Saturday, August 30, 2008

Solarfun Reports Second Quarter 2008 Results

August 27, 2008 7:48 AM EDT

SHANGHAI, China--(BUSINESS WIRE)--Solarfun Power Holdings Co. , Ltd. ("Solarfun" or "the Company") (NASDAQ: SOLF), an established vertically integrated manufacturer of silicon ingots and photovoltaic (PV) cells and modules in China, today reported its unaudited financial results for the second quarter ended June 30, 2008.


-- Net revenue was RMB 1.35 billion (US$ 197.1 million), an increase of 12.7% from the first quarter of 2008, and 192.2% from the second quarter of 2007.
-- PV module shipments reached 43.1 MW, an increase of 162% from the second quarter of 2007. Solarfun also shipped 5 MW of cells with specification levels that are different than the
Company's mainstream business.
-- Average selling price ("ASP") improved to US$4.17 from US$4.07 in the first quarter of 2008. Business in Europe remained robust, with Germany, Spain and France accounting for 56%, 33%
and 5% of net revenues, respectively.
-- Gross profit was RMB 185.6 million (US$ 27.1 million), an increase of 163.7% from the second quarter of 2007.
-- Gross margin decreased to 13.7% from 15.8% in the first quarter of 2008. The figure was in line with the Company's guidance and was primarily due to higher polysilicon and wafer
-- Operating profit was RMB 116.4 million (US$ 17.0 million), an increase of 306.6% from the second quarter of 2007. Operating margins decreased to 8.6% from 11.8% in the first quarter of
2008 as the Company returned to more normal levels of spending to support growth, including a nearly RMB 2.9 million sequential increase in research and development expenses.
-- Interest expense rose over RMB 25.5 million (US$ 3.7 million) from the second quarter of 2007 to RMB 28.1 million (US$ 4.1 million) due to increased bank borrowings and the Company's convertible senior notes offering earlier in the year.
-- Currency gain was RMB 4.1 million (US$ 0.6 million) as a result of the appreciation of the RMB relative to the U.S. dollar.
-- Net income was RMB 78.1 million (US$ 11.4 million), a 285.2% increase over the second quarter of 2007.
-- Earnings per basic ADS were RMB 1.62 (US$ 0.24).

Harold Hoskens, CEO of Solarfun, noted "We are pleased with the progress achieved during the second quarter as we continued to see healthy demand and firm pricing. The tight supply and higher costs for polysilicon and wafers constrained both our top and bottom line growth, and our gross margins. This is a temporary situation with visibility improving on both measures during the second half of 2008, most notably during the fourth quarter. A number of important initiatives were completed following the close of the quarter which position us for continued growth going forward."


As of June 30, 2008, the Company had cash and cash equivalents of RMB 557.7 million (US$ 81.3 million) and working capital of RMB 2.2 billion (US$ 322.7 million). Total bank borrowings were RMB 1.28 billion (US$ 186.8 million), remaining relatively constant with the levels of the first quarter of 2008. Subsequent to the end of the second quarter of 2008, the Company raised US$ 71.9 million in net proceeds from a sale of 5,421,093 ADSs pursuant to a sales agency agreement with Morgan Stanley & Co. Inc.

The Company continued to improve its working capital management with improved inventory and accounts receivable management. Net accounts receivable were RMB 442.2 million (US$ 64.5 million). Days Sales Outstanding (DSOs) continued to improve to 37 days, down from 41 days in the first quarter of 2008. Inventories of RMB 823.4 million (US$ 120 million) were relatively constant with last quarter and inventory turnover days improved to 63 days versus 104 days from the same period in 2007.

* Capital outlays during the second quarter totaled US$ 57.2 million, of which US$ 42.4 million was for capital expenditures and US$ 14.8 million was for pre-payments to suppliers.


-- Signed an 8-year, 1.2 gigwatt ("GW") contract for virgin polysilicon with GCL Silicon Technology.
-- Purchased the remaining 48% interest in Jiangsu Yangguang Solar (a silicon ingot producer) that the Company did not already own.


Following the close of the second quarter of 2008, the Company made a number of announcements, including:

-- Completed and successfully initiated production on four new manufacturing lines, increasing nameplate capacity by 120 MW to 360 MW.
-- Began early stage operation of an expanding wire saw facility at the Company's manufacturing facility in Qidong.
-- Signed a 47 MW sales contract to supply PV modules to Schuco International KG between December 2008 and October 2009, with installations targeted for the Middle East and south-east Europe.
-- Signed a 30 MW sales contract to supply PV modules to Martifer Solar Sistemas Solares, a leading solar project developer, installer and producer in Europe, from January through
December 2009.
-- Concluded a letter-of-intent ("LOI") with Q-Cells AG for a three-year module supply agreement for the purchase by Q-Cells of no less than 100 MW of PV modules per annum using PV cells Q-Cells will provide from 2009 through 2011. The Company and Q-Cells intend to enter into an agreement to exchange technology to further enhance the development of highly
efficient and low cost PV modules.


Based on current operating trends and other conditions, the Company's outlook is as follows: For the remainder of 2008, management expects:
-- Continued strong demand. Based on contracted sales volume, guidance for 2008 shipments has been raised from 160-180 MW to 175-190 MW. In constant Euro terms (the currency in which the majority of the Company's sales are recorded) pricing is expected to be relatively stable for the remainder of the year.
-- Gross margins for the second half of 2008 are expected to improve from levels seen in the second quarter of 2008, although the Company expects that polysilicon and wafer pricing will continue to be high during the third quarter of 2008. Margin improvements from lower supply costs and other benefits related to greater vertical integration are expected to become more meaningful during the fourth quarter of 2008.
-- Operating expenses as a percent of revenues are expected to remain in the 5-6 % range.
-- Capital expenditures for the remainder of 2008 are anticipated to approach US$ 90 million, and an additional $70-$80 million for supplier prepayments and the LYG equity acquisition. Cash on hand and access to additional commercial debt is viewed as adequate to fund the Company's capital outlays for the remainder of 2008.

For the Full Year 2009, management expects:
-- Total shipments to rise 50% from the revised full-year guidance range of 175-190 MW for 2008. The Company has good visibility on 200 MW of contracted sales volume for 2009,
one-half of which is secured through signed contracts.
-- ASP's to decline 5-10% from the expected full-year 2008.
-- The Company's polysilicon and wafer needs are 100% secured, of which approximately two thirds are in the form of long-term contracts.
-- Through the reduction in polysilicon-related costs and the benefits of vertical integration, the Company foresees the potential to improve gross margins 500 basis points for full-year 2009.
-- Management's current projections call for a further 120 MW of integrated cell and module capacity expansion in 2009. A further 100MW of module capacity will be added and dedicated
to the Company's aforementioned arrangement with Q-Cells.
-- These projections assume constant currencies (Euro vs. US Dollar), management's ability to execute its vertical integration ramp, and to a lesser extent, dependence on raw material suppliers meeting contractual obligations for timely delivery.

Harold Hoskens concluded, "We are on track for a solid year of growth in 2008 and have positioned ourselves for meaningful progress in 2009. Although near-term supply constraints and higher costs persist, we see visibility for better conditions beginning in the fourth quarter of this year and further improvements throughout 2009. Demand is good. Our brand is growing worldwide. Customers recognize our low-cost and high quality manufacturing platform and are contracting their production needs with us. We are secure in our supply needs for next year and our vertical integration strategy will begin to show meaningful benefits starting in the final quarter of this year."

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