicon needs.

So we look at contracts like that, as well as some of our other sub $1 billion contracts, such as with Nitol, as contracts that we think are phases that will grow as we grow. So each of these vendors will be adding capacity as we’ll be adding capacity, so we look at it as the beginning of a long-term relationship.

Vishal Shah - Lehman Brothers

Great. Thank you.

Operator

Your next question comes from the line of Satya Kumar from Credit Suisse.

Satya Kumar - Credit Suisse

Thanks. Dr. Shi, great quarter. I just wanted to get a little bit more clarity on your silicon pricing. If you could tell me what was your mix between contract and spot in Q3?

Dr. Zhengrong Shi

I think the long-term and spot purchase is 50% to 50%.

Satya Kumar - Credit Suisse

Is this ratio something that you would look to maintain going forward into ’08, or how should we think about that?

Dr. Zhengrong Shi

For ’08, we start to improve -- long-term contracts will be increased.

Satya Kumar - Credit Suisse

So the 530 you are talking about for ’08 is long-term contract, correct?

Dr. Zhengrong Shi

No, it is 60% long-term and 40% is like a long-term contract but the price is higher than the long-term contract price.

Satya Kumar - Credit Suisse

What are the current conversion costs from wafer modules right now, and where do you think you can take that over the next two years?

Dr. Zhengrong Shi

Amy, can you take this?

Amy Yi Zhang

If you look at our total cost structure, again wafer cost still takes around 75% of the total cost of production, so the remaining 25% goes to the other manufacturing costs and other raw material costs to product module from wafers.

Satya Kumar - Credit Suisse

So you are roughly maybe $1.20 or so for the remaining costs, per watt?

Dr. Zhengrong Shi

I think it will be less than $0.80.

Amy Yi Zhang

Less than, yeah.

Satya Kumar - Credit Suisse

I guess what I am trying to get at is when you say that eventually you’ll reach grid parity, what sort of numbers are you assuming for system price and module price in that assumption?

Dr. Zhengrong Shi

I think in order for solar electricity costs to reach grid parity means comparable to the grid electricity price. So the total system costs, including module balance system and the installation, should be below $5 per watt.

Satya Kumar - Credit Suisse

And what --

Dr. Zhengrong Shi

Sorry, $4 per watt.

Satya Kumar - Credit Suisse

And where do you think the module prices should be at that point?

Dr. Zhengrong Shi

I think within three to five years time. I think some leading companies should be able to reach at that point around $2 per watt.

Satya Kumar - Credit Suisse

Perfect. Thank you.

Operator

Your next question comes from the line of Adam Hinckley from CIBC World Markets.

Adam Hinckley - CIBC World Markets

Good evening. Can you just provide us with a little more detail -- of that 530 megawatts that you have locked up for next year, can you just break that out between people that have produced polysilicon in the past and new entrants into polysilicon manufacturing?

Steven Chan

Most of the new entrants, I would say that the volumes won’t really add up to a material amount until 2009. So we are getting some new entrant poly in 2008 but it’s going to be 5% to 10% or so of our poly needs for 2008.

Adam Hinckley - CIBC World Markets

Perfect. And then, can you comment on as you build up this massive, one-gigawatt facility, where do you expect your operating expenses to go? Are they going to trend down as a percentage of revenue or should they stay flat in 2008?

Amy Yi Zhang

Currently, we are doing a percentage of 5% as the total OpEx versus the net revenue. I think going forward, we’ll be able to maintain that total OpEx within the range of 5% or below 5%. When we get to certain critical mass and economy of scale, we’ll be able to fix the total OpEx to an absolute dollar value instead of percentage of revenue.

Adam Hinckley - CIBC World Markets

Okay, great. And then also, are you going to be taking any pre-production costs for the thin film facility when you look into mid next year?

Dr. Zhengrong Shi

I think for the thin film plant, we will still be in the operation period in ’08 and most of the expenses will relate to the pre-operating expenses. I don’t think the amount will be significant at all.

Operator

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

Cheryl Tang - Goldman Sachs

Thank you for taking my questions. I wonder if I could have some color on the capacity ramp-up in ’08, given capacity will raise from 601 gigabits next year.

Dr. Zhengrong Shi

We will gradually install new equipment in our facility to start from quarter one, so basically we are sort of on average -- every quarter we will add some new lines.

Cheryl Tang - Goldman Sachs

Thank you.

Operator

Your next question comes from the line of Carrie Liu from JP Morgan.

Carrie Liu - JP Morgan

Good evening. About the new entrants in terms of polysilicon supply, I’m just wondering -- will there be any execution-related risks that will result in delays in supply?

Steven Chan

We don’t think so. We actually have selectively chosen new entrants that we feel are ahead of the curve relative to most. For example, Nitol produces their own trichlorosilane, which is a major gas that’s required for polysilicon. The major Korean conglomerate has a long track record, and then also, for example, Asian Silicon has really very advanced production processes that they’ve already sort of worked out and they have among the lowest electricity rates throughout the industrial plants in China, and some of the lowest CapEx costs that we’ve ever seen.

So the new entrants that we’ve decided to work with really are doing quite well, so we don’t feel like that’s an issue.

Having said that, we do feel that we continue to source polysilicon and we will have a comfortable buffer of polysilicon relative to our production output requirements in any given year.

Dr. Zhengrong Shi

Also, most of this new entrant that we are contracting, they will start production in middle of ’08, but we did not count too much of the supply for next year because I think the majority of supply will start to occur in the beginning of ’09.

Carrie Liu - JP Morgan

Also, I would like to know your view on the U.S. market because there is some market chatter talking about the U.S. energy bill might be passed without a solar incentive. If it is really being passed without a solar incentive, are we going to suffer the market share loss? Is there going to be any impact?

Steven Chan

Absolutely no impact. We feel that the U.S. is a region that has great potential for the future, and so we’ve put investment dollars at work to build a long-term base of customers and operations with our new U.S. headquarters in San Francisco. We’ve allotted upwards of 100 megawatts to the U.S. region and that’s something that we’ve done probably at cost to dollars, where we could probably command higher revenues or ASPs in certain European countries, because we do feel quite strongly that the U.S., the awareness with the climate change is really a momentum that really can’t be stopped.

If you look at the U.S., 50 distinct states, only maybe less than seven or eight of them have substantive solar policies, and so there’s quite a bit market to continue to develop.

And the recent chatter coming out of Washington, D.C. we think is really short-term relative to this long-term view that we have. We do feel that at minimum, the investment tax credit would be extended or last for 18 months or so, so we don’t look at that as being an issue at all.

Carrie Liu - JP Morgan

Okay. Thank you very much.

Operator

Your next question comes from the line of Peter Peng from ThinkEquity Partners.

Peter Peng - ThinkEquity Partners

I’m calling on behalf of Jonathan Hoopes at ThinkEquity. Actually, first our question is you are signing off 530 megawatts of silicon right now. What is the upside? It seems to us that you guys are signing off silicon contracts left and right, as if you are scouring the earth for all your supplies. I’m just wondering, do you see more potential suppliers that you can sign up to fulfill to the upper end of your one-gigawatt capacity in ’08?

Dr. Zhengrong Shi

I think as we stated, the 530 megawatts is based on the silicon contract we signed today, and of course there are additional two months, one-and-a-half months for this year and we may have more deals to sign and also next year, so I think we cannot give you exactly the definite number for the upside.

Peter Peng - ThinkEquity Partners

Okay, so if I say in terms of percentage, what roughly can we model in terms of -- I am sure you are not going to build to one gigawatts for producing 530.

Dr. Zhengrong Shi

In the beginning of next year, we have 530 megawatts capacity and towards the end of next year, we will reach the one gigawatt capacity. Then we have to work on additional silicon.

Peter Peng - ThinkEquity Partners

Okay, good. All right, a second question is, I’m not sure if this was asked or mentioned, what is the average efficiency of your cells right now and what is the highest efficiency that came out of the production line as well as out of your lab?

Dr. Stuart R. Wenham

I guess in general, we pay far more importance on the power of our modules because at the end of the day, it’s the power that’s produced by the cells when they are encapsulated in modules. That’s where their customers are purchasing, so we don’t actually place a big effort in keeping track of our average efficiencies, but more so the power output of our modules.

I guess just to give you a feel for it, our monocrystalline modules, or our modules based on the 125-by-125 size of cells are predominantly in the 170 to 180 watt range at the moment, and with our new technology placed on the Pluto technology, we are expecting around about a 20 watts average increase in the power output of the modules.

If you jump to the larger size of wafers, 156-by-156, which are multicrystalline wafers, the larger size, they are predominantly in the 260 to 280 watt range.

Just in general, with our Pluto technology, once that’s in large-scale production and based on the performance we are getting at the moment in pilot production of the technology, we are expecting around about a 10% increase in power output from those cells, which therefore translates to a 10% power output increase at the module level.

And based on I guess the performance of our devices in the laboratory, we are expecting the Pluto technology, which is currently at 18% to 19%, we are expecting to be able to increase that over the next 12 to 18 months we are expecting to increase that to about 20% efficiency in pilot production.

Peter Peng - ThinkEquity Partners

Okay, great. Thank you.

Operator

Your next question comes from the line of Pranab Kumar Sarmah from Daiwa Securities.

Pranab Kumar Sarmah - Daiwa

Thank you for taking my questions. The first question is on CapEx. Could you give us guidelines on the 2008 CapEx? And how much of those CapEx that you have already placed order with the equipment vendor? And how many percent of those equipment do you think will come from the local vendors?

Amy Yi Zhang

I think the total CapEx for 2008 will be around $250 million, in ’08. Out of that, we have the majority of that which has already been contracted. Again, because CapEx recognition is based on cash actually paid, so that’s just the amount we expect to pay across the entire year ’08.

Pranab Kumar Sarmah - Daiwa

Any color, how many percentage will probably come from the local vendors of that $250 million?

Amy Yi Zhang

Around 30%.

Pranab Kumar Sarmah - Daiwa

Second one is on your revenue breakdown; could you give us color, how many percentage of your revenue third quarter came in Euro versus U.S. dollar? And is there any impact, positive impact on the gross margin because of stronger Euro in the last quarter?

Boxun Zhang

I think in the third quarter, we have about a 20% off sales. [It’s especially in] Euro and it’s about 80% is by U.S. dollar and other currencies.

I think in the third quarter, the Euro has been strong against a lot of other currencies, especially the U.S. dollar. So we have seen some improvement on the foreign exchange gain loss, especially on the operating expenses. Our foreign exchange loss reduced about $2.6 million in the third quarter.

Pranab Kumar Sarmah - Daiwa

Thank you. Last one is on the OpEx in the fourth quarter; will there be any additional expenses related to employee bonus, because your [profitability] has been pretty good? Or do you think that it will be similar and the 5% level should be good enough?

Amy Yi Zhang

That has already been accrued in line with the -- across the entire year. We actually make certain provision and accrual to form a bonus pool to be distributed upon the completion of the whole fiscal year, so there wouldn’t be any big fluctuation in terms of bonus spending in Q4.

Pranab Kumar Sarmah - Daiwa

Thank you.

Operator

Your next question comes from the line of Paul Leming from Soleil Securities. Please proceed.

Paul Leming - Soleil Securities

Good evening. Could you give us any detail on the construction schedules at Asian Silicon and Nitol? Specifically, when is mechanical completion currently scheduled at each of those two projects and what capacity are they actually planning on bringing on in the first phase of their construction?

Dr. Zhengrong Shi

When we are talking about Asian Silicon, Asian Silicon started construction about their first phase, 2,000 pound polysilicon later last year. I believe the construction will be completed towards the end of this year, early next year. Towards Q1 they will start to install all the equipment and they should be able to turn on the reactor sometime in June next year.

For Nitol, Nitol actually they already have about 300 pound powerline production at this moment and also their first phase production construction started later last year and we also believe they should be turning on their reactor sometime in the second half of the year and fully ramp up in the beginning of ’09.

Paul Leming - Soleil Securities

And if I could just follow up on that, that have been a number of groundbreaking announcements throughout China over the last two to three months of new polysilicon plants. The largest one I’ve seen is [Dailoo] Group. Are there any other projects out there that you are currently looking at that seem to hold the promise of significant amount of polysilicon being available over the next 18 months?

Dr. Zhengrong Shi

Of course we are watching very closely all these developments and Suntech has been invited to attend all these groundbreaking ceremonies. If there is any significant progress, I think Suntech should be able to be part of it.

Paul Leming - Soleil Securities

Okay. Thank you very much.

Operator

Your next question comes from the line of Mehdi Hosseini from Friedman, Billings, Ramsey.

Mehdi Hosseini - Friedman, Billings, Ramsey

Thank you for taking the questions. Dr. Shi, going back to your prior comment regarding the ASP environment next year, and also in addition to the reduced silicon costs as these long-term contracts come in, how should we think about your margin profile towards the latter or end of 2008, when I think the impact of reduced tariffs would finally have a dramatic impact on pricing? Are you considering such a step down in pricing environment in your margin profile, like 12 months from here?

Dr. Zhengrong Shi

I think the module price reduction will start occur from ’09 onward. That’s because there will be more and local silicon start to be available. And for ’08, according to [fitting] tariff reduction curve, module prices should be also -- and ASP -- should be also reduced accordingly.

But because of in the past supply of silicon and silicon wafers, the order demand is still far ahead of the price, so that’s why keep the ASP relatively flat for 2008.

Mehdi Hosseini - Friedman, Billings, Ramsey

Would it be fair to say that as it stands right now, you have built enough reduced silicon costs in your long-term contract to account for a steep decline as the [inaudible] imperatives decline next year?

Dr. Zhengrong Shi

Not next year -- next year, they will stay. Next year, we do not account too much of this local silicon suppliers as a significant portion of our silicon. So as we emphasized, most of this silicon delivery will start to occur in the beginning of ’09.

Mehdi Hosseini - Friedman, Billings, Ramsey

Okay, and then two follow-up questions; first, if you could provide us an update on your thin film progress, and then in terms of the overall solar demand in China, do you see any demand driven, legislative action by the government -- anything that you expect to happen over the next couple of months?

Dr. Zhengrong Shi

Well, certainly -- I’m not sure if we have already informed you guys. MDRC has announced 150 megawatts grid connected demonstration project to be realized within the next three years. That was announced about two or three months ago by MDRC.

Mehdi Hosseini - Friedman, Billings, Ramsey

Okay, so over the next couple of years, Japan and South Korea are still the largest markets in Asia? Is that correct?

Dr. Zhengrong Shi

I think so, yes.

Mehdi Hosseini - Friedman, Billings, Ramsey

Okay, and then any update on the thin film?

Dr. Zhengrong Shi

The thin film, as we said, we are in the construction stage. We expect to start production in the middle of next year.

Mehdi Hosseini - Friedman, Billings, Ramsey

What is the capacity for the first ramp-up of --

Dr. Zhengrong Shi

Fifty megawatts -- 50.

Mehdi Hosseini - Friedman, Billings, Ramsey

Thank you.

Operator

Your next question comes from the line of Charles Yonts from CLSA.

Charles Yonts - CLSA

Congratulations. Let’s see -- I wonder if you could tell us a little bit more about what you are looking at for 2009 in terms of capacity. You’ve spoken a little bit about where you see ASPs going, but really in terms of capacity and a bit more on how much you would expect ASPs to fall on an annual basis going out to 2009, 2010.

Dr. Zhengrong Shi

Look, I mean, if we look at on a microscope scale of the industry, then ASP has to fall. As I mentioned earlier, if we assume we reach grid parity within five years time, the whole system costs need to come down below $4 per watt. That means module pricing should be around $2 per watt. That is the situation and we have to face that and we have to prepare for that to reach this price demand request but still be profitable.

Charles Yonts - CLSA

Certainly, and it’s clear that you are taking steps to reach that point. Then, the other aspect of reaching grid parity, or the $4 per watt that you are talking about would be, of course, that you need to rely on your partners to bring down their costs for insulation.

Now, is Suntech taking steps to move down and control your channels more and actually get into installations by yourself to ensure you reach grid parity?

Dr. Zhengrong Shi

No, with Suntech's strategy, we don’t want to compete with our customers by entering the installation market. We want to work closely with our customers to adding value to their projects and to work together to reduce the costs as a whole.

Steven Chan

We can give an example of that, with Akeena, where we have worked to co-develop and manufacture a product with them which is a frame assembly, special BIPV module that essentially reduces the balance of system installation costs by over $1 a watt. That’s an example of an initiative that we work on.

Charles Yonts - CLSA

Okay, fantastic. Thanks a lot.

Operator

Your next question comes from the line of Pavel Molchanov from Raymond James.

Pavel Molchanov - Raymond James

A question from Dr. Shi; Dr. Shi, you stated in the media a few months ago that if the Australian creates renewable energy incentives, you would consider creating manufacturing capacity in Australia itself. A, do you believe that is a likely scenario? And two, would you actually considering developing manufacturing capacity outside of China, either in Australia or elsewhere?

Dr. Zhengrong Shi

Well, we feel confident that the Australian Government, either the existing government or the opposition party, they both have announced a new regulation to promote solar, so Suntech actually is in the process to form an Australian team. That’s one part, and we believe that when the demand volume reaches a certain mass, we do consider to form a manufacturing capability in Australia.

And also in other parts of the world when we reach a multi-gigawatts and we have to open our production line or a factory close to the market. That’s our general thinking.

Pavel Molchanov - Raymond James

And any countries in particular where you would consider developing manufacturing capacity, maybe in the next let’s say three years?

Dr. Zhengrong Shi

I mean, we start to think from today, because you look at which countries will start to fit our manufacturing -- basically these are major market counties, such as Europe and the U.S. maybe in the near future.

Pavel Molchanov - Raymond James

Thanks very much.

Operator

Your next question comes from the line of Carl Richter from Susquehanna Capital.

Carl Richter - Susquehanna

Thanks. Just on the OpEx, I think this is important because there seems to be a different trend in OpEx. It looks like for the first quarter in seven, not only did OpEx come down as a percent but it actually dropped in dollars. How should we think about, and Amy, I understood the 5% long-term target there, but how should we think about OpEx over the nearer term maybe, over the next two or three quarters? Especially considering I guess the uncertainty for me about how to think about Pluto and thin film, which I’m assuming aren’t COGS hits yet when they are in the development stage.

Amy Yi Zhang

I think by considering the quick growth and expenses that we have to batch expense quickly, I would still say operating expenditures will remain within the range of 6% to 7% of the net revenue in the near quarter.

For [longer term], I think around 5% of net revenue and again, like what I said, for the real long term, we’ll be able to fix the total operating expenditure at an absolute value, dollar value instead of a percentage of revenue because we will be able to achieve a real critical mass and benefit from the continuously increased economy of scale.

Carl Richter - Susquehanna

Okay, that’s great. That’s clear. I’m understanding that to mean that OpEx dollars probably go back up for the next couple of quarters then and -- do you think that’s the right conclusion?

Amy Yi Zhang

I would still say in the coming few quarters, it would still be more prudent to keep it within the range of 6% to 7% of net revenue.

Carl Richter - Susquehanna

Okay, thanks.

Operator

Your next question comes from the line of Elaine [Clee] from Signal Hill Capital.

Elaine Clee - Signal Hill

Just a quick question on MSK; could you just quantify exactly how much of the inventory is still left?

Boxun Zhang

It is less than 0.5 megawatts.

Elaine Clee - Signal Hill

Okay. And could you just comment a little more generally on market capacity to absorb the additional production that you have coming out? It does sound like there is a very strong pricing environment and if we take away that, on the demand side of things, that it’s still very strong?

Steven Chan

I think that in each of the past six months, like each month, as we’ve gone by we’ve seen that the demand has gotten progressively stronger and so we do see that reflected in the guidance we provided today with flat to slightly up ASPs for next year, and increasing our capacity expansion for next year. Our silicon has increased, enabling us to give a pretty good substantive revenue projection for next year, based on our silicon procurement, which we do think that we can improve upon.

So the demand environment is incredibly strong. I don’t think it’s been stronger, so we are very optimistic.

Elaine Clee - Signal Hill

Okay, great. Thank you.

Operator

Your next question comes from the line of Adam Krop from Ardour Capital. Please proceed.

Adam Krop - Ardour Capital

Good evening. I actually have a follow-up to Elaine’s question. Can you comment on just a little bit more color on the MSK side as far as what you saw for revenues in the quarter, and maybe on the gross margin, how that’s looking as well?

Boxun Zhang

I think in the third quarter, MSK has made a great effort to clear out their remaining slow-moving inventory in the warehouse. Based on the volume, they sold about 1.8 megawatts modules in the third quarter. And the remaining inventory is very trivial, like I mentioned. It is less than 0.5 megawatts.

Adam Krop - Ardour Capital

And did it break even in the quarter?

Boxun Zhang

Because we are doing a lot of inter-company transactions, it will be very hard to find what is their independent sales and what is their independent operating profit, so I think it is on a group basis, we have been showing a very significant improvement on the gross margin and the bottom line growth.

Steven Chan

Adam, if you look at the chart that we have in our earnings release, the cell-to-module segment shows a gross margin of about 10%, and that embeds the minimal amount of MSK revenue that we’ve reported. I think when we first reported MSK revenue about a year ago, that segment was minus 10%, so we’ve basically seen a 20% turnaround in that, so something that we feel like we’ve done quite well about in terms of integration in improving that business.

Adam Krop - Ardour Capital

Thank you very much.

Operator

Your next question comes from the line of David Peck from Jefferies & Company.

David Peck - Jefferies & Company

Congratulations on a great quarter. This question may have been asked before, but given that you have such good visibility into 2008, how much of your orders, probably on a megawatt basis, will be coming from the U.S. versus Europe?

Dr. Zhengrong Shi

As we described in our earnings release, we think the 100 megawatts will be sold to U.S. markets.

David Peck - Jefferies & Company

Okay. Thanks.

Operator

Your next question comes from the line of Glenda Shay from Citadel Investment Group.

Glenda Shay - Citadel Investment Group

Thanks for taking my questions. I just want to clarify on your silicon purchase for ’08. The 530 megawatts locked already, there is 60% for lower long-term contracts and 40% for higher priced contracts -- is that correct?

Dr. Zhengrong Shi

Yes.

Glenda Shay - Citadel Investment Group

And none of them are coming from the spot market purchasing?

Dr. Zhengrong Shi

No.

Glenda Shay - Citadel Investment Group

Okay, so is it reasonable to say that if you see more demand and your capacity catch up and then if you buy more on the spot market, then you probably can product more output?

Dr. Zhengrong Shi

Quite possible.

Glenda Shay - Citadel Investment Group

And another question is, is that 530 megawatts locked include the recent announcement for the Korean partners?

Dr. Zhengrong Shi

Yes.

Glenda Shay - Citadel Investment Group

So that is included already?

Dr. Zhengrong Shi

Yes.

Glenda Shay - Citadel Investment Group

Can you give us more color about this Korean partner? Is it well-established, one of the suppliers in the market or is it a new entrant?

Steven Chan

Yes, it is a well-established Korean conglomerate and so it’s a company that’s been supplying wafers, as far as we know, for many years.

Glenda Shay - Citadel Investment Group

Okay, thank you. And another question for Amy; can you give us a little bit more color on how we should expect your FX gain and loss in the coming quarters?

Amy Yi Zhang

Sorry, I missed the last bit of your question.

Glenda Shay - Citadel Investment Group

That’s okay. You mentioned that you will probably be able to control your OpEx expenses in the coming quarter, in the range of 5% to 7%. And I’m just wondering then, how should we expect that the FX gain and loss to be in the coming quarters?

Amy Yi Zhang

You are talking about the exchange impact to be hit to the total OpEx, right?

Glenda Shay - Citadel Investment Group

Yeah, because you have like FX loss in the first quarter and the FX gain in the second quarter.

Amy Yi Zhang

Normally we also have some natural hedging instruments in place to -- for example, try to increase the Euro sales and increase the U.S. dollar purchase and things like that, which will allow us to have some natural hedge in place.

And also, according to the Central Bank guidance, normally foresee a 3% to 5% appreciation of RMB versus the U.S. dollar, so if you want to forecast the change of the effect or exchange gain or loss, we normally just look at that kind of trend in percentage.

Glenda Shay - Citadel Investment Group

Sorry, what percentage is natural hedge?

Amy Yi Zhang

I don’t have that percentage on hand for the natural hedge, but again like --

Dr. Zhengrong Shi

Maybe you can follow-up later.

Rory Macpherson

Yes, Glenda, we’ll have to go to next caller. Thank you.

Operator

Your next question comes from the line of John Thomas from Jayhawk Capital. Please proceed.

John Thomas - Jayhawk Capital

I noticed from Q3 to going to Q4, that your megawatt output is slowing down a little bit. Can you provide the rationale or reasoning behind that?

Dr. Zhengrong Shi

I think this is still the full operation of our installed production line, and I think it is within our projected range. For example, our Q2 to Q3 is about a 10 megawatt increase and Q3 to Q4 is also about a 10 megawatt increase.

Steven Chan

And then John, I think another thing is if you noticed the cell-to-module business, it was 19% of our revenues in Q3. And actually, the run-rate normally for that should be probably less than 5%. And so even though it’s not growing that much from what you had said but the actual core business, the wafer-to-module business, which means the expanding cell capacity, is actually growing just as quickly as it has in past sequential quarters.

John Thomas - Jayhawk Capital

Okay, and just quickly, I noticed you’ve locked up a lot of poly supply for 2009. I’m just wondering if you are fixing your prices now and then supply is supposed to loosen up substantially in 2009, is there any pricing risk you face now basically in locking up the prices when it could potentially be lower on spot when it opens up in ’09?

Steven Chan

That’s a question that we get asked a lot, and I think that what we’ve seen thus far is that the silicon supply has continuously been tighter and the length of the tightness has gotten longer than most people have predicted.

Some of our long-term contracts that we’ve associated recently, they have provisions where in latter years of the contract, there is a collar where we could actually have an adjustment on the price, depending on the prevailing spot market at that given time.

And so we’ve made efforts to actually have flexible contracts, although the contracts are generally take or pay in nature. So we feel like we are pretty mobile to be responsive to that.

We don’t see that as a problem.

John Thomas - Jayhawk Capital

Okay, great. Thank you, guys.

Operator

We are now approaching the end of the conference call. I will now turn the call over to Suntech's Chief Executive Officer, Dr. Shi, for closing remarks.

Dr. Zhengrong Shi

Again, thank you for joining us today. If you have any further questions, please do not hesitate to contact any of our investor relations representatives. Have a nice day.

Operator

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

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