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

Q3 2007 Earnings Call

November 15, 20078:00 am ET

Executives

Rory Macpherson - Investor Relations Manager

Dr. Zhengrong Shi - Chairman of the Board, Chief ExecutiveOfficer

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'sthird quarter 2007 earnings conference call. (Operator Instructions) I wouldnow like to turn the meeting over to your host for today’s conference, RoryMacpherson, Suntech's Investor Relations Manager. Please proceed.

Rory Macpherson

Hello, everyone and welcome to Suntech's third quarter 2007earnings conference call. My name is Rory Macpherson, Suntech’s InvestorRelations 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 FinancialController Boxun Zhang, will participate in the Q&A following Dr. Shi’sclosing remarks.

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

A number of potential risks and uncertainties are outlinedin our earnings release issued earlier today and our SEC filings. Suntech doesnot undertake any obligation to update any forward-looking statements except asrequired under applicable law.

As a reminder, this conference call is being recorded and awebcast of management’s prepared remarks will be available on the investorrelations section of Suntech's website after this call. Also, please make notethat 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 pleasedto report another outstanding quarter, with record output, total revenues andearnings. Exceeding our output guidance, we shipped over 100 megawatts PV cellsand modules for the first time in a single quarter and generated total netrevenues of $386.7 million, a 137% increase compared to the quarter one yearago.

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

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

Our performance was driven by tremendous demands for SuntechPV modules in all our key markets, and outstanding execution by our operationsteam. We are continuing to execute on our core strategies of rapidly expandingmanufacturing scale, securing reliable, low-cost silicon supply, anddiversifying and solidifying our downstream channels. These initiatives are allfocused on our key objective of reducing cost of solar to grid parity.

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

From a demand perspective, we continue to see extensivedemand for Suntech branded PV products in all of the major solar marketsworldwide. In fact, we have already locked in over 450 megawatts of PV moduleorders 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 demanddrivers with over 80% of our product shipped to those two countries in thethird quarter. Our customers in both countries are extremely pleased with thevalue proposition that Suntech offers -- a combination of high efficiency,reliability, guaranteed performance, and speedy supply.

For example, we recently completed a 23-megawatt projectwith Atersa and Elecnor in Spain, and since this initial collaboration, whichbegan in 2006, we have signed additional contracts for the supply of more than50 megawatts of PV modules for delivery both in 2007 and early 2008.

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

In Asia, Korea is the fastest growing market. We recentlycompleted the first phase of our 3-megawatt project for WEPCO, which is asubsidiary of the largest power companyin South Korea.WEPCO has the exceptional capability to influence the growth of the domestic PVindustry and we expect that this relationship will lead to further projects in2008. For 2007, we expect that we will have about 10 megawatts to South Korea.

We are accelerating our penetration of the North Americanmarket 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 salestarget of 100 megawatts in the U.S. in 2008, which is about three times largerthan our U.S. sales in 2007.

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

Since we acquired MSK in 2006, we have significantlystrengthened our BIPV product offering, which we at this point believe is thebroadest portfolio of BIPV solutions.

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

Suntech's deep product development expertise and diversifiedmanufacturing is critical to the success of this product. This initiative alsohelped to significantly reduce the cost structure for some balance-on-systemcomponents, which are essential to the overall reduction of solar costs.

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

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

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

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

Finally, I wanted to give a quick update on siliconprocurement, which is an area where we have made tremendous progress in thispast quarter. Despite the industry shortage, we have been able to successfullytransform Suntech's silicon supply through leveraging our scale, marketleadership, and a strong relationship with upstream supply.

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

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

For 2008, we have already procured enough silicon to produce530 plus megawatts. We expect to grow upon this between now and the end of2008.

In summary, we just closed the strongest quarter in thecompany’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 ourcommercialization of the Pluto technology is progressing on schedule. We haverecently taken delivery of the first of the two unique pieces of equipmentdesigned specifically for the large scale manufacture of this technology andfor which patent protection is being sought. This equipment has beencommissioned and is currently being evaluated as part of our upgraded pilotline facilities.

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

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

Construction of our thin film plant is also progressing welland we expect to commence manufacturing on our 50 megawatt line in the secondhalf of 2008. Once this facility is operating at capacity, we expect to haveproduction costs close to the lowest in the industry. We expect there will bestrong demand for this product, particularly when employed in our leading BIPVproducts.

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

Amy Yi Zhang

Thank you, Stuart and hello to everyone on the call. Today Iwill provide some color on certain results from the third quarter 2007 andprovide guidance for the fourth quarter 2007, full year 2007, and full year2008. I will discuss Suntech's performance focusing principally on non-GAAPnumbers that we believe give a clearer picture of the operating dynamics of thecompany. Specifically, these measures exclude $6.6 million of share-basedcompensation expense, $0.8 million of MSK restructuring costs, and $0.5 millionnet income impact related to amortization expenses of the MSK acquisition.

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

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

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

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

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

The non-GAAP gross margin for our wafer-to-module businessimproved 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 wasrecognized as cost of revenues, $0.3 million as selling expenses, $1.4 millionas R&D and $2 million as G&A expenses.

Looking at our operating expenses, we are pleased to see amarked improvement from the second quarter. Non-GAAP operating expenses as apercentage 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 exchangegains, 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 thesecond quarter.

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

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

Moving now to our balance sheet, over the past few quarterswe have made a concerted effort to improve our cash flow management and in thethird quarter, we achieved a positive operating cash flow for the first timesince 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 decreased17.2% from the balance at June 30, 2007, and the inventory turnover improvedfrom 70 days in Q2 to 53 days in Q3. Inventory management has been another keyfocus of ours and this significant improvement reflects our efforts in thisarea.

Accounts receivable rose to $236 million from $225.8 millionas of June 30, 2007. Although the balance slightly increased sequentially indollar terms, our DSOs improved substantially from 64 days in Q2 to 55 days inQ3, which reflect our tight credit control as well.

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

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

Due to the accelerated installation of production lineswithin the newly opened one-gigawatt facility, we have raised the year-end 2007PV cell production capacity target from 480 megawatts to 540 megawatts. We alsoraised the year-end 2008 PV cell production capacity target from 600 megawattsto one-gigawatt, two years ahead of the previously announced one-gigawatt PVcell 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 capacityguidance, we expect that extremely strong demand for our PV products willcontinue. We intend to build on our year-to-date success with powerful growthin 2008. We are expanding our capacity and growth to address strong salesoutlook and our vastly improved silicon procurement that can support 100% ofour 530-plus megawatt current output target.

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

Question-and-AnswerSession

Operator

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

Sanjay Shrestha -Lazard Capital

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

Dr. Zhengrong Shi

To answer your question, first of all, you are right. Atthis moment, our guidance given is based on the procurement of the silicontoday. Secondly, our one-gigawatt capacity by the end of next year is graduallyinstallation. 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 youwere talking about a firm pricing. Is that based on your continued positiveoutlook in the Spanish market, German market, up-tick in the U.S.? Are youstarting to see markets like Italy -- I heard that on the conference call ofanother company yesterday -- is really starting to pick up on a large scaleproject, do you expect to start to see some incremental sales going into thatmarket, 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 thequeue.

Operator

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

Paul Clegg -Jefferies & Company

Congratulations on a great quarter. You had a lot ofcompanies announce major production announcements and new silicon contracts. Iwas 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 theywill affect ASPs in 2008?

Dr. Zhengrong Shi

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

Paul Clegg -Jefferies & Company

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

Dr. Zhengrong Shi

Well, our ASP compared this quarter to last quarter, asindicated 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 fromCowen and Company.

Robert Stone - Cowenand Company

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

Steven Chan

The silicon costs for 2008 will go down slightly relative to2007 on a blended basis, although the contracted silicon percentage will startto go up, and that’s a trend that we expect to maintain and sort of acceleratein the years going forward, particularly in 2009 when we see a lot of sub-$100per kilogram really come online as part of various long-term contracts takingeffect, so we remain quite optimistic about our silicon procurement situation.

Dr. Zhengrong Shi

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

Robert Stone - Cowenand Company

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

Dr. Zhengrong Shi

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

Robert Stone - Cowenand Company

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

Dr. Zhengrong Shi

Can you see our faces smiling?

Robert Stone - Cowenand Company

Okay, good. Thank you.

Operator

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

Jeff Osborne - ThomasWeisel Partners

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

Dr. Stuart R. Wenham

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

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

The other piece of equipment is less modification fromstandard existing equipment and it’s also equipment that we are currently usingas part of our semiconductor finger technology, and so there is less of achallenge associated with the development of that equipment. But most of therest of the equipment is all existing equipment.

In terms of timing, we expect to commence production on thattechnology in the middle of 2008 and we’ll initially retrofit one of ourexisting production lines and then a second, and then progressively, based onhow well the technology is performing, we’ll then progressively retrofit ourother production lines.

Jeff Osborne - ThomasWeisel Partners

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

Dr. Stuart R. Wenham

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

Jeff Osborne - ThomasWeisel Partners

Very good.

Operator

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

Angello Chan - CreditSuisse

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

Dr. Zhengrong Shi

I will take the second question and refer the first questionto Amy to answer. Our core business is wafer-to-module manufacturing and fromtime 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 littlebit higher than $5 a piece in Q3.

Angello Chan - CreditSuisse

That’s per wafer?

Amy Yi Zhang

Yeah, per piece of wafer.

Angello Chan - CreditSuisse

Thank you very much.

Operator

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

Lu Yeung - MerrillLynch

Congratulations. [inaudible] -- moving margins [over] nextyear, how would you manage your top line shift in your net income goingforward?

Steven Chan

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

Lu Yeung - MerrillLynch

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

Dr. Zhengrong Shi

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

Lu Yeung - MerrillLynch

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

Dr. Zhengrong Shi

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

Lu Yeung - MerrillLynch

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

Dr. Zhengrong Shi

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

Lu Yeung - MerrillLynch

Would you try to satisfy demand and make [inaudible] some ofyour 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 lightis really at the end of the tunnel in terms of silicon supply shortage withrespect to us, because we have a lot of long-term contracts that are takingeffect in 2009 with the sub $100 pricing. So we don’t think that, even as wegrow as rapidly as we are, we don’t think we’ll need to sacrifice margins toaccomplish that because it’s really -- it’s a benefit to the Suntech model withsome of the technology improvements that Stuart described, with the possible10% to 12% improvement in gross margins that’s taking effect, as well as thingslike expanding economies of scale associated with the large production base.

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

Lu Yeung - MerrillLynch

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

Dr. Zhengrong Shi

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

Lu Yeung - MerrillLynch

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

Operator

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

Vishal Shah - LehmanBrothers

Good evening, guys. Congratulations on a great quarter. Canyou 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 - LehmanBrothers

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

Dr. Zhengrong Shi

I think about 35 megawatts in total.

Vishal Shah - LehmanBrothers

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

Dr. Zhengrong Shi

Yes.

Vishal Shah - LehmanBrothers

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

Steven Chan

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

So we look at contracts like that, as well as some of ourother sub $1 billion contracts, such as with Nitol, as contracts that we thinkare phases that will grow as we grow. So each of these vendors will be addingcapacity as we’ll be adding capacity, so we look at it as the beginning of along-term relationship.

Vishal Shah - LehmanBrothers

Great. Thank you.

Operator

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

Satya Kumar - CreditSuisse

Thanks. Dr. Shi, great quarter. I just wanted to get alittle bit more clarity on your silicon pricing. If you could tell me what wasyour 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 maintaingoing forward into ’08, or how should we think about that?

Dr. Zhengrong Shi

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

Satya Kumar - CreditSuisse

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

Dr. Zhengrong Shi

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

Satya Kumar - CreditSuisse

What are the current conversion costs from wafer modulesright 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 coststill 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 productmodule from wafers.

Satya Kumar - CreditSuisse

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

Dr. Zhengrong Shi

I think it will be less than $0.80.

Amy Yi Zhang

Less than, yeah.

Satya Kumar - CreditSuisse

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

Dr. Zhengrong Shi

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

Satya Kumar - CreditSuisse

And what --

Dr. Zhengrong Shi

Sorry, $4 per watt.

Satya Kumar - CreditSuisse

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

Dr. Zhengrong Shi

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

Satya Kumar - CreditSuisse

Perfect. Thank you.

Operator

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

Adam Hinckley - CIBCWorld Markets

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

Steven Chan

Most of the new entrants, I would say that the volumes won’treally add up to a material amount until 2009. So we are getting some newentrant poly in 2008 but it’s going to be 5% to 10% or so of our poly needs for2008.

Adam Hinckley - CIBCWorld Markets

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

Amy Yi Zhang

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

Adam Hinckley - CIBCWorld Markets

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

Dr. Zhengrong Shi

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

Operator

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

Cheryl Tang - GoldmanSachs

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

Dr. Zhengrong Shi

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

Cheryl Tang - GoldmanSachs

Thank you.

Operator

Your next question comes from the line of Carrie Liu from JPMorgan.

Carrie Liu - JPMorgan

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

Steven Chan

We don’t think so. We actually have selectively chosen newentrants 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 requiredfor polysilicon. The major Korean conglomerate has a long track record, andthen also, for example, Asian Silicon has really very advanced productionprocesses that they’ve already sort of worked out and they have among thelowest electricity rates throughout the industrial plants in China, and some ofthe lowest CapEx costs that we’ve ever seen.

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

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

Dr. Zhengrong Shi

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

Carrie Liu - JPMorgan

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

Steven Chan

Absolutely no impact. We feel that the U.S. is a region thathas great potential for the future, and so we’ve put investment dollars at workto 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 theU.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 Europeancountries, because we do feel quite strongly that the U.S., the awareness withthe climate change is really a momentum that really can’t be stopped.

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

And the recent chatter coming out of Washington, D.C. wethink is really short-term relative to this long-term view that we have. We dofeel that at minimum, the investment tax credit would be extended or last for18 months or so, so we don’t look at that as being an issue at all.

Carrie Liu - JPMorgan

Okay. Thank you very much.

Operator

Your next question comes from the line of Peter Peng fromThinkEquity 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 siliconright now. What is the upside? It seems to us that you guys are signing offsilicon contracts left and right, as if you are scouring the earth for all yoursupplies. I’m just wondering, do you see more potential suppliers that you cansign 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 thesilicon contract we signed today, and of course there are additional twomonths, one-and-a-half months for this year and we may have more deals to signand also next year, so I think we cannot give you exactly the definite numberfor the upside.

Peter Peng -ThinkEquity Partners

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

Dr. Zhengrong Shi

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

Peter Peng -ThinkEquity Partners

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

Dr. Stuart R. Wenham

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

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

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

Just in general, with our Pluto technology, once that’s inlarge-scale production and based on the performance we are getting at themoment in pilot production of the technology, we are expecting around about a10% increase in power output from those cells, which therefore translates to a10% power output increase at the module level.

And based on I guess the performance of our devices in thelaboratory, we are expecting the Pluto technology, which is currently at 18% to19%, we are expecting to be able to increase that over the next 12 to 18 monthswe 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 KumarSarmah from Daiwa Securities.

Pranab Kumar Sarmah -Daiwa

Thank you for taking my questions. The first question is onCapEx. Could you give us guidelines on the 2008 CapEx? And how much of thoseCapEx that you have already placed order with the equipment vendor? And howmany 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 $250million, in ’08. Out of that, we have the majority of that which has alreadybeen contracted. Again, because CapEx recognition is based on cash actuallypaid, 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 thelocal vendors of that $250 million?

Amy Yi Zhang

Around 30%.

Pranab Kumar Sarmah -Daiwa

Second one is on your revenue breakdown; could you give uscolor, how many percentage of your revenue third quarter came in Euro versusU.S. dollar? And is there any impact, positive impact on the gross marginbecause 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 othercurrencies.

I think in the third quarter, the Euro has been strongagainst a lot of other currencies, especially the U.S. dollar. So we have seensome improvement on the foreign exchange gain loss, especially on the operatingexpenses. Our foreign exchange loss reduced about $2.6 million in the thirdquarter.

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 similarand the 5% level should be good enough?

Amy Yi Zhang

That has already been accrued in line with the -- across theentire year. We actually make certain provision and accrual to form a bonuspool to be distributed upon the completion of the whole fiscal year, so therewouldn’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 fromSoleil Securities. Please proceed.

Paul Leming - SoleilSecurities

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

Dr. Zhengrong Shi

When we are talking about Asian Silicon, Asian Siliconstarted construction about their first phase, 2,000 pound polysilicon laterlast year. I believe the construction will be completed towards the end of thisyear, early next year. Towards Q1 they will start to install all the equipmentand 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 atthis moment and also their first phase production construction started laterlast year and we also believe they should be turning on their reactor sometimein the second half of the year and fully ramp up in the beginning of ’09.

Paul Leming - SoleilSecurities

And if I could just follow up on that, that have been anumber of groundbreaking announcements throughout China over the last two tothree 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 atthat seem to hold the promise of significant amount of polysilicon beingavailable over the next 18 months?

Dr. Zhengrong Shi

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

Paul Leming - SoleilSecurities

Okay. Thank you very much.

Operator

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

Mehdi Hosseini -Friedman, Billings, Ramsey

Thank you for taking the questions. Dr. Shi, going back toyour prior comment regarding the ASP environment next year, and also inaddition to the reduced silicon costs as these long-term contracts come in, howshould 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 impacton pricing? Are you considering such a step down in pricing environment in yourmargin profile, like 12 months from here?

Dr. Zhengrong Shi

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

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

Mehdi Hosseini -Friedman, Billings, Ramsey

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

Dr. Zhengrong Shi

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

Mehdi Hosseini -Friedman, Billings, Ramsey

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

Dr. Zhengrong Shi

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

Mehdi Hosseini -Friedman, Billings, Ramsey

Okay, so over the next couple of years, Japan and SouthKorea 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 fromCLSA.

Charles Yonts - CLSA

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

Dr. Zhengrong Shi

Look, I mean, if we look at on a microscope scale of theindustry, then ASP has to fall. As I mentioned earlier, if we assume we reach gridparity 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 isthe situation and we have to face that and we have to prepare for that to reachthis price demand request but still be profitable.

Charles Yonts - CLSA

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

Now, is Suntech taking steps to move down and control yourchannels more and actually get into installations by yourself to ensure youreach grid parity?

Dr. Zhengrong Shi

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

Steven Chan

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

Charles Yonts - CLSA

Okay, fantastic. Thanks a lot.

Operator

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

Pavel Molchanov -Raymond James

A question from Dr. Shi; Dr. Shi, you stated in the media afew months ago that if the Australian creates renewable energy incentives, youwould consider creating manufacturing capacity in Australia itself. A, do youbelieve that is a likely scenario? And two, would you actually consideringdeveloping manufacturing capacity outside of China, either in Australia orelsewhere?

Dr. Zhengrong Shi

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

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

Pavel Molchanov -Raymond James

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

Dr. Zhengrong Shi

I mean, we start to think from today, because you look atwhich countries will start to fit our manufacturing -- basically these aremajor 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 fromSusquehanna Capital.

Carl Richter -Susquehanna

Thanks. Just on the OpEx, I think this is important becausethere seems to be a different trend in OpEx. It looks like for the firstquarter in seven, not only did OpEx come down as a percent but it actuallydropped in dollars. How should we think about, and Amy, I understood the 5% long-termtarget there, but how should we think about OpEx over the nearer term maybe,over the next two or three quarters? Especially considering I guess theuncertainty for me about how to think about Pluto and thin film, which I’massuming 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 wehave to batch expense quickly, I would still say operating expenditures willremain 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 andagain, like what I said, for the real long term, we’ll be able to fix the totaloperating expenditure at an absolute value, dollar value instead of apercentage of revenue because we will be able to achieve a real critical massand benefit from the continuously increased economy of scale.

Carl Richter -Susquehanna

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

Amy Yi Zhang

I would still say in the coming few quarters, it would stillbe 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] fromSignal Hill Capital.

Elaine Clee - SignalHill

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

Boxun Zhang

It is less than 0.5 megawatts.

Elaine Clee - SignalHill

Okay. And could you just comment a little more generally onmarket 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 takeaway 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 eachmonth, as we’ve gone by we’ve seen that the demand has gotten progressivelystronger and so we do see that reflected in the guidance we provided today withflat to slightly up ASPs for next year, and increasing our capacity expansionfor next year. Our silicon has increased, enabling us to give a pretty goodsubstantive 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’tthink it’s been stronger, so we are very optimistic.

Elaine Clee - SignalHill

Okay, great. Thank you.

Operator

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

Adam Krop - ArdourCapital

Good evening. I actually have a follow-up to Elaine’squestion. Can you comment on just a little bit more color on the MSK side asfar 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 toclear out their remaining slow-moving inventory in the warehouse. Based on thevolume, they sold about 1.8 megawatts modules in the third quarter. And theremaining inventory is very trivial, like I mentioned. It is less than 0.5megawatts.

Adam Krop - ArdourCapital

And did it break even in the quarter?

Boxun Zhang

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

Steven Chan

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

Adam Krop - ArdourCapital

Thank you very much.

Operator

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

David Peck -Jefferies & Company

Congratulations on a great quarter. This question may havebeen asked before, but given that you have such good visibility into 2008, howmuch 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 100megawatts will be sold to U.S. markets.

David Peck - Jefferies& Company

Okay. Thanks.

Operator

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

Glenda Shay - CitadelInvestment Group

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

Dr. Zhengrong Shi

Yes.

Glenda Shay - CitadelInvestment Group

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

Dr. Zhengrong Shi

No.

Glenda Shay - CitadelInvestment Group

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

Dr. Zhengrong Shi

Quite possible.

Glenda Shay - CitadelInvestment Group

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

Dr. Zhengrong Shi

Yes.

Glenda Shay - CitadelInvestment Group

So that is included already?

Dr. Zhengrong Shi

Yes.

Glenda Shay - CitadelInvestment Group

Can you give us more color about this Korean partner? Is itwell-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 soit’s a company that’s been supplying wafers, as far as we know, for many years.

Glenda Shay - CitadelInvestment Group

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

Amy Yi Zhang

Sorry, I missed the last bit of your question.

Glenda Shay - CitadelInvestment Group

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

Amy Yi Zhang

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

Glenda Shay - CitadelInvestment Group

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

Amy Yi Zhang

Normally we also have some natural hedging instruments inplace 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 naturalhedge in place.

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

Glenda Shay - CitadelInvestment 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 fromJayhawk Capital. Please proceed.

John Thomas - JayhawkCapital

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

Dr. Zhengrong Shi

I think this is still the full operation of our installedproduction line, and I think it is within our projected range. For example, ourQ2 to Q3 is about a 10 megawatt increase and Q3 to Q4 is also about a 10megawatt increase.

Steven Chan

And then John, I think another thing is if you noticed thecell-to-module business, it was 19% of our revenues in Q3. And actually, therun-rate normally for that should be probably less than 5%. And so even thoughit’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, isactually growing just as quickly as it has in past sequential quarters.

John Thomas - JayhawkCapital

Okay, and just quickly, I noticed you’ve locked up a lot ofpoly supply for 2009. I’m just wondering if you are fixing your prices now andthen supply is supposed to loosen up substantially in 2009, is there anypricing risk you face now basically in locking up the prices when it couldpotentially 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 thatwhat we’ve seen thus far is that the silicon supply has continuously beentighter and the length of the tightness has gotten longer than most people havepredicted.

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

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

We don’t see that as a problem.

John Thomas - JayhawkCapital

Okay, great. Thank you, guys.

Operator

We are now approaching the end of the conference call. Iwill now turn the call over to Suntech's Chief Executive Officer, Dr. Shi, forclosing remarks.

Dr. Zhengrong Shi

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

Operator

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

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