Hanwha SolarOne, a vertically integrated manufacturer of silicon ingots, wafers and PV cells and modules in China, on Friday reported its unaudited financial results for the three months ended September 30.
Mr. Seong-woo Nam, chairman and CEO of Hanwha SolarOne, said: "Our third-quarter results reflect the prevalent industry trends in place: record shipments due to strong demand, lower average selling prices reflecting an increasing proportion of business in China and the negative impact of a strong U.S. dollar in relation to the yen and euro.
"Our revenues improved over 8% quarter-to-quarter in spite of lower pricing. We achieved more than a 3% reduction in production costs quarter-to-quarter, which was not fully reflected in profitability due to the more rapid decline in product pricing.
"Noticeable progress was made in penetrating the large and growing domestic market in China.
"Shipments to China reached 30% of our total volume, over a 400% quarter-over-quarter gain. We signed several substantial module supply agreements and have increased our pipeline of potential downstream projects. We continued to maintain a strong presence in the important Japanese market."
Chairman Nam added: "There were a number of accomplishments on the manufacturing front. We began commercial production of our next generation S Series modules, fully automated a number of existing module lines, and made significant progress towards installing up to 500 MW of new capacity for both cells and modules.
"We continue to upgrade the manufacturing equipment at our ingot and wafer plant, which has improved efficiency and lowered costs.
"The outlook for the fourth quarter is good. We expect a new record in module shipments, stable-to-improving average selling prices due to strong module demand and tight supply, and an increase in the proportion of modules sold to higher-priced markets, such as the EU and U.S.
"We also aim to further reduce manufacturing costs, which should further increase profitability. We also expect to begin development of our first IPP project."
Third quarter results: Total net revenues were RMB 1,198 billion ($195.2 million), an increase of 8.2% from RMB1.1073 billion in 2Q14, and an increase of 5.5% from RMB1.1351 billion in 3Q13. The increase in total net revenues in 3Q14 compared with 2Q14 was primarily due to higher shipments. Module processing services accounted for approximately 10% of revenues.
PV module shipments, including module processing services, were 373.2 MW, a 9.9% increase from 339.5 MW in 2Q14, and a 17.4% increase from 317.8 MW in 3Q13.
Shipment markets
The company continues to preserve a strong position in the Japanese market this quarter, representing 43% of module shipments worldwide in 3Q14.
Shipments to China increased to almost one-third of shipments in response to strong demand in light of the government's policy change and as a result of the company's heightened focus on this market. We expect this trend to continue in the fourth quarter.
Penetration in the Korean market was sustained with the support of the wider Hanwha Group, accounting for 8% of modules shipped.
Third-quarter shipments to the U.S. declined due to the uncertainty created by ongoing regulatory changes.
Deliveries to Europe were subdued partly due to the weakening of the Euro, as well as continued difficulty caused by the price undertaking mechanism.
In the three months ended September 30, deliveries to Canada and Turkey remained fairly constant at 3% and 2%, respectively.
The company broadened its global footprint by shipping PV modules to 25 countries during 3Q14, including a number of notable new markets.
Shipments to Europe and Africa (EA) contributed 9% of total module shipments, Asia Pacific (AP) accounted for 83% and North America (NA) 8%.
ASP
The average selling price of modules, excluding module processing services, decreased to RMB3.74/W ($0.61/W), from RMB4.17/W in 2Q14 and decreased from RMB4.16/W in 3Q13. This is primarily attributable to a greater percentage of business in China, which has lower market prices.
Gross profit in 3Q14 was RMB81 million ($13.2 million), compared with a gross profit of RMB105.1 million in 2Q14 and a gross profit of RMB57.8 million in 3Q13. The increase in gross profit in 3Q14 was primarily due to higher shipments.
Gross margin was positive 6.8%, compared with positive 9.5% in 2Q14 and positive 5.1% in 3Q13. The decline in gross margins is the result of a lower average selling price.
The blended cost of goods sold (COGS) per Watt, excluding module processing services, was $0.57, representing a 3.4% decrease from 2Q14. The blended COGS takes into account the production cost (silicon and non-silicon) using internally-sourced wafers, and the purchase costs and additional processing costs of externally-sourced wafers and cells.
The company's cost structure improved in light of increased utilization and improved manufacturing efficiencies at our ingot and wafer production facilities, lower polysilicon costs, increased automation, and new product introductions that use fewer raw materials.
Operating loss in 3Q14 was RMB72.8 million ($11.9 million), compared with an operating loss of RMB39.9 million in 2Q14 and an operating loss of RMB132.7 million in 3Q13. Operating margin decreased to negative 6.1% from negative 3.6% in 2Q14 and increased from negative 11.7% in 3Q13.
Operating expenses as a percentage of total net revenues were 12.8% in 3Q14, compared with 13.1% in 2Q14 and 16.8% in 3Q13. The company continues to maintain tight control over operating expenses.
Interest expense was RMB90.5 million ($14.8 million), compared with RMB83.7 million in 2Q14 and RMB89.3 million in 3Q13.
The company recorded a net loss of RMB71 million ($11.6 million), which included a foreign exchange loss and a gain from the change in fair value of derivatives in hedging activities. The company recorded a net gain of RMB37.3 million in 2Q14 and a net gain of RMB40.3 million in 3Q13 for the foreign exchange gain/loss and the gain/loss from change in fair value of derivatives in hedging activities.
Gain from the change in fair value of the conversion feature of the company's convertible bonds was RMB4.4 million ($700,000), compared with a gain of RMB3.4 million in 2Q14 and a loss of RMB29.5 million in 3Q13. This line item has fluctuated, and is expected to continue to fluctuate quarter-to-quarter, based primarily on changes in the company's ADS price. The company has no direct control over the fluctuations.
Net loss attributable to shareholders on a non-GAAP basis was RMB203.7 million ($33.2 million), compared with a net loss attributable to shareholders of RMB54 million in 2Q14 and a net loss attributable to shareholders of RMB401.6 million in 3Q13.
Net loss per basic ADS on a non-GAAP basis was RMB2.23 ($0.36), compared with net loss per basic ADS on a non-GAAP basis of RMB0.59 in 2Q14 and net loss per basic ADS on a non-GAAP basis of RMB4.74 in 3Q13.
Net loss attributable to shareholders on a GAAP basis was RMB234.3 million ($38.2 million), compared with net loss attributable to shareholders of RMB54.8 million in 2Q14 and net loss attributable to shareholders of RMB460.4 million in 3Q13.
Net loss per basic ADS on a GAAP basis was RMB2.56 ($0.42), compared with net loss per basic ADS of RMB0.60 in 2Q14 and net loss per basic ADS of RMB5.44 in 3Q13.
Annualized ROE on a non-GAAP basis was -55.9% in 3Q14, compared with -13.6% in 2Q14 and -88.8% in 3Q13.
Annualized ROE on a GAAP basis was -55.2% in 3Q14, compared with -11.9% in 2Q14 and -86.6% in 3Q13.
Financial position
As of September 30, the company had cash and cash equivalents of RMB877 million ($142.9 million) and negative net working capital of RMB1.5733 billion ($256.3 million), compared with cash and cash equivalents of RMB981.5 million and negative net working capital of RMB1.2047 billion as of June 30.
Total short-term bank borrowings (including the current portion of long-term bank borrowings) were RMB2.9614 billion ($482.5 million) as of September 30, compared with RMB2.9188 billion as of June 30.
As of September 30, the company's convertible bonds were classified as a current liability and totaled RMB492.6 million ($80.3 million). Holders of the convertible bonds have the option to require the company to redeem the notes on January 15.
Since January 1, 2012, the company has been buying back its convertible bonds from time to time. The company has repurchased convertible bonds to the value of approximately $86.4 million out of $172.5 million in face value as of September 30.
As of September 30, the company had total long-term debt of RMB1.5209 billion ($247.8 million), which is comprised of long-term bank borrowings and long-term notes.
The company's long-term bank borrowings are to be repaid in installments until their maturities, which range from one to two years. The company's long-term notes are to be repaid in two years.
Net cash used in operating activities in 3Q14 was RMB247.2 million ($40.3 million), compared with net cash provided in operating activities of RMB130.6 million in 2Q14 and net cash used in operating activities of RMB315.9 million in 3Q13.
As of September 30, accounts receivable were RMB992.1 million ($161.6 million), compared with RMB641 million as of June 30 and RMB744.7 million, as of December 31.
Days sales outstanding (DSO) decreased to 107 days in 3Q14 from 116 days in 2Q14, compared with 125 days in 3Q13.
As of September 30, inventories increased to RMB932.7 million ($152 million) from RMB852.9 million as of June 30 and RMB752.3 million as of December 31. Inventories were increased in preparation for higher shipment volumes. Day's inventory was 72 days in 3Q14 compared with 73 days in 2Q14 and 62 days in 3Q13.
Capital expenditures were RMB129.2 million ($21 million) in 3Q14.
Capacity status
As of September 30, the company had production capacity of 800 MW for ingot and wafer, 1.3 GW for cell and 1.5 GW for module.
The company is on plan to expand cell and module capacities to at least 1.5 GW and 2 GW, respectively, by the end of 2014.
Additional disclosure
On June 8, 2012, we submitted an arbitration request to the Guangzhou Arbitration Commission requiring Guangdong Guo Hua New Energy Investment Co., Ltd., or Guo Hua, owner of a PV project for which we acted as an engineering, procurement and construction (EPC) contractor, to pay a total amount of RMB92 million including, among others, overdue payment of the EPC contract price, accrued interest, damages and legal costs in accordance with the EPC contract.
On August 5, 2012, Guo Hua filed a counterclaim to the Guangzhou Arbitration Commission alleging that we have substantially breached the EPC contract, and Guo Hua requested to terminate the EPC contract and demanded that we pay a total amount of RMB187 million for breach of contract.
On September 11, the Guangzhou Arbitration Commission issued its arbitral award which dismisses Guo Hua's counterclaim for approximately RMB187 million and supports the company's claim for payment of approximately RMB78.2 million plus interests for late payment at the rate of 8.33% per month since December 20, 2010, until the RMB78.2 million is fully paid.
On September 30, a European customer initiated arbitration proceedings against Hanwha SolarOne (Qidong) Co., Ltd., or SolarOne Qidong, a subsidiary of Hanwha SolarOne Co., Ltd., under the rules of the London Court of International Arbitration.
In its initial pleading, the European customer alleged that certain solar modules it purchased from SolarOne Qidong between 2009 and 2011 were defective, claiming total damages of approximately $240 million, comprised of purchase price adjustments and damages, as well as indemnification against any liability arising from the European customer's sale of such modules to end customers.
SolarOne Qidong intends to vigorously defend against the claims.
On November 7, SolarOne Qidong filed its response to the European customer's request for arbitration, denying all liability for the claims asserted and reserving the right to assert any defense or counterclaim it deems appropriate. The arbitral tribunal is currently being constituted.
Business outlook
The company provides the following guidance based on current operating trends and market conditions.
For the fourth quarter the company expects: Module shipments of 400-425 MW.
For the full year, the company expects: Module shipments to be between 1.43 GW and 1.46 GW of which 25-30% will be for PV module processing services and capital expenditures of $80 million largely for the automation of existing manufacturing lines, as well as cell and module capacity expansions
