Yingli Green Energy Q3 Earnings Call Transcript

123jump.com Staff
24 Dec, 2008
New York City

The solar panel material maker revenues increased 73.1% to $325.5 million and net income declined 15.8% to $22.2 million and earnings per share of 17 cents. The company guided PV module shipment and net revenue targets for the fiscal year of 2008 of 270 to 280 mw and $1.05 billion to $1.1 billion.

Yingli Green Energy Holding Company Limited ((YGE))
Q3 2008 Earnings Call Transcript
November 26, 2008, 8:00 a.m. ET

Executives

Tip Fleming – Investor Relations
Liansheng Miao – Chairman and Chief Executive Officer
Bryan Li – Chief Financial Officer
Stuart Brannigan – Managing Director, Europe
Qing Miao – Director, Investor Relations
Yiyu Wang – Chief Strategy Officer

Analysts

Jesse Pichel – Piper Jaffray & Co.
Dan Ries – Collins Stewart LLC
Satya Kumar – Credit Suisse
Vishal Shah – Barclays Capital
Lu Yeung – Merrill Lynch & Co.
Sam Dubinsky – Oppenheimer & Co.
Sunil Gupta – Morgan Stanley
Emily Liu – Arete Research

Presentation

Operator

Good day ladies and gentlemen, and welcome to the third quarter 2008 Yingli Green Energy Holding Company Limited earnings conference call. My name is Shenel (ph) and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. If at any time during the call you require assistance, please press “*” followed by “0” and a coordinator will be happy to assist you. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today’s call, Mr. Tip Fleming from Christensen. Please proceed.

Tip Fleming

Thank you Operator. And thank you everyone for joining us today for Yingli''s third quarter 2008 financial results conference call. On the call today from Yingli Green Energy are Mr. Miao Liansheng, Chairman and Chief Executive Officer; Mr. Bryan Li, Chief Financial Officer; Mr. Yiyu Wang, Chief Strategic Officer; Ms. Miao Qing, IR Director; Mr. Stuart Brannigan, MD of Europe; and Mr. Robert Petrina, Business Development Manager, US.

About an hour ago, Yingli issued their earnings release. Hopefully you had a chance to take a look at it by now. The release can be found on the company’s website at www.yinglisolar.com. The call today will feature a short presentation from Mr. Miao covering business and operational developments. Stuart Brannigan will read those comments in English. Bryan Li will follow with a discussion of the company''s financial performance, and after that, the presenters will open the floor to questions from the audience.

Before beginning, the management of Yingli would like to remind the audience that this presentation contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and as defined in the US Private Securities Litigation Reform Act of 1995. These forward-looking statements could be identified by terminology such as “will,” “expects,” “anticipates,” “future,” “intends,” “plans,” “believes,” “estimates” and similar statements.

Such statements are based on management''s current expectations and current market and operating conditions, and relate to events that involve known and unknown risks, uncertainties and other factors, all of which are difficult to predict and many of which are beyond Yingli Green Energy''s control, which may cause Yingli’s actual results, performance or achievements to differ materially from those in the forward-looking statements. Further information regarding these and other risks, uncertainties or factors is included in Yingli''s filings with the US Securities and Exchange Commission. Yingli does not undertake any obligation to update any forward-looking statement as a result of new information, future events or otherwise, except as required under applicable law.

I would now like to turn the call over to Chairman, Miao. Please begin.

Liansheng Miao

(Interpreted). Thank you. Good morning, everyone. Thank you for joining us for Yingli Green Energy’s third quarter 2008 conference call. Despite recent global financial turmoil, which dramatically impacted the PV industry, our business operations continued to remain strong during the third quarter of 2008. Total PV module shipments and net revenues increased to 18 megawatts and RMB 2,209.8 million respectively from 62.8 megawatts and RMB 1,987 million in the second quarter.

While we face increased challenges in this uncertain macroeconomic environment, we are pleased to reaffirm our expected PV module shipment and net revenue targets for the fiscal year of 2008 of 270 to 280 megawatts and $1,053 million to $1,106 million. Looking forward, we believe the European market led by Germany, Italy, Spain and France will continue to be the key market benefiting from the mature feed in tariff incentive programs, which continued to drive the demands of PV products in this area. In the United States, the recent ATA investment tax credit extension has provided a crucial market demand signal in this increasingly important market. In addition, we see significant opportunities in several new emerging PV markets, including South Korea, Belgium and China.

Recently, we kicked of a series of initiatives to enhance our marketing strategies with a focus on improving product quality and solidifying our customer base, including our strategic cooperation with TUV Shanghai, assisting our customers with access to project finance advisory services and potential funding solutions with the help of Deutsche Bank, also enhancing our global brand recognition and influence by hosting successfully the first Annual Yingli Green Energy Customer Conference. In addition, we have continued to provide competitive PV module pricing whilst maintaining high product quality supported by the lowest non-poly cost structure in the industry.

On the production side, we successfully expanded our total annual production capacity to 400 megawatts in each of the polysilicon ingots and wafers, PV cells and PV modules. That was in September, ahead of our original schedule, and with more advanced equipment and more advanced processing techniques.

As far as our current capacity expansion plans, we also plan to install an additional 200 megawatts of manufacturing capacity to be completed in the third quarter ’09. We believe our current cash and expected cash flow from operations on available lines of credit will be sufficient to cover capital expenditure while maintaining adequate working capital to support our operations.

Moreover, we have five long-term polysilicon agreements that start delivery at the beginning of 2009, which we believe will significantly reduce our blended polysilicon cost and further improve product quality. While the spot price of polysilicon has declined recently, we are actively pursuing opportunities to reduce our poly costs, including among other things renegotiation of polysilicon prices under our current contracts and strengthening our strategic relationships with leading polysilicon suppliers. With our increased operational scale and efficiency, superior non-poly cost structure, and a stable long-term customer base, we believe we are well positioned to meet the challenges and opportunities ahead in this difficult macroeconomic environment.

And now, our CFO, Bryan Li.

Bryan Li

Thank you. And good morning, ladies and gentlemen. In the third quarter of 2008, our net revenues were RMB $2,209.8 million, equivalent to $325.5 million, in the third quarter of 2008, an increase of 11.2% from RMB 1,987 million in the second quarter of 2008 and 73.1% from RMB 1,276.5 million in the third quarter of 2007. The increase was primarily due to increased shipment volume as a result of continued strong demand for PV modules supported by increased production output, partially offset by lower average selling price. The average selling price for PV modules in the third quarter of 2008 was $4.04 per watt, a decrease of 3.8% from $4.20 per watt in the second quarter of 2008. This decrease was primarily due to the depreciation of the Euro against the RMB in the third quarter of 2008, as a majority of our PV module shipments were under contracts denominated in Euros.

Total PV module shipments increased 17.3% to 80 megawatts in the third quarter of 2008 from 68.2 megawatts in the second quarter of 2008. The increase of shipments was supported by the installation and the trial production of an additional 200 megawatts of annual manufacturing capacity of each of PV polysilicon ingots and wafers, PV cells and PV modules in September, as well as improvements in operational efficiency and capacity utilization at each stage of our manufacturing process.

Gross margin was 22.3% in the third quarter of 2008, down from 25.8% in the second quarter of 2008 and 23.7% in the third quarter of 2007. The decrease in gross margin was primarily due to the decrease in the average selling price caused by the depreciation of the Euro against the RMB in the third quarter of 2008. The unit cost level remained stable in the third quarter of 2008 despite higher polysilicon costs, as both polysilicon usage per watt and non-polysilicon costs were reduced through research and development efforts at each stage of the company''s vertically integrated manufacturing processes.

Operating expenses in the third quarter of 2008 were RMB 115.5 million, $17 million, compared to RMB 116.1 million in the second quarter of 2008 and RMB 778.8 million in the third quarter of 2007. Operating expenses as a percentage of net revenue decreased to 5.2% in the third quarter of 2008 from 5.8% in the second quarter of 2008 and 6.2% in the third quarter of 2007. The decrease in operating expenses as a percentage of net revenue was primarily due to economies of scale and better control of sales and marketing related expenses, partially offset by higher research and development expenses.

Operating income in the third quarter of 2008 was RMB 377.1 million, equivalent to $55.5 million, a decrease of 4.7% from RMB 395.7 million in the second quarter of 2008 and an increase of 68.3% from RMB 224 million in the third quarter of 2007. Operating margin decreased to 17.1% in the third quarter of 2008 from 19.9% in the second quarter of 2008 and 17.6% in the third quarter of 2007.

Foreign currency exchange loss was RMB 133.1 million, equivalent to $19.6 million, in the third quarter of 2008 compared to a foreign currency exchange loss of RMB 68.2 million in the second quarter of 2008 and a foreign currency exchange gain of RMB 14.0 million in the third quarter of 2007. The foreign currency exchange loss in the third quarter of 2008 was primarily due to the depreciation of the Euro against the RMB in the quarter. The Euro depreciated approximately 7.7% against the RMB in the third quarter of 2008, compared to approximately 2.3% depreciation of Euro against the RMB in the second quarter of 2008, which resulted in a loss upon the revaluation of accounts receivables and the raw material prepayments denominated in Euro at the end of the quarter.

In recent months, the Euro further depreciated dramatically, and we have been taking the following steps to help mitigate currency and volatility risk. Firstly, we have secured approximately 20% of our estimated 2009 Euro denominated revenues in the third quarter, and we plan to further increase this percentage up to the level we feel comfortable based on the foreign currency market situation.

Secondly, we continue to implement natural hedging through balancing the Euro and the US dollar denominated assets against the Euro and the US dollar denominated liabilities. As a result of the factors discussed above, net income was RMB 150.8 million, equivalent to $22.2 million in the third quarter of 2008, a decrease of 27.2% from RMB 207.2 million in the second quarter of 2008 and 15.8% from RMB 179 million in the third quarter of 2007. Diluted earnings per ordinary share and per ADS were RMB 1.17 equivalent to $0.17 in the third quarter of 2008, compared to RMB 1.60 in the second quarter of 2008.

On an adjusted non-GAAP basis, which excludes share-based compensation and amortization of intangible assets arising from purchase price allocation in connection with a series of acquisitions of equity interest in Tianwei Yingli, the company''s principal operating subsidiary, net income was RMB 175.3 million, equivalent to $25.8 million, in the third quarter of 2008, down 25.2% from RMB 234.5 million in the second quarter of 2008. Adjusted non-GAAP diluted earnings per ordinary share and per ADS were RMB 1.35, equivalent to $0.20, in the third quarter of 2008 compared to RMB 1.81 in the second quarter of 2008.

Now a quick review of our balance sheet. As of September 30, 2008, Yingli Green Energy had RMB 737.1 million, equivalent to $108.6 million, in cash and RMB 3,271.7 million, equivalent to $481.8 million, in working capital, compared to RMB 674.7 million in cash and RMB 3,335.8 million in working capital as of June 30, 2008. Short-term borrowings increased by RMB 172.6 million, equivalent to $25.4 million, from RMB 1,622.3 million in the second quarter of 2008 to RMB 1,794.9 million, equivalent to $264.3 million, in the third quarter of 2008.

Long-term bank borrowings increased from nil in the second quarter to RMB 340.9 million, equivalent to $50.2 million, in the third quarter in connection with the drawdown in full of the previously announced five-year $50 million credit facilities with FMO and DEG. Since September 30, 2008, the credit facility was expanded by $25 million with the inclusion of PROPARCO, which has been fully drawdown. As of the date of this press release, 2008, the company has approximately RMB 4,177 million in authorized lines of credit, of which RMB 2,862 million has been utilized. The remaining RMB 1,315 million in available lines of credit can be used if and when needed. Days sales outstanding was 48 days in the third quarter of 2008, remained flat compared to 47 days in the second quarter of 2008.

In our credit profile, we have domestic banks such as China Export-Import Bank, the Industrial and Commercial Bank of China, and Minsheng Bank, with which we have enjoyed excellent relationship and which are less impacted by the current financial turmoil. Large multi-national foreign banks such as Citibank, ABN AMRO and JP Morgan, and development financial institutions, including FMO, DEG and PROPARCO, which for the high priority are environmentally friendly sustainable. Their commitment to YGE has expanded as we have grown into an industry leader, and we expect this relationship will continue.

The capital expenditures were approximately $100 million in the third quarter, and we expect the capital expenditure of approximately $40 million in the fourth quarter of this year and $90 million in the year of 2009. We believe free cash flow will be close to break even in the fourth quarter of 2008 and turn positive since the first quarter of 2009. And we are also expecting strong operating cash flow in the year of 2009. We believe that with the positive operating cash flow generated and the current credit facility on hand, our current cash and expected cash flow from operations in available lines of credit will be sufficient to cover our capital expenditures to achieve our anticipated total manufacturing capacity of 600 megawatts in 2009 while maintaining adequate working capital to support our daily operations.

Now turning to the guidance. Based on the current operating conditions, current production capacity and forecasted customer demand, as well as current exchange rates for the US dollar, Euro and RMB, the company reaffirms its expected PV module shipments, net revenue and the targets for the fiscal year of 2008 as follows. PV module shipments are expected to be in the estimated range of 270 megawatts to 280 megawatts, which represents an increase of 89.5% to 96.5% compared to the fiscal year of 2007. Total net revenues are expected to be in the estimated range of $1,053 million to $1,106 million, which represents an increase of 89.2% to 98.7% compared to the fiscal year of 2007. For the whole year of 2008, we expect our gross margin will be in the range of 22% to 23%.

Now I would like to give some indicative targets and expectations for ASP and the gross profit margins in the fourth quarter of 2008. First, the Euro continues to depreciate over US dollar on an accelerated basis since the third quarter, together with the pressure on ASP under the current market condition. We estimate that our ASP will decline 15% to 20% in the fourth quarter. However, the company is very confident to maintain its annual shipment guidance.

Secondly, we expect our polysilicon blended costs to decline significantly by approximately 15% to 20% benefited from the recent decline of polysilicon price, an exposure we take to the spot market purchase. However, this is expected to be partially offset by the comparatively high cost polysilicon stock purchase done in October and early November. Furthermore, we expect to further reduce our polysilicon usage per watt and then our polysilicon costs through research and development efforts at each stage of the company''s vertically integrated manufacturing process. Consequently, we expect our unit cost per watt to reduce by 12% to 17%.

As aforementioned, we expect the gross margin in the fourth quarter of 2008 will be in the range of 17% to 19%. For the year of 2009, we currently estimate PV module shipment target to be in the range of 550 megawatts to 600 megawatts, subject to among other factors the successful installation and ramp-up of the company''s additional 200 megawatts plant expansion in the third quarter of 2009.

Thanks to the mid to long-term virgin polysilicon supply agreements with leading global polysilicon suppliers will start delivery at the beginning of 2009 and a further decrease trend of the polysilicon price. We estimate our gross margin for the year of 2009 will be above 24% after considering the negative impact of the decreased module price. The further depreciation of Euro and US dollar and the potential risk that the polysilicon price may come back in the second half of 2009.

Before we move on to the questions, let me say a few words about our potential acquisition of Cyber Power and its polysilicon manufacturing subsidiary. As we just announced, we signed a binding letter of intent today to acquire 100% of the issued and outstanding share capital of Cyber Power Group Limited, a company controlled one of our affiliated entities. Cyber Power, through Fine Silicon, its China-based operating subsidiary, is a development stage enterprise, which will be engaged in the business of producing solar-grade polysilicon in Baoding, Hebei Province of China.

Under the terms of the letter of intent, we will acquire Cyber Power for an aggregate consideration in the range of $70 million to US $80 million, with $25 million payable offering. Under the letter of intent, the above advance payment is required to be repaid in full to the company if the letter of intent is terminated or the proposed transaction is not completed prior to February 6, 2009. The repayment obligation of the advance payment will be secured by certain guarantees and a collateral provided by our affiliates and the Chairman, Mr. Liansheng Miao.

Definitive agreements with respect to the proposed acquisition are subject to further negotiation and certain conditions, including completion of our due diligence, receipt of satisfactory financing, and the approval by the audit committee and our Board of Directors. We believe the acquisition of Cyber Power will enable us to have a more secure and a stable supply of polysilicon, independent of the market condition and allowed us to further vertically integrate our manufacturing processes and improve gross margins.

That concludes our prepared remarks. Now we will be happy to take your questions.

Question-and-Answer Session

Operator

Ladies and gentlemen, if you wish to ask a question, please key “*” followed by “1” on your touchtone telephone. If your question has been answered and you like to have your question removed, please key “*2”. Questions must be submitted at this time in order for your question to be registered. Again, please key “*1” to ask a question. And we will pause for a moment to compile a list of questions. Your first question comes from the line of Jesse Pichel of Piper Jaffray.

Jesse Pichel – Piper Jaffray & Co.

Yes, good evening. Your implied Q4 guidance indicates essentially flat megawatts relative to Q3, and I''d like to know what gives you the confidence to guide as such, given that your competitors in China are guiding to a significant decline? Would your exposure to Germany have something to do with that? And if so, what is the exposure to Germany? And I have a follow-up question. Thank you.

Qing Miao

Okay. Thank you, Jesse. Let me translate. Thanks.

Liansheng Miao

(Interpreted). A couple of reasons on that. And first of all, I would like to say it''s really benefited from our solid customer base, which has been accumulated during the past couple of years. As I had mentioned in the previous earnings call that those are utility companies and the large scale system installation companies. I think Mr. Miao is going to make a couple of more reasons behind that.

Jesse Pichel – Piper Jaffray & Co.

Okay.

Liansheng Miao

(Interpreted). And sorry – that''s not what I mean to say directly because we have offered a competitive selling price benefited from our lowest polysilicon price. Furthermore is that based on our competitive selling price, we have requested some of our customers to either pay down payment or to give up that currently, which increase the visibility of contract execution. Thanks.

Jesse Pichel – Piper Jaffray & Co.

And Bryan, do you know what the percentage is in Germany for the quarter – for Q4 rather?

Bryan Li

For Q4, we will expect to sell in the range of 60% to 70% to Germany.

Jesse Pichel – Piper Jaffray & Co.

Well, okay. That explains that. My next question is for the Chairman. You signed the letter of intent to acquire the poly plant and I''d like to know what is your thinking behind this, given that we are all hearing that polysilicon prices are going well below $150 a kilo. And also what is your – the capital that will be required to complete this plant over the next year or two?

Liansheng Miao

(Interpreted). Jesse, first of all, for your question – but actually this question needs to be taken by Bryan and you together because Mr. Miao has been involved into this transaction and he has been considered as a related party. Okay, then I will do not do the translation. Bryan, you please give your answer then.

Bryan Li

Sure. Let me talk about the rationale behind that and subsequent financing to support the expansion. We and – full YGE, we believe the proposal on transaction will be a good strategic move for our company because of couple of reasons. One, it''s an acquisition and development of a polysilicon factory that will allow YGE to build a complete vertically integrated business model and help the company significantly reduce the material cost. And secondly, the synergies of a completed and vertically integrated business model as the result of the acquisition is expected to help the company further reduce its polysilicon manufacturing costs and improve profitability. And third, the acquisition – the integration of the entire PV value chain will allow the company to gain greater control over all important aspects of the production, thus further in enhancing the quality of its products, which has become key factors to the customers – for the customer to consider when they are selecting the suppliers. So in summary, we believe the acquisition of Cyber Power will enable us to have a secure and stable supply of polysilicon independent of market conditions and allowed us to further vertically integrate the manufacturing processes. After the acquisition, our blended polysilicon is expected to fall, provided a better position in increasing the competitive PV markets.

And as to the second question regarding the financing to support the expansion of poly facilities, and we have – YGE has performed a conservative cash flow analysis. And based on our analysis, we believe there is a great uncertainty that the acquisition price, the additional CapEx requirement for the polysilicon project and the cash needed for YGE''s operation can be covered by our own cash flow from operating activities. And the cash requirements are also supported by our access to the financing sources, including unutilized banking facilities, and access to other investors who have expressed their interests in providing financing for the proposed acquisition. We do not believe this financing needs will impose material risks on the cash flow of our company due to our projected growth and the fact that the polysilicon project of Fine Silicon is expected to be completed and commence production of polysilicon in the second half of 2009.

Jesse Pichel – Piper Jaffray & Co.

Thank you. And what is that CapEx requirement is really what I''m trying to drive at? What will you need to spend to complete these plans?

Bryan Li

As we are still in the further process of completing our necessary due diligence works, at this moment – and we don''t want to comment on the total CapEx.

Jesse Pichel – Piper Jaffray & Co.

The other part of my question was, given that poly has fallen to perhaps 120 a kilo and less for contracts, are you telling us that you think that''s not sustainable, that it might go up? Or do you think that''s not a compelling price there to reach good parity?

Bryan Li

Yes. I think I would like to explain – answer your question in three different folds. First of all, although the polysilicon price is dropping significantly during the past couple of weeks, but if you look at the poly project itself, it still yields more than 50% margins than the module business. So, for the company when we make investment decisions, it''s more attractive for the company to decide the option for investments. And secondly, we believe the current decrease in the polysilicon price is temporary due to the financial crisis, and its price may rebound when financial crisis is eased and the credit market is unfrozen. In order to ensure that we would not suffer for such price increase, we believe it''s critical for us to have our own supply of polysilicon. And lastly, and as a part of – as one of the core of our long-term business strategy, we need – if we are having the internal polysilicon manufacturing capacity, so that will help us to position us as the module producers with the lowest cost in the world. And then that will give us a lot of flexibility and opportunities and when the parity is approaching and that will also help us – that will also enable us to quickly move into the downstream of the value chain as well as the solar projects. Thanks.

Jesse Pichel – Piper Jaffray & Co.

Thank you very much.

Bryan Li

Thank you.

Qing Miao

Thank you.

Operator

Your next question comes from the line of Dan Ries of Collins Stewart.

Dan Ries – Collins Stewart LLC

Hi, thank you for taking my call. The balance sheet, it looks like the inventory went up about 100 million and the short-term prepayments went down 100 million. So if I''m calculating it right, you have 100 days in inventory – you had 100 days in inventory entering the quarter. Can you tell us approximately, A, approximately the average price of that inventory that you had entering the quarter?

Bryan Li

The price, as we discussed in the prepared remarks, the costs – the costs of polysilicon in September – in October and early part of November is higher in line with the level of the spot market price. But starting from the second half of November and towards the end of December, we have been able to source the cheaper polysilicon from the spot markets.

Dan Ries – Collins Stewart LLC

Okay. Can you elaborate on your CapEx in the third quarter and then what you think you will need in 4Q ''08 and perhaps one half of 2009, excluding any CapEx for the polysilicon plant?

Bryan Li

Yes. If we exclude the polysilicon plant in the third quarter, we have spent approximately $100 million as our CapEx. And in the fourth quarter, we are planning to spend another $40 million as CapEx and towards the end of 2009, to complete an extra 200 megawatts capacity we are expecting to put another $90 million. So that will conclude the existing 600 megawatts plan.

Dan Ries – Collins Stewart LLC

And then that $90 million, what I''m trying to get at is that maybe what would be the CapEx potentially for 2009, again excluding anything related to the poly plant.

Bryan Li

That would be $90 million.

Dan Ries – Collins Stewart LLC

Okay, great. Can you just – the grants per watt, it looks like it''s had a nice improvement. Can you give us roughly what it was in 2Q ''08, 3Q ''08, and maybe expected for 4Q ''08?

Bryan Li

Yes. In 2Q ''08, the grant per watt is at a level close to 6.7. In the 3Q ''08, we were almost getting close to 6.5. And in the 4Q ''08 and next year, we are really looking at much lower level and we will be expecting another 0.1, 0.2 reduction in the next quarter and the first quarter of ''09.

Dan Ries – Collins Stewart LLC

Okay. Thank you very much.

Bryan Li

Thank you.

Operator

Your next question comes from the line of Satya Kumar of Credit Suisse.

Satya Kumar – Credit Suisse

Yes, hi, thanks. Satya Kumar from Credit Suisse. What was your non-polysilicon cost in Q3? How should we expect this will track in Q4 and in 2009?

Bryan Li

Our polysilicon cost in Q3 is approximately $0.80 on a per-watt basis. And in the second quarter, it''s also close to $0.80 on a per-watt basis. But there is one thing I would like to share with you is we are talking about the dollar basis. If you look at – actually the dollar is getting depreciated from the second quarter to the third quarter against RMB. So although the dollar – the dollar-wise there is a part, but actually we are getting better.

Satya Kumar – Credit Suisse

Got it. And 2009, how do you think this will track?

Bryan Li

In 2009, we currently look at 3% to 5% reduction in 2009.

Satya Kumar – Credit Suisse

Okay. In terms of your Q1 outlook for next year, what portion of your production have you sold out for Q1? What is your current expectation for ASPs in Q1? And how do you think your polysilicon costs are looking like for Q1?

Qing Miao

Let me do the translation.

Liansheng Miao

(Interpreted). Sorry, we are not going to only give those.

Qing Miao

Sorry, we have now our CFO to reply to your question directly.

Bryan Li

Currently, given the competitiveness in the costs, we will be very flexible to offer an attractive price to our customers for 2009. As of today, we have been secured about 190 – sorry, 120 megawatts for 2009. And we have been confirmed the – another 350 megawatts sales with our customers to confirm all the major commercial terms.

Satya Kumar – Credit Suisse

Great. I was looking for a little bit more color on the first quarter, in particular, if you have sold most of your production in the first quarter. Is that 120 megawatts mostly for the first and second quarters, or is it for the full year? And I was also seeing if you have an expectation on what you think the pricing will be in the first quarter and how should we think about the polysilicon cost in the first quarter?

Bryan Li

Let me take these questions. For the ASP in 2009, we currently expect that it will be declining by approximately 30% from 2008''s level. But for the polysilicon, we currently expect it will be declining by about 40% to 45% from 2008''s level. So that will give us a leverage on the gross margins.

Satya Kumar – Credit Suisse

Great. I guess I was trying to get a sense as to the sequential decline from the fourth quarter to the first quarter. Sorry to press you on that. You are guiding to a gross margin level of 24% for calendar year ''09 and you are guiding to 17% in Q4. I just wanted to see what sort of ramp profile you are expecting throughout the year in 2009, which is why I wanted to get some extra color on the first quarter that price change from the quarter this year. How much do you expect the pricing to change? And also on the polysilicon side, how much do you expect the pricing to change?

Bryan Li

For the contract – for the sales contract, we have already entered into – with the customers or of which – or the material commercial terms have been agreed with the customers are pretty much a one year contract or even longer contracts. So the delivery will cover the beginning of next year through the end of 2009. And also, starting from the beginning of 2009, our long-term contracts of polysilicon will start delivery from January. So that will match – the polysilicon delivery will match the sales contracts. So we would expect the gross margin – the gross margin should be evenly spread out across the quarters in the next year.

Satya Kumar – Credit Suisse

Okay. And lastly – thanks for that. Can you walk us through your overall strategy for factory loading in 2009? You clearly have the lowest non-polysilicon cost in the industry, but also one of the highest capital intensity. Is your strategy to price your panels a little bit more competitively compared to your competitors and maintain a continuously high factory loading throughout the year and basically figure out the polysilicon and the panel clearing prices? Is that the right way to think about your strategy?

Qing Miao

Let me do the translation for –

Yiyu Wang

As explained by Bryan in the previous questions, actually given the cost competitiveness other than the processing cost and the decrease of the poly cost in 2009, our company is going to generate a sufficient operating cash flow to support another expansion either in the vertical manufacture process from ingot to module or another area of investment. So while we decided the – which area we are going to invest further for the CapEx, our company has been decided to invest in the products given the (inaudible). First, we are going to more fully vertical from the poly side to module, which can give us a solid control for the module quality. And then the second is that out of the poly project that can be at a higher investment return and the investment in the module. And the third, with the internal supply of poly, our company is going to generate an EPS accretion by a lower production costs compared to the poly supplied by the third party. Thanks.

Bryan Li

Quickly to supplement Yiyu''s explanation, and there is one key focus our company has been – has very, very – pays a lot of focus – lot of efforts on is the branding. As we – although we have the lowest in the polysilicon producing cost, but at the end of the day, in a way you go out to the market, what you really sell is the product with your company''s own brand name. If you don''t have the brand name, then which may – you will be – your destiny is decided by the other people, by the seller instead of yourself. So we have to – so from the early beginning when we started our business and that we have always placed – we have always been focused on the brand equity establishment as well as the quality control to bring confidence to the customers to promote any brand. So that''s where we are focusing on. Thank you.

Satya Kumar – Credit Suisse

Thanks.

Stuart Brannigan

Can I just add a little bit of color to that? This is Stuart Brannigan. The 120 megawatts of contracts that we have signed so far with customers that we have had, working with us for four or five years, and each of those customers so far has taken between 40% and 100% more volume than they took in 2008 into 2009. I think it''s difficult to talk about the first quarter yet because as we said, we''ve got 350 megawatts of contracts during the final stages of negotiation. And then once we land those in next two to three weeks with a much clearer idea of how Q1 is looking in terms of a shipment schedule, it''s quite difficult at the moment because we just don''t have those signed contracts in our hands to make a full commitment to it. I think it’s also – I think going back to your comment about lowest cost of polysilicon, you take that with the increasing brand value that we have and we are going to be aggressively priced into 2009.

Satya Kumar – Credit Suisse

Very helpful, Stuart. Thanks.

Operator

Your next question comes from the line of Vishal Shah of Barclays Capital.

Vishal Shah – Barclays Capital

Yes, thanks for taking my question. Vishal Shah from Barclays Capital. On the 120 megawatts of contract that you''ve signed so far, can you just explain to me what the distribution is going to look like between first half and second half?

Bryan Li

I will try and say that for you. The PV industry in general always works on a kind of ramp basis. So the biggest amount is normally in Q2, Q3. And then Q4 depends upon how things are looking in terms of the changes in the feed in tariffs, etc. So at the moment for us, the business here is looking pretty much as it has done every year, year-on-year, a little bit less demand in the first quarter than in the second quarter and third quarter. But the way things are stacking up for the moment is that with the 350 megawatts of contracts we are talking to at the moment, we may need to build the inventory in the first quarter simply to satisfy demand in the second quarter. It''s very difficult to say exactly right now because we are right in the final stages of negotiations with these customers and we need to finish those contracts off.

Vishal Shah – Barclays Capital

Right. That makes sense. And the ASP declines that you guided for next year, 20%, should we expect all of that at one time in Q1, or should we expect a steady decline in ASPs throughout the year?

Bryan Li

I think a big chunk of that is going to come in the first and second quarters. I think that a lot of the PV industry is in this position of ""let''s see where the prices land.” We''ve done our home work. We understand where system prices need to be in Germany, Italy, Spain, Greece, and France. So we understand where the system and module price needs to be, but that doesn''t necessarily mean that customers will expect exactly that price point. So I think the vast majority in the first and second quarter and then maybe some slow price movement in the third and fourth. But at the moment, I think the majority will be at the beginning.

Vishal Shah – Barclays Capital

That makes sense. And when you look at your capacity utilization rate today, given the guidance I would imagine that you have to idle some capacity. What percentage of your production capacity in Q4 you would expect to idle?

Qing Miao

For which quarter? For the current quarter?

Vishal Shah – Barclays Capital

Yes, current quarter.

Qing Miao

For the fourth quarter or the third quarter?

Vishal Shah – Barclays Capital

Fourth quarter.

Qing Miao

Okay.

Liansheng Miao

(Interpreted). The estimated output for fourth quarter will be 77 to 80 megawatts.

Bryan Li

And one thing I want to supplement is for the fourth quarter, we will still be running 24 hours, three shifts everyday. And – but we will reserve some inventory in preparation of the delivery requirement in the first quarter of next year.

Vishal Shah – Barclays Capital

Okay. All right. And then in terms of your headcount, are you looking at any cost controls and headcount reduction? Are you sort of thinking demand is going to be recover and you don''t need to cut any headcount?

Bryan Li

No, we don''t have such plan. And actually, as we are in the process of constructing the last 200 megawatts capacity, so we are actually recruiting people instead of cutting the people. And also one of the important HR strategies I would like to share with everyone is we like to train up our own people and before – yearly, six months before we formally start a ramp-up and we will start to train up the people. As we already have an existing capacity of 400 megawatts, we have more than 3,000 employees at our company. So what we will do is we will recruit the people six months earlier and then plugging those new staff into the existing factory and then to a better system and have those experienced workers to train up the new guys. And then six months later, when we start up our new facilities, those guys with part of the experienced technicians will be able to lead the operation.

Vishal Shah – Barclays Capital

Okay. Makes sense. So when do you expect to receive the equipment for the last phase of 200 megawatts capacity addition, I would imagine while you made the payment to the equipment suppliers?

Qing Miao

Yes, the company has already stated in its earnings release that the next additional 200 megawatts, we are expecting to be completed by the third quarter of 2009, but one equipment will be, I mean, stepped aside, which would be received by the company. I need to further consult with Mr. Miao.

Bryan Li

And the equipments will start to be delivered off field from the first quarter from the beginning of next year. But the installation is a lumpy process. The equipments will be coming to their factories depending on the installation schedules. So yearly, the furnaces and the module will come the first and then Cell will come in the middle. And we have a very detailed installation schedule and we strictly follow the schedule. And now everything is on track.

Vishal Shah – Barclays Capital

Okay, great. Thank you very much.

Bryan Li

Thank you.

Operator

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

Lu Yeung – Merrill Lynch & Co.

Hi, thanks for taking my questions. Can you give a little color on your polysilicon supply contract in 2009 with respect to spot price right now? And what is your percentage of spot exposure in 2009?

Bryan Li

Starting in 2009 we will have five long-term contracts to start delivery, three with Wacker Chemie and one with DC Chemical, and one with (inaudible). And those contracts are priced at a low level comparing to the spot market price and the spot market price currently we see in the market is somewhere close to $200 per kilogram to $220 and it depends on where the polysilicon is – where is the origin of the polysilicon and also it depends on who is the producers of the polysilicon. So it''s at like the $40 to $50 band – around I mean.

Lu Yeung – Merrill Lynch & Co.

One more follow-up will be in the fourth quarter – 4Q ''08, is that in the October and early November you have some higher price polysilicon? Has that – you guys already digest all these higher price materials and your gross margin in December or you recovered back to the level of third quarter?

Bryan Li

Yes, as we said, in October and the first part of November, we were still utilizing the higher cost of polysilicon. So the gross margin we guided for the fourth quarter of this year is really 17% to 19%, which has already reflected the higher polysilicon costs and the depreciation of the Euro against RMB.

Lu Yeung – Merrill Lynch & Co.

All right. Thanks a lot.

Bryan Li

Thank you.

Operator

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

Sam Dubinsky – Oppenheimer & Co.

Hi, guys. Just a couple of quick questions. Do you guys feel that you may have taken inventory charge in Q4 just because of the rapid decline of poly pricing? And can you also quantify how many metric tons of poly you have in inventory today?

Qing Miao

Hold on a second, we will check out the number for you.

Bryan Li

I will take this question. Given the more resources of the poly from spot markets right now, actually we keep a kind of poly balance by two to three weeks as a kind of inventory balance.

Sam Dubinsky – Oppenheimer & Co.

Okay. So do you expect to take an inventory charge if poly prices stay as low or you don''t feel you need to?

Bryan Li

I don''t think we need to – I would rather say that we have already absorbed all the high -cost poly in October and middle of November. So actually since that we are going to have a spot – lower spot price poly coming from after the middle of November, so we don''t have any issue on that – regarding that.

Sam Dubinsky – Oppenheimer & Co.

Okay. And of those five contracts, how many metric tons is that that you have for the long-term contract?

Qing Miao

And it could depend on the production of 230, and which we have already done the calculation regarding to the total of five long-term contract polysilicon supply contracts. And one more point I want to add up is that, for the first quarter, the blended cost will come down by 1.8% compared to last quarter.

Sam Dubinsky – Oppenheimer & Co.

Okay. So for next year, those five contracts are priced below $200 and the rest is coming from the spot market for next year, just to be clear?

Bryan Li

Yes, you''re correct.

Sam Dubinsky – Oppenheimer & Co.

Okay. And you guided 550 megawatts of production for next year – or shipments, but if you are only going to be at 600 megawatt by Q3, how do you get there? Is it just inventory you''re building now?

Bryan Li

No, we don''t have to. As you know, we are the fully vertical manufacturing processes from the Q1, Q2; you can find our company can be – operated the process very efficient today by having a high output and will impact the output of each line.

Sam Dubinsky – Oppenheimer & Co.

Okay, so it''s for each line. Okay. Thank you guys.

Operator

Your next question comes from the line of Sunil Gupta of Morgan Stanley.

Sunil Gupta – Morgan Stanley

Hi, thanks for taking my questions. Could we just go back to your comments about Cyber solar, if you could update us in terms of what is the current capacity of Cyber solar and what would it look like in 2009 and 2010?

Bryan Li

The Cyber Power is now under the construction and their initial capacity, the Cyber Power is looking at, is 300 metric ton capacity, will be done through the different stage.

Sunil Gupta – Morgan Stanley

And when do you expect to start production?

Bryan Li

Cyber Power expects to start production in the second half of the year.

Sunil Gupta – Morgan Stanley

And how much would you start production with? Is the 350 tons broken down in phases?

Bryan Li

The party ramp-up process is a lengthy process. So it will be done stage-by-stage. And we have – when we are talking about the polysilicon coverage next year and we haven''t seen the potential polysilicon we can source – we will be producing internally.

Sunil Gupta – Morgan Stanley

Okay. And in terms of your poly costing for Q3, what was your blended average cost per kg?

Bryan Li

In Q3, as we discussed earlier, and the poly cost is (inaudible) and plus $0.05 or $0.06 of the warranty reserve and insurance and freight charge, then also taking into consideration of (inaudible) then you can simplify, you can easily back out the polysilicon.

Sunil Gupta – Morgan Stanley

Okay. At the end of Q3, the inventory that you had, how many tons of inventory did you have?

Bryan Li

Including our inventory, we have raw materials – we have raw materials of polysilicons. We also have raw materials of the other production materials. Besides the raw materials, we have wafer and finished goods. And at the end of third quarter of this year, raw material – the polysilicon occupies like 50% to 55% of the total inventory. And the finished goods is only up like mid-single digit of the percentage of the inventory and the remaining are the wafer (inaudible).

Sunil Gupta – Morgan Stanley

Okay. And what was your polysilicon sourcing mix in Q3? How much did you buy in the spot market?

Bryan Li

In Q3, we source – we sourced about 40% to 50% on the spot market. But one point I would like to correct, when talking about the spot market purchase we are actually referring to the pricing level. A lot of polysilicon purchases, we will do – we do a short-term contract. But given the nature of the contract, the price is close to the spot market price.

Sunil Gupta – Morgan Stanley

Okay. Then you mentioned in terms of your CapEx that you will spend $90 million to take your capacity from 400 to 600 on a fully integrated basis. Is that because you have spent some of that CapEx requirements in 2008 because $90 million sort of sounds bit low for 200 megawatts?

Bryan Li

Yes, that''s correct. You''re absolutely right. And the total CapEx for 2008 is 200 megawatts of vertically integrated capacity will require roughly $200 million. And then we have already spent like $70 million to $80 million by the end of third quarter where we will continue to spend $40 million in the fourth quarter and another $90 million in the year of 2009. So that will conclude – that will give you a ballpark of $200 million.

Sunil Gupta – Morgan Stanley

Okay. And my last question, for 2009, you provided a guidance – gross margin guidance of I think I got 24 – you said more than 24% for 2009. What kind of pricing assumptions are you assuming when you provide that guidance? So what would you expect the module ASP to be, say, by end of 2009 and what do you expect the poly prices to be?

Bryan Li

Yes. As we answered in the previous questions, for ''09, we saw the ASP will be declining – will be declining by about – by close to 30% – 30% from 2008 level while the polysilicon costs will be declining by 40% to 45%, so that will give us a lot of leverage on the gross margin. And also this actually shows – demonstrates our ability as a vertically integrated player to quickly capture the gross margins when the polysilicon price falls.

Sunil Gupta – Morgan Stanley

Okay, great. Thank you.

Bryan Li

Thank you.

Operator

Your final question comes from the line of Emily Liu of Arete Research.

Emily Liu – Arete Research

Hi, thank you for taking my question. I have two quick questions. First of all, I think you guys just mentioned there might be an increase in inventory in the first quarter next year. And can you give us some color on what is the mix that you have in mind? Do you mean more increase in poly or more increase in finished goods? And we have tried – probably want to – you are guiding you might want to build up inventory to meet the market demand in the second and third quarter. And my second question is regarding the terms and condition of the acquisition of Cyber Power, because they said that acquisition consideration of $70 million is book value of the net tangible asset. They also mentioned that the initial consideration $25 million will be used to repay the debt, to finance the construction. I was wondering what you can give us down – whether the – what''s the real book value of the poly plant and how much debt that is? Thanks.

Bryan Li

Thank you. Let me take your questions one by one. And for your first question, the inventory build-up in next year, we still see a large demand from the installation market into ''09. But there will be a seasonal effect in the first quarter and second quarter of next year. So although we are fully confident selling out of our modules produced in the first quarter, but if we are – if I''m going to answer your scenario and I would rather save the modules in my inventory instead of reserving the polysilicon in my inventory, as the polysilicon excessive scenario is certain. And the second question is, for the acquisition costs, as stated in the letter of intent, it''s in the range of $70 million to $80 million. That was determined at least a reference to the audited book value of Cyber Power''s net intangible assets. And our Audit Committee believes that it''s a fair price for the proposed transactions. Such consideration will be subject to adjustments based on our further due diligence. And then for the prepayment, YGE will make – as we also talked about in the letter of intent, YGE will make $25 million prepayment upfront and the reason – the part of the reason is the seller, which is the Grand Avenue Group Limited, needs cash to repay a portion of its indebtedness, which was used to finance polysilicon projects of its subsidiary. And the vast payments will be paid to YGE in the event that the letter of intent is terminated or the proposed acquisition is not consummated. And secondly, the repayment obligation of the advance payment is secured by certain guarantees and the collaterals provided by the seller''s affiliates. In addition, we believe the continued ramp-up of the polysilicon project prior to our acquisition is in the interest of our company.

Emily Liu – Arete Research

Yes. Actually just to follow up on that – sorry, hello?

Bryan Li

No, no. I said, please go ahead.

Emily Liu – Arete Research

Okay. And this 25 – 24%, 25% gross margin guidance for next year, does that include – is that on a consolidated basis where you include production and revenue of Cyber Power? Is that on a consolidated basis or excluding Cyber Power?

Bryan Li

That''s a good question. And actually, the 24% plus guidance for gross margin guided for next year is excluding – is on an exclusion basis. We didn’t include the Cyber Power as the consolidation basis into our consideration as we are still in the process of the due diligence. And once we – if we will – if YGE is able to complete the acquisition by February 6th and then we will be able to provide a new guidance after the acquisition to the analysts and investors.

Emily Liu – Arete Research

Okay. Thank you very much. Thanks.

Bryan Li

Thank you.

Operator

That concludes the Q&A session. I would now like to turn the call back over to management.

Tip Fleming

That concludes our call today. I would like to thank you very much for attending. If you have any additional questions, please feel free to call back to us or the management team directly. Thank you and good bye.

Operator

Ladies and gentlemen, that concludes the presentation. Thank you for your participation. You may now disconnect. Have a happy Thanksgiving.