China Sunergy Co., Ltd. (CSUN), a solar cell manufacturer in China, reported better than expected second quarter financial results this morning. Revenues rose to $111.6 million, an increase of 98.6% year-over-year and 44.9% sequentially. Net income was $3.1 million, or 8 cents per ADS, compared to a net loss of $3.5 million for the same period last year, and an improvement of 520% sequentially from $0.5 million. Analysts were looking for earnings of 3 cents per ADS on revenues of $94.7 million.

“I am pleased to report another quarter during which we have grown revenues, improved margins and strengthened our balance sheet,” said Dr. Allen Wang, CEO of China Sunergy. “The important steps we have taken over the past year to improve operational efficiency and develop market leading products are beginning to show genuine improvements to our bottom line and this gives me confidence that we are better positioned than ever for future growth. Although we managed to improve margins during the first half of the year, we still face a number of potential challenges in the second half, in particular wafer costs and wafer quality. Despite these challenges I am confident that our improving supply pipeline, declining wafer costs, and higher conversion efficiencies, will strengthen our gross margin from the end of this year and into 2009.”

The company forecasts a slight improvement in financial metrics in the third quarter. Average selling price (ASP) per watt is expected to be $3.40 – $3.50, compared to $3.37 per watt in the second quarter. Production volume is expected to be 35-37 MW, vs. 35 MW in Q2. Profit margin, which was 10.6% during the second quarter, is expected to remain in a range of 9-11%.

Wafer costs are the biggest concern in the near term. Wafer costs per watt of $2.79 rose 19% year-over-year and account for 91.2% of total production costs of $3.06 per watt. “Our contract with REC will help us to reduce overall wafer costs from 2009, we remain cautious about the overall market outlook for wafer prices in the second half of this year,” said Kenneth Luk, CFO of China Sunergy. “However, the expected increase in high efficiency cell production will enable us to at least partially offset any increase in wafer cost”.

Shares of CSUN closed at $9.93 yesterday and have traded in a 52-week range of $4.83 – $11.60. Shares are bid 13% higher in early extended trading at $11.30. With 39.9 million ADS outstanding, CSUN has a market cap of $396 million at yesterday’s closing price. Several Chinese solar companies, including LDK, CSIQ, SOL, and STP, have reported earnings recently that have surprised to the upside. The entire sector has responded positively as a result. Solarfun (SOLF) is the last significant member of the group to report, due next Wednesday morning. Shares of SOLF have already begun a pre-earnings run-up in heavy and extremely volatile trading.

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