Sun Rises on China Sunergy

• The Company: China Sunergy, a solar cell product manufacturer.
• The Filing: FORM 6-K filed with the SEC on August 25, 2008.
• The Finding: For the latest second-quarter, China Sunergy said its gross profit was $11.6 million, which led to a blended gross margin of 10.4 percent, up from 4.9 percent in the quarter ended June 2007. An average higher selling price (ASP) resulting from the shipment of a greater volume of high efficiency cell products offset the drag from a weaker U.S. dollar and higher wafer costs.

The Upshot: Despite near-term uncertainties in terms of wafer costs, quality, and supply, management is maintaining its full year 2008 production target at 125-145 megawatts (MW), with approximately 55 to 75 MW expected to come from high efficiency cell products (defined as any cells with a conversion efficiency rate greater than 17 percent).

The weaker dollar had a mixed affect on operational efficiency: blended ASP year-on-year rose 19.5% to $3.37 per watt, helped by a weaker dollar; but wafer costs per watt, which account for 91.2% of aggregate manufacturing costs, rose 18.7% over last year to $2.79 per watt, as a result of Chinese production costs valued in the stronger, local (Renminbi) currency.

Chief Executive Allen Wang told analysts on the earnings call that he was confident that improved visibility in supply pipeline, declining wafer costs, and higher conversion efficiencies would lead to continued strengthening of China Sunergy’s gross margin from the end of this year into 2009.

Of the 31.0 MW of solar cells shipped during the second quarter, 11.4 MW were in the form of high efficiency cells (with an average efficiency rate of 16.7 percent), up from 9.1 MW during the first quarter of 2008.

A concern remains, however, that a new mono-crystalline supply agreement with European wafer provider Renewable Energy Corp would only cover approximately 20 percent of targeted 2009 production of 220-250MW. In addition, higher conversion efficiencies are contingent on access to quality silicon supplies.

The Question: Will an expected decline in wafer costs be enough to offset any potential ASP weakness?