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

Q1 2012 Earnings Conference Call

June 5, 2012 8:00 am ET

Executives

Dr. Peng Fang – CEO

Min Cao – CFO

Ming Yang – VP of Business Development and Corporate Communications

Martin Reidy – Brunswick Group

Analysts

Jesse Pichel - Jefferies & Company, Inc

Brandon Heiken - Credit Suisse

Karen Tai - Piper Jaffray & Co

Kelly Dougherty - Macquarie Research Equities

Mahesh Sanganeria - RBC Capital Markets

Yeuk-fai Edwin Mok - Needham & Company, LLC

Caleb Dorfman - Simmons & Company

Amy Song - The Goldman Sachs group, Inc

Pavel Molchanov - Raymond James

Pranab Kumar Sarmah - Daiwa Capital Markets

Jeff Osborne - Stifel Nicolaus & Company, Inc

Operator

Hello, and thank you for standing by for JA Solar’s First Quarter 2012 Earnings Conference Call. At this time, all participants are in a listen-only mode. After management’s prepared remarks, there will be a question-and-answer session. Today’s conference is being recorded. If you have any objections, you may disconnect at this time.

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

Martin Reidy

Thank you. Welcome to JA Solar’s first quarter 2012 earnings conference call. Joining us from the Company today are Dr. Peng Fang, CEO; Mr. Min Cao, CFO; and Mr. Ming Yang, VP of Business Development and Corporate Communications.

As stated in the press release, the oversimplified translation of CNY into U.S. dollars, which is set at 6.2975 RMB to the dollar, is made solely for the convenience of the audience. References to dollars are the lawful currency of the USA.

The press release published today provides detailed financial tables for the conversion from CNY to USD. On this call, Dr. Fang will begin with an overview of our Q1 2012 results covering the business and market developments and outlook. Following that, Min will provide details of the Company’s financial performance.

After prepared remarks, we will open up for questions for the remainder of the call. And we expect the entire call to last approximately one hour.

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

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

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

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

Dr. Peng Fang

Thank you, Martin, and thank you everyone for joining today’s call. The market environment has remained volatile in the first quarter with downward pricing pressure continue to squeezing margins across the industry. In this seasonally slow quarter; JA Solar recorded a shipment of 366 megawatt, which is above the high-end of our guidance of 350 megawatt.

It is clear that the long-term winners in the solar industry will be the companies who have the customer relationships that pick (indiscernible) and the financial strength to sustain through this current downturn. Over the past several quarters, JA Solar is focused on executing a strategy to scope with the external industry challenges and position ourselves for long-term market leadership and in Q1 we made important progress.

We maintained a healthy financial position and leveraged this to build our marketing share. Customers from various regions are increasingly relying on top tier suppliers who has the ability to navigate through the industry downturn. The only one to choose the companies that will be able to honor the long-term product warranties and these customers recognize that JA Solar is in a better position than many of our competitors. As a result, we have maintained a strong market position, thanks to our dependability and bankability while been conservative with our cash.

And we continue to push forward with important technologically innovations and not only reduced cost, but also enable us to manufacture high quality and high efficiency products that are better than our peers offerings and well suit to the changing market requirements.

This is obviously a challenging time for everyone in the solar industry, but at the end of this first quarter, I believe that we’re better positioned to weather the near-term challenges and emerging strongly when the market recovers.

Let’s look at some of the key metrics. Firstly, our shipments, this quarter despite we have Chinese New Year holiday shut down, we shipped 366 megawatt of solar cells and the modules above the top-end of our previous guidance of 320 megawatt to 350 megawatt. This is encouraging. Shipment was slightly down from Q4 because of the Chinese New Year holiday reduced our production capacity during the first quarter, which in turn influenced our shipments. Demand remains very strong, particularly to our high efficiency products, which now accounts for approximately 60% of our total cell productions.

In terms of breakdown we shipped approximately 62% of cells and 78% of modules, which recently awarded the contracts to JA Solar. We expect that module shipments to China to increase substantially in the coming quarters as installation activity in China picks up.

We recorded a positive gross margin of 2.1% in the first quarter, which includes a provision for countervailing and anti-dumping duties of US$2.9 million or roughly 1.1% of our net revenue. Excluding the impact of this provision, gross margin would have been 3.2%. This sequential improvement in gross margin was driven by our efforts to reduce costs while continuing to offer high quality, high efficiency products.

On the revenue side, cell price has stabilized at reasonable levels, though we did see a strong downward pressure on module pricing towards the end of first quarter, which in turn pressure gross margin. Module price coming under pressure because of the uncertainty in Europe markets and the continued supply-demand imbalance.

We posted a net loss of US$39.8 million or US$0.20 per diluted ADS for the quarter. However, we want to highlight is that our operating cash flow and EBITDA continue to be positive. Throughout the current downturn marketing cycle, JA Solar has been committed to prudent cash management. We now have cash and cash equivalents of US$676.2 million with a total debt to assets ratio of 42.6%. This compares favorably to many of our competitors in the industry. Banks and other financial institutes are increasingly focusing on supporting only a handful of past solar manufacturers with strong financial positions including JA Solar. And this of course gives our customers confidence that JA Solar will be their long-term partner.

At the same time, this quarter we continued to focus on cost reduction through innovations in technology, improvements in production efficiency, and the better supply chain management. For example, we are introducing a new great design which reduces the amount of silver paste we use on a per watt basis, but actually has higher efficiency than our (indiscernible).

We also started working with the new silver paste suppliers at a rate that is 10% cheaper than our previous suppliers. Furthermore, as we build up our module capacity, we’re achieving improved economies of scale and our unit costs are therefore reducing. And we’re confident that JA Solar has the financial fundamentals in place to see through the current challenges and sustain long-term market leadership.

Now I’d like to take you through the progress we’ve made in our main markets this quarter. On (indiscernible) conditions are tough throughout the global solar market, but demand for our product is holding up very well.

As I mentioned, we’ve seen that more and more customers are focusing their procurements on the top tier suppliers who they’re dependent on in the long-term. Customers want to know that the 10-year or 25-year warranties on their products will be honored, so they want to work with companies who have the financial strength to navigate through the current challenges.

We performed well in German and Italy this quarter. While there is clearly some uncertainty about the long-term sustainability of solar incentives in this market, we are confident that Italy and Germany can continue to be strong drivers of demand in medium-term. Even our solar incentives are adjusted, we have seen the demand for roof-top installations growing in these regions and we’re benefiting from this trend because the high-power offered by our high efficiency modules makes them ideally fit to the applications in constrained areas.

We also offered a very attractive ROI in comparison to our competitors’ product. We expected a demand we’ve seen for our roof-top product to continue through at least the next two quarters in Germany and we expect the demand in Italy to remain strong through the Q3 as well.

While we believe that, we can see sustainable demand from Europe in the long-term. We’ve been working hard to push into other promising market. We see Japan as a crucial market because there is a huge potential for long-term growth. I’m pleased to say that we’re ahead of the curve here and are performing very well.

In Q1, we marked another record of quarterly shipment to Japan, independent to market analysis suggesting that JA Solar was one of the top [steady] suppliers to Japan in the beginning of the year.

The partnerships we’ve been built with the local distributors and OEMs are starting to paying-off. We’re now have a local sales team on the ground driving our engagements with the Japanese customers, where the Japanese market promises high growth in the coming quarters, only if selected a few producers will do well there. Japanese clients demand very high-quality and high-efficiency product. So it is very encouraging that our product has gained widespread acceptance in a relatively short period of time. This speaks to the technology and the product quality that differentiated JA Solar’s product from those of our peers.

There are also a number of our other new markets where we’re seeing promising sign of growth. We’re very excited by the potential of growth in the Middle East. For example, in this quarter we began volume shipments to the UAE, which is relatively new market for us. Now – we now have local office on the ground in the region, and we aim to expand our footprints here by partnering with project developers and EPCs. We’ve also gained solid tractions in other fast growing markets like Australia and the U.K.

As I mentioned, Q1 is traditionally a slow quarter in the China market with bidding and the installation activities only rarely picking up after Chinese New Year. However, we’ve made a significant progress in project development in Q1. For example, we’ve received provisional approval for Jiuquan, our 100 megawatt project. In addition, we were awarded double-digits of megawatt of captive project under the Golden Sun program. And we’ve also owned the bidding for more than 100 megawatt of other utility-scale programs with key Chinese IPPs. We expected that 2012 will be another strong year for China market and we’re confident that JA Solar can ship several hundreds of megawatts to China, this year.

Looking at the United States, we’re disappointed by the Department of Commerce’s preliminary decision on anti-dumping duties we made lastly since the third quarter of last year, we’ve been taking the necessary steps to ensure that JA Solar is relatively insulated from the effect of new tariff. We’ve been working to establish a long-term solution through our capacity requirements, including establishing more partnerships with cell producers best in those regions and actively exploring the feasibility of establishing our own manufacture facility for solar products outside of China. We aim to ensure that we can meet the growing demand for our products in the U.S. and provide our U.S. customers with access to solar product at globally competitive price.

I’m pleased to say that the majority of the products that we shipped to the U.S. in Q1 were manufactured in regions outside of China. As a result, we expected our exposures to be relatively small and significantly lower than many of our peers. In total, we recorded a provision of anti-dumping and anti – and countervailing tariff of $2.9 million. This is only a preliminary determination and the tariff decision is expected to finalize in the fourth quarter of this year. Because we had the flexibility and the foresight to adjust our performance strategy for U.S. at an early stage, we’re much less exposed to the tariff than most of our peers. While we believe that the tariffs will not help development of U.S. market, we’re still optimistic about the regions long-term future. We’ve a strong sales and operating team in North America and we remain committed to our existing partnerships with the leading developers and IPPs there. And in terms of pricing, we expected a more stable pricing as the tariff take effect and the supplies become constrained.

Looking to Q2, we’ve seen volumes picking up in Europe. Although the pricing environment remains challenging, demand for our products remains strong. Our guidance for shipment in Q2 is 420 megawatt to 440 megawatt. We’ll continue to be focused on managing cash and reducing product cost, while building our market share in existing market and moving further into new ones. We’re maintaining our yearly shipment goals that we’ve previously announced at 1.8 to 2 gigawatts.

Now, let me turn the call over to Min for a more detailed update at our operations and our financials.

Ming Yang

Thank you, Dr. Fang, and welcome everyone to today’s call. I’d like to give you some details on our key metrics and financial results for the first quarter of 2012.

Looking first at our progress in research and development, as Dr. Fang pointed out earlier, JA Solar enjoys an important competitive advantage compared to our peers because of our high-efficiency products, which are very well suited to the changing market demand. We see a big increase in (indiscernible) installations in Europe and Japan as the roof-top market there increases.

On the cell side, the conversion rate of our high-efficiency mono-crystalline cells SECIUM reached 19.2% and our MAPLE high-efficiency multi-crystalline cells reached 18.5% efficiency and our standard multi-crystalline solar cell hit the 19.4%. We believe these are higher than what’s commonly available in the market today.

We’re also pushing forward new innovations. For example, we’re now able to produce solar cell in commercial volume incorporating our new Metal Wrap Through or MWT technology. MWT technology eliminates the need of bus bars in the front side of the cell, which increases the power output of standard multi-crystalline solar cells.

In addition, we expect to enhance our newer generation solar cell technology in the coming weeks, which will represent an important milestone on our technology roadmap to 20% commercial efficiency.

Now turning over to our financials, in Q1 we shipped 366 megawatts of solar power products above the top-end of our previous guidance, representing a decrease of 8% sequentially and a decrease of 18.8% year-over-year.

Solar cells accounted for 57.4% of shipments, cell and module tolling accounted for 4.4%, and module accounted for 38.2%. As we’ve said previously, over the last year we’ve significantly increased our focus on module sales and achieved substantial growth in module shipment volume. As Dr. Fang mentioned, module sales was slightly down this quarter, but we expect this to pick up in Q2 as our Chinese installations increase.

In terms of geographic breakdown, in Q1, approximately 47.4% of shipments were to China and approximately 52.6% to overseas market. To breakdown international shipments further, our European sales were 32.4% and rest of the world including U.S. and Japan accounted for 20%.

Total revenue for Q1 was US$254.4 million, a decrease of 17.7% sequentially. Q1 gross profit was US$5.3 million, gross margin including provision for potential countervailing, anti-dumping duties was 2.1% in the first quarter of 2012 compared with 0.5% in the fourth quarter of 2011. Assuming the progression for the countervailing, anti-dumping duties gross margin would have been 3.2%.

Total operating expenses in the first quarter was $38.5 million, a sequential decrease of $78.9 million from the Q4 2011, which included PP&E impairment of $48.1 million. Included in SG&A this quarter is RMB 40 million or US$6.4 million of accounts receivables provision.

Loss from operations was US$25.3 million or negative 9.9% of net revenues in Q1. This compares with a loss from operations of US$77.4 million or a negative 25.1% of revenue in the fourth quarter of 2011.

Interest expense in Q1 totaled US$19.5 million, up slightly from US$18.7 million in Q4 2011. Other income in Q1 was US$5.1 million compared to an income of US$33.2 million from Q4 2011. Q1 net loss was US$39.8 million and loss per diluted ADS was US$0.20 compared to loss per diluted ADS of US$0.39 in the fourth quarter of 2011.

On the balance sheet side, our cash and cash equivalents at the end of Q1 was US$676.2 million compared with US$617.6 million at the end of the Q4 and US$439 million at the end of the first quarter of 2011.

Accounts receivables at the end of Q1 were US$230.9 million compared with US$197.7 million at the end of Q4 and US$185.1 million at the end of Q1 2011.

Days of sales outstanding at the end of Q1 were 82 days compared with 58 days in Q4 2011. Total inventories at the end of Q1 were US$189.4 million compared to US$116 million at the end of Q4, 2011, and US$197.2 million at the end of the first quarter 2011. High inventory balance at the end of this quarter was in preparation for the increasing shipment in Q2. Inventory turnover days in Q1 were 67 days compared with 34 days in Q4, 2011.

Total prepayments to suppliers were US$197.2 million down from US$284.1 million in Q1 2011. We’re expected to utilize US$77.7 million of prepayments or 26.1% over the next 12 months. Total working capital at March 31, 2011 was US$591.2 million.

Total short-term bank borrowing was US$153.8 million, while long-term bank loans outstanding were US$697.9 million; the face value of our convertible notes due 2013 was US$220.7 million. We have US$379.7 million of bank loans due over the next 12 months. The company generated a positive operating cash flow of US$18.2 million in Q1.

Operators, you may now open the call up for questions. Thank you.

Question-and-Answer Session

Operator

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

Jesse Pichel - Jefferies & Company, Inc

Yes. Hi, good evening, gentlemen. What is the Company’s strategy once the SolarWorld WTO case expands to the EU; will you move your manufacturing lines or will you continue to trade for Taiwanese cells?

Dr. Peng Fang

Yeah, we have good relationship with some customers in the EU, and some of them have manufacturer capability locally in Europe. If that really happen, so far we didn’t see it has to happen, right. So, if that really happen we can shifting our partnership or even have some investment or relationship with our customers who has manufacturer facility over there. So we’re thinking we are – management is looking into this possibility and also we are trying to prepare the countermeasures. Thank you.

Jesse Pichel - Jefferies & Company, Inc

Okay. Okay, thank you. And if I have a follow-up question it would be; what is your outlook for ASPs and cost as we look for the rest of 2012?

Ming Yang

Hi, Jesse this is Ming. Thank you for your question. So, in terms of ASP we’re actually looking at a fairly wide range for the second half of this year as we end the year. So depending on various markets, the pricing can be quite wide. For Europe and China for example we’re probably looking in the low US$0.78 to the high US$0.68 to US$0.78 type of range. But for markets like Japan, ASP could be as high as US$1 or higher and then for markets like U.S. that remains in the US$0.90 to US$1 range. So, various markets are very different pricing and that really is driven by the geographic distribution of our sale.

Operator

Thank you for your questions. The next question comes from the line of Satya Kumar from Credit Suisse. Please ask your question now.

Brandon Heiken - Credit Suisse

Hi. This is Brandon Heiken speaking on behalf of Satya Kumar. Thanks for the question. I was wondering if you could clarify what – you mentioned that ASP dropped significantly at the end of the first quarter. Are you able to say what the ASPs were in the first quarter and also ASPs for cell, and if I could follow-up on Jesse’s question about your cost in the first quarter and target for the year? Thank you.

Ming Yang

Okay. So, I guess, the ASP in terms of overall Q1 versus the Q4 was down approximately 18% and most of that drop occurred in – towards the end of the quarter. But cell ASP was actually relatively flat; it was beyond the low single-digit percentage range.

And what was your second question? I am sorry.

Brandon Heiken - Credit Suisse

For costs, if you could talk about cost for the first quarter and for the rest of the year, please?

Ming Yang

Okay. So in terms of overall costs for Q1, we have some high cost inventory that has to be rolled here. But I think if you exclude the cost of high inventories, I would say the overall manufacturing cost is probably in the high US$0.60 to US$0.70 type of range, and I believe we can lower such module production cost and well we can lower that cost to probably around the US$0.60 range in the second half of this year for our modules.

Brandon Heiken - Credit Suisse

And what about cell?

Ming Yang

So we’ve never disclosed the cell processing cost. The cell processing cost did come down during the quarter.

Brandon Heiken - Credit Suisse

Okay. Thank you.

Operator

Thank you for your questions. Next question comes from the line of Ahmar Zaman from Piper Jaffray. Please ask your question now.

Karen Tai - Piper Jaffray & Co

Hi, Dr. Fang, Mr. Cao and Mr. Yang; this is Karen calling on behalf of Ahmar. I have one question regarding your OpEx guidance. Due to your expectation of increased module shipments in the second half, what is your guidance for OpEx going forward?

Ming Yang

Okay. We think operating expenses should be relatively flat excluding the progressions for accounts receivable, so probably in the current type of range that you saw in Q1.

Karen Tai - Piper Jaffray & Co

Okay, got it. I’ll go back in the queue. Thank you.

Ming Yang

Thank you.

Operator

Thank you for your question. Next question comes from the line of Kelly Dougherty from Macquarie. Please ask your question now.

Kelly Dougherty - Macquarie Research Equities

Hi, guys. Thanks for taking the question. I just want to dig into two things. I guess, follow-up on the comment about pricing being so different on a geographic basis, can you give us a sense of that, 1.8, 2 gigawatts, how that breaks up geographically? And then maybe within that as well for the second quarter and for the full-year, how you expect the separation between cells, modules and then projects? Thanks.

Ming Yang

Give us a minute. We need to do some really quick math. Hold on.

Kelly Dougherty - Macquarie Research Equities

Sure. Thanks.

Ming Yang

Okay, so Kelly it’s more than difficult to give just a straight geographic because a big portion of our cells is still sourced out and those still go to China. So, overall we still anticipate roughly half of our shipments would go to China, which is a mix of modules and also solar cells. And then Europe would probably constitute around 30% to 35% of our overall shipments, and the rest would be the Japan, India, U.K. and other countries.

Kelly Dougherty - Macquarie Research Equities

Min, could you maybe just break down the module shipments amongst, maybe China, Europe, Japan, the U.S. just from the module perspective?

Ming Yang

From module perspective – so for example, for the full-year guidance of 2 gigawatts we would expect about 50% of that this modules and roughly a third would go to China, and then about 40% would go to Europe and the rest would go to, for example India and Japan and U.S.

Kelly Dougherty - Macquarie Research Equities

Okay, great. And then maybe if could give us the split between cells, modules and projects for the second quarter and for the full-year. I think you said 50% modules, but how much are you allocating maybe to your own projects for the full-year?

Ming Yang

So, project would be in the second half because of the development time and the time for construction; and for Q2 …

Dr. Peng Fang

Our module shipment in Q2 probably is about 60% in megawatt.

Ming Yang

Yeah.

Dr. Peng Fang

So we actually would ship more modules, whereas in Q2.

Kelly Dougherty - Macquarie Research Equities

Okay, perfect. And then just real quickly, for projects you said more a second half weighted, but do you have a megawatt target maybe we could have?

Ming Yang

Around 100 megawatts.

Kelly Dougherty - Macquarie Research Equities

Around 100. Okay, thanks very much guys.

Ming Yang

Thank you.

Operator

Thank you for your question. Your next question comes from the line of Mahesh Sanganeria from RBC Capital Markets. Please ask your question now.

Mahesh Sanganeria - RBC Capital Markets

Thank you. Min, on the cost reductions, can you give us an idea of where the most reduction is coming from, in the module side or on the cell?

Ming Yang

It would come from both – it would come from both. So, both wafer cell and module would come down in terms of cost.

Mahesh Sanganeria - RBC Capital Markets

So, is it proportional, I mean, is it all coming under the same rate?

Ming Yang

I would say similarly, yeah.

Mahesh Sanganeria - RBC Capital Markets

And in terms of your assumption for the full-year shipment, if there is an impact on the demand on Europe; how much can be the variation in your shipment depending on what happens in Europe?

Ming Yang

So, if we look at our second half shipment actually a lot of it’s actually based on the growth for China, for us. Also we have a lot of significant project pipelines in the U.S. and South Africa for example also – for example France, so we think that our geographic distribution is as relatively diverse, also the ramp-up of our Japanese customers for example. Yeah, so we think overall impact from Europe or particularly Germany and Italy in terms of the changing regulations they would be relatively manageable you know in terms of our guidance.

Mahesh Sanganeria - RBC Capital Markets

Okay, thanks.

Operator

Thank you for your questions. (Operator Instructions) Your next question comes from the line of Edwin Mok from Needham. Please ask your question.

Yeuk-fai Edwin Mok - Needham & Company, LLC

Hi. Thanks for taking my question. So first one is on Italy; how much of your guidance is baked into assumption that there’s a [pooling] effect in Italy? And then my follow-up question is on Japan, you mentioned there is strong growth there. How do you guys see your position in Japan versus how local supply there, and do you see opportunity to substantially grow this share in that market?

Dr. Peng Fang

Yeah, maybe first a comment about the Japanese market; I think in February we went to a Japanese Tokyo PV show, actually the JA products is very well accepted in Japan, I think its based on our business model. So we basically are not competing with local brands and that we rather full supporting them through the partnership. So actually I signed a few important contracts with the large corporations and also distributors.

And if you look at some of the independent study, in the early January, February or – time frame we are the top shipment from China, you know, it’s the top two or top three based on different data, so which is -- it means that, Japanese markets just ramped-up this year for major Chinese customers, we actually are ahead of our peers over there.

Ming Yang

And just to answer your question on Italy, Italy represents between 5% to 10% of our business and we actually have a fairly diverse customer base there and right now we’re focused less on projects and more on the distribution side of the business, primarily for commercial and residential rooftops also industrial roof-tops. So as we transition that type of customer we think our demand there is also manageable and that we’re not for example pushing a lot of orders through to Italy. We’re looking to grow in other regions primarily.

Yeuk-fai Edwin Mok - Needham & Company, LLC

That’s helpful. Well, if you don’t mind, I will squeeze in a quick follow-up, so you mentioned about the high efficiency was accounted by 60% of your shipment in first quarter. I was wondering how much of that was in module form versus cell and [in that form] how do you guys see it split between commodity base, high efficiency versus mono or do you see a pick-up for one way or the other? Thank you.

Dr. Peng Fang

The total shipment in the Q1 module is about 38%. Among that I think in some of this is – maybe half of this is high-efficiency one and half of this is just conventional one. And in second half – I mean in Q2 or onwards, I think the proportion of module shipment will be a significantly more. The reason is we’re ramping up the module capacity.

Ming Yang

And Edwin just on the mono versus multi in terms of high-efficiency product; so for mono, we’re primarily focused on residential roof-tops and these are actually real number possibly in Japan and in Germany, for example, primarily for smaller installations where people are very constrained. Those are higher relatively installed with some cost. And for the multi-crystalline, the MAPLE product is primarily for industrial and commercial roof-tops, where we are still able to pack more power into the limited area.

Yeuk-fai Edwin Mok - Needham & Company, LLC

Thank you. Sorry, just – quickly just to clarify, you said module shipment is exactly the – around 60% potential growth in the first quarter. Was that mostly driven by high-efficiency, just want to be really clear on that? Thanks.

Dr. Peng Fang

The high-efficiency product is very well accepted by the customer. However, I think our mainstream module product with the high priority and cost competitive, is still the mainstream, I think.

Ming Yang

Well, one thing to add is, some of the ramp-up in shipments for module, for example, in Q2 is for the Chinese market and that’s primarily standard conventional product for large scale projects.

Yeuk-fai Edwin Mok - Needham & Company, LLC

Thanks for clarifying. That’s very helpful. Thank you.

Ming Yang

Okay. Thank you.

Operator

Thank you. Your next question comes from the line of Caleb Dorfman from Simmons. Please ask your question.

Caleb Dorfman - Simmons & Company

Thanks for taking my question. First, speaking on the theme of the high-efficiency module, it seems like every major module manufacturer has introduced high-efficiency products. You used to formerly get a nice pricing premium for the high-efficiency products, but with the influx of the high-efficiency products into the market what type of trends are you seeing on the pricing premium? Has it been declining or is it the 5% to 10% premium still intact there?

Dr. Peng Fang

Let’s say the high-efficiency module, we can list it with our internal technology and innovation. We can produce normally 5 to 10 watts higher on the same cell efficiency basis based on our internal innovative technology and the premium wise, I think it can enjoy 5% to 10% premium also.

Caleb Dorfman - Simmons & Company

Of the premium and all?

Dr. Peng Fang

Yeah.

Caleb Dorfman - Simmons & Company

Great. And then next what are you seeing happening in terms of credit terms, both in China and in Europe? Have you seen Europe’s customers asking for longer credit terms, as Europe gets into more financial lows and what are you seeing in terms of credit terms in China versus in terms of your other markets? Are the Chinese customers asking for extremely long credit terms?

Dr. Peng Fang

We are very conservative in the sales terms. So, basically, we maintain our international customer. We maintain that the terms within 90 days in most of the cases. So we’re relatively conservative financial provider for the module market. So we’re interacting with some customers with relatively strong financial background.

And in terms of China, actually we deal with some of the large IPPs or EPC companies. Basically they have better payment terms in advance and when the contract is signed and also they may be have the 10% qualitative [reservation] which is – lasts longer. So, in general, in China, we can also getting payment in the relatively short-term.

Caleb Dorfman - Simmons & Company

That’s very helpful. Thank you.

Operator

Thank you for your question. Your next question comes from the line of Amy Song from Goldman Sachs. Please ask your question now.

Amy Song - The Goldman Sachs group, Inc

Hi. Thanks for taking my question. I just have a question on your outstanding CBs. It seemed like you’re doing next year in May, and also you guys announced a share buyback program back to August last year. So what's your follow-up on that or are you planning on to buyback some CB as well. How do you plan on to retire this debt, please?

Dr. Peng Fang

I think in the – for CB this year, we continuously buyback – when the time would not allow, so right now we have about US$220 million still outstanding, but we are – the Company is continuously buying back this year. With the cash on hand, we are able to do that this year. And also the CB is due by last May from currently that’s why we keep some cash under our balance sheet. We make sure there is no disruptive situation will happen when the CB is due right now. We don’t think that will happen. So we have kind of ability to manage the situation.

Amy Song - The Goldman Sachs group, Inc

Okay. So, for share buyback, is anything follow-up on that or just you are doing nothing there?

Dr. Peng Fang

We don’t have any new updates, but we’re actively looking into the opportunity and once it’s approved by the Board, we will announce it.

Amy Song - The Goldman Sachs group, Inc

Okay. Thank you.

Ming Yang

Okay. Thank you, Amy.

Operator

Thank you for your questions. Your next questions comes of the line of Pavel Molchanov from Raymond James. Please ask your question now.

Pavel Molchanov - Raymond James

Yeah, thanks very much. Just a high level question about the Chinese PV industry, if I may. We’ve heard from a number of players about the need for rationalization and perhaps having Beijing enforce some kind of capacity shutdown on a large scale and I am curious as to your thoughts on what you’re hearing from the policy circles and whether some decisions could perhaps be made later this year?

Dr. Peng Fang

I think – we see the – as far as capacity and utilization, I think that we will see the marketing consolidation is happening, which means – a lot of volume concentrated to the top players. That’s why unexpectedly in the late Q1 and Q2 we have more demand and also other smaller players that actually have to shutdown capacity.

Our understanding is that when the customers right now is looking for more financially viable companies, so they are rather shifting their demand to the company like JA and to avoid the potentially smaller companies that cannot maintain their guarantee for long-term.

So, in that case, our capacity, for example, we continuously ramp up module capacity because we’re right now running in the full capacity for modules. I did not see any government guided or forced capacity shutdown or whatever, I didn’t see that happen and also it’s not a practice in China anyway. It’s a company decision.

Pavel Molchanov - Raymond James

Are the state-owned lenders restricting access to credit for Tier 2 and Tier 3 players?

Dr. Peng Fang

I think it’s case to case. Right now the central government’s policy, they announced that the – for the – overall has tightened their lending and actually in our case – in JA’s case, we’ve relatively conservative financial situation. So we have plenty of cash on our balance sheet right now.

Pavel Molchanov - Raymond James

Okay. Thank you very much.

Operator

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

Pranab Kumar Sarmah - Daiwa Capital Markets

Yeah. Thank you for taking my question. You have indicated you’re trying to utilize new silver-paste supplier, could you able to give some color from which country this silver paste supply is and once you start using those product, I presume that for the front-end – front side silver paste, what sort of cost reductions, you might expect on cell level compared to current silver paste?

Dr. Peng Fang

So – again we use both international and also Asian suppliers. So we rather would not give too much color on who we actually source on because it’s actually a trade secret. And in terms of cost reductions, we’re probably looking at approximately 10% reduction in cell processing cost as a result of both switching the supplier and also on the new [grid] pattern that we’re introducing.

Pranab Kumar Sarmah - Daiwa Capital Markets

And how many percent does of your shipment this year, you think, you’ll be able to use this new paste supplier, sliver paste supplier?

Dr. Peng Fang

I think starting in June probably around 50% to 60% of our production. We will use …

Pranab Kumar Sarmah - Daiwa Capital Markets

Very good.

Dr. Peng Fang

... based on this new supplier again.

Pranab Kumar Sarmah - Daiwa Capital Markets

Yeah. Thank you very much.

Dr. Peng Fang

Great. Thank you.

Operator

Thank you. You have a follow-up question from Kelly Dougherty from Macquarie. Please ask your question now.

Kelly Dougherty - Macquarie Research Equities

Hi. Thanks for taking the follow-up. I just want to talk about your wafer capacity. Previously, I think you said you’re making about 20% of your wafer needs, but obviously, now the capacity stands higher than that. So just wondering how you think about the trade-off between keeping the internal capacity utilized versus where we see spot wafer pricing. How many megawatts of wafers do you expect to make internally this year?

Ming Yang

Kelly, so the way it looks right now, we’re probably running between 50% to 60% utilization on our wafer capacity. A lot of that it’s really dependent on how much poly we have under the contract and also our procurement cost for poly in terms of cash cost and cash production cost, and how that relates to the current market pricing for wafer. So that – it's actually very dynamic. But as of now, we’re looking at probably roughly 60% utilization and that’s more or less a percent about – a third of our overall wafer needs.

Kelly Dougherty - Macquarie Research Equities

So, how do you think about – when we think about wafer processing costs supposedly improving, because I think you said each of the different segments should improve kind of commensurate with – and I was wondering how do we think about that if you’re running at 50% to 60% utilization?

Ming Yang

So, we’re making a lot of progress in terms of reducing wafering cost. So, we think starting in June or maybe in the Q3 if that continue to be the case then we will possibly increase the amount of production for our internal wafer relative to what we procure.

Dr. Peng Fang

Another thing is the way probably use more mono wafer internally for the wafer capacity and to procurement – to purchase in the multi on the outside market.

Kelly Dougherty - Macquarie Research Equities

Can you give us a sense of what your wafer processing costs are even relative to selling your peers that have already given numbers? Are they X percent higher because of the underutilization?

Ming Yang

I’d say we were probably similar in cost, so just ballpark probably in the US$0.12 to US$0.14 type of range in as of June.

Kelly Dougherty - Macquarie Research Equities

US$0.12 to US$0.14, even running 50% to 60% utilization?

Ming Yang

Yes, essentially for multi-crystalline wafers.

Kelly Dougherty - Macquarie Research Equities

And how much more for mono?

Ming Yang

Similar, I would say.

Kelly Dougherty - Macquarie Research Equities

Okay. Thank you.

Ming Yang

Great. Thanks.

Operator

Thank you. You also have a follow-up question from Jesse Pichel from Jefferies. Please ask your question now.

Jesse Pichel - Jefferies & Company, Inc

Hi. Just looking at the balance sheet, can you refinance your short-term debt to longer-term debt, looking at your cash burn plus the convert to last year? Or is there other liquidity means available?

Ming Yang

So Jesse, we could, but it will take time because it’s a lot easier to get short-term loan, real short-term loans for us. For longer to grow short term into longer term that is a little bit more complicated in China, but we continue to have access. For example, this quarter we did get more long-term loans from the banks, yeah. But we continue to have ample liquidity to meet the convertible bond payment and also for any of the short-term loans. We have no issue rolling our – all of our loan currently.

Jesse Pichel - Jefferies & Company, Inc

Have you bought back any of your convert and do you intend to given the discount in the market?

Dr. Peng Fang

We’re continuously buying back. As we said, it is originally US$410 million. Right now our remaining balance is about $220 million. So we bought back a significant portion of that already and we will continue to do that in the rest of the year.

Jesse Pichel - Jefferies & Company, Inc

Okay. Thank you very much.

Ming Yang

Great. Thank you, Jesse.

Operator

Thank you. You also have a follow-up question from Pranab Sarmah from Daiwa Capital Markets. Please ask your question now.

Pranab Kumar Sarmah - Daiwa Capital Markets

Yeah, thank you for taking my follow-up. Could you also elaborate little bit on Japan side? I understand you have a few number of partners already intact. How many percentage of your shipment is going for megawatt type of projects in Japan now, that is large scale utility project and have you shipped anything for roof-top products in Japan?

Dr. Peng Fang

We are starting volume shipments in Japanese market from the Q1. We expect it to gradually ramp up, because their tariffs and programs actually will be effective after June, right. However, we’re already starting shipments and also the shipments to Japan needs a lot of certification and also quality and also technology work. So, we’re preparing that market in the last two quarters. So, we see the volume gradually going up.

In terms of roof-tops, we do have partners in distribution market, which were installed in residential, but I think in the 60% or 70% were with the larger projects or with the industry partners over there.

Pranab Kumar Sarmah - Daiwa Capital Markets

Got you. And my last question is on your module manufacturing, are you going to use any raw material supplier from China especially for EVA or back-sheet side?

Dr. Peng Fang

If I look at most of our current supplier base actually for the module materials, a lot of the – including EVA and back-sheet, are international suppliers. But they're usually with international capacity in China, so they actually can supply us materials at very competitive pricing.

Pranab Kumar Sarmah - Daiwa Capital Markets

Okay

Dr. Peng Fang

We generally for some of the key components we do not use Chinese material or Chinese-branded products.

Pranab Kumar Sarmah - Daiwa Capital Markets

Got you. Okay. Thank you very much.

Dr. Peng Fang

Great. Thank you.

Operator

Thank you. Your last question comes from the line of Jeff Osborne from Stifel Nicolaus. Please ask your question.

Jeff Osborne - Stifel Nicolaus & Company, Inc

Great. Thanks for getting me in. Min, I just want to ask about the cash flow expectations for the second half of the year with the shift in the business towards modules and the 100 megawatts of systems in China that you spoke off. What should we think about in terms of inventory and receivables expectations for that versus the mix shift that you’ve had here in the early stages of 2012?

Ming Yang

So far our focus is continued to offer a positive operating cash flow. So, we certainly think we can continue to do that in the second half. In terms of receivables, that’s usually can be matched by payables – accounts payables, so our suppliers are giving us terms and similarly for inventory as well, so we think we should be okay.

Jeff Osborne - Stifel Nicolaus & Company, Inc

Because your inventory and receivables were up sequentially this quarter as well, so you think that trend will continue in terms of stretching out DSOs, but your suppliers will continue to give you favorable terms to offset that?

Ming Yang

Yeah, we think so because even this quarter we still were able to record a positive operating cash flow.

Jeff Osborne - Stifel Nicolaus & Company, Inc

Great. Thanks so much.

Ming Yang

Great. Thank you.

Operator

Thank you. Ladies and gentlemen, we’re now approaching the end of the conference call. I will now turn the call over to Ming Yang, Vice President of JA Solar for closing remarks.

Ming Yang

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

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Good day.

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