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Suntech Power (NYSE:STP)

Q4 2005 Earnings Conference Call

February 13th 2006, 7:00 PM.

Executives:

Cindy Shao, Investor Relations Coordinator

Dr. Zhengrong Shi, Chief Executive Officer

Amy Yi Zhang, Chief Financial Officer

Dr. Stuart Wenham, Chief Technical Officer

Analysts:

Angelo Chane, Credit Suisse

Rob Stone, SG Cowen & Company

Sunil Gupta, Morgan Stanley

Ming Yang, Piper Jeffries

Stand Vichy, Everest Capital

Charles Boultier, Imphal Asset Management

Stanz Kue, Reform Technology Research

Riley McCormack, Tracer Capital Partners

Operator

Good day ladies and gentlemen and welcome to the Suntech Power Holdings Fourth Quarter and Full Year 2005 Earnings Conference Call. My name is Daniel, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. If at anytime during the call you require assistance, please key "*" followed by "0" and a coordinator will be happy to assist you. As a reminder this conference is being recorded for replay purposes. I will now turn the call over to today's host, Ms. Cindy Shao, the Investor Relations coordinator for Suntech. Please proceed, Ma’am.

Cindy Shao, Investor Relations Coordinator

Hello everyone and welcome to Suntech's Fourth Quarter and Full Year 2005 Earnings Conference Call. My name is Cindy Shao. I am Suntech's Investor Relations Coordinator. Suntech announced its fourth quarter and full year earnings today. You may find a copy of the press release on the Company's website. Today Dr. Zhengrong Shi, Chairman and CEO of Suntech will review some of the Company's business highlights, and Amy Zhang, Chief Financial Officer will provide greater details of Suntech's financial results and guidance. Dr. Shi will then provide closing remarks and open the call to questions. Suntech's Chief Technology Officer, Dr. Stuart Wenham, is also on the call and will be available to answer questions during the Q&A session.

Before we continue, allow me to take you through the Safe Harbor policy. During this conference call, representatives of the Company will make certain forward-looking statements in an effort to assist you in understanding the Company and its results. The forward-looking statements will be made under the Safe Harbor provisions of the US Private Securities Reform Act of 1995. Forward-looking statements involving inherent, risks and uncertainty. As such Suntech’s future results maybe materially different from the views expressed today. A number of potential risk and uncertainties are outlined in Suntech’s public filings with the US Securities and Exchange Commission. Suntech does not undertake any obligation to update any forward-looking statements except as required under applicable law.

As a reminder, this conference call is being recorded and webcast of the management, prepared remarks will be available on the Investor Relations section of Suntech's website after this call. Also, please make note that all figures mentioned during this conference call are in US dollars. I will now turn the call over to Suntech’s Chairman and Chief Executive Officer, Dr. Zhengrong Shi.

Dr. Zhengrong Shi, Chief Executive Officer

Thank you, Cindy. Hello and thank you for joining our first earnings conference call as a public company. It is my pleasure to review with you our fourth quarter and the full year 2005 results. Suntech ended the year strongly. Our fourth quarter net revenue grew 136.3% year-over-year to $89 million. We recorded net income of $10.6 million, this strong performance was due to the expansion of our production capacity to meet the strong global demand for PV cells and module products. We expect the market for our products to continue to grow rapidly, backed by a worldwide trend of government initiatives to promote the use of solar energy. I would like to talk briefly about some of the important initiatives.

In Europe, the new German Government has kept its solar incentive program intact, and it remains one of four largest solar markets. Spain and Italy have also passed trading tariffs that have just started solar industrial development in those countries. In the United States on January 12, 2006, Californian Regulators approved an 11-year $3 billion solar cell initiative. The plan is the largest solar energy policy ever put in place, in the United States and is second only in size to the incentive program in Germany. We believe, this initiative will make the United States another major solar market in the near future. Here in China, the Government put into effect its first renewable energy law at the beginning of 2006. The Chinese Government has targeted 15% of the nation’s electricity needs to come from renewable energy sources by 2020, compared to the current level of 7%. We anticipate that this law will have a strong impact on domestic demands for renewable energy and then we expect to see a pickup in solar power in China.

Largely driven by this initiative, the demand for solar energy worldwide far exceeds supply, and we currently see an increase in capacity rapidly absorbed by the market. Cost effective capacity expansion is the key part of our growth strategy, and then during the fourth quarter, we increased our production capacity to 150 megawatt as our new 30 megawatt solar cell production line came into operation. We expect our capacity to reach 240 megawatt by the end of the third quarter 2006. Leading photovoltaic solar technology is a killer of Suntech's success. As such, we continue to place great emphasis on our research and our development. We have embarked around $20 million for research and development over the next three years.

Our research and development efforts are focused on driving conversion efficiencies higher to reduce costs per watt to the customer in order to further drive demand for our products. As of December 31, 2005 our monocrystalline and multicrystalline silicon photovoltaic conversion efficiencies reached 17% and 15.3% respectively. This is up from 16.5% and 15% at the end of the third quarter 2005. Our aim is to enable our products to achieve 20% conversion efficiencies by 2008.

Turning to our full year results. Suntech continued its strong growth momentum in 2005. Revenues grew almost threefold, over 2004 to $226 million, and we delivered our third consecutive year of profitability. Our successful New York Stock Exchange listing in December 2005 raised over $300 million for Suntech. The idea provided capital to fuel our growth and raised our international profile and the brand recognition. In 2005, we made significant strides in diversifying our customers and our geographic reach. By the end of the year, sales from Germany represented 45% of our total net revenues compared to 72% at the end of 2004. Sales from China and Europe were 25% and 71% respectively of sales. We expect to continue to take advantage of the developing market for solar energy products in Spain and Italy, and with our recently secured UL Certificate we are already selling into the US. 2006 will be the fine year for Suntech and we plan to almost double our capacity and enter new markets worldwide.

We believe that our innovative technology, continued efficiency improvements, and our low manufacturing costs position us well in terms of gaining market share and raising the Company's profile. The shortage and rising costs of silicon remain the major challenge facing the solar energy market today. Our 2006 silicon supply has been fully secured for our planned production volume and we are taking steps to secure our supply in the future while building strategic alliances with key suppliers and entering into collaborations with silicon manufacturers.

At the same time, we will continue to make technology improvements that we believe will enable us to generate more power per unit of silicon. Let me now turn the call over to our Chief Financial Officer, Amy Zhang, who will give you an overview of our financial performance in the fourth quarter and the full year of 2005. Thank you.

Amy Yi Zhang, Chief Financial Officer

Thank you Dr. Shi. Good morning and good evening to everyone. We completed the first quarter with total net revenue of $89 million representing 136.3% increase over 2004 total revenues, net revenues, and a 57.2% increase over the previous quarter. PV modules, accounted for approximately 64% of our total net revenues and PV cells accounted for approximately 36%. The increase in our total net revenue is due to the increase in our sales volume as well as the improvements in the average sales price of our products. During the fourth quarter of 2005, we shipped a total output of 26 megawatt, which was comprised of 10 megawatt of solar cells and 16 megawatt of solar modules. Our total volume shipped in the fourth quarter, which was 26 megawatt compared with 17 megawatt in the third quarter.

The split of our PV cell output to PV modules was 39% to 61%, which compares with 26% to 74% of total volume for the previous quarter. In the fourth quarter, average sales prices of our cell and module products were $3.12 and $2.49 respectively compared to $3.11 and $3.33 in third quarter. The increase in our average sales prices reflects the strong demand for our products and our ability to pass through raw material cost increases to customers. Silicon material prices increased by 49% in full year 2005, and we estimate that it could rise by another 15% to 20% in 2006. As the prices of PV products are linked very closely to silicon prices, we expect our average sales prices to continue to increase in the next 12 months.

Gross profit for the fourth quarter was $23.6 million or 26.5% of net sales, compared to $12.8 million in the fourth quarter of 2004 or 34.1% of net sales and $16.9 million last quarter or 29.8% of net sales. While our gross profit increased approximately 84% over fourth quarter 2004. Gross margin decreased due to the increase in the prices of silicone, which constitutes our largest cost of revenues. The sequential decrease in gross margin was also partly due to a $1.6 million inventory write-off for sub-standard wafers as well as an increase in share-based compensation to $1.2 million.

Operating income for the fourth quarter was $12.5 million or 14.1% of net sales as compared to $11 million or 29.3% of net sales in the fourth quarter of 2004, and $10.3 million or 18.2% of net sales in the last quarter. The decrease in operating margin was primarily due to increase in share-based compensation and research and development expenses.

Net income for the fourth quarter was $10.6 million representing a 4% increase from the same quarter a year ago, and a 22% increase from last quarter. Basic net income per share for the fourth quarter 2005 was $0.10 compared to $0.12 for the same quarter in 2004. For the full year 2005, our total net revenue increased 165% to $226 million over total net revenue of $85.3 million in '04. For the full year Suntech derived approximately 75% of total net revenues from PV modules and 24% from PV cells. During the year we shipped a total output of 86 megawatt compared to 29.5 megawatt in '04. Gross profit for the full year of '05 was $68.6 million representing a year-over-year increase of 173%. Gross margin increased slightly to 30.3% compared to 29.4% in the previous year.

Operating margin for 2005 increased by about 113% to $42.7 million, while operating margin decreased to 18.9% from 23.5% in '04, primarily due to the increase in general and administrative expenses relating to Suntech's business expansion, restructuring as well as share-based compensation charges. Net income for the full year 2005 was $30.6 million representing a 55% increase from the previous year. Basic net income per share was $0.31 in 2005 compared to $0.22 in 2004.

Moving now to our balance sheet, which was further strengthened after our IPO. We ended the first quarter with cash and cash equivalents of approximately $360 million. Our accounts receivable and other receivables remain low at approximately $4 million giving the current weight of supply dynamics, Suntech has been using and will continue to use its financial resources to secure sufficient raw material. This can be seen in the increase in raw material levels to approximately $17 million as well as in the rising advances to suppliers.

Our net operating cash flow for the full year 2005 was $23 million compared to $3 million in 2004, and $0.7 million two years ago. Capital expenditures in 2005 totaled $30 million, compared to $9 million in 2004 and $3 million in 2003. Let me now read you our financial guidance for the first quarter 2006. Please note that the following outlook statements are based on our current expectations. These statements are forward looking and actual results may differ materially.

Total net revenue in the first quarter are expected to be in the range of $75 million to $80 million representing year-over-year growth in the range of 95% to 108%. For the full year 2006, we expect total production output will be between 130 megawatt to 140 megawatt.

At this time, I'd like to turn the call back to Dr. Shi.

Dr. Zhengrong Shi, Chief Executive Officer

Thank you, Amy. Solar energy has enormous growth potential, and is one of the world's leading two players solar manufacturers. We are well positioned to capitalize on this growth. Technology improvements are key to making solar power a commercial and viable energy source, and we believe our research and development team is among the most innovative in the world. By all measures this is an exciting time for Suntech.

Let me again thank you for participating in our quarterly earnings conference call. We look forward to being in contact with you in the months, quarters and years ahead. Now we would be happy to take your questions.

Questions-and-Answer Session

Operator

Thank you. Ladies and gentlemen, if you would like to ask a question, please press "*" "1" on your touchtone telephone. If your question has been answered, or if you wish to withdraw your question, press "2". Questions will be taken in the order that it is received. Ladies and gentlemen, we will pause for just a moment, before we start with. Your first question comes from Angelo Chane with Credit Suisse. Please proceed.

Q - Angelo Chane

Dr. Shi, thank you very much for doing the call. Congratulations on the result. I have a few questions. Can you give us an update on the latest silicon purchase agreements? Any updates on additional exchange agreements you might have signed with the suppliers, the amount, and the period and the pricing? And for 2006 silicon purchases can you tell us how much of your planned requirement for silicon wafers from 2006, you have logged in prices? And can you also tell us the current ESPs for cells – modules that you have achieved for the latest contracts for your cells and also the latest silicon wafer prices that you have agreed to purchase versus your compared to the average of 2005? Thank you very much.

A - Dr. Zhengrong Shi

As your first question. We have secured enough silicone wafer for planned production in 2006, and this includes long-term contracts and also the historic contracts, and also the chain of programs of wafers for solar cells. As indicated by Amy, for 2006, our projected production volume is somewhere between 130 megawatt to 140 megawatt. And with the price, 100% of the wafer purchase is based on that, is a surprise we locked for the entire year, and the rest is based on quarterly price. At the moment our price, sorry my apologies, the full extent of wafer purchase is fixed for the entire year and the rest is negotiable. And for the wafer price at the moment our Q1, the wafer price is very much similar to Q4's price, and for ASP of our solar cells and module for Q1 in '06 the price is also very much similar to Q4. Perhaps with a very little slight increase. At the moment we expect for entire year 2006, the ASP for both cells and modules will increase about 3% to 7% - about 5% to 7%, whilst the price for wafers will be increased for another 15% to 20% compared to those for 2005.

Q - Angelo Chane

Thank you.

Operator

Your next question comes from Mr. Rob Stone with SG Cowen & Company. Please proceed Sir.

Q - Rob Stone

I wonder given the very strong performances in Q4, the reason for your sequential decline in expected revenue in the first quarter, is that gauged Dr. Shi by timing of deliveries for wafers?

A - Dr. Zhengrong Shi

Hi there. It's mainly due to holiday season. As we know in the end of January we had a one-week off for Chinese New Year and also in February we basically only have 28 days. So it's like a seasonal influence.

Q - Rob Stone

Okay, and given the comments you made about the prices being similar, selling prices and ASP prices, should we assume then that excluding the write-off for the sub-standard wafers that gross margins should be up sequentially?

A - Dr. Zhengrong Shi

I'll turn this question to Amy.

A - Amy Yi Zhang

Correct, you mean after that, if you take out that impact on the inventory write-off for the sub-standard wafers of $1.6 million and our gross profit would be around 28.5%.

Q - Rob Stone

Yes and so, I guess the question relates to the fact that you are continuing to add capacity but you have a shorter production period this quarter, so the gross margins as reported, you actually will have the charge for the sub-standard wafers. But backing off that charge, can you comment on the direction of margins from quarter to quarter?

A - Dr. Zhengrong Shi

I think it was excluding our share-based compensation, you know amortized every quarter. So, SBC or Share Based Compensation will be there anyhow.

A - Amy Yi Zhang

Yes I think for the first quarter gross profit, we're quite confident at achieving the range between 27% and 29% of the gross margin.

Operator

And your next question comes from Sunil Gupta with Morgan Stanley. Please proceed.

Q - Sunil Gupta

Good morning Dr. Shi. Good morning Amy. I wanted to understand a little bit better the discussion about inventory write-off that you took in Q4. I presume this was booked in cost of goods sold and that's why your gross margin was lower. Can you help us understand, when did you get these wafers, who were the suppliers and what has the Company done to ensure that we don't have this, certain material write-off in the future?

A - Amy Yi Zhang

Let's say this $1.6 million inventory write-off is purely from the inventory revaluation done at year-end. In normal inventory revaluation it's actually done on a quarterly basis by following the US GAAP rules. The reason why this amount is quite significant is purely because the purchasing volume and the consumption of wafer in Q4 is higher from the whole year.

Q - Sunil Gupta

But presuming that wafer prices are going up, revaluation should not result in a loss. So I'm wondering is it a revaluation or was it a sub-standard business?

A - Amy Yi Zhang

Sunil?

Q - Sunil Gupta

Yes.

A - Amy Yi Zhang

The revaluation was only done on the sub-standard wafers.

Q - Sunil Gupta

And so have you now totally cleaned up all these sub-standard wafers that may have been there in the inventory?

A - Amy Yi Zhang

Actually we don't, we have already got a quite a thorough quality check and we are also talking to the suppliers regarding full on supply of and delivery of their wafers in the future. We don't think these are, these will be any useable or we would have any gain on the disposal of scrap.

Q - Sunil Gupta

And were these wafers sourced domestically or were they from one of the other existing…

A - Amy Yi Zhang

Domestic ones. It's domestic one, and we have done that purely for prudent purpose.

Q - Sunil Gupta

And is this supplier of wafers from, were sub-standard wafers came, are they still going to supply wafers to you in the first half of '06?

A - Dr. Zhengrong Shi

Yes, this mainly for the wafer for solar cell that Amy progressed. So, again shows some of it is customer, they have problems and the rest are under control. So in the future we may not take these people as part of our one unless their wafer quality is good enough.

Q - Sunil Gupta

Okay, great. And my final question is in terms of your guidance for Q1, that you've given us a revenue guidance, what kind of production output do you expect in Q1 of '06?

A - Amy Yi Zhang

That's between 22 megawatt to 23 megawatt.

Q - Sunil Gupta

Thank you.

Operator

And your next question comes from Ming Yang with Piper Jaffrey. Please proceed Sir.

Q - Ming Yang

Hi, this is Ming Yang for Jessie Purcells (phonetic). Can you talk about your total stock comp expense and also what kind of tax rate you expect?

A - Dr. Zhengrong Shi

I’m sorry, could you repeat the question again?

Q - Ming Yang

Can you talk about your total stock comp expense for the quarter?

A - Amy Yi Zhang

Actually the computation of the share-based compensation has already been down based on the appraisal results. And total year share-based compensation in '06 would be around $11.3 million and actually amortized in 12 months by straight line method. And for '07 is around $7 million. In '07, also amortized in 12 months by average.

Q - Ming Yang

What do you expect your tax rate to be for the year?

A - Amy Yi Zhang

You mean the corporate income tax rate?

Q - Ming Yang

Yes, corporation income tax yes.

A - Amy Yi Zhang

The set mandatory corporate income tax rate is 32%, because Suntech is facing high tax benefit. We actually enjoy 15% as a standard in corporate income tax rate. Now we also because Suntech has been qualified as hi-tech and advice, we are still in the tax holiday of two years exemption and three years enhanced and currently our tax or corporate income tax is 7.5% to end of 2007 and starting from '08 we're going to, we will pay 15% on corporate income tax.

Q - Ming Yang

Then just a quick question on growth margin. Is that sustainable given the Polish orders and the rising wafer prices for the year?

A - Amy Yi Zhang

You mean in terms of margin percentage?

Q - Ming Yang

Growth margin, yes.

A - Dr. Zhengrong Shi

I think for Q1, as Amy has given that guidance and as we said before, wafer price is going to continue to be increased and for the world to believe the ASP where the increase accordingly. So that's as far as we can take the information further, the information we can give to you at the moment.

A - Amy Yi Zhang

Yes, and also for the whole yearend it could be ranged between 27% and 30% in terms of gross profit and because, why we feel quite confident in maintaining the gross profit at this level is simply also because of the continuous improvement of technologies like improvements on conversion efficiencies which also contribute to the gross profit as well as like reduction of thickness of wafer.

Q - Ming Yang

Okay, great thanks.

A - Amy Yi Zhang

Thanks.

Operator

And your next question comes from Stand Vichy (phonetic) with Everest Capital. Please proceed.

Q - Stand Vichy

Hello Dr. Shi, very good result and congratulations. Basically my question is also on the silicon wafer. I wonder because you are moving to the upstream, so can you find the margin is high on the upstream silicone wafer supply or it’s higher on your side as solar module producer? Thank you.

A - Dr. Zhengrong Shi

Well I think really I cannot comment on the margin on upstream but one thing you know for sure, along the value chain the effects of which gains the highest margin for the silicone manufacturer. So although the wafer manufacturers their margins really depend on at what price the purchase of silicon but I'm pretty sure that polysilicon manufactures charge us at too high price, for sure.

Q - Stand Vichy

And so how about your strategy for moving upstream, you're going to buy the Company or you basically just locked the supplier?

A - Dr. Zhengrong Shi

Well I guess we do everything we can, like one of our strategies for Company growth is the secure supply. So if there's an opportunity we can move upstream and to collaborate with companies and secure capacity for long term, so we will do so, and but as of this moment, we sign a long-term contract and provide for payments. And above all this we secure our silicon supply and as I said earlier, we do everything we can at this moment to secure additional silicon for our future planned growth.

Q - Stand Vichy

Okay, thank you.

Operator

And your next question comes from Charles Boultier (phonetic) with Imphal Asset Management (phonetic). Please proceed.

Q - Charles Boultier

Hi, thank you very much for taking the question. The question is about your silicon wafer supply. Does the transaction, I understand that I think right now you sourced around 20% of your silicon to an exchange agreement with SolarWorld, is that going to be effected in any way because of the transaction between SolarWorld and Shell Solar going forward in terms of your silicon supply for either 2006 or 2007? Thank you.

A - Dr. Zhengrong Shi

Yes, we noticed the recent transaction this year. SolarWorld was basically the Shell Solar and, but we haven't had any discussions with SolarWorld yet regarding future supply situation.

Q - Charles Boultier

So you can't say anything, you can't comment on the impact it might have on your silicon?

A - Dr. Zhengrong Shi

And, one thing we can comment because we did sign an 10-year supply contract agreement with SolarWorld, so this contract will remain effective for the next 10-years.

Q - Charles Boultier

For the next 10 years?

A - Dr. Zhengrong Shi

Yes.

Operator

And your next question comes from Stanz Kue with Forum Technology Research (phonetic). Please proceed.

Q - Stanz Kue

Yes, good morning. Hello, I think I will ask one question. For the moment, what's the wafer thickness for the wafer you use because you mentioned that you will reduce the thickness of wafer later on to improve our gross margins?

A - Dr. Zhengrong Shi

Yes, 30% of the wafer thickness is moving away using is around 210 microns. The rest is around 240 microns.

Q - Stanz Kue

So, maybe going forward then maybe '06 or '07 timeframe, how thin you can go?

A - Dr. Zhengrong Shi

Yes, I think in '06 we will gradually replace our wafer supply to reduce the thickness to 210 micron.

Q - Stanz Kue

I see, okay. Another related question is for the revenue you received in Q4 of '05, what's the improvement in the number of say 8-inch wafers?

A - Dr. Zhengrong Shi

Okay, for the 8-inch wafer I think probably around 15% of the total production.

Q - Stanz Kue

And if you convert all the other size of the wafer, convert all of them into say maybe 8-inch wafer, what's the increase in the number of silicon wafers?

A - Dr. Zhengrong Shi

Okay, we actually, we do it the other way around because more than 60% of wafers we use is actually, we produce or 60% I think, 60% of our wafers actually have been monocrystalline silicon. The monocrystalline silicon, the size is actually five inch a square. Therefore 15-inch wafer, basically there is a multicrystalline silicon or maybe some small portion of monocrystalline silicon wafers. So you can convert it, together I think altogether it should be I think about 3.5 or 3.6 million wafers per month. Hence it should be about over 10 million, 10 million or 11 million wafers.

Q - Stanz Kue

Okay. Thank you.

A - Dr. Zhengrong Shi

Okay.

Operator

And your next question is a follow-up from Angelo Chane with Credit Suisse. Please proceed.

Q - Angelo Chane

Dr. Shi, just two follow-up questions. I've noticed that the split of your sales between sales and modules is somewhat different?

A - Dr. Zhengrong Shi

You mean in Q4?

Q - Angelo Chane

Sales, between sales margins, is somewhat different……

A - Dr. Zhengrong Shi

You mean in Q4?

Q - Angelo Chane

Can you tell us your expectation for the split between PV sales and PV margins on 2006 - what kind of split between your product mix? And also, to follow-up on the earlier question, can you actually tell us whether you have signed additional silicon wafer exchange agreements with new partners and can you tell us the volume there?

A - Dr. Zhengrong Shi

Okay, to answer your first question, in Q1 our total sales in solar module production ratio will still remain about 25% to 30% versus 75% to 70%, okay. So Q4 is again, as I say, is seasonal impact here because, for European or other overseas customer, due to their sales recognition period, they need to deliver the product, deliver earlier, so that’s why we move a moderate delivery to the fourth quarter and in the sales production, more sales of cells production in Q4. So, for Q1, we believe things will stay around 30% to 70% or 75% to 25%. And you mentioned this additional agreement, this has changed. The general answer is yes. As I mentioned not something, not only working for 2006, as in 2006 we were already secure enough sufficient wafers for our planned production volume. But in the meantime, we have to look to 2007, so that means we have to sell this relationship, as many of these relationships as possible.

Q - Angelo Chane

Thank you Dr. Shi, but can you actually give us the names of your new exchange agreement partners and the volumes that you are securing?

A - Dr. Zhengrong Shi

If you let, I wonder if you have time I’ll let you know exactly – I have to check with our purchase department to give a greater detail.

Operator

And your next question comes from Riley McCormack with Tracer Capital. Please proceed. Riley. And your next question is a follow up from Sunil Gupta with Morgan Stanley. Please proceed.

Q - Sunil Gupta

Hi Dr. Shi, I just wanted to get a better understanding of your mix by geography. I missed some of the earlier numbers that you mentioned on the call. What percentage of your production was sold domestically in China in Q4, and what do you expect it would be in Q1?

A - Dr. Zhengrong Shi

Okay, hold on a minute. In Q4, what was sold in China is actually, is around 30%, I think 30% for Q4. It actually is 36% in China. And this mainly, as we indicated before the majority of solar cells was sold in China, so that’s why the proportion in the percentage of sales to China has increased in Q4. And then for Q1 in ’06, as we explained, we expect the percentage of our sales to China will still remain about 25% to 30%.

Q - Sunil Gupta

So essentially most of your sales are in China?

A - Dr. Zhengrong Shi

Yes.

Q - Sunil Gupta

And in terms of your Q1 guidance, while I understand that you have less number of days than Q1 because of Chinese New Year and also fewer days in February. Can you help me reconcile, and I think Rob asked this question as to why is there a decline, because if you have 150 megawatt of annualized capacity as you exit Q4, that should translate to in a normal quarter about 37 megawatt and in Q1 it should translate to about 23 megawatts. And it seems like your production in Q1, you’re guiding to more like low twenties…

A - Dr. Zhengrong Shi

Yes, I know what you mean.

Q - Sunil Gupta

So, what’s holding you back there?

A - Dr. Zhengrong Shi

Okay, just bear in mind like the Q4 is a good production, I’m sorry, the additional production line in ’05 was just installed. Most of the tuning work and slowly ramp up and also training of staff will take place gradually in Q1 this year. So, that’s why we cannot expect this additional line to run at full capacity.

Q - Sunil Gupta

Okay. And on the capacity question, what do you expect your capacity to be by end of Q1 ’06?

A - Dr. Zhengrong Shi

Q1 ’06, I think, well still, in Q2 we have, the second line where the, in Q2 we were at another production line okay. So actually, as we said before, in 2006 we were going to add additional four production lines. So the first production line, actually, was brought forward. So that actually installed in the end of ’05. So another three lines already added coming operational in Q2 and another two will come operational in Q3.

Q - Sunil Gupta

So you would not be able to bring another line in, I thought you were able to bring another line on in Q1 or is this the same line that…?

A - Dr. Zhengrong Shi

This line has been brought forward. Actually, this is the 150 megawatt. The 130 megawatt line supposed to be installed in Q1 but we did it in the end of December Q4.

Q - Sunil Gupta

So it looks like end of Q1 your capacity will still be about 150 megawatt, but it will be fully operational?

A - Dr. Zhengrong Shi

Exactly.

Q - Sunil Gupta

Thank you.

Operator

Your next question comes from Mr. Rob Stone from SG Cowen and Company. Please proceed.

Q - Rob Stone

Hi, a follow-up question for Amy. You’ve noted that the corporate tax rate should be about 7.5%, but it looks like the effective tax rate for the last couple of quarters has been higher. Can you explain the difference please?

A - Amy Yi Zhang

You mean the cash percentage?

Q - Rob Stone

No, the tax rate. As I computed the effective tax rate in the fourth quarter was more like 12.7%, as opposed to the 7% or 8% that you projected it would be. What accounts for the higher rate?

A - Amy Yi Zhang

I think I need to go back and have a look at those detailed percentages regarding the cash flow, because it’s still being, the final cash flow statements are still being reviewed at the moment, and also, I think the difference incurred that you were talking about was probably from the adjustment on the deferred tax at year end.

Q - Rob Stone

Okay. So you would expect it to be a 7% or 8% effective tax rate in 2006?

A - Amy Yi Zhang

Yes.

Q - Rob Stone

Okay. Then, I have to say the weighted average shares result was quite a bit lower in the fourth quarter than I had estimated. I suspect that has to do with the timing of the IPO perhaps. Can you say what you expect the weighted share accounts to be in the first quarter?

A - Amy Yi Zhang

I don’t think we can give the guidance on that item for the time being.

Q - Rob Stone

Can you say what your fully diluted share account was at the end of December - non-weighted, but just fully diluted shares outstanding?

A - Amy Yi Zhang

It’s 103 million, 103 and it’s the average for Q4 ’05.

Q - Rob Stone

Yes, that was the average. I was looking for the fully diluted number, the non-weighted number at the end of the quarter, post the IPO and so forth?

A - Amy Yi Zhang

Hi Rob. Can I get back to you later?

Q - Rob Stone

Yes certainly.

A - Amy Yi Zhang

Yes.

Operator

And your next question comes from Riley McCormack with Tracer Capital. Please proceed.

Q - Riley McCormack

Hi, can you guys hear me now?

A - Dr. Zhengrong Shi

Hello.

Q - Riley McCormack

Yes, hi. A couple of questions. First of all on this quarter, how much of your operating expenditures were stock-based compensation?

A - Dr. Zhengrong Shi

In the Q4?

Q - Riley McCormack

For Q4, yes.

A - Dr. Zhengrong Shi

Okay, just hold on a minute. Could you repeat the question again?

Q - Riley McCormack

You broke out how much the stock-based comp was for the cost of goods sold, but you didn’t break it out for operating expenditures. So I was trying to figure out how much of your operating expenditure was stock-based comp?

A - Amy Yi Zhang

Actually, on a whole the share-based compensation of $1 million we recognized in ’05, the items taken on the OpEx, let me have a look, so it’s around 75% of the total.

Q - Riley McCormack

I’m sorry what’s 75% of the total?

A - Amy Yi Zhang

75% of that 11 million share based compensation recognized in the whole year ’05.

Q - Riley McCormack

Okay. So 75% of that $11 million was share based compensation?

A - Amy Yi Zhang

On the old tax we have three major items right - selling expenses, G&A and R&D. And the share based compensation actually has been split in three items. One is the cost of goods sold, the other is G&A and then R&D. I mean, of that $11 million we recognized in ’05 - 75% were actually booked on the old tax for share based compensation.

Q - Riley McCormack

Okay. How much was it for Q4, or can I just take a rough approximation and say, if in the COGS it was $1.5 million, then it was $4 million or so in OpEx for Q4?

A - Dr. Zhengrong Shi

Yes you can, I think you can.

A - Amy Yi Zhang

Yes.

Q - Riley McCormack

So it’s about $4 million or something like that?

A - Dr. Zhengrong Shi

Yes. If you have any further questions you can let us know later.

Q - Riley McCormack

Okay. I thought when we spoke before you mentioned you were going to give pro forma numbers backing out the share based comp. Do you guys still plan on doing that?

A - Amy Yi Zhang

Yes, we are working on that.

Q - Riley McCormack

Okay. My next question is on the gross margin targets you guys gave for ’06 - that 27% to 30%. Does that include stock based comp or is that a cash gross margin?

A - Amy Yi Zhang

It’s already share based compensation included.

Q - Riley McCormack

It’s included in that. Do you have a target, then, for operating margin for 2006, without share based comp, or with share based comp, however you want to do it because, I guess, you’ve told us already its $11 million for ’06 right?

A - Amy Yi Zhang

You mean at operating margin level?

Q - Riley McCormack

You mentioned 27% to 30% gross margin target for ’06. I’m correct right on this?

A - Amy Yi Zhang

At GP level right?

Q - Riley McCormack

At GP. Do you have an operating margin target for ’06?

A - Dr. Zhengrong Shi

I can give ’06 like an SBC diagnostic number but the impact is not that great anyway.

Q - Riley McCormack

Right, but what do you, so do you think, what do you think the operating margin will be with or without the stock? Forget the stock based comp, what do you think your operating margin target will be for ’06?

A - Amy Yi Zhang

We do have a target here, absolutely, and currently we take out, you want the number without SBC in Q1?

Q - Riley McCormack

Sure.

A - Amy Yi Zhang

I think the share based compensation to be charged in Q1 will be around $3 million and maybe, after you plug in that number you can work out the GP margin percentage yourself.

Q - Riley McCormack

Okay. $3 million both in COGS and in OpEx?

A - Amy Yi Zhang

Yes.

Q - Riley McCormack

Okay. And then, one last question. You guys mentioned getting to a 240 megawatt run rate by the end of ’06. Is that fair, then, for us to think that you guys could be producing 60 megawatt in Q1 of ’07? Is there a difference between production capacity and ending capacity for ’06?

A - Dr. Zhengrong Shi

Put it this way, the number we give you, the production, real production volume we give you is the highest possible materialized, so that we can turn out with the capacity we can install this year.

Q - Riley McCormack

Great, okay. So, ending with 240, when you say you’re going to end with 240 that means that’s all tested, that’s all ready to go, you just need the poly to run through it right?

A - Dr. Zhengrong Shi

That’s for ’07, but not for ’06.

Q - Riley McCormack

Okay guys, thanks a lot.

Operator

And your next question comes Stand Vichy with Everest Capital. Please proceed.

Q - Stand Vichy

Thank you. Dr. Shi, basically, I want to ask a question about newcomer in field, because I heard lots of provinces in Mongolia or Tzsing Hai somewhere else, lots of new projects of solar cells are coming. Do you have any comment on that?

A - Dr. Zhengrong Shi

The newcomer of solar cells from manufacturers?

Q - Stand Vichy

Yes.

A - Dr. Zhengrong Shi

Yes, of course, everybody sees the success of Suntech and they all want to get into this exciting industry, and my comment is that to do this successfully in this industry you need a continued support, technology support and that’s number one. The second is an ability to secure silicon at this critical time, I believe. Also you need a very strong financial ability to expand quickly and to secure the material quickly. And with these three aspects, I believe, Suntech is in a very, perhaps, the strongest position in China. And I’m not sure the new players how can they handle all through the difficult times. That’s how I understand this situation.

Q - Stand Vichy

So, on the technology side so it’s possible for other guys can, has the technology to produce solar cell?

A - Dr. Zhengrong Shi

Well I think as, maybe I can hand the question to speak to you, Dr. Wenham to give you some insight of our technology and all the areas of hard technology. Stuart. Hello, Stuart.

A - Dr. Stuart Wenham

Yes, thank you Dr. Shi. The technology is of great importance when going into manufacturing and I guess, to illustrated that fact, I’d like to point out that when we first set up our production lines in China back in 2002, the published range of efficiencies achieved by manufacturers throughout the world using the same solid grade materials, was ranging from 12% to 17% efficiency. Now, we were very pleased in our first year, to reach 14.5% efficiency which takes us round about the middle of that range of published efficiencies achievable throughout the world. How with that type of efficiency, because we did so well in the early stages, we were actually able to become profitable in our first year, but the profit margins were very, very small, as you will see if you look back at the data.

Now since that time, we’ve quite rapidly improved our technology and our efficiencies and we’re up now close to 17% efficiency, which is the very highest in that published range of efficiencies achievable throughout the world using solid grade materials, and that’s been a key contributor to why we’ve been able to increase our profit margins to the high levels that they now are, compared to many of our competitors around the world.

Now for each company to get into manufacturing, they need to go through that same sort of learning curve that we went through, but it will be far more difficult for any other company. Suntech has a very strong R&D team, and it also has a very strong collaboration with some of the leading research institutions around the world, such as The University of Muta Files, who have provided a lot of technical expertise for the Company to help the Company do very well with its technology. And so, to think that another company can just enter the market in China and jump up to the sorts of efficiencies achievable by Suntech at this present point in time, I think is not at all realistic. And I think to illustrate that you just need to look at the fact that there are some companies that have been in manufacturing in China for 20 years, and are still struggling to even be profitable, even though the industry as a whole is doing very well at the present point in time. So Suntech doesn’t feel threatened by these new start up companies.

Q - Stand Vichy

Great, thank you.

Operator

And your next question is another follow up from Angelo Chane with Credit Suisse.

Q - Angelo Chane

Hi, Dr. Shi, it’s Angelo again. I just want to ask you for your opinion on silicon prices going forward. You mentioned at the earlier part of your presentation that the addition of the solar program from California would likely lift demand growth. When do you think silicon wafer prices might start to flatten out or even start to ease, given the current demand and supply situation? Because we have see sharp increases in the silicon wafer prices in all parts. The expectation is for further prices increases in ’06. Thank you.

A - Dr. Zhengrong Shi

As I said earlier, we expect silicon wafer prices will increase for another 15% to 20% in 2006, and accordingly we ought to expect the ASP for most products will also increase around 5% to 7% this year. But again, we hope the price should stop somewhere, because if it continues to rise it’s not going to do any good for the industry, and that’s not the aim. And hopefully, for this industry to grow rapidly, we should reduce the cost, reduce the price increase. And, I think perhaps with the expansion of these poly cellular manufacturers, they are doing very rapid expansion programs. I think, in the second half of 2007 or 2008, the situation will be improved somewhat.

Operator

And your final question is a follow up from Sunil Gupta with Morgan Stanley. Please proceed.

Q - Sunil Gupta

Thank you. Dr. Shi, I just wanted to get some of the numbers for your average vehicle costs in Q4 on a 5-inch and a 6-inch wafer, and what you expect it to be in Q1? Thank you.

A - Dr. Zhengrong Shi

Yes, as I said earlier, in Q1 the wafer costs and the SP was very much similar to those in Q4.

Q - Sunil Gupta

And what was the actual cost in Q4 for 5-inch and 5-inch wafer?

A - Dr. Zhengrong Shi

Q4 was, the wafer is $3.90 blended price. The universal level was for 5-inch wafers.

Q - Sunil Gupta

Just blended for mono and multi?

A - Dr. Zhengrong Shi

Yes. And normalized to 5-inch wafer.

Q - Sunil Gupta

Okay, great. Thank you.

Operator

We have no further questions in the queue. Now I’ll turn the call back over to Dr. Shi for any closing remarks.

Dr. Zhengrong Shi, Chief Executive Officer

Yes, once again thank you very much for joining us today. If you have any additional questions, please contact our Investor Relations Representative. Thank you all. Have a nice evening.

Operator

Thank you, ladies and gentlemen for participating in today’s conference. This concludes the presentation. You may all now disconnect. Have a great day.

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Source: Suntech Power Q4 2005 Earnings Conference Call Transcript (STP)
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