Solarfun Reports First Quarter 2010 Results

SHANGHAI, May 26 /PRNewswire-FirstCall/ -- Solarfun Power Holdings Co., Ltd. ( "Solarfun" or the "Company") (Nasdaq: SOLF), a vertically integrated manufacturer of silicon ingots, wafers and photovoltaic (PV) cells and modules in China, today reported its unaudited financial results for the quarter ended March 31, 2010.

FIRST QUARTER 2010 HIGHLIGHTS

• Total net revenues were RMB 1,475.8 million (US$216.2 million) in 1Q10, an increase of 17.8% from 4Q09 and an increase of 115.7% from 1Q09.  
• PV module shipments, including module processing services, reached 150.6 MW, an increase from 110.8 MW in 4Q09 and from 35.7 MW in 1Q09.  
• Average selling price, excluding module processing services, declined, as expected, to US$1.76 per watt in 1Q10.
• Gross profit was RMB 272.5 million (US$39.9 million) and gross margin was 18.5%.
• Net income attributable to shareholders on a non-GAAP basis(1) was RMB 158.1 million (US$23.2 million), an increase of 64.9% from 4Q09 and a substantial increase from RMB 12.4 million in 1Q09.
• Net income per diluted ADS on a non-GAAP basis was RMB 2.72 (US$ 0.40), an increase of 63.9% from RMB 1.66 in 4Q09, and a substantial increase from RMB 0.23 in 1Q09.  
• Annualized ROE on a non-GAAP basis significantly improved to 26.6 % in 1Q10 from 17.4% in 4Q09 and 2.3% in 1Q09.
• As of March 31, 2010, the Company had cash and cash equivalents of RMB 936.3 million (US$137.2 million) and working capital of RMB 1,978.1 million (US$289.8 million).

Peter Xie, President of Solarfun, commented, "We are very pleased with our strong performance in the first quarter of 2010.   Quarterly revenues for the first time in the Company's history exceeded $200 million, and net income per diluted ADS on a non-GAAP basis reached US$0.40, a substantial increase of over 63.9% compared to the fourth quarter of 2009.  The strong performance was attributable to our ability to take advantage of favorable industry demand while keeping a keen focus on cost control and risk management.  

To keep up our momentum, we plan to ramp up our internal cell capacity to 500MW by July, and our module capacity to 900MW by August of this year.  This progress, along with our ongoing efforts to reduce our manufacturing costs and increase our cell efficiencies while expanding our R&D efforts, makes us optimistic about our future."

FIRST QUARTER 2010 RESULTS

• Total net revenues were RMB 1,475.8 million (US$216.2 million) in 1Q10, an increase of 17.8% from RMB 1,252.7 million in 4Q09 and an increase of 115.7% from RMB 684.2 million in 1Q09.  The increase in net revenues in 1Q10 was primarily due to higher shipment volumes reflecting improved industry demand.  
• Revenue contribution from PV module processing services as a percentage of total net revenues remained relatively flat at 7.8% in 1Q10 as compared to 6.3% in 4Q09.  
• PV module shipments reached 150.6 MW in 1Q10, an increase from 110.8 MW in 4Q09 and from 35.7 MW in 1Q09.   In 1Q10, German-based customers accounted for 81% of the Company's total net PV module revenues, excluding module processing services, up from 57% in 4Q09.  The increase in revenue contribution from German-based customers reflected the pull-in demand from the German market ahead of the anticipated reduction in feed-in tariff by the end of June 2010. Other key markets in 1Q10 were Australia, Italy, Portugal and Spain, which collectively accounted for 14.7% of total net revenues.    The Company anticipates that revenue contribution from non-German customers will increase in the second half of 2010 as most of the shipments to customers outside of Germany, including important new growth markets such as the U.S., Italy and China, are currently being pushed out to 3Q and 4Q of 2010.
• Average selling price ("ASP"), excluding module processing services, declined, as expected, by 9.7% to US$1.76 per watt in 1Q10 from US$1.95 per watt in 4Q09.  The decline in ASP was due to a combination of the decrease in the market price of PV products as well as the depreciation of the Euro against the U.S. dollar.
• Gross profit was RMB 272.5 million (US$39.9 million) in 1Q10, compared to gross profit of RMB 235.6 million in 4Q09 and gross profit of RMB 49.4 million in 1Q09.  Gross margin, despite lower ASP, in 1Q10 was 18.5%, which was in-line with 18.8% in 4Q09 and a substantial increase from 7.2% in 1Q09.
• The blended COGS per watt (excluding module processing services) was $1.42 in 1Q10, representing a decrease from $1.57 in 4Q09 and $2.57 in 1Q09.   The blended COGS takes into account the processing cost (silicon and non-silicon) using internal wafers, purchase cost and additional processing cost of the externally-sourced wafers and cells, as well as freight costs.  
• Operating profit was RMB 189.1 million (US$27.7 million) in 1Q10, representing an increase of 50.4% from RMB 125.7 million in 4Q09.  The Company had an operating loss of RMB 15.3 million in 1Q09.   Operating margin for 1Q10 was 12.8%, which compares to 10.0% in 4Q09 and negative 2.2% in 1Q09.  The improvement in operating margin was primarily due to tight control over operating expenses.  Operating expenses as a percentage of total net revenues decreased to 5.7% in 1Q10 as compared to 8.8% in 4Q09.  
• Interest expense remained relatively flat at RMB 40.9 million (US$6.0 million) in 1Q10, as compared to RMB 39.7 million in 4Q09 and RMB 41.4 million in 1Q09.
• Although Solarfun is not immune to currency fluctuations, especially the depreciation of the Euro against the US dollar, its active hedging program reduces the Company's exposure.  For the first quarter of 2010, the Company recorded a net gain of RMB 3.7 million (US$0.5 million), representing foreign exchange losses that were offset by a gain on the change in fair value of foreign currency derivatives.   The Company recorded a net foreign exchange gain of RMB 0.7 million in 4Q09.
• Loss from the change in fair value of the conversion feature of the Company's convertible bonds was RMB 2.5 million (US$0.4 million) in 1Q10 as compared to a loss of RMB 71.3 million in 4Q09.  This compares to a gain of RMB 28.5 million in 1Q09.  The fluctuations, from the adoption of ASC 815-40, were primarily due to changes in the Company's share price during the quarter. This line item has fluctuated, and is expected to continue to fluctuate quarter-to-quarter.  The Company has no direct control over the fluctuations.
• On a non-GAAP basis, net income attributable to shareholders was RMB 158.1 million (US$23.2 million) in 1Q10, representing an increase of 64.9% from RMB 95.9 million in 4Q09 and a substantial increase from RMB 12.4 million in 1Q09.   Net income per diluted ADS, on a non-GAAP basis, was RMB 2.72 (US$0.4) in 1Q10, representing an increase of 63.9% from RMB 1.66 in 4Q09 and a substantial increase from RMB 0.23 in 1Q09.
• On a GAAP basis, net income attributable to shareholders was RMB 138.9 million (US$20.4 million) in 1Q10, compared to net income attributable to shareholders of RMB 10.6 million in 4Q09 and RMB 27.4 million in 1Q09.  Net income per diluted ADS was RMB 2.39 (US$0.35) in 1Q10, compared to RMB 0.18 in 4Q09 and RMB 0.51 in 1Q09.
• On a non-GAAP basis, the Company had an annualized return on equity of 26.6% in 1Q10 as compared to 17.4% in 4Q09 and 2.3% in 1Q09.   On a GAAP basis, the Company had an annualized return on equity of 19.2% in 1Q10 as compared to 1.5% in 4Q09 and 4.0% in 1Q09.
• In October 2009, the FASB issued ASU No. 2009-15, "Accounting for Own-Share Lending Arrangements in Contemplation of Convertible Debt Issuance or Other Financing" ("ASU 2009-15").  ASU 2009-15 amends ASC 470-20, "Debt: Debt with Conversion and Other Options", to include the accounting for own-share lending arrangements in contemplation of convertible debt issuance or other financing.  ASU 2009-15 is effective for fiscal years beginning on or after December 15, 2009 and shall be applied retrospectively for all arrangements outstanding as of the beginning of fiscal years beginning on or after December 15, 2009 and for arrangements entered into on or after the beginning of the first reporting period that begins on or after June 15, 2009.  Early adoption is not permitted.  The Company has determined that upon the adoption of ASU 2009-15 on January 1, 2010, the redeemable ordinary shares issued in January 2008 concurrent with its convertible bond issuance is regarded as an own-share lending arrangement. As such, the share-lending arrangement is measured at fair value, and recognized as an issuance cost with an offset to equity.  The Company has evaluated the adoption of ASU 2009-15 and determined that the fair value of share-lending arrangement is immaterial to its consolidated financial statement.

FINANCIAL POSITION

As of March 31, 2010, the Company had cash and cash equivalents of RMB 936.3 million (US$137.2 million) and net working capital of RMB 1,978.1 million (US$289.8 million). Total short-term bank borrowings (including the current portion of long-term bank borrowings) were RMB 930.6 million (US$136.3 million), compared to RMB 494.8 million as of December 31, 2009.   The increase in short-term borrowings was because the Company drew down some additional short-term bank borrowings in anticipation of financing needs as the Company expands its manufacturing capacity and R&D capabilities to meet robust demand.

As of March 31, 2010, the Company had total long-term debt of RMB 977.7 million (US$143.2 million), which comprises both long-term bank borrowings and convertible notes payable.   The Company's long-term bank borrowings are to be repaid in installments until their maturity in 2011 and 2012.  The first maturity of the convertible notes payable is in 2015.

Net cash from operating activities in 1Q10 was negative RMB 85.2 million (US$12.5 million), compared to RMB 336.9 million in 4Q09 and RMB 82.5 million in 1Q09.   The net cash outflow to operating activities was primarily due to the increase in account receivables which resulted from the increase in the total net revenues.

As of March 31, 2010, accounts receivable increased to RMB 849.0 million (US$124.4 million) from RMB 587.5 million as of December 31, 2009.  Days sales outstanding was 47 days in 1Q10, which was consistent with 4Q09. 

As of March 31, 2010, inventories decreased to RMB 720.9 million (US$105.6 million) from RMB 784.0 million as of December 31, 2009.  Days inventory outstanding improved to 57 days in 1Q10 from 71 days in 4Q09 and 106 days in 1Q09 as the Company continues to improve its supply chain management.

Capital expenditures were RMB 65.0 million (US$9.5 million) in 1Q10.

CAPACITY EXPANSION

The Company has already reached its previously announced module capacity target of 700 MW.  Due to anticipated demand from customers for the second half of 2010, the Company plans to further expand module capacity to 900 MW by August 30, 2010.

The Company recently acquired a cell production line with an annual capacity of 25MW from a wholly owned subsidiary of Semiconductor Manufacturing International Corporation and began operations in May 2010.  Including the previously announced cell capacity expansion plan of 120 MW, the Company is expected to have a total cell capacity of 500 MW by July 1, 2010.

The Company also plans to expand its annual ingot production capacity from 300 MW to 360 MW and annual wire saw capacity from 300 MW to 400 MW by May 31, 2010.  This is to be achieved primarily through improvements in production technique without incurring any significant capital expenditures.

Details on the Company's production capacities and expected production capacities:

BUSINESS OUTLOOK

The Company provides the following guidance based on current operating trends and market conditions.

For 2Q10, the Company expects:

• Total module shipments to be 160MW to 170MW, of which approximately 35% will be for PV module processing services.
• ASP for PV module shipments to stay flat in constant currency but decline by approximately 6.5% from 1Q10 on the assumption that the Euro/US dollar exchange rate stays at approximately 1.25 for the rest of the quarter.

For 2010 full year shipment, the Company is raising its guidance from 600MW to 650MW   based on strong demand from customers for 2010.  Module processing services is expected to represent approximately 20-30% of the total shipments.

CONFERENCE CALL

Management will host a conference call to discuss Solarfun's 2010 first quarter results on May 26, 2010 at 8:00 am Eastern Daylight Time ( 8:00 pm Shanghai time )  and take questions following the prepared remarks.

The dial-in details for the live conference call are as follows:

A live webcast of the conference call will be available on the investor relations section of the Company's website at: http://www.solarfun-power.com. A replay of the webcast will be available for one month.

Telephone replay of the call will be available for seven days after the conclusion of the call. The dial-in details for the replay are as follows:

FOREIGN CURRENCY CONVERSION

The conversion in this release of Renminbi into U.S. dollars is made solely for the convenience of the reader, and is based on the exchange rate as set forth in the H.10 statistical release of the Federal Reserve Board as of March 31, 2010, which was RMB 6.8258 to US$1.00. No representation is intended to imply that the Renminbi amounts could have been, or could be, converted, realized or settled into U.S. dollars at that rate on March 31, 2010 or at any other date. The percentages stated in this press release are calculated based on Renminbi amounts.

USE OF NON-GAAP FINANCIAL MEASURES

The Company has included in this press release certain non-GAAP financial measures, including certain line items presented on the basis that the accounting impact of the adoption of ASC 815-40 had not been recorded. The Company believes that both management and investors benefit from referring to these non-GAAP financial measures in assessing the performance of the Company and when planning and forecasting future periods. Readers are cautioned not to view non-GAAP financial measures on a stand-alone basis or as a substitute for GAAP measures, or as being comparable to results reported or forecasted by other companies, and should refer to the reconciliation of GAAP measures with non-GAAP measures also included herein.

SAFE HARBOR STATEMENT  

This press release contains forward-looking statements. These statements constitute "forward-looking" statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and as defined in the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements include 2Q and full-year 2010 estimates for PV product shipments, ASPs, production capacities and other results of operations.  Forward-looking statements involve inherent risks and uncertainties and actual results may differ materially from such estimates depending on future events and other changes in business climate and market conditions.  Solarfun disclaims any obligation to update or correct any forward-looking statements.

About Solarfun

Solarfun manufactures silicon ingots, wafers, PV cells and PV modules and provides PV module processing services to convert PV cells into PV modules. Solarfun produces both monocrystalline and multicrystalline silicon cells and modules. Solarfun sells its products through third-party distributors, OEM manufacturers and directly to system integrators. Solarfun was founded in 2004 and its products have been certified to TUV and UL safety and quality standards.

SOLF-G

(1) All non-GAAP numbers used in this press release exclude the accounting impact from the adoption of ASC 815-40, which relates to the accounting treatment for the convertible bonds.   Please refer to the attached financial statements for the reconciliation between the GAAP and non-GAAP financial results.  

SOURCE Solarfun Power Holdings Co., Ltd.