China Sunergy Announces Second Quarter 2011 Financial Results

NANJING, China, August 19, 2011 -

- Missed Shipment Guidance, but Prospects in Emerging Markets Bright

China Sunergy Co., Ltd. (NASDAQ: CSUN) (”China Sunergy” or “The Company”), a specialized solar cell and module manufacturer, today announced its financial results for the second quarter ended June 30, 2011. The results reflected lower quarterly shipments, but slightly higher gross margins compared to the most recent guidance provided by the Company.

Second Quarter 2011 Financial Highlights(1)

• Total revenue was US$144.0 million, a 22.4% increase over Q2 2010 but a 13.1% sequential decrease from Q1 2011.
• Shipments totaled 89.3 MW (87.4 MW of which were solar modules) in the second quarter, representing an 8.9% decrease over Q1 2011.
• Average selling price (ASP) per watt for the Company’s solar modules was US$1.64 per watt.
• Gross profit decreased to US$3.7 million, a decrease of 84.1% over Q2 2010 and a decrease of 79.2% over Q1 2011.
• Gross margin was 2.6%. In-house gross margin related to modules produced with the Company’s in-house cells was 6.1%.
• Net losses were US$16.9 million, and net margin was negative 11.7%.  
• Net loss per ADS was US$0.42 on both basic and diluted basis, compared to a net income of US$0.09 per ADS on both basic and diluted basis in the first quarter of 2011 and net income per ADS of US$0.34 on basic and US$0.33 on diluted basis in the second quarter of 2010.
• Operating cash inflow in the second quarter was US$37.3 million. As of June 30, 2011, the Company had cash and cash equivalents of US$117.4 million.

    (1) Note that Q2 2011 financial results are not entirely comparable to Q2
    2010 due to the November 2010 acquisition of two solar module companies.

Technological, Operational and Business Highlights in Second Quarter

• Capacity expansion: China Sunergy announced in late June that its subsidiaries China Sunergy (HK) Co., Ltd. and China Sunergy (Nanjing) Co., Ltd would invest RMB1.8 billion (approximately US$282 million) in a 1GW solar cell expansion project in Yangzhou, Jiangsu Province; this plant will produce high efficiency Quasar cells.  The first batch of 500MW solar cell production lines is expected to be commercialized by the end of the first half of 2012.  
• Quasar cells in production: The pilot line for Quasar cells, a new kind of P-type cell produced on average P-type wafers started daily production at China Sunergy’s Nanjing R&D Center in early June 2011; daily production reached 3000 pieces/day in July and is ramping up rapidly. The highest batch average efficiency rate maintained our previously reported level of 18.6% in June as we scaled up production.
• Indian market entry: In June 2011, China Sunergy entered into a 13MW supply contract with Visual Percept Solar Projects Private Limited, a solar project developer established to help India’s National Solar Mission. Visual Percept is part of the well-known Enam Group in India.

Mr. Stephen Cai, CEO of China Sunergy, commented: “Our second quarter results, while disappointing, marked a turning point for China Sunergy, which expects a significant rebound in the second half of 2011. The focus of the Company in the second quarter was on diversifying beyond Europe and into new geographic markets, especially the United States and India, but the results from this strategic expansion will not be reflected in our financial performance until the second half of this year. Likewise, our capacity expansion and technological improvements represent a deliberate attempt to plan ahead for future demand in emerging solar markets such as the U.S., India, and our home country of China. We are investing now in our long-term future.”

Second Quarter 2011 Financial Results in Detail

Total Revenue and Shipments

For the second quarter of 2011, revenue amounted to US$144.0 million, a decrease of 13.1% over the first quarter of 2011. Revenue from module sales amounted to US$142.9 million and accounted for 99.2% of total revenue. Shipments for the second quarter were 89.3 MW, including 87.4 MW of solar modules. The decline in revenue was partially attributed to falling ASPs and partially attributed to lower quarterly shipments. As of June 30, 2011 the Company had 11.2 MW of shipments in transit; these sales were recognized in July. It is for this reason that the Company did not meet the low end of its revised shipment guidance of 100 MW for the quarter.

Gross Profit and Gross Margin

Gross profit for the second quarter was US$3.7 million, representing a sequential decrease of 79.2%. Gross margin was 2.6% for the second quarter of 2011, higher than the revised guidance of 1% partially because of later delivery of the 11.2 MW mentioned above which was sold at an ASP of $1.43. A number of short term factors, including a higher proportion of higher-cost inventory in second quarter shipments, an increase in non-silicon costs, and a faster than expected drop in solar module ASP all contributed to the low margin levels.

Average Selling Price

Blended module ASP during the second quarter was US$1.64 per watt, declining from US$1.74 per watt in the first quarter 2011.

Costs

In the second quarter of 2011, blended wafer costs were US$0.79 per watt, representing a sequential decrease of 14.1%. The prices of polysilicon and wafers are expected to continue declining in the third quarter. Non-silicon costs for cells and modules for the second quarter of 2011 were US$0.27 and US$0.32 per watt respectively.

Operating Expense, Operating Profit/Loss and Net Income/Loss

SG&A expenses in the second quarter of 2011 were US$13.5 million, compared to US$8.5 million in the first quarter of 2011. The increase was primarily due to a quarter-on-quarter increase of US$2.1 million in sales and marketing expenses, related mainly to the development of new markets. In addition, the Company recorded US$1.8 million of bad debt expense in association with certain doubtful accounts receivables.

Operating expenses were US$15.1 million for the second quarter of 2011, representing 10.5% of total revenue, and increasing by 54.1% over first quarter of 2011. Operating expenses account only for 5.9% of total revenue for the first quarter of 2011. This increase is in line with the significant increase in SG&A expenses.

For the second quarter of 2011, loss from operations was US$11.3 million and net loss was US$16.9 million.

Inventory

Inventories at the end of the second quarter of 2011 reached US$98.9 million, including about US$7.0 million in provisions. Inventory levels decreased 20.3% over the first quarter of 2011.

Cash Flow

The Company generated operating cash inflow of US$37.3 million, largely due to the accompanying 20.3% decrease in inventory and 14.3% decrease in accounts receivable during the quarter.

Additional Company Updates Subsequent to Q2 2011

• U.S. Office Opening: On July 14, 2011, China Sunergy launched its U.S. headquarters, China Sunergy (US) Clean Tech Inc., in San Francisco. San Francisco Mayor Edwin M. Lee, China Sunergy Chairman Mr. Tingxiu Lu, and China Sunergy CEO Stephen Cai officially opened the new office at an opening ceremony and a reception on that day.  
• New U.S. CEO: China Sunergy appointed Mr. Willis He as its new U.S. CEO.  He will manage the U.S. operations from the new office in San Francisco. He will lead local recruitment efforts, pursue bankability status with U.S. banks, investigate U.S. manufacturing and project development opportunities, and be the public face of the Company in America.
• India Market Exploration: China Sunergy supplied 30MW of solar modules to Indian markets in July and August. The Company is expected to supply more solar modules to India later this year.
• China Development Bank loan: In August 2011, China Sunergy signed US$160 million in financing and credit facilities with China Development Bank to help fund its growth. These facilities, including a combination of both long-term and short-term loans, will be used in cell capacity expansion and as working capital.  
• Establishment of China Sunergy Luxembourg S.A.: In August 2011, the Company established China Sunergy Luxembourg S.A. through acquisition of a shell company in order to explore potential future investments in solar projects throughout Europe.

REC Dispute

After an oral hearing, the Halogaland Court of Appeal on June 30, 2011, ruled in favor of China Sunergy and determined that REC Wafer was not, and had never been a party to the contract.

In parallel to the main dispute China Sunergy has been granted an injunction with regard to a $50 million bank guarantee raised according to the contract between China Sunergy and the dissolved REC Sitech AS. The Court of Appeal has decided that the injunction shall remain in force until the Court of Appeal has passed a judgment in the main case. As the court now has ruled in favor of China Sunergy in the main case there will be no need for a further injunction.

REC Wafer has stated they will appeal the decision made by the Court of Appeal.

2011 Third Quarter Guidance

The Company believes that third quarter shipments will be 140MW to 160MW. The Company expects its gross margin for the third quarter of 2011 to be between 4% and 5%, with an in-house margin of 6% to 7%.

For the full year 2011 guidance, the Company now expects its solar module shipments to be between 470MW and 500MW.

Conference Call

China Sunergy will host an earnings conference call on Friday, August 19, at 8:00 a.m. Eastern Time (Friday, August 19 at 8:00 p.m. Beijing/Hong Kong time). The management team will be on the call to discuss the Company’s results, operating performance and business outlook and to answer questions.

To access the conference call, please dial:

    United States toll-free: +1.800.320.2978
    International:           +1.617.614.4923
    China:                   +86.400.881.1629 / +86.400.881.1630
    Hong Kong:               +852.3002.1672
    Singapore:               +65.6823.2164

Please ask to be connected to Q2 2011 China Sunergy Co., Ltd Earnings Conference Call and provide the following passcode: 1877 3947.

China Sunergy will also broadcast a live audio webcast of the conference call. The broadcast will be available by visiting the “Investor Relations” section of the Company’s web site at www.chinasunergy.com/

Following the earnings conference call, an archive of the call will be available by dialing:

    United States toll-free: +1.888.286.8010
    International:           +1.617.801.6888

The passcode for replay participants is 8191 6273. The telephone replay also will be archived on the “Investor Relations” section of the Company’s web site for seven days following the earnings announcement.

About China Sunergy Co., Ltd.

China Sunergy Co., Ltd. is a specialized manufacturer of solar cell and module products in China. China Sunergy manufactures solar cells from silicon wafers, which utilize crystalline silicon solar cell technology to convert sunlight directly into electricity through a process known as the photovoltaic effect, and assembles solar cells into solar modules. China Sunergy sells these solar products to Chinese and overseas module manufacturers, system integrators, and solar power systems for use in various markets. For more information, please visit our website at www.chinasunergy.com/.

    Investor and Media Contacts:
    China Sunergy Co., Ltd.
    Elaine Li
    Phone: +86.25.5276.6696
    Email: Elaine.li@chinasunergy.com

    Brunswick Group
    Hong Kong                         Hong Kong
    Ginny Wilmerding                  Nina Zhan
    Phone: +852.3512.5000             Phone: +852.3512.5000
    Email: csun@brunswickgroup.com    Email: csun@brunswickgroup.com

Safe Harbor Statement

This announcement contains forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical facts in this announcement are forward-looking statements. These forward-looking statements are based on current expectations, assumptions, estimates and projections about the Company and the industry, and involve known and unknown risks and uncertainties, including but not limited to, the Company’s ability to raise additional capital to finance the Company’s activities; the effectiveness, profitability, and the marketability of its products; litigations and other legal proceedings; the economic slowdown in China and elsewhere and its impact on the Company’s operations; demand for and selling prices of the Company’s products, the future trading of the common stock of the Company; the ability of the Company to operate as a public Company; the period of time for which its current liquidity will enable the Company to fund its operations; the Company’s ability to protect its proprietary information; general economic and business conditions; the volatility of the Company’s operating results and financial condition; the Company’s ability to attract or retain qualified senior management personnel and research and development staff; future shortage or availability of the supply of raw materials; impact on cost-competitiveness as a result of entering into long-term arrangements with raw material suppliers and other risks detailed in the Company’s filings with the Securities and Exchange Commission. The Company undertakes no obligation to update forward-looking statements to reflect subsequent occurring events or circumstances, or to changes in its expectations, except as may be required by law. Although the Company believes that the expectations expressed in these forward looking statements are reasonable, they cannot assure you that their expectations will turn out to be correct, and investors are cautioned that actual results may differ materially from the anticipated results.

The following financial information is extracted from the Company’s condensed consolidated financial statements for the respective periods.

     China Sunergy Co., Ltd.
     Unaudited Condensed Consolidated Income Statement Information
     (In US$ '000, except share and per share data)

                                         For the 3 months ended
                              Jun 30, 2011    Mar 31, 2011    Jun 30, 2010

     Sales to third parties        144,004         159,231          42,060
     Sales to related parties           15           6,424          75,553
     Total sales                   144,019         165,655         117,613
     Cost of goods sold           (140,304)       (147,886)        (94,282)
     Gross profit                    3,715          17,769          23,331
     Operating expenses:
     Selling expenses               (5,507)         (3,427)         (1,069)
     General and
     administrative expenses        (8,035)         (5,099)         (3,722)
     Research and development
     expenses                       (1,514)         (1,264)           (731)
     Total operating expenses      (15,056)         (9,790)         (5,522)
     Income(loss) from
     operations                    (11,341)          7,979          17,809
       Interest expense             (3,776)         (3,220)         (2,142)
       Interest income                 508             528             339
       Other income/(expenses),
        net                           (510)          4,670          (1,619)
       Changes in fair value of
        derivatives                 (1,870)         (5,713)            867
     Income(loss) before
     income tax                    (16,989)          4,244          15,254
     Income tax
     benefit(expense)                   72            (743)         (1,426)

     Net income(loss)              (16,917)          3,501          13,828

     Net income(loss) per ADS
     Basic                          ($0.42)          $0.09           $0.34
     Diluted                        ($0.42)          $0.09           $0.33

     Weighted average ADS
     outstanding
     Basic                      40,116,876      40,116,876      40,116,876
     Diluted                    40,116,876      40,117,760      43,694,111

     China Sunergy Co., Ltd
     Unaudited Condensed Consolidated Balance Sheet Information
     (In US$ '000, except share and per share data)

                                          Jun 30, 2011      Dec 31, 2010
     Assets
     Current Assets
       Cash and cash equivalents               117,437           106,468
       Restricted cash                         105,981            84,988
       Accounts receivable, net                133,877            65,581
       Other receivable, net                    39,980            22,775
       Income tax receivable                     2,280                 -
       Inventories, net                         98,908            72,335
         Advance to suppliers, net              11,793             8,503
         Amount due from related parties        18,158            42,578
         Current deferred tax assets             6,814             3,941
         Other current assets                        -               428
     Total current assets                      535,228           407,597
     Property, plant and equipment, net        127,868           111,629
     Prepaid land use rights                    10,896            11,042
     Deferred tax assets                         3,118             3,118
     Intangible assets                           6,253             7,626
     Goodwill                                   14,806            14,806
     Restricted cash-collateral account          8,774            18,522
     Other long-term assets                      3,181             3,739
     Total assets                              710,124           578,079

     Liabilities and equity
     Current liabilities
       Short-term bank borrowings              238,134           139,530
       Accounts payable                         74,893            51,646
       Notes payable                            57,986            31,634
       Accrued expenses and other current
        liabilities                             21,637            14,287
       Amount due to related parties             2,402             2,463
       Income tax payable                            -             6,162
       Current deferred tax liability              341               654
     Total current liabilities                 395,393           246,376
     Collateral account payable                  8,773            18,522
     Convertible bond payable                   44,000            44,000
     Long-term debt                             30,904            30,199
     Accrued warranty costs                     11,507             8,631
     Other liabilities                           3,451             3,542
     Total liabilities                         494,028           351,270

     Equity:
     Ordinary shares: US$0.0001 par
      value; 267,287,253 shares
      issued outstanding as of June 30,
      2011 and December 31, 2010.                   27                27
     Additional paid-in capital                185,422           185,475
     Accumulated profit(deficit)                 (129)            13,286
     Accumulated other comprehensive
      income                                    30,776            28,021
     Total equity                              216,096           226,809
     Total liabilities and equity              710,124           578,079

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