Emeren Group Ltd (SOL) 2008 Q2 法說會逐字稿

Good evening, and thank you for standing by for the ReneSola Limited second quarter 2008 conference call. At this time, all participants are in a listen-only mode. After management prepared remarks, there will be a question and answer session. As a reminder, today's conference is being recorded.

I would now like to turn the meeting over to your host for today's conference, Mr. Derek Mitchell, ReneSola Investor Relations consultant from Ogilvy Financial. Sir, you may proceed.

Thank you. Hello everyone, and welcome to ReneSola's second quarter 2008 earnings conference call. The company's second quarter 2008 earnings results were released earlier and are available on the company's website, as well as on newswire services. You can follow along with today's call by downloading a short slide presentation which can also be found on ReneSola's website at www.renesola.com.

With me today from ReneSola are Mr. Xianshou Li, Chief Executive Officer, Mr. Charles Bai, Chief Financial Officer, and Mr. Cheng Hsien Yeh, Chief Operating Officer. Charles will be discussing the business and financial results, and all three company representatives will be available to answer your questions during the Q&A session that follows.

Before we continue, please note that today's discussion will contain forward-looking statements made under the safer harbor provisions of the US Private Security of Litigation Reform act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company's results may be materially different from the views expressed today.

Further information regarding these and other risks and uncertainties is included in the company's registration statement on Form F1 and other documents filed with the US Securities & Exchange Commission. ReneSola does not assume any obligation to update any forward-looking statements expect as required under applicable law.

Before I turn the call over to Charles, please be reminded that unless otherwise noted, all figures mentioned during this conference call are in US dollars.

It is now my pleasure to introduce Charles Bai, CFO of ReneSola. Charles.

Thank you, Derek, and thank you everyone for participating in today's earnings call. Please turn to page four of our presentation for a summary of our business and the financial highlights for the second quarter.

Our second quarter 2008 results were released earlier today, and I am proud to announce that ReneSola enjoyed another record quarter of revenues and net profit with solid revenue growth and margin improvement after excellent Q1 results. We achieved total net revenues of $173 million for the quarter, an increase of 40.7% over the first quarter of 2008 and 289% over the same period last year.

Our second quarter gross margin was 24.7% compared with 22.1% in the first quarter of 2008. Gross margin for the second quarter 2008 was 24.4% under equity method to account for our investment in the joint venture in Henan Province, China, compared to 22.1% in the first quarter of 2008. Improvement in gross margin from 22.1% to 22.4% under the equity accounting method was achieved when our feedstock costs increased by 6.4% during the quarter, although our wafer ASP increased by only 1.75% during the quarter. We once again demonstrated our ability to continue executing on our growth strategy in tandem with improved profitability.

We made significant progress during the quarter and exceeded our target output by successfully executing on our previously stated growth objectives. We successfully increased our production output to 82.5 megawatts, exceeding our previously issued guidance of 75 megawatts to 80 megawatts range. This ramp up of our production represented an increase of approximately [24.1]% sequentially, and this was mainly due to the additional output from our new mono furnaces which came into operation during the quarter (corrected by Company).

We took further steps to improve our production efficiency during Q2 as we continued to drive technological innovation to reduce crop and kerf losses and minimize the scrap yield during our production process that drove further reduction of silicon consumption to 6.24 grams per watt, down from 6.3 grams per watt in Q1.

Our processing cost was further reduced to $0.39 per watt during the quarter, compared to $0.40 per watt achieved in Q1, although purchase costs for many of our consumer materials and spare parts sourced in China increased due to an increasing inflation of over 7% in the country during the quarter.

Looking at our mono and multi production in more detail; in addition to 378 megawatts of installed capacity at the end of 2007, we dedicated Q2 to ramping up of our mono production capacity with newly added 72 megawatts of mono furnaces during the quarter, bringing a total of 290 megawatts in mono capacity and 450 megawatts in installed production capacity at the end of Q2.

While we are constructing additional multi facilities, the installed capacity of our multi wafer production remained unchanged for the quarter. We currently have 160 megawatts of multi production capacity. We continue to benefit from the implementation of this segment as it diversifies our product mix and helps to address strong customer demand. We will further increase our multi capacity as we move forward in rolling out our expansion strategy. The synergies offered through the utilization of mono and multi production continue to help us control costs and help mitigate the high feedstock cost. This helps ensure that ReneSola maintains its unique competitive position as a global leading wafer producer equipped with significant capacity in both mono and multi wafer production.

Please turn to page seven of the presentation to see our feedstock sources. As we outlined in the release today, we have recently taken steps to revise the minimum amount of silicon we are contractually obligated to purchase from our Linzhou Zhongsheng Steel joint venture project, in which we hold 49% stake. The smooth progress of our Sichuan polysilicon project and an expected more competitive poly costs at our Sichuan poly project and some of our other suppliers have allowed us to examine our feedstock supply and related strategies, and to this end we have decided that it is in our best interest to amend the supply period of the original supply contract and reduce the minimum amount of poly we are required to buy from the JV. Under the terms of the original agreement signed in August 2007, ReneSola was obligated to purchase 90% of the JV's virgin polysilicon output at 97% of the market price over a 30 year period. On June 28, 2008, following a reassessment of the JV's position under the company's multi-pronged feedstock strategy, ReneSola and Zhongsheng Steel amended the agreement to reduce the contractual obligation of the company to purchase output of the JV to a minimum of 55% of output at market price for a period of three years. It is important to note that while the amendment agreement reduces our minimum purchase amount to 55% of the JV's output, we have the flexibility to purchase more polysilicon from the joint venture. The feedstock procurement contracts recently signed are expected to provide additional buffer to the company's raw material sufficiency in 2008 and beyond. It is also important to note that, although the change in accounting treatment will have an impact on our gross margin, it does not have the impact on economics and net earnings.

As a result, the company uses equity accounting method for its 49% interest in the joint venture. Consequently, the Group balance sheet at June 30, 2008, does not include consolidated figures for the joint venture. However, the income statement includes consolidated figures for the joint venture up to June 28, 2008. For the sake of clarity and comparison purposes, the discussion of figures from the income statement later tonight will show figures with the consolidation, and figures calculated on equity method to account for our investment in the joint venture in the quarter.

Our plan to develop a wholly owned polysilicon production facility in Sichuan Province with an annualized capacity of 3,000 tons is on track for completion early in 2009. Construction on the physical structure is well underway with buildings to house critical equipment being erected. We reported in our previous earnings conference call that we did not expect to suffer any material effect as a result of the nearby earthquake, and this proved to be accurate with the construction on schedule and the facility expected to come online and begin contributing polysilicon feedstock during the first half of 2009. We maintain our belief that the increase in polysilicon manufacturing capacity will provide us with a more long term stable and a cost effective source of polysilicon feedstock, will help further reduce feedstock procurement risk, and will strengthen our competitiveness as a low cost solar wafer producer.

Late last year, we signed two long term polysilicon purchase contracts for a total supply of 13,200 tons of virgin polysilicon over a six-year period. These contracts have come into effect recently, and are expected to provide a stable supply for our scheduled ramp up of production output. In addition, we signed a number of additional polysilicon purchase contracts with international and domestic suppliers, with terms ranging from one to five years. These additional contracts will provide a total of approximately 1,700 tonnes of polysilicon to be delivered during 2008 and 2009, with the majority to be delivered in 2009. With two long term polysilicon purchase contracts signed last year, we have contracted all the feedstock needed for our projected output in 2008, and 2,350 tons of our 2009 production. Together with 1,500 tons of polysilicon expected from our internal production and purchases from our joint venture in Henan Province, substantial amount of our feedstock is secured for our planned 2009 wafer production output.

Cost reductions. Our silicon consumption rate of 6.24 grams per watt achieved in Q2 continues to be one of the lowest in the industry. Through the utilization of innovative technologies, close-loop scrap polysilicon recycling, and an increased utilization of thinner wires for wafer slicing, we have decreased processing costs from that approximately average of $0.40 per watt in Q1 to an average of $0.39 per watt in the second quarter, although many of our consumable materials and spare parts experienced a significant increase of purchase costs as a result of higher inflation in the country during the quarter. We'll continue to stay focused on cost efficient production, and to implement additional cost reduction programs to mitigate the negative impact from the increased consumable costs.

ReneSola is continually seeking new ways to innovate, and we are intensively focusing on R&D. During the second quarter, we significantly increased our investments in technologies that can utilize alternative raw materials for future wafer production. As a result of these efforts, we have innovated proprietary technologies to make previously unusable raw material usable. We also made significant advancements in the utilization of metallurgical grade silicon for our future wafer production. The test results were very positive, and we are in the process of technically refining these technologies in order to initiate commercial production in the near future. This illustrates our focus on exploring new ways to address the current polysilicon shortage and to improve efficient cost production.

Now please turn to page ten for our capacity expansion and output updates.

ReneSola's 2008 capacity expansion plan is on track to achieve our previously announced full year 2008 production capacity target of 645 megawatts by the year end. A total of 72 megawatts of new mono furnace were installed, and are in various stages of output ramp up and the final batch with additional 35 megawatts of mono furnaces, are expected to be delivered during the third quarter. As such, we'll have completed our mono production capacity expansion plan by the end of the third quarter this year, bringing our total mono production capacity to the 325 megawatts.

Construction of facility to house 160 megawatts of new multi furnaces is now complete and ready for delivery of the furnaces which will occur during the third and the fourth quarter 2008. Once these new furnace are installed, ReneSola will have a total of 320 megawatts of multi production capacity in place.

Construction has begun on new facility that will hold additional 355 megawatts of multi furnaces as part of ReneSola's 2009 wafer manufacturing capacity expansion plan. The facility is expected to be in place in January 2009. The furnaces are contracted to be delivered in batches, and last shipment from the supplier is expected to be in early third quarter 2009 when we achieve our production capacity expansion plan in 2009.

In June, we completed our equity follow-on offering, generating net profits of approximately $[185.2] million (corrected by Company). The additional funding has provided ReneSola with sufficient cash sources to fund our 2009 expansion plan and ensure a smooth ramping up of production.

Wafer sales. As in the previous quarter, demand for our quality wafer products remains very, very high. We continue to be constrained by production capacity while expanding our strong customer base, both domestically in China and internationally through additional long term wafer supply contracts as recently announced.

We witnessed strong sales for both our mono and multi wafer lines highlighted by additional long term wafer sales contracts signed since the closing of our follow-on offerings in June 24 this year. The key contracts signed include an amendment agreement with Jetion Holdings to deliver 120 megawatts of wafers over a six year period replacing a three year wafer sales contract signed in August 2007; a wafer sales contract with a cell manufacturer in Northern China to deliver 225 megawatts of wafers over a five year period beginning in the third quarter 2008; a wafer sales contract with ShanShan Ulica Science & Technology to deliver 105 megawatts of wafers over a six year period beginning in the third quarter 2008; and a contract with CSG PV Tech in Guangdong Province, China, to deliver 266 megawatts of wafers over a four year period, beginning also in the third quarter 2008.

And today, we announce a major agreement with Suntech for the supply of approximately 1.5 gigawatts of wafers over an eight and a half year period beginning in July 2008. In October 2007, ReneSola and Suntech signed a four year contract for the supply of 510 megawatts of silicon wafers. The new contract provides for the supply of additional wafers to Suntech in 2008 and replaces the remaining terms of the contract signed in October.

These long term sales contracts demonstrate the strong downstream demand for, and the quality of, our wafers, especially considering that two of these agreements were existing contracts which have been extended in length and volume.

As of today, approximately 355 megawatts of our production capacity for 2009 are contracted out under various wafer subcontracts. This represents approximately 60% to 65% of our own wafer production output target for 2009.

Now let's turn to financials. I would like to walk you through the contributors to our second quarter 2008 results, and some financial highlights. You can find a snapshot of our financial statements on page 12 to 15 of the presentation. The first item is net revenues. Net revenues for the second quarter of 2008 were $173 million, an increase of [40.7]% sequentially, and 289% year-over-year (corrected by Company). Under equity accounting method, net revenue for the second quarter of 2008 were $171.9 million, an increase of 40% sequentially, and 287% year-over-year. The rise in the second quarter of 2008 revenue was primarily attributable to an increase in output from the successful ramp of production capacity installed during Q1 2008, and the increase of wafer ASPs. Average wafer ASPs increased from $2.56 per watt in Q1 to $2.60 per watt in the second quarter due to increasing industry demand in general, and a continuing strong demand for our quality wafers in particular.

The total wafer shipment in the second quarter was 82.3 megawatts consisting of 57.7 megawatts of wafer sales. Wafer shipment under toll arrangements was approximately 24.6 megawatts during the quarter. Out of the wafer shipment of 82.3 megawatts, 44.3 megawatts were mono-wafers and the remainder of 38 megawatts were multi-wafers.

Gross profit. Second quarter 2008 gross profit was $42.8 million, a 57% increase sequentially and 330% year-over-year. The gross margin for the second quarter 2008 was 24.7% compared to 22.1% in the first quarter 2008. Under equity accounting method, gross margin for the second quarter was 22.4%, improved from 22.1% in the first quarter. The solid gross margin improvement was primarily attributable to a further reduction in silicon consumption from an average of 6.3 grams per watt in Q1 to an average of 6.24 grams per watt during the second quarter, the continuing reduction in non-raw material related production costs, increasing wafer ASPs due to a high demand for our wafer products and, obviously, the contribution from the joint venture. This was achieved despite an increase of our feedstock costs during the quarter over 6%.

Operating profit. Operating profit in the second quarter was $34.5 million, an increase of 49% sequentially, and 328% year-over-year. Operating margin was 20% in the second quarter compared to 19% in the first quarter of 2008 (Company corrected after the conference call). Under the equity accounting method, the operating margin for the second quarter 2008 was 17.8%, compared to 19% in the first quarter of 2008. Total operating expenses in the second quarter of 2008 were $8.3 million, up from $4 million in the first quarter of 2008, reflecting a substantial increase in R&D expenditure of approximately $3 million relating to our investments in developing technologies for alternative silicon feedstock materials. As stated in the Q2 press release, we've made significant advancements into the utilization of alternative silicon materials for future wafer production, including the use metallurgical grade polysilicon. With the proprietary technologies in place, we're starting strategies to deploy metallurgical grade polysilicon in our future commercial production.

Profit before tax. Profit before tax in the second quarter was $31.2 million, a 46.6% increase sequentially, and a 443% increase year-over-year. Under the equity accounting method, profit before tax in the quarter was $28.2 million, an increase of 32% sequentially and a 390% increase year-over-year. Finance costs increased by 28.5% sequentially, reflecting the increased bank borrowings from approximately $123 million by the end of Q1 to approximately $178 million by the end of Q2, and also on an increase in an average interest rate of approximately 2.9%. Finance costs, however, as a percentage of the net revenue has decreased from 1.7% in the first quarter of 2008 to 1.6% in the second quarter. The second quarter foreign exchange loss was approximately $800,000 due to a further appreciation of R&D against US dollars during the quarter, compared to foreign exchange loss of $60,000 in the first quarter.

Taxation. Our income tax for the second quarter 2008 was $6.8 million in the second quarter at an effective corporate income tax rate of 21.9%, compared to tax expenses of $3.6 million in the first quarter of 2008. Under the equity accounting method, tax expense was $4.8 million with an effective corporate income tax rate of approximately 17%, similar to that in Q1 2008.

Net profit. Second quarter 2008 net profit increased by 31.9% sequentially, and 295% year-over-year, to $23.3 million. The net profit in the second quarter is the same under equity accounting method.

Now let's turn to the Q3 and 2008, as well as 2009 full year guidance. We expect our gross margins to remain stable for the rest of 2008 and expect production output to be in the range of 90 megawatts to 95 megawatts in the third quarter compared to 82.5 megawatts in the second quarter and 36 megawatts in the third quarter of 2007.

We're once again increasing our outlook for full year 2008 production output to be in the range of 340 megawatts to 350 megawatts from the range of 330 megawatts to 340 megawatts, as previously guided, and also, by increasing our full year outlook for 2008, our annual net revenues to be in the range $640 million to $670 million; previously guided range of $570 million to $590 million; while we maintain our wafer production capacity target to be 1 gigawatt by the end of 2009. Our 2009 full year outlook for production output is expected to be in the range of 650 megawatts to 750 megawatts, which includes output expected from our total services to be in the range of 100 megawatts to 150 megawatts.

At this time we're happy to take your questions. Operator.

(OPERATOR INSTRUCTIONS). Your first question comes from the line of Sanjay Shrestha from Lazard Capital Markets. Please proceed.

Good evening, guys. First of all, congratulations on a great quarter. A couple of quick questions, can you talk a little bit about the overall pricing dynamics here for you guys? You talked about pricing being stable in the second half of the year, but is it a situation where it's up in Q3 and modestly down in Q4?

And also if you can talk a little bit about, given all the sales contracts, what silicon wafer pricing are you seeing in 2009?

Okay, I refer this question to our CEO, Mr. Li.

(Spoken in Chinese).

(interpreted) The CEO said, based on your first question, he doesn't see -- he sees ASPs modestly rising in the third quarter --

Okay.

(interpreted) ASP's coming off in the fourth quarter, but on the contrary also modestly rising. Based on our visibility, the first half of '09 remains -- demand for wafers remains strong, and we don't see ASP's coming off.

Okay, that's helpful. So especially in the third quarter then, despite the anticipated rise in the price of poly, you guys at least should be able to maintain the margin that you saw in Q2 here given the ASP dynamics. Is that a fair assessment?

(Spoken in Chinese).

(interpreted) He says, based on our current visibility, our margins should be fairly stable.

Okay, terrific. Another question then; so this Suntech announcement, the 1.5 gigawatt a wafer over eight an a half years, can you guys give us any more detail on that as to how much of that is expected to be shipped in 2008 versus '09? And from a pricing standpoint, what sort of price reduction is there between '08 and '09?

(Spoken in a Chinese).

(interpreted) Sanjay just bear with us, we're just looking at our numbers.

No problem; that's fine.

(Spoken in Chinese).

(interpreted) First part of your question, our original supply contract was for 60 megawatts in '08 and that will go up to 80 megawatts.

Okay.

(Spoken in Chinese).

(interpreted) And for '09 it will be about 110 megawatts.

Okay, and -- all right. And two quick questions then and I'll hop back in the queue. One, in your 2009 output guidance, is there anything that you guys have included coming from the upgraded metallurgical grade silicon there, or anything from [you think] would be an incremental upside to that?

(Spoken in Chinese).

(interpreted) Based on our contractual obligations we will not be able to answer that question.

Okay, fair enough. Then let me try one more question. So how much silicon coverage do you guys have for that 650 megawatts to 750 megawatts? I see some of the numbers here but didn't get a chance to go through all of it. So what is that number?

Well, let me answer your question, if we use the 600 megawatts at the low end as a start point, and if we use the (inaudible) watt on a conventional ratio --

Exactly.

-- and the raw material we need is 3,600 tons, and the long term contracts, under long term contracts we have, contracts we have signed, we should have a 2,350 tons of silicon.

Now the second component of the source of the raw material is, obviously, our in-house polysilicon production expected from our Sichuan polysilicon project, plus the purchase from our joint venture in Henan, and we give it a total of 1,500 tons. Now if you lump this 1,500 tons with the 2,350 tons, you've got a total of 3,850 tons, so there's a surplus. And the surplus, obviously, is going to be used as a cushion for a strategic reserve for any unexpected events. For example, would there be a delay in certain projects in startup, those are just a strategic reserve.

In addition to that, Sanjay, and we have demonstrated our ability to purchase under short term contracts, and this year, as we stated in the prospectus for both follow-on and actual contracted, 940 tons. So if we could do that this year, we should do actually the same amount at least next year. And again, this amount on a short term contract is a strategic reserve of buffer.

Got it, that's great. Thanks a lot and congratulations once again, guys.

Thank you, Sanjay.

Your next question comes from the line of Lu Yeung from Merrill Lynch. Please proceed.

Hi, Mr. Li; hi, Charles. I just want to ask how many of your -- percentage of your 2009 production have already been booked based on the new contracts you have received.

We have -- if you see a range of 650 megawatts to 750 megawatts as a basis, and we said it, that the contracts we have secured up to today is 355 megawatts, so that represents 60% to 65% of our planned output for 2009. And I want to stress that the demand for wafer remains very strong. We believe that the rush into finding long term contracts may not be to our best interests and to our shareholders' best interest. So we are waiting for the right moment to fill the rest of the capacity available.

So that means you have more demand for your output in '09 but you haven't signed a contract yet?

Well, from the interest and requests we have received so far, we should have no problem to fill the gap.

I see. So one more question is it looks like you have some revenue contribution from the Henan JV, and can you talk about what you're seeing from production from the JV, and how we should think about it in terms of margin in the second half based on your JV?

Sure. I refer this question to Mr. Li.

(Spoken in Chinese).

(interpreted) Mr. Li states that in the second quarter, we received 25 tons from the Henan joint venture. Mr. Li has personally been to Henan to see the factory and believes that the JV should be producing at least 20 tons a month from now on.

So what -- how should we think about the margin increasing from the JV production?

Well, obviously, when you look at the economics and the way of accounting, there will be an impact on the gross margin from the deconsolidation. However, the impact on the bottom line, there will not be an impact on the bottom line or project economics. So the only thing changed here is really an accounting change; there's no change on their earnings, as I said, going forward.

I see. One more question I have is you said you are thinking about metallurgical silicon. Would that be used as a blending material or will it be marketed as a separate product?

(Spoken in Chinese).

(interpreted) Mr. Li says that, based on our contractual obligations, we can't answer. But what we can say is that we have -- we have reached conversion efficiency which is well within an acceptable range.

I see. Congratulations on the quarter. I hop back into the queue later. Thanks.

(interpreted) Thanks, Lu.

Your next question comes from the line of Sam Dubinsky from Oppenheimer. Please proceed.

Hey, guys. Couple of quick questions. Can you maybe just clarify a little more, give a little more detail regarding why you restructured the JV to the equity accounting method? Since I guess the gross margins are pretty favorable, why are you changing the structure of this? And I have a couple of follow-ups.

Yes; thanks, Sam. Let me take on this question.

We actually -- we have been confident to review our raw material sourcing strategy. Obviously, we have a constant revaluation and a reassessment of our procurement strategy, including the position of the joint venture in our corporate strategy going forward. And I think we talk about -- we were talking about this before, but the technology used for -- used in the joint venture is not really comparable to that we use in -- we were using in the Sichuan project and in many other, the polysilicon projects under development, various development stages.

So [from number] terms strategically that we believe we are better off not to be locked ourselves for 30-year period at raw material potentially higher than the other sources of the polysilicon. So we actually reduced our obligations from 30 years to three years, which really reflects our belief that in three years' time this JV may not produce virgin polysilicon at a cost competitive to the market.

So, yes, we get a hit in terms of the gross margin, but longer on, I think it's best in our interest and the shareholders' interest.

And another thing I want to point out is it's only an accounting change. Actually, the impact on our net earnings is not there. So on an EPS basis, the situation remains the same.

Okay, and I've a couple more questions, the last one on the JV in terms of why was the gross margin so high with the JV? Was that just from the 25 tons contributing, or is that a function -- do they sell poly to other suppliers? I'm just trying to figure out --. It just seems like the gross margin's pretty healthy with that small contribution of the JV. Maybe you could just clarify that more, and then I have one last question.

Yes, well, I think the -- yes, the gross margin in the JV is high, and actually, they supply most, if not all, of their poly to us under the agreement. The JV is in compliance with the mutual agreement. They're supplying 90% to us. And we're paying, remember, 97% of the market price, which remains high.

Okay.

And their production cost is low. So the margin's high.

Oh, okay. I got it. Thank you. And on the R&D side, it seems like R&D increased a decent amount this quarter. How should we think about that going forward? And is all that related to UMG, or is that also poly production?

I'm sorry, are you talking about R&D?

Yes, R&D now.

We actually -- yes, we incurred a significant increase in our R&D investments, primarily in technologies in alternative silicon materials. And going forward, we will continue to make investments but I don't think we will have a substantial increase in R&D into this space in the near term. So we will probably maintain a range like $3 million to $4 million in the next few quarters.

I got it. Okay. And then on the silicon utilization, it seems like it decreased a little bit this quarter. Actually thinking about that going forward as you increase mix of a multi wafer, should that decline or will that be roughly flattish?

Are you talking about silicon consumption rate?

Yes, grams per watt.

Yes, well we -- obviously, when you see the numbers, we achieved a reduction over there, and we still have the target of 6 grams per watt by the year end. That's not changed. And we're working hard to move towards that target.

Okay. And then my last question for you is on the UMG side; the numbers that you gave for '09, that does not include anything from UMG?

I think it's really answered that question earlier.

Oh, someone did. Okay, sorry about that. Thank you, guys.

Your next question comes from the line of [Sayed Vershar] from Lehman Brothers. Please proceed.

Yes, thanks for taking my question; congratulations. I wondered to talk to you about the Suntech contract in more detail. Can you maybe just provide some color on what kind of pricing terms you have for the contract; maybe just give us some color on whether it's fixed price or variable price contract?

Well, unfortunately -- Vershar, hi. I don't think we are allowed to disclose the present terms and we're confined by the confidentiality clause in the sales contract. But I can just probably comment on the general pricing term in 2009.

As Mr. Li said that we do not expect there's a drastic drop-off of wafer ASP in 2009, especially in the first half 2009, because the poly supply still remains in shortage. It's pretty short and we expect that the shortage will continue into at least the first half of 2009. So I think that the pricing -- this is our projection for the price trend in the next few months.

Okay. And you said your wafer prices are going up in Q3 and then are likely to come down in Q4. Is that right?

I refer this question to Mr. Li.

(Spoken in Chinese).

(interpreted) Based on current visibility, we are not seeing that trend in the market place.

Do you not see any price decline?

(interpreted) We're not seeing a decline in Q4.

Okay, okay. And when you think about your polysilicon costs in 2009 versus 2008, what percentage decline do you expect?

Actually, when we look at the contract, the long term contract we have signed and expected because of our in-cost production, we actually projected our input cost next year on an average in a range of $190 to $200 per kilo.

Okay.

And this is actually, obviously, lower than what we have been experiencing this year. I remember we talked about our input cost in the first quarter to be $260 to $263 per kilo. And actually, that number was increased to $276 to $277 per kilo, and so I think that in the next few -- in a couple of quarters the cost probably will remain fairly firm.

Okay. And when you talk about your internal polysilicon production, do you expect that in the second half of '09 or first half?

Well, we anticipate the trial production at least starting first half, second quarter.

Trial production in second quarter?

Yes.

Okay. UMG, you said you've achieved conversion efficiencies which are well within an acceptable range. So I believe this is using a blend of UMG material or using 100% UMG?

As stated earlier, Mr. Li said we are not allowed to disclose technologies as yet.

Oh, okay. Okay. That's fine. Right, thank you very much.

Thanks, Vershar.

Your next question comes from the line of Emily Lu from Lux Research. Please proceed.

Hi, congratulations on good quarter, and thank you for taking my question. I have a question on the equipment side. Can you disclose who are your equipment provider for your mono and multi furnaces, is question number one.

And question number two, I just wondered whether your Sichuan plant has [TCS] capacity -- facility, or you plan to procure external TCS.

(Spoken in Chinese).

(interpreted) No problem.

(Spoken in Chinese).

Okay.

(interpreted) So on the mono side, our original furnaces came from Beijing [Gintech].

Okay.

(interpreted) And subsequently, we started buying [farotek] machines, of which we have 120 right now. On the multi side --

Okay.

(interpreted) -- we're using torpedo technology from ALD in Germany.

Okay, all right.

(interpreted) And in Sichuan, we have our own TCS production.

Right. So is it TCS production built up on schedule then?

(Spoken in Chinese).

(interpreted) We have TCS on track.

Okay, thanks.

(interpreted) Thanks, Emily.

Thank you.

(interpreted) Any more questions, please?

Your next question comes from the line of Paul Leming from Soleil Securities. Please proceed.

I have two questions. First, on the gram per watt statistics you gave us on your silicon consumption, could you indicate what efficiency levels that that presumes on the mono and the multi wafer?

And then I've got a second question on capital spending, if I could.

I refer this question to Mr. Li.

(Spoken in Chinese).

(interpreted) Based on what our customers are saying with regard to the efficiency of the wafers, the mono wafers are in excess of 17%, and that's verified by Suntech. And on the multi side, both by Suntech and Gintech they're in excess of 15%, for the multi wafers.

Okay, thank you. And then on capital spending; if you gave these numbers earlier I apologize for missing them. Could you tell us what capital spending has been year-to-date, what you're budgeting for all of 2008? And then look at 2009 capital spending levels?

Sure, I can give you the numbers. I think we provided a breakdown in our first quarter conference call but I'll do it again.

We have three major components in terms of CapEx for 2008. The first one is the Sichuan polysilicon project. The total CapEx is in range of $325 million to $330 million, and out of that, for 2008, our expenditure is planned or expected to be $230 million, and $70 million is paid off already. So on that one remaining payment there's $170 million for remaining of the year.

And the second component is wafer production capacity expansion from 378 megawatts at end of the last year to 645 megawatts at end of this year. The total requirement under CapEx is $100 million, and we paid out $90 million already, leaving only $10 million to be paid.

The last component is wafer expansion planned for 2009 when we hit 1 gigawatt at year end, and the pre-payments required for that is $45 million which we have not paid on as yet. So adding the remaining payment for 2008, so you're coming up to the number of $230 million.

For 2008?

That's correct.

And then for 2009, some sense of where that number is headed?

For 2009, the number is projected to be $170 million.

Okay, thank you very much.

You're welcome.

And your final question is a follow-up question from Sayed Vershar from Lehman Brothers. Please proceed.

Hi, guys. Just a quick follow-up. You mentioned that you're increasing your output to Suntech from 60 megawatts to 80 megawatts. Is all of that increment going to be in the second half or do you think you ship some in the first half as well?

(Spoken in Chinese).

(interpreted) As the contract was only signed recently, the extra 20 megawatts will be in the second half of the year.

Okay, perfect. Thank you very much.

Thanks, Vershar.

At this time, I'm showing you have no further questions. I'd like to now turn the call back over to management for closing remarks.

Well, in summary, we posted an outstanding second quarter highlighted by record revenues and the improved gross margins with the ramp up of our production capacity. We'll be continuing to ramp up production to meet strong demand.

Again, thank you for joining us today. If you have any further questions, please do not hesitate to contact me or any of our investor relations representatives. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference call. This concludes the call. You may now disconnect. Have a wonderful day.