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Executives

Stephen Zhifang Cai – Chief Executive Officer

Dr. Jianhua Zhao – Vice Chairman, Chief Technology Officer

Mr. Yongfei Chen – Acting Chief Financial Officer

Elaine Li – Senior Investor Relations Manager

Analysts

James D. Medvedeff – Cowen & Co.

Pranab K. Sarmah – Daiwa Capital Markets (Hong Kong) Ltd.

James D. Medvedeff – Cowen & Co.

Jesse W. Pichel – Jefferies & Co., Inc.

China Sunergy Co. Ltd. (CSUN) Q1 2012 Earnings Call May 22, 2012 8:00 AM ET

Operator

Welcome to China Sunergy’s First Quarter 2012 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. Ms. Elaine Li, Senior Investor Relations Manager, you may begin your conference.

Elaine Li

Thank you, operator, and welcome to China Sunergy’s first quarter 2012 earnings conference call. This is Elaine Li speaking, China Sunergy’s Senior Investor Relations Manager. We have posted a presentation for this call in Webcast and Presentation under Investor Relations on our website. Today, we will be closely following and referring to that presentation in our prepared remarks.

With us today are China Sunergy’s CEO, Mr. Stephen Cai; CFO, Mr. Yongfei Chen; and CTO, Dr. Jianhua Zhao, the photographs can been seen on the page three of the presentation.

Today, before the market opened, the company issued a press release announcing our first quarter financial results and our guidance update for the second quarter of 2012. This press release is also available on the investor section of China Sunergy’s website at www.chinasunergy.com.

To start, Stephen will present an overview of our first quarter results and important developments that have taken place this year. Then our CFO, Mr. Yongfei Chen will explain our financial results in more detail. Following that, Dr. Zhao will give a technology update. Stephen will close with guidance predictions; afterwards, they will all be available to take questions.

Before I turn the call over to Stephen, may I remind our listeners that management prepared remarks include forward-looking statements made under the Safe Harbor provisions of the US Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties, and as such, our results may be materially different from the views expressed here today. A number of potential risks and uncertainties are outlined in our public filings with the SEC. China Synergy does not undertake any obligation to update any forward-looking statements, except as required under applicable law. As a reminder, this conference is being recorded.

Now, I’d like to turn the call over to CEO, Mr. Stephen Cai. Stephen?

Stephen Zhifang Cai

Thank you, Elaine, thank you all for joining. It’s been just over two months since I reported our [fourth] quarter 2011 and full year results. And today, we are pleased to report that our performance and the market conditions have shown improvements.

Please see slide five. You may remember that we set lower shipment guidance of 70 megawatts to 200 megawatts for Q1 as we were focused on restructuring our client base reorganizing our global sales team and shifting into new markets. Our actual shipments for Q1 were 79.9 megawatts and our gross margins came in at 1.1%, slightly above 1% guidance. Strong markets in Q1, included Italy with 22% of the sales, Australia which made up 18%, Bulgaria at 14% and Germany with 12%. Sales in China made up 8% of the revenue this quarter and this figure is expected to grow.

Our expanded sales teams in Asia and in Europe have been working hard to lead us into a recovery. And we see that QSAR module sales are growing stronger, we sold 2 megawatts in the first quarter and we’ve shipped another 4.4 megawatts in early May.

Our revenue at $68.5 million were down 38.2% from first quarter 2011, but considering the drop in ASPs and the lower shipments over the last quarter, this decrease is not surprising.

Net losses narrowed quite a bit too $1.6 million for the quarter, our ASP was $0.86, $0.02 higher than predicted. CSUN is neither at top nor at bottom of the pricing spectrum, we are just above the middle. As our brand recognition improves, and as we transaction to sell more QSAR modules. We hope to sell at premium to more of our pears.

Now, I want to comment on industry at large and then we review our strategic growth and our recent progress. Global solar demand for 2012 is expected to be slightly higher than last year, perhaps 28 or 29 gigawatts.

Industrial forecast show annual demand rising to over 75 gigawatts within five years partly due to a shift in demand from European to other markets, yet the global supply will still over strip demand in 2012 at roughly 45 gigawatts. So in the short term, there would be more consolidation in the industry, both in (inaudible) and in China and then projects will fall a bit further in line with the cost of reductions and the subsidy cuts.

Polysilicon supplies are now struggling much more than module manufactures. The current spot price of polysilicon is $23 to $24 per kilogram, down from $30 at the beginning of this year. The price of the raw material has jumped faster than module ASP have jumped and many polysilicon suppliers have shutdown.

We are used to volatility and our strategy has not changed, but we will still, and always have adjusted to meet current market conditions. Last quarter, we said we will focus on advancing the market. We will invest in the supply equipment to downstream projects, with an EPC partner.

In fact, we have already invested in downstream the projects that in Central Europe, by the way, potential sale in the third quarter. Downstream projects that have the potential to earn high margins, but they do require upfront investment. We work with reliable EPC partners and apply on a project-by-project basis for financing from Chinese banks.

Fortunately, we have their support, or they believe in the potential of the downstream projects and they consider us worthy borrowers. We also said last quarter that, we will focus on any initiatives, which can bring down operating costs. We have done this and I have the numbers to prove it. We’ll discuss this in a bit.

We said, we will continue to invest in building up our QSAR capacity and focus on the developing higher and high efficiency products. Our average QSAR efficiency rates are now over 19%, and our R&D center is near in completion. See slide 10, with the photos. These efforts will be explained in more detail by Dr. Zhao.

Finally, we told you, we will further localize our sales force and that we have. Please see slide nine, we hired a European marketing Director and now we are adding local salespeople in Germany. A Pan-European sales team in Paris, Frankfurt and Rome are helping us to sell more in Western Europe and the Chinese team has been driven most of our sales in Eastern Europe, such as Bulgaria.

Last week, we announced that we have shipped over 40 megawatts to Bulgaria since last January. In 2011, we gained over 30% of the Bulgarian market and we are hoping to maintain that level this year. Bulgaria is a great simple of the high potential module market for China Sunergy, and we believe, we can build on the solid relationship we have there to sell more in the future.

A few other markets also deserve special mission; see slide 8. Australia accounted for an increasing 18% of the CSUN total revenue in the first quarter. The amount there is mainly driven by commercial scale roof top projects whose costs are not considered to be at or better than great parity.

China accounted for 8% of the CSUN total revenues in Q1. We have 15 people on our sales team in our home market and are actually pursuing many projects in Northwest China. We note the recent announcement of the RMB5.5 per watt subsidy and we hope that to great connections keep pace with the growing number of the larger scale solar projects here.

Japan has also turned out to be a strong and a growing market accounting for 3% of the CSUN total revenue in the quarter. CSUN is registering a Tokyo sales office now and has hired a new Japanese sales director, who is already actively pursing sales in Japan.

Indonesia and India although not accounting for huge percentages this quarter are expected to contribute significantly in the coming quarters. U.S. market while it has huge potential has taken longer to enter due to policy and certain risks and [should varies] in the past few months.

Now the preliminary decision from the U.S. Department of the Commerce has been announced. And the China Sunergy is forced into the qualified growth wholesale source in China, are subjected to an anti-banking duty of 31.18%. We had no sales to the U.S. from last October till the end of the first quarter. However, we are planning to serve this market with the sales from outside China and then we are trying to finalize an opportunity to set up the module plant in America.

We are also pleased to have made great progress in cutting costs. I will speak briefly about how to maximize operational efficiency while protecting and improving the quality of our products.

See slide 6, in Q1, we lowered conversion costs for cell by $0.04 to $0.19 per watt. And then lowered the conversion cost for modules by $0.02 to $0.25 per watt. I’m also very excited about our new partnership with DuPont a supply partner, who has provided us with best-in-class metal pastes and back sheets.

In Q2, we are targeting to bring down the sales conversion cost to $0.16 by doing the following. Using much less metal pastes, decreasing use of utilities like water and electricity, and increasing the run rate targeted to reduce module conversion cost to about $0.23 by increasing the run rate using fuel frac, using new (inaudible) cutting more precisely, growing sales [brokerage] rate and minimizing power loss. Meanwhile, we are also operating more leanly by clearing all inventory and we are no longer producing on spec, but waiting until we are very confident in our sales forecast.

Most of the $55 million in the inventory at the end of the Q1 was shipped in April. We have also trimmed sales and the marketing expenses by reducing overseas travel, the company has been managed more tightly than ever.

In closing, before I return to offer our guidance for Q2, I would like to express an optimistic view about the future of industry and about the CSUN being well positioned for recovery. This year, we are expecting prices to fall another 10% to 15%. We are prepared for further price drops and have those strategies to persist in anticipation of the next wave in demand.

The overcapacity situation is still serious, and we see some weaker players being driven out of the market. However, we had a strong technology, a clear strategy, a strong management team, and a good global reputation, and we believe we will be one of those companies who is around for the long-term.

Now, I’d like to turn the floor over to Yongfei Chen, our CFO to go through the numbers in detail. Mr. Chen?

Yongfei Chen

Thank you, Stephen. Please turn to page 11 in PowerPoint presentation. In the first quarter of 2012, we shipped a total of 29.9 megawatts, a 31.6% decrease of the first quarter and 18.5% decrease year-on-year. A 31.6% decrease of the first quarter and 18.5% decrease year-on-year.

Q1, shipments are in line with our guidance of 70 megawatts to 80 megawatts and as Stephen will point out later, Q2 shipments are quite strong. We feel we have a good momentum so far this year. First quarter revenues were $68.5 million, a decrease of 38.2% of the first quarter, and less than half of the revenues in Q1, last year.

Our ASP at $0.86 per watt, it’s $0.02 better than expected. As you know, this is less than half of the ASP a year ago, which was $1.74. Obviously revenue and ASP are directly related and therefore markets driven.

Our gross profit for Q1, 2012 was $728,000 (inaudible) last two quarters. While this is still only a gross margin of 1.1%, which is slightly better than our prediction of 1% and shows we are moving in the right direction. And it is an improvement of a break-even at gross margin level last year.

Our net loss for the first quarter at $9.6 million narrowed from $49.6 million in Q4. Our net loss per ADS was $0.71 on both basic and diluted basis. There are a few key reasons for the substantially narrowed loss. This quarter there was no goodwill impairment. This provisions, was $3.4 million less and interest expense declined by $3.1 million. In addition, we generated a one-time gain of around $8.2 million by repurchasing our own convertible bonds at a discount.

In the future, the company will have a better debt mix and we will use more long-term loans and (inaudible) bonds, which have a lower cost maintenance fee than (inaudible) loans. Despite of the one-time gain, the narrowing net loss as a result of diligent efforts to control operating costs and to reduce expenses, which is something we must do to become profitable again, especially while prices are still falling.

As Stephen mentioned, cell and module conversion cost was down by $0.04 and $0.02 respectively due to advantages and cost savings from the new metal paste supplied by (inaudible) as well as the increased production volume, this is very positive news.

As the cell conversion cost remains flat in previous quarters and came about despite a utilization rate in cell lines of only 76%. Our operating efficiency is getting better and better.

Selling expenses were $4.3 million, 25.9% lower than in Q4. During the period, interest expenses decreased by $3.1 million as we (inaudible) notes. We recorded lower bad debt provisions this quarter, although we did accrue an unpaid brands of around $5.9 million, customers who are having the most trouble paying are mostly from Europe, especially Italy. We made great efforts in restructuring our client base and tightening credit control. As a result, our accounts receivable decreased by a total of $26.8 million over December 2011.

Inventory levels increased 25% to $55 million. Most of the increased inventories was subsequently shipped in April. CapEx was $10 million this quarter, mostly for the expansion project of cell and module lines. We are carefully considering any expansion and still taking a slow and more conservative approach. I will close this with a few words on our cash position and financing. We saw strong operating cash inflow in the first quarter, mainly because of the better management of accounts receivable, other receivable and accounts payable. We currently have cash on hand of $233.2 million. We had expanded the relationship with major Chinese Banks, we have long-term working capital needs and into projects financing as well.

Now, Dr. Zhao, will update you on the latest technology news. Dr. Zhao?

Dr. Jianhua Zhao

Moving on to technology, please see slide 10. We have made impressive progress in the last quarter. The batch average efficiency of Quasar cells is now 19.1% and even topped 19.3% at times. So we believe the production average efficiency will soon come improved to this range. Also, we have produced PSAR modules using mono-like wafers with operating efficiency of around 18%.

The mono-like modules have been shift to our customers. Mono-like production has stopped for a couple of months, and we will review in June. And the expenses remain stable and the new R&D center is nearing completion and we will open for both research and production at the end of this year. You can see a photograph of this building in slide 10.

Now back to you. Stephen?

Stephen Zhifang Cai

Thank you, Dr. Zhao. Now I would like to close with the guidance for the second quarter of the 2012. Please refer to the slide 14. We expect a large jump in shipment in Q2 to 145 megawatts to 155 megawatts. Gross margin should recover to the mid single digits, hopefully around 5%. We are still forecasting a net loss, our guidance for the full year still stands at 500 megawatts to 550 megawatts.

We feel confident about these predictions and we hope that the global investor confidence in the sector recovers in the coming two quarters.

Now, we’d like to take your questions. Our Senior Investor Relations Manager Mr. Elaine Li, will facilitate this session and assist the management in answering questions. If anything does not get answered satisfactorily on this call, please do contact us afterwards and we will be glad to engage with you, and attempt to answer your questions. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question comes from the line of James Medvedeff from Cowen & Co. Please ask your question.

James D. Medvedeff – Cowen & Co.

Good evening.

Stephen Zhifang Cai

Good evening, Medvedeff.

James D. Medvedeff – Cowen & Co.

So this is the first time in a while that you’ve sold any cells, I wonder what can you tell us what the ASP was for those? Hello.

Stephen Zhifang Cai

Hello. First quarter we have not sold few megawatts offsite. And ASP is around $0.40 per watt.

James D. Medvedeff – Cowen & Co.

Okay, thanks. And can you help me with your PP&E, your capital PP&E is up $16 million in the quarter and yet your capital spending is only $10 million, so what’s missing there?

Unidentified Company Representative

[Foreign Language]

Unidentified Company Representative

[Foreign Language]

Unidentified Company Representative

Because some CIP is turning to PP&E, so that’s the gap.

James D. Medvedeff – Cowen & Co.

Okay, thank you. And backing up to the revenue line, again, did you have any tolling in the quarter, third -party tolling?

Stephen Zhifang Cai

No.

James D. Medvedeff – Cowen & Co.

Okay. I’ll get back in the line, let someone else ask. Thank you.

Stephen Zhifang Cai

Thank you.

Operator

Your next question comes from the line of Pranab Sarmah from Daiwa Capital Markets. Please ask your question.

Pranab K. Sarmah – Daiwa Capital Markets (Hong Kong) Ltd.

Yeah, thank you for taking my question. My first question is on your shipment guidance. Could you elaborate like high efficiency module QSAR or PSAR, how much they will account in the second quarter and rest of the year 2012?

Stephen Zhifang Cai

I think in the second quarter as a prediction, QSAR about is a 5 megawatts. And the PSAR, we will not a prediction.

Pranab K. Sarmah – Daiwa Capital Markets (Hong Kong) Ltd.

Okay. And for 2012 out of 550 megawatt how much you think that your high efficiency these type of module will account for?

Stephen Zhifang Cai

Okay, I think for QSAR I think around 50 megawatts to 60 megawatts, around.

Pranab K. Sarmah – Daiwa Capital Markets (Hong Kong) Ltd.

Okay, got it. That means you are expecting a very significant ramp up on second half because first half is only 7 megawatt, so you will need almost like 40 megawatt on the second half of this year.

Stephen Zhifang Cai

Yeah.

Pranab K. Sarmah – Daiwa Capital Markets (Hong Kong) Ltd.

Okay, I got it. And second question is, what is the ASP premium of these modules over normal modules and what is the margins or cost structure versus normal module?

Stephen Zhifang Cai

I think we will make up the $0.05 per watt, versus a normal module if we sell the QSAR module around something.

Pranab K. Sarmah – Daiwa Capital Markets (Hong Kong) Ltd.

Around 5% net gain per watt?

Stephen Zhifang Cai

Yes, correct.

Pranab K. Sarmah – Daiwa Capital Markets (Hong Kong) Ltd.

Okay, Got it. Thank you very much. And my last question is on your sales breakdown wise, it looks you do not have too much exposure on U.S. market on Q1, but your rest of the world looks like it will increase quite significantly in the 2012? Where the rest of the world demand is coming from?

Stephen Zhifang Cai

In first quarter, frankly speaking, we don’t have the sales in the U.S. market.

Pranab K. Sarmah – Daiwa Capital Markets (Hong Kong) Ltd.

But on 2012 estimates, you have about 10%, 15% exposure, you expect rest of the world which is I’m going to define, can you elaborate, which is the rest of the world market this one?

Stephen Zhifang Cai

But totally we have forecasting this year, our growth is world grows from the last year’s more than 400 to this year’s over 500, mainly the growth come from the China, India, Australia, Japan and even in the Eastern Europe.

Pranab K. Sarmah – Daiwa Capital Markets (Hong Kong) Ltd.

Okay, thank you very much.

Stephen Zhifang Cai

Thank you.

Operator

(Operator Instructions) Your next question comes from the line of [Paul Silpa from S&A Capital]. Please ask your question.

Unidentified Analyst

Hey, guys, just two quick ones. One, on your cost reduction roadmap, you insert an asterisk where you say it’s manufacturing cost only encapsulation loss is not included. Can you sort of clarify what encapsulation loss is and can you also talk about any incremental costs like warranty or insurance or shipping that we go into that cost that maybe isn’t captured in the chart in your presentation?

Elaine Li

It’s $0.02.

Unidentified Analyst

$0.02 for the other stuff?

Elaine Li

Yeah, Paul, this is Elaine. Yeah, it covers about $0.02 for other packaging or power loss expenses. We’re always taking the manufacturing cost on the presentation that we that we prepared today.

Unidentified Analyst

Great. Just one other clarification and then second on your Bulgarian project that you’re intending to sell in Q3, can you talk about the economics of that, and have you lined up buyers for that yet? Is there a robust market for projects in Bulgaria to purchase, and sort of, what do you think ASPs will be for that, and sort of what kind of margin you think that project will bring?

Stephen Zhifang Cai

In Bulgarian market, we will not involve any project investment, but it will just be only to sell business with a local partner?

Elaine Li

Yeah, Paul to clarify, the 4 megawatt that we invested were in Italy, not Bulgaria.

Stephen Zhifang Cai

Not Bulgaria, yes.

Unidentified Analyst

Okay, my mistake. I thought you said Bulgaria, then my questions have all been answered.

Stephen Zhifang Cai

That’s all, that’s okay.

Unidentified Analyst

Thank you so much.

Elaine Li

Thank you.

Stephen Zhifang Cai

Thank you.

Operator

(Operator Instructions) Your next question comes from the line of James Medvedeff from Cowen & Co. Please ask your question.

James D. Medvedeff – Cowen & Co.

Hi. I just wanted to follow up on the cell piece. What is your capacity in cells at the end of Q1?

Stephen Zhifang Cai

Okay. Now, we still have the 400 megawatts of the cell capacity in Q1.

James D. Medvedeff – Cowen & Co.

Okay. And so in order to deliver 145 megawatts to 150 megawatts modules in Q2, I assume you’d be buying some cells?

Stephen Zhifang Cai

Yeah, you’re right. We will buy cell as a source. And some we shall source in Q2 where we will buy cells from outside to support the U.S. market, as you know that.

James D. Medvedeff – Cowen & Co.

Yes, yes, of course. Then if you are able to make, are you able to run above the 400 megawatt run rate, or is that a true, is the nameplate kind of the true operating level. So in another words, if you are going to sell a 150 megawatts of modules, are you going to make 100 megawatts of cells or you can push that a little harder, make more?

Yongfei Chen

Yeah. 100%

Elaine Li

We can actually, its up 100%, we can produce around 115% actually.

James D. Medvedeff – Cowen & Co.

Okay. And finally you said, I think you said the ASP for cells in the quarter was $0.40. Now if I add $0.25 for conversion cost and maybe not everyone can do it that cheaply, but that’s only $0.65 cost and seems like your gross margin, would be much higher.

Yongfei Chen

Yeah, I think so.

Elaine Li

To, clarify the $0.40 is the megawatt, that we sold externally, that those are actually secondary cells, we shipped over 75 megawatt modules, that means most of our cells will be used internally. So you cannot take $0.40 to do the calculation.

James D. Medvedeff – Cowen & Co.

Okay, so the $0.40 is for sort off spec secondary cells.

Elaine Li

Yeah, you are right.

James D. Medvedeff – Cowen & Co.

At or below cost perhaps, it sounds like.

Elaine Li

Yeah.

James D. Medvedeff – Cowen & Co.

Okay, that’s all for me. Thanks again.

Yongfei Chen

Thank you.

Elaine Li

Thank you, James.

Operator

(Operator Instructions). Your next question comes from the line of Jesse Pichel from Jefferies. Please ask your question.

Jesse W. Pichel – Jefferies & Co., Inc.

Hello, everyone, good evening.

Stephen Zhifang Cai

Hi, good evening, Jesse.

Jesse W. Pichel – Jefferies & Co., Inc.

Yes. Have we seen any rationalization of capacity in China, from some of your smaller competitors?

Stephen Zhifang Cai

Jessie, say it again.

Jesse W. Pichel – Jefferies & Co., Inc.

Have we seen any smaller competitors of yours go away?

Stephen Zhifang Cai

You are talking about consolidation?

Jesse W. Pichel – Jefferies & Co., Inc.

Yes.

Stephen Zhifang Cai

Since last quarter, we haven’t been approaching the some of the small and the middle size of capacity of the cell or even some modules of players. We are going to we have the original plan to consolidate with them, but unfortunately finally results that obviously we stop the plan, because their

But unfortunately finally results that we start the plan, because their equipment, they bought even a half year ago and the one year ago, is not matching our requirements, which will make our high efficiency. And this was one question, one of the reasons we stopped that.

And second one is that total equipment of manufacturing actually their cost already equaled or even below their equipment of cost. So we could buy the new equipment from the equipment maker. We don’t need to buy the current equipment that they have. So this is the second reason we don’t go forward.

Jesse W. Pichel – Jefferies & Co., Inc.

All right. I was just asking if there’s been any rationalization of capacity in the industry in China, if we’re starting to see the banks cutback on their funding of some of these smaller competitors. Let me move on to a second question, thought, in your press release you mentioned PowerClip, and I was wondering how much does PowerClip cost you?

Stephen Zhifang Cai

Okay, so turning to our CFO, Chen.

Unidentified Company Representative

[Foreign Language]

Unidentified Company Representative

[Foreign Language]

Elaine Li

It’s about $1.5 million covered sales this year.

Jesse W. Pichel – Jefferies & Co., Inc.

What is that per watt, you know? About $1 a watt, is it?

Yongfei Chen

I think is about 450 megawatts above.

Jesse W. Pichel – Jefferies & Co., Inc.

I see. Very few of the large Tier 1 cell and module solar module suppliers have module insurance. Why do you think that is?

Stephen Zhifang Cai

It’s because, well, we wanted to get strong the, strongest local finance from the local bank, because we bought this insurance, we will have the strongest, strength of building confidence for our customer to buy our product, because our lease brand is the – we are known in the group, but not enough to cover all of bank in group. So if we buy that, the customer (inaudible) local finance from bank, definite purpose.

Jesse W. Pichel – Jefferies & Co., Inc.

Does PowerGuard protect the customer against the bankruptcy in China for some of your competitors?

Stephen Zhifang Cai

Yes, including terms, yes.

Jesse W. Pichel – Jefferies & Co., Inc.

Okay. Thank you very much.

Stephen Zhifang Cai

Thank you Jesse.

Operator

(Operator Instructions) Ladies and gentlemen, we have now come to the end of our question-and-answer session. I will now turn the call back to Stephen for closing remarks. Please go ahead.

Stephen Zhifang Cai

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

Operator

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

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