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LDK Solar Co., Ltd. (NYSE:LDK)

Q2 2012 Earnings Conference Call

September 17, 2012 8:00 am ET

Executives

Xiaofeng Peng - Chairman and CEO

Jack Lai - CFO and EVP

Xingxue Tong - COO and President

Dr. Yuepeng Wan - Chief Technology Officer

Ellen Davis - The Blueshirt Group, IR

Analysts

Shawn Lockman - Piper Jaffray & Co.

Edwin Mok - Needham & Company

Harsh Agarwal - Credit Suisse

Aaron Chew - Maxim Group

Håkon Levy - DnB NOR Markets

Emily Liu - Arete Research

Sanjay Shrestha - Lazard Capital Markets

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the LDK Solar Company Second Quarter 2012 Earnings Conference Call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions) This conference is being recorded today, Monday, September 17, 2012.

I’d now like to turn the conference over to Ellen Davis from The Blueshirt Group. Please go ahead.

Ellen Davis

Thank you. Good morning and thank you for joining us on today’s conference call to discuss LDK Solar’s second quarter 2012 financial results. This call is being broadcast live over the web and can be accessed on the Investor Relations section of LDK Solar’s website at www.ldksolar.com for 90 days.

On today’s call are Xiaofeng Peng, Chairman and Chief Executive Officer; Jack Lai, Chief Financial Officer; Sam Tong, President and Chief Operating Officer; and Dr. Yuepeng Wan, Chief Technology Officer.

Earlier today, LDK Solar issued a press release discussing the results for the second quarter 2012. We also filed the press release on Form 6-K with the U.S. Securities and Exchange Commission. The press release is accessible online at the Company’s website, as well as the SEC’s website.

We would like to remind you that during the course of this conference call, LDK Solar’s management team may make projections or other forward-looking statements regarding future events or the future financial performance of the Company made pursuant to the Safe Harbor Provisions of the U.S. Private Securities Litigation Reform Act of 1995.

Although, LDK Solar believes that the expectations reflected in such forward-looking statements are based on reasonable assumptions, such statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. We refer you to the documents that LDK Solar files from time-to-time with the SEC, specifically the Company’s most recent Form F-20 and any Form 6-Ks. These documents identify important factors that could cause the actual results to differ materially from those contained in our projections or forward-looking statements.

And now, I’d like to turn the call over to Mr. Xiaofeng Peng, Chairman and Chief Executive Officer to go over LDK Solar’s corporate and business updates. Chairman Peng, please go ahead.

Xiaofeng Peng

Good morning to you all and thank you for joining us on LDK’s second quarter 2012 earnings conference call. This environment for the solar industry remained difficult in the second quarter. Our revenue was within the expected range as our results continue to reflect the sluggish economy and the project challenges in solar industry conditions.

Pricing pressure caused by the weak market demand and industry oversupply continue to adversely effect our business. Despite our ongoing cost reduction efforts, lower price across the global supply chain led to continued ASP erosion and together with the impact of our inventory write-down and other provisions reduced our revenue and margins for the second quarter. During the second quarter, it was generally $235.4 million in revenue with a negative 39.1% gross margin.

As evident by our results, the solar industry continue to come from very harsh conditions, while the business environment remains tough. Our management teams have worked diligently due to leaner and stronger operations in order to remain competitive to work through what will be held in the foreign exchange of the weakened global economy.

Our management team has been working closely together to evaluate our operations on a regular basis so that we can adapt our business to the evolving demand environment. Our financial performance was also affected by a lower utilization of manufacturing capacity inventory write-downs, along the asset impairments and a foreign exchange and financial expenses impact.

Market challenge including transition in traditional feed-in-tariff market such as Germany and Italy, to the [extend] or within the U.S. market anti-dumping duty and PV project executions delayed due to permits and a subsidy for our customers. To adjust increasing competition in today’s solar industries, we have recently realigned our business operation within our Strategic Business Units or SBUs.

The Company’s revenue are generally from SBUs, include polysilicon, ingots, wafers, cells, modules, PV projects as well as subsidiaries, which includes Sunways, in Germany and SPI, in the USA. We’ve transferred the majority of the business decision making power to the SBU, and the subsidiaries exclusively so that they will have more power to make timing and critical decisions. This realignment helped to increase our productivity and reduce our headcount significantly.

Going forward our holding company will be focused on the corporate governance, strategic directions, continuous planning, new development, as well as our [order control]. We expect this challenge will accelerate our day to day decision making process so that we’re able to generate more revenue and profit among our SBUs and the subsidiaries.

I will have to provide some color on – some of our key markets in the regions. While European markets remain difficult, we’ve been exploring emerging new markets in Eastern Europe, Central America, Australia, Japan, India and other Asian areas. This last week’s Solar Power International show, in Orlando, Florida, we also explored more opportunity in North America. We will continue to expand our presence in the North American region as we believe that [free] trade will prevail, as we continue to grow in this market region, we will work to ensure that we can meet the growing demand for our products in the U.S. at a global competitive prices. We remain optimistic about our regions long-term growth potential. Recently European countries just started another round of anti-dumping actions, we believe these actions do not meet the principle of [free] trade. We are not fair on inventory, we will have the long-term development of the solar industry.

We continue to believe that some markets such as China we’re beginning to see improved demand as this year progresses. Our strong presence in China have been a competitive advantage and has had advantaged our efforts to expand our PV project development service business. We expect to see continued growth opportunities throughout the China market this year and next several years.

The Company remains challenged by its current cash and liquidity position. As of the most recent reports, we have approximately $3.3 billion of interest-bearing borrowings. Our financing and the capital management team have been working with our bank as well the provincial and municipal governments to provide continued support to LDK Solar.

We are maintaining constructive relations with our bank and they have committed to work with LDK to ensure long-term support by renewing current loans. Our goal is continuing to improve our debt maturity profile by refinancing. In the past few months we have had in depth discussion with several companies. Two of this company have shown significant interest in talking a strategic investment position in our Company. While no offer has been received at this point, we remain positive that the large size – as a stabilized company are willing to cooperate with our long-term growth demand.

We are navigating the current volatile market environment by streamlining our manufacturing operations, reducing production costs, and improving utilization. In order to include the industry downturn, we continue to believe that the most critical issue for all solar industry participants are sustained cost reduction and managing a stronger balance sheet.

The LDK management team is fully engaged in strengthening our operations and tightening our cash flow management by seeking strategic equity investors to optimize our share structure and increase our capital position to lower the debt equity ratio, working on [fully] offer in the U.S. market, bringing more fresh capital to meet our working capital needs, minimize capital expenditures to only spend our manufacturing process improvement projects, expedite the transaction of our inventory on hand and save our Company’s PV project in order to generate cash flow, closely manage the collection of accounts receivables, strengthening the Company’s management system and communication process around all critical business actions, control and reduce our operating expenses on an ongoing basis.

I will now turn the call over to Jack Lai, our Chief Financial Officer, to provide you with the financial report. Jack?

Jack Lai

Thank you, Chairman Peng. Good morning and thank you for joining us to discuss LDK Solar's second quarter of 2012 results. Net sales for the second quarter were $235.4 million, up 17.6% from $200.1 million in the first quarter. Wafer sales increased to $79.9 million from $58.8 million. Cell and module sales decreased to $78.3 million from $113.7 million. Polysilicon sales increased to $14.5 million from $13.3 million. OEM sales for wafers remained unchanged at zero. OEM sales for modules decreased to negative 3000 from $1.1 million.

During the second quarter, LDK Solar had an inventory write-down and a provision for firm purchase commitment of $35.1 million due to relatively high production costs incurred in the second quarter of 2012, and a continuous decline in market price for polysilicon, wafers, cells and modules. As a result, gross margin and operating results for the second quarter were negatively impacted.

By geography, net sales in the second quarter were 41.8% generated from China, 26.0% from Asia Pacific excluding China, 18.8% from Europe and 13.4% from North America. All our top 10 accounts in the second quarter accounted for 31.9% of total revenues, with the top three accounts combined accounted for 12.8%.

Wafer shipments increased to 316.7 megawatts from 164.4 megawatts in the first quarter of 2012. The average selling price for wafers was $0.25 per watt in the second quarter of 2012, because of the increase of sales of our [substandard] wafers. OEM shipments remained unchanged at zero in the second quarter. Cell and module shipments including our processing business were 135.6 megawatt in the second quarter of 2012, down from 153.9 megawatts in the first quarter of 2012.

The average selling price for modules excluding processing business was $0.80 per watt in the second quarter of 2012. Cell and module shipment has decreased during the second quarter due to the challenging market conditions. Gross margin in the second quarter was negative 39.1% compared to a negative 65.5% in the first quarter. Our gross margin for all wafer business in the second quarter was negative 47.2%, up from negative 147.3% in the first quarter of 2012. Gross margin for our polysilicon business fell in the second quarter to negative 118.4% from negative 73.9% in the first quarter of 2012. Gross margin for our cell and module business decreased to negative 62.4% in the second quarter from negative 29.3% in the first quarter of 2012.

Overall, the sequential decrease in our gross margin for our polysilicon, cell, and module business in the second quarter was due to the severe price erosion, which was significantly steeper than anticipated and the inventory write-down during the second quarter. Our wafer conversion cost was $0.70 per watt, as we have not fully utilized our capacity during the quarter and the average cost of polysilicon we consumed was $31.8 per kilogram in the second quarter of 2012.

Operating expenses were $80.7 million in the second quarter of 2012, up from $4.8 million in the first quarter of 2012. During the second quarter of 2012, $1.2 million of provision for doubtful receivables was provided and recorded in general and administrative expenses compared to a reversal of $43.8 million of provision for doubtful receivables and a prepayment during the first quarter of 2012. Loss from operations for the second quarter of fiscal year 2012 was $172.7 million compared to loss from operations of $135.8 million for the first quarter of fiscal 2012.

As a part of our liquidity plan, we enter into several sale agreements to sell some of our properties and land use right during the second quarter of 2012. As a result $13.5 million of impairment loss for property, plant and equipment was recorded for excess of book value to sale price.

Our share-based compensation expenses were approximately $1.8 million in the second quarter of 2012. Operating margins in the second quarter was negative 73.4% versus negative $67.9% in the first quarter. Net loss available to our shareholders for the second quarter was $254.3 million and loss per diluted ADS was $2. Approximately 127.2 million shares were used in computing the fully diluted EPS.

Depreciation and amortization was $65.2 million for the second quarter. Capital expenditures was $22.1 million in the second quarter, which includes $4.2 million for wafers, $8.6 million for cells and modules, and $8.5 million for polysilicon.

Our wafer manufacturing capacity reached 4.3 gigawatts in June and we achieved total installed polysilicon production capacity of 17,000 metric tons. Going forward, we anticipate CapEx of approximately $80 million to $120 million for the full-year of 2012. Our headcount was 16,521 at the end of June of 2012 compared to 20,405 at the end of the first quarter of 2012, a reduction of 3,884.

Facing a highly competitive solar market, we implemented strategies to optimize our organizational structure, increase our productivity, enhance production management, and align our production plan and labor requirements, which result in increased productivity and operational efficiency. We have been right-sizing our production output in order to build a sustainable capacity with a responsive scale to match our customers’ demand.

Now, let's turn to the balance sheet. We ended the second quarter with $296.2 million in cash and cash equivalents and $523.4 million in short-term pledge bank deposits. Inventories decreased to $467.1 million from $555.3 million in the first quarter of 2012. Our turnover days of our accounts receivable decreased to 158 days, while our payables decreased to 159 days.

We expect several PV project in the final stage of completion will be sold in the next couple of quarters. Our polysilicon inventory at the end of the second quarter was approximately 1,064 metric tons at an average cost of approximately $20.9 per kilogram.

The interest bearing borrowings were approximately $3.3 billion at the end of the quarter, including approximately $2.4 billion of short-term borrowings and $0.9 billion of long-term borrowings.

In the fourth quarter of 2011, we announced plans to issue an aggregate principal amount of RMB3 billion notes due in 2014 to institutional investors in the PRC. The first phase RMB500 million was issued in December 2011. At this point, we do not have a fixed plan for the next issuance.

Now let me turn the call to Sam Tong, our President and the Chief Operating Officer, to provide you with an operation update.

Xingxue Tong

Thank you, Jack. I will provide updates on our wafer, cell, module, and polysilicon operations. Our wafer processing cost in the second quarter decreased to $0.17 per watt from $0.23 per watt in the first quarter, reflecting the benefit of the lean production management.

We will continue to work towards our goal of reducing our wafer cost – conversion costs to as low as $0.15 per watt over the next few quarters. Instead of strictly lowering costs, we are focused on delivering more and more higher quality and higher efficiency wafers for our customers. In this highly competitive market environment, we believe our focus on quality will ensure that we retain our long-term loyal customer base.

Over the past two quarters, we provided assets on our new generation of LDK M2 high efficiency wafers and share positive feedbacks we have received from our major customers. We have increased the manufacturing capacity of M2 wafers through more than 70% of our total wafer production. With the fast changing market demand, we’re now in the position to promote our third generation of M3 wafers to the vast solar market.

In our solar cell facility, normally 90.8 megawatt of cells were produced in the second quarter of 2012 because of market downturn. Our cell processing cost has decreased to $0.21 per watt during the second quarter of 2012 from $0.34 per watt in the first quarter. In addition to providing a steady supply of cells for our module production, we expect that our integration of R&D efforts for polysilicon wafers, cells, and modules will continue to drive down the total cost of modules.

All of our production lines have implemented our fine-line technology and the average cell efficiency has reached 16.9% to 17% with our normal wafers; 17.3% to 17.4% with our M2 wafers and 17.4% to 18% with our M3 wafers.

To enhance the quality control, we scaled our module operation with more automated production lines in the second quarter and we anticipate lower shipments of volumes in the second half of 2012 because of the impact of anti-dumping issues from the United States and Europe.

Total polysilicon production was lower than expected levels during the second quarter and approximately 538 metric tons polysilicon was produced because of the installation of hydrochlorination systems to achieve future lower production cost.

Now let me turn the call to Dr. Wan, our Chief Technology Officer, to provide you with R&D update. Dr. Wan, please.

Dr. Yuepeng Wan

Thank you, Tong. I’d like to provide an update on our research and development programs. One of our polysilicon production line was successfully upgraded with the hydrochlorination process that can convert the byproduct into the raw material with much less energy consumption and at a lower final product cost. The capacity of this pilot line is about 10,000 tons of silicon hydrochloride conversion.

Continued efforts was put into the further optimization of the M2 wafers. The production cost of the new M2 wafers has been significantly reduced. Our new effort on developing our high performance multi-wafers has resulted in the new wafer product M3. The detailed wafer kind of [credit mix] will be announced soon in our new products press release. We’ve improved the cell conversion efficiency from 18.6% to 19.2% with our new [method] technique for monocrystalline silicon cells.

We developed technologies for reducing the consumption of silver paste, while improving the cell conversion efficiency. The consumption of silver paste was reduced about 17% with a new design of trending patents. Also we were able to further reduce the silver consumption by 10% with a new printing technology. During the second quarter 14 patents were granted and three patents were applied for.

I’ll not turn the call back over to Jack. Jack?

Jack Lai

Thank you, Dr. Wan. Based upon current business conditions, for the third quarter 2012, LDK Solar estimates its revenue to be in a range of $220 million to $260 million. We anticipate wafer shipments between 190 megawatts and 240 megawatts; cell and module shipments between 140 megawatts and 180 megawatts.

For fiscal year 2012, LDK Solar estimates its revenue in the range of $1.1 billion to $1.5 billion; polysilicon shipments between 1,100 metric tons and 1,400 metric tons, wafer shipment between 0.9 gigawatts and 1.2 gigawatts, cell and module shipments between 550 megawatts and 750 megawatts, and inverter shipments between 170 megawatts to 210 megawatts. LDK Solar expects PV System Project construction to be in the range of 200 megawatts to 300 megawatts and to recognize between 110 megawatts and 150 megawatts through projects sales and EPC services for third-party customers.

And now, we would like to turn the call back to the operator to open the lines for questions. Operator?

Question-and-Answer Session

Operator

Thank you. We will now begin our question-and-answer session. (Operator Instructions) And our next question comes from the line of Shawn Lockman from Piper Jaffray. Please go ahead.

Shawn Lockman - Piper Jaffray & Co.

Good morning, gentlemen. I was wondering if you could just kind of give us your outlook on what you're seeing in the U.S. market and sort of ongoing strategy to penetrate that market? Thanks.

Xiaofeng Peng

Yeah, we expect the U.S. market will continue growing than last year and we focus on to use our partner for the solar sale from Taiwan and Asian countries and continue to service the U.S. market. And also we have a strong pipeline of PV projects in the U.S, so we will continue to service our customers, both module and also PV project service.

Shawn Lockman - Piper Jaffray & Co.

Thank you.

Operator

Thank you. Our next question comes from the line of Edwin Mok from Needham & Company. Please go ahead.

Edwin Mok - Needham & Company

Hey, thanks for taking my question. First question Jack, just to clarify, your OEM module business was -- you had a negative revenue for the quarter; can you give us some clarification what happened there?

Jack Lai

It's only $3,000 worth and that was adjustment.

Edwin Mok - Needham & Company

It was $3,000 okay – okay, sorry I misheard that number. Thanks for clarifying that. Then I noticed that if I kind of take the revenue and shipment number that you guys provided on the module and the cell shipment, would imply that you ship more cell this quarter. Is there a reason behind that or its just you guys are seeing more demand for cell or why is that you’re shipping more cell this quarter than previous quarters?

Xiaofeng Peng

We just let you know we have increased different SBU. So every SBU we’re selling to the – the products to in-house also selling to third-party. So the solar cell SBU, also try to selling the solar cells to the market.

Edwin Mok - Needham & Company

I see, but where were the demands coming from? Is that coming from European customer or what drove the increase in terms of cell shipment this quarter?

Xiaofeng Peng

Yeah, the majority sell into China and also some sell into the Canada and Europe and some also somewhat into Asian country.

Edwin Mok - Needham & Company

Okay, great. Thanks for clarifying that. And the third question I have is, Xiaofeng, you talk about cover your alignment I think that implies some cost reduction effort in terms of your operation right wise. Any kind of -- the way you can kind of quantify that either in terms of your operating expense cost reduction or in terms of how much cost you think you can pick up with the business model?

Xiaofeng Peng

Well, there are many things that we do, Edwin especially that for a headcount point of view that we – I think when – during the high time that we had somewhere about 27,000, 28,000 people about a year ago and right now we are running at about 16,000 people. So, from an organization point of view we already streamlined our organization and tried to right sizing these operations by reorganizing to SBUs and our holding company has very small stepping and actually trying to manage our day-to-day operations and corporate management through a very effective organization.

And of course, we're also looking to our R&D activities and try to focus on technology and the process to improve the cost, not to do so much – not getting immediate start. And from a marketing point of view, we also try to spend the money right on with the new product and the customers that need to be developed. So, try to use the money only, I think it's for the near-term requirement rather than to build a big expense base. So, I’d say the Company is working very hard trying to reduce operating expenses in every front.

Edwin Mok - Needham & Company

Great, that was helpful color. And my last question is related to your project business. It sounds like you guys expect to start completing some of these projects and start to collect some revenue, right? I guess either for EPC project completion. I guess, two question I have is; first is, are these predominantly North American or is that any kind of projects in China? And then the second question related to any projects in China. We have recently heard that there is quite a bit of – have project issues right in China, such as quick connection and issue like that, so can you help us in terms of – give us some color in terms of how the projects business in China is progressing? Thank you.

Xiaofeng Peng

Yeah, we had a project business from Europe, USA and China, so we have and the U.S. it's mainly from the SPI and also SGT in Europe, and also we have quite a good business in China. But our this year as you said, some grid connection will be delayed, so its why you see our construction in China may be delayed some to next year. So reviews continue, you’ll see some project in China this year. So we see that project business in China will continue to increase and we see that more and more project probably will be connected and finished in the next few months and early next year.

Edwin Mok - Needham & Company

Great, that’s helpful. One last, if I can squeeze in one last question, it’s kind of related to polysilicon. How do you guys think about the production level in the second half of this year and in terms of cost what you guys had in terms of cost right now? Thanks you. That’s all I have.

Xiaofeng Peng

The production output for polysilicon will be relatively small because we have been focusing on retrofit our processing to include the hydrochlorination which might take another – probably six months or so to get to ready. Our solar production output for the second half will be very small, very, very small. And cost wise that we cannot really realize our cost savings with this small production, so we'd expect that cost still in low-30s to mid-30s. However, once we get our improvement of process, we do expect that we will reach somewhere about $20 level per kilogram.

Edwin Mok - Needham & Company

Great, that’s all I have. Thank you.

Operator

Thank you. And our next question comes from the line of Harsh Agarwal from Credit Suisse. Please go ahead.

Harsh Agarwal - Credit Suisse

Hi, I had three questions. One was; can you confirm if you bought back any bonds or convertible bonds the second quarter, please?

Jack Lai

We did not buy back bonds or CBs during the second quarter of this year.

Harsh Agarwal - Credit Suisse

Okay. And how much was the cash proceeds you received from sale of your properties and your land use right?

Jack Lai

The total proceeds are coming from a sale of the land use rights and some properties will be somewhere about RMB350 million. So they’re equivalent of maybe somewhere $50 million to $60 million.

Operator

And our next question comes from the line of Aaron Chew from Maxim Group. Please go ahead.

Aaron Chew - Maxim Group

Hey, good morning. Thanks for the question. Jack, wondering if you can offer us an update on your thoughts on the LDK polysilicon IPO requirement next year and just given how the capital markets are towards solar companies. What, if any discussions you may be having with China Construction Bank and China Development Bank to deal with the deadline you have next year or any insight would be appreciated? Thanks.

Jack Lai

Aaron, certainly this is a very important action for the Company. We still are working on the fundamentals, because we just discussed about the production cost, which we try to aim at reaching $20 better or better than $20 per kilogram and our the focus for this year has been put on the processing improvement, especially the hydrochlorination improvement, so until we can get that done that maybe take, say, through year-end or beginning of next year.

If we don't get to this $20 level, I think that, that gross margin expectation for our polysilicon business will be very challenging, and that could have a very difficult IPO theme, and I think that in the near-term that one to two quarters from today that we’re still working on this operational improvements and hopefully by that time that we can – ramping up our production and lower our cost to the $20 level and hopefully at that time, that the global market will recover from this crazy price of low-20s and that’ll give us a reasonable gross margin, and at that time, I think that the financial market will be – probably more welcome this IPO proposal.

But right now I think it's relatively very difficult to get to the market. We don't see that as three month, six month thing, so maybe take a little bit more than that.

Aaron Chew - Maxim Group

That’s helpful but how do you think the banks will accommodate you given how difficult the public markets are, do you think they will be willing to waive the put?

Jack Lai

I think that we cannot speak for the banks, but we continue to communicate with CDB and other associated investors and to provide a timely update with the actions that we are taking as the Company has mobilized all resources and especially focusing on improving the process and operating cost, so that we can have an operation which aiming at, make it higher efficiency and also to produce positive bottom-line for our investors, and we believe that at this moment, it's prudent that to improve the manufacturing cost and to improve the process probably important than just try to get the IPO. So, certainly that when the cost objective is achieved, then the IPO that we can get it done, and of course the time is therefore and I think about a year of time that we have to accomplish this, but I think that before we get to IPO, we would really have to work on our manufacturing improvement.

Aaron Chew - Maxim Group

All right. Okay, excellent. I really appreciate the question Jack. Thanks.

Jack Lai

Thank you, Aaron.

Operator

Thank you. And our next question comes from the line of Håkon Levy from DNB Markets. Please go ahead.

Håkon Levy - DnB NOR Markets

Thanks for taking my questions. This is Håkon Levy from DnB Markets in Norway. What was your free cash flow during the second quarter and how will you describe your financial position? And secondly, what kind of headcount do you expect to have by year-end and there are other than any of your business areas that you would consider divesting or closing down to cut losses or generate cash?

Jack Lai

Well for the second quarter of 2012 our cash flow is about breakeven and of course that's also supported by disposal of some adduced, our non-production related properties that we generated somewhere about RMB350 million for the second quarter.

From headcounts point of view that right now, we already are sitting at about 16,000 people level. We believe that’s still possible that we can further to make organization more productivity, however the reduction at this moment that we see is not going to be that much significant as we also see some strong demand, our stronger demand that’s still are seeing that some are production of our products actually is getting tighter. So the reduction -- total reduction of headcount could not be very significant.

Håkon Levy - DnB NOR Markets

Okay. But are there any of your business areas that you will consider stop operating in or consider selling or closing down and I mean, say the polysilicon is currently operating at losses or standing still?

Jack Lai

Well, certainly that we try to run our business to meet the demand of our customers. For instance, our M2 wafers and the new M3 wafers coming with very strong demand and we are spending100% efforts to try to produce wafers for our customers. In the same time that certain modules demand also is very, very strong and we have to meet those kinds of modules that meet the demand of our customers.

Two, from a polysilicon side, as I mentioned that our cost is still a little bit too high and we need to focus on improvement of our manufacturing process, hence that our revenue generated from polysilicon in the remaining of 2012 will be somehow limited. While as the Chairman mentioned that project business that with the efforts our SPI by U.S. and SGT from Italy and also with new Chinese government policy that’s going to increase probably additional 20 gigawatts of solar project in China, we are positioned to capitalize this opportunity. So definitely the downstream project business is going to be also a good opportunity for LDK to expand our future revenues.

Håkon Levy - DnB NOR Markets

Okay. Thank you.

Operator

Thank you. (Operator Instructions) And our next question comes from the line of Emily Liu from Arete Research. Please go ahead.

Emily Liu - Arete Research

Hi, thanks for taking my question. I have a question for Chairman Peng; just wonder what is your expectation about Chinese market this year and next year? And does Jiangxi province have their own specific incentive for solar installation?

Xiaofeng Peng

So your question is solar …

Emily Liu - Arete Research

For the Chinese market – Chinese demand basically this year and next year?

Xiaofeng Peng

We already see a big demand in market – more increase than last year, last year about break equal in China. This year we only see a lot of installation starting from this month and also the Golden Sun projects I think at least 5 gigawatts, even probably 6 gigawatts this year already will be installed in China. So, next year I think we will be probably doubled than from this year so at least 10 gigawatts, even more than 10 gigawatts next year, and this is a …

Emily Liu - Arete Research

Okay.

Xiaofeng Peng

… will be considerably the same thing in Q1 next year in China.

Emily Liu - Arete Research

Right.

Xiaofeng Peng

Because now we see a lot of pipeline already coming from many province, especially in Gansu and Western China like Qinghai and Xinjiang also in [Xizang and Shaanxi] and also a lot of province in China like [Liaoning and Shandong and Gansu] province already have own program for additional – that didn't have national program, and this is also had more markets from like Gansu and Shandong area.

I think also maybe more province will come in also on program and also we believe next year the Golden Sun project will be also more than -- will be more than one – this year we have seen already1.7 gigawatts, next year we can easily see more than 1.7 gigawatts for some projects. So, I think next year will be double than this year again.

Emily Liu - Arete Research

Okay, thank you. Thanks.

Xiaofeng Peng

And in Jiangxi province also we see a lot of new applications coming especially solar together with agriculture.

Emily Liu - Arete Research

Okay.

Xiaofeng Peng

So, we see a more and more -- solar program with agriculture program application and I think this could be essentially more application in Jiangxi province next year.

Emily Liu - Arete Research

Okay. Just a quick question; the Jiangxi province where LDK is sitting have its own goal regarding the – installation target like part of the ‘12 five-year plan?

Xiaofeng Peng

I think Jiangxi have already – do have a lot of [implication] on the Golden Sun project. I think together maybe with some – the project with Solar together with agriculture could be a good program for the Jiangxi province. I think the major market for China next year still Western China for utility level and gross expansion level for the Golden Sun project and also the PV project. And I think next year probably across the nation a lot of PV application together with agriculture and this is also – the incentive next year.

Emily Liu - Arete Research

Okay. Thanks. Thank you.

Xiaofeng Peng

Thanks, Emily.

Emily Liu - Arete Research

Thank you. Thanks.

Operator

Thank you. And our next question comes from the line Sanjay Shrestha from Lazard Capital Markets. Please go ahead.

Sanjay Shrestha - Lazard Capital Markets

Great, thank you. Good evening guys, I’ve got a couple of questions. Chairman Peng, can you elaborate a bit more on some of the discussion going on with strategic partners, who are they, what kind of players are these guys and maybe if you can give us any more details surrounding that?

Xiaofeng Peng

Yeah, we have potentially several strategic investors in discussions and two of this strategic investor have a very detailed discussion already. So, I can only think they are a very big company and very well capitalized company, so and they’re all familiar with this industry and familiar with our company. So, no more – no other detail I can provide today, but I think if now we also have not received any offer for that thus until discussed. If we have any information, definitely we will announce and let you know.

Sanjay Shrestha - Lazard Capital Markets

Are these like the utility type guys or energy guys or are these like financial players, what can you share that with us?

Xiaofeng Peng

We cannot get this close to detail, but anyway they’re both very familiar with this industry.

Sanjay Shrestha - Lazard Capital Markets

Okay, one more follow-on for me if I may. So, you guys also talked about the project business it looks like, that seems to be the focus for a lot of players even from China at this point, so is this project business going to be limited to targeting the opportunity in China for you guys or how are you going about really sort of building your capabilities and the presence in the project business and what can we expect from this, volume-wise, what capacity will be allocated and how you plan to fund it and things along those lines?

Xiaofeng Peng

For project business we have been building a project in Europe, SGT, and also the operating [project] pipeline, in U.S. and in China we are already starting getting experience in China from two years ago. So we have a strong operational partnership with different players in China, an utility company. So we have still a strong experience in China to – of course different market at different experience especially China the working it is a service of project (indiscernible), in China, in U.S. and in Europe is almost still different.

Sanjay Shrestha - Lazard Capital Markets

Okay.

Xiaofeng Peng

Now we're starting also – starting a project in major markets in Asia and Africa and also in South America. So I hope we're quite focused for these opportunities in emerging countries.

Sanjay Shrestha - Lazard Capital Markets

Okay. And how big do you think your project business will be in 2013?

Xiaofeng Peng

I think the project business is becoming more and more – a very strong revenue for the Group.

Sanjay Shrestha - Lazard Capital Markets

Okay, but is it going to be 200 megawatt, 300 megawatt, 500 megawatt; how are you thinking about it?

Xiaofeng Peng

I think if next year you’ll know whether the project count to more than 10 gigawatts in China; I think we'll gain a big percentage of cake in China market. So, I think the project (indiscernible) kind of very significant volume in next year.

Sanjay Shrestha - Lazard Capital Markets

Okay, one final question then from me. So, if China is going to be a big project business for you guys, obviously payment terms are very different in China and with your balance sheet being where it is, how do you plan to sort of fund and execute on some of these project business in China. How should we think of that?

Xiaofeng Peng

We’re working closer with a well capitalized company in China, an utility company in China and provide our experience and our technology, if you say (indiscernible) so I think it’ll become very – working very closer with different partners use our strong points especially in technology side and also for service side.

Sanjay Shrestha - Lazard Capital Markets

Okay. And then how are you thinking about sort of your poly capacity? I apologize if you've already answered it. Given where the spot prices are and given where your cost of production is right now; how are you thinking about capacity utilization for your poly plant and what are the things that you can do in terms of capital expenditure to further reduce your cost of poly production and where would that be in 2013 in terms of cost per kilogram?

Jack Lai

And of course that, before we get into the $20 level that which will we have to finish our process improvement in the hydrochlorination and that would take probably three to six months to get there. We expect that after our improvement, we should challenge our production cost at about $20 level.

With our efficiency improvement in terms of just the consumption and also probably higher after we can debottleneck that actually a depreciation also will be amortized over bigger output, which probably have a chance to go below $20, which means that the Company at that time can generate or realize reasonable gross margins and that of course it required some investment at which we're putting, I'd say probably somewhere at $60 million, $70 million already, we probably still need to putting probably somewhere $25 million to $35 million in the next six months to get to the position that we can really enjoy that low cost operation which will be in the long run competitive to industry.

Sanjay Shrestha - Lazard Capital Markets

Okay, that’s fair. That’s all I had. Thank you so much guys.

Jack Lai

Thank you, Sanjay.

Operator

Thank you, ladies and gentlemen. That does conclude our question-and-answer session. I would like to turn it back over to management for any closing remarks.

Xiaofeng Peng

Thank you for participating in today's quarterly earnings call. We appreciate your continuous support to LDK Solar. We look forward to meeting with you again in next events. We wish you all a nice day.

Operator

Thank you, ladies and gentlemen. That does conclude our conference call for today and you may now disconnect.

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