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China Sunergy Co., Ltd. (NASDAQ:CSUN)

Q2 2008 Earnings Call Transcript

August 22, 2008 8:00 pm ET

Executives

Julian Wilson – IR, Financial Dynamics

Allen Wang – CEO

Kenneth Luk – CFO

Analysts

Robert Stone – Cowen and Company

Sanjay Shrestha – Lazard Capital Markets

Paul Clegg – Jefferies & Co.

Lu Yeung – Merrill Lynch

Emily Lu [ph] – Rate Research [ph]

James Penn [ph] – ERA Global [ph]

Operator

Good day ladies and gentlemen and welcome to the China Sunergy second quarter 2008 earnings conference call. My name is Fab and I will be your coordinator for today. At this time all participants are in a listen-only mode. We will conduct the question-and-answer session towards the end of this conference. (Operator instructions) As a remainder this conference is being recorded for replay purposes.

I would now like to turn the presentation over to Mr. Julian Wilson, please proceed.

Julian Wilson

Thank you and welcome to second quarter 2008 conference call. On the call today from China Sunergy are CEO, Allen Wang, CFO, Kenneth Luk; CTO, Dr. Zhao and head of R&D Dr. Wang. There will be some initial comments as always from Allen and Kenneth and we will followed by the Q&A session.

But before we start I'd like to remind you again that statements about the company’s future expectations, including future revenue and earnings, and all other statements in the Press Release, other than historical facts, are forward looking statements and are made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995.

Such forward-looking statements involve risks and uncertainties and are subject to change at any time. The company’s actual results could differ materially from expected results. In reflecting subsequent events or circumstances, the company undertakes no obligation to update forward looking statements.

Thank you, and with that I would like to introduce Allen Wang, CEO of China Sunergy. Allen

Allen Wang

Thank you Julian and I welcome everyone to our second quarter 2008 result discussion. I will start by making some introductory remarks about the operational progress we have in the second quarter and then I will hand over it over to CFO, Kenneth Luk who will provide a more detailed review of the financial results. Production retrained to normal in Q2 following the interruption cause by the snowstorms in the first quarter.

As a result this quarter we are seeing growing revenues and improved margin. Operating cash flow remains positive and the cash inflow in Q2 was $27.4 million. During Q2 we reported revenue of $111.6 million, which represents a 98.6% increased compared to the same period last year and they reported 4.9% increase compared to the previous quarter.

I am also pleased to report that overall improvement in the conversion efficiency of cells product have helped to improve our overall gross margin for the quarter to 10.4% compared to 9.2% during the first quarter of 2008. Quarterly production was 32.8 megawatt a 44.7% increased sequentially and 62.7% increased on a year-over-year basis.

In terms of technology one of the key developments during the quarter was the conversion of our remaining P-type lines to HP lines in mid June. Sales produced on those HP lines achieved an average efficiency rate of around 16.7% largely as a result of four wafer quality average efficiency remain at the 17.2% in the second quarter of 2008 even though a maximum conversion efficiency of 18.8% was recorded during the quarter.

It should be noted that when we use light sunlight wafer quality SE cells generally achieved higher conversion efficiency than HP cell and also display greater wafer quality tolerance. This means that wafers cells would normally be discarded as off-spec actually able to be used to produce SE cells, even though those cells might not reach the 17% conversion efficiency, which allow us to command the high SE.

We believe that once the wafer supply situation improves we should see a notable improvement to the overall efficiency rates. Particularly, on our SE cells products, for example on one particular batch of 4000 high-quality wafers we were able to achieve average conversion efficiency rate of 17.74% on our SE production line. This gives me great confidence that our supply quality improves then cell to well efficiency rate in our gross margin.

I am therefore please that all four new SE production lines are expect to be in mass production, but end of the fourth quarter 2008 despite some delays in electricity supply and equipment delivery. This will take the total number of SE lines to five by the end of 2008 and significantly improve our overall production capacity for these high-margin products as we move into 2009.

As I mentioned in Q1 steady progress continues on the development of our patent N-type cells, and as a plans R&D center in Shanghai is expect to be complete during the first half of 2008 and we’re involve a initial investment of $8 million. This Shanghai facility is an important investment for us and one that should maintain our technological leadership in the industry.

Regarding the ASP during the second quarter of 2008 the Blended ASP rose from U.S. $3.23 per watt in the previous quarter to $3.37 per watt due to a greater volume of high-efficiency cells, strong product demand and the strengthening of the RMB against U.S. dollar. The Blended ASP for the second quarter of 2007 was $2.82 per watt. Now comes to the poly silicon supply situation which is something we are continued to work hard to improve.

Now, during the second quarter of 2008, we entered into a supply agreement with the European wafer provider REC Wafer for a high quality supply of monocrystalline 156-millimeter wafers for the seven years starting from 2009 all the way to 2015. The continuous REC is an important development, that we will considerably improve our overall supply situation by giving out asses to a high quality wafers at a price significantly below current spot market price. The high quality wafer supply for REC will improve conversion efficiency rate and increase production yield and also which we will intent improve our gross margin.

In order to maximize the effectiveness of REC supply we will allocate this high quality wafers to our SE lines, which efficiency rate can be maximum. The RMB contract is a example how we intent to take advantage of improvement to wafer supply by using some of our free cash to secure a long-term supply contract with repeatable suppliers at a favorable price. Although, we expect to see more, to see some short-term pressure on our wafer price, I believe that as we move into 2009 wafer price are likely to decline and this will more than offset any potential softening of the ASP

I’d now like to hand over the call to Kenneth Luk, our CFO, who will talk through the numbers for a quarter. Ken

Kenneth Luk

Thank you Allen, and thank you everyone for joining the call. The results that I would be discussing denominated in U.S. dollar and have been prepared under the U.S. GAAP.

During the first quarter of 2008, our revenue grew 44.9% sequentially to US$111.6 million. Sales from solar cells, modules and process cells under OEM arrangements and other cells accounted for 93.5%, 3.8%, 1.9% and 0.8% of total revenues respectively.

Shipments, including 1 megawatts for module sales and 3 megawatts of solar cells processed under OEM arrangements amounted to approximately 35 megawatts compared to 15.8 megawatts during the second quarter of 2007 and 24 megawatts during the first quarter of 2008. During the second quarter the company increased its quarter-on-quarter sales of core solar cells product by 39.3% as compared to the previous quarter.

The percentage of overall cell sales in overseas markets was 39.5% in the second quarter of 2008, compared to 29.4% and 37.4% in the second quarter of 2007 and the first quarter of 2008 respectively. Of the 31% megawatts of cells shipped during the second quarter 11.4 megawatts were in the form of high efficiency cells, up from 9.1 megawatts during the first quarter of 2008.

Gross profit for the quarter was $11.6 million, which led to a blended gross margin of 10.4% up from 9.2% in the previous quarter as a result of the gross margin contribution from higher ASP. The sequential increase in gross margin on solar cell sales from 8.8% to 9.2% was also mainly attributable to high ASP. Blended ASP for the second quarter rose from US$3.23 per watt in the previous quarter to US$3.37 per watt. Blended ASP for the second quarter of 2007 was US$2.82.

ASP rose as a result of strong product demand higher volume of high efficiency cell shifted and the strengthening of Renminbi against the U.S. dollar. Again wafer costs continued to account for a large proportion of overall manufacturing costs. In Q2, wafer cost rose to US$2.79 per watt compared to US$2.64 per watt in the previous quarter and US$2.35 in the second quarter of 2007. Mainly due to the strengthening of the Renminbi against the U.S. dollar and an increase in the average cost per wafer in Renminbi terms.

Other production cost, which mainly consists of other raw materials, labor, depreciation and utilities, were US$0.27 per watt come from US$0.28 during the previous quarter, as a result of economy of scale derived from our high production of volume. Wafer cost has a percentage of total production cost increased from 90.3% in Q1 2008 to 91.2% in Q2 2008.

Operating expenses for the quarter increased from US$4.4 million to US$5.1 million sequentially of which the share based compensation charge was US$0.9 million compared to US$0.7 million in the previous quarter.

Quarterly net income was US$3.1 million in the second quarter compared to a net income of only US$0.5 million in the previous quarter and a net loss of US$3.5 million in the second quarter of 2007.

As of June 30, 2008, the company had cash and cash equivalents of US$124.1 million

Net operating cash inflow for the second quarter was US$27.4 million, mainly due to continuous enforcement of restrictive measures on cash management. In the second quarter of 2008, depreciation was US$1.3 million and capital expenditures were US$14.5 million. For the second half of 2008, we hope to maintain our stable financial position, continue to secure long-term supply agreement, expand production and maintain our gross margin.

The cell of the higher volume of high efficiency cells product keep us confident that we will be able to maintain our gross margin for the rest of 2008. However, we’ve remained cautious about our overall outlook for wafer prices and quality. And I’m assured you all of it on 1st of July in this year we closed our US$54.5 million fund raising through the issuance of senior convertible notes and we planned to mainly due to this process to secure long term supply contracts, expense production capacity and enhanced research and development.

Thank you and I would now turn the call back to Allen.

Allen Wang

Thank you, Ken. Before we turn the call over to questions, there are a few further items I would like to discuss. Overall gross margin was above guidance as 10.4% in Q2, it was too affected by wafer costs and wafer quality. We maintain our full year 2008 production target from 125 to 145 megawatt. We approximately 55 to 75 megawatt expect to come from high efficiency cell product, taking to account the increase in wafer cost for Q3 as well as the uncertainties in terms of wafer quality and foreign exchange fluctuation.

We believe our gross margin for the third quarter will be between 9% to 11% and the production volume in the range of 35 to 37 megawatt. The Blended ASP expects to be approximately $3.4 to $3.5 per watt. Even though raising wafer cost may put some pressure on our margin for the second half of the year. I believe that the introduction of our new SE lines and the improvement to the ASP will mean that margins will remains stable for the remainder of the year.

Looking towards to 2009 we believe that as the overall supply situation improves. We are well positioned to see margin improvement from the beginning of the next year as a result of one, credit trends from the suppliers two, high conversing efficiency rate as a result of the better wafer quality, three, improved operational efficiency, four continued R&D progress, which were resulting in the commercialization of new high efficient sales product and fifth, the expected decline in Wafer cost more than offsetting any potential ASP within next year.

I believe, you have seeing another successful quarter for China Sunergy and I remain extremely confident that we can continue to deliver steady growth and overcome many of the challenges facing the industry. Finally I would like to thank you all for your ongoing support and we’d now like to open the call for questions. Operator

Question-and-Answer Session

Operator

Thank you. (Operator instructions) And your first question will come from the line of Rob Stone from Cowen and Company.

Robert Stone – Cowen and Company

Good evening gentlemen, congratulations on the strong results.

Allen Wang

Thank you.

Robert Stone – Cowen and Company

I just wanted to clarify a couple of things about your guidance. You mentioned production targets for the quarter, could you comment on the shipment outlook including what you would expect from OEM megawatts and module?

Allen Wang

You mean for the next quarter?

Robert Stone – Cowen and Company

Yes for Q3.

Allen Wang

For Q3, I think probably the similar level to the production.

Robert Stone – Cowen and Company

Okay, so does your production figure include then for instance your plan for 2009, you cited a megawatt total including OEM. I am just wondering what the production figure you cite for Q3 also includes OEM megawatt?

Allen Wang

In Q3 that OEM megawatt will be a very small number, so most all the sales.

Robert Stone – Cowen and Company

Okay. So, the OEM is more opportunistic subject to available capacity, I guess

Allen Wang

Yes, you’re right.

Robert Stone – Cowen and Company

Okay could you comment on the mix of a HP versus SE cells in the 11.4 megawatt to prior efficiency products in Q2?

Kenneth Luk

It is approximately one-third for SE and, two-third for HP.

Robert Stone – Cowen and Company

Okay and I am assuming with the new SE lines that the four new lines will come on until Q4 that the volume of SE cells stated at the sailing Q3 or how should we think about that SE HP mix in Q3?

Kenneth Luk

Because we are not sure, there could be some delay in terms of electricity supply and there could be some delay in terms of equipment delivery. So, it should be in all the four additional lines will be up and running sometime in Q4. We are not sure exactly when, so, depending on the timing.

Robert Stone – Cowen and Company

Okay, and finally I wonder if you could comment –

Kenneth Luk

But definitely we expect SE and HP will increase in Q4.

Robert Stone – Cowen and Company

Okay, I was just wondering in between now and then in Q3 I guess there won’t be any incremental SE capacity, correct?

Kenneth Luk

Not, you are right. The capacity in Q3 will be the as same as in Q2. The capacity in Q3 would be a little bit higher than that in Q2 because in Q2 we convert two of the P-lines to HP lines and there were some kind of interruptions and Q3 that the same kind of the interruption won’t exit.

Robert Stone – Cowen and Company

Yes, that’s what I was just going to say you should have higher HP capacity in Q3.

Kenneth Luk

Yes, you are correct.

Robert Stone – Cowen and Company

Okay, and finally with respect to your silicon coverage situation you have commented in the past, how much of 2008 and 2009 silicon will secure, could you give us a figures as of now?

Kenneth Luk

Well, for 2008, for the second half, we have 100% coverage for the supply. For 2009 the only contract we signed so far is the REC contract, which should likely that cover 20% of our plan for next year.

Robert Stone – Cowen and Company

Okay, thank you.

Kenneth Luk

That’s Robert I think you know we are open, we are looking at opportunity to sign another long-term contract for next year, which will cover something like another 20% of our production need for 2009.

Robert Stone – Cowen and Company

With respect to the cash in order to secure additional raw materials, you had an excellent result in terms of your working capital balances this quarter. Would you expect to be able to maintain these same ratios or how should we think about inventory terms and accounts receivables, day’s sales outstanding?

Kenneth Luk

We’ve make significant improvement in Q1 because of ample opportunity and, in Q2 yes, I think we are satisfied with the results as well, but there is always a limit, I think, in Q3 and Q4 we have two competent that cash flow could be positive at operation level, but I believe the increase will not be substantial as in the first half.

Robert Stone – Cowen and Company

So, in terms of the ratios and inventory turns and receivable days, should they will be similar to what you just achieved in Q2?

Kenneth Luk

No actually we made a good achievement in Q2 for example inventory. Inventory turnover days in Q1 were 71 and we improved to 43 in Q2, accounts receivable turnover improved from 21 days to six days and also inventory reduced substantially in Q2 comparing with Q1.

Robert Stone – Cowen and Company

I was remarking on that very good progress. My question was whether those ratios are sustainable in the second half?

Kenneth Luk

Yes, recently the ratios are sustainable, but the improvement will be less significant.

Robert Stone – Cowen and Company

Okay. Great, thank you.

Kenneth Luk

Okay.

Operator

Your next question will come from the line of Sanjay Shrestha from Lazard Capital Markets.

Sanjay Shrestha – Lazard Capital Markets

Great. Good evening guys once again congratulations on a good quarter. Couple of quick question here, you guys talked about this REC contract occurring 20% of your Poly requirement for next year and potential another long-term contract that you guys are working on. Can you give us some more detail on that as to who that might be, what sort of a pricing we might get? What stages of the negotiation are you at? Can you talk about out a little bit more?

Allen Wang

I probably will talk about particular supplier. We do have a couple of suppliers we are in active discussion.

Sanjay Shrestha – Lazard Capital Markets

Okay.

Allen Wang

And that we should be able to cover out 20% needs for year 2009.

Sanjay Shrestha – Lazard Capital Markets

Okay.

Allen Wang

But I won’t be able to tell who they are and the terms specifically.

Sanjay Shrestha – Lazard Capital Markets

Sure, sure and in terms of the timing, is there something that’s we might be able to hear in the near future or is it more or like ongoing negotiation that might be in another few quarters out?

Allen Wang

Those negotiations have been taken out of the file and already. I think if we want looking product closer within the quarter, but we are not in a rush. I think Sanjay to put like this it the matter of the negotiation if want to have to sign another long-term contract, we can sign it tomorrow.

Sanjay Shrestha – Lazard Capital Markets

Got it.

Allen Wang

I think at this time to negotiate for better terms and conditions.

Sanjay Shrestha – Lazard Capital Markets

And that’s the right way to do it. So, that’s good. So, okay and in terms of the CapEx plan for you guys there is share for your SE lines or either that the four lines that’s going to be up and running by the Q4. How much CapEx are we going to need for that?

Kenneth Luk

For the four additional lines?

Sanjay Shrestha – Lazard Capital Markets

Correct.

Allen Wang

It is $60 million, but we spent a majority of that money already.

Sanjay Shrestha – Lazard Capital Markets

That’s what I was trying to get out. Okay $60 million. Now another things, guys as you talk about your installed capacity to be at above 320 megawatt by the end of this year. Correct.

Kenneth Luk

I think 8.15 to wafer

Sanjay Shrestha – Lazard Capital Markets

Correct, correct, yes of course and then you talk about your shipment expectation of 200 to 250 megawatts in 2009. Now is that expectation takes into consideration you going to evaluate with the Poly. Is that because that you are still being conservative with the Poly availabilities, because that almost says that you are not going to plan to add any capacity during 2009. So, if you sign one more long-term contract I would imagine there is a meaningful upside to that. Is that fair way to think about it?

Kenneth Luk

Its reduced 5 inch instead of 6 inch with ten production line capacity will be in the range of 220 megawatts, 230 megawatts.

Sanjay Shrestha – Lazard Capital Markets

Okay, okay.

Kenneth Luk

So, at this point of time we cannot assure whether we can get more six inch.

Sanjay Shrestha – Lazard Capital Markets

Got it. Okay and in terms of the Poly coverage you guys talk about for the second half of this year, you said that you have 100% coverage right, but there is a range of output here 125 to 145 megawatt. Is that 100% coverage for 145 or 125 megawatt?

Allen Wang

Well for 145.

Sanjay Shrestha – Lazard Capital Markets

And then one last question then guys in terms of that long-term contract that you have with REC coverage 20% but other sort of like domestic players that you guys have had interaction in the past. Can you talk about that a little bit as to what some of the other players you’re discussing and if you can also talk and what you said it’s a substantial reduction in 2009 and may be help us to understand a little bit as to how should that translate into the margin gain for you guys as much as the utility you can I understand it’s a sensitive issue, but as much as detail as you guys can provide.

Kenneth Luk

Can you repeat those questions Sanjay?

Sanjay Shrestha – Lazard Capital Markets

Sure, sure can you talk about some ongoing discussions that you guys have with the local Poly producers for 2009 and the second thing is can you help us to understand how much of a margin gain we might be able to see just with this one REC contract during 2009.

Allen Wang

For the other long-term contract will be discussed, okay. We believe that the wafer cost probably would be in that 15% drop from this year’s level.

Sanjay Shrestha – Lazard Capital Markets

Okay, okay that’s great thanks a lot then guys good quarter.

Allen Wang

Thank you

Operator

Your next question will come from the line of Paul Clegg from Jefferies Paul Clegg – Jefferies & Co.

Good evening guys congratulations on the strong quarter.Allen Wang

Thank you, Paul. Paul Clegg – Jefferies & Co.

I just wanted to you make a follow up to Sanjay’s question about the 145 megawatts being covered with Poly for 2008. If that’s the case at some I also noticed you’re reducing your guidance for the number of high-efficiency cells in the mix. So the constrain here really is about getting the equipment and is that correct?

Allen Wang

That’s correct. If we can add additional four SE lines in place in October versus if we can only have done in December it’s totally different fro us.

Paul Clegg – Jefferies & Co.

And would you just –

Allen Wang

And at this point of time you cannot be sure yet.

Paul Clegg – Jefferies & Co.

Okay. So it’s really about incremental production in the fourth quarter and how much of an impact could that have on fourth quarter margins if you were to get those lines earlier. You’re talking about gross margins being flat basically for the reminder of the year.

Allen Wang

I think if we can have to four lines up and running in October, we’re talking about something like 2% to 3%.

Paul Clegg – Jefferies & Co.

200 basis points to 300 basis points incrementally.

Allen Wang

Yes correct.

Paul Clegg – Jefferies & Co.

On your fourth quarter gross margin. Okay very good and can you just maybe talk a little bit more about what some of the issues we’re and getting equipment it’s just the question of the supplier. You also mention some electricity issues there. So, I guess just more detail perhaps on what the issues where it’s just that the suppliers slow in getting the equipment to you and then what were the issues than with the electricity of the sight.

Allen Wang

That should be a supplier thing, because we have to get approval from the government and in China I think, you have to go through some their aquatic process in China so, sometime the uncertainty is there.

Paul Clegg – Jefferies & Co.

Okay so, it’s just a question of your product processes, what was the current…

Allen Wang

We our finding equipments on the Italian supplier and good supplier we do now have a good track record based on our cost experience. So, I think the latest status what is the latest status.

Kenneth Luk

I think they could probably deliver sometimes in September, October timeframe.

Paul Clegg – Jefferies & Co.

September, October it looks like they could deliver for September or October.

Kenneth Luk

They should be able deliver in September. I think if they push out probably we could to, we should get in October?

Paul Clegg – Jefferies & Co.

Is that for all four lines?

Allen Wang

No the two lines already arrived. Okay but we still needing equipment to make into SE. The lines the current configuration is for the HP configuration. We’re still missing some equipment that we need to get into in order to market into the SE configuration.

Paul Clegg – Jefferies & Co.

Okay and that equipment are sourced locally or are they also from the Italian supplier?

Allen Wang

(inaudible)

Paul Clegg – Jefferies & Co.

Okay and then if could just one more Wafer sources for the second half of ’08. I understand your overall production capacity is changes significantly whether its 5 inch or 6 inch Wafer that’s you have, what’s the mix of your Wafer supply for the second half of ’08 between and 5 inch and 6 inch

Allen Wang

I think it’s like roughly the six-inch is like 25% to 30%.

Paul Clegg – Jefferies & Co.

25% to 30% expansion and then for 2009 your REC contract that’s all six-inch?

Allen Wang

The REC contract all is six-inch.

Paul Clegg – Jefferies & Co.

All six-inch. Okay, very good thank you.

Allen Wang

Thank you.

Operator

Your next question will come from a line of Lu Yeung from Merrill Lynch.

Lu Yeung – Merrill Lynch

Hi, I have a question on the efficiency, you recorded was 18.8%, was it based on that good quality of wafers you probably see from your new supplier or how should we think about it versus wafer quality?

Kenneth Luk

The 18.8% was the highest achievement in Q2, but I think, Allen mentioned about that in a single pack we talk about 4000 wafers, all good quality wafers and then, by using that good quality wafers, that batch of production we achieved average of 17.7% and I think in Q4 last year where we initially introduced SE product the energy efficiency is at 17.5%. So, if we have stable good quality wafers then that efficient to gain will be pretty significant that’s why we say that REC contract is very important to us because there will be also additional efficiency gain.

Lu Yeung – Merrill Lynch

Would you expect consistent efficiency about 18% based on the new supplier that you have in 2009?

Kenneth Luk

It’s hard to say that we know it definitely would be over 17.5% we still need to test out before we can really comment on those, we do have good confidence growth.

Lu Yeung – Merrill Lynch

Also do you have any update on the N-type?

Allen Wang

We did have some improvement in the cell performance that it is still going up, but talking to production we’ve probably, need a little more time. We need further research for that.

Lu Yeung – Merrill Lynch

Can you also give us some color on your OEM contracts and it looks like as pretty profitable business there and how we should think about in the second half ’08. How much volume we should expect from OEMs?

Kenneth Luk

Well, in the second half of ’08, the OEM volumes will be kind of minimum probably in the range of 5 to 10 megawatts, not significant, because we pretty much sold our capacity rates. Okay, so in 2009 we do plan to allocate probably like 28% to 25% of our capacity for the OEM

Lu Yeung – Merrill Lynch

Was your OEM mainly high performance cell or just regular P-type?

Allen Wang

It depends on the customer needs, we’ve customer they request for the high-efficiency cells.

Lu Yeung – Merrill Lynch

I see so looking into ’09 have you been signed sales contract for ’09?

Allen Wang

We don’t have secured the sales contract. We are in constant discussions with our existing customers for the long-term income for the 2009 and long-term contract.

Lu Yeung – Merrill Lynch

You have some sort of figure that you may have bookings or any for 2009?

Allen Wang

I don’t know have any bookings for 2009.

Lu Yeung – Merrill Lynch

Okay, all right. Congratulation on the quarter, thank you.

Allen Wang

Thank you.

Operator

Your next question will come from the line of Emily Lu [ph] from Rate Research [ph].

Emily Lu – Rate Research

Hi, congratulations on the good quarter and thank you for taking my question. Have a quick follow up question on OEM. I just wonder whether you guys disclose OEM margin, it’s possible to give us a range and my second question is you mention you have a 20% Poly secure for next year and you were in the process negotiation extra long term contract I just wonder whether you have intention to participating assortment of spot market next year.

Kenneth Luk

The OEM gross margin in Q2 was 63%.

Emily Lu – Rate Research

Okay, that’s very high.

Kenneth Luk

Yes, what was your second question?

Emily Lu – Rate Research

Second question is you mention you have a 20% of Poly secure for 2009 and you are in the process of negotiating actual long-term contract. I just wonder if you’re have any kind of how you are going to manage the sourcing program next year as you do intend to source a little bit on a spot on expectation you’re seeing that the spot market could go down?

Kenneth Luk

I guess, in our 2009 sourcing program we had 20% were high and see it maybe a little 20% to 25% for OEM.

Emily Lu – Rate Research

Okay.

Kenneth Luk

The federal loan with this additional long-term contract probably it in the regional 20%. So, we probably still have that 20% to 40% we would leave both in for the spot okay.

Emily Lu – Rate Research

Okay I have another short follow up. I just wonder whether you guys intend to continue the source friendly on Shanghai next year.

Kenneth Luk

We always want suppliers; we have no plan to now work with them. We’ll continue to walk withstand.

Emily Lu – Rate Research

Okay, great. Thank you.

Kenneth Luk

Thank you.

Emily Lu – Rate Research

Thanks

Operator

Your next question is a follow up from the line of Paul Clegg, Jefferies & Co. Please proceed.

Paul Clegg – Jefferies & Co.

Thanks for taking my follow-up. The tax rate for the quarter was a little lower than what we are looking for I think the last quarter you guys were talking about something more or like 12%, 13%. What should we look forward for the reminder of 2008?

Kenneth Luk

It will remain to be 12.5% until 2010 and we are trying to apply for high tax basis if we manage to get that the tax rate will decrease to 7.5%.

Paul Clegg – Jefferies & Co.

Okay, when would we here something about that?

Kenneth Luk

Because, this is still new, it is still new in China we are trying maybe in a few months Paul.

Paul Clegg – Jefferies & Co.

Okay, and then if you could also disclose the currency impacts on ASP this quarter versus in the first quarter. How much have been

Kenneth Luk

The currency impact this quarter is quietly is bigger than the real increase. I think it’s something like we achieved ASP this quarter it was 3.37 versus 3.32 in Q1, so, out of the $0.14 improvement, $0.10 due to foreign exchange impact.

Paul Clegg – Jefferies & Co.

Okay, and then just a little bit of it due to the mix.

Kenneth Luk

Yes.

Paul Clegg – Jefferies & Co.

Okay and you’re not actively hedging currency at this time I don’t think, that correct.

Kenneth Luk

Not at the moment, but that going to be we will try to put up its something a process to, because we are hedging something like 30% to 35% of our revenue in Euro and because, Euro is depreciating against the U.S. dollar recently. So, it hasn’t really we are looking at it and we will put up the process to make that kind to do some kind of hedging.

Paul Clegg – Jefferies & Co.

Okay

Kenneth Luk

While closing Euro. Yes.

Paul Clegg – Jefferies & Co.

And that was part of the reason that you’re being a bit conservative on the gross margin guidance I think with the reminder of the year.

Kenneth Luk

Yes, exactly there is a lot of uncertainty, yes.

Paul Clegg – Jefferies & Co.

Okay and I am sorry I didn’t hear the previous question about OEM margins I was enable to hear the answer to that if you could repeat the OEM volume.

Kenneth Luk

63.2% for Q3.

Paul Clegg – Jefferies & Co.

Okay. Okay, thank you very much.

Kenneth Luk

You’re welcome.

Operator

Your next question will comes the line of James Penn [ph] from ERA Global [ph].

James Penn – ERA Global

Hi, Allen and Kenneth congratulations on a wonderful quarter, just a follow-up on Forex. How do you guys view in terms of break down of different currency for sales the U.S dollar, RMB versus Euro and the rest half of the year.

Kenneth Luk

In terms of sales?

James Penn – ERA Global

In terms of sales, yes.

Kenneth Luk

We have something like 5% in U.S. dollars, 30% to 32% in euro and the remaining in RMB.

James Penn – ERA Global

Okay and is there any implication on your balance sheet accounts that would cause you to have a FOREX gain or loss on your income statement?

Kenneth Luk

Let me make sure I understand your question, can you repeat it again?

James Penn – ERA Global

Is there any implication on your balance sheet accounts for example your debt, your accounts receivable, accounts payable. That might cause you to have a FOREX gain or loss reported on your income statement due to mark-to-market based on current FOREX rate?

Kenneth Luk

I can touch that at long-term customers. Cash and cash equivalents and also accounts receivables. We felt you’re looking.

James Penn – ERA Global

I just want to understand a little better you have a $123 million of debt, right as of the second quarter. What's the currency breakdown of that debt? Yes, R&D debt and U.S. dollar debt and you just break that out?

Kenneth Luk

Now you call short-term loan from the local bank here in China, it’s all Renminbi.

James Penn – ERA Global

Okay, it’s all in Renminbi. Okay and what as well as the CapEx number for this quarter?

Kenneth Luk

I think the CapEx, we only spent majorities of to CapEx for 2008. For Q2 we spent something like $14.5 million.

James Penn – ERA Global

$14.5 million. Ken, I don’t understand, you just raised $50 million from your CD, but what caused you to comeback to market and raise money again in the second half of the year or next year?

Kenneth Luk

I think you about the CapEx need for Q2 2008, the money we’ve raised I think we also include that the spending for the upcoming setup of a R&D center in Shanghai. If nothing new I think our cash now is good until our first quarter or even second quarter of 2009.

We have not yet finalized our 2009 trend, I think, only until if we make the decisions to add additional production line or we want to sign a long-term contract which require very substantial prepayment or because of the contract size is very large and we need, only these two cases happened I don’t think we have any need to go to the market.

James Penn – ERA Global

Okay, great and we are very glad to see your inventory trends cut by a lot to down to 40-days, but would you be concerned at this 40-day level in terms of how that might affect your production in the second half?

Allen Wang

No, we don’t see that as a problem.

James Penn – ERA Global

And you mentioned you got 100% covered in terms of your Poly for 2008 those are fixed quantity contract as…

Allen Wang

For 2008, we are 100% covered up, unfortunately all those contracts area not on not fixed price.

James Penn – ERA Global

Okay, but there is fixed quantity right that’s why your confidence to keep your inventory at a 40-day level?

Kenneth Luk

Yes or no its fixed quantity, okay, and we are be conservative because things on our experience. If we signed for 100 pieces then we can for sure we have high confident to get 50%.

Allen Wang

I think we are confident?

Kenneth Luk

Yes, we are confident.

James Penn – ERA Global

Okay, great. Thank you.

Allen Wang

Okay.

Operator

That concludes the Q&A portion of today's call. I would now like to turn it back over Mr. Allen Wang for closing comments.

Allen Wang

Thank you again for participating in our earning call and for your continuous support on China Sunergy. If you have any additional question, please feel free to contact us and looking forward to speaking to you again soon. Bye.

Operator

Thank you for your participation in today's conference. Thus concludes the presentation. You may now disconnect. Have a great day.

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Source: China Sunergy Co., Ltd. Q2 2008 Earnings Call Transcript
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