China Sunergy Co., Ltd. (NASDAQ: CSUN) (“China Sunergy” or “the Company”), a specialized solar cell and module manufacturer, announced its financial results for the third quarter ended September 30, 2013.
Mr. Stephen Cai, CEO of China Sunergy, commented, “As anticipated, our third quarter shipment volume slowed and gross margin decreased sequentially, due to the Company’s temporarily constrained working capital that required us to take on more OEM business.”
“Encouragingly, the tightened credit environment in China has improved in the fourth quarter, and we are once again able to secure additional working capital for operations and other initiatives. Additionally, we are glad to see a continuing positive momentum in the global markets, especially in Asia where favorable government policies and plans fuel strong demand growth.”
Third Quarter 2013 Financial Highlights
Total revenue was US$57.1 million, a decrease of 20.6% from US$71.9 million in the second quarter of 2013.
Shipments totaled 112.7MW, a decrease of 10.8% (13.7MW) from 126.4MW in the second quarter of 2013. Module shipments including 21.8MW module processed under OEM arrangements were 112.2MW, or 99.6% of total shipments.
Average selling price (“ASP”) for the Company’s solar modules, excluding those processed under OEM arrangements, was US$0.62 per watt, a decrease of 1.6% from US$0.63 in the second quarter of 2013.
Conversion cost for cells was US$0.15 per watt, unchanged from the prior quarter. Conversion cost for modules was US$0.22 per watt, an increase of two cents from US$0.20 in the second quarter of 2013.
Gross profit was US$1.7 million, and gross margin was 3.0%, compared with gross profit of US$6.7 million and gross margin of 9.3% in the second quarter of 2013. Non-GAAP  gross profit was US$2.6 million, and Non-GAAP gross margin was 4.6%.
N et loss attributable to ordinary shareholders was US$13.2 million, compared with US$1.4 million in the second quarter of 2013. Non-GAAP net loss attributable to ordinary shareholders was US$11.0 million.
N et loss attributable to ordinary shareholders per ADS was US$0.99, compared with US$0.11 in the second quarter of 2013. Non-GAAP net loss attributable to ordinary shareholders per ADS was US$0.83.
Operating cash inflow was US$16.4 million, compared to net cash inflow of US$6.3 million in the second quarter of 2013.
Cash, cash equivalents and restricted cash totaled US$216.4 million, as of September 30, 2013. China Sunergy’s Non-GAAP financial measures are its corresponding GAAP financial measures as adjusted by excluding costs related to certain charges, including inventory and bad debt provisions. Please refer to “Reconciliations of Non-GAAP Financial Measures to the Nearest Comparable GAAP Measures” at the end of this press release.
Third Quarter 2013 Financial Review
Total Revenue and Shipments
For the third quarter of 2013, total revenue was US$57.1 million, a decrease of 20.6% from the second quarter of 2013, primarily due to a combination of lower shipments and ASP.
Total shipments for the third quarter of 2013 were 112.7MW, a decrease of 10.8% from the second quarter of 2013. Including module processed under OEM arrangements, Asia contributed 63.2% of the total shipment in the third quarter of 2013, with India, China and Japan accounting for 24.0%, 23.1%, and 16.1% of total revenue, respectively.
Module ASP for the third quarter was US$0.62 per watt, which decreased by one cent or 1.6% compared with that of the last quarter. The lower module ASP was primarily due to increased shipments to lower-priced regions during the quarter.
Wafer and Conversion Costs
Blended wafer costs in the third quarter of 2013 were US$0.22 per watt, which was one cent or 4.3% lower than those of the last quarter. Conversion costs of cells and modules manufactured in the third quarter of 2013 were US$0.15 and US$0.22 per watt, respectively. The increase of conversion cost of modules was mainly due to higher conversion cost for the modules produced in the Company’s Turkey plant, which commenced mass production in the third quarter.
Gross Profit and Gross Margin
Gross profit for the third quarter was US$1.7 million, and gross margin was 3.0%, compared to gross margin of 9.3% for the second quarter of 2013. Due to a combination of higher solar module inventory and lower ASP, inventory provision increased to approximately US$0.9 million from US$12,000 in the prior quarter. Excluding the inventory provision, non-GAAP gross profit was US$2.6 million, and non-GAAP gross margin was 4.6% in the third quarter of 2013.
The sequential decrease in gross margin in the third quarter of 2013 was primarily attributable to decreased ASP of solar modules, increased shipment of OEM business, increased inventory provision, and higher conversion cost.
Operating Expense, Operating Profit/Loss and Net Income/Loss
Operating expenses increased to US$14.8 million in the third quarter of 2013, from US$11.2 million in the second quarter of 2013. The increase in operating expenses was mainly attributable to an increase of US$3.4 million in general and administrative expenses, which included bad debt provisions of US$1.3 million in the third quarter of 2013, compared with a bad debt reversal of US$2.0 million in the second quarter of 2013.
Loss from operations increased to US$13.1 million in the third quarter of 2013, compared to US$4.6 million in the second quarter of 2013.
Correspondingly, net loss attributable to ordinary shareholders was US$13.2 million and non-GAAP net loss attributable to ordinary shareholders was US$11.0 million for the third quarter of 2013.
Amount Due from Related Parties
Amount due from related parties totaled US$99.8 million as of September 30, 2013, a decrease of US$32.3 million compared to US$132.1 million as of June 30, 2013. The decreased balance was mainly attributable to the Company’s collection of short-term advances.
During the second quarter of 2013, the Company provided short-term interest-free advances totaling US$44.3 million to one of the related companies, CEEG Nanjing Semi-Conductor Co. Ltd (“CEEG Semi-Conductor”). The short-term interest-free advances were provided to address liquidity pressure on CEEG Semi-Conductor and China Electric Equipment Group Co., Limited (“CEEG Group”), and in turn preserve China Sunergy’s credit and liquidity, as CEEG Group guaranteed most of the Company’s bank loans. As of October 30, 2013, CEEG Semi-Conductor had repaid all of the short-term interest-free non-trading advances.
Amount Due to Related Parties
Amount due to related parties totaled US$12.5 million as of September 30, 2013, a decrease of US$13.3 million compared to US$25.8 million as of the end of the second quarter.
Inventories at the end of the third quarter of 2013 totaled US$65.6 million, an increase of US$19.1 million from the prior quarter, driven by increased purchase of raw materials and higher finished goods balance primarily due to increased production in September.
Cash and Cash Flow
As of September 30, 2013, the Company had cash and cash equivalents of US$31.5 million, and restricted cash of US$184.9 million.
Operating cash inflow increased to US$16.4 million for the third quarter of 2013, compared with US$6.3 million in the second quarter of 2013, primarily driven by lower account receivables, higher advances from customers, and higher account payables.
Additional Company Updates Subsequent to Third Quarter 2013
China Sunergy’s Head of Research Wins 2013 ACAA/IELTS Australia China Alumni Awards: Dr. Aihua Wang, the Company’s Head of Research and Vice President received the 2013 ACAA/IELTS Australia China Alumni Awards for Research and Innovation. The award honors outstanding alumni of Australian universities and colleges, who have made significant contributions in their chosen field and are currently based in China.
China Sunergy’s First Samples of High-Efficient QSAR II Module Passed Chemitox PID Test: the Company’s first samples of its new high-efficient QSAR II modules were successfully tested according to the Chemitox PID (potential-induced degradation) standards. Initial test shows that QSARII modules have the potential to not only fulfill the IEC 62804 standard but also can withstand the harshest simulated PID test conditions by Chemitox laboratory.
China Sunergy’s “Made in Turkey” Modules Successfully Deployed: the first project that deploys the Company’s Turkey-produced modules was installed by KosiFranken solar on top of the Asfa school in Istanbul’s Uskudar district. The 66 KW system targets to produce up to 75 MWh per year, out of which up to 70% will be connected to the grid.
Mr. Cai continued, “We are thrilled to witness the recent positive policies and incentives for the solar industry enacted by China’s central and provincial governments that boosted local banks’ confidence and support. At the same time, China Sunergy is progressively moving back on track, as we secure additional working capital and further enhance operations through higher production efficiency and more disciplined cost and expense controls. As such, we are optimistic that China Sunergy will capture additional market opportunities and gain greater operational scale.”
Reflecting its improved working capital and stronger-than-expected OEM shipments, the Company estimates that the total shipment for the fourth quarter of 2013 will range from 158MW to 168MW, including approximately 40MW of solar module processed under OEM arrangements. Gross margin for the fourth quarter of 2013 is expected to be mid-single digit.
Correspondingly, the Company raised its full-year 2013 total shipment estimates to range between 500MW to 510MW, from the prior range of 440MW to 480MW.
This guidance is based on the current market conditions and reflects the Company’s current and preliminary estimates of market and operating conditions and customer demand, which are all subject to change.