China Sunergy Co., Ltd. (China Sunergy), a China-based solar cell manufacturer, has reported total net sales of $37.3 million for the first quarter of 2009, compared with the total net sales of $77 million in the year-ago quarter. It has also reported a net loss of $15.9 million for the first quarter of 2009, compared with the net income of $545,000 in the year-ago quarter.

First Quarter Financial Results:

Revenues were $37.0 million, a 14.4% decrease compared to the fourth quarter of 2008. Revenues generated from solar cell sales were $34.4 million, representing a 15.1% decrease compared to the fourth quarter of 2008.

Gross loss was $8.8 million compared to gross loss of $14.3 million during the fourth quarter of 2008. Accordingly, gross margin was negative 23.7%, compared to negative 33.1% during the fourth quarter of 2008.

Adjusted non-GAAP net loss was $13.2 million, which excludes share-based compensation and a change in the fair value of foreign currency derivatives. This compares to non-GAAP net loss of $17.1 million the fourth quarter of 2008. GAAP net loss was $15.9 million.

Adjusted non-GAAP net loss per ADS was $0.33 on both basic and diluted basis, which excludes share-based compensation and a change in the fair value of foreign currency derivatives, compared to a non-GAAP net loss of $0.43 per ADS in the fourth quarter of 2008. GAAP net loss per ADS was $0.40 on both basic and diluted basis.

Inventory was reduced during the quarter to $29.6 million from $59.1 million. The balance of inventory provision was $8.0 million at end of this quarter, a decrease of $5.8 million compared to the balance of $13.8 million at end of last quarter. The decline in inventory will lessen the future impact of the high cost wafer which was purchased in 2008.

Operating cash flow in the first quarter was positive $7.9 million.

Operational Highlights

Shipments in the first quarter amounted to around 23.9MW, representing a 69.5% increase sequentially and a very slight 0.4% decrease on a year-over-year basis.

Shipments of high efficiency cells (defined as any cells with a conversion efficiency rate of over 17%) during the first quarter of 2009 amounted to 8.9MW, or 37.2% of total solar cell shipments, compared with 6.5MW, or 46.1% of total solar cell shipments, during the fourth quarter of 2008. Although high-efficiency cell sales fell as a percentage of overall sales, among mono-crystalline customers the shipment of high-efficiency cells increased from 55.6% to 58.2%.

The company entered into several important sales and framework agreements, expanding its diverse client base to include asola Advanced and Automotive Solar System GmbH, and Solarwatt AG in Germany, Ajit Solar Pvt Ltd. in India and Solarmax Technology Inc. in the United States. While Europe will remain a key market for China Sunergy, with its European headquarters in Germany and an enhanced sales force, the company is aggressively entering new markets to benefit from developing interest in solar power solutions.

Recently, the company submitted a rooftop solar project application for China’s national rooftop solar subsidy, and signed multiple sales agreements with Chinese partners who have submitted rooftop solar project applications. The total volume of these applications is around 17.6MW.

Allen Wang, CEO of China Sunergy, remarked: As anticipated, the first quarter was another challenging period for China Sunergy given the impact of the economic climate in which we are operating. Although we reported a 69.5% sequential quarterly increase in solar product shipments to a more diverse set of customers, our existing inventory of high-cost wafers prevented us from taking full advantage of reduced upstream costs while our ASPs fell, leading to severe gross margin pressure and a net loss for the quarter.

However, China Sunergy did demonstrate progress compared to last quarter by reducing our negative gross margins and net loss. As the first quarter progressed, we began to purchase high-quality, lower cost wafers at spot market pricing. The cells we manufactured utilizing these new wafers generated positive gross margins, which began to partly offset the impact of the more expensive wafers in our inventory. As we continue to exhaust our inventory of high-cost wafer and further enjoy the benefits of reduced wafer pricing, we anticipate this recovery will continue and we expect to report positive gross margins in the second quarter. Although we are facing significant headwinds, we have begun to receive positive indications regarding the strength of our results over the coming quarters and 2009.

First Quarter 2009 Financial Review

Revenues, Shipment and Production

During the first quarter of 2009, revenues decreased 14.4% sequentially to $37.0 million. Sales from solar cells, modules, cells processed under OEM arrangements and other sales accounted for 93.0%, 0.8%, 3.5% and 2.7% of total revenues, respectively.

Shipments, including 2.8MW of solar cells processed under OEM arrangements, amounted to around 23.9MW, compared to 24.0MW during the first quarter of 2008 and 14.1MW during the fourth quarter of 2008.

The percentage of solar cell sales in overseas markets was 24.2% of total solar cell sales in the first quarter of 2009 compared to 37.4% and 56.4% in the first quarter of 2008 and the fourth quarter of 2008, respectively. The decline in overseas orders from the fourth quarter was largely due to delayed orders from our European module customers during the first quarter.

ASP, Gross Profit/Loss & Gross Margins

Blended ASP for the first quarter of 2009 declined from $2.97 per watt in the previous quarter to $1.64 per watt. The blended ASP for the first quarter of 2008 was $3.23. The rapid decline in ASP, combined with high levels of inventory, contributed to a gross loss for the quarter of $8.8 million, with a blended gross margin of negative 23.7%, as compared to the negative 33.1% margin in the previous quarter. This was largely a result of the company’s purchases of less costly, high-quality wafers on the spot market towards the end of the quarter. These less expensive wafers resulted in cells that generated positive gross margins, slightly offsetting the impact of the more expensive wafers in inventory.

Wafer Costs

In the first quarter of 2009, blended wafer cost, a part of production costs, declined to $1.61 per watt compared to $2.74 per watt in the fourth quarter of 2008. This blended cost included the remaining wafer inventory which was purchased at higher cost in 2008. As existing inventory is consumed, the company’s procurement flexibility allowed it to begin to purchase more raw materials on the spot market, reducing blended wafer cost.

Wafer cost still account for a large portion of overall manufacturing costs, but continued to decline as a percentage due to lower wafer pricing in the first quarter. Wafer cost per watt as a percentage of total production costs per watt declined from 86.3% in the fourth quarter of 2008 to 81.4% in the first quarter of 2009.

Other production costs, or conversion costs, for the quarter were $0.37 per watt, compared with $0.43 per watt in the fourth quarter of 2008. The decline from the fourth quarter was largely due to effective non-wafer cost controls.

SG&A, Operating Profit/Loss and Net Income/Loss

SG&A expenses in the first quarter of 2009 were $6.1 million, compared to $4.4 million in the first quarter of 2008 and $6.3 million in the last quarter. G&A expenses in the first quarter included $1.4 million for bad debt provision on account receivables.

Loss from operations was $16.4 million for the first quarter, compared to operating loss of $21.0 million for the fourth quarter of 2008. Operating income for the first quarter of 2008 was $2.2 million.

Interest expense for the first quarter 2009 was $1.4 million, compared to $1.9 million for the first quarter of 2008 and $2.4 million for the fourth quarter of 2008, respectively.