Question-and-Answer Session
Operator
(Operator Instructions) Your first question comes from Ping Luo - Global Hunter Securities.
Ping Luo - Global Hunter Securities
For this quarter essentially we are seeing lower gross margin and higher operating expenses. I want to know if going forward are we seeing this margin to continue or is there any operating expenses that is only Korean this quarter that will not be recurring in the coming quarters. My question is that, whether you will continue to be at such a margin going forward?
Li Jie [Interpreted]
Okay, there’s a few things here; first is the gross margin. In the third quarter, we continue to experience the high raw material price, followed by the second quarter, given somewhat our raw material inventory we purchased. Actually it was purchased in the second quarter, but now we are coming towards the end of those material and entering fourth quarter generally the steel price has been coming down. So, it’s benefiting us going forward. So, fourth quarter our cost of goods sold should be lower and gross margin will be higher than the third quarter.
On the expense side, in response to the market, we increased our marketing effort in the third quarter, so that increased our overall selling expenses in the third quarter. Also we don’t believe we will continue to have such high marketing expenses in the fourth quarter, so in terms of marketing and selling expenses we should start coming down as well.
Also in the third quarter, we have higher account receivables. According to the U.S. GAAP, we incurred some of the bad debt provisions that also go into our G&A. We are looking forward to collect those receivables in the fourth quarter and we are confident we will be able to collect that and with that we should be able to lower our operating expenses. So, operating margin will be improved in the fourth quarter as well.
Also in terms of steel price, to just gives you a more color on the apple-to-apple comparison, in the third quarter 2008 compared with the third quarter of 2007, the steel price has gone up more than 50%. Also steel is one of the key raw materials of our products, which account for 20% of our cost of goods sold, so you can do the math with such a high steel price. Our cost has gone up more than 10%, so the recent price decline on the steel price is definitely benefiting us. Coming into the fourth quarter, we should see a better gross margin.
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