China Sunergy Announces Financial Results for the Third Quarter 2008

Reports Third Quarter Revenues of US$119.0 million, an Increase of 142.9% Year-Over-Year; Solar Cell Production and Gross Margin are both within Guidance at 35.7.MW and 9.3% respectively

NANJING, China, Nov 25, 2008 /PRNewswire-Asia via COMTEX/ -- China Sunergy Co., Ltd. , ("China Sunergy" or the "Company") a specialized solar cell manufacturer based in Nanjing, China, announced today its financial results for the third quarter of 2008.

Third Quarter Financial Results
-- Revenues were US$119.0 million, representing a 142.9% and 6.6% increase compared to the third quarter of 2007 and the second quarter of 2008, respectively; revenues generated from solar cell sales were US$113.4 million, representing a 144.9% and 8.6% increase compared to the third quarter of 2007 and the second quarter of 2008, respectively.
-- Gross profit was US$11.1 million compared to US$1.0 million and US$11.6 million during the third quarter of 2007 and the second quarter of 2008, respectively. Gross margin was 9.3%, which was within the Company's guidance range, compared to 2.1% and 10.4% during the third quarter of 2007 and the second quarter of 2008, respectively. Blended gross margin was impacted mainly by the reduced OEM volume, compared to previous quarter.
-- GAAP net income was US$0.2 million, compared to net loss of US$4.4 million and net income of US$3.1 million in the third quarter of 2007 and the second quarter of 2008, respectively. Lower GAAP net income was largely due to non-operational accounting measures.
-- Non-GAAP net income, which excludes share-based compensation and change in fair value of non-cash derivative loss, was US$2.0 million, compared to non-GAAP net loss of US$4.3 million and non-GAAP net income of US$4.0 million in the third quarter of 2007 and the second quarter of 2008, respectively. The non-GAAP measures are described below and reconciled to the corresponding GAAP measure in the section below titled "Use of Non-GAAP Financial Measures."
-- GAAP net income per ADS was US$0.01 both on basic and diluted basis, compared to a net loss of US$0.11 and a net income of US$0.08 per ADS in the third quarter of 2007 and the second quarter of 2008, respectively.
-- Non-GAAP net income per ADS, which excludes share-based compensation and change in fair value of non-cash derivative loss, was US$0.05 both on basic and diluted basis, compared to a non-GAAP net loss of US$0.10 and a non-GAAP net income of US$0.10 per ADS in the third quarter of 2007 and the second quarter of 2008, respectively.
-- Operating cash flow in this quarter was positive US$1.8 million.

Commenting on the financial results, Dr. Allen Wang, CEO of China Sunergy, said: "Despite experiencing a deteriorating market environment towards the end of the quarter, which resulted in some canceled orders, I am pleased that we were able to achieve our guidance for the quarter regarding margins and production volume. We have maintained our focus on execution through the signing of an important sales agreement and procuring high-quality silicon supplies at flexible and favorable prices, which will benefit the long term health of our Company despite the short-term impact of operating within an extremely challenging and uncertain solar sector."

Third Quarter and Recent Operational Highlights
-- Quarterly production of 35.7 megawatts ("MW") of solar cells represented a 100.6% increase on a year-over-year basis and an 8.8% increase sequentially.
-- Shipments of solar power products amounted to approximately 34.1 MW, representing a 105.4% increase on a year-over-year basis and a 2.6% decrease sequentially. Shipments were impacted by several orders which were canceled in late September due to market conditions, which would have amounted to 4.3 MW.
-- Shipments of high efficiency cells (defined as any cells with a conversion efficiency rate of over 17%) during the third quarter of 2008 amounted to 11.1MW, or 34.0% of total solar cell shipments, slightly less than the 11.4 MW, or 36.8% of total solar cell shipments, during the second quarter of 2008.
-- Average selective emitter (SE) cell conversion efficiency was 17.2% in the third quarter of 2008. Cells produced on the HP lines achieved an average conversion efficiency rate of approximately 16.7%.
-- The Company entered into a seven year sales agreement with Wuxi Guofei Green Energy Source Co., Ltd. ("Wuxi Guofei"), a leading Chinese solar energy company. Under the greement, China Sunergy will supply Wuxi Guofei with 10 MW of monocrystalline cells each year, beginning in 2009 and concluding in 2015.

"Although we were only moderately affected by the market situation towards the end of the third quarter, we have experienced much more severe pressure on our operations in recent months particularly in October as ASP erosion has been rapid," continued Dr. Wang. "While this will significantly impact our results in the coming quarter and hence the full year, we have already implemented critical adjustments to minimize the long-term effect of the current environment and ensure that as the solar sector regains equilibrium we will be poised to regain the momentum that we demonstrated over the past quarters."

Technological Developments

During the quarter China Sunergy continued to make progress with the production and development of its high-efficiency cells. China Sunergy currently has one SE line and four HP lines available for operation, and has maintained one multi-crystalline P type line to cater to current client requirements.

The installation of the four new selective emitter ("SE") cell production lines is scheduled to be completed by the end of November, which will bring the total number of SE lines in production to five from the beginning of 2009. It should be noted that given any specific quality of wafer the SE cells not only generally achieve higher conversion efficiencies than our P and HP-type cells, but they also display greater wafer quality tolerance and are therefore able to achieve this even when poorer quality wafers are used during production.

China Sunergy's investment in more advanced cells has again resulted in impressive returns with regards to the development of new forms of high efficiency cells. In particular, significant breakthrough has been achieved in the advancement of the N-type cells. At the laboratory level, an average efficiency of over 19% was consistently achieved, and the Company has put up a plan to start commercial shipments late in the fourth quarter of 2009. Additionally, the planned R&D center in Shanghai remains scheduled to be completed during the first half of 2009.

Third Quarter 2008 Financial and Business Review

Revenues, Shipment and Production

During the third quarter of 2008, revenues increased 142.9% on a year- over-year basis, and 6.6% sequentially to US$119.0 million.

Sales from solar cells, modules and processed cells under OEM arrangements and other sales accounted for 95.3%, 4.2%, 0.2% and 0.3% of total revenues, respectively. Shipments, including 1.2MW for module sales and 0.3MW of solar cells processed under OEM arrangements, amounted to approximately 34.1 MW, compared to 16.6 MW during the third quarter of 2007 and 35.0 MW during the second quarter of 2008.

Revenues and Shipment Comparison between Q3 2008 and Q2 2008
Q3 2008 Q2 2008
Volume* Value (US$mm) Volume* Value (US$mm)
Solar cell sales 32.6 113.4 31.0 104.4
Module sales 1.2 5.0 1.0 4.2
OEM 0.3 0.2 3.0 2.2
Other sales 0.4 0.8
* All volumes are expressed in MW.

During the third quarter of 2008, the Company increased its quarter-on- quarter sales of solar cell products by 8.6% as compared to the previous quarter. The percentage of solar cell sales in overseas markets of total solar cell sales was 45.1% in the third quarter of 2008 compared to 48.3% and 39.5% in the third quarter of 2007 and the second quarter of 2008, respectively.

Of the 32.6 MW of solar cells shipped during the third quarter, 11.1 MW were in the form of high efficiency cells (defined as any cells with a conversion efficiency rate of 17% and above.)

Gross Profit, Gross Margins and Average Selling Price ("ASP")

Gross profit for the quarter was US$11.1 million, which led to a blended gross margin of 9.3%, down from 10.4% in the previous quarter, mainly as a result of less OEM volume. The gross margin of solar cells was largely the same as the previous quarter.

Margin Breakdown
Gross margin
Q3 2008 Q2 2008
Solar cell sales 9.1% 9.2%
Module sales 6.8% 12.4%
OEM 68.8% 63.2%
Other sales 68.1% 19.9%
Blended 9.3% 10.4%

Blended ASP for the third quarter of 2008 rose from US$3.37 per watt in the previous quarter to US$3.48 per watt due in part to the strengthening of the Renminbi against U.S. dollar. The blended ASP for the third quarter of 2007 was US$2.85.

Wafer Costs

Wafer costs continued to account for a large proportion of overall manufacturing costs. In the third quarter of 2008, wafer costs rose to US$2.87 per watt compared to US$2.45 and US$2.79 per watt in the third quarter of 2007 and the second quarter of 2008, mainly due to the strengthening of the Renminbi against U.S. dollar and the price increase of wafer.

Wafer costs per watt as a percentage of total production costs per watt declined slightly from 91.2% in the second quarter of 2008 to 91.1% in the third quarter of 2008, mainly due to the increased production volume. Other production costs, which mainly consisted of other raw materials, labor, depreciation and utilities, were US$0.28 per watt compared to US$0.27 in the second quarter of 2008.

SG&A, Operating Profit and Net Income

Our SG&A expenses in the third quarter of 2008 were US$4.9 million, compared to US$4.2 million in the third quarter of 2007 and US$5.1 million sequentially, which included share based compensation charge US$0.9 million, US$0.1 million, and US$0.9 million, respectively.

Profit from operations was US$5.7 million, compared to an operating loss of US$3.6 million and an operating profit of US$6.0 million for the third quarter of 2007 and the second quarter of 2008, respectively.

Interest expense for the third quarter 2008 was US$2.1 million, compared to US$2.0 million for the third quarter of 2007 and US$1.7 million for the second quarter of 2008, respectively. The increase was attributable to amortization of expenses and interest charges related to the senior convertible bonds closed on July 1, 2008.

In the third quarter we had other expenses amounting to US$3.7 million, mainly from unrealized foreign currency exchange loss due to devaluation of the Euro against Renminbi.

The Company reported a decline in net income to US$0.2 million this quarter, largely due to exchange and foreign currency derivative loss. This compares to a net income of US$3.1 million in the previous quarter and a net loss of US$4.4 million in the third quarter of 2007.

Non-GAAP net income, which excludes share-based compensation and change in fair value of non-cash derivative loss, was US$2.0 million in the third quarter of 2008, compared to net loss of US$4.3 million and net income of US$4.0 million in the third quarter of 2007 and the second quarter of 2008, respectively (please refer to note 1 of reconciliation).

The non-GAAP measures are described below and reconciled to the corresponding GAAP measures in the section below titled "Use of Non-GAAP Financial Measures."

Balance Sheet and Cash Flow

As of September 30, 2008, the Company had cash and cash equivalents of US$122.1 million. Net operating cash inflow for the third quarter was US$1.8 million. The Company also has access to an untapped bank credit facility of US$70M as at the end of September, and at this point sees no issues in its ability to renew existing bank loans or to obtain new lines of credit, should they be necessary.

Inventory was at a similar level compared to the second quarter, and the Company's working capital ratio improved from 178% in the second quarter to 212% in the third quarter. Depreciation and amortization were US$1.4 million and capital expenditures were US$8.7 million.

Capital expenditures in Q3 were payments made for equipment relating to the expansion of the Company's selective emitter cell lines. The outstanding payment for the 4 SE lines is US$12M and the budget for the R&D Center in Shanghai is US$8M. These two items have been accounted for. The only new capex requirement is approximately US$8M for the conversion of one SE line to N-type. The Company sees no issues in generating this funding internally out of its 2009 profits.

On July 1, 2008, the Company issued US$54.5 million 4.75% senior convertible notes (including US$4,500,000 pursuant to the exercise of the over-allotment option in full) due June 15, 2013 ("the Notes"). The terms of the Notes include certain conversion, repurchase and conversion rate adjustment features. The Notes are convertible into shares of the Company's stock. Total issuance costs of the senior convertible notes were approximately US$3.9 million.

Concurrent with this offering, 4,431,000 ADSs were borrowed by an affiliate of the initial purchaser of the notes pursuant to an ADS lending agreement, and offered in a transaction registered under the Securities Act. A nominal lending fee of US$0.0006 per ADS was received from the ADS borrower for the use of the borrowed ADSs.

Commenting on the financial results, Kenneth Luk, CFO of China Sunergy, said: "Despite the financial pressure caused by the depreciation of the Euro, we achieved the lower end of our margin guidance and generated cash during the third quarter. We have sufficient capital to fund our operations during this uncertain time and throughout 2009. While the outlook for the fourth quarter is certainly not ideal and we will face challenging results, China Sunergy will take the necessary steps to limit the financial impact and ensure we have the resources necessary to benefit from the anticipated long-term demand for our advanced solar products."

Outlook

The recent global economic environment will have a much more significant impact on the Company's fourth quarter and full year results than was experienced during the third quarter. The rapid decline in the ASP for solar cells during October was not immediately matched with a reduction in the upstream costs, largely polysilicon, resulting in negative gross margins and a conscious reduction in production of solar cells. Despite the recent cost corrections, the short term lack of demand for solar products has led to reduced shipments and revenues and therefore a reduced opportunity to compensate for the weak beginning to the quarter.

Taking into account the reduced ASP and relatively higher cost of polysilicon, the Company believes it will report a negative gross margin for the fourth quarter. The Company actively reduced production during the beginning of the quarter, leading to production volume in the range of 15-20MW. This results in the Company reducing its full year 2008 production target to 107-112MW, out of which around 44MW are expected to be high efficiency products.

China Sunergy observed that starting in early November the price of polysilicon began to erode, and at this time has now fallen by an even greater extent than the recent ASP decline. Given the current opportunity for flexible procurement of polysilicon and recently observed pricing trends, the Company has seen gross margins return to a level similar to the second quarter of 2008. In addition, going forward there will be incidental margin improvement due to a more favorable production mix and higher wafer quality from overseas suppliers.

By the first quarter of 2009, all 4 new selective emitter production lines will be operating, bringing the total number of selective emitter lines to 5. While production may not run at the full capacity in Q1, the Company will focus production on those lines until their production capacity is fulfilled, thus targeting to generate a higher average gross margin.

For 2009, the Company, although prudently optimistic, would like to be conservative at this point of time and revise down the production target to 180-210MW including 20% from OEM business. It is important to note that this target is based on the Company's existing commitments and ongoing negotiations with customers while the market is more volatile than usual. Our gross margin should be positively, instead of negatively, impacted based on the recent trend of declining ASP and wafer costs. Taking into consideration the effect of a better production mix of 50% SE cells as well as better wafer quality, China Sunergy expects a gross margin of 15-19% for 2009.

Additional Company Updates

During the annual general meeting of shareholders held in Nanjing on August 15, 2008, the Company adopted several shareholder resolutions, including the re-elections of Mr. Tingxiu Lu, Mr. Ruennsheng Allen Wang and Ms. Jian Li as directors of the Company, the ratification of the appointment of the Independent Auditor Deloitte Touche Tohmatsu for the fiscal year 2007 and appointment of the Independent Auditor Deloitte Touche Tohmatsu for the fiscal year 2008.