SOLARFUN POWER HOLDINGS CO., LTD.
As filed with the Securities and Exchange Commission on
December 31, 2007
Registration No. 333-147627
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
Amendment No.2 to
Form F-1
REGISTRATION
STATEMENT
UNDER
THE SECURITIES ACT OF
1933
Solarfun Power Holdings Co.,
Ltd.
(Exact name of registrant as
specified in its charter)
Not Applicable
(Translation of
Registrants name into English)
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Cayman Islands
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3674
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Not Applicable
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(State or other jurisdiction
of
incorporation or organization)
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(Primary Standard Industrial
Classification Code Number)
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(I.R.S. Employer
Identification Number)
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666 Linyang Road
Qidong, Jiangsu Province 226200
Peoples Republic of China
(86-513) 8330-7688
(Address, including zip code,
and telephone number, including area code, of
registrants principal
executive offices)
CT Corporation System
111 Eighth Avenue
New York, New York 10011
(212) 894-8940
(Name, address, including zip
code, and telephone number,
including area code, of agent
for service)
Copies to:
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Alan Seem
Shearman & Sterling LLP
12th Floor East Tower, Twin Towers
B-12 Jianguomenwai Dajie
Beijing 100022, Peoples Republic of China
(86-10)
5922-8000
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James C. Lin
Davis Polk & Wardwell
18th Floor, The Hong Kong Club Building
3A Chater Road
Hong Kong
(852) 2533-3300
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Approximate date of commencement of proposed sale to the
public: As soon as practicable after the
effective date of this registration statement.
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933, check the
following
box. o
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
check the following box and list the Securities Act registration
statement number of the earlier effective registration statement
for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earliest effective registration statement for the same
offering. o
CALCULATION OF REGISTRATION FEE
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Proposed Maximum Aggregate
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Amount of
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Title of Each Class of
Securities to be Registered
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Offering
Price(1)
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Registration Fee
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Ordinary shares, par value US$0.0001 per
share(2)(3)
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US$125,000,000
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US$3,837.5
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(1)
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Estimated solely for the purpose of
determining the amount of registration fee in accordance with
Rule 457(o) under the Securities Act of 1933.
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(2)
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Includes ordinary shares initially
offered and sold outside the United States that may be resold
from time to time in the United States either as part of their
distribution or within 40 days after the later of the
effective date of this registration statement and the date the
shares are first bona fide offered to the public. The ordinary
shares are not being registered for the purpose of sales outside
the United States.
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(3)
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American depositary shares issuable
upon deposit of the ordinary shares registered hereby have been
registered under a separate registration statement on
Form F-6 (Registration No. 333-139263). Each American
depositary share represents five ordinary shares.
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The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933, as amended, or until the
Registration Statement shall become effective on such date as
the Securities and Exchange Commission, acting pursuant to such
Section 8(a), may determine.
The information in this prospectus is not complete and may be
changed. We may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these
securities and we are not soliciting offers to buy these
securities in any state where the offer or sale is not
permitted.
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PROSPECTUS
(Subject to Completion)
Issued ,
2008
American Depositary
Shares
Solarfun Power Holdings Co.,
Ltd.
REPRESENTING
ORDINARY SHARES
This is an offering of our American depositary shares, or
ADSs. Each ADS represents five ordinary shares, par value
US$0.0001 per ordinary share. The ADSs are evidenced by American
depositary receipts, or ADRs.
The purpose of this offering is to facilitate the
concurrent private placement of our convertible senior
notes.
The ADSs being offered hereby are ADSs that we will
effectively lend to an affiliate of Morgan Stanley, the
underwriter for this offering. This affiliate will sell the ADSs
in this offering and will use the resulting short position to
enable investors in our convertible senior notes to hedge their
investments. See Description of Share Issuance and
Repurchase Agreement and Concurrent Offering of Our Convertible
Notes.
We will not receive any proceeds from the sale of the ADSs
in this offering, but we will receive the proceeds from the
concurrent private placement of our convertible senior notes.
Delivery of the ADSs in this offering is conditioned upon
closing of the sale of our convertible senior notes.
Because of our arrangement with an affiliate of Morgan
Stanley described in more detail under Description of
Share Issuance and Repurchase Agreement and Concurrent Offering
of Our Convertible Notes, we do not believe that this
transaction will increase the number of ordinary shares
considered outstanding for the purpose of calculating our basic
or diluted earnings per share under U.S. GAAP.
Our ADSs are listed on The Nasdaq Global Market under the
symbol SOLF. On December 27, 2007 the last reported
sale price of our ADSs was US$33.73 per ADS.
Investing in the ADSs involves risks. See Risk
Factors beginning on page 12.
PRICE
$
AN ADS
The underwriter has been granted options to purchase up to an
additional ADSs
on the same terms, solely to cover over-allotments.
The Securities and Exchange Commission and state securities
regulators have not approved or disapproved of these securities,
or determined if this prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
Morgan Stanley & Co. Incorporated expects to
deliver the ADSs to purchasers
on ,
2008.
MORGAN STANLEY
,
2008
TABLE OF
CONTENTS
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS
PROSPECTUS AND ANY FREE WRITING PROSPECTUS WE
AUTHORIZE TO BE DELIVERED TO YOU. WE HAVE NOT, AND THE
UNDERWRITER HAS NOT, AUTHORIZED ANYONE TO PROVIDE YOU WITH
ADDITIONAL INFORMATION OR INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS AND ANY SUCH FREE WRITING
PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO
BUY, OUR ADSs ONLY IN JURISDICTIONS WHERE THOSE OFFERS AND SALES
ARE PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS AND
ANY SUCH FREE WRITING PROSPECTUS IS ACCURATE ONLY AS
OF THEIR RESPECTIVE DATES. OUR BUSINESS, FINANCIAL CONDITION,
RESULTS OF OPERATION AND PROSPECTS MAY HAVE CHANGED SINCE THOSE
DATES.
IMPORTANT
INFORMATION ABOUT THIS PROSPECTUS
This prospectus is based on information provided by us and other
sources that we believe to be reliable. The underwriter is not
responsible for, and is not making any representation or
warranty to you concerning, our future performance or the
accuracy or completeness of this prospectus. This prospectus
summarizes certain documents and other information, and we refer
you to them for a more complete understanding of what we discuss
in this prospectus.
You should rely only on the information contained in this
prospectus. We have not, and the underwriter has not, authorized
any person to provide you with additional or different
information. If anyone provides you with additional, different
or inconsistent information, you should not rely on it.
You should not assume that the information contained in this
prospectus is accurate as of any date other than the date
appearing on the front cover of this prospectus. Our business,
financial condition, results of operations and prospects may
have changed since those dates.
You should not consider any information included in this
prospectus to be investment, legal or tax advice. You should
consult your own counsel, accountant and other advisors for
legal, tax, business, financial and related advice regarding any
purchase of ADSs. We are not, and the underwriter is not, making
any representation to any offeree or purchaser of the ADSs
regarding the legality of an investment in the ADSs by that
offeree or purchaser under appropriate investment or similar
laws.
In making an investment decision regarding the ADSs we are
offering, you must rely on your own examination of our company
and the terms of this offering, including the potential merits
and risks involved. We are offering the ADSs on the basis of
this prospectus only. Accordingly, you must base any decision to
purchase the ADSs in this offering only on the information
contained in this prospectus.
You must comply with all applicable laws and regulations in
force in any jurisdiction in which you purchase, offer or sell
the ADSs or possess this prospectus. Because the laws of certain
jurisdictions may restrict the distribution of this prospectus
and the offer and sale of the ADSs, you must inform yourself
about, and observe, these restrictions. You must obtain any
consent, approval or permission required for your purchase,
offer or sale of the ADSs under the laws and regulations in
force in any jurisdiction to which you are subject or in which
you make any purchases, offers or sales.
We are not, and the underwriter is not, making an offer to sell,
or a solicitation of an offer to buy, any of the ADSs to any
person in any jurisdiction except where such an offer or
solicitation is permitted.
The following summary is qualified in its entirety by, and
should be read in conjunction with, the more detailed
information and financial statements appearing elsewhere in this
prospectus. In addition to this summary, we urge you to read the
entire prospectus carefully, especially the risks of investing
in our ADSs discussed under Risk Factors, before
deciding whether to buy our ADSs.
Our
Business
We are an established manufacturer of both photovoltaic, or PV,
cells and PV modules in China. We manufacture and sell a variety
of PV cells and PV modules using advanced manufacturing process
technologies that have helped us to rapidly increase our
operational efficiency. All of our PV modules are currently
produced using PV cells manufactured at our own facilities. We
sell our products both directly to system integrators and
through third party distributors. In the nine months ended
September 30, 2007, we sold our products to over 20
customers, mostly in Germany and Spain, as well as several other
European countries. In the past, we also provided PV cell
processing services for some of our silicon suppliers. We
conduct our business in China through our operating subsidiary,
Jiangsu Linyang Solarfun Co., Ltd., or Linyang China.
We currently operate four monocrystalline PV cell production
lines and four multicrystalline PV cell production lines, each
with up to 30 MW of annual manufacturing capacity. As part
of our vertical integration and supply sourcing strategy, we
recently acquired a controlling stake in a Chinese silicon ingot
manufacturing company, which we believe could produce 50 to
60 MW of ingots in 2008. In order to meet the fast-growing
market demands for solar products, we plan to significantly
expand our PV cell manufacturing capacity over the next several
years. We expect that the aggregate annual manufacturing
capacity of our PV cell production lines that are completed or
under construction will reach 360 MW by the middle of 2008.
In addition, we have achieved improvements in process technology
and product quality since we commenced our commercial production
in November 2005. Our monocrystalline PV cells achieved
conversion efficiency rates in the range of 16.1% to 16.6% in
the nine months ended September 30, 2007 and we are now
able to process wafers as thin as 200 microns.
Our net revenue increased from RMB166.2 million in 2005 to
RMB630.9 million (US$84.2 million) in 2006, and our
net income increased from RMB14.4 million in 2005 to
RMB105.9 million (US$14.1 million) in 2006. In the
nine months ended September 30, 2007, our net revenue and
net income amounted to RMB1,407.4 million
(US$187.8 million) and RMB81.6 million
(US$10.9 million), respectively, compared to
RMB386.2 million and RMB72.9 million, respectively, in
the same period in 2006.
Industry
Background
The PV industry has experienced significant growth since the
beginning of this decade. According to Solarbuzz, an independent
solar energy research firm, the global PV market increased from
345 MW in 2001 to 1,744 MW in 2006 in terms of total
annual PV installations, representing a compound annual growth
rate of 38%. The PV industry revenue increased from
US$7 billion in 2004 to US$10.6 billion in 2006.
Moreover, cumulative installed PV electricity generating
capacity has increased tenfold over the past nine years and
currently is approximately 7 GW worldwide, while investment in
new plants to manufacture PV cells was approximately
US$750 million in 2006. According to Solarbuzz, annual PV
installations are expected to increase to 4.2 GW, and PV
industry revenue is expected to increase to
US$18.6 billion, in 2011.
We believe that rising energy demand, the increasing scarcity of
traditional energy resources coupled with rising prices, the
growing adoption of government incentives for solar energy due
to increasing environmental awareness, and the decreasing
production costs of solar energy will continue to drive the
growth of the solar industry.
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Our
Competitive Strengths
We believe the following strengths enable us to capture
opportunities in the rapidly growing PV industry and compete
effectively in the PV market in China and internationally:
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strong execution capability demonstrated by significant and
rapid operational expansion in a competitive market;
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scalable integrated manufacturing capacity and extensive
industry relationships to support our expansion plans;
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operational cost advantages achieved through efficient
utilization of management, engineering, labor and manufacturing
resources in China;
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industry experience to support our development of downstream
business opportunities in China;
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research and development capabilities that leverage both third
party collaborations and internal resources; and
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entrepreneurial management with extensive industry contacts and
strong track record of successful execution.
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Our
Strategies
Our long-term goal is to become a leading global PV cell and
module manufacturer and to leverage our core strengths to become
an innovator and an important player in the downstream PV
markets, particularly in China. To achieve this goal, we plan to
implement the following specific strategies:
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continue to expand manufacturing capacity and reduce operational
costs to achieve greater economies of scale;
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secure future supplies of silicon and expand our ingot
production business;
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increase investments for research and development activities,
enhance production process technologies and develop next
generation products through continuous innovation;
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diversify our product and service offerings and expand our
business in downstream markets; and
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broaden our geographical revenue base, and build and enhance
brand recognition both domestically and internationally.
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Our
Challenges
We believe that the following are some of the major risks and
uncertainties that may materially affect our business, financial
condition, results of operations and prospects:
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our inability to significantly increase our manufacturing
capacity and output, to make strategic investments or
acquisitions or to establish strategic alliances;
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our failure to obtain silicon wafers, our primary raw material,
in sufficient quantities or at acceptable prices;
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intense competition from both conventional and alternative
energy sources and technologies;
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the reduction or elimination of government subsidies and
economic incentives for on-grid solar energy applications;
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our inability to further refine our technology and develop and
introduce new products; and
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limited adoption of PV technology and insufficient demand for PV
products.
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Corporate
Structure
We commenced operations through Linyang China in August 2004.
Linyang China was a 68%-owned subsidiary of Jiangsu Linyang
Electronics Co., Ltd., or Linyang Electronics, at the time of
its establishment on August 27, 2004. Linyang Electronics
is one of the leading electricity-measuring instrument
manufacturers in China. In anticipation of our initial public
offering, we incorporated Solarfun Power Holdings Co., Ltd., or
Solarfun, in the Cayman Islands on May 12, 2006 as our
listing vehicle. To enable us to raise equity capital from
investors outside of China, we established a holding company
structure by incorporating Linyang Solar Power Investment
Holding Ltd., or Linyang BVI, in the British Virgin Islands on
May 17, 2006. Linyang BVI is wholly owned by Solarfun.
Linyang BVI purchased all of the equity interests in Linyang
China on June 2, 2006. On November 30, 2007, Linyang BVI
transferred all of the equity interest in Linyang China to
Solarfun Power Hong Kong Limited, a wholly owned subsidiary of
Linyang BVI, for a consideration of US$199.0 million. In March
2006, April 2006 and April 2007, we established three
majority-owned or wholly owned subsidiaries in China, Shanghai
Linyang Solar Technology Co., Ltd., or Shanghai Linyang, Sichuan
Leshan Jiayang New Energy Co., Ltd., or Sichuan Jiayang, and
Nantong Linyang Solarfun Engineering Research and Development
Center Co., Ltd., or Nantong Linyang, respectively, to expand
our business into new markets and sectors. In August 2007, we
acquired a 52% interest in Jiangsu Yangguang Solar Technology
Co., Ltd., or Yangguang Solar. In September 2007, we established
a wholly owned subsidiary, Solarfun Power U.S.A. Inc., as part
of our plan to enter the United States market.
We and certain selling shareholders of our company completed our
initial public offering of 12,000,000 ADSs, each representing
five ordinary shares, on December 26, 2006. On
December 20, 2006, we listed our ADSs on The Nasdaq Global
Market under the symbol SOLF.
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The diagram below sets forth the entities directly or indirectly
controlled by us as the date of this prospectus:
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(1)
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The other shareholders of Shanghai
Linyang are three individuals: Mr. Yongliang Gu,
Mr. Rongqiang Cui, and Mr. Cuis spouse.
Mr. Gu and Mr. Cui are our shareholders.
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(2)
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The other shareholders of Sichuan
Jiayang are Sichuan Jianengjia Electric Power Co., Ltd., or
Sichuan Jianengjia, which holds a 30% equity interest, and a
member of Sichuan Jiayangs management team, Mr. Wei
Gu, who holds a 15% equity interest on behalf of
Mr. Yonghua Lu, our chairman and chief executive officer,
pursuant to an entrustment agreement entered into in November
2006. Under this entrustment agreement, Mr. Lu provided
RMB3.0 million (US$0.4 million) to Mr. Gu to
acquire the 15% equity interest in Sichuan Jiayang. Under the
entrustment agreement, all the rights enjoyed by Mr. Gu as
the holder of record of the 15% equity interest in Sichuan
Jiayang, including economic rights, belong to Mr. Lu.
Mr. Gu may only exercise rights relating to this equity
interest in Sichuan Jiayang, such as voting and transfer rights,
pursuant to written instructions from Mr. Lu. Mr. Lu
also has the right to transfer all or a portion of the 15%
equity interest to the management of Sichuan Jiayang or other
third parties. This entrustment arrangement was originally
contemplated at the time of establishment of Sichuan Jiayang,
but was not formalized in writing until November 2006, and was
meant to serve as a transitional step in advance of potentially
fully transferring these equity interests to Mr. Gu and
other members of Sichuan Jiayangs management team as
performance incentives.
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(3)
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Upon confirmation of Yangguang
Solar, the other shareholders of Yangguang Solar are Suyang
Group, which hold a 30% equity interests, and Nanjing Linyang,
which holds an 18% equity interests. Suyuan Group has entered
into a share transfer agreement with Nanjing Guangyi Technology
Co.,Ltd on November 16, 2007. However, the equity interests
transfer procedure is still in the process.
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Corporate
Information
Our principal executive offices are located at 666 Linyang Road,
Qidong, Jiangsu Province, 226200, Peoples Republic of
China. Our telephone number at this address is
(86-513)
8330-7688
and our fax number is
(86-513)
8311-0367.
Our registered office in the Cayman Islands is at the offices of
M&C Corporate Services Limited, PO Box 309GT,
Ugland House, South Church Street, George Town, Grand Cayman,
Cayman Islands.
Investor inquiries should be directed to us at the address and
telephone number of our principal executive offices set forth
above. Our website is www.solarfun.com.cn. The
information contained on our website does not constitute a part
of this prospectus. Our agent for service of process in the
United States is CT Corporation System, located at 111 Eighth
Avenue, New York, New York 10011.
Conventions
That Apply To This Prospectus
Unless otherwise indicated, references in this prospectus to:
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ADRs are to the American depositary receipts that
evidence our ADSs;
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ADSs are to our American depositary shares, each of
which represents five ordinary shares;
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China or the PRC are to the
Peoples Republic of China, excluding, for the purpose of
this prospectus only, Taiwan and the special administrative
regions of Hong Kong and Macau;
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conversion efficiency are to the ability of
photovoltaic, or PV, products to convert sunlight into
electricity, and conversion efficiency rates are
commonly used in the PV industry to measure the percentage of
light energy from the sun that is actually converted into
electricity;
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cost per watt and price per watt are to
the method by which the cost and price of PV products,
respectively, are commonly measured in the PV industry. A PV
product is priced based on the number of watts of electricity it
can generate;
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GW are to gigawatt, representing 1,000,000,000
watts, a unit of power-generating capacity or consumption;
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MW are to megawatt, representing 1,000,000 watts, a
unit of power-generating capacity or consumption. In this
prospectus, it is assumed that, based on a yield rate of 95%,
420,000 125mm x 125mm or 280,000 156mm x 156mm silicon wafers
are required to produce PV products capable of generating
1 MW, that each 125mm x 125mm and 156mm x 156mm PV cell
generates 2.4 W and 3.7 W of power, respectively, and that each
PV module contains 72 PV cells;
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PV are to photovoltaic. The photovoltaic effect is a
process by which sunlight is converted into electricity;
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RMB and Renminbi are to the legal
currency of China;
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series A convertible preference shares are to
our series A convertible preference shares, par value
US$0.0001 per share;
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shares or ordinary shares are to our
ordinary shares, par value US$0.0001 per share; and
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US$ and U.S. dollars are to the
legal currency of the United States.
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References in this prospectus to our annual manufacturing
capacity assume 24 hours of operation per day for
350 days per year.
Unless the context indicates otherwise, we,
us, our company and our
refer to Solarfun, its predecessor entities and its consolidated
subsidiaries.
This prospectus contains translations of certain Renminbi
amounts into U.S. dollars at specified rates. All
translations, unless otherwise noted, from Renminbi to
U.S. dollars were made at the noon buying rate in The City
of New York for cable transfers in Renminbi per U.S. dollar
as certified for customs purposes by the Federal Reserve Bank of
New York as of September 28, 2007, which was RMB7.4928 to
US$1.00. We make no representation that the Renminbi or
U.S. dollar amounts referred to in this prospectus could
have been or could be converted into
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U.S. dollars or Renminbi, as the case may be, at any
particular rate or at all. See Risk Factors
Risks Related to Our Company and Our Industry
Fluctuations in exchange rates could adversely affect our
business as well as result in foreign currency exchange
losses. On December 27, 2007, the noon buying rate
was RMB 7.3079 to US$1.00.
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THE
OFFERING
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Issuer |
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Solarfun Power Holdings Co., Ltd. |
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Total ADSs offered hereby |
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ADSs,
representing
ordinary shares (or up
to
ADSs if the underwriter exercises its option in full). Pursuant
to the share issuance and repurchase agreement, we will sell
these ADSs to an affiliate of Morgan Stanley (the ADS
purchaser), subject to our right to repurchase them for
par value of the underlying ordinary shares. |
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Ordinary shares outstanding following this offering |
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ordinary shares
(including
ordinary shares represented by the ADSs offered hereby) (or up
to
ordinary shares (including up
to
ordinary shares represented by the ADSs offered hereby) if the
underwriter exercises its option in full). This calculation of
ordinary shares outstanding does not take into account our
obligations to repurchase the ADSs we sell to the ADS purchaser
(the purchased ADSs) pursuant to the share issuance
and repurchase agreement (or the ordinary shares underlying such
ADSs). |
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Nasdaq Global Market Symbol for our ADSs |
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Our ADSs are listed on The Nasdaq Global Market under the symbol
SOLF. |
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Risk Factors |
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See Risk Factors beginning on page 12 and other
information included in this prospectus for a discussion of
factors you should carefully consider before deciding to invest
in the ADSs. |
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Description of Concurrent Offering |
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Concurrently with this offering of ADSs, we are offering, by
means of a separate private placement,
US$
million aggregate principal amount of
our % Convertible Senior Notes
due ,
2017 (our convertible notes) (or up to
US$
million convertible notes if the initial purchasers exercise
their option to purchase additional convertible notes in full). |
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The delivery of the ADSs hereunder is contingent upon the
closing of the concurrent offering of our convertible notes, and
the closing of the offering of our convertible notes is
contingent upon the delivery by us of the purchased ADSs offered
hereby. See Description of Share Issuance and Repurchase
Agreement and Concurrent Offering of Our Convertible Notes. |
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Use of Proceeds |
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We will not receive any proceeds from the sale of the purchased
ADSs in this offering. An affiliate of the ADS purchaser will
receive all the proceeds from the sale of the purchased ADSs.
Such affiliate has informed us that it intends to use the short
position created by the repurchase provisions of the share
issuance and repurchase agreement and the concurrent sale of the
purchased ADSs by means of this offering to facilitate
transactions by which investors in our convertible notes may
hedge their investments through privately negotiated
transactions. |
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ADSs |
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Each ADS represents five ordinary shares, par value US$0.0001
per ordinary share. All non-Direct Registration System ADSs will
be evidenced by American depositary receipts. |
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The depositary will be the holder of the ordinary shares
underlying the ADSs and you will have the rights of an ADR
holder as provided in the deposit agreement among us, the
depositary and owners and holders of ADSs from time to time. |
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You may surrender your ADSs to the depositary to withdraw the
ordinary shares underlying your ADSs. The depositary will charge
you a fee for such an exchange. |
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We may amend or terminate the deposit agreement for any reason
without your consent. If an amendment becomes effective, you
will be bound by the deposit agreement as amended if you
continue to hold your ADSs. |
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To better understand the terms of the ADSs, you should carefully
read the section in this prospectus entitled Description
of American Depositary Shares. We also encourage you to
read the deposit agreement, which is an exhibit to the
registration statement that includes this prospectus. |
|
|
|
Timing and settlement for ADSs |
|
The ADSs are expected to be delivered against payment
on ,
2008. The ordinary shares underlying the ADSs will be deposited
with The Bank of New Yorks custodian and will be
registered in the name of The Bank of New York or its nominee.
The Depository Trust Company, or DTC, and its direct and
indirect participants, will maintain records that will show the
beneficial interests in the ADSs and facilitate any transfer of
the beneficial interests. |
|
|
|
Depositary |
|
The Bank of New York. |
|
|
|
Purpose of this offering |
|
This offering is being done concurrently with a private offering
of our convertible notes under Rule 144A under the
Securities Act. This offering is intended to allow Morgan
Stanley, which is acting as the initial purchaser of the
convertible notes and the underwriter for this offering, to
provide a hedge for the convertible note investors. |
|
|
|
|
|
Ordinarily, hedge funds investing in an issuers
convertible securities would borrow the underlying common stock
and short it in the public market. In our case, however, there
does not appear to be a sufficient public float in our
outstanding ADSs to enable prospective investors to hedge the
convertible notes efficiently. To remedy this problem and to
make our convertible notes marketable on better terms, we will
make additional ADSs available to Morgan Stanley as described
below. |
|
|
|
|
|
We will sell the purchased ADSs to Morgan Stanley pursuant to a
share issuance and repurchase agreement, which is described
below under Description of Share Issuance and Repurchase
Agreement and Concurrent Offering of Our Convertible
Notes. Under this agreement, we will sell ADSs to Morgan
Stanley for the par value of the underlying ordinary shares,
subject to our right to repurchase an equal number of ADSs from
Morgan Stanley for the same price per share. In addition, under
this agreement Morgan Stanley will pay to us an amount equal to
any dividends or other distributions we make on the purchased
ADSs, whether or not Morgan Stanley continues to hold them.
Morgan Stanley is selling these purchased ADSs in this offering.
The net effect of these transactions is to create a short
position for Morgan Stanley in our ADSs, as if Morgan Stanley
had borrowed |
8
|
|
|
|
|
ADSs from us and sold them in the public market. This short
position will allow Morgan Stanley to enter into swaps with
investors in the convertible notes, allowing such investors to
hedge their investments. |
|
|
|
|
|
In view of the contractual undertakings of Morgan Stanley in the
share issuance and repurchase agreement, which have the effect
of substantially eliminating the economic dilution that
otherwise would result from the sale of the ADSs under the
agreement, we believe that under U.S. GAAP, the ADSs sold in
this offering will not be considered outstanding for the purpose
of computing our basic or diluted earnings per share. |
|
|
|
|
|
The overall effect of the transactions described above is to
allow us to market our convertible notes on terms that are
comparable to the terms we would otherwise have been able to
achieve if there were enough of our ADSs available to be
borrowed in the public market to enable investors in our
convertible notes to hedge their investments efficiently. The
existence of the share issuance and repurchase agreement could
have the effect of causing the market price of our ADSs to be
lower over the term of the agreement than it would have been had
we not entered into the agreement. See Risk
Factors Risks Related to This Offering
The effect of the issuance of the purchased ADSs in this
offering, which issuance is being made to facilitate
transactions by which investors in our convertible notes may
hedge their investments, may be to lower the market price of our
ADSs. However, we have determined that the entry into the
share issuance and repurchase agreement is in our best interests
as a means to facilitate the offer and sale of our convertible
notes pursuant to the concurrent private placement on terms more
favorable to us than we could have otherwise obtained. |
9
SUMMARY
CONSOLIDATED FINANCIAL AND OPERATING DATA
The following summary consolidated financial data have been
derived from our consolidated financial statements included
elsewhere in this prospectus. Our consolidated statements of
operations for the period from August 27, 2004 (inception)
to December 31, 2004 and the years ended December 31,
2005 and 2006, and our consolidated balance sheets as of
December 31, 2005 and 2006 have been audited by
Ernst & Young Hua Ming, an independent registered
public accounting firm. The report of Ernst & Young
Hua Ming on those audited consolidated financial statements is
included elsewhere in this prospectus, and the summary
consolidated financial data for those periods and as of those
dates are qualified by reference to those financial statements
and that report, and should be read in conjunction with them and
with Managements Discussion and Analysis of
Financial Condition and Results of Operations. The summary
consolidated statement of operations data for each of the nine
month periods ended September 30, 2006 and 2007 and summary
consolidated balance sheet data as of September 30, 2007
have been derived from our unaudited consolidated financial
statements included elsewhere in this prospectus, which have
been prepared on the same basis as our audited consolidated
financial statements and contain normal recurring adjustments
which are, in the opinion of management, necessary for a fair
presentation of the results for such unaudited periods. Our
consolidated financial statements are prepared and presented in
accordance with United States generally accepted accounting
principles, or U.S. GAAP. Our historical results do not
necessarily indicate our results expected for any future periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 27,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Inception) to
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
December 31,
|
|
|
Year Ended December 31,
|
|
|
Ended September 30,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
|
|
(RMB)
|
|
|
(RMB)
|
|
|
(RMB)
|
|
|
(US$)
|
|
|
(RMB)
|
|
|
(RMB)
|
|
|
(US$)
|
|
|
|
(in thousands, except share and per share data)
|
|
|
Consolidated Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
|
|
|
|
|
166,178
|
|
|
|
630,907
|
|
|
|
84,202
|
|
|
|
386,239
|
|
|
|
1,407,365
|
|
|
|
187,829
|
|
Cost of revenue
|
|
|
|
|
|
|
(139,903
|
)
|
|
|
(446,530
|
)
|
|
|
(59,595
|
)
|
|
|
(267,429
|
)
|
|
|
(1,184,087
|
)
|
|
|
(158,030
|
)
|
Gross profit
|
|
|
|
|
|
|
26,275
|
|
|
|
184,377
|
|
|
|
24,607
|
|
|
|
118,810
|
|
|
|
223,278
|
|
|
|
29,799
|
|
Operating expenses
|
|
|
(629
|
)
|
|
|
(10,120
|
)
|
|
|
(70,620
|
)
|
|
|
(9,425
|
)
|
|
|
(40,331
|
)
|
|
|
(122,147
|
)
|
|
|
(16,302
|
)
|
Operating profit (loss)
|
|
|
(629
|
)
|
|
|
16,155
|
|
|
|
113,757
|
|
|
|
15,182
|
|
|
|
78,479
|
|
|
|
101,131
|
|
|
|
13,497
|
|
Net income (loss)
|
|
|
(607
|
)
|
|
|
14,410
|
|
|
|
105,921
|
|
|
|
14,136
|
|
|
|
72,871
|
|
|
|
81,593
|
|
|
|
10,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to ordinary shareholders
|
|
|
(607
|
)
|
|
|
14,410
|
|
|
|
98,695
|
|
|
|
13,172
|
|
|
|
69,195
|
|
|
|
81,593
|
|
|
|
10,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
(0.01
|
)
|
|
|
0.26
|
|
|
|
0.95
|
|
|
|
0.13
|
|
|
|
0.69
|
|
|
|
0.34
|
|
|
|
0.05
|
|
Diluted
|
|
|
(0.01
|
)
|
|
|
0.22
|
|
|
|
0.74
|
|
|
|
0.10
|
|
|
|
0.55
|
|
|
|
0.34
|
|
|
|
0.05
|
|
Shares used in computation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
51,994,399
|
|
|
|
54,511,540
|
|
|
|
103,631,832
|
|
|
|
103,631,832
|
|
|
|
100,350,000
|
|
|
|
240,024,754
|
|
|
|
240,024,754
|
|
Diluted
|
|
|
51,994,399
|
|
|
|
66,366,469
|
|
|
|
142,108,460
|
|
|
|
142,108,460
|
|
|
|
131,624,178
|
|
|
|
240,024,754
|
|
|
|
240,024,754
|
|
Net income (loss) per ADS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
(0.05
|
)
|
|
|
1.32
|
|
|
|
4.76
|
|
|
|
0.64
|
|
|
|
3.45
|
|
|
|
1.70
|
|
|
|
0.23
|
|
Diluted
|
|
|
(0.05
|
)
|
|
|
1.09
|
|
|
|
3.72
|
|
|
|
0.50
|
|
|
|
2.75
|
|
|
|
1.70
|
|
|
|
0.23
|
|
Shares used in computation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
10,398,880
|
|
|
|
10,902,308
|
|
|
|
20,726,366
|
|
|
|
20,726,366
|
|
|
|
20,070,000
|
|
|
|
48,004,951
|
|
|
|
48,004,951
|
|
Diluted
|
|
|
10,398,880
|
|
|
|
13,273,294
|
|
|
|
28,421,692
|
|
|
|
28,421,692
|
|
|
|
26,324,836
|
|
|
|
48,004,951
|
|
|
|
48,004,951
|
|
Other Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
|
|
|
|
15.8
|
%
|
|
|
29.2
|
%
|
|
|
|
|
|
|
30.8
|
%
|
|
|
15.9
|
%
|
|
|
|
|
Operating profit margin
|
|
|
|
|
|
|
9.7
|
%
|
|
|
18.0
|
%
|
|
|
|
|
|
|
20.3
|
%
|
|
|
7.2
|
%
|
|
|
|
|
Net profit margin
|
|
|
|
|
|
|
8.7
|
%
|
|
|
16.8
|
%
|
|
|
|
|
|
|
18.9
|
%
|
|
|
5.8
|
%
|
|
|
|
|
Net cash flow used in operating activities
|
|
|
(8,180
|
)
|
|
|
(76,582
|
)
|
|
|
(523,061
|
)
|
|
|
(69,809
|
)
|
|
|
(414,659
|
)
|
|
|
(834,940
|
)
|
|
|
(111,433
|
)
|
Net cash flow from (used in) investing activities
|
|
|
(295
|
)
|
|
|
(37,464
|
)
|
|
|
(190,047
|
)
|
|
|
(25,364
|
)
|
|
|
(95,387
|
)
|
|
|
(324,236
|
)
|
|
|
(43,273
|
)
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 27,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Inception) to
|
|
|
Year Ended
|
|
|
Nine Months
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
Ended September 30,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
|
2007
|
|
|
Other Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of PV cells produced (including PV cell processing) (in
MW)
|
|
|
|
|
|
|
1.0
|
(1)
|
|
|
26.2
|
(2)
|
|
|
16.2
|
(3)
|
|
|
63.3
|
(3)
|
Amount of PV modules produced (in MW):
|
|
|
|
|
|
|
5.5
|
|
|
|
19.6
|
|
|
|
11.3
|
|
|
|
53.7
|
|
Average selling price (in US$/W):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PV
cells(4)
|
|
|
|
|
|
|
3.00
|
|
|
|
3.07
|
|
|
|
3.05
|
|
|
|
2.75
|
|
PV
modules(5)
|
|
|
|
|
|
|
3.93
|
|
|
|
3.99
|
|
|
|
4.02
|
|
|
|
3.68
|
|
|
|
|
(1)
|
|
Of which 0.9 MW was used in
our PV module production.
|
(2)
|
|
Of which 19.9 MW was used in
our PV module production.
|
|
|
|
(3)
|
|
All of which was used in our PV
module production.
|
|
|
|
(4)
|
|
All sales contracts for PV cells
are denominated in Renminbi. Translations of Renminbi into U.S.
dollars have been made at period end exchange rates.
|
|
|
|
(5)
|
|
Represents the average unit selling
price in U.S. dollars specified in the sales contracts for PV
modules.
|
The following table represents a summary of our consolidated
balance sheet data as of December 31, 2004, 2005 and 2006
and September 30, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
As of September 30,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
|
|
(RMB)
|
|
|
(RMB)
|
|
|
(RMB)
|
|
|
(US$)
|
|
|
(RMB)
|
|
|
(US$)
|
|
|
|
(in thousands)
|
|
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
3,525
|
|
|
|
7,054
|
|
|
|
1,137,792
|
|
|
|
151,851
|
|
|
|
345,448
|
|
|
|
46,104
|
|
Restricted cash
|
|
|
|
|
|
|
22,229
|
|
|
|
33,822
|
|
|
|
4,514
|
|
|
|
34,171
|
|
|
|
4,561
|
|
Accounts receivable, net of doubtful accounts
|
|
|
|
|
|
|
|
|
|
|
147,834
|
|
|
|
19,730
|
|
|
|
681,914
|
|
|
|
91,009
|
|
Inventories, net
|
|
|
4,511
|
|
|
|
76,819
|
|
|
|
372,504
|
|
|
|
49,715
|
|
|
|
522,955
|
|
|
|
69,794
|
|
Advance to suppliers
|
|
|
4,850
|
|
|
|
61,312
|
|
|
|
238,178
|
|
|
|
31,788
|
|
|
|
468,371
|
|
|
|
62,509
|
|
Other current assets
|
|
|
762
|
|
|
|
20,705
|
|
|
|
75,525
|
|
|
|
10,080
|
|
|
|
159,551
|
|
|
|
21,294
|
|
Amount due from related parties
|
|
|
18,000
|
|
|
|
|
|
|
|
153
|
|
|
|
20
|
|
|
|
3,009
|
|
|
|
402
|
|
Amount due from shareholders
|
|
|
|
|
|
|
|
|
|
|
578
|
|
|
|
78
|
|
|
|
|
|
|
|
|
|
Fixed assets, net
|
|
|
292
|
|
|
|
55,146
|
|
|
|
207,449
|
|
|
|
27,686
|
|
|
|
503,424
|
|
|
|
67,188
|
|
Intangible assets, net
|
|
|
|
|
|
|
|
|
|
|
12,897
|
|
|
|
1,721
|
|
|
|
94,930
|
|
|
|
12,670
|
|
Long-term investment
|
|
|
|
|
|
|
|
|
|
|
300
|
|
|
|
40
|
|
|
|
300
|
|
|
|
40
|
|
Deferred tax assets
|
|
|
|
|
|
|
96
|
|
|
|
3,400
|
|
|
|
454
|
|
|
|
8,129
|
|
|
|
1,084
|
|
Long-term deferred expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
109,000
|
|
|
|
14,547
|
|
Total assets
|
|
|
31,940
|
|
|
|
243,361
|
|
|
|
2,230,432
|
|
|
|
297,677
|
|
|
|
2,931,202
|
|
|
|
391,202
|
|
Short-term bank borrowings
|
|
|
|
|
|
|
20,000
|
|
|
|
379,900
|
|
|
|
50,702
|
|
|
|
752,887
|
|
|
|
100,482
|
|
Long-term bank borrowings, current portion
|
|
|
|
|
|
|
|
|
|
|
16,000
|
|
|
|
2,135
|
|
|
|
16,000
|
|
|
|
2,135
|
|
Accounts payable
|
|
|
2,221
|
|
|
|
18,794
|
|
|
|
51,452
|
|
|
|
6,867
|
|
|
|
146,400
|
|
|
|
19,539
|
|
Notes payable
|
|
|
|
|
|
|
20,000
|
|
|
|
14,020
|
|
|
|
1,871
|
|
|
|
5,000
|
|
|
|
667
|
|
Accrued expenses and other liabilities
|
|
|
301
|
|
|
|
22,920
|
|
|
|
33,619
|
|
|
|
4,487
|
|
|
|
70,635
|
|
|
|
9,427
|
|
Customer deposits
|
|
|
|
|
|
|
55,319
|
|
|
|
17
|
|
|
|
2
|
|
|
|
84,825
|
|
|
|
11,321
|
|
Amount due to related parties
|
|
|
25
|
|
|
|
32,658
|
|
|
|
24,486
|
|
|
|
3,268
|
|
|
|
18,971
|
|
|
|
2,532
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,086
|
|
|
|
1,213
|
|
Amount due to shareholders
|
|
|
|
|
|
|
|
|
|
|
7,572
|
|
|
|
1,011
|
|
|
|
|
|
|
|
|
|
Long-term bank borrowings, non-current portion
|
|
|
|
|
|
|
|
|
|
|
15,000
|
|
|
|
2,002
|
|
|
|
7,000
|
|
|
|
934
|
|
Total liabilities
|
|
|
2,547
|
|
|
|
169,691
|
|
|
|
542,066
|
|
|
|
72,345
|
|
|
|
1,110,804
|
|
|
|
148,250
|
|
Minority interests
|
|
|
|
|
|
|
|
|
|
|
10,151
|
|
|
|
1,355
|
|
|
|
44,820
|
|
|
|
5,981
|
|
Total shareholders equity
|
|
|
29,393
|
|
|
|
73,670
|
|
|
|
1,678,215
|
|
|
|
223,977
|
|
|
|
1,775,578
|
|
|
|
236,971
|
|
Total liabilities and shareholders equity
|
|
|
31,940
|
|
|
|
243,361
|
|
|
|
2,230,432
|
|
|
|
297,677
|
|
|
|
2,931,202
|
|
|
|
391,202
|
|
11
An investment in our ADSs involves significant risks. You
should carefully consider the risks described below as well as
information in this prospectus, including our consolidated
financial statements and related notes, before you decide to buy
our ADSs. If any of the following risks actually occurs, our
business, financial condition, results of operations and
prospects could be materially harmed, the trading price of our
ADSs could decline and you could lose all or part of your
investment.
Risks
Related to Our Company and Our Industry
Evaluating
our business and prospects may be difficult because of our
limited operating history, and our past results may not be
indicative of our future performance.
There is limited historical information available about our
company upon which you can base your evaluation of our business
and prospects. We began operations in August 2004 and shipped
our first PV modules and our first PV cells in January 2005 and
November 2005, respectively. Our business has grown and evolved
at a rapid rate since we started our operations. As a result,
our historical operating results may not provide a meaningful
basis for evaluating our business, financial performance and
prospects and we may not be able to achieve a similar growth
rate in future periods. In particular, our future success will
require us to continue to increase the manufacturing capacity of
our facilities significantly beyond their current capacities.
Moreover, our business model, technology and ability to achieve
satisfactory manufacturing yields at higher volumes are
unproven. Therefore, you should consider our business and
prospects in light of the risks, expenses and challenges that we
will face as a company with a relatively short operating history
in a competitive industry seeking to develop and manufacture new
products in a rapidly growing market, and you should not rely on
our past results or our historic rate of growth as an indication
of our future performance.
Our
future success substantially depends on our ability to
significantly expand both our manufacturing capacity and output,
which is subject to significant risks and uncertainties. If we
fail to achieve this expansion, we may be unable to grow our
business and revenue, reduce our costs per watt, maintain our
competitive position or improve our profitability.
Our future success depends on our ability to significantly
increase both our manufacturing capacity and output. We plan to
expand our business to address growth in demand for our
products, as well as to capture new market opportunities. Our
ability to establish additional manufacturing capacity and
increase output is subject to significant risks and
uncertainties, including:
|
|
|
|
|
the need for additional funding to purchase and prepay for raw
materials or to build manufacturing facilities, which we may be
unable to obtain on reasonable terms or at all;
|
|
|
|
delays and cost overruns as a result of a number of factors,
many of which may be beyond our control, such as increases in
raw materials prices and problems with equipment vendors;
|
|
|
|
|
|
the inability to obtain, or delays in, obtaining required
approvals by relevant government authorities;
|
|
|
|
|
|
diversion of significant management attention and other
resources; and
|
|
|
|
failure to execute our expansion plan effectively.
|
In order to manage the potential growth of our operations, we
will be required to improve our operational and financial
systems, procedures and controls, increase manufacturing
capacity and output, and expand, train and manage our growing
employee base. Furthermore, our management will be required to
maintain and expand our relationships with our customers,
suppliers and other third parties. We cannot assure you that our
current and planned operations, personnel, systems and internal
procedures and controls will be adequate to support our future
growth.
If we encounter any of the risks described above, or are
otherwise unable to establish or successfully operate additional
manufacturing capacity or to increase manufacturing output, we
may be unable to grow our business and
12
revenue, reduce our costs per watt, maintain our competitiveness
or improve our profitability, and our business, financial
condition, results of operations and prospects will be adversely
affected.
Our
recent acquisition of an early stage ingot plant may have a
material adverse effect on our results of
operations.
We have entered into the silicon ingot production business
through our acquisition of a 52% equity interest in Yangguang
Solar, an ingot plant that commenced operations in October 2007.
Our expansion into the ingot business aims to secure our access
to steady supplies of silicon ingots at reasonable prices, and
we intend to integrate such upstream business into our
increasingly vertical business model. However, we have no prior
experience in operating an ingot plant. The technology for the
manufacture of silicon ingots is complex, requires costly
equipment and continuous modifications in order to improve
yields and product performance. Increases in lead times for
delivering ingot-making equipment could also delay or otherwise
hamper the development of our ingot business. We will also need
to make substantial capital expenditure in installing Yangguang
Solars production lines and ramping up its capacity in
2008, which may put a strain on our capital resources.
Moreover, Yangguang Solar relies on Jiangsu Zhongneng PV
Technology Development Co., Ltd., or Zhongneng, which is also an
early stage company that has in the past experienced delays in
ramping up its operations, to supply a significant portion of
its polysilicon requirements. Although Zhongneng agreed to
supply 1,950 tons of polysilicon to Yangguang Solar over a
three-year period in the equity transfer agreement Zhongneng
entered into with Nanjing Linyang Electrics Investment Co.,
Ltd., or Nanjing Linyang, and Lianyungang Suyuan Group Co.,
Ltd., or Suyuan Group, this supply arrangement will only be
legally enforceable by Yangguang Solar once a supply agreement
between Zhongneng and Yangguang Solar has been entered into. In
addition, polysilicon suppliers frequently enter into supply
agreements to sell an aggregate amount of polysilicon that
exceeds their production capacity. Yangguang Solar has in the
past experienced delays in delivery of polysilicon from
Zhongneng and may experience delays in the future. If we are not
successful in implementing our expansion plan for our newly
acquired ingot business on a profitable basis or if Yangguang
Solar fails to obtain polysilicon at commercially reasonable
prices, our results of operations would be materially and
adversely affected.
We
depend on a limited number of customers for a high percentage of
our revenue and the loss of, or a significant reduction in
orders from, any of these customers, if not immediately
replaced, would significantly reduce our revenue and decrease
our profitability.
We currently sell a substantial portion of our PV products to a
limited number of customers. Customers accounting for more than
10% of our net revenue accounted for an aggregate of 50.8%,
71.2% and 48.6% of our net revenue in 2005, 2006 and the nine
months ended September 30, 2007, respectively. Most of our
large customers are located in Europe, particularly Germany,
Italy and Spain. The loss of sales to any one of these customers
would have a significant negative impact on our business. Sales
to our customers are mostly made through non-exclusive
arrangements. Due to our dependence on a limited number of
customers, any one of the following events may cause material
fluctuations or declines in our revenue and have a material
adverse effect on our financial condition and results of
operations:
|
|
|
|
|
reduction, delay or cancellation of orders from one or more of
our significant customers;
|
|
|
|
selection by one or more of our significant distributor
customers of our competitors products;
|
|
|
|
loss of one or more of our significant customers and our failure
to identify additional or replacement customers;
|
|
|
|
any adverse change in the bilateral or multilateral trade
relationships between China and European countries, particularly
Germany; and
|
|
|
|
failure of any of our significant customers to make timely
payment for our products.
|
We expect that we will continue to depend on a relatively small
number of customers for a high percentage of our revenue for the
foreseeable future, as well as the ability of these customers to
sell solar power products that incorporate our PV products.
13
With certain significant customers, we enter into framework
agreements that set forth our customers purchase goals and
the general conditions under which our sales are to be made. But
such agreements are only binding to the extent a purchase order
for a specific amount of our products is issued and certain
sales terms may be adjusted from time to time. For example, we
entered into a framework agreement with Social Capital S.L.
under which it agreed to purchase 84 MW of PV modules in
total from 2007 to 2008. However, since we could not reach an
agreement with Social Capital S.L. on actual sales terms, Social
Capital S.L. has not made any purchase order of our PV modules
and it is unlikely that it will purchase our PV modules in the
foreseeable future. In addition, we have in the past had
disagreements with our customers relating to the volumes,
delivery schedules and pricing terms contained in such framework
contracts that have required us to renegotiate these contracts.
However, renegotiation of our framework contracts may not always
be in our best interests and disagreements on terms could
escalate into formal disputes that could cause us to experience
order cancellations or harm our reputation.
Furthermore, our customer relationships have been developed over
a short period of time and are generally in preliminary stages.
We cannot be certain that these customers will generate
significant revenue for us in the future or if these customer
relationships will continue to develop. If our relationships
with customers do not continue to develop, we may not be able to
expand our customer base, or maintain or increase our customers
and revenue. Moreover, our business, financial condition,
results of operations and prospects are affected by competition
in the market for the end products manufactured by our
customers, and any decline in their business could materially
harm our revenue and profitability.
We are
currently experiencing an industry-wide shortage of silicon and
silicon wafers. The prices that we pay for these materials have
increased in the past and prices may continue to increase in the
future, which may materially and adversely affect our results of
operations and decrease our gross profit margins and
profitability.
Silicon wafers are an essential raw material in our production
of PV products. Silicon is created by refining quartz or sand,
and is melted and grown into crystalline ingots or other forms
which are then sliced into wafers. We depend on our suppliers
for timely delivery of silicon wafers in sufficient quantities
and satisfactory quality, and any disruption in supply or
inability to obtain silicon wafers at an acceptable cost or at
all, will materially and adversely affect our business and
operations.
There is currently an industry-wide shortage of silicon and
silicon wafers, which has resulted in significant price
increases. Based on our experience, the average prices of
silicon and silicon wafers may continue to increase. Moreover,
we expect the shortages of silicon and silicon wafers to
continue as the solar power industry continues to grow and as
additional manufacturing capacity is added. Silicon wafers are
also used in the semiconductor industry generally and any
increase in demand from that sector will exacerbate the current
shortage. The production of silicon and silicon wafers is
capital intensive and adding manufacturing capacity requires
significant lead time. While we are aware that several new
facilities for the manufacture of silicon and silicon wafers are
under construction around the world, we do not believe that the
supply shortage will be remedied in the near term. We expect
that the demand for silicon and silicon wafers will continue to
outstrip supply for the foreseeable future.
We have attempted to ease our supply shortages by prepaying for
silicon and silicon wafers and establishing strategic
relationships with certain suppliers. However, we cannot assure
you that we will be able to obtain supplies from them or any
other suppliers in sufficient quantities or at acceptable
prices. In particular, since some of our suppliers do not
themselves manufacture silicon but instead purchase their
requirements from other vendors, it is possible that these
suppliers will not be able to obtain sufficient silicon to
satisfy their contractual obligations to us. In addition, we,
like other companies in the PV industry, compete with companies
in the semiconductor industry for silicon wafers, and companies
in that sector typically have greater purchasing power and
market influence than companies in the PV industry. We acquire
silicon wafers from our suppliers primarily through short-term
supply arrangements for periods ranging from several months to
two years. This subjects us to the risk that our suppliers may
cease supplying silicon wafers to us for any reason, including
due to uncertainties in their financial viability and having
committed more volume to customers than they can deliver. These
suppliers could also choose not to honor such contracts and we
generally have limited recourse to seek any form of
compensation. If either of these circumstances occurs, our
supply of critical raw materials at reasonable costs and our
basic ability to conduct our business could be severely
restricted. Moreover, since most of our supply contracts require
prepayment of a
14
substantial portion of the contract price, we may not be able to
recover such prepayments and we would suffer losses should such
suppliers fail to fulfill their delivery obligations under the
contracts. Furthermore, we have not fixed the price for a
significant portion of the silicon wafers supplies for 2008 with
some of our suppliers. As a result, the price we will need to
pay may need to be adjusted or renegotiated to reflect the
prevailing market price around the time of delivery, which may
be higher than we expect. Increases in the prices of silicon and
silicon wafers have in the past increased our production costs
and may materially and adversely impact our cost of revenue,
gross margins and profitability. Any disagreements on terms
could also escalate into formal disputes and disrupt the supply
of silicon wafers to us.
There are a limited number of silicon wafer suppliers, and many
of our competitors also purchase silicon wafers from these
suppliers. Since we have only been purchasing silicon wafers in
bulk for approximately two years, our competitors may have
longer and stronger relationships with these suppliers than we
do. As we intend to significantly increase our manufacturing
output, an inadequate allocation of silicon wafers would have a
material adverse effect on our expansion plans. Moreover, the
inability to obtain silicon wafers at commercially reasonable
prices or at all would harm our ability to meet existing and
future customer demand for our products, and could cause us to
make fewer shipments, lose customers and market share and
generate lower than anticipated revenue, thereby materially and
adversely affecting our business, financial condition, results
of operations and prospects.
Our
dependence on a limited number of suppliers for a substantial
majority of silicon and silicon wafers could prevent us from
delivering our products in a timely manner to our customers in
the required quantities, which could result in order
cancellations, decreased revenue and loss of market
share.
In 2005, 2006 and the nine months ended September 30, 2007,
our five largest suppliers supplied in the aggregate 71.3%,
50.9% and 85.2%, respectively, of our total silicon and silicon
wafer purchases. If we fail to develop or maintain our
relationships with these or our other suppliers, we may be
unable to manufacture our products, our products may only be
available at a higher cost or after a long delay, or we could be
prevented from delivering our products to our customers in the
required quantities, at competitive prices and on acceptable
terms of delivery. Problems of this kind could cause us to
experience order cancellations, decreased revenue and loss of
market share. In general, the failure of a supplier to supply
materials and components that meet our quality, quantity and
cost requirements in a timely manner due to lack of supplies or
other reasons could impair our ability to manufacture our
products or could increase our costs, particularly if we are
unable to obtain these materials and components from alternative
sources in a timely manner or on commercially reasonable terms.
Allegations have been made and may be made in the future
regarding the quality of our suppliers inventories. In
addition, some of our suppliers have a limited operating history
and limited financial resources, and the contracts we entered
into with these suppliers do not clearly provide for remedies to
us in the event any of these suppliers is not able to, or
otherwise does not, deliver, in a timely manner or at all, any
materials it is contractually obligated to deliver. In
particular, due to a shortage of raw materials for the
production of silicon wafers, increased market demand for
silicon wafers, a failure by some silicon suppliers to achieve
expected production volumes and other factors, some of our major
silicon wafer suppliers failed to fully perform in the past on
their silicon wafer supply commitments to us, and we
consequently did not receive all of the contractually agreed
quantities of silicon wafers from these suppliers. We cannot
assure you that we will not experience similar or additional
shortfalls of silicon or silicon wafers from our suppliers in
the future or that, in the event of such shortfalls, we will be
able to find other silicon suppliers to satisfy our production
needs. Any disruption in the supply of silicon wafers to us may
adversely affect our business, financial condition and results
of operations.
Our
ability to adjust our materials costs may be limited as a result
of entering into prepaid, fix-priced arrangements with our
suppliers, and it therefore may be difficult for us to respond
appropriately in a timely manner to market conditions, which
could materially and adversely affect our revenue and
profitability.
We have in the past secured, and plan to continue to secure, our
supply of silicon and silicon wafers through prepaid supply
arrangements with overseas and domestic suppliers. In 2006, we
entered into supply contracts with some of our suppliers, under
which these suppliers agreed to provide us with specified
quantities of silicon wafers
15
and we have made prepayments to these suppliers in accordance
with the supply contracts. As of December 31, 2006 and
September 30, 2007, we had advanced RMB238.2 million
(US$31.8 million) and RMB468.4 million
(US$62.5 million) to our suppliers, respectively. The
prices of the supply contracts we entered into with some of our
suppliers are fixed. If the prices of silicon or silicon wafers
were to decrease in the future and we are locked into prepaid,
fixed-price arrangements, we may not be able to adjust our
materials costs, and our cost of revenue would be materially and
adversely affected. In addition, if demand for our PV products
decreases, we may incur costs associated with carrying excess
materials, which may have a material adverse effect on our
operating expenses. To the extent we are not able to pass these
increased costs and expenses to our customers, our revenue and
profitability may be materially reduced.
We
require a significant amount of cash to fund our operations as
well as meet future capital requirements. If we cannot obtain
additional capital when we need it, our growth prospects and
future profitability may be materially and adversely
affected.
We typically require a significant amount of cash to fund our
operations, especially prepayments to suppliers to secure our
silicon wafer requirements. We also require cash generally to
meet future capital requirements, which are difficult to plan in
the rapidly changing PV industry. In particular, we will need
capital to fund the expansion of our facilities as well as
research and development activities in order to remain
competitive. Furthermore, we acquired a 52% equity interest in
Yangguang Solar, a newly established silicon ingot plant, in
August 2007 and will need to make substantial capital
expenditures in equipment purchases to ramp up its production
capacity in 2008. We believe that our cash and cash equivalents,
anticipated cash flow from operations and existing credit
facilities may not be sufficient to meet our anticipated needs
for the 12 months following the date of this prospectus.
Any future acquisitions, expansions, or market changes or other
developments will cause us to require additional funds. Our
ability to obtain external financing in the future is subject to
a variety of uncertainties, including:
|
|
|
|
|
our future financial condition, results of operations and cash
flows;
|
|
|
|
general market conditions for financing activities by
manufacturers of PV and related products; and
|
|
|
|
economic, political and other conditions in the PRC and
elsewhere.
|
We cannot assure you that financing will be available on
satisfactory terms, or at all. In particular, as of
September 30, 2007, RMB675.9 million
(US$90.2 million) of our outstanding borrowings were
guaranteed by Linyang Electronics, a company controlled by
Yonghua Lu, our founder, chairman and chief executive officer.
We do not have control over Linyang Electronics and Mr. Lu has
recently reduced his holding of our shares by a significant
amount. See Two of our existing shareholders have
substantial influence over our company and their interests may
not be aligned with the interests of our other
shareholders. If for any reason Linyang Electronics ceases
to guarantee our existing borrowings, it may be difficult for us
to obtain necessary financing in a timely manner or on
commercially acceptable terms and our growth prospects and
future profitability may decrease materially.
We
face risks associated with the marketing, distribution and sale
of our PV products internationally, and if we are unable to
effectively manage these risks, they could impair our ability to
expand our business abroad.
In 2005, 2006 and the nine months ended September 30, 2007
a substantial majority of our revenue was generated by sales to
customers outside of China. The marketing, distribution and sale
of our PV products overseas expose us to a number of risks,
including:
|
|
|
|
|
fluctuations in currency exchange rates of the U.S. dollar,
Euro and other foreign currencies against the Renminbi;
|
|
|
|
difficulty in engaging and retaining distributors and agents who
are knowledgeable about, and can function effectively in,
overseas markets;
|
|
|
|
increased costs associated with maintaining marketing and sales
activities in various countries;
|
16
|
|
|
|
|
difficulty and costs relating to compliance with different
commercial and legal requirements in the jurisdictions in which
we offer our products;
|
|
|
|
inability to obtain, maintain or enforce intellectual property
rights; and
|
|
|
|
trade barriers, such as export requirements, tariffs, taxes and
other restrictions and expenses, which could increase the prices
of our products and make us less competitive in some countries.
|
If we are unable to effectively manage these risks, our ability
to conduct or expand our business abroad would be impaired,
which may in turn have a material adverse effect on our
business, financial condition, results of operations and
prospects.
If we
are unable to compete in the highly competitive solar energy
market, our revenue and profits may decrease.
The solar energy market is very competitive. We face competition
from a number of sources, including domestic, foreign and
multinational corporations. We believe that the principal
competitive factors in the markets for our products are:
|
|
|
|
|
manufacturing capacity;
|
|
|
|
power efficiency;
|
|
|
|
range and quality of products;
|
|
|
|
price;
|
|
|
|
strength of supply chain and distribution network;
|
|
|
|
after-sales services; and
|
|
|
|
brand image.
|
Many of our current and potential competitors have longer
operating histories, greater name recognition, access to larger
customer bases and resources and significantly greater economies
of scale, and financial, sales and marketing, manufacturing,
distribution, technical and other resources than we do. In
particular, many of our competitors are developing and
manufacturing solar energy products based on new technologies
that may ultimately have costs similar to, or lower than, our
projected costs. In addition, our competitors may have stronger
relationships or have or may enter into exclusive relationships
with key suppliers, distributors or system integrators to whom
we sell our products. As a result, they may be able to respond
more quickly to changing customer demands or devote greater
resources to the development, promotion and sales of their
products than we can. Furthermore, competitors with more
diversified product offerings may be better positioned to
withstand a decline in the demand for solar power products. Some
of our competitors have also become vertically integrated, with
businesses ranging from upstream silicon wafer manufacturing to
solar power system integration, and we may also face competition
from semiconductor manufacturers, several of which have already
announced their intention to commence production of PV cells and
PV modules. It is possible that new competitors or alliances
among existing competitors could emerge and rapidly acquire
significant market share, which would harm our business. If we
fail to compete successfully, our business would suffer and we
may lose or be unable to gain market share and our financial
condition and results of operations would be materially and
adversely affected.
In the immediate future, we believe that the competitive arena
will increasingly center around securing silicon supply and
forming strategic relationships to secure supply of key
components and technologies. Many of our competitors have
greater access to silicon supply or have upstream silicon wafer
manufacturing capabilities. We believe that as the supply of
silicon stabilizes over time, competition will become
increasingly based upon more traditional marketing and sales
activities. Since we have conducted limited advertising in the
past, the greater sales and marketing resources, experience and
name recognition of some of our competitors may make it
difficult for us to compete if and when this transition occurs.
In addition, the solar power market in general competes with
other sources of renewable energy as well as conventional power
generation. If prices for conventional and other renewable
energy resources decline, or if these
17
resources enjoy greater policy support than solar power, the
solar power market and our business and prospects could suffer.
Our
profitability depends on our ability to respond to rapid market
changes in the solar energy industry, including by developing
new technologies and offering additional products and
services.
The solar energy industry is characterized by rapid increases in
the diversity and complexity of technologies, products and
services. In particular, the ongoing evolution of technological
standards requires products with improved features, such as more
efficient and higher power output and improved aesthetics. As a
result, we expect that we will need to constantly offer more
sophisticated products and services in order to respond to
competitive industry conditions and customer demands. If we fail
to develop, or obtain access to, advances in technologies, or if
we are not able to offer more sophisticated products and
services, we may become less competitive and less profitable. In
addition, advances in technology typically lead to declining
average selling prices for products using older technologies. As
a result, if we are not able to reduce the costs associated with
our products, the profitability of any given product, and our
overall profitability, may decrease over time. Furthermore,
technologies developed by our competitors may provide more
advantages than ours for the commercialization of PV products,
and to the extent we are not able to refine our technology and
develop new PV products, our existing products may become
uncompetitive and obsolete.
In addition, we will need to invest significant financial
resources in research and development to maintain our
competitiveness and keep pace with technological advances in the
solar energy industry. However, commercial acceptance by
customers of new products we offer may not occur at the rate or
level expected, and we may not be able to successfully adapt
existing products to effectively and economically meet customer
demands, thus impairing the return from our investments. We may
also be required under the applicable accounting standards to
recognize a charge for the impairment of assets to the extent
our existing products become uncompetitive or obsolete, or if
any new products fail to achieve commercial acceptance. Any such
charge may have a material adverse effect on our financial
condition and results of operations.
Moreover, in response to the rapidly evolving conditions in the
solar energy industry, we may expand our business downstream to
provide system integration products and services. This expansion
requires significant investment and management attention from
us, and we are likely to face intense competition from companies
that have extensive experience and well-established businesses
and customer bases in the system integration sector. We cannot
assure you that we will succeed in expanding our business
downstream. If we are not able to bring quality products and
services to market in a timely and cost-effective manner and
successfully market and sell these products and services, our
ability to continue penetrating the solar energy market, as well
as our results of operations and profitability, will be
materially and adversely affected.
Our
future success depends in part on our ability to make strategic
acquisitions and investments and to establish and maintain
strategic alliances, and failure to do so could have a material
adverse effect on our market penetration, results of operations
and profitability. In addition, such strategic acquisitions,
alliances and investments themselves entail significant risks
that could materially and adversely affect our
business.
We are pursuing expansion into downstream system integration
services through our subsidiary, Shanghai Linyang, and we are
considering pursuing upstream silicon feedstock sourcing through
strategic partnerships and investments. We intend to continue to
establish and maintain strategic alliances with third parties in
the PV industry, particularly with silicon suppliers. These
types of transactions could require that our management develop
expertise in new areas, manage new business relationships and
attract new types of customers and may require significant
attention from our management, and the diversion of our
managements attention could have a material adverse effect
on our ability to manage our business. We may also experience
difficulties integrating acquisitions and investments into our
existing business and operations. Furthermore, we may not be
able to successfully make such strategic acquisitions and
investments or to establish strategic alliances with third
parties that will prove to be effective or beneficial for our
business. Any difficulty we face in this regard could have a
material adverse effect on our market penetration, our results
of operations and our profitability.
18
Strategic acquisitions, investments and alliances with third
parties could subject us to a number of risks, including risks
associated with sharing proprietary information and loss of
control of operations that are material to our business.
Moreover, strategic acquisitions, investments and alliances may
be expensive to implement and subject us to the risk of
non-performance by a counterparty, which may in turn lead to
monetary losses that materially and adversely affect our
business. In addition, changes in government policies, both
domestically and internationally, that are not favorable to the
development of the solar energy industry, may also have a
material adverse effect on the success of our strategic
acquisitions, investments and alliances.
Problems
with product quality or product performance could result in a
decrease in customers and revenue, unexpected expenses and loss
of market share. In addition, product liability claims against
us could result in adverse publicity and potentially significant
monetary damages.
Our PV modules are typically sold with a two-year or, most
recently, three-year unlimited warranty for technical defects, a
10-year
warranty against declines greater than 10%, and a 20 or
25-year
warranty against declines of greater than 20%, in their initial
power generation capacity. As a result, we bear the risk of
extensive warranty claims for an extended period after we have
sold our products and recognized revenue. Since our products
have been in use for only a relatively short period, our
assumptions regarding the durability and reliability of our
products may not be accurate. We consider various factors when
determining the likelihood of product defects, including an
evaluation of our quality controls, technical analysis, industry
information on comparable companies and our own experience. As
of December 31, 2005 and 2006 and September 30, 2007,
our accrued warranty costs totaled RMB1.5 million,
RMB7.6 million (US$1.0 million) and
RMB18.3 million (US$2.4 million), respectively.
In addition, as we purchase the silicon and silicon wafers and
other components that we use in our products from third parties,
we have limited control over the quality of these raw materials
and components. Unlike PV modules, which are subject to certain
uniform international standards, silicon and silicon wafers
generally do not have uniform international standards, and it is
often difficult to determine whether product defects are a
result of the silicon or silicon wafers or other components or
reasons. Furthermore, the silicon and silicon wafers and other
components that we purchase from third-party suppliers are
typically sold to us with no or only limited warranties. The
possibility of future product failures could cause us to incur
substantial expense to repair or replace defective products,
provide refunds or resolve disputes with regard to warranty
claims through litigation, arbitration or other means. Product
failures and related adverse publicity may also damage our
market reputation and cause our sales to decline.
As with other solar power product manufacturers, we are exposed
to risks associated with product liability claims if the use of
the solar power products we sell results in injury, death or
damage to property. We cannot predict at this time whether
product liability claims will be brought against us in the
future or the effect of any resulting negative publicity on our
business. In addition, we have not made provisions for potential
product liability claims and we may not have adequate resources
to satisfy a judgment if a successful claim is brought against
us. Moreover, the successful assertion of product liability
claims against us could result in potentially significant
monetary damages and require us to make significant payments and
incur substantial legal expenses. Even if a product liability
claim is not successfully pursued to judgment by a claimant, we
may still incur substantial legal expenses defending against
such a claim.
If PV
technology is not suitable for widespread adoption, or
sufficient demand for PV products does not develop or takes
longer to develop than we anticipated, our sales may not
continue to increase or may even decline, and our revenue and
profitability would be reduced.
The PV market is at a relatively early stage of development and
the extent to which PV products will be widely adopted is
uncertain. Furthermore, market data in the PV industry are not
as readily available as those in other more established
industries, where trends can be assessed more reliably from data
gathered over a longer period of time. If PV technology proves
unsuitable for widespread adoption or if demand for PV products
fails to develop sufficiently, we may not be able to grow our
business or generate sufficient revenue to sustain our
profitability. In addition, demand for PV products in our
targeted markets, including China, may not develop or may
develop to a lesser extent
19
than we anticipated. Many factors may affect the viability of
widespread adoption of PV technology and demand for PV products,
including:
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cost-effectiveness of PV products compared to conventional and
other non-solar energy sources and products;
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performance and reliability of PV products compared to
conventional and other non-solar energy sources and products;
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availability of government subsidies and incentives to support
the development of the PV industry or other energy resource
industries;
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success of other alternative energy generation technologies,
such as fuel cells, wind power and biomass;
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fluctuations in economic and market conditions that affect the
viability of conventional and non-solar alternative energy
sources, such as increases or decreases in the prices of oil and
other fossil fuels;
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capital expenditures by end users of PV products, which tend to
decrease when the overall economy slows down; and
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deregulation of the electric power industry and the broader
energy industry.
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Existing
regulations and policies governing the electricity utility
industry, as well as changes to these regulations and policies,
may adversely affect demand for our products and materially
reduce our revenue and profits.
The electric utility industry is subject to extensive
regulation, and the market for solar energy products, including
PV products, is heavily influenced by these regulations as well
as the policies promulgated by electric utilities. These
regulations and policies often affect electricity pricing and
technical interconnection of end-user power generation. As the
market for solar and other alternative energy sources continue
to evolve, these regulations and policies are being modified and
may continue to be modified. Customer purchases of, or further
investment in research and development of, solar and other
alternative energy sources may be significantly affected by
these regulations and policies, which could significantly reduce
demand for our products and materially reduce our revenue and
profits.
Moreover, we expect that our PV products and their installation
will be subject to oversight and regulation in accordance with
national and local ordinances relating to building codes,
safety, environmental protection, utility interconnection and
metering and related matters in various countries. We also have
to comply with the requirements of individual localities and
design equipment to comply with varying standards applicable in
the jurisdictions where we conduct business. Any new government
regulations or utility policies pertaining to our PV products
may result in significant additional expenses to us, our
distributors and end users and, as a result, could cause a
significant reduction in demand for our PV products, as well as
materially and adversely affect our financial condition and
results of operations.
The
reduction or elimination of government subsidies and economic
incentives for on-grid solar energy applications could have a
materially adverse effect on our business and
prospects.
We believe that the near-term growth of the market for
on-grid applications, where solar energy is used to
supplement a customers electricity purchased from the
electric utility, depends in large part on the availability and
size of government subsidies and economic incentives. As a
portion of our sales is in the on-grid market, the reduction or
elimination of government subsidies and economic incentives may
hinder the growth of this market or result in increased price
competition. As a result, there are indications that the PV
market has been experiencing a price decrease in PV products
since the second half of 2006. The average selling price of our
PV modules decreased to US$3.68 per watt in the nine months
ended September 30, 2007 from US$4.02 in the same period in
2006. We anticipate the average selling price of our PV modules
may continue to decline, which could have a material adverse
effect on our business, financial condition and results of
operation.
20
The cost of solar energy currently substantially exceeds the
cost of power furnished by the electric utility grid in many
locations. As a result, federal, state and local governmental
bodies in many countries, most notably Germany, Italy, Spain and
the United States, have provided subsidies and economic
incentives in the form of rebates, tax credits and other
incentives to end users, distributors, system integrators and
manufacturers of solar power products to promote the use of
solar energy in on-grid applications and to reduce dependency on
other forms of energy. These government economic incentives
could be reduced or eliminated altogether. In particular,
political changes in a particular country could result in
significant reductions or eliminations of subsidies or economic
incentives. Electric utility companies that have significant
political lobbying powers may also seek changes in the relevant
legislation in their markets that may adversely affect the
development and commercial acceptance of solar energy. The
reduction or elimination of government subsidies and economic
incentives for on-grid solar energy applications, especially
those in our target markets, could cause demand for our products
and our revenue to decline, and have a material adverse effect
on our business, financial condition, results of operations and
prospects.
The
lack or inaccessibility of financing for off-grid solar energy
applications could cause our sales to decline.
Our products are used for off-grid solar energy
applications in developed and developing countries, where solar
energy is provided to end users independent of an electricity
transmission grid. In some countries, government agencies and
the private sector have, from time to time, provided subsidies
or financing on preferred terms for rural electrification
programs. We believe that the availability of financing could
have a significant effect on the level of sales of off-grid
solar energy applications, particularly in developing countries
where users may not have sufficient resources or credit to
otherwise acquire PV systems. If existing financing programs for
off-grid solar energy applications are eliminated or if
financing becomes inaccessible, the growth of the market for
off-grid solar energy applications may be materially and
adversely affected, which could cause our sales to decline. In
addition, rising interest rates could render existing financings
more expensive, as well as serve as an obstacle for potential
financings that would otherwise spur the growth of the PV
industry.
Our
failure to protect our intellectual property rights may
undermine our competitive position, and litigation to protect
our intellectual property rights may be costly.
We rely primarily on patents, trademarks, trade secrets,
copyrights and other contractual restrictions to protect our
intellectual property. Nevertheless, these afford only limited
protection and the actions we take to protect our intellectual
property rights may not be adequate. In particular, third
parties may infringe or misappropriate our proprietary
technologies or other intellectual property rights, which could
have a material adverse effect on our business, financial
condition and results of operations. Policing unauthorized use
of proprietary technology can be difficult and expensive. In
addition, litigation may be necessary to enforce our
intellectual property rights, protect our trade secrets or
determine the validity and scope of the proprietary rights of
others. We also cannot assure you that the outcome of any such
litigation would be in our favor. Furthermore, any such
litigation may be costly and may divert management attention as
well as expend our other resources away from our business. An
adverse determination in any such litigation will impair our
intellectual property rights and may harm our business,
prospects and reputation. In addition, we have no insurance
coverage against litigation costs and would have to bear all
costs arising from such litigation to the extent we are unable
to recover them from other parties. The occurrence of any of the
foregoing could have a material adverse effect on our business,
financial condition and results of operations.
Implementation of PRC intellectual property-related laws has
historically been lacking, primarily because of ambiguities in
the PRC laws and difficulties in enforcement. Accordingly,
intellectual property rights and confidentiality protections in
China may not be as effective as in the United States or other
countries.
21
We may
be exposed to infringement or misappropriation claims by third
parties, particularly in jurisdictions outside China which, if
determined adversely against us, could disrupt our business and
subject us to significant liability to third parties, as well as
have a material adverse effect on our financial condition and
results of operations.
Our success depends, in large part, on our ability to use and
develop our technology and know-how without infringing the
intellectual property rights of third parties. As we continue to
market and sell our products internationally, and as litigation
becomes more common in the PRC, we face a higher risk of being
the subject of claims for intellectual property infringement, as
well as having indemnification relating to other parties
proprietary rights held to be invalid. Our current or potential
competitors, many of which have substantial resources and have
made substantial investments in competing technologies, may have
or may obtain patents that will prevent, limit or interfere with
our ability to make, use or sell our products in the European
Union, the PRC or other countries. The validity and scope of
claims relating to PV technology patents involve complex,
scientific, legal and factual questions and analysis and,
therefore, may be highly uncertain. In addition, the defense of
intellectual property claims, including patent infringement
suits, and related legal and administrative proceedings can be
both costly and time consuming, and may significantly divert the
efforts and resources of our technical and management personnel.
Furthermore, an adverse determination in any such litigation or
proceeding to which we may become a party could cause us to:
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pay damage awards;
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seek licenses from third parties;
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pay ongoing royalties;
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redesign our products; or
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be restricted by injunctions,
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each of which could effectively prevent us from pursuing some or
all of our business and result in our customers or potential
customers deferring or limiting their purchase or use of our
products, which could have a material adverse effect on our
financial condition and results of operations.
We may
not be able to obtain sufficient patent protection on the
technology embodied in the PV products we currently manufacture
and sell, which could reduce our competitiveness and increase
our expenses.
Although we rely primarily on trade secret laws and contractual
restrictions to protect the technology in the PV cells we
currently manufacture and sell, our success and ability to
compete in the future may also depend to a significant degree on
obtaining patent protection for our proprietary technologies. As
of September 30, 2007, we had one issued patent and seven
pending patent applications in the PRC. We do not have, and have
not applied for, any patents for our proprietary technologies
outside the PRC. As the protections afforded by our patents are
effective only in the PRC, our competitors and other companies
may independently develop substantially equivalent technologies
or otherwise gain access to our proprietary technologies, and
obtain patents for such technologies in other jurisdictions,
including the countries in which we sell our products. Moreover,
our patent applications in the PRC may not result in issued
patents, and even if they do result in issued patents, the
patents may not have claims of the scope we seek. In addition,
any issued patents may be challenged, invalidated or declared
unenforceable. As a result, our present and future patents may
provide only limited protection for our technologies, and may
not be sufficient to provide competitive advantages to us.
We
depend on our key personnel, and our business and growth may be
severely disrupted if we lose their services.
Our future success depends substantially on the continued
services of some of our directors and key executives. In
particular, we are highly dependent upon our directors and
officers, including Mr. Yonghua Lu, chairman of our board
of directors and chief executive officer, Mr. Hanfei Wang,
our director and chief operating officer, and Mr. Yuting
Wang, our chief engineer. Mr. Fei Yun recently resigned as
director of technology. In addition,
22
Ms. Xihong Deng recently resigned as a member of our board
of directors and as vice president in charge of international
sales. If we lose the services of one or more of our directors
and executive officers, we may not be able to replace them
readily, if at all, with suitable or qualified candidates, and
may incur additional expenses to recruit and retain new
directors and officers, particularly those with a significant
mix of both international and China-based solar power industry
experience similar to our current directors and officers, which
could severely disrupt our business and growth. In addition, if
any of these directors or executives joins a competitor or forms
a competing company, we may lose some of our customers. Each of
these directors and executive officers has entered into an
employment agreement with us, which contains confidentiality and
non-competition provisions. However, if any disputes arise
between these directors or executive officers and us, it is not
clear, in light of uncertainties associated with the PRC legal
system, the extent to which any of these agreements could be
enforced in China, where all of these directors and executive
officers reside and hold some of their assets. See
Risks Related to Doing Business in
China Uncertainties with respect to the PRC legal
system could have a material adverse effect on us.
Furthermore, as we expect to continue to expand our operations
and develop new products, we will need to continue attracting
and retaining experienced management and key research and
development personnel.
Competition for personnel in the solar energy industry in China
is intense, and the availability of suitable and qualified
candidates is limited. In particular, we compete to attract and
retain qualified research and development personnel with other
PV technology companies, universities and research institutions.
Competition for these individuals could cause us to offer higher
compensation and other benefits in order to attract and retain
them, which could have a material adverse effect on our
financial condition and results of operations. We may also be
unable to attract or retain the personnel necessary to achieve
our business objectives, and any failure in this regard could
severely disrupt our business and growth.
Our
recent change in chief financial officer may have an adverse
effect on the functioning of our financial controls and
reporting.
We recently appointed Ms. Amy Jing Liu to be our chief
financial officer, replacing Mr. Kevin C. Wei, whose
employment contract expired on October 31, 2007.
Ms. Ru Cai resigned as principal accounting officer when
her employment contract expired on October 31, 2007.
Although there was an overlap of almost two weeks between the
end of Mr. Weis tenure at our company and
Ms. Lius appointment and we have hired additional
financial officers during the past few months, the transition
between the two chief financial officers may not be smooth and
there may be an adverse effect on the functioning of our
financial controls and reporting as a result of this change in
management.
Our
independent auditors, in the course of auditing our consolidated
financial statements for the year ended December 31, 2006
noted significant deficiencies in our internal controls that
collectively were deemed to constitute a material weakness. If
we fail to maintain an effective system of internal control over
financial reporting, our ability to accurately and timely report
our financial results or prevent fraud may be adversely
affected. In addition, investor confidence and the market price
of our ADSs may be adversely impacted if we or our independent
auditors are unable to attest to the adequacy of the internal
control over financial reporting of our company in accordance
with the requirements of Section 404 of the Sarbanes-Oxley
Act of 2002.
Our reporting obligations as a public company will place a
significant strain on our management, operational and financial
resources and systems for the foreseeable future. Prior to our
initial public offering in December 2006, we were a private
company with a short operating history and limited accounting
personnel and other resources with which to address our internal
control and procedures over financial reporting. In connection
with their audits of our consolidated financial statements for
the period from August 27, 2004 (inception) to
December 31, 2004 and the year ended December 31,
2005, our auditors, an independent registered public accounting
firm, noted and communicated to us certain significant
deficiencies in our internal control over financial reporting
that were deemed to constitute material weaknesses
as defined in standards established by the U.S. Public
Company Accounting Oversight Board. These material weaknesses
previously identified by our independent auditors, which could
have resulted in more than a remote likelihood that a material
misstatement in our annual or interim financial statements would
not be prevented or detected, consisted of inadequate
independent oversight and inadequate
23
personnel resources, processes and documentation to address
reporting requirements under U.S. GAAP and relevant
regulations of the U.S. Securities and Exchange Commission, or
the SEC.
In order to remedy these material weaknesses, we adopted and
implemented several measures to improve our internal control
over financial reporting. In addition to appointing a chief
financial officer to lead our companys financial and risk
management and a principal accounting officer, we established in
November 2006 an audit committee composed entirely of
independent directors to oversee the accounting and financial
reporting processes as well as external and internal audits of
our company.
In the course of auditing our consolidated financial statements
as of and for the nine months ended September 30, 2006 and
the year ended December 31, 2006, our auditors noted
improvements in our internal controls, as well as certain
circumstances in which our financial statement closing processes
could and should be further enhanced that collectively
constituted a material weakness in our internal control over
financial reporting. Specifically, written intentions to grant
share options to certain of our employees should have been
disclosed in the previously issued December 31, 2004,
December 31, 2005 and March 31, 2006 financial
statements as a subsequent event. This material weakness could
result in more than a remote likelihood that a material
misstatement in our annual or interim financial statements would
not be prevented or detected. However, our management believes
that none of the specific deficiencies identified has
individually or collectively had a material adverse effect on
our financial statements, and these deficiencies were not
related to any fraudulent acts.
To address this material weakness, we have undertaken additional
initiatives to strengthen our internal control over financial
reporting generally and specifically to improve our
U.S. GAAP financial closing-related policies and
procedures. These initiatives have included hiring additional
qualified professionals with relevant experience for our finance
and accounting department and increasing the level of
interaction among our management, audit committee, independent
auditors and other external advisors. We are also in the process
of implementing additional measures to further make
improvements, including providing specialized training for our
existing personnel. However, the implementation of these
initiatives may not fully address these deficiencies in our
internal control over financial reporting, and we cannot yet
conclude that they have been fully remedied. Our failure to
correct these deficiencies or our failure to discover and
address any other weaknesses or deficiencies could result in
inaccuracies in our financial statements and could also impair
our ability to comply with applicable financial reporting
requirements and related regulatory filings on a timely basis.
As a result, our business, financial condition, results of
operations and prospects, as well as the trading price of our
ADSs, may be materially and adversely affected.
We are subject to the Sarbanes-Oxley Act of 2002, or the
Sarbanes-Oxley Act. Section 404 of the Sarbanes-Oxley Act
will require that we include a report from management on our
internal control over financial reporting in our annual report
on
Form 20-F
beginning with our annual report for the fiscal year ended
December 31, 2007. In addition, beginning at the same time,
our auditors must attest to and report on the effectiveness of
our internal control over financial reporting. Our management
may conclude that our internal control over financial reporting
is not effective. Moreover, even if our management does conclude
that our internal control over financial reporting is effective,
our independent registered public accounting firm may disagree.
If our independent registered public accounting firm is not
satisfied with our internal control over financial reporting or
the level at which our internal control over financial reporting
is documented, designed, operated or reviewed, or if the
independent registered public accounting firm interprets the
requirements, rules or regulations differently than we do, then
they may decline to attest to the effectiveness of our internal
control over financial reporting or may issue an adverse
opinion. Any of these possible outcomes could result in an
adverse reaction in the financial marketplace due to a loss of
investor confidence in the reliability of our reporting
processes, which could adversely impact the market price of our
ADSs. We will need to incur significant costs and use
significant management and other resources in order to comply
with Section 404 of the Sarbanes-Oxley Act.
We
have very limited insurance coverage and we are subject to the
risk of damage due to fires or explosions because some materials
we use in our manufacturing processes are highly
flammable.
We do not maintain any third-party liability insurance coverage
or any insurance coverage for business interruption or
environmental damage arising from accidents that occur in the
course of our operations. As a result, we may have to pay for
financial and other losses, damages and liabilities, including
those caused by natural
24
disasters and other events beyond our control, out of our own
funds, which could have a material adverse effect on our
financial condition and results of operations.
Furthermore, we are subject to risk of explosion and fires, as
highly flammable gases, such as silane and nitrogen gas, are
generated in our manufacturing processes. While we have not
experienced to date any explosion or fire, the risks associated
with these gases cannot be completely eliminated. We have
adopted various measures, such as using special gas treatment
equipment, to minimize such risk. Although we maintain fire
insurance coverage, it may not be sufficient to cover all of our
potential losses due to an explosion or fire. Moreover, if any
of our production lines or equipment were to be damaged or cease
operation as a result of an explosion or fire, it would
temporarily reduce our manufacturing capacity and may result in
investigations or penalties by relevant regulatory authorities,
which could materially and adversely affect our business,
financial condition and results of operations.
Any
environmental claims or failure to comply with any present or
future environmental regulations may require us to spend
additional funds and may materially and adversely affect our
financial condition and results of operations.
We are subject to a variety of laws and regulations relating to
the use, storage, discharge and disposal of chemical by-products
of, and water used in, our manufacturing operations and research
and development activities, including toxic, volatile and
otherwise hazardous chemicals and wastes. We are in compliance
with current environmental regulations to conduct our business
as it is presently conducted. Although we have not suffered
material environmental claims in the past, the failure to comply
with any present or future regulations could result in the
assessment of damages or imposition of fines against us,
suspension of production or a cessation of our operations. New
regulations could also require us to acquire costly equipment or
to incur other significant expenses. Any failure by us to
control the use of, or to adequately restrict the discharge of,
hazardous substances could subject us to potentially significant
monetary damages and fines or suspension of our business, as
well as our financial condition and results of operations.
The use of certain hazardous substances, such as lead, in
various products is also coming under increasingly stringent
governmental regulation. Increased environmental regulation in
this area could adversely impact the manufacture and sale of
solar modules that contain lead and could require us to make
unanticipated environmental expenditures. For example, the
European Union Directive 2002/96/EC on Waste Electrical and
Electronic Equipment, or the WEEE Directive, requires
manufacturers of certain electrical and electronic equipment to
be financially responsible for the collection, recycling,
treatment and disposal of specified products placed on the
market in the European Union. In addition, European Union
Directive 2002/95/EC on the Restriction of the use of Hazardous
Substances in electrical and electronic equipment, or the RoHS
Directive, restricts the use of certain hazardous substances,
including lead, in specified products. Other jurisdictions are
considering adopting similar legislation. Currently, we are not
required under the WEEE or RoHS Directives to collect, recycle
or dispose any of our products. However, the Directives allow
for future amendments subjecting additional products to the
Directives requirements. If, in the future, our solar
modules become subject to such requirements, we may be required
to apply for an exemption. If we were unable to obtain an
exemption, we would be required to redesign our solar modules in
order to continue to offer them for sale within the European
Union, which would be impractical. Failure to comply with the
Directives could result in the imposition of fines and
penalties, the inability to sell our solar modules in the
European Union, competitive disadvantages and loss of net sales,
all of which could have a material adverse effect on our
business, financial condition and results of operations.
Our
business benefits from certain PRC government incentives.
Expiration of, or changes to, these incentives could have a
material adverse effect on our results of
operations.
In accordance with the current PRC Income Tax Law for
Enterprises with Foreign Investment and Foreign Enterprises and
the related implementing rules, Linyang China is currently
subject to a preferential enterprise income tax rate of 24% and
a local income tax rate of 3%. In addition, under these taxation
laws and regulations, Linyang China was exempted from enterprise
income tax for 2005 and 2006 and will be taxed at a reduced rate
of 12% in 2007, 2008 and 2009. From 2005 until the end of 2009,
Linyang China is also exempted from the 3% local income tax.
From 2010 onward, Linyang China will be taxed at a rate of 27%,
consisting of 24% enterprise income tax and 3% local income tax.
Furthermore, Linyang China is entitled to a two-year income tax
exemption for 2006
25
and 2007 and a reduced tax rate of 12% for the following three
years on income generated from its increased capital resulting
from our contribution to Linyang China of the funds we received
through issuances of our series A convertible preference
shares in June and August 2006. As these tax incentives expire,
the effective tax rate of Linyang China will increase
significantly, and any increase of Linyang Chinas
enterprise income tax rate in the future could have a material
adverse effect on our financial condition and results of
operations.
In addition, on March 16, 2007, the National Peoples
Congress of the PRC passed the PRC Enterprise Income Tax Law,
which law will take effect as of January 1, 2008. In
accordance with the new law, a unified enterprise income tax
rate of 25% and unified tax deduction standards will be applied
equally to both domestic-invested enterprises and
foreign-invested enterprises such as Linyang China. Enterprises
established prior to March 16, 2007 eligible for
preferential tax treatment in accordance with the currently
prevailing tax laws and administrative regulations shall, under
the regulations of the State Council, gradually become subject
to the new tax rate over a five-year transition period starting
from the date of effectiveness of the new law. We expect details
of the transitional arrangement for the five-year period from
January 1, 2008 to December 31, 2012 applicable to
enterprises established prior to March 16, 2007, such as
Linyang China, to be set out in more detailed implementing rules
to be adopted in the future. Linyang Chinas applicable tax
rate may gradually increase to the unified tax rate of 25% by
January 1, 2013 under the new tax law and in accordance
with more detailed implementing rules to be adopted in the
future. Any increase in our effective tax rate as a result of
the above may adversely affect our operating results.
Under
a recently promulgated PRC Tax Law, we may be classified as a
Resident Enterprise of the PRC. Such classification
would likely result in negative tax consequences to us and our
non-PRC shareholders.
Under the new tax law, an enterprise established outside of the
PRC with de facto management bodies within the PRC
is considered a resident enterprise and will normally be subject
to enterprise income tax at the rate of 25% on its global
income. All of our management is currently located in the PRC,
and we may be considered a resident enterprise and therefore be
subject to the enterprise income tax at the rate of 25% of our
global income. In that case, dividends paid by us to our non-PRC
shareholders may be subject to a withholding tax. The new tax
law provides that an income tax rate of 10% will normally be
applicable to dividends payable to foreign investors and does
not specifically exempt withholding tax on dividends payable to
foreign investors. In addition, under the new tax law, foreign
shareholders and ADS holders may be subject to a 10% income tax
on any gains they realize from the transfer of their shares or
ADSs, if such income is regarded as income from sources within
the PRC.
Fluctuations
in exchange rates could adversely affect our business as well as
result in foreign currency exchange losses.
Our financial statements are expressed in, and our functional
currency is Renminbi. The change in value of the Renminbi
against the U.S. dollar, Euro and other currencies is
affected by, among other things, changes in Chinas
political and economic conditions. On July 21, 2005, the
PRC government changed its decade-old policy of pegging the
value of the Renminbi to the U.S. dollar. Under the new
policy, the Renminbi is permitted to fluctuate within a narrow
and managed band against a basket of certain foreign currencies.
This change in policy has resulted in a more than 11.7%
appreciation of the Renminbi against the U.S. dollar. The
PRC government may decide to adopt an even more flexible
currency policy in the future, which could result in a further
and more significant appreciation of the Renminbi against the
U.S. dollar. An appreciation of the Renminbi relative to
other foreign currencies could decrease the per unit revenue
generated from our international sales. If we increased our
pricing to compensate for the reduced purchasing power of
foreign currencies, we may decrease the market competitiveness,
on a price basis, of our products. This could result in a
decrease in our international sales and materially and adversely
affect our business.
A substantial portion of our sales is denominated in
U.S. dollars and Euros, while a substantial portion of our
costs and expenses is denominated in Renminbi and
U.S. dollars. As a result, the revaluation of the Renminbi
in July 2005 has increased, and further revaluations could
further increase, our costs. In addition, as we rely entirely on
dividends paid to us by Linyang China, our operating subsidiary
in the PRC, any significant revaluation of the Renminbi may have
a material adverse effect on our financial condition and results
of operations. The value of, and any dividends payable on, our
ADSs in foreign currency terms will also be affected. For
example, when converting
26
the U.S. dollars we receive from financing into Renminbi
amount for our operations, any appreciation of Renminbi against
the U.S. dollar will decrease the Renminbi amount we
receive from the conversion. Conversely, if we decide to convert
our Renminbi into U.S. dollars for the purpose of making
payments for dividends on our ordinary shares or ADSs or for
other business purposes, an appreciation of the U.S. dollar
against the Renminbi would have a negative effect on the
U.S. dollar amount available to us.
Fluctuations in exchange rates, particularly among the
U.S. dollar, Renminbi and Euro, also affect our gross and
net profit margins and could result in fluctuations in foreign
exchange and operating gains and losses. We incurred net foreign
currency losses of RMB1.8 million, RMB4.3 million
(US$0.6 million) and RMB22.3 million
(US$3.0 million) in 2005, 2006 and the nine months ended
September 30, 2007, respectively. We cannot predict the
impact of future exchange rate fluctuations on our financial
condition and results of operations, and we may incur net
foreign currency losses in the future.
Very limited hedging transactions are available in the PRC to
reduce our exposure to exchange rate fluctuations. To date, we
have not entered into any hedging transactions in an effort to
reduce our exposure to foreign currency exchange risk. While we
may enter into hedging transactions in the future, the
availability and effectiveness of these transactions may be
limited and we may not be able to successfully hedge our
exposure at all. In addition, our foreign currency exchange
losses may be magnified by PRC exchange control regulations that
restrict our ability to convert Renminbi into foreign currencies.
Two of
our existing shareholders have substantial influence over our
company and their interests may not be aligned with the
interests of our other shareholders.
Mr. Yonghua Lu, chairman of our board of directors and
chief executive officer, and Good Energies II LP currently own
16.10% and 34.65%, respectively, of our outstanding share
capital. In December 2007, Mr. Yonghua Lu transferred
38,634,750 ordinary shares beneficially owned by him to
Good Energies II LP acting by its general partner Good Energies
General Partner Jersey Limited. Mr. Lu and Good Energies II
LP have substantial influence over our business, including
decisions regarding mergers, consolidations and the sale of all
or substantially all of our assets, election of directors and
other significant corporate actions. This concentration of
ownership may discourage, delay or prevent a change in control
of our company, which could deprive our shareholders of an
opportunity to receive a premium for their shares as part of a
sale of our company and might reduce the price of our ADSs.
These actions may be taken even if they are opposed by our other
shareholders.
If we
grant employee share options and other share-based compensation
in the future, our net income could be adversely
affected.
We adopted a share incentive plan for our employees in November
2006, pursuant to which we may issue options to purchase up to
10,799,685 ordinary shares. As of September 30, 2007,
options to purchase 8,772,998 ordinary shares had been granted
under this plan. In August 2007, we adopted our 2007 equity
incentive plan and 10,799,685 ordinary shares were reserved for
issuance under the plan. In addition, our 2007 equity incentive
plan provides for annual increase in the number of shares
available for issuance on the first day of each fiscal year
equal to 2% of our outstanding ordinary shares on the last day
of the immediately preceding fiscal year or such lesser amount
as our board of directors may determine. As a result of these
option grants and potential future grants under these plans, we
expect to incur significant share compensation expenses in
future periods. The amount of these expenses will be based on
the fair value of the share-based awards. Fair value is
determined based on an independent third party valuation. We
have adopted Statement of Financial Accounting Standard
No. 123 (revised 2004) for the accounting treatment of
our share incentive plan. As a result, we will have to account
for compensation costs for all share options, including share
options granted to our directors and employees, using a
fair-value based method and recognize expenses in our
consolidated statement of operations in accordance with the
relevant rules under U.S. GAAP, which may have a material
adverse effect on our net profit. Moreover, the additional
expenses associated with share-based compensation may reduce the
attractiveness of such incentive plan to us. However, our share
incentive plan and other similar types of incentive plans are
important in order to attract and retain key personnel. We
cannot assure you that employee share options or other
share-based compensation we may grant in the future, would not
have a material adverse effect on our profitability.
27
Risks
Related to Doing Business in China
Adverse
changes in political and economic policies of the PRC government
could have a material adverse effect on the overall economic
growth of China, which could reduce the demand for our products
and materially and adversely affect our competitive
position.
Substantially all of our operations are conducted in China and
some of our sales are made in China. Accordingly, our business,
financial condition, results of operations and prospects are
affected significantly by economic, political and legal
developments in China. The PRC economy differs from the
economies of most developed countries in many respects,
including:
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the amount of government involvement;
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the level of development;
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the growth rate;
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the control of foreign exchange; and
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the allocation of resources.
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While the PRC economy has grown significantly over the past
25 years, the growth has been uneven, both geographically
and among various sectors of the economy. The PRC government has
implemented various measures to encourage economic growth and
guide the allocation of resources. Some of these measures
benefit the overall PRC economy, but may also have a negative
effect on us. For example, our financial condition and results
of operations may be adversely affected by government control
over capital investments or changes in tax regulations that are
applicable to us.
The PRC economy has been transitioning from a planned economy to
a more market-oriented economy. Although the PRC government has
in recent years implemented measures emphasizing the utilization
of market forces for economic reform, the reduction of state
ownership of productive assets and the establishment of sound
corporate governance in business enterprises, a substantial
portion of the productive assets in China is still owned by the
PRC government. The continued control of these assets and other
aspects of the national economy by the PRC government could
materially and adversely affect our business. The PRC government
also exercises significant control over economic growth in China
through the allocation of resources, controlling payment of
foreign currency-denominated obligations, setting monetary
policy and providing preferential treatment to particular
industries or companies. Efforts by the PRC government to slow
the pace of growth of the PRC economy could result in decreased
capital expenditure by solar energy users, which in turn could
reduce demand for our products.
Any adverse change in the economic conditions or government
policies in China could have a material adverse effect on the
overall economic growth and the level of renewable energy
investments and expenditures in China, which in turn could lead
to a reduction in demand for our products and consequently have
a material adverse effect on our business and prospects. In
particular, the PRC government has, in recent years, promulgated
certain laws and regulations and initiated certain
government-sponsored programs to encourage the utilization of
new forms of energy, including solar energy. We cannot assure
you that the implementation of these laws, regulations and
government programs will be beneficial to us. In particular, any
adverse change in the PRC governments policies toward the
solar power industry may have a material adverse effect on our
operations as well as on our plans to expand our business into
downstream system integration services.
Uncertainties
with respect to the PRC legal system could have a material
adverse effect on us.
We conduct substantially all of our business through our
operating subsidiary in the PRC, Linyang China, a Chinese wholly
foreign-owned enterprise. Linyang China is generally subject to
laws and regulations applicable to foreign investment in China
and, in particular, laws applicable to wholly foreign-owned
enterprises. The PRC legal system is based on written statutes,
and prior court decisions may be cited for reference but have
limited precedential value. Since 1979, PRC legislation and
regulations have significantly enhanced the protections afforded
to various forms of foreign investments in China. However, since
these laws and regulations are relatively new and the PRC legal
system continues to rapidly evolve, the interpretations of many
laws, regulations and rules
28
are not always uniform and enforcement of these laws,
regulations and rules involve uncertainties, which may limit
legal protections available to us. In addition, any litigation
in China may be protracted and result in substantial costs and
diversion of resources and management attention.
We
rely principally on dividends and other distributions on equity
paid by our operating subsidiary to fund cash and financing
requirements, and limitations on the ability of our operating
Subsidiary to pay dividends or other distributions to us could
have a material adverse effect on our ability to conduct our
business.
We are a holding company and conduct substantially all of our
business through our operating subsidiary, Linyang China, which
is a limited liability company established in China. We rely on
dividends paid by Linyang China for our cash needs, including
the funds necessary to pay dividends and other cash
distributions to our shareholders, to service any debt we may
incur and to pay our operating expenses. The payment of
dividends by entities organized in China is subject to
limitations. In particular, regulations in the PRC currently
permit payment of dividends only out of accumulated profits as
determined in accordance with PRC accounting standards and
regulations. Linyang China is also required to set aside at
least 10% of its after-tax profit based on PRC accounting
standards each year to its general reserves until the
accumulative amount of such reserves reaches 50% of its
registered capital. These reserves are not distributable as cash
dividends. In addition, Linyang China is required to allocate a
portion of its after-tax profit to its staff welfare and bonus
fund at the discretion of its board of directors. Moreover, the
instruments governing Linyang Chinas indebtedness restrict
its ability to pay dividends or make other distributions to us
and Linyang China may in the future enter into agreements that
limit its ability to pay dividends or make other distributions
to us.
Restrictions
on currency exchange may limit our ability to receive and use
our revenue effectively.
A portion of our revenue and expenses are denominated in
Renminbi. The Renminbi is currently convertible under the
current account, which includes dividends, trade and
service-related foreign exchange transactions, but not under the
capital account, which includes foreign direct
investment and loans. Currently, Linyang China may purchase
foreign currencies for settlement of current account
transactions, including payments of dividends to us, without the
approval of the State Administration of Foreign Exchange, or
SAFE. However, the relevant PRC government authorities may limit
or eliminate our ability to purchase foreign currencies in the
future. Any existing and future restrictions on currency
exchange may limit our ability to utilize revenue generated in
Renminbi to fund our business activities outside China that are
denominated in foreign currencies.
Foreign exchange transactions by Linyang China under the capital
account continue to be subject to significant foreign exchange
controls and require the approval of or need to register with
PRC governmental authorities, including SAFE. In particular, if
Linyang China borrows foreign currency loans from us or other
foreign lenders, these loans must be registered with SAFE, and
if we finance Linyang China by means of additional capital
contributions, these capital contributions must be approved by
certain government authorities, including the National
Development and Reform Commission, or the NDRC, the Ministry of
Commerce or their respective local counterparts. These
limitations could affect the ability of Linyang China to obtain
foreign exchange through debt or equity financing.
Recent
PRC regulations relating to the establishment of offshore
special purpose companies by PRC residents may subject our PRC
resident shareholders to personal liability and limit our
ability to acquire PRC companies or to inject capital into our
PRC subsidiary, limit our PRC subsidiarys ability to
distribute profits to us, or otherwise materially and adversely
affect us.
SAFE issued a public notice in October 2005, or the SAFE notice,
requiring PRC residents, including both legal persons and
natural persons, to register with the competent local SAFE
branch before establishing or controlling any company outside of
China, referred to as an offshore special purpose
company, for the purpose of acquiring any assets of or
equity interest in PRC companies and raising fund from overseas.
In addition, any PRC resident that is the shareholder of an
offshore special purpose company is required to amend its SAFE
registration with the local SAFE branch, with respect to that
offshore special purpose company in connection with any increase
or decrease of capital, transfer of shares, merger, division,
equity investment or creation of any security interest over
29
any assets located in China. If any PRC shareholder of any
offshore special purpose company fails to make the required SAFE
registration and amendment, the PRC subsidiaries of that
offshore special purpose company may be prohibited from
distributing their profits and the proceeds from any reduction
in capital, share transfer or liquidation to the offshore
special purpose company. Moreover, failure to comply with the
SAFE registration and amendment requirements described above
could result in liability under PRC laws for evasion of
applicable foreign exchange restrictions. Our current beneficial
owners who are PRC residents have registered with the local SAFE
branch as required under the SAFE notice. The failure of these
beneficial owners to amend their SAFE registrations in a timely
manner pursuant to the SAFE notice or the failure of future
beneficial owners of our company who are PRC residents to comply
with the registration procedures set forth in the SAFE notice
may subject such beneficial owners to fines and legal sanctions
and may also result in a restriction on our PRC
subsidiarys ability to distribute profits to us or
otherwise materially and adversely affect our business. In
addition, the NDRC promulgated a rule in October 2004, or the
NDRC Rule, which requires NDRC approvals for overseas investment
projects made by PRC entities. The NDRC Rule also provides that
approval procedures for overseas investment projects of PRC
individuals shall be implemented with reference to this rule.
However, there exist extensive uncertainties in terms of
interpretation of the NDRC Rule with respect to its application
to a PRC individuals overseas investment, and in practice,
we are not aware of any precedents that a PRC individuals
overseas investment has been approved by the NDRC or challenged
by the NDRC based on the absence of NDRC approval. Our current
beneficial owners who are PRC individuals did not apply for NDRC
approval for investment in us. We cannot predict how and to what
extent this will affect our business operations or future
strategy. For example, the failure of our shareholders who are
PRC individuals to comply with the NDRC Rule may subject these
persons or our PRC subsidiary to certain liabilities under PRC
laws, which could adversely affect our business.
We
face risks related to health epidemics and other
outbreaks.
Adverse public health epidemics or pandemics could disrupt
business and the economics of the PRC and other countries where
we do business. From December 2002 to June 2003, China and other
countries experienced an outbreak of a highly contagious form of
atypical pneumonia now known as severe acute respiratory
syndrome, or SARS. On July 5, 2003, the World Health
Organization declared that the SARS outbreak had been contained.
However, a number of isolated new cases of SARS were
subsequently reported, most recently in central China in April
2004. During May and June of 2003, many businesses in China were
closed by the PRC government to prevent transmission of SARS.
Moreover, some Asian countries, including China, have recently
encountered incidents of the H5N1 strain of bird flu, or avian
flu. We are unable to predict the effect, if any, that avian flu
may have on our business. In particular, any future outbreak of
SARS, avian flu or other similar adverse public developments
may, among other things, significantly disrupt our business,
including limiting our ability to travel or ship our products
within or outside China and forcing us to temporary close our
manufacturing facilities. Furthermore, an outbreak may severely
restrict the level of economic activity in affected areas, which
may in turn materially and adversely affect our financial
condition and results of operations. We have not adopted any
written preventive measures or contingency plans to combat any
future outbreak of avian flu, SARS or any other epidemic.
Risks
Related to This Offering
The
effect of the issuance of our ADSs in this offering, which
issuance is being made to facilitate transactions by which
investors in our convertible notes may hedge their investments,
may be to lower the market price of our ADSs.
In this offering, we are
offering ADSs (or up
to ADSs if the underwriter
exercises its options in full). These ADSs are being purchased
by the ADS purchaser, an affiliate of Morgan Stanley &
Co. Incorporated, the underwriter in this offering, pursuant to
a share issuance and repurchase agreement. We will not receive
any proceeds from the sale of the purchased ADSs. An affiliate
of the ADS purchaser has informed us that it intends to use the
short position created by the repurchase provisions of the share
issuance and repurchase agreement and concurrent sale of the
purchased ADSs to facilitate transactions by which investors in
our convertible notes may hedge their investments through
privately negotiated transactions.
We will have the right to repurchase, for par value, the
purchased ADSs when our convertible notes, which are being
offered in a concurrent private placement, are no longer
outstanding, or in certain other circumstances. Our
30
right to repurchase ADSs under the share issuance and repurchase
agreement will expire one month after the maturity date of the
convertible notes. The ADS purchaser may require us to
repurchase, for par value, the purchased ADSs, in whole or in
part, at any time on three business days notice. See
Description of Share Issuance and Repurchase Agreement and
Concurrent Offering of Our Convertible Notes.
The existence of the share issuance and repurchase agreement and
the sales of our ADSs effected in connection with the sale of
our convertible notes could cause the market price of our ADSs
to be lower over the term of the share issuance and repurchase
agreement than would have been the case had we not entered into
that agreement.
The
market price for our ADSs may be volatile.
The market price of our ADSs experienced, and may continue to
experience, significant volatility. For the period from
December 20, 2006 to December 27, 2007, the trading
price of our ADSs on the Nasdaq Global Market has ranged from a
low of US$8.22 per ADS to a high of US$37.85 per ADS.
Numerous factors, including many over which we have no control,
may have a significant impact on the market price of our ADSs,
including, among other things:
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announcements of technological or competitive developments;
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regulatory developments in our target markets affecting us, our
customers or our competitors;
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announcements regarding patent litigation or the issuance of
patents to us or our competitors;
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announcements of studies and reports relating to the conversion
efficiencies of our products or those of our competitors;
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actual or anticipated fluctuations in our quarterly operating
results;
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changes in financial estimates by securities research analysts;
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changes in the economic performance or market valuations of
other PV technology companies;
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addition or departure of our executive officers and key research
personnel; and
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sales or perceived sales of additional ordinary shares or ADSs.
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In addition, the stock market in recent years has experienced
extreme price and trading volume fluctuations that often have
been unrelated or disproportionate to the operating performance
of individual companies. These broad market fluctuations may
adversely affect the price of our ADSs, regardless of our
operating performance.
Future
issuances of ordinary shares, ADSs or equity-related securities
may depress the trading price of our ADSs.
Any issuance of equity securities after this offering, could
dilute the interests of our existing shareholders, and could
substantially decrease the trading price of our ADSs. We may
issue equity securities in the future for a number of reasons,
including to finance our operations and business strategy
(including in connection with acquisitions, strategic
collaborations or other transactions), to adjust our ratio of
debt to equity and to satisfy our obligations upon the exercise
of outstanding warrants or options or for other reasons.
Sales of a substantial number of ADSs or other equity-related
securities in the public market could depress the market price
of our ADSs, and impair our ability to raise capital through the
sale of additional equity securities. We cannot predict the
effect that future sales of our ADSs or other equity-related
securities would have on the market price of our ADSs. In
addition, the price of our ADSs could be affected by possible
sales of our ADSs by investors who view the convertible notes as
a more attractive means of obtaining equity participation in our
company and by hedging or arbitrage trading activity that we
expect to develop involving our convertible notes.
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Our
articles of association contain anti-takeover provisions that
could have a material adverse effect on the rights of holders of
our ordinary shares and ADSs.
Our articles of association limit the ability of others to
acquire control of our company or cause us to engage in
change-of-control transactions. These provisions could have the
effect of depriving our shareholders of an opportunity to sell
their shares at a premium over prevailing market prices by
discouraging third parties from seeking to obtain control of our
company in a tender offer or similar transaction. For example,
our board of directors has the authority, without further action
by our shareholders, to issue preferred shares in one or more
series and to fix their designations, powers, preferences,
privileges, and relative participating, optional or special
rights and the qualifications, limitations or restrictions,
including dividend rights, conversion rights, voting rights,
terms of redemption and liquidation preferences, any or all of
which may be greater than the rights associated with our
ordinary shares, in the form of ADS or otherwise. Preferred
shares could be issued quickly with terms calculated to delay or
prevent a change in control of our company or make removal of
management more difficult. If our board of directors decides to
issue preferred shares, the price of our ADSs may fall and the
voting and other rights of the holders of our ordinary shares
and ADSs may be materially and adversely affected.
Holders
of ADSs have fewer rights than shareholders and must act through
the depositary to exercise those rights.
Holders of ADSs do not have the same rights as our shareholders
and may only exercise the voting rights with respect to the
underlying ordinary shares in accordance with the provisions of
the deposit agreement. Under our amended and restated articles
of association, the minimum notice period required to convene a
general meeting is 14 days. When a general meeting is
convened, you may not receive sufficient notice of a
shareholders meeting to permit you to withdraw your
ordinary shares to allow you to cast your vote with respect to
any specific matter. If requested in writing by us, the
depositary will mail a notice of such a meeting to you. In
addition, the depositary and its agents may not be able to send
voting instructions to you or carry out your voting instructions
in a timely manner. We will make all reasonable efforts to cause
the depositary to extend voting rights to you in a timely
manner, but you may not receive the voting materials in time to
ensure that you can instruct the depositary to vote your ADSs.
Furthermore, the depositary and its agents will not be
responsible for any failure to carry out any instructions to
vote, for the manner in which any vote is cast or for the effect
of any such vote. As a result, you may not be able to exercise
your right to vote and you may lack recourse if your ADSs are
not voted as you requested. In addition, in your capacity as an
ADS holder, you will not be able to call a shareholders
meeting.
You
may be subject to limitations on transfers of your
ADSs.
Your ADSs are transferable on the books of the depositary.
However, the depositary may close its transfer books at any time
or from time to time when it deems expedient in connection with
the performance of its duties. In addition, the depositary may
refuse to deliver, transfer or register transfers of ADSs
generally when our books or the books of the depositary are
closed, or at any time if we or the depositary deem it advisable
to do so because of any requirement of law or of any government
or governmental body, or under any provision of the deposit
agreement, or for any other reason.
Your
right to participate in any future rights offerings may be
limited, which may cause dilution to your holdings, and you may
not receive distributions with respect to the underlying
ordinary shares if it is impractical to make them available to
you.
We may from time to time distribute rights to our shareholders,
including rights to acquire our securities. However, we cannot
make rights available to you in the United States unless we
register the rights and the securities to which the rights
relate under the Securities Act or an exemption from the
registration requirements is available. Also, under the deposit
agreement, the depositary will not make rights available to you
unless the distribution to ADS holders of both the rights and
any related securities are either registered under the
Securities Act, or exempted from registration under the
Securities Act. We are under no obligation to file a
registration statement with respect to any such rights or
securities or to endeavor to cause such a registration statement
to be declared effective. Moreover, we may not be able to
establish an exemption from registration under the Securities
Act. Accordingly, in the event we conduct any rights offering in
the future, the depositary may not make such rights available to
you or may
32
dispose of such rights and make the net proceeds available to
you. As a result, you may be unable to participate in our rights
offerings and may experience dilution in your holdings.
In addition, the depositary of our ADSs has agreed to pay to you
the cash dividends or other distributions it or the custodian
receives on our ordinary shares or other deposited securities
after deducting its fees and expenses. You will receive these
distributions in proportion to the number of ordinary shares
your ADSs represent. However, the depositary may, at its
discretion, decide that it is inequitable or impractical to make
a distribution available to any holders of ADSs. As a result,
the depositary may decide not to make the distribution and you
will not receive such distribution.
We are
a Cayman Islands Company and, because judicial precedent
regarding the rights of shareholders is more limited under
Cayman Islands law than under U.S. law, you may have less
protection for your shareholder rights than you would under U.S.
law.
Our corporate affairs are governed by our amended and restated
memorandum and articles of association, the Cayman Islands
Companies Law and the common law of the Cayman Islands. The
rights of shareholders to take action against the directors,
actions by minority shareholders and the fiduciary
responsibilities of our directors to us under Cayman Islands law
are to a large extent governed by the common law of the Cayman
Islands. The common law of the Cayman Islands is derived in part
from comparatively limited judicial precedent in the Cayman
Islands as well as that from English common law, which has
persuasive, but not binding, authority on a court in the Cayman
Islands. The rights of our shareholders and the fiduciary
responsibilities of our directors under Cayman Islands law are
not as clearly established as they would be under statutes or
judicial precedent in some jurisdictions in the United States.
In particular, the Cayman Islands has a less developed body of
securities laws than the United States. In addition, some
U.S. states, such as Delaware, have more fully developed
and judicially interpreted bodies of corporate law than the
Cayman Islands. In addition, Cayman Islands companies may not
have standing to initiate a shareholder derivative action in a
federal court of the United States.
In addition, most of our directors and officers are nationals
and residents of countries other than the United States.
Substantially all of our assets and a substantial portion of the
assets of these persons are located outside the United States.
The Cayman Islands courts are also unlikely:
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to recognize or enforce against us judgments of courts of the
United States based on certain civil liability provisions of
U.S. securities laws; and
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to impose liabilities against us, in original actions brought in
the Cayman Islands, based on certain civil liability provisions
of U.S. securities laws that are penal in nature.
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There is no statutory recognition in the Cayman Islands of
judgments obtained in the United States, although the courts of
the Cayman Islands will generally recognize and enforce a
non-penal judgment of a foreign court of competent jurisdiction
without retrial on the merits.
As a result of all of the above, public shareholders may have
more difficulty in protecting their interests in the face of
actions taken by management, members of the board of directors
or controlling shareholders than they would as shareholders of a
U.S. public company.
33
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that relate
to our current expectations and views of future events. The
forward-looking statements are contained principally in the
sections entitled Prospectus Summary, Risk
Factors, Use of Proceeds,
Managements Discussion and Analysis of Financial
Condition and Results of Operations and Our
Business. These statements relate to events that involve
known and unknown risks, uncertainties and other factors,
including those listed under Risk Factors, which may
cause our actual results, performance or achievements to be
materially different from any future results, performances or
achievements expressed or implied by the forward-looking
statements.
In some cases, these forward-looking statements can be
identified by words or phrases such as aim,
anticipate, believe,
continue, estimate, expect,
intend, is/are likely to,
may, plan, potential,
will or other similar expressions. We have based
these forward-looking statements largely on our current
expectations and projections about future events and financial
trends that we believe may affect our financial condition,
results of operations, business strategy and financial needs.
These forward-looking statements include, among other things,
statements relating to:
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our expectations regarding the worldwide demand for electricity
and the market for solar energy;
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our beliefs regarding the effects of environmental regulation,
lack of infrastructure reliability and long-term fossil fuel
supply constraints;
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our beliefs regarding the inability of traditional fossil
fuel-based generation technologies to meet the demand for
electricity;
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our beliefs regarding the importance of environmentally friendly
power generation;
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our expectations regarding governmental support for the
deployment of solar energy;
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our beliefs regarding the acceleration of adoption of solar
technologies;
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our expectations with respect to advancements in our
technologies;
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our beliefs regarding the competitiveness of our solar products;
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our expectations regarding the scaling of our manufacturing
capacity;
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our expectations with respect to increased revenue growth and
our ability to achieve profitability resulting from increases in
our production volumes;
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our expectations with respect to our ability to secure raw
materials, especially silicon wafers, in the future;
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our future business development, results of operations and
financial condition; and
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competition from other manufacturers of PV products and
conventional energy suppliers.
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This prospectus also contains data related to the PV market
worldwide and in China. This market data, including market data
from Solarbuzz, an independent solar energy research firm,
include projections that are based on a number of assumptions.
The PV market may not grow at the rates projected by the market
data, or at all. The failure of the market to grow at the
projected rates may have a material adverse effect on our
business and the market price of our ADSs. In addition, the
rapidly changing nature of the PV market subjects any
projections or estimates relating to the growth prospects or
future condition of our market to significant uncertainties. If
any one or more of the assumptions underlying the market data
turns out to be incorrect, actual results may differ from the
projections based on these assumptions. You should not place
undue reliance on these forward-looking statements.
The forward-looking statements made in this prospectus relate
only to events or information as of the date on which the
statements are made in this prospectus. We undertake no
obligation to update or revise publicly any forward-looking
statements, whether as a result of new information, future
events or otherwise, after the date on which the statements are
made or to reflect the occurrence of unanticipated events. You
should read this prospectus and the documents that we reference
in this prospectus and have filed as exhibits to the
registration statement, of which this prospectus is a part,
completely and with the understanding that our actual future
results may be materially different from what we expect.
34
We will not receive any proceeds from the sale of the purchased
ADSs in this offering. An affiliate of the ADS purchaser will
receive all the proceeds from the sale of the purchased ADSs.
Such affiliate has informed us that it intends to use the short
position created by the repurchase provisions of the share
issuance and repurchase agreement and the concurrent sale of the
purchased ADSs by means of this offering to facilitate
transactions by which investors in our convertible notes may
hedge their investments through privately negotiated
transactions. This offering is being conducted concurrently with
the private placement of our convertible notes. This offering is
conditioned upon the closing of such offering.
Pursuant to the share issuance and repurchase agreement, we will
sell the purchased ADSs offered in this offering (or up
to
ADSs if the underwriter exercises its option in full) for
US$0.0005 per ADS, subject to our rights to repurchase these
ADSs for US$0.0005 per ADS. The proceeds of these sales,
totalling US$ (or up to
US$ if the underwriter exercises
its option in full) will be used for general corporate purposes.
We estimate that our net proceeds from the sale of our
convertible notes, offered concurrently with this offering, will
be approximately
US$ million
after deducting the initial purchasers discount and
estimated offering expenses payable by us. If the initial
purchasers exercise in full their option to acquire additional
convertible notes, we estimate that our net proceeds will be
approximately
US$ million.
We intend to use approximately US$60.0 million for wafer
and polysilicon pre-payments, US$60.0 million for capital
expenditures and the remainder for working capital and repayment
of our existing bank borrowings.
35
The following table sets forth our capitalization, as of
September 30, 2007 on an actual basis and on an adjusted
basis to reflect the sale of the purchased ADSs pursuant to the
share issuance and repurchase agreement (assuming the
underwriter does not exercise its option to purchase additional
ADSs) and the sale of our convertible notes (assuming the
initial purchasers do not exercise their option to purchase
additional convertible notes) offered concurrently with this
offering.
You should read this table together with Selected
Consolidated Financial and Operating Data,
Managements Discussion and Analysis of Financial
Condition and Results of Operations and our consolidated
financial statements and the related notes included elsewhere in
this prospectus.
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As of September 30, 2007
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As
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As
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Actual
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Actual
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Adjusted
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Adjusted
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RMB
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US$
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RMB
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US$
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(in thousands)
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Long-term borrowings
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7,000
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934
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Shareholders equity
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Ordinary shares, US$0.0001 par value,
500,000,000 shares authorized; and 240,024,754 shares
issued and
outstanding(1)
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193
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25
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Additional paid-in capital
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1,581,294
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211,042
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Statutory reserve
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28,309
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3,779
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Retained earnings
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165,782
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22,125
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Total shareholders equity
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1,775,578
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236,971
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Total capitalization
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1,775,578
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236,971
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(1)
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Exclude 10,799,685 ordinary shares
reserved for future issuance under our 2006 equity incentive
plan.
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As of the date of this prospectus, there has been no material
change to our capitalization as set forth above.
36
PRICE
RANGE OF OUR AMERICAN DEPOSITARY SHARES
For the period from December 20, 2006 to December 27,
2007, the trading price of our ADSs on the Nasdaq Global Market
ranged from US$8.22 to US$37.85 per ADS.
Set forth below, for the applicable periods indicated, are the
high and low sales prices per ADS as reported by the Nasdaq
Global Market.
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High
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Low
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US$
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US$
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2006 (from December 20)
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12.50
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9.90
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2007
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Quarterly Highs and Lows
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First Quarter 2007
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17.10
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10.21
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Second Quarter 2007
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17.69
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8.22
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Third Quarter 2007
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15.74
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8.68
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Monthly Highs and Lows
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January 2007
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15.60
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10.21
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February 2007
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17.10
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13.23
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March 2007
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14.00
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11.88
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April 2007
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17.69
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12.15
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May 2007
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15.29
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9.02
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June 2007
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11.16
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8.22
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July 2007
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13.99
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10.40
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August 2007
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11.62
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8.68
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September 2007
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15.74
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10.20
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October 2007
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15.28
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12.56
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November 2007
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17.32
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9.90
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December 2007 (through December 27)
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37.85
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16.05
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On December 27, 2007, the last reported closing sale price
of our ADSs on the Nasdaq Global Market was US$33.73 per ADS.
37
We made a one-time cash dividend payment in the aggregate amount
of RMB7.2 million (US$0.9 million) to the holders of
the Series A convertible preference shares on
December 31, 2006. Except for the forgoing, we have never
declared or paid any cash dividends, nor do we have any present
plan to pay any cash dividends on our capital stock in the
foreseeable future. We currently intend to retain most, if not
all, of our available funds and any future earnings to operate
and expand our business.
Our board of directors has complete discretion on whether to pay
dividends, subject to the approval of our shareholders. Even if
our board of directors decides to pay dividends, the form,
frequency and amount will depend upon our future operations and
earnings, capital requirements and surplus, general financial
condition, contractual restrictions and other factors that the
board of directors may deem relevant. If we pay any dividends,
we will pay our ADS holders to the same extent as holders of our
ordinary shares, subject to the terms of the deposit agreement,
including the fees and expenses payable thereunder. See
Description of American Depositary Shares. Cash
dividends on our ordinary shares, if any, will be paid in
U.S. dollars.
We rely on dividends paid by Linyang China for our cash needs,
including the funds necessary to pay dividends to our
shareholders. The payment of dividends by Linyang China is
subject to limitations. See Risk Factors Risks
Related to Doing Business in China We rely
principally on dividends and other distributions on equity paid
by our operating subsidiary to fund cash and financing
requirements, and limitations on the ability of our operating
subsidiary to pay dividends or other distributions to us could
have a material adverse effect on our ability to conduct our
business.
38
EXCHANGE
RATE INFORMATION
The following table sets forth information regarding the noon
buying rates in Renminbi and U.S. dollars for the periods
indicated.
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Renminbi per U.S. Dollar Noon Buying Rate
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Period End
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Average(1)
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Low
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High
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2001
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8.2766
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8.2772
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8.2709
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8.2786
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2002
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8.2800
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8.2772
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8.2700
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8.2800
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2003
|
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|
8.2767
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8.2771
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8.2765
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8.2800
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2004
|
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8.2765
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8.2768
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8.2764
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8.2774
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2005
|
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8.0702
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8.1826
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8.0702
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8.2765
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2006
|
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7.8041
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7.9723
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7.8041
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8.0702
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2007
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January
|
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7.7714
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7.7876
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|
7.7705
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7.8127
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February
|
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|
7.7410
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|
7.7502
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|
|
|
7.7410
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|
|
|
7.7632
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March
|
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|
7.7232
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|
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|
7.7369
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|
|
|
7.7232
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|
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|
7.7454
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April
|
|
|
7.7090
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|
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|
7.7247
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|
7.7090
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|
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7.7345
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May
|
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|
7.6516
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|
7.6773
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|
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7.6463
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|
|
|
7.7065
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June
|
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|
7.6120
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|
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|
7.6333
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|
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|
7.6120
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|
|
|
7.6680
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July
|
|
|
7.5720
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|
|
|
7.5757
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|
|
|
7.5580
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|
|
|
7.6055
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August
|
|
|
7.5462
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|
|
|
7.5734
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|
|
|
7.5420
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|
|
|
7.6181
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September
|
|
|
7.4928
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|
|
|
7.5196
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|
|
|
7.4928
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|
|
|
7.5540
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October
|
|
|
7.4682
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|
|
|
7.5016
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|
|
|
7.4682
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|
|
|
7.5158
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November
|
|
|
7.3850
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|
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|
7.4212
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7.3800
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7.4582
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December (through December 27)
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7.3079
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|
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|
7.3758
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|
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7.3079
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|
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7.4120
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Source:
Federal Reserve Bank of
New York
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(1)
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Annual averages are calculated from
month-end rates. Monthly averages are calculated using the
average of the daily rates during the relevant period.
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On December 27, 2007, the noon buying rate was RMB7.3079 to
US$1.00.
We publish our financial statements in Renminbi. This prospectus
contains translations of Renminbi amounts into U.S. dollars
at specified rates solely for the convenience of the reader. All
translations, unless otherwise noted, from Renminbi to
U.S. dollars were made at the noon buying rate in The City
of New York for cable transfers in Renminbi per U.S. dollar
as certified for customs purposes by the Federal Reserve Bank of
New York as of September 28, 2007, which was RMB7.4928 to
US$1.00. No representation is made that the Renminbi amounts
referred to in this prospectus could have been or could be
converted into U.S. dollars at any particular rate or at
all.
The Peoples Bank of China, or PBOC, issued a public notice
on July 21, 2005 increasing the exchange rate of the
Renminbi against the U.S. dollar by approximately 2% to
RMB8.11 per US$1.00. Further to this notice, the PRC government
has reformed its exchange rate regime by adopting a managed
floating exchange rate regime based on market supply and demand
with reference to a portfolio of currencies. Under this new
regime, the Renminbi will no longer be pegged to the
U.S. dollar. This change in policy has resulted in a more
than 11.7% appreciation of the Renminbi against the
U.S. dollar. The PRC government may decide to adopt an even
more flexible currency policy in the future, which could result
in a further and more significant appreciation of the Renminbi
against the U.S. dollar.
39
SELECTED
CONSOLIDATED FINANCIAL AND OPERATING DATA
The following selected consolidated financial data have been
derived from our consolidated financial statements included
elsewhere in this prospectus. Our consolidated statements of
operations for the period from August 27, 2004 (inception)
to December 31, 2004, and the years ended December 31,
2005 and 2006 and our consolidated balance sheets as of
December 31, 2005 and 2006 have been audited by
Ernst & Young Hua Ming, an independent registered
public accounting firm. The report of Ernst & Young
Hua Ming on those audited consolidated financial statements is
included elsewhere in this prospectus, and the selected
consolidated financial data for those periods and as of those
dates are qualified by reference to those financial statements
and that report, and should be read in conjunction with them and
with Managements Discussion and Analysis of
Financial Condition and Results of Operations. Our
consolidated statement of operations data for each of the nine
month periods ended September 30, 2006 and 2007 and
consolidated balance sheet data as of September 30, 2007
have been derived from our unaudited consolidated financial
statements included elsewhere in this prospectus, which have
been prepared on the same basis as our audited consolidated
financial statements and contain normal recurring adjustments
which are, in the opinion of management, necessary for a fair
presentation of the results for such unaudited periods. Our
consolidated financial statements are prepared and presented in
accordance with United States generally accepted accounting
principles, or U.S. GAAP. Our historical results do not
necessarily indicate our results expected for any future periods.
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Period from
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August 27, 2004
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(Inception) to
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Year Ended
|
|
Nine Months
|
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December 31,
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|
December 31,
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Ended September 30,
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|
|
2004
|
|
2005
|
|
2006
|
|
2006
|
|
2006
|
|
2007
|
|
2007
|
|
|
(RMB)
|
|
(RMB)
|
|
(RMB)
|
|
(US$)
|
|
(RMB)
|
|
(RMB)
|
|
(US$)
|
|
|
(in thousands, except share and per share data)
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Consolidated Statement of Operations Data:
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|
|
|
|
|
|
|
|
Net revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PV modules
|
|
|
|
|
|
|
165,636
|
|
|
|
604,317
|
|
|
|
80,653
|
|
|
|
360,154
|
|
|
|
1,405,371
|
|
|
|
187,563
|
|
PV cells
|
|
|
|
|
|
|
542
|
|
|
|
7,182
|
|
|
|
959
|
|
|
|
6,624
|
|
|
|
1,994
|
|
|
|
266
|
|
PV cells processing
|
|
|
|
|
|
|
|
|
|
|
19,408
|
|
|
|
2,590
|
|
|
|
19,461
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
|
|
|
|
|
166,178
|
|
|
|
630,907
|
|
|
|
84,202
|
|
|
|
386,239
|
|
|
|
1,407,365
|
|
|
|
187,829
|
|
Cost of revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PV modules
|
|
|
|
|
|
|
(139,481
|
)
|
|
|
(434,493
|
)
|
|
|
(57,988
|
)
|
|
|
(255,867
|
)
|
|
|
(1,182,231
|
)
|
|
|
(157,782
|
)
|
PV cells
|
|
|
|
|
|
|
(422
|
)
|
|
|
(5,983
|
)
|
|
|
(799
|
)
|
|
|
(5,548
|
)
|
|
|
(1,856
|
)
|
|
|
(248
|
)
|
PV cells processing
|
|
|
|
|
|
|
|
|
|
|
(6,054
|
)
|
|
|
(808
|
)
|
|
|
(6,014
|
)
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
|
|
|
|
|
(139,903
|
)
|
|
|
(446,530
|
)
|
|
|
(59,595
|
)
|
|
|
(267,429
|
)
|
|
|
(1,184,087
|
)
|
|
|
(158,030
|
)
|
Gross profit
|
|
|
|
|
|
|
26,275
|
|
|
|
184,377
|
|
|
|
24,607
|
|
|
|
118,810
|
|
|
|
223,278
|
|
|
|
29,799
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling expenses
|
|
|
|
|
|
|
(5,258
|
)
|
|
|
(11,883
|
)
|
|
|
(1,586
|
)
|
|
|
(6,023
|
)
|
|
|
(39,610
|
)
|
|
|
(5,287
|
)
|
General and administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
expenses
|
|
|
(629)
|
|
|
|
(4,112
|
)
|
|
|
(52,214
|
)
|
|
|
(6,969
|
)
|
|
|
(31,585
|
)
|
|
|
(63,603
|
)
|
|
|
(8,488
|
)
|
Research and development expenses
|
|
|
|
|
|
|
(750
|
)
|
|
|
(6,523
|
)
|
|
|
(870
|
)
|
|
|
(2,723
|
)
|
|
|
(18,934
|
)
|
|
|
(2,527
|
)
|
Total operating expenses
|
|
|
(629)
|
|
|
|
(10,120
|
)
|
|
|
(70,620
|
)
|
|
|
(9,425
|
)
|
|
|
(40,331
|
)
|
|
|
(122,147
|
)
|
|
|
(16,302
|
)
|
Operating profit (loss)
|
|
|
(629)
|
|
|
|
16,155
|
|
|
|
113,757
|
|
|
|
15,182
|
|
|
|
78,479
|
|
|
|
101,131
|
|
|
|
13,497
|
|
Interest expenses
|
|
|
|
|
|
|
(123
|
)
|
|
|
(8,402
|
)
|
|
|
(1,121
|
)
|
|
|
(3,855
|
)
|
|
|
(14,686
|
)
|
|
|
(1,960
|
)
|
Interest income
|
|
|
22
|
|
|
|
95
|
|
|
|
1,326
|
|
|
|
177
|
|
|
|
492
|
|
|
|
18,050
|
|
|
|
2,409
|
|
Exchange losses
|
|
|
|
|
|
|
(1,768
|
)
|
|
|
(4,346
|
)
|
|
|
(580
|
)
|
|
|
(2,123
|
)
|
|
|
(22,322
|
)
|
|
|
(2,979
|
)
|
Other income
|
|
|
|
|
|
|
215
|
|
|
|
902
|
|
|
|
120
|
|
|
|
486
|
|
|
|
9,058
|
|
|
|
1,209
|
|
Other expenses
|
|
|
|
|
|
|
(260
|
)
|
|
|
(836
|
)
|
|
|
(112
|
)
|
|
|
(474
|
)
|
|
|
(7,639
|
)
|
|
|
(1,020
|
)
|
Change in fair value of embedded foreign currency derivative
|
|
|
|
|
|
|
|
|
|
|
(163
|
)
|
|
|
(22
|
)
|
|
|
(1,082
|
)
|
|
|
|
|
|
|
|
|
Government grant
|
|
|
|
|
|
|
|
|
|
|
852
|
|
|
|
114
|
|
|
|
640
|
|
|
|
720
|
|
|
|
96
|
|
Net income (loss) before tax and minority interests
|
|
|
(607)
|
|
|
|
14,314
|
|
|
|
103,090
|
|
|
|
13,758
|
|
|
|
72,563
|
|
|
|
84,312
|
|
|
|
11,252
|
|
Income tax benefit/(expenses)
|
|
|
|
|
|
|
96
|
|
|
|
3,132
|
|
|
|
418
|
|
|
|
574
|
|
|
|
(3,644
|
)
|
|
|
(486
|
)
|
Minority interest
|
|
|
|
|
|
|
|
|
|
|
(301
|
)
|
|
|
(40
|
)
|
|
|
(266
|
)
|
|
|
925
|
|
|
|
124
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 27, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Inception) to
|
|
Year Ended
|
|
Nine Months
|
|
|
December 31,
|
|
December 31,
|
|
Ended September 30,
|
|
|
2004
|
|
2005
|
|
2006
|
|
2006
|
|
2006
|
|
2007
|
|
2007
|
|
|
(RMB)
|
|
(RMB)
|
|
(RMB)
|
|
(US$)
|
|
(RMB)
|
|
(RMB)
|
|
(US$)
|
|
|
(in thousands, except share and per share data)
|
|
Net income (loss)
|
|
|
(607)
|
|
|
|
14,410
|
|
|
|
105,921
|
|
|
|
14,136
|
|
|
|
72,871
|
|
|
|
81,593
|
|
|
|
10,890
|
|
Net income (loss) attributable to ordinary shareholders
|
|
|
(607)
|
|
|
|
14,410
|
|
|
|
98,695
|
|
|
|
13,172
|
|
|
|
69,195
|
|
|
|
81,593
|
|
|
|
10,890
|
|
Net income (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
(0.01)
|
|
|
|
0.26
|
|
|
|
0.95
|
|
|
|
0.13
|
|
|
|
0.69
|
|
|
|
0.34
|
|
|
|
0.05
|
|
Diluted
|
|
|
(0.01)
|
|
|
|
0.22
|
|
|
|
0.74
|
|
|
|
0.10
|
|
|
|
0.55
|
|
|
|
0.34
|
|
|
|
0.05
|
|
Shares used in computation Basic
|
|
|
51,994,399
|
|
|
|
54,511,540
|
|
|
|
103,631,832
|
|
|
|
103,631,832
|
|
|
|
100,350,000
|
|
|
|
240,024,754
|
|
|
|
240,024,754
|
|
Diluted
|
|
|
51,994,399
|
|
|
|
66,366,469
|
|
|
|
142,108,460
|
|
|
|
142,108,460
|
|
|
|
131,624,178
|
|
|
|
240,024,754
|
|
|
|
240,024,754
|
|
Net income (loss) per ADS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
(0.05)
|
|
|
|
1.32
|
|
|
|
4.76
|
|
|
|
0.64
|
|
|
|
3.45
|
|
|
|
1.70
|
|
|
|
0.23
|
|
Diluted
|
|
|
(0.05)
|
|
|
|
1.09
|
|
|
|
3.72
|
|
|
|
0.50
|
|
|
|
2.63
|
|
|
|
1.70
|
|
|
|
0.23
|
|
Shares used in computation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
10,398,880
|
|
|
|
10,902,308
|
|
|
|
20,726,366
|
|
|
|
20,726,366
|
|
|
|
20,070,000
|
|
|
|
48,004,951
|
|
|
|
48,004,951
|
|
Diluted
|
|
|
10,398,880
|
|
|
|
13,273,294
|
|
|
|
28,421,692
|
|
|
|
28,421,692
|
|
|
|
26,324,836
|
|
|
|
48,004,951
|
|
|
|
48,004,951
|
|
Other Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
|
|
|
|
15.8
|
%
|
|
|
29.2
|
%
|
|
|
|
|
|
|
30.8
|
%
|
|
|
15.9
|
%
|
|
|
|
|
Operating profit margin
|
|
|
|
|
|
|
9.7
|
%
|
|
|
18.0
|
%
|
|
|
|
|
|
|
20.3
|
%
|
|
|
7.2
|
%
|
|
|
|
|
Net profit margin
|
|
|
|
|
|
|
8.7
|
%
|
|
|
16.8
|
%
|
|
|
|
|
|
|
18.9
|
%
|
|
|
5.8
|
%
|
|
|
|
|
Net cash flow used in operating activities
|
|
|
(8,180)
|
|
|
|
(76,582
|
)
|
|
|
(523,061
|
)
|
|
|
(69,809
|
)
|
|
|
(414,659
|
)
|
|
|
(834,940
|
)
|
|
|
(111,433
|
)
|
Net cash flow from (used in) investing activities
|
|
|
(295)
|
|
|
|
(37,464
|
)
|
|
|
(190,047
|
)
|
|
|
(25,364
|
)
|
|
|
(95,387
|
)
|
|
|
(324,236
|
)
|
|
|
(43,273
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
August 27, 2004
|
|
|
|
|
|
|
|
|
|
|
(Inception) to
|
|
Year Ended
|
|
Nine Months
|
|
|
December 31,
|
|
December 31,
|
|
Ended September 30,
|
|
|
2004
|
|
2005
|
|
2006
|
|
2006
|
|
2007
|
|
Other Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of PV cells produced (including PV cell processing) (in
MW)
|
|
|
|
|
|
|
1.0
|
(1)
|
|
|
26.2
|
(2)
|
|
|
16.2
|
(3)
|
|
|
63.3
|
(3)
|
Amount of PV modules produced (in MW):
|
|
|
|
|
|
|
5.5
|
|
|
|
19.6
|
|
|
|
11.3
|
|
|
|
53.7
|
|
Average selling price (in US$/W):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PV
cells(4)
|
|
|
|
|
|
|
3.00
|
|
|
|
3.07
|
|
|
|
3.05
|
|
|
|
2.75
|
|
PV
modules(5)
|
|
|
|
|
|
|
3.93
|
|
|
|
3.99
|
|
|
|
4.02
|
|
|
|
3.68
|
|
|
|
|
(1)
|
|
Of which 0.9 MW was used in
our PV module production.
|
(2)
|
|
Of which 19.9 MW was used in
our PV module production.
|
|
|
|
(3)
|
|
All of which was used in our PV
module production.
|
|
|
|
(4)
|
|
All sales contracts for PV cells
are denominated in Renminbi. Translations of Renminbi into U.S.
dollars have been made at period end exchange rates.
|
|
|
|
(5)
|
|
Represents the average unit selling
price in U.S. dollars specified in the sales contracts for PV
modules.
|
41
The following table represents a summary of our consolidated
balance sheet data as of December 31, 2004, 2005 and 2006
and September 30, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
As of September 30,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
|
|
(RMB)
|
|
|
(RMB)
|
|
|
(RMB)
|
|
|
(US$)
|
|
|
(RMB)
|
|
|
(US$)
|
|
|
|
(in thousands)
|
|
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
3,525
|
|
|
|
7,054
|
|
|
|
1,137,792
|
|
|
|
151,851
|
|
|
|
345,448
|
|
|
|
46,104
|
|
Restricted cash
|
|
|
|
|
|
|
22,229
|
|
|
|
33,822
|
|
|
|
4,514
|
|
|
|
34,171
|
|
|
|
4,561
|
|
Accounts receivable, net of doubtful accounts
|
|
|
|
|
|
|
|
|
|
|
147,834
|
|
|
|
19,730
|
|
|
|
681,914
|
|
|
|
91,009
|
|
Inventories, net
|
|
|
4,511
|
|
|
|
76,819
|
|
|
|
372,504
|
|
|
|
49,715
|
|
|
|
522,955
|
|
|
|
69,794
|
|
Advance to suppliers
|
|
|
4,850
|
|
|
|
61,312
|
|
|
|
238,178
|
|
|
|
31,788
|
|
|
|
468,371
|
|
|
|
62,509
|
|
Other current assets
|
|
|
762
|
|
|
|
20,705
|
|
|
|
75,525
|
|
|
|
10,080
|
|
|
|
159,551
|
|
|
|
21,294
|
|
Amount due from related parties
|
|
|
18,000
|
|
|
|
|
|
|
|
153
|
|
|
|
20
|
|
|
|
3,009
|
|
|
|
402
|
|
Amount due from shareholders
|
|
|
|
|
|
|
|
|
|
|
578
|
|
|
|
78
|
|
|
|
|
|
|
|
|
|
Fixed assets, net
|
|
|
292
|
|
|
|
55,146
|
|
|
|
207,449
|
|
|
|
27,686
|
|
|
|
503,424
|
|
|
|
67,188
|
|
Intangible assets, net
|
|
|
|
|
|
|
|
|
|
|
12,897
|
|
|
|
1,721
|
|
|
|
94,930
|
|
|
|
12,670
|
|
Long-term investment
|
|
|
|
|
|
|
|
|
|
|
300
|
|
|
|
40
|
|
|
|
300
|
|
|
|
40
|
|
Deferred tax assets
|
|
|
|
|
|
|
96
|
|
|
|
3,400
|
|
|
|
454
|
|
|
|
8,219
|
|
|
|
1,084
|
|
Long-term deferred expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
109,000
|
|
|
|
14,547
|
|
Total assets
|
|
|
31,940
|
|
|
|
243,361
|
|
|
|
2,230,432
|
|
|
|
297,677
|
|
|
|
2,931,202
|
|
|
|
391,202
|
|
Short-term bank borrowings
|
|
|
|
|
|
|
20,000
|
|
|
|
379,900
|
|
|
|
50,702
|
|
|
|
752,887
|
|
|
|
100,482
|
|
Long-term bank borrowings, current portion
|
|
|
|
|
|
|
|
|
|
|
16,000
|
|
|
|
2,135
|
|
|
|
16,000
|
|
|
|
2,135
|
|
Accounts payable
|
|
|
2,221
|
|
|
|
18,794
|
|
|
|
51,452
|
|
|
|
6,867
|
|
|
|
146,400
|
|
|
|
19,539
|
|
Notes payable
|
|
|
|
|
|
|
20,000
|
|
|
|
14,020
|
|
|
|
1,871
|
|
|
|
5,000
|
|
|
|
667
|
|
Accrued expenses and other liabilities
|
|
|
301
|
|
|
|
22,920
|
|
|
|
33,619
|
|
|
|
4,487
|
|
|
|
70,635
|
|
|
|
9,427
|
|
Customer deposits
|
|
|
|
|
|
|
55,319
|
|
|
|
17
|
|
|
|
2
|
|
|
|
84,825
|
|
|
|
11,321
|
|
Amount due to related parties
|
|
|
25
|
|
|
|
32,658
|
|
|
|
24,486
|
|
|
|
3,268
|
|
|
|
18,971
|
|
|
|
2,532
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,086
|
|
|
|
1,213
|
|
Amount due to shareholders
|
|
|
|
|
|
|
|
|
|
|
7,572
|
|
|
|
1,011
|
|
|
|
|
|
|
|
|
|
Long-term bank borrowings, non-current portion
|
|
|
|
|
|
|
|
|
|
|
15,000
|
|
|
|
2,002
|
|
|
|
7,000
|
|
|
|
934
|
|
Total liabilities
|
|
|
2,547
|
|
|
|
169,691
|
|
|
|
542,066
|
|
|
|
72,345
|
|
|
|
1,110,804
|
|
|
|
148,250
|
|
Minority interests
|
|
|
|
|
|
|
|
|
|
|
10,151
|
|
|
|
1,355
|
|
|
|
44,820
|
|
|
|
5,981
|
|
Total shareholders equity
|
|
|
29,393
|
|
|
|
73,670
|
|
|
|
1,678,215
|
|
|
|
223,977
|
|
|
|
1,775,578
|
|
|
|
236,971
|
|
Total liabilities and shareholders equity
|
|
|
31,940
|
|
|
|
243,361
|
|
|
|
2,230,432
|
|
|
|
297,677
|
|
|
|
2,931,202
|
|
|
|
391,202
|
|
42
MANAGEMENTS
DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and
results of operations is based upon and should be read in
conjunction with our consolidated financial statements and
related notes included elsewhere in this prospectus. This
discussion contains forward-looking statements that involve
risks and uncertainties. Actual results could differ materially
from those projected in the forward-looking statements. In
evaluating our business, you should carefully consider the
information provided under the caption Risk Factors
beginning on page 12 of this prospectus.
Overview
We are an established manufacturer of both PV cells and PV
modules in China. We manufacture and sell a variety of PV cells
and PV modules using advanced manufacturing process technologies
that have helped us to rapidly increase our operational
efficiency. All of our PV modules are currently produced using
PV cells manufactured at our own facilities. We sell our
products both directly to system integrators and through third
party distributors.
We commenced operations on August 27, 2004 through Linyang
China. On August 27, 2004, Linyang Electronics, one of the
leading electricity-measuring instrument manufacturers in China,
owned 68% of the equity interests of Linyang China. In
anticipation of our initial public offering, we incorporated
Solarfun in the Cayman Islands on May 12, 2006 as our
listing vehicle. To enable us to raise equity capital from
investors outside of China, we established a holding company
structure by incorporating Linyang BVI in the British Virgin
Islands on May 17, 2006. Linyang BVI is wholly owned by
Solarfun. Linyang BVI purchased all of the equity interests in
Linyang China on June 2, 2006 from Linyang Electronics and
the three other shareholders of Linyang China for aggregate
consideration of US$7.3 million. This transaction was
accounted for as a recapitalization. On May 16, 2007,
Linyang BVI established a wholly owned subsidiary, Solarfun
Power Hong Kong Limited. In March 2006, April 2006 and April
2007, we established three majority-owned or wholly owned
subsidiaries in China, Shanghai Linyang, Sichuan Jiayang and
Nantong Linyang, respectively, to expand our business into new
markets and sectors. As of September 30, 2007, we owned
83%, 55% and 100% of the equity interest in Shanghai Linyang,
Sichuan Jiayang and Nantong Linyang, respectively. In August
2007, we acquired a 52% equity interest in Yangguang Solar. In
September 2007, we established a wholly owned subsidiary,
Solarfun Power U.S.A. Inc., as part of our plan to enter the
United States market. On November 30, 2007, Linyang BVI
transferred all of the equity interest in Linyang China to
Solarfun Power Hong Kong Limited, a wholly owned subsidiary of
Linyang BVI, for a consideration of US$199.0 million.
We operate and manage our business as a single segment. We
currently operate four monocrystalline PV cell production lines
and four multicrystalline PV cell production lines, each with up
to 30 MW of annual manufacturing capacity. We produced
5.6 MW, 26.2 MW (including PV cell processing) and
63.3 MW of our PV products in 2005, 2006 and in the nine
months ended September 30, 2007, respectively. The average
selling price of our PV modules was US$3.93, US$3.99 and US$3.68
per watt in 2005, 2006 and the nine months ended
September 30, 2007, respectively, and the average selling
price of our PV cells was US$3.00, US$3.07 and US$2.75 per watt
during the same periods. In 2005, 2006 and the nine months ended
September 30, 2007, approximately 79.7%, 94.3% and 96.7%,
respectively, of our net revenue were attributable to sales to
customers outside of the PRC. Moreover, in 2005, 2006 and the
nine months ended September 30, 2007, customers accounting
for more than 10% of our net revenue accounted in the aggregate
for 50.8%, 71.2% and 48.6%, respectively, of our net revenue.
Our products and services are primarily provided to European
customers under our proprietary Solarfun brand.
Our net revenue increased from RMB166.2 million in 2005 to
RMB630.9 million (US$84.2 million) in 2006, and our
net income increased from RMB14.4 million in 2005 to
RMB105.9 million (US$14.1 million) in 2006. In the
nine months ended September 30, 2007, our net revenue and
net income amounted to RMB1,407.4 million
(US$187.8 million) and RMB81.6 million
(US$10.9 million), respectively, compared to
RMB386.2 million and RMB72.9 million, respectively, in
the same period in 2006.
43
Limited
Operating History
We have a limited operating history upon which you can evaluate
our business. You should consider the risks and difficulties
frequently encountered by companies with a relatively short
operating history, such as us, in new and rapidly evolving
markets, such as the PV market. Our rapid revenue growth since
we started operations in August 2004 should not be taken as
indicative of the rate of revenue growth, if any, that can be
expected in the future. In addition, our limited operating
history provides a limited historical basis to assess the impact
that critical accounting policies may have on our business and
our financial performance.
Key
Factors Affecting Our Financial Performance
The most significant factors affecting our financial performance
are:
|
|
|
|
|
availability and price of silicon wafers;
|
|
|
|
average selling price of our PV products;
|
|
|
|
manufacturing capacity;
|
|
|
|
process technologies; and
|
|
|
|
industry demand.
|
Availability
and Price of Silicon Wafers
Silicon wafers are the most important raw materials for
manufacturing PV products, and substantially all of our raw
material costs are attributable to silicon wafers. There is
currently an industry-wide shortage of silicon and silicon
wafers due to increased demand as a result of recent expansions
and large demand in the solar energy and semiconductor
industries, which has resulted in significant price increases
for, and a shortage of, silicon and silicon wafers in 2004,
2005, 2006 and the nine months ended September 30, 2007. As
the solar energy industry continues to grow, we believe the
average prices of silicon and silicon wafers may increase and we
expect the shortages of silicon and silicon wafers will
continue. Moreover, as building silicon manufacturing lines
generally requires significant upfront capital commitment and it
typically takes an average of two to three years to construct a
manufacturing line and ramp up production, silicon suppliers are
generally willing to expand their capacity only if they are
certain of sufficient customer demand. As a result, silicon and
silicon wafer suppliers are increasingly requiring customers to
make prepayments for raw materials well in advance of their
shipment, which, in turn, leads to significant working capital
commitments for PV product manufacturers such as us.
We do not currently produce silicon or silicon wafers ourselves
but source them from other companies. We recently acquired a
controlling stake in silicon ingot manufacturing company, which
we believe could produce 50 to 60 MW of ingots in 2008. To
maintain competitive manufacturing operations, we depend on our
suppliers timely delivery of quality silicon wafers in
sufficient quantities and at acceptable prices. Our silicon
wafer suppliers, in turn, depend on silicon manufacturers to
supply silicon required for the production of silicon wafers.
The significant growth of the solar energy industry has resulted
in a significant increase in demand for silicon and silicon
wafers. In addition, some suppliers of silicon also supply to
silicon wafer manufacturers for the semiconductor industry,
which typically have greater buying power and market influence
than manufacturers for the solar energy industry.
As we expect the shortage of silicon and silicon wafers to
continue in 2008 and 2009, we entered into various short-term
and long-term supply agreements in 2006 and 2007 with our major
silicon and silicon wafer suppliers to secure adequate and
timely supply of silicon wafers. In particular, we have entered
into agreements for the provision of silicon materials to meet a
significant portion of our planned silicon supply requirements
in 2008, including through:
|
|
|
|
|
a supply agreement entered into in July 2007 with a non-PRC
supplier which has agreed to deliver to us 178 MW of ingots
and wafers during the period from July 2007 to June 2014;
|
|
|
|
|
|
a supply agreement entered into with Jiangxi LDK Solar Hi-Tech
Co., Ltd., or LDK, a wafer manufacturer located in Jiangxi
Province, China, under which LDK will provide 37 MW of
silicon wafers from July 2007 to June 2008. Furthermore, in
October 2007, we entered into a supply agreement with LDK under
which
|
44
|
|
|
|
|
LDK has agreed to deliver to us multicrystalline silicon wafers
with a value of approximately RMB2 billion during the
period from early 2008 to 2010; and
|
|
|
|
|
|
a supply agreement with Hoku Scientific, Inc., or Hoku, under
which Hoku agreed to deliver to us polysilicon with a value of
approximately US$306 million beginning no later than 2009
and continuing over an eight-year period.
|
In addition, we entered into a supply agreement in June 2006
with E-mei
Semiconductor Material Factory, or
E-mei, which
became effective in October 2006, under which we agreed to make
prepayments totaling RMB220 million to secure exclusive
rights to purchase the silicon products to be produced by
E-meis
future manufacturing facility at a discount to the prevailing
market price for five years starting from the completion of the
facility.
E-mei will
use the prepayments to construct a new manufacturing facility,
the construction of which is expected to be completed by April
2008, with an expected annual production capacity of 500 tons of
silicon products. Moreover,
E-mei agreed
to provide us approximately 0.6 MW of silicon and silicon
wafers each month from July 2007 to March 2008.
We cannot assure you that we will be able to secure sufficient
quantities of silicon and silicon wafers to meet our planned
increase in manufacturing capacity. See Risk
Factors Risks Related to Our Company and Our
Industry We are currently experiencing an
industry-wide shortage of silicon and silicon wafers. The prices
that we pay for these materials have increased in the past and
prices may continue to increase in the future, which may
materially and adversely affect our results of operations and
decrease our gross profit margins and profitability. If
the market price of silicon and silicon wafers increases, our
suppliers may seek to renegotiate the terms of these supply
contracts and may request for price increases on us. Increases
in the prices of silicon and silicon wafers have in the past
increased our production costs and may impact our cost of
revenue, gross margins and profitability in the future. We have
been successful in absorbing such increases in silicon wafer
costs by improving our process technologies, increasing our
manufacturing efficiencies or passing such cost increases to our
customers. However, we cannot assure you that we will be able to
absorb future silicon and silicon wafer price increases and
continue to increase our gross margin and profitability.
In addition, due to a shortage of raw materials for the
production of silicon wafers, increased market demand for
silicon wafers, a failure by some silicon suppliers to achieve
expected production volumes and other factors, some of our major
silicon wafer suppliers have failed to fully perform their
silicon wafer supply commitments to us, and we consequently did
not receive all of the contractually agreed quantities of
silicon wafers from these suppliers. We subsequently cancelled
or renegotiated these silicon supply contracts. Furthermore, we
were able to enter into agreements with other suppliers to
replace the majority of the remaining supply shortfall at a
lower average silicon purchase price. Nevertheless, we cannot
assure you that we will not experience similar or additional
shortfalls of silicon or silicon wafers from our suppliers in
the future or that, in the event of such shortfalls, we will be
able to find other silicon suppliers to satisfy our production
needs. See Risk Factors Risks Related to Our
Company and Our Industry We depend on a limited
number of customers for a high percentage of our revenue and the
loss of, or a significant reduction in orders from, any of these
customers, if not immediately replaced, would significantly
reduce our revenue and decrease our profitability.
Average
Selling Price of Our PV Products
PV products are priced based on the number of watts of
electricity they can generate. Pricing of PV products is
principally affected by the manufacturing costs, including the
cost of silicon wafers, as well as the overall demand in the PV
industry. Increased economies of scale and advancement of
process technologies over the past decade have also led to a
reduction in manufacturing costs and the prices of PV products.
We generally price our products based on the prevailing market
price at the time we enter into sales contracts with our
customers, taking into account the size of the contract, the
strength and history of our relationship with each customer and
our capacity utilization. From time to time, we enter into
agreements where the selling price for certain of our PV
products is fixed over a defined period. This has helped reduce
our exposure to risks from decreases in PV cell prices
generally, but has, on the other hand, also prevented us from
benefiting from price increases. An increase in our
manufacturing costs, including the cost of silicon wafers, over
such a defined period
45
could have a negative impact on our overall gross profit. Our
gross profit may also be impacted by certain adjustments for
inventory reserves.
Following several years of increases, PV product prices have
been declining gradually in the past twelve months as a result
of decreases in subsidies or feed-in tariffs in major PV module
end-markets such as Germany as well as increased production
output around the world. The average selling price of our PV
modules was US$3.93, US$3.99 and US$3.68 per watt in 2005, 2006
and the nine months ended September 30, 2007, respectively,
and the average selling price of our PV cells was US$3.00,
US$3.07 and US$2.75 per watt during the same periods.
Fluctuations in the prevailing market prices have historically
affected the prices of our products and may continue to have a
material effect on the prices of our products in the future.
We believe that the high conversion efficiencies of our PV
products and our low-cost manufacturing capabilities have
enabled us to price our products competitively, and will further
provide us with flexibility in adjusting our price while
maintaining our profit margin.
Manufacturing
Capacity
Capacity and capacity utilization are key factors in growing our
net revenue and gross profit. In order to accommodate the
growing demand for our products, we have expanded, and plan to
continue to expand, our manufacturing capacity. An increase in
capacity has a significant effect on our financial results, both
by allowing us to produce and sell more PV products and achieve
higher net revenue, and by lowering our manufacturing costs as a
result of increased economies of scale.
Due to current strong end-market demand for PV products, we have
been attempting to maximize the utilization of our available
manufacturing capacity as it comes on-line, so as to allow us to
spread our fixed costs over a higher production volume, thereby
reducing our per unit and per MW fixed costs. As we build
additional production facilities, our fixed costs will increase,
and the overall utilization rate of our production facility
could decline, which could negatively impact our gross profit.
However, regardless of the capacity of a particular
manufacturing facility, our capacity utilization may vary
greatly depending on the mix of products we produce at any
particular time.
We have expanded rapidly our manufacturing capacity since our
establishment in August 2004. We produced 5.6 MW,
26.2 MW (including PV cell processing) and 63.3 MW of
our PV products in 2005, 2006 and the nine months ended
September 30, 2007. We currently operate eight PV cell
manufacturing lines with an annualized aggregate capacity of
240 MW. We expect that the aggregate annual manufacturing
capacity of our PV cell production lines that are completed or
under construction will reach 360 MW by the middle of 2008.
Process
Technologies
Advancements of process technologies have enhanced conversion
efficiencies of PV products. High conversion efficiencies reduce
the manufacturing cost per watt of PV products and could thereby
contribute to increasing gross profit margins. For this reason,
solar energy companies, including us, are continuously
developing advanced process technologies for large-scale
manufacturing while reducing costs to maintain and improve
profit margins.
We have achieved improvements in process technology and product
quality since we commenced our commercial production in November
2005. Our monocrystalline PV cells achieved conversion
efficiency rates in the range of 16.1% to 16.6% in the nine
months ended September 30, 2007 and we are now able to
process wafers as thin as 200 microns. Our advanced process
technologies have also significantly improved our productivity
and increased the efficiency of our raw material usage, both of
which have led to the lowering of the cost per watt of our
products and improved our gross profit margins.
Industry
Demand
Our business and revenue growth depends on PV industry demand.
There has been a significant growth of the PV market in the past
decade. According to Solarbuzz, the global PV market increased
from 345 MW in 2001 to 1,744 MW in 2005 in terms of
total annual PV installations. Annual PV installations are
expected to increase to
46
4.2 GW by 2011. In addition, any policy changes by
relevant governmental bodies in certain key countries toward the
solar energy industry will also have an impact on PV industry
demand and, as a result, our business, financial condition,
results of operations and prospects.
Net
Revenue
We currently generate a substantial majority of our net revenue
from the production and sale of PV modules. We also generate a
small portion of our net revenue from the sale of PV cells to
third parties. In 2006, we also entered into PV cell processing
arrangements with certain silicon suppliers to produce PV cells
made from silicon provided by these customers, and a portion of
our net revenue in 2006 was derived from these services. We
record the amount of revenue on these processing transactions
based on the amount received from a customer for PV cells sold
less the amount paid for the raw materials purchased from the
same customer. The revenue recognized is recorded as PV cell
processing revenue and the production costs incurred related to
providing the processing services are recorded as PV cell
processing costs within cost of revenue. Furthermore, in the
event we pay the shipping costs on behalf of our customers, we
include the shipping costs passed on to our customers in our
sales revenue. We record revenue net of all value-added taxes
imposed by governmental authorities and collected by us from
customers concurrent with revenue-producing transactions.
The following table sets forth the net revenue from our
principal products and services and as a percentage of our net
revenue for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
2005
|
|
2006
|
|
Nine Months Ended September 30, 2007
|
|
|
|
|
Percentage of
|
|
|
|
|
|
Percentage of
|
|
|
|
|
|
Percentage of
|
|
|
Amount
|
|
Net Revenue
|
|
Amount
|
|
Net Revenue
|
|
Amount
|
|
Net Revenue
|
|
|
(RMB)
|
|
|
|
(RMB)
|
|
(US$)
|
|
|
|
(RMB)
|
|
(US$)
|
|
|
|
|
(in thousands, except percentages)
|
|
Net Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PV modules
|
|
|
165,636
|
|
|
|
99.7
|
%
|
|
|
604,317
|
|
|
|
80,653
|
|
|
|
95.8
|
%
|
|
|
1,405,371
|
|
|
|
187,563
|
|
|
|
99.9
|
%
|
PV cells
|
|
|
542
|
|
|
|
0.3
|
|
|
|
7,182
|
|
|
|
959
|
|
|
|
1.1
|
|
|
|
1,994
|
|
|
|
266
|
|
|
|
0.1
|
|
PV cell processing
|
|
|
|
|
|
|
|
|
|
|
19,408
|
|
|
|
2,590
|
|
|
|
3.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
166,178
|
|
|
|
100.0
|
%
|
|
|
630,907
|
|
|
|
84,202
|
|
|
|
100.0
|
%
|
|
|
1,407,365
|
|
|
|
187,829
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We commenced manufacturing and selling PV modules in January
2005, and had net revenue of RMB165.6 million,
RMB604.3 million (US$80.7 million) and
RMB1,405.4 million (US$187.6 million), respectively in
2005, 2006 and the nine months ended September 30, 2007.
We began manufacturing PV cells in November 2005, primarily to
supply our PV module production. As a result, we only sold a
small number of the total PV cells we manufactured to certain
customers to maintain business relationships. Since our business
strategy is focused on increasing our own output of PV modules
on a cost-efficient basis, we plan to continue to use the
substantial majority of our PV cells for use in manufacturing
our PV modules and will maintain our sale of PV cells to third
parties at a relatively low level. In 2005, 2006 and the nine
months ended September 30, 2007, our net revenue from the
sale of PV cells was RMB0.5 million, RMB7.2 million
(US$1.0 million) and RMB2.0 million
(US$0.3 million), respectively.
In 2006, we provided services to certain of our silicon
suppliers to process their silicon wafers into PV cells. We
recorded, as our net revenue from such services, the gross
revenue from sales of PV cells less the purchase cost of the
silicon wafers. We recorded RMB19.4 million
(US$2.6 million) as our net revenue from these services in
this period. We provided these services only on a selective
basis to maintain relationships with certain of our silicon
suppliers and did not provide these services in the nine months
ended September 30, 2007.
We currently depend on a limited number of customers for a high
percentage of our net revenue. In 2005, 2006 and the nine months
ended September 30, 2007, customers accounting for more
than 10% of our net sales accounted for an aggregate of 50.8%,
71.2% and 48.6%, respectively, of our net revenue. From a
geographic standpoint, Europe, particularly Germany, has been
our largest market. In 2005, 2006 and the nine months ended
September 30, 2007, our sales to European customers
accounted for 79.8%, 94.3% and 95.8%, respectively, of our net
revenue,
47
with German customers accounting for 76.2%, 31.4% and 57.3%,
respectively, in such periods. Although we anticipate that our
dependence on a limited number of customers in a few
concentrated geographic regions will continue for the
foreseeable future, we are actively expanding our customer base
and geographic coverage through various marketing efforts,
especially in other developing European PV markets, such as
Spain, Italy, Norway and Netherlands.
Sales to our customers are typically made through non-exclusive,
short-term arrangements. We require payment of deposits of a
certain percentage of the contract price from our customers
which we record under customer deposits in our consolidated
balance sheets. Once the revenue recognition criteria are met,
we then recognize these payments as net revenue. As of
December 31, 2005, 2006 and September 30, 2007, we had
received deposits of RMB55.3 million, RMB0.02 million
and RMB84.8 million (US$11.3 million), respectively.
Costs of
Revenue and Operating Expenses
Cost
of Revenue
The following table sets forth our cost of revenue and operating
expenses and these amounts as percentages of our net revenue for
the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
2005
|
|
2006
|
|
Nine Months Ended September 30, 2007
|
|
|
|
|
Percentage of
|
|
|
|
Percentage of
|
|
|
|
Percentage of
|
|
|
Amount
|
|
Net Revenue
|
|
Amount
|
|
Net Revenue
|
|
Amount
|
|
Net Revenue
|
|
|
(RMB)
|
|
|
|
(RMB)
|
|
(US$)
|
|
|
|
(RMB)
|
|
(US$)
|
|
|
|
|
(in thousands, except percentages)
|
|
Cost of revenue
|
|
|
(139,903
|
)
|
|
|
84.2
|
%
|
|
|
(446,530
|
)
|
|
|
(59,595
|
)
|
|
|
70.8
|
%
|
|
|
(1,184,087
|
)
|
|
|
(158,030
|
)
|
|
|
84.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling expenses
|
|
|
(5,258
|
)
|
|
|
3.2
|
|
|
|
(11,883
|
)
|
|
|
(1,586
|
)
|
|
|
1.9
|
|
|
|
(39,610
|
)
|
|
|
(5,287
|
)
|
|
|
2.8
|
|
General and administrative expenses
|
|
|
(4,112
|
)
|
|
|
2.5
|
|
|
|
(52,214
|
)(1)
|
|
|
(6,969
|
)
|
|
|
8.3
|
|
|
|
(63,603
|
)
|
|
|
(8,488
|
)
|
|
|
4.5
|
|
Research and development expenses
|
|
|
(750
|
)
|
|
|
0.5
|
|
|
|
(6,523
|
)
|
|
|
(870
|
)
|
|
|
1.0
|
|
|
|
(18,934
|
)
|
|
|
(2,527
|
)
|
|
|
1.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
(10,120
|
)
|
|
|
6.1
|
%
|
|
|
(70,620
|
)
|
|
|
(9,425
|
)
|
|
|
11.2
|
%
|
|
|
(122,147
|
)
|
|
|
(16,302
|
)
|
|
|
8.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
In 2006, we recorded a share
compensation charge of RMB10.3 million
(US$1.4 million), which related to a sale of our ordinary
shares to Linyang Electronics, a company controlled by our
chairman and chief executive officer, at less than fair market
value by other shareholders of our company, a share compensation
charge of RMB12.1 million (US$1.6 million) as a result
of the issuance of series A convertible preference shares
to Good Energies Investments (Jersey) Limited and a share
compensation charge of RMB2.9 million (US$0.4 million)
which related to stock options granted on November 30, 2006
under our companys employee stock option plan.
|
Our cost of revenue includes the cost of raw materials used for
our PV module and PV cell production and PV cell processing,
such as silicon wafers, and other direct raw materials and
components, including ethylene vinyl acetate, triphenyltin,
tempered glass, connecting bands, welding bands, silica gel,
aluminum alloy and junction boxes. The costs relating to
providing the PV cell processing services were recorded as
service processing costs within cost of revenue. We expect the
cost of silicon wafers, our primary raw material for the
manufacturing of PV products, will continue to constitute a
substantial portion of our cost of revenue in the near future.
Other items contributing to our cost of revenue are direct
labor, which includes salaries and benefits for personnel
directly involved in manufacturing activities, manufacturing
overhead, which consists of utility, maintenance of production
equipment, shipping and handling costs for products sold, and
other support expenses associated with the manufacturing of our
PV products and depreciation and amortization of manufacturing
equipment and facilities.
48
We expect cost of revenue to increase as we increase our
capacity and production volume. Potential increases in our
suppliers cost of silicon wafers as well as the potential
increase in shipping costs for our PV products may also
contribute to higher cost of revenue.
Silicon wafers are the most important raw materials for our
products. We record the purchase price of silicon wafers and
other raw materials initially as inventory in our consolidated
balance sheets, and then transfer this amount to cost of revenue
after the raw materials are consumed in our manufacturing
process and the finished products are sold and delivered. As of
December 31, 2005 and 2006 and September 30, 2007, our
inventory of raw materials totaled RMB65.0 million,
RMB295.1 million (US$39.4 million) and
RMB215.6 million (US$28.8 million), respectively, of
which RMB58.2 million, RMB278.2 million
(US$37.1 million) and RMB210.3 million
(US$28.1 million), respectively, represent silicon and
silicon wafers. Silicon suppliers generally require prepayments
from us in advance of delivery. We classify such prepayments as
advances to suppliers and record such prepayments under current
assets in our consolidated balance sheets. However, if such
suppliers fail to fulfill their delivery obligations under the
silicon supply agreements, we may not be able to recover such
prepayments and would suffer losses, which may have a
significant impact on our financial condition and results of
operations.
Operating
Expenses
Our operating expenses consist of selling expenses, general and
administrative expenses and research and development expenses.
Selling
Expenses
Our selling expenses primarily consist of warranty costs,
advertising and other promotional expenses, and salaries,
commissions, traveling expenses and benefits for our sales and
marketing personnel. As we intend to pursue an aggressive
marketing strategy to promote our products in different
geographic markets, we expect that our selling expenses will
increase for the immediate future. In 2005, 2006 and the nine
months ended September 30, 2007, our selling expenses were
RMB5.3 million, RMB11.9 million (US$1.6 million)
and RMB39.6 million (US$5.3 million), respectively.
We provide a two-year or, most recently, three-year unlimited
warranty for technical defects, a
10-year
warranty against declines of greater than 10%, and a 20 or
25-year
warranty against declines of greater than 20%, in the initial
power generation capacity of our PV modules. As a result, we
bear the risk of extensive warranty claims for a long period
after we have sold our products and recognized net revenue. We
consider various factors when determining the likelihood of
product defects, including an evaluation of our quality
controls, technical analysis, industry information on comparable
companies and our own experience. As of December 31, 2005
and 2006 and September 30, 2007, our accrued warranty costs
totaled RMB1.5 million, RMB7.6 million
(US$1.0 million) and RMB18.3 million
(US$2.4 million), respectively. Since our products have
been in use for only a relatively short period, our assumptions
regarding the durability and reliability of our products may not
be accurate. In 2005, 2006 and the nine months ended
September 30, 2007, we provided RMB1.6 million,
RMB6.0 million (US$0.8 million) and
RMB14.1 million (US$1.9 million), respectively, in
warranty costs.
General
and Administrative Expenses
Our general and administrative expenses primarily consist of
salaries and benefits of our administrative staff, depreciation
charges of fixed assets used for administrative purposes, as
well as administrative office expenses including, among others,
consumables, traveling expenses, insurance and share
compensation expenses. In 2005, 2006 and the nine months ended
September 30, 2007, our general and administrative expenses
were RMB4.1 million, RMB52.2 million
(US$7.0 million) and RMB63.6 million
(US$8.5 million), respectively. The significant increase in
these expenses in 2006 was mainly due to a RMB12.1 million
(US$1.6 million) share compensation charge as a result of
the issuance of series A convertible preference shares to
Good Energies Investments (Jersey) Limited and a share
compensation charge of RMB2.9 million (US$0.4 million)
which related to stock options granted on November 30, 2006
under our employee stock option plan. An additional
RMB10.3 million (US$1.4 million) in share compensation
expenses was recorded relating to a sale of our ordinary shares
to Linyang Electronics, a
49
company controlled by our chairman and chief executive officer,
at less than fair market value by other shareholders of our
company. See Share Compensation Expenses.
Research
and Development Expenses
Our research and development expenses primarily consist of
salaries and benefits of our research and development staff,
other expenses including depreciation, materials used for
research and development purpose, and the travel expenses
incurred by our research and development staff or otherwise in
connection with our research and development activities. In
2005, 2006 and the nine months ended September 30, 2007,
our research and development expenses were RMB0.8 million,
RMB6.5 million (US$0.9 million) and
RMB18.9 million (US$2.5 million), respectively.
Share
Compensation Expenses
We adopted our 2007 equity incentive plan in August 2007 which
provides for the grant of options, restricted stock, restricted
stock units, stock appreciation rights, performance units and
performance stock to our employees, directors and consultants.
The maximum aggregate number of our ordinary shares that may be
issued under the 2007 equity incentive plan is 10,799,685. In
addition, the plan provides for annual increase in the number of
shares available for issuance on the first day of each fiscal
year, beginning with our 2008 fiscal year, equal to (i) 2%
of our outstanding ordinary shares on the last day of the
immediately preceding fiscal year or (ii) such lesser
amount as our board of directors may determine.
We adopted our 2006 equity incentive plan in November 2006
pursuant to which we may issue up to 10,799,685 ordinary shares
upon exercise of awards granted under the plan. As of
September 30, 2007, options to purchase 8,772,998 ordinary
shares have been granted under this plan.
In 2005, we recorded RMB0.5 million as share compensation
expenses relating to shares subscribed for by Linyang
Electronics in connection with a rights offering. In 2006, we
recorded share compensation expenses of RMB10.3 million
(US$1.4 million), which was reflected entirely in our
general and administrative expenses for that period, relating to
a sale of our ordinary shares to Linyang Electronics, a company
controlled by our chairman and chief executive officer, at less
than fair market value by other shareholders of our company, a
share compensation charge of RMB12.1 million
(US$1.6 million) as a result of the issuance of
series A convertible preference shares to Good Energies
Investments (Jersey) Limited and a share compensation charge of
RMB2.9 million (US$0.4 million) which related to stock
options granted on November 30, 2006 under our employee
stock option plan. In the nine months ended September 30,
2007, we recorded RMB15.4 million (US$2.1 million) as
share compensation expenses.
Taxation
PRC
Enterprise Income Tax
PRC enterprise income tax is calculated based on taxable income
determined under PRC accounting principles. In accordance with
the PRC Income Tax Law for Enterprises with Foreign Investment
and Foreign Enterprises, or the Income Tax Law, and the related
implementing rules, foreign invested enterprises incorporated in
the PRC are generally subject to an enterprise income tax rate
of 33%, consisting of 30% state enterprise income tax and 3%
local enterprise income tax. The Income Tax Law and the related
implementing rules provide certain favorable tax treatments to
foreign invested enterprises. Production-oriented
foreign-invested enterprises, which are scheduled to operate for
a period of ten years or more, are entitled to exemption from
income tax for two years commencing from the first profit-making
year and 50% reduction of income tax for the subsequent three
years. In certain special areas such as coastal open economic
areas, special economic zones and economic and technology
development zones, foreign-invested enterprises are entitled to
reduced enterprise income tax rates, namely, in coastal open
economic areas, the tax rate applicable to production-oriented
foreign-invested enterprises is 24%; in special economic zones,
the rate is 15%. In addition, according to the Income Tax Law,
local governments at the provincial level are authorized to
waive or reduce the 3% local income tax on foreign-invested
enterprises that operate in an encouraged industry.
50
In accordance with the current PRC Income Tax Law for
Enterprises with Foreign Investment and Foreign Enterprises and
the related implementing rules, as a foreign-invested
production-oriented enterprise established in Qidong, Nantong
City, a coastal open economic area, Linyang China is currently
subject to a preferential state enterprise income tax rate of
24%. In addition, under these taxation laws and regulations,
Linyang China was exempted from state and local enterprise
income tax for 2005 and 2006 and will be taxed at a reduced
state enterprise income tax rate of 12% for the years of 2007,
2008 and 2009 and at a rate of 25% from 2010 onward. From 2005
until the end of 2009, Linyang China is also exempt from the 3%
local income tax applicable to foreign-invested enterprises in
Jiangsu Province. From 2010 onward, Linyang China will not be
exempt from the 3% local enterprise income tax. In addition,
under relevant PRC tax rules and regulations, Linyang China may
apply for a two-year income tax exemption on income generated
from its increased capital resulting from our contribution to
Linyang China of funds we received through issuances of
series A convertible preference shares in a private
placement in June and August 2006, and a reduced tax rate of 12%
for the three years thereafter. We are currently in the process
of applying for such preferential tax treatment. In addition,
for the 2007 tax year, our subsidiaries, Shanghai Linyang and
Sichuan Jiayang, are subject to an enterprise income tax rate of
33%, consisting of 30% enterprise income tax and 3% local
enterprise income tax.
If Linyang China no longer qualifies for the preferential
enterprise income tax rate, we will consider available options
under applicable law that would enable us to qualify for
alternative preferential tax treatment. To the extent we are
unable to offset the expiration of this preferential tax
treatment with other tax benefits, the expiration of this
preferential tax treatment will cause our effective tax rate to
increase.
In addition, on March 16, 2007, the National Peoples
Congress of the PRC passed the PRC Enterprise Income Tax Law,
which will take effect as of January 1, 2008. In accordance
with the new law, a unified enterprise income tax rate of 25%
and unified tax deduction standards will be applied equally to
both domestic-invested enterprises and foreign-invested
enterprises such as Linyang China. Enterprises established prior
to March 16, 2007 eligible for preferential tax treatment
in accordance with the currently prevailing tax laws and
administrative regulations shall, under the regulations of the
State Council, gradually become subject to the new tax rate over
a five-year transition period starting from the date of
effectiveness of the new law. We expect details of the
transitional arrangement for the five-year period from
January 1, 2008 to December 31, 2012 applicable to
enterprises approved for establishment prior to March 16,
2007, such as Linyang China, to be set out in more detailed
implementing rules to be adopted in the future. Linyang
Chinas applicable tax rate may gradually increase to the
unified tax rate of 25% by January 1, 2013 under the new
tax law and in accordance with more detailed implementing rules
to be adopted in the future. Any increase in our effective tax
rate as a result of the above may adversely affect our operating
results. However, details regarding implementation of this new
law are expected to be provided in the form of one or more
implementing regulations to be promulgated by the PRC government
and the timing of the issuance of such implementing regulations
is currently unclear.
Critical
Accounting Policies and Estimates
We prepare our consolidated financial statements in conformity
with U.S. GAAP, which requires us to make estimates and
assumptions that affect the reported amounts of, among other
things, assets, liabilities, revenue and expenses. We base our
estimates on our own historical experience and on various other
factors that we believe to be relevant under the circumstances.
Actual results may differ from these estimates under different
assumptions or conditions. Some of our accounting policies
require higher degrees of judgment than others in their
application. We consider the policies discussed below to be
critical to an understanding of our financial statements as
their application places the most significant demands on our
managements judgment.
Revenue
Recognition
Our primary business activity is to produce and sell PV modules.
We periodically, upon special request from customers, sell an
insignificant amount of PV cells in the form of cells. We record
revenue related to the sale of PV modules or PV cells when the
criteria of SEC Staff Accounting Bulletin No. 104,
Revenue Recognition, are met. These criteria include
all of the following: persuasive evidence of an arrangement
exists, delivery has occurred, the sales price is fixed or
determinable and collectibility is reasonably assured.
51
More specifically, our sales arrangements are evidenced by
either master sales agreements or by individual sales agreements
for each transaction. The shipping terms of our sales
arrangements are generally
free-on-board
shipping point, whereby the customer takes title and assumes the
risks and rewards of ownership of the products upon delivery to
the shipper. Other than warranty obligations, we do not have any
commitments or obligations to deliver additional products or
services to our customers. The product sales price agreed to at
the order initiation date is final and not subject to
adjustment. We do not accept sales returns and do not provide
customers with price protection. Generally, our customers pay
all or a substantial portion of the product sales price prior to
shipment. We assess customers creditworthiness before
accepting sales orders. Historically, we have not experienced
any credit losses related to sales. Based on the above, we
record revenue related to product sales upon transfer of title,
which in almost all cases occurs upon delivery of the product to
the shipper.
In the event we pay the shipping costs for the convenience of
the customer, the shipping costs are included in the amount
billed to the customer. In these cases, sales revenue includes
the amount of shipping costs passed on to the customer. We
record the shipping costs incurred in our cost of revenue.
We periodically enter into service arrangements to process raw
materials into PV cells. For these PV cell service arrangements,
we purchase raw material from a customer and contemporaneously
agree to sell a specified quantity of PV cells back to the same
customer. The quantity of PV cells sold back to the customers
under these processing arrangements is consistent with the
amount of raw materials purchased from the customer based on
current production conversion rates. We record the amount of
revenue from these processing transactions based on the amount
received for PV cells sold less the amount paid for the raw
materials purchased from the customer. The revenue recognized is
recorded as processing service revenue and the production costs
incurred related to providing the processing services are
recorded as service processing costs within cost of revenue.
These sales are subject to all of the above-noted accounting
policy disclosure relating to revenue recognition.
Revenue is recognized net of all value-added taxes imposed by
governmental authorities and collected by us from customers
concurrent with revenue-producing transactions.
Fixed
Assets, Net
Fixed assets are stated at cost net of accumulated depreciation
and are depreciated using the straight-line method over the
estimated useful lives of the assets, as follows:
|
|
|
|
|
Buildings
|
|
|
20 years
|
|
Plant and machinery
|
|
|
10 years
|
|
Furniture, fixtures and office equipment
|
|
|
5 years
|
|
Computer software
|
|
|
5 years
|
|
Motor vehicles
|
|
|
5 years
|
|
We periodically reassess the useful lives of our fixed assets
and in doing so we take into consideration any relevant changes
in technology, the industry and the manner in which we plan to
use the assets.
Repair and maintenance costs are charged as expenses when
incurred, whereas the cost of renewals and betterment that
extend the useful life of fixed assets are capitalized as
additions to the related assets. Retirement, sale and disposals
of assets are recorded by removing the cost and accumulated
depreciation with any resulting gain or loss reflected in the
consolidated statement of operations.
Cost incurred in constructing new facilities, including progress
payments, interest and other costs relating to the construction,
are capitalized and transferred to fixed assets on completion.
Interest capitalized at September 30, 2007 totaled
RMB3.9 million (US$0.5 million).
Warranty
Costs
Our standard warranty on PV modules sold to customers provides
for a two-year or, most recently, three-year unlimited warranty
against technical defects, a
10-year
warranty against a decline from initial power generation
capacity of more than 10% and a 20 to
25-year
warranty against a decline from initial power generation
capacity of
52
more than 20%. We consider various factors in determining the
likelihood of product defects, including our quality controls,
technical analyses, industry information on comparable companies
and our own experience. Based on those considerations and our
ability and intention to provide refunds for defective products,
we have accrued for warranty costs for the two-year unlimited
warranty against technical defects based on 1% of revenue
derived from the sales of our PV modules. No warranty cost
accrual has been recorded for the
10-year and
20 to
25-year
warranties because we have determined the likelihood of claims
arising from these warranties to be remote based on internal and
external testing of the PV modules and the quality control
procedures in place in the production process. The basis for the
warranty accrual will be reviewed periodically based on our
actual experience. Apart from our standard warranty, we do not
provide any other warranty coverage.
Impairment
of Long-Lived Assets
We evaluate our long-lived assets or asset group for impairment
whenever events or changes in circumstances (such as a
significant adverse change to market conditions that will impact
the future use of the assets) indicate that the carrying amount
of a group of long-lived asset group may not be recoverable.
Such a determination of recoverability requires a careful
analysis of all relevant factors affecting the assets or asset
group and involves significant judgment on the part of our
management. When these events occur, we evaluate the impairment
by comparing the carrying amount of the assets to future
undiscounted net cash flows expected to result from the use of
the assets and their eventual disposition. The estimation of
future undiscounted net cash flows requires significant
judgments regarding such factors as future silicon prices,
production levels and PV product prices. If the sum of the
expected undiscounted cash flow is less than the carrying amount
of the assets, we would recognize an impairment loss based on
the excess of the carrying amount of the asset group over fair
value.
Share
Compensation
We account for the share options granted under our 2006 and 2007
equity incentive plans in accordance with
SFAS No. 123(R) Share-Based Compensation.
In accordance with SFAS No. 123(R), all grants of
share options are recognized in the financial statements based
on their grant date fair values. We have elected to recognize
compensation expense using the straight-line method for all
share options granted with services conditions that have a
graded vesting schedule.
Accounting
for Uncertain Income Tax Positions
In June 2006, the Financial Accounting Standards Board, or FASB,
issued Interpretation No. 48, Accounting for
uncertainty in Income Taxes, an interpretation of FAS 109,
Accounting for Income Taxes, or FIN 48, which became
effective on January 1, 2007 for our company. FIN 48
prescribes a recognition threshold and a measurement attribute
for the financial statement recognition and measurement of tax
positions taken or expected to be taken in a tax return. For
those benefits to be recognized, a tax position must be
more-likely-than-not to be sustained upon examination by taxing
authorities. The amount recognized is measured as the largest
amount of the benefit that is more likely than not to be
realized upon ultimate settlement. Our adoption of FIN 48
did not result in any adjustment to the opening balance of our
retained earnings as of January 1, 2007, nor did it have
any impact on our financial statements in the nine months ended
September 30, 2007.
Our accounting policy for interest
and/or
penalties related to underpayments of income taxes is to include
interest in interest expense and penalties in other operating
expenses. No such amounts have been incurred or accrued by us
through September 30, 2007.
Based on existing PRC tax regulations, the tax returns of
Solarfun China, Shanghai Linyang, Sichuan Jiayang and Nantong
Linyang for the years ended December 31, 2004, 2005 and
2006 remain subject to examination by the tax authorities.
Controls
and Procedures
Our auditors, an independent registered public accounting firm,
in connection with their audit of our consolidated financial
statements for the period from August 27, 2004 (inception)
to December 31, 2004 and the year ended December 31,
2005, noted and communicated to us certain significant
deficiencies in our internal
53
control over financial reporting that were deemed to constitute
material weaknesses in our internal control over
financial reporting as defined in standards established by the
U.S. Public Company Accounting Oversight Board, or the
PCAOB. A material weakness is defined by the PCAOB as a
significant deficiency, or combination of significant
deficiencies, that results in more than a remote likelihood that
a material misstatement in the annual or interim financial
statements will not be prevented or detected. A
significant deficiency is a control deficiency, or
combination of control deficiencies, that adversely affects the
companys ability to initiate, authorize, record, process
or report external financial data reliably in accordance with
generally accepted accounting principles such that there is more
than a remote likelihood that a misstatement in the
companys annual or interim financial statements that is
more than inconsequential will not be prevented or detected. A
control deficiency exists when the design or
operation of a control does not allow management or employees,
in the normal course of performing their assigned functions, to
prevent or detect misstatements on a timely basis.
These material weaknesses previously identified by our
independent auditors consisted of inadequate independent
oversight and inadequate personnel resources, processes and
documentation to address reporting requirements under
U.S. GAAP and relevant SEC regulations. In order to remedy
these material weaknesses, we adopted and implemented several
measures to improve our internal control over financial
reporting. In addition to appointing a new chief financial
officer in July 2006 to lead our companys financial
management and a new principal accounting officer in August
2006, both of whom have extensive audit experience and
U.S. GAAP knowledge, we established in November 2006 an
audit committee composed of a majority of independent directors
to oversee the accounting and financial reporting processes as
well as external and internal audits of our company.
In the course of auditing our consolidated financial statements
as of and for the nine months ended September 30, 2006 and
the year ended December 31, 2006, our auditors noted
improvements in our internal controls, as well as certain
circumstances in which our financial statement closing processes
could and should be further enhanced that collectively
constituted a material weakness in our internal control over
financial reporting. Specifically, written intentions to grant
share options to certain of our employees should have been
disclosed in the previously issued December 31, 2004,
December 31, 2005 and March 31, 2006 financial
statements as a subsequent event. However, our management
believes that none of the specific deficiencies identified has
individually or collectively had a material adverse effect on
our financial statements, and these deficiencies were not
related to any fraudulent acts.
To address this material weakness, we have undertaken additional
initiatives to strengthen our control over financial reporting
generally and specifically to improve our U.S. GAAP
financial closing-related policies and procedures. These
initiatives have included hiring additional qualified
professionals with relevant experience for our finance and
accounting department, and increasing the level of interaction
among our management, audit committee independent auditors and
other external advisors. We are also in the process of
implementing additional measures to further make improvements,
including providing additional specialized training for our
existing personnel. However, the process of designing and
implementing an effective financial reporting system is a
continuous effort that requires us to anticipate and react to
changes in our business and the economic and regulatory
environments and to expend significant resources to maintain a
financial reporting system that is adequate to satisfy our
reporting obligations. See Risk Factors Risks
Related to Our Company and Our Industry Our
independent auditors, in the course of auditing our consolidated
financial statements for the year ended December 31, 2006
noted significant deficiencies in our internal controls that
collectively were deemed to constitute material weaknesses. If
we fail to maintain an effective system of internal control over
financial reporting, our ability to accurately and timely report
our financial results or prevent fraud may be adversely
affected. In addition, investor confidence and the market price
of our ADSs may be adversely impacted if we or our independent
auditors are unable to attest to the adequacy of the internal
control over financial reporting of our company in accordance
with the requirements of Section 404 of the Sarbanes-Oxley
Act of 2002.
54
Consolidated
Results of Operations
Results
of Operations in the Period from August 27 (Inception) to
December 31, 2004, the Years Ended December 31, 2005,
2006 and the Nine Months Ended September 30, 2006 and
2007
The following table sets forth our summary consolidated
statement of operations for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From August 27
|
|
|
|
|
|
|
(Inception) to
|
|
|
|
Nine Months Ended
|
|
|
December 31,
|
|
Year Ended December 31,
|
|
September 30,
|
|
|
2004
|
|
2005
|
|
2006
|
|
2006
|
|
2007
|
|
|
(RMB)
|
|
(RMB)
|
|
(RMB
|
|
(US$)
|
|
(RMB)
|
|
(RMB)
|
|
(US$)
|
|
|
(in thousands)
|
|
Net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PV modules
|
|
|
|
|
|
|
165,636
|
|
|
|
604,317
|
|
|
|
80,653
|
|
|
|
360,154
|
|
|
|
1,405,371
|
|
|
|
187,563
|
|
PV cells
|
|
|
|
|
|
|
542
|
|
|
|
7,182
|
|
|
|
959
|
|
|
|
6,624
|
|
|
|
1,994
|
|
|
|
266
|
|
PV cell processing
|
|
|
|
|
|
|
|
|
|
|
19,408
|
|
|
|
2,590
|
|
|
|
19,461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
166,178
|
|
|
|
630,907
|
|
|
|
84,202
|
|
|
|
386,239
|
|
|
|
1,407,365
|
|
|
|
187,829
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PV modules
|
|
|
|
|
|
|
(139,481
|
)
|
|
|
(434,493
|
)
|
|
|
(57,988
|
)
|
|
|
(255,867
|
)
|
|
|
(1,182,231
|
)
|
|
|
(157,782
|
)
|
PV cells
|
|
|
|
|
|
|
(422
|
)
|
|
|
(5,983
|
)
|
|
|
(799
|
)
|
|
|
(5,548
|
)
|
|
|
(1,856
|
)
|
|
|
(248
|
)
|
PV cell processing
|
|
|
|
|
|
|
|
|
|
|
(6,054
|
)
|
|
|
(808
|
)
|
|
|
(6,014
|
)
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
(139,903
|
)
|
|
|
(446,530
|
)
|
|
|
(59,595
|
)
|
|
|
(267,429
|
)
|
|
|
(1,184,087
|
)
|
|
|
(158,030
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
|
|
|
26,275
|
|
|
|
184,377
|
|
|
|
24,607
|
|
|
|
118,810
|
|
|
|
223,278
|
|
|
|
29,799
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling expenses
|
|
|
|
|
|
|
(5,258
|
)
|
|
|
(11,883
|
)
|
|
|
(1,586
|
)
|
|
|
(6,023
|
)
|
|
|
(39,610
|
)
|
|
|
(5,287
|
)
|
General and administrative
expenses(1)
|
|
|
(629
|
)
|
|
|
(4,112
|
)
|
|
|
(52,214
|
)
|
|
|
(6,969
|
)
|
|
|
(31,585
|
)
|
|
|
(63,603
|
)
|
|
|
(8,488
|
)
|
Research and development expenses
|
|
|
|
|
|
|
(750
|
)
|
|
|
(6,523
|
)
|
|
|
(870
|
)
|
|
|
(2,723
|
)
|
|
|
(18,934
|
)
|
|
|
(2,527
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
(629
|
)
|
|
|
(10,120
|
)
|
|
|
(70,620
|
)
|
|
|
(9,425
|
)
|
|
|
(40,331
|
)
|
|
|
(122,147
|
)
|
|
|
(16,302
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit (loss)
|
|
|
(629
|
)
|
|
|
16,155
|
|
|
|
113,757
|
|
|
|
15,182
|
|
|
|
78,479
|
|
|
|
101,131
|
|
|
|
13,497
|
|
Interest expenses
|
|
|
|
|
|
|
(123
|
)
|
|
|
(8,402
|
)
|
|
|
(1,121
|
)
|
|
|
(3,855
|
)
|
|
|
(14,686
|
)
|
|
|
(1,960
|
)
|
Interest income
|
|
|
22
|
|
|
|
95
|
|
|
|
1,326
|
|
|
|
177
|
|
|
|
492
|
|
|
|
18,050
|
|
|
|
2,409
|
|
Exchange losses
|
|
|
|
|
|
|
(1,768
|
)
|
|
|
(4,346
|
)
|
|
|
(580
|
)
|
|
|
(2,123
|
)
|
|
|
(22,322
|
)
|
|
|
(2,979
|
)
|
Other income
|
|
|
|
|
|
|
215
|
|
|
|
902
|
|
|
|
120
|
|
|
|
486
|
|
|
|
9,058
|
|
|
|
1,209
|
|
Other expenses
|
|
|
|
|
|
|
(260
|
)
|
|
|
(836
|
)
|
|
|
(112
|
)
|
|
|
(474
|
)
|
|
|
(7,639
|
)
|
|
|
(1,020
|
)
|
Changes in fair value of embedded foreign currency derivative
|
|
|
|
|
|
|
|
|
|
|
(163
|
)
|
|
|
(22
|
)
|
|
|
(1,082
|
)
|
|
|
|
|
|
|
|
|
Government Grant
|
|
|
|
|
|
|
|
|
|
|
852
|
|
|
|
114
|
|
|
|
640
|
|
|
|
720
|
|
|
|
96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) before tax
|
|
|
(607
|
)
|
|
|
14,314
|
|
|
|
103,090
|
|
|
|
13,758
|
|
|
|
72,563
|
|
|
|
84,312
|
|
|
|
11,252
|
|
Income tax benefit
|
|
|
|
|
|
|
96
|
|
|
|
3,132
|
|
|
|
418
|
|
|
|
574
|
|
|
|
(3,644
|
)
|
|
|
(486
|
)
|
Minority interest
|
|
|
|
|
|
|
|
|
|
|
(301
|
)
|
|
|
(40
|
)
|
|
|
(266
|
)
|
|
|
925
|
|
|
|
124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(607
|
)
|
|
|
14,410
|
|
|
|
105,921
|
|
|
|
14,136
|
|
|
|
72,871
|
|
|
|
81,593
|
|
|
|
10,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to ordinary shares
|
|
|
(607
|
)
|
|
|
14,410
|
|
|
|
98,695
|
|
|
|
13,172
|
|
|
|
69,195
|
|
|
|
81,593
|
|
|
|
10,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
In 2006, we recorded a share
compensation charge of RMB10.3 million
(US$1.4 million), which related to a sale of our ordinary
shares to Linyang Electronics, a company controlled by our
chairman and chief executive officer, at less than fair market
value by other shareholders of our company and a share
compensation charge of RMB12.1 million
(US$1.6 million) as a result of the issuance of
series A convertible preference shares to Good Energies
Investments (Jersey) Limited and a share compensation charge of
RMB2.9 million (US$0.4 million) which related to stock
options granted on November 30, 2006 under our
companys employee stock option plan.
|
55
Nine
Months Ended September 30, 2007 Compared to Nine Months
Ended September 30, 2006
Net
Revenues
Our total net revenues increased by 264.4% to
RMB1,407.4 million (US$187.8 million) in the nine
months ended September 30, 2007 from RMB386.2 million
in the same period in 2006. The increase was due primarily to an
increase in our manufacturing capacity and the corresponding
increase in sales volume of our PV modules, driven by an
increase in market demand for our products, and was partially
offset by a decline in the average selling price of our
products. Our net revenue derived from our PV module business
increased by 290.2% to RMB1,405.4 million
(US$187.6 million) in the nine months ended
September 30, 2007 from RMB360.2 million in the same
period in 2006. Our PV module sales volume increased by 348.2%
to 50.2 MW in the nine months ended September 30, 2007 from
11.2 MW in the same period in 2006. Consistent with the
general trend in our industry, the average selling price of our
PV modules decreased to US$3.68 per watt in the nine months
ended September 30, 2007 from US$4.02 per watt in the same
period in 2006, which we believe was attributable to an
increased supply of PV modules and the continued reduction of
feed-in tariffs in our targeted markets. Based on the selling
prices of our PV modules to be sold under our sales contracts
recently entered into, we do not anticipate the average selling
price of our PV modules to continue to decline in the near term.
In the first nine months of 2007, we derived almost all of our
total net revenue from the sale of PV modules, which constituted
99.9% of our total net revenue, compared to 93.2% in the same
period in 2006.
During the nine months ended September 30, 2007, we shipped
our products to over 20 customers. We have also diversified our
customer base. In the nine months ended September 30, 2006
and 2007, customers accounting for 10.0% or more of our net
revenues collectively accounted for approximately 82.0% and
48.6% of our net revenues, respectively, and sales to our
largest customer accounted for approximately 33.7% and 16.8% of
our net revenues, respectively. We seek to further diversify our
geographic presence and customer base in order to achieve a
balanced and sustainable growth.
Cost of Revenues
Our cost of revenues increased significantly by 342.8% to
RMB1,184.1 million (US$158.0 million) in the nine
months ended September 30, 2007 from RMB267.4 million
in the same period in 2006. The increase in our cost of revenues
was due primarily to a significant increase in our expenditures
on raw materials, which was caused by an increase in the sales
volume of our PV products and, to a lesser extent, increases of
unit costs of silicon wafers. In particular, the costs
associated with PV module production increased 362.0% to
RMB1,182.2 million (US$157.8 million) in the nine
months ended September 30, 2007 from RMB255.9 million
in the same period in 2006, due to a significant increase in raw
material costs as the sales volume of our PV modules increased
significantly during this period. Cost of revenues as a
percentage of our total net revenues increased to 84.1% in the
nine months ended September 30, 2007 from 69.2% in the same
period in 2006, due primarily to the increase in our average
cost of silicon wafers in the nine months ended
September 30, 2007 over the same period in 2006, as a
result of the rising market price of silicon wafers.
Gross Profit
As a result of the foregoing, our gross profit increased by
87.9% to RMB223.3 million (US$29.8 million) in the
nine months ended September 30, 2007 from
RMB118.8 million in the same period in 2006. Our gross
margin decreased to 15.9% in the nine months ended
September 30, 2007 from 30.8% in the same period in 2006
primarily due to the decline in average selling prices of our PV
modules, an increase in material costs and our decision not to
provide any PV cell processing services, which has a higher
gross margin than PV cell and PV module production businesses,
during the nine months ended September 30, 2007.
Operating Expenses
Our operating expenses increased significantly by 202.9% to
RMB122.1 million (US$16.3 million) in the nine months
ended September 30, 2007 from RMB40.3 million in the
same period in 2006. The increase in our operating expenses was
due primarily to significant increases in our general and
administrative expenses and selling expenses and, to a lesser
extent, an increase in our research and development expenses.
Our operating expenses as a
56
percentage of our total net revenues decreased to 8.7% in the
nine months ended 2007 from 10.4% in the same period in 2006.
Selling Expenses
Our selling expenses primarily consist of warranty costs,
marketing and promotional expenses, and salaries, commissions,
share-based compensation charges, traveling expenses and
benefits for our sales and marketing personnel. Our selling
expenses increased by 560.0% to RMB39.6 million
(US$5.3 million) in the nine months ended
September 30, 2007 from RMB6.0 million in the same
period in 2006. Selling expenses as a percentage of our total
net revenues increased to 2.8% in the nine months ended
September 30, 2007 from 1.6% in the same period in 2006.
The increase in our selling expenses was due primarily to the
increase in our sales volume and our hiring of sales personnel
in a variety of locations.
General and Administrative Expenses
Our general and administrative expenses primarily consist of
salaries and benefits of our administrative staff, depreciation
charges of fixed assets used for administrative purposes, as
well as administrative office expenses, including, among others,
consumables, traveling expenses, insurance and share
compensation expenses for our administrative personnel. Our
general and administrative expenses increased by 101.3% to
RMB63.6 million (US$8.5 million) in the nine months
ended September 30, 2007 from RMB31.6 million in the
same period in 2006. However, general and administrative
expenses as a percentage of our total net revenues decreased to
4.5% in the nine months ended September 30, 2007 from 8.2%
in the same period in 2006. The increase in our general and
administrative expenses was due primarily to the increase in our
headcounts and fees paid to legal and accounting professionals
in connection with our obligations as a public company.
Research and Development Expenses
Our research and development expenses primarily consist of
salaries and benefits of our research and development staff,
other expenses including depreciation, materials used for
research and development purposes, and travel expenses incurred
by our research and development staff or otherwise in connection
with our research and development activities. Our research and
development expenses increased to RMB18.9 million
(US$2.5 million) in the nine months ended
September 30, 2007 from RMB2.7 million in the same
period in 2006. Research and development expenses as a
percentage of our total net revenues increased to 1.3% in the
nine months ended September 30, 2007 from 0.7% in the same
period in 2006. The increase was due primarily to the hiring of
additional research and development staff, expenses incurred in
connection with testing production of our new PV cell production
lines and share-based compensation charges. We expect our
research and development expenses to increase in line with the
increase in our total net revenues.
Operating Profit (Loss)
As a result of the foregoing, our operating profit increased to
RMB101.1 million (US$13.5 million) in the nine months
ended September 30, 2007 from RMB78.5 million in the
same period in 2006, and our operating profit margin decreased
to 7.2% in the nine months ended September 30, 2007 from
20.3% in the same period in 2006.
Interest Income (Expenses), Exchange Losses and Other Income
(Expenses)
We incurred exchange losses of RMB22.3 million
(US$3.0 million) in the nine months ended
September 30, 2007, compared to exchange losses of
RMB2.1 million in the same period of 2006, primarily due to
the appreciation of the Renminbi against the U.S. dollar. We
generated interest income of RMB18.1 million
(US$2.4 million) and at the same time incurred interest
expenses of RMB14.7 million (US$2.0 million) in the
nine months ended September 30, 2007, compared to interest
income of RMB0.5 million and interest expenses of
RMB3.9 million in the same period in 2006. Our interest
income in the nine months ended September 30, 2007 was
primarily the interest generated on the proceeds from our
initial public offering in December 2006. Our interest expenses
in the nine months ended September 30, 2007 mainly consist
of interest paid on our commercial loans.
Income Tax
We incurred income tax expenses of RMB3.6 million
(US$0.5 million) in the nine months ended
September 30, 2007 while our income tax benefit was
RMB0.6 million in 2006, because Linyang China, our
operating subsidiary
57
in the PRC, was exempted from enterprise income tax for 2006
and 2005. Linyang China will be taxed at a reduced state
enterprise income tax rate of 12% for the years of 2007, 2008
and 2009 and at a rate of 25% from 2010 onward.
Net Income
As a result of the cumulative effect of the above factors, our
net income increased by 12.0% to RMB81.6 million
(US$10.9 million) in the nine months ended
September 30, 2007 from RMB72.9 million in the same
period in 2006, while our net profit margin decreased to 5.8% in
the nine months ended September 30, 2007 from 18.9% in the
same period in 2006.
2006
Compared to 2005
We began PV module production in January 2005 and began PV cell
production in November 2005. Our operating results in 2006
represented significant increases compared to 2005 due to the
increase in sales volume, average selling prices and profit
margins of our products. We previously outsourced PV cells used
for our PV module production from third party suppliers at
market prices. In 2006, we manufactured all of the PV cells used
for our PV module production, thereby significantly reducing our
reliance on third party PV cell suppliers, decreasing our PV
module production costs and increasing our profit margins.
Net
Revenue
Our net revenue was RMB630.9 million (US$84.2 million)
in 2006, an increase of RMB464.7 million from
RMB166.2 million in 2005, primarily due to increased sales
volumes and selling prices of our PV cells and PV modules. The
net revenue we generated from our PV cell business increased
from RMB0.5 million in 2005 to RMB7.2 million
(US$1.0 million) in 2006. Our net revenue derived from PV
module business increased from RMB165.6 million to
RMB604.3 million (US$80.7 million) in 2006. Our sales
volumes of PV modules increased from 5.2 MW in 2005 to
19.0 MW in 2006 and sales volumes of PV cells increased
from 0.02 MW in 2005 to 0.3 MW in 2006. The average
selling prices of our PV modules increased from US$3.93 per watt
in 2005 to US$3.99 per watt in 2006 and the average selling
prices of our PV cells increased from US$3.00 per watt in 2005
to US$3.07 per watt in 2006. We also began providing PV
cell processing services from January 2006 and generated revenue
of RMB19.4 million (US$2.6 million) from PV cell
processing in 2006, based on 3.3 MW of PV cells we
processed and provided to our customers in this period. We
derived 94.3% and 5.7% of our net revenue in 2006 and 79.8% and
20.2% in 2005 from customers in Europe and China, respectively.
Cost of
Revenue and Gross Profit
Our cost of revenue was RMB446.5 million
(US$59.6 million) in 2006, an increase of
RMB306.6 million from RMB139.9 million in 2005. The
costs associated with PV cell and PV module production were
RMB6.0 million (US$0.8 million) and
RMB434.5 million (US$58.0 million), respectively,
accounting for 1.3% and 97.3% of our total cost of revenue,
respectively, in 2006. The costs associated with PV cell and PV
module production were RMB0.4 million and
RMB139.5 million, respectively, accounting for 0.3% and
99.7% of our total cost of revenue, respectively, in 2005. We
also had cost of revenue relating to PV cell processing of
RMB6.1 million (US$0.8 million) in 2006. Cost of
revenue as a percentage of our net revenue was 70.8% and 84.2%,
respectively, in 2006 and 2005. As a result of the foregoing,
our gross profit was RMB184.4 million
(US$24.6 million) for the year 2006, compared to
RMB26.3 million in 2005. Our gross profit margin in 2006
was 29.2%, compared to 15.8% in 2005.
Operating
Expenses and Operating Profit
Our operating expenses were RMB70.6 million
(US$9.4 million) in 2006, compared to RMB10.1 million
in 2005. These operating expenses consisted mainly of selling
expenses, general and administrative expenses and research and
development expenses.
We incurred selling expenses of RMB11.9 million
(US$1.6 million) in 2006, which represented 1.9% of our net
revenue in the same period. These expenses mainly related to
warranty expenses and our marketing efforts in our main target
markets of Germany, Spain, Italy and China. We incurred selling
expenses of RMB5.3 million in 2005, accounting for 3.2% of
our net revenue in the same period.
58
Our general and administrative expenses increased by
RMB48.1 million to RMB52.2 million
(US$7.0 million) in 2006 from RMB4.1 million in 2005,
due primarily to a share compensation charge of
RMB12.1 million (US$1.6 million) as a result of the
issuance of series A convertible preference shares to Good
Energies Investments (Jersey) Limited, a share compensation
charge of RMB10.3 million (US$1.4 million) related to
a sale of our ordinary shares to Linyang Electronics by other
shareholders of our company, a share compensation charge of
RMB2.9 million (US$0.4 million) related to options
granted under our 2006 equity incentive plan, and a
RMB11.3 million (US$1.5 million) allowance for
doubtful accounts related to one of our customers in Spain.
General and administrative expenses also increased due to an
increase in the number of our general and administrative
personnel, as well as the overall increase in our business
activities and the size of our operations. General and
administrative expenses as a percentage of our net revenue were
8.3% and 2.5%, respectively, in 2006 and 2005.
In addition, we also incurred research and development expenses
of RMB6.5 million (US$0.9 million) in 2006, increased
by RMB5.7 million from RMB0.8 million in 2005,
primarily due to an increase in the number of research and
development personnel as well as increased level of research and
development activities. Research and development expenses as a
percentage of our net revenue were 1.0% and 0.5%, respectively,
in 2006 and 2005.
As a result of the foregoing, our operating profit in 2006 was
RMB113.8 million (US$15.2 million), an increase of
RMB97.6 million from RMB16.2 million in 2005. Our
operating profit margin in 2006 was 18.0% compared to 9.7% in
2005. This measure includes a share compensation charge of
RMB10.3 million (US$1.4 million) related to a sale of
our ordinary shares to Linyang Electronics by other shareholders
of our company and a share compensation charge of
RMB12.1 million (US$1.6 million) as a result of the
issuance of series A convertible preference shares to Good
Energies Investments (Jersey) Limited during this period.
Interest
Expenses and Other Income (Expenses)
Our interest expenses were RMB8.4 million
(US$1.1 million) in 2006 and RMB0.1 million in 2005,
mainly consisting of interest expenses on our commercial loans.
We incurred exchange losses in the amount of RMB4.3 million
(US$0.6 million) in 2006 and RMB1.8 million in 2005,
mainly due to foreign currency exchange losses resulting from
the appreciated exchange rate of the Renminbi against the
U.S. dollar. We had other income of RMB0.9 million
(US$0.1 million) in 2006, compared to RMB0.2 million
in 2005.
Net
Income Before Tax and Income Tax Benefit
As a result of the foregoing, we had net income before tax of
RMB103.1 million (US$13.8 million) in 2006 and
RMB14.3 million in 2005. Our tax expenses were nil in 2006
and 2005, because Linyang China, our operating subsidiary in the
PRC, was exempted from enterprise income tax for 2006 and 2005.
We recorded RMB3.1 million (US$0.4 million) income tax
benefit as a result of recognizing deferred tax assets related
to warranty provision in 2006, compared to RMB0.1 million
in 2005.
Net
Income
We had net income of RMB105.9 million
(US$14.1 million) in 2006 and RMB14.4 million in 2005.
Our net income margin was 16.8% in 2006 and 8.7% in 2005. This
measure includes a share compensation charge of
RMB10.3 million (US$1.4 million) related to a sale of
our ordinary shares to Linyang Electronics by other shareholders
of our company and a share compensation charge of
RMB12.1 million (US$1.6 million) as a result of the
issuance of series A convertible preference shares to Good
Energies Investments (Jersey) Limited.
Period
from August 27, 2004 (Inception) to December 31,
2004
Since we only had minimal operating activities during the period
from August 27 to December 31, 2004, we do not believe that
a comparison between this period and the year ended
December 31, 2005 is meaningful.
We commenced our business operations on August 27, 2004.
Since we did not begin production of any of our PV products
until 2005, we did not generate any revenue or incur any cost of
revenue for the period from August 27
59
to December 31, 2004. We incurred general and
administrative expenses of RMB0.6 million, and as a result,
we had net loss of RMB0.6 million during this period.
Liquidity
and Capital Resources
We are a holding company, and conduct substantially all of our
business through Linyang China, our PRC operating subsidiary. We
rely on dividends paid by Linyang China for our cash needs,
including the funds necessary to pay dividends and other cash
distributions to our shareholders, to service any debt we may
incur and to pay our operating expenses. The payment of
dividends by entities organized in China is subject to
limitations. Current PRC regulations permit our subsidiaries to
pay dividends to us only out of their accumulated profits, if
any, determined in accordance with PRC accounting standards and
regulations. In addition, each of our subsidiaries in China is
required to set aside a certain amount of its after-tax profits
each year, if any, to fund certain statutory reserves. These
reserves are not distributable as cash dividends. As of
September 30, 2007, a total of RMB12.3 million
(US$1.6 million) was not available for distribution to us
in the form of dividends due to these PRC regulations.
Liquidity
The following table sets forth a summary of our cash flows for
the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 27, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Inception) to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
Year Ended December 31,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
|
2007
|
|
|
|
(RMB)
|
|
|
(RMB)
|
|
|
(RMB)
|
|
|
(US$)
|
|
|
(RMB)
|
|
|
(RMB)
|
|
|
(US$)
|
|
|
|
(in thousands)
|
|
|
Net cash used in operating activities
|
|
|
(8,180
|
)
|
|
|
(76,582
|
)
|
|
|
(523,061
|
)
|
|
|
(69,809
|
)
|
|
|
(414,659
|
)
|
|
|
(834,940
|
)
|
|
|
(111,433
|
)
|
Net cash used in investing activities
|
|
|
(295
|
)
|
|
|
(37,464
|
)
|
|
|
(190,047
|
)
|
|
|
(25,364
|
)
|
|
|
(95,387
|
)
|
|
|
(324,236
|
)
|
|
|
(43,273
|
)
|
Net cash generated from financing activities
|
|
|
12,000
|
|
|
|
117,575
|
|
|
|
1,843,846
|
|
|
|
246,082
|
|
|
|
571,938
|
|
|
|
366,832
|
|
|
|
48,958
|
|
Net increase in cash and cash equivalents
|
|
|
3,525
|
|
|
|
3,529
|
|
|
|
1,130,738
|
|
|
|
150,910
|
|
|
|
61,892
|
|
|
|
(792,344
|
)
|
|
|
(105,748
|
)
|
Net Cash
Used in Operating Activities
Net cash used in operating activities primarily consists of net
income (loss), as adjusted for non-cash items such as
depreciation, amortization of intangible assets, warranty
provision, share compensation expense and deferred tax benefit,
and the effect of changes in certain operating assets and
liabilities line items such as inventories, other current assets
(including advances to suppliers and other receivables), amounts
due to related parties, accounts and notes payable, customer
deposits, accrued expenses and other liabilities.
Our net cash used in operating activities was
RMB834.9 million (US$111.4 million) in the nine months
ended September 30, 2007, which was derived from a net
income of RMB81.6 million (US$10.9 million) adjusted
to reflect a net increase relating to non-cash items and a net
decrease relating to changes in operating assets and
liabilities. The adjustments relating to non-cash items were
primarily comprised of an increase in share compensation
expenses of RMB15.4 million (US$2.0 million),
depreciation expense of RMB16.4 million
(US$2.2 million), warranty provision of
RMB13.3 million (US$1.8 million) and write-down of
inventories of RMB4.6 million (US$0.6 million),
partially offset by allowance on doubtful accounts of
RMB11.3 million (US$1.5 million). The adjustments
relating to changes in operating assets and liabilities, which
resulted in a net decrease of RMB952.8 million
(US$127.2 million), were primarily comprised of:
|
|
|
|
|
an increase of RMB522.8 million (US$69.8 million) in
accounts receivable, primarily due to increased sales on credit
in the nine months ended September 30, 2007;
|
60
|
|
|
|
|
an increase of RMB226.4 million (US$30.2 million) in
advances to suppliers, primarily due to increased prepayments to
our suppliers for purchases of silicon and silicon wafers;
|
|
|
|
|
|
an increase of RMB157.5 million (US$21.0 million) in
inventories principally as a result of increased purchases of
silicon and silicon wafers; and
|
|
|
|
|
|
an increase of RMB76.9 million (US$10.3 million) in
accounts payable, primarily due to increased purchases of raw
materials.
|
Our net cash used in operating activities was
RMB523.1 million (US$69.8 million) in 2006, which was
derived from a net income of RMB105.9 million
(US$14.1 million) adjusted by an increase in depreciation
expense of RMB6.6 million (US$0.9 million), warranty
provision of RMB6.0 million (US$0.8 million), share
compensation expenses of RMB25.3 million
(US$3.4 million), allowance on doubtful accounts of
RMB11.3 million (US$1.5 million) and deferred tax
benefits of RMB3.3 million (US$0.4 million). The
adjustments relating to changes in operating assets and
liabilities, which resulted in a net decrease of
RMB675.4 million (US$90.1 million), were primarily
comprised of:
|
|
|
|
|
an increase of RMB159.2 million (US$21.2 million) in
accounts receivable, primarily due to increased sales on credit
in the fourth quarter of 2006;
|
|
|
|
|
|
an increase of RMB176.9 million (US$23.6 million) in
advances to suppliers, primarily due to increased prepayments to
our suppliers for purchases of silicon and silicon wafers;
|
|
|
|
|
|
an increase of RMB295.7 million (US$39.5 million) in
inventories principally as a result of increased purchases of
silicon and silicon wafers; and
|
|
|
|
|
|
a decrease of RMB55.3 million (US$7.4 million) in
deposits received from customers, primarily due to our provision
of more preferential credit terms to our customers.
|
Our net cash used in operating activities was
RMB76.6 million in 2005, consisting primarily of net income
of RMB14.4 million, adjusted by a RMB0.8 million
depreciation of fixed assets, RMB1.5 million warranty
provision, and RMB0.5 million stock compensation expense,
and offset by a net increase in operating assets and liabilities
of RMB93.8 million, including primarily:
|
|
|
|
|
an increase of RMB72.3 million in inventories principally
as a result of an increase of RMB60.5 million in the
purchase of raw materials;
|
|
|
|
an increase of RMB56.5 million in advances to suppliers;
|
|
|
|
an increase of RMB16.6 million in accounts payable mainly
due to raw materials purchases;
|
|
|
|
an increase of RMB22.2 million in restricted cash relating
to customer deposits; and
|
|
|
|
an increase of RMB55.3 million in deposits received from
customers.
|
These changes in 2005 were all principally due to the increase
in our overall business as we ramped up our production and sale
of PV modules and PV cells.
Our net cash used in operating activities was
RMB8.2 million in the period from August 27 to
December 31, 2004, primarily consisting of a net loss of
RMB0.6 million, adjusted by an increase of
RMB7.6 million in operating assets and liabilities, which
principally resulted from an increase of RMB4.5 million in
inventories and an increase of RMB4.9 million in advances
to suppliers.
Net Cash
Used in Investing Activities
Our net cash used in investing activities primarily consists of
cash used for the acquisition of fixed assets and advances made
to related parties.
Our net cash used in investing activities was
RMB324.2 million (US$43.3 million) in the nine months
ended September 30, 2007, consisting of
RMB285.8 million (US$38.1 million) of cash used for
the acquisition of fixed assets, primarily our manufacturing
machinery and equipment.
61
Our net cash used in investing activities was
RMB190.0 million (US$25.4 million) in 2006, consisting
of RMB177.9 million (US$23.7 million) of cash used for
the acquisition of fixed assets, including primarily our
manufacturing machinery and equipment, and RMB13.0 million
(US$1.7 million) of cash used for the acquisition of land
use rights.
Our net cash used in investing activities was
RMB37.5 million in 2005, consisting primarily of cash used
for the acquisition of fixed assets of RMB37.5 million.
Our net cash used in investing activities in the period from
August 27 to December 31, 2004 was RMB0.3 million, all
of which related to the acquisition of fixed assets.
Net Cash
Generated from Financing Activities
Our net cash generated from financing activities primarily
consists of capital contributions by equity shareholders,
short-term bank borrowings and advances provided by related
parties, as offset by payments of short-term bank borrowings and
by bank deposits for securing credit facilities granted by
commercial banks, which are not available for use for our
operations.
Our net cash generated from financing activities was
RMB366.8 million (US$49.0 million) in the nine months
ended September 30, 2007. This was mainly attributable to
short-term bank borrowings of RMB729.0 million
(US$97.3 million), partially offset by our payments of
short-term bank borrowings of RMB356.0 million
(US$47.5 million).
Our net cash generated from financing activities was
RMB1,843.8 million (US$246.1 million) in 2006. This
was mainly attributable to the issuance of ordinary shares in
the amount of RMB1,060.5 million (US$141.5 million),
the issuance of series A convertible preference shares in
the amount of RMB420.0 million (US$56.1 million) and
new bank loans of RMB475.7 million (US$63.5 million).
Our net cash generated from financing activities was
RMB117.6 million in 2005, including RMB29.3 million in
proceeds received as capital contributions from our shareholders
and RMB20.0 million (US$2.5 million) in short-term
bank loans, RMB146.4 million in repayment of advances and
RMB116.1 million in advances from Linyang Electronics Co.,
Ltd. for working capital purposes.
We had net cash generated from financing activities of
RMB12.0 million in the period from August 27 to
December 31, 2004, consisting entirely of capital
contributions from our shareholders offset by the advance of
RMB18.0 million to Linyang Electronics and Huaerli
(Nantong) Electronics Co., Ltd., or Huaerli (Nantong) as silicon
purchase prepayments.
Contractual
Obligations and Commercial Commitments
The following table sets forth our contractual obligations as of
September 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Due by Period
|
|
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
More than
|
|
|
|
Total
|
|
|
1 Year
|
|
|
1 to 2 Years
|
|
|
2 to 3 Years
|
|
|
3 Years
|
|
|
|
|
|
|
(in thousands of Renminbi)
|
|
|
|
|
|
Purchase obligations relating to machinery and equipment
|
|
|
52,734
|
|
|
|
52,734
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase obligations relating to raw materials
|
|
|
3,314,158
|
|
|
|
1,390,332
|
|
|
|
210,928
|
|
|
|
463,533
|
|
|
|
1,249,365
|
|
Operating lease commitments
|
|
|
10,463
|
|
|
|
3,504
|
|
|
|
2,208
|
|
|
|
2,160
|
|
|
|
2,591
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
3,377,355
|
|
|
|
1,446,570
|
|
|
|
213,136
|
|
|
|
465,693
|
|
|
|
1,251,956
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On October 25, 2007, Linyang China entered into an
agreement with Linyang Electronics, a company controlled by
Mr. Yonghua Lu, our founder, chairman and chief executive
officer under which Linyang China agreed to pay Linyang
Electronics a guarantee fee equivalent to an annual interest of
2.0% of the total bank borrowings guaranteed by Linyang
Electronics.
62
Capital
Resources and Capital Expenditures
We have financed our operations primarily through cash flows
from operations and also through bank loans and related-party
loans and proceeds from our initial public offering. As of
September 30, 2007, we had short-term bank loans from
various commercial banks with an aggregate outstanding balance
of RMB752.9 million (US$100.5 million). Our short-term
bank loans outstanding as of September 30, 2007 bore an
average interest rate of 6.3751% per annum. These short-term
bank loans have terms of six months to one year, and expire at
various times throughout the year. These facilities contain no
specific renewal terms but we have historically been able to
obtain extensions of some of the facilities shortly before they
mature. Our short-term bank loans were secured by land use
rights and substantially all of our short-term bank loans were
guaranteed by Linyang Electronics. We plan to repay our
short-term bank borrowings with cash generated by our operating
activities in the event we are unable to obtain extensions of
these facilities or alternative fundings in the future.
As of September 30, 2007, we had long-term bank loans with
an aggregate outstanding balance of RMB7.0 million
(US$0.9 million). Our long-term bank loans outstanding as
of September 30, 2007 bore an average interest rate of
6.65% per annum and were guaranteed by Linyang Electronics.
As of September 30, 2007, we had cash and cash equivalents
in the amount of RMB345.4 million (US$46.1 million).
Our cash and cash equivalents primarily consist of cash on hand,
demand deposits and liquid investments with original maturities
of three months or less that are placed with banks and other
financial institutions. Our advances to suppliers increased
significantly from RMB238.2 million (US$31.8 million)
as of December 31, 2006 to RMB468.4 million
(US$62.5 million) as of September 30, 2007 as we made
more prepayments to our silicon wafer suppliers in order to
satisfy our increased manufacturing capacity. Going forward, we
expect advances to suppliers to continue to increase as we
further expand our manufacturing capacity. Our fixed assets
increased significantly from RMB207.4 million
(US$27.7 million) as of December 31, 2006 to
RMB503.4 million (US$67.2 million) as of
September 30, 2007. This increase was due primarily to the
additional plant and equipment we purchased in connection with
the expansion of our production capacity.
Our capital expenditures were used primarily in the purchase of
a manufacturing facility and additional manufacturing equipment
for the production of PV cells and modules. We plan to fund the
balance of our 2007 capital expenditures and our 2008 capital
expenditures substantially with proceeds from our convertible
note offering, additional borrowings from third parties and cash
from operations.
Off-Balance
Sheet Arrangements
We do not have any outstanding derivative financial instruments,
off-balance sheet guarantees, interest rate swap transactions or
foreign currency forward contracts. We do not engage in
speculative transactions involving derivatives.
Inflation
Since our inception, inflation in China has not materially
impacted our results of operations. According to the National
Bureau of Statistics of China, the change of consumer price
index in China was 3.9%, 1.8% and 1.5% in 2004, 2005 and 2006,
respectively.
Quantitative
and Qualitative Disclosures About Market Risk
Foreign
Currency Exchange Risk
Our financial statements are expressed in Renminbi and our
functional currency is Renminbi. The change in value of the
Renminbi against the U.S. dollar, Euro and other currencies
is affected by, among other things, changes in Chinas
political and economic conditions. On July 21, 2005, the
PRC government changed its decade-old policy of pegging the
value of the Renminbi to the U.S. dollar. Under the new
policy, the Renminbi is permitted to fluctuate within a narrow
and managed band against a basket of certain foreign currencies.
This change in policy has resulted in a more than 11.7%
appreciation of the Renminbi against the U.S. dollar
between July 21, 2005 and December 27, 2007. There
remains significant international pressure on the PRC government
to adopt an even more flexible
63
currency policy, which could result in a further and more
significant appreciation of the Renminbi against the
U.S. dollar.
A substantial portion of our sales is denominated in Euros and
U.S. dollars, while a substantial portion of our costs and
expenses is denominated in Renminbi and U.S. dollars.
Therefore, the revaluation in July 2005 and potential future
revaluations have increased and could further increase our
costs. In addition, any significant revaluation of the Renminbi
may have a material adverse effect on our revenue and financial
condition. Fluctuations in exchange rates, particularly among
the U.S. dollar, Renminbi and Euro, also affect our gross
and net profit margins and could result in fluctuations in
foreign exchange and operating gains and losses. The value of,
and any dividends payable on, our ADSs in foreign currency terms
may also be affected. If we decide to convert our Renminbi into
U.S. dollars for the purpose of making dividend payments on
our ordinary shares or ADSs or for other business purposes,
appreciation of the U.S. dollar against the Renminbi would
have a negative effect on the U.S. dollar amount available
to us.
Interest
Rate Risk
Our exposure to interest rate risk primarily relates to the
interest rates for our short-term bank deposits. We have not
used any derivative financial instruments to manage our interest
risk exposure. Interest-earning instruments carry a degree of
interest rate risk. We have not been exposed, nor do we
anticipate being exposed, to material risks due to changes in
interest rates. However, our future interest income may be lower
than expected due to changes in market interest rates.
Recent
Accounting Pronouncements
In September 2006, the FASB issued Statement of Financial
Accounting Standards No. 157, Fair Value
Measurements, or SFAS No. 157.
SFAS No. 157 establishes a framework for measuring
fair value in generally accepted accounting principles,
clarifies the definition of fair value within that framework,
and expands disclosures about the use of fair value
measurements. SFAS No. 157 is effective for fiscal
years beginning after November 15, 2007. The provisions are
to be applied prospectively as of the beginning of the fiscal
year in which SFAS No. 157 is initially applied,
except as it pertains to a change in accounting principles
related to (i) large positions previously accounted for
using a block discount and (ii) financial instruments
(including derivatives and hybrids) that were initially measured
at fair value using the transaction price in accordance with
guidance in footnote 3 of
EITF 02-3
or similar guidance in SFAS No. 155. For these
transactions, differences between the amounts recognized in the
statement of financial position prior to the adoption of
SFAS No. 157 and the amounts recognized after adoption
should be accounted for as a cumulative-effect adjustment to the
opening balance of retained earnings in the year of adoption. We
are currently assessing the impact, if any, that
SFAS No. 157 will have on our financial condition or
results of operations.
In February 2007, the FASB issued Statement of Financial
Accounting Standards No. 159, The Fair Value Option
for Financial Assets and Financial Liabilities
Including an amendment of FASB Statement No. 115, or
SFAS No. 159. SFAS No. 159 permits entities to choose
to measure certain of their financial instruments and certain
other items at fair value that are not currently required to be
measured at fair value. SFAS No. 159 is effective for
financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal
years. We are currently assessing the impact, if any, of this
new standard on our financial statements.
64
OUR
CORPORATE HISTORY AND STRUCTURE
We are a Cayman Islands holding company and conduct
substantially all of our business through our operating
subsidiary in the PRC, Linyang China. We own 100% of Linyang
BVI, a British Virgin Islands holding company, which owns 100%
of Solarfun Power Hong Kong Limited. Solarfun Power Hong
Kong Limited owns 100% of Linyang China. We established three
subsidiaries in China, Shanghai Linyang, Sichuan Jiayang and
Nantong Linyang, to expand our business into new markets and
sectors. We also established a wholly owned subsidiary, Solarfun
Power U.S.A. Inc., as part of our plan to enter the United
States market. In August 2007, we acquired a 52% equity interest
in Yangguang Solar. The diagram sets forth the entities directly
or indirectly controlled by us as of the date of this prospectus:
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(1)
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The other shareholders of Shanghai
Linyang are three individuals: Mr. Yongliang Gu,
Mr. Rongqiang Cui, and Mr. Cuis spouse.
Mr. Gu and Mr. Cui are our shareholders.
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(2)
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The other shareholders of Sichuan
Jiayang are Sichuan Jianengjia, which holds a 30% equity
interest, and a member of Sichuan Jiayangs management
team, Mr. Wei Gu, who holds a 15% equity interest on behalf
of Mr. Yonghua Lu, our chairman and chief executive
officer, pursuant to an entrustment agreement entered into in
November 2006. Under this entrustment agreement, Mr. Lu
provided RMB3.0 million (US$0.4 million) to
Mr. Gu to acquire the 15% equity interest in Sichuan
Jiayang. Under the entrustment agreement, all the rights enjoyed
by Mr. Gu as the holder of record of the 15% equity
interest in Sichuan Jiayang, including economic rights, belong
to Mr. Lu. Mr. Gu may only exercise rights relating to
this equity interest in Sichuan Jiayang, such as voting and
transfer rights, pursuant to written instructions from
Mr. Lu. Mr. Lu also has the right to transfer all or a
portion of the 15% equity interest to the management of Sichuan
Jiayang or other third parties. This entrustment arrangement was
originally contemplated at the time of establishment of Sichuan
Jiayang, but was not formalized
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in writing until November 2006, and
was meant to serve as a transitional step in advance of
potentially fully transferring these equity interests to
Mr. Gu and other members of Sichuan Jiayangs
management team as performance incentives.
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(3)
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Upon confirmation of Yangguang
Solar, the other shareholders of Yangguang Solar are Suyang
Group, which hold a 30% equity interests, and Nanjing Linyang,
which holds an 18% equity interests. Suyuan Group has entered
into a share transfer agreement with Nanjing Guangyi Technology
Co.,Ltd on November 16, 2007. However, the equity interests
transfer procedure is still in the process.
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We commenced our operations in August 2004 through Linyang
China. In connection with our initial public offering, we
completed a restructuring in June 2006 pursuant to which we
established our current holding company structure. Immediately
prior to our restructuring, on June 1, 2006, Linyang China
was a Sino-foreign joint venture company with four shareholders:
Linyang Electronics held 70% of the equity interests of Linyang
China; Mr. Rongqiang Cui, our shareholder, and
Mr. Yongliang Gu, our shareholder, held 3% and 2%,
respectively, of Linyang China; and a non-PRC resident held the
remaining 25% as the non-PRC joint venture partner. Linyang
Electronics is one of the leading electricity-measuring
instrument manufacturers in China. Mr. Yonghua Lu, our
founder, chairman and chief executive officer, together with his
spouse, holds 75% of the equity interests of Linyang
Electronics, with the non-PRC resident joint venture partner of
Linyang China holding the remaining 25%. In connection with the
restructuring, the non-PRC resident joint venture partner of
Linyang China ceased to own any interest in our company and
received cash for the transfer of his interest in Linyang China.
In June and August 2006, we issued in a private placement an
aggregate of 79,644,754 series A convertible preference
shares to Citigroup Venture Capital International Growth
Partnership, L.P., Citigroup Venture Capital International
Co-Investment, L.P., Hony Capital II, L.P., LC Fund III,
L.P., Good Energies Investments (Jersey) Limited and two
individual investors. The proceeds we received from this
transaction, before deduction of transaction expenses, were
US$53 million. All of these 79,644,754 series A
convertible preference shares were converted to ordinary shares
of our company upon the completion of our initial public
offering.
We and certain selling shareholders of our company completed our
initial public offering of 12,000,000 ADSs, each representing
five ordinary shares, on December 26, 2006. On
December 20, 2006, we listed our ADSs on The Nasdaq Global
Market under the symbol SOLF.
For a discussion of our current shareholding structure, see
Principal Shareholders.
66
Overview
We are an established manufacturer of both PV cells and PV
modules in China. We manufacture and sell a variety of PV cells
and PV modules using advanced manufacturing process technologies
that have helped us to rapidly increase our operational
efficiency. All of our PV modules are currently produced using
PV cells manufactured at our own facilities. We sell our
products both directly to system integrators and through third
party distributors. In the nine months ended September 30,
2007, we sold our products to over 20 customers, mostly in
Germany and Spain, as well as several other European countries.
In the past, we also provided PV cell processing services for
some of our silicon suppliers. We conduct our business in China
through our operating subsidiary, Linyang China.
We currently operate four monocrystalline PV cell production
lines and four multicrystalline PV cell production lines, each
with up to 30 MW of annual manufacturing capacity. As part
of our vertical integration and supply sourcing strategy, we
recently acquired a controlling stake in a Chinese silicon ingot
manufacturing company, which we believe could produce 50 to
60 MW of ingots in 2008. In order to meet the fast-growing
market demands for solar products, we plan to significantly
expand our PV cell manufacturing capacity over the next several
years. We expect that the aggregate annual manufacturing
capacity of our PV cell production lines that are completed or
under construction will reach 360 MW by the middle of 2008.
In addition, we have achieved improvements in process technology
and product quality since we commenced our commercial production
in November 2005. Our monocrystalline PV cells achieved
conversion efficiency rates in the range of 16.1% to 16.6% in
the nine months ended September 30, 2007 and we are now
able to process wafers as thin as 200 microns.
Our net revenue increased from RMB166.2 million in 2005 to
RMB630.9 million (US$84.2 million) in 2006, and our
net income increased from RMB14.4 million in 2005 to
RMB105.9 million (US$14.1 million) in 2006. In the
nine months ended September 30, 2007, our net revenue and
net income amounted to RMB1407.4 million
(US$187.8 million) and RMB81.6 million
(US$10.9 million), respectively, compared to
RMB386.2 million and RMB72.9 million, respectively, in
the same period in 2006.
Our
Strengths
We believe the following strengths enable us to capture
opportunities in the rapidly growing PV industry and compete
effectively in the PV market in China and internationally:
Strong
Execution Capability Demonstrated by Significant and Rapid
Operational Expansion in a Competitive Market
We have achieved significant milestones in a highly competitive
market within the short period since our establishment,
including the following:
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Rapid Buildup of Manufacturing Capacity and Fast Rollout of
Products. We completed our first PV cell
production line within seven months from the initial project
design phase in April 2005 to final completion of construction
in November 2005. We built up our manufacturing capacity within
a short period of time, and have achieved an annual
manufacturing capacity of 240 MW of PV cells. We believe
our ability to build up our manufacturing capacity and produce
high-quality products within a short period of time has allowed
us to meet the market demands in a timely manner.
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Continuing Improvements of Process Technology and Product
Quality. In line with the ongoing refinement of
our manufacturing processes, we further improved our process
technology, including being able to process wafers as thin as
200 microns. In the nine months ended September 30, 2007,
our monocrystalline PV cells achieved conversion efficiency
rates in the range of 16.1% to 16.6%. We also obtained TÜV
certification in October 2005 and July 2007 and UL certification
issued by Underwriters Laboratories in March 2007 for our PV
modules. Obtaining and maintaining TÜV certification has
significantly enhanced our sales in Europe, since European
customers generally require this certification for any PV
products they purchase.
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We believe these achievements reflect the execution capabilities
of our experienced management team, the technical support
provided by our research and development team, the skills of our
operational personnel, and the efficiency of our production and
management system. Due to these factors, we believe we are
well-positioned to maintain our execution momentum and
capitalize on the rapidly growing PV market.
Scalable
Integrated Manufacturing Capacity and Extensive Industry
Relationships to Support Our Expansion Plans
We believe our existing manufacturing capacity and strong
customer and supplier relationships will serve as a solid base
for us to implement our future expansion plans.
We currently have an annual manufacturing capacity of
240 MW for PV cells. We expect that the aggregate annual
manufacturing capacity of our completed and under-construction
PV cell production lines will reach 360 MW by the middle of
2008. We believe our experience in building up capacity within
short periods of time will allow us to successfully execute our
future capacity expansion plans.
We believe our access to silicon supplies is a key factor in our
expansion plans, as there is currently an industry-wide shortage
of these raw materials. We have established supply arrangements
with our key silicon and silicon wafer suppliers, including an
eight-year supply contract with Hoku, a seven-year supply
contract with a non-PRC supplier and supply contracts with LDK.
In addition, we entered into a supply agreement in June 2006
with E-mei,
which became effective in October 2006, under which we agreed to
make prepayments to secure exclusive rights to purchase the
silicon products to be produced by
E-meis
future manufacturing facility at a discount to the prevailing
market price for five years starting from the completion of the
facility.
E-mei will
use the prepayments to construct a new manufacturing facility,
the construction of which is expected to be completed by April
2008, with an expected annual production capacity of 500 tons of
silicon products. Moreover,
E-mei agreed
to provide us approximately 0.6 MW of silicon and silicon
wafers each month from July 2007 to March 2008.
In August 2007, we acquired a 52% equity interest in Yangguang
Solar. Pursuant to the equity transfer agreement under which
Zhongneng agreed to transferred a 70% equity interest in
Yangguang Solar to Nanjing Linyang and the remainder 30% equity
interest to Suyuan Group, Zhongneng agreed to supply 1,950 tons
of polysilicon to Yangguang Solar over a three-year period.
Although we believe these supply arrangements will satisfy a
significant portion of our planned silicon supply requirements
in 2008, our polysilicon and silicon wafer suppliers may not be
able to supply us with sufficient materials and components that
meet our quality, quantity and cost requirements in a timely
manner due to lack of supplies or other reasons.
Our key customers include prominent international solar power
system integrators and distributors, such as Solar Projekt
Energiesysteme GmbH, UB Garanty Project S.L., Ecostream
Switzerland GmbH and Scatec. In addition, we are discussing
potential business opportunities with other leading
international solar energy companies. We expect that these
relationships with suppliers and customers will serve as the
basis for our further growth and expansion.
Operational
Cost Advantages Achieved through Efficient Utilization of
Management, Engineering, Labor and Manufacturing Resources in
China
As our operations are based in China, we believe we have
significant cost advantages over companies in the solar energy
industry that are based in developed countries. In particular,
the factors that contribute to our relatively low cost basis
include the following:
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The cost of professional management and engineering personnel as
well as skilled labor in China is much lower than in developed
countries.
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We have enjoyed relatively low equipment costs. We combine
imported equipment with domestically produced equipment based on
our own manufacturing design to achieve an optimal mix between
technical specifications and cost, without compromising the
process and product quality.
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Industry
Experience to Support Our Development of Downstream Business
Opportunities in China
We believe we are well-positioned to leverage our core
competencies in PV cell and PV module manufacturing to
effectively develop system integration and other downstream
businesses. This evolution is supported by:
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Our managements extensive participation in the electricity
generation industry and experience in electronics manufacturing
over the last decade.
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Our establishment of Shanghai Linyang in the first quarter of
2006 to explore downstream opportunities. In particular,
Shanghai Linyangs personnel have previously been involved
in several solar energy electricity generation projects in
Shanghai, including the Shanghai Xinzhuang Industry Park 3 KW
on-grid application system, the Shanghai Charity Foundation 3 KW
on-grid application system and the Shanghai Energy Conservation
Center 1 KW off-grid application system.
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Research
and Development Capabilities That Leverage Both Third Party
Collaborations and Internal Resources
We have adopted a systematic approach to our research and
development activities that is aimed at achieving both near-term
manufacturing process efficiency gains and long-term
technological breakthroughs by leveraging third party
collaborations as well as our internal resources. This approach
consists of:
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Collaborations with Research Institutions. We
have established a joint research program with ISC Konstanz in
Germany to improve our PV cell manufacturing. We also have a
long-term joint development relationship with Shanghai Jiaotong
University, one of the leading science and engineering
universities in China, which we believe will provide our company
access to PV experts in China and allow us to participate in the
development and implementation of the next generation of PV
technologies. We have also cooperated with the Institute of
Electrical Engineering of the Chinese Academy of Sciences to
jointly develop new PV products. In addition, we have
established a joint PV research program with Sun Yat-sen
University in China to conduct research on PV cell process
technology and set up a research and development framework
program with ISC Konstanz, a German solar research institute, to
improve our PV cell manufacturing. We believe these research and
development initiatives have helped us, and will help us, to
achieve our technological advancement.
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Internal Research and Development
Capabilities. Our research and development
efforts have allowed us to improve our products and enhance our
overall business. We currently have one issued patent and seven
pending patent applications in China. In April 2007, we
established Nantong Linyang as part of our effort to strengthen
our research and development capabilities.
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Establishment of PV Technology Committee. We
have established a PV technology committee that is composed of
12 PV technology experts. This committees mandate is to
monitor and report on technological developments, trends and new
governmental policies affecting the industry. The committee also
participates in the research and development activities of our
company, conducts its own research on selected topics and
contributes to the development and training of our research and
development team.
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Entrepreneurial
Management with Extensive Industry Contacts and Strong Track
Record of Successful Execution
Our management team consists of an experienced and diversified
group of entrepreneurs and professionals who have positioned our
company to take advantage of the rapidly growing PV market. Our
senior management has significant industry and managerial
experience and contacts throughout the electricity generation
industry, which is evidenced by their track records of founding
and managing successful enterprises. For example,
Mr. Yonghua Lu, our founder, chairman and chief executive
officer, has been chairman and general manager of Linyang
Electronics, one of the largest electricity measuring instrument
manufacturers in China since 1997. Mr. Hanfei Wang, our
director and chief operating officer, was a key management team
member of a leading solar company in China from 2001 to 2004.
Mr. Yuting Wang, our chief engineer, has extensive
experience in solar energy research and development in China. In
addition, more than half of our middle management and production
supervisors have
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extensive manufacturing and managerial experience based on their
prior employment at Linyang Electronics and other successful PV
enterprises.
Our
Strategies
Our long-term goal is to become a leading global PV cell and
module manufacturer and to leverage our core strengths to become
an innovator and an important player in the downstream PV
markets, particularly in China. To achieve this goal, we plan to
implement the following specific strategies:
Continue
to Expand Manufacturing Capacity and Reduce Operational Costs to
Achieve Greater Economies of Scale
We believe that scale and manufacturing capacity are the key
factors in determining competitiveness in the PV market. Our
plans for expanding our production capacity are three-fold:
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PV Cell Production. We currently have eight PV
cell production lines in commercial operation. We plan to
install four additional PV cell production lines in 2008 to
raise our manufacturing capacity to 360 MW by the middle of
2008.
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Other Production Lines. In addition, we plan
to install other production lines for other products. For
example, we recently commenced initial operation of a new
15 MW building integrated PV production line.
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Our planned expansion is expected to help us to achieve
economies of scale in production and reduced materials
procurement costs, as well as rationalize our equipment costs
and general and administrative expenses. In addition, we plan to
begin to design our own equipment, including cleaning and
printing machines, debottleneck our production capacity and
improve our manufacturing processes. We believe that this will
reduce our costs and allow us to meet our customers
product and volume requirements, while maintaining our
profitability.
Secure
Future Supplies of Silicon and Expand our Ingot Production
Business
We intend to leverage our financial strength, market position
and industry experience in China to enter into various forms of
strategic alliances with silicon suppliers in China and overseas
to reduce our exposure to the risk of supply shortages. In
particular, we plan to secure supplies of silicon through the
following means:
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Wafers and Polysilicon Supply Contracts. We
have entered into supply contracts with Hoku, LDK and
E-mei for
wafers or polysilicon. We recently entered into a seven-year
supply contract with a non-PRC supplier and are in active
discussions with other silicon and silicon wafer suppliers both
in China and overseas to secure stable and reliable silicon
supplies. We believe that our expanding production capacity
makes us an attractive customer for global silicon and silicon
wafer suppliers.
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Other Solutions. We plan to selectively enter
into spot market silicon purchase contracts to supplement our
existing long-term supply agreements.
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Internal Ingot Manufacturing Capacity. In
August 2007, we acquired a 52% equity interest in Yangguang
Solar, which is engaged in ingot production with an annualized
production capacity of
15-20 MW
at the end of 2007. Yangguang Solar plans to install additional
equipment and we believe its aggregate annualized production
capacity could reach 60 to 80 MW by the end of 2008. This
acquisition provides us with an additional source for silicon
ingots, as well as strategic flexibility to expand into the
additional segments of the PV industry value chain. However, we
have no prior experience in operating an ingot plant,
particularly an early stage company that is new and unproven and
we may not be able to operate it successfully.
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Increase
Investments for Research and Development Activities, Enhance
Production Process Technologies and Develop Next Generation
Products through Continuous Innovation
To further enhance our existing product technology and our
manufacturing processes and develop new products and
technologies, we plan to devote substantial resources to
research and development, including by
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participating in various types of cooperation projects with
leading domestic and international research institutions. In
particular, our research and development efforts will focus on
the following areas:
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Increase Conversion Efficiencies. We intend to
develop new technologies and design advanced equipment to
manufacture, on a large scale and cost-effectively, PV cells
with higher conversion efficiencies.
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Reduce Silicon Usage by Using Thinner Silicon
Wafers. We intend to develop process technologies
for wafers with thicknesses of less than 150 microns to address
manufacturing challenges associated with reducing the thickness
of silicon wafers.
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Develop Thin-Film Silicon PV Cell Technologies and Other
Technologies. We intend to develop manufacturing
technologies for the next generation thin film silicon PV cells
on glass, which would significantly reduce the consumption of
silicon materials and manufacturing costs.
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In addition, in order to improve our operating efficiency, we
continue to develop new equipment and tools and redesign our
manufacturing processes. We also plan to build upon our existing
research and development capabilities by continuing to recruit
experienced research personnel and establishing additional
alliances and collaborations with leading Chinese and
international institutions.
Diversify
Our Product and Service Offerings and Expand Our Business in
Downstream Markets
We plan to diversify our PV cell and PV module offerings and to
enter the system integration business by leveraging our core
competencies in cell and module manufacturing and our
managements experience and relationships in the
electricity generation and electronics manufacturing industries.
In particular:
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Our product lines currently include primarily PV cells and PV
modules, and we plan to expand them to include building
integrated PV and other PV applications and products, such
as inverters and net meters, in order to address a broader range
of market opportunities and reduce our dependence on our current
products. Moreover, we believe the addition of these products
will also help us to increase our profitability and brand
recognition.
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We expect the PV market in China to grow rapidly in light of
recent legislation and policies. We plan to take advantage of
the rapid development of Chinas PV market and the PRC
governments promotion of the development of solar energy
in Chinas western provinces, to begin to provide PV system
services. By targeting high-profile projects, we believe we can
also use these downstream opportunities to enhance awareness of
our core products and our brand. We have already established
Shanghai Linyang to capitalize on the potential system
integration opportunities in China. Provision of system
integration services typically generates a higher profit margin
than PV cells and PV modules. Development of system integration
products and services may also provide us with greater pricing
power, as the new products and services are less susceptible to
commoditization than our current products.
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Broaden
Our Geographical Revenue Base, and Build and Enhance Brand
Recognition Both Domestically and Internationally
We plan to broaden the geographical distribution of our sales in
order to seek new market opportunities, reduce our reliance on
any particular geographic region and achieve a more diversified
distribution of our products.
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Overseas Market. Europe has been our largest
market since we commenced operations in 2004. We have
established a sales and marketing office in Germany. As part of
our plan to enter the United States market, we obtained UL
certification issued by Underwriters Laboratories, an
independent product-safety testing and certification
organization in the United States, for our PV modules in March
2007, and have established Solarfun Power U.S.A. Inc. to
coordinate our marketing efforts in the United States.
|
|
|
|
|
|
PRC Market. We believe that Chinas PV
market is expected to grow rapidly with the enactment of more
solar energy incentive policies by the PRC government. By
leveraging upon the existing broad domestic sales platform of
Linyang Electronics, our affiliate, we intend to further expand
our PRC market presence, especially in the downstream market.
|
71
|
|
|
|
|
Strengthening Our Brand. We plan to build and
enhance our Solarfun brand both domestically and
internationally by continuing to provide high quality products
and services and through a targeted marketing campaign.
|
Our
Products and Services
Our products include PV cells and PV modules. In 2006, we also
provided PV cell processing services to convert silicon wafers
into PV cells on behalf of third parties. The table below shows
our net revenue derived from the sales of PV cells, PV modules,
the provision of PV cell processing services, and the percentage
contribution of each of these products and services to our net
revenue, for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Nine Months Ended
|
|
|
|
2005
|
|
|
2006
|
|
|
September 30, 2007
|
|
Products and Services
|
|
Net Revenue
|
|
|
%
|
|
|
Net Revenue
|
|
|
%
|
|
|
Net Revenue
|
|
|
%
|
|
|
|
(in thousands of Renminbi, except percentages)
|
|
|
|
|
|
PV cells
|
|
|
542
|
|
|
|
0.3
|
%
|
|
|
7,182
|
|
|
|
1.1
|
%
|
|
|
1,994
|
|
|
|
0.1
|
%
|
PV modules
|
|
|
165,636
|
|
|
|
99.7
|
%
|
|
|
604,317
|
|
|
|
95.8
|
%
|
|
|
1,405,371
|
|
|
|
99.9
|
%
|
PV cell processing
|
|
|
|
|
|
|
|
|
|
|
19,408
|
|
|
|
3.1
|
%
|
|
|
|
|
|
|
|
|
Our
Products
PV
Cells
A PV cell is a semiconductor device that converts sunlight into
electricity by a process known as the photovoltaic effect. The
following table sets forth the specifications of two types of PV
cells we currently produce:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dimensions
|
|
|
Conversion
|
|
|
Thickness
|
|
|
Maximum
|
|
PV Cell Type
|
|
(mm×mm)
|
|
|
Efficiency (%)
|
|
|
(EM)
|
|
|
Power (W)
|
|
|
Monocrystalline silicon cell
|
|
|
125 × 125
|
|
|
|
15.0 - 17.2
|
%
|
|
|
200 - 220
|
|
|
|
2.23 - 2.56
|
|
|
|
|
156 × 156
|
|
|
|
15.0 - 16.8
|
%
|
|
|
200 - 220
|
|
|
|
3.60 - 4.03
|
|
Multicrystalline silicon cell
|
|
|
125 × 125
|
|
|
|
14.5 - 16.0
|
%
|
|
|
200 - 220
|
|
|
|
2.19 - 2.50
|
|
|
|
|
156 × 156
|
|
|
|
14.5 - 15.8
|
%
|
|
|
200 - 220
|
|
|
|
3.41 - 3.85
|
|
The key technical efficiency measurement of PV cells is the
conversion efficiency rate. In general, the higher the
conversion efficiency rate, the lower the production cost of PV
modules per watt because more power can be incorporated into a
given size package. Our monocrystalline PV cells achieved
conversion efficiency rates in the range of 16.1% to 16.6% in
the nine months ended September 30, 2007.
We are now able to process wafers as thin as 200 microns. In
order to further lower our production costs, we intend to focus
on producing PV cells with decreasing thickness levels.
PV
Modules
A PV module is an assembly of PV cells that have been
electrically interconnected and laminated in a durable and
weather-proof package. We have been selling a wide range of PV
modules, currently ranging from 5W to 200W in power output
specification, made primarily from the PV cells we manufacture.
We are developing modules with higher power to meet the rising
demand for on-grid configurations. The majority of the PV
modules we currently offer to our customers range in power
between 160W and 200W. We sell approximately 60% of our PV
modules under our proprietary Solarfun brand, and
approximately 40% of our PV modules under the brand names of our
customers.
72
The following table sets forth the types of PV modules we
manufacture with the specifications indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
Dimensions
|
|
Weight
|
|
|
|
|
PV Module Manufactured
with:
|
|
(mm)
|
|
(Kg)
|
|
|
Power (W)
|
|
|
Monocrystalline silicon
|
|
1580 × 808 × 45
|
|
|
15
|
|
|
|
160 - 185
|
|
|
|
1494 × 1000 × 45
|
|
|
18
|
|
|
|
190 - 210
|
|
Multicrystalline silicon
|
|
1580 × 808 × 45
|
|
|
15
|
|
|
|
155 - 180
|
|
|
|
1494 × 1000 × 45
|
|
|
18
|
|
|
|
185 - 205
|
|
We believe our PV cells and modules are highly competitive with
other products in the solar energy market in terms of efficiency
and quality. We expect to continue improving the conversion
efficiency and power, and reducing the thickness, of our solar
products as we continue to devote significant financial and
human resources in our various research and development programs.
Our
Services
PV Cell
Processing
In 2006, we provided PV cell processing services to convert
silicon wafers into PV cells on behalf of third parties,
including some of our silicon suppliers. For these PV cell
processing service arrangements, we purchased raw
materials from a customer and at the same time agreed to
sell a specified quantity of PV cells back to the
same customer. The quantity of PV cells sold back to the
customer under these processing arrangements was consistent with
the amount of raw materials purchased from the customer. We
recorded the amount of revenue from these processing
transactions based on the amount received for PV cells sold less
the amount paid for the raw materials purchased from the
customer. The revenue recognized was recorded as processing
service revenue and the production costs incurred related to
providing the processing services were recorded as service
processing costs within cost of revenue.
Raw
Materials Supply Management
Manufacturing of our solar products requires reliable supplies
of various raw materials, including silicon wafers, ethylene
vinyl acetate, triphenyltin, tempered glass, connecting bands,
welding bands, silica gel, aluminum alloy and junction boxes. We
seek to diversify the supply sources of raw materials and have
not in the past experienced any disruption of our manufacturing
process due to insufficient supply of raw materials. In
addition, we are not dependent on any single supplier. The
aggregate costs attributable to our five largest raw materials
suppliers in 2006 and the nine months ended September 30,
2007 were 50.9% and 72.1%, respectively, of our total raw
materials purchases.
We maintain different inventory levels of our raw materials,
depending on the type of product and the lead time required to
obtain additional supplies. We seek to maintain reasonable
inventory levels that achieve a balance between our efforts to
reduce our storage costs and optimize working capital on one
hand, and the need to ensure that we have access to adequate
supplies on the other. In light of the current industry-wide
constraints on silicon wafer supply, our current policy is to
procure as many silicon wafers as possible. As of
December 31, 2006 and September 30, 2007, we had
RMB295.1 million (US$39.4 million) and
RMB215.6 million (US$28.8 million), respectively, of
raw materials in inventory.
Silicon
Wafers
Among the various raw materials required for our manufacturing
process, silicon wafers are the most important for producing PV
cells. A silicon wafer is a flat piece of crystalline silicon
that can be processed into a PV cell. Silicon wafers used for PV
cell production are generally classified into two different
types: monocrystalline and multicrystalline silicon wafers.
Compared to monocrystalline silicon wafers, multicrystalline
silicon wafers have a lower conversion rate but are less
expensive. We currently use
5-inch and
6-inch
wafers in our production, and plan to use
8-inch
wafers in the future, since the amount of silicon wastage
decreases with an increase in the diameter of the wafers used.
PV cells can be manufactured on our production lines using both
types
73
of silicon wafers. We believe that the ability to manufacture
using both types of silicon wafers provides us with greater
flexibility in procuring raw materials, especially during
periods of silicon supply shortages.
We purchase both silicon ingots and silicon wafers from
third-party suppliers. We outsource the slicing of silicon
ingots into silicon wafers to third parties. We purchase silicon
from both domestic and overseas suppliers, with the majority of
our purchases being made in the domestic market. Currently, our
principal silicon suppliers include Hoku, LDK,
E-mei and a
non-PRC supplier.
We purchase silicon from third-party suppliers on a purchase
order or annual or semi-annual contract basis. Under the
annual/semi-annual purchase agreements, we are typically
required to prepay a certain percentage of the purchase price.
We have established supply arrangements with our key silicon and
silicon wafer suppliers, including an eight-year supply contract
with Hoku, a seven-year supply contract with a non-PRC supplier
and supply contracts with LDK. In addition, we entered into a
supply agreement in June 2006 with
E-mei, which
became effective in October 2006, under which we agreed to make
prepayments to secure exclusive rights to purchase the silicon
products to be produced by
E-meis
future manufacturing facility at a discount to the prevailing
market price for five years starting from the completion of the
facility.
E-mei will
use the prepayments to construct a new manufacturing facility,
which is expected to be completed by April 2008, with an
expected annual production capacity of 500 tons of silicon
products. Moreover,
E-mei agreed
to provide us approximately 0.6 MW of silicon and silicon
wafers each month from July 2007 to March 2008.
In August 2007, we acquired a 52% equity interest in Yangguang
Solar, which we believe could produce 50 to 60 MW of ingots
in 2008. Pursuant to the equity transfer agreement, under which
Zhongneng agreed to transferred a 70% equity interest in
Yangguang Solar to Nanjing Linyang and the remainder 30% equity
interest to Suyuan Group, Zhongneng agreed to supply 1,950 tons
of polysilicon to Yangguang Solar over a three-year period.
Although we believe these supply arrangements will satisfy our
silicon supply requirements for a significant portion of our
planned silicon supply requirements in 2008, our polysilicon and
silicon wafer suppliers may not be able to supply us with
sufficient materials and components that meet our quality,
quantity and cost requirements in a timely manner due to lack of
supplies or other reasons. In the past, due to a shortage of raw
materials for the production of silicon wafers, increased market
demand for silicon wafers, a failure by some silicon suppliers
to achieve expected production volumes and other factors, some
of our major silicon wafer suppliers failed to fully perform on
their silicon wafer supply commitments to us, and we
consequently did not receive all of the contractually agreed
quantities of silicon wafers from these suppliers. We
subsequently cancelled or renegotiated these silicon supply
contracts. The majority of this shortfall was due to the
cancellation of a single silicon supply contract with one of our
silicon suppliers. However, we were able to enter into contracts
with other suppliers to replace the majority of the shortfall
from the cancellation of this contract at a lower average
silicon purchase price. Nevertheless, we cannot assure you that
we will not experience similar or additional shortfalls of
silicon or silicon wafers from our suppliers in the future or
that, in the event of such shortfalls, we will be able to find
other silicon suppliers to satisfy our production needs. See
also Risk Factors Risks Related to Our Company
and Our Industry Our dependence on a limited number
of suppliers for a substantial majority of silicon and silicon
wafers could prevent us from delivering our products in a timely
manner to our customers in the required quantities, which could
result in order cancellations, decreased revenue and loss of
market share and Managements Discussion and
Analysis of Financial Condition and Results of
Operations Key Factors Affecting Our Financial
Performance Availability and Price of Silicon
Wafers. We are also in the process of discussing potential
business opportunities with other silicon suppliers outside
China.
Other
Raw Materials
In addition to silicon, we use a variety of other raw materials
for our production. As part of our continuing cost control
efforts, we source a significant portion of these raw materials
locally. We believe that our policy to use primarily locally
sourced raw materials and our continuing price negotiations with
our local raw material suppliers have made a significant
contribution to our profitability since we commenced operations
in 2004. The use of locally sourced raw materials also shortens
our lead order time and provides us with better access to
technical and other support from our suppliers.
74
Production
We manufacture our PV cells and PV modules through Linyang
China, our wholly owned PRC subsidiary, with facilities
occupying a gross floor area of 12,952 square meters in
Qidong, Jiangsu Province, China. We currently operate eight PV
cell production lines, each with 30 MW of annual
manufacturing capacity. We commenced commercial production on
our first PV cell production line in November 2005. Our second
PV cell production line became fully operational in September
2006, followed by our third and fourth PV cell production lines
in March 2007, our fifth and sixth PV cell production lines in
July 2007 and our seventh and eighth PV cell production lines in
November 2007. From the inception of our company in August 2004
through September 30, 2007, we have invested
RMB409.6 million (US$54.7 million) in building up our
current PV cell production capacity. We were able to lower our
initial investment by purchasing key equipment with more
sophisticated technology from overseas suppliers while procuring
other equipment domestically. In this manner, we believe we have
achieved an optimal balance between technical specifications and
cost efficiency without sacrificing product quality. We plan our
production on an annual, semi-annual and monthly basis in
accordance with anticipated demand and make weekly adjustments
to our production schedule based on actual orders received.
Production
Process
The following diagram shows the general production stages for
our PV cells:
75
The following diagram shows the production procedures for our PV
modules:
Quality
Control and Certifications
Our finished PV cells and PV modules are inspected and tested
according to standardized procedures. In addition, we have
established multiple inspection points at key production stages
to identify product defects during the production process.
Unfinished products that are found to be below standard are
repaired or replaced. Our quality control procedures also
include raw material quality inspection and testing. Moreover,
we provide regular training and specific guidelines to our
operators to ensure that production processes meet our quality
inspection and other quality control procedures.
We maintain several certifications for our quality control
procedures, which demonstrate our compliance with international
and domestic operating standards. We believe that our quality
control procedures are enhanced by the use of sophisticated
production system designs and a high degree of automation in our
production process. The certifications we currently maintain
include ISO 9001:2000 quality system certification for the
process of design, production and sale of our PV modules, the
TÜV certification for our PV modules and the UL
certification. The TÜV certification is issued by an
independent approval agency in Germany to certify our PV modules
are qualified for IEC 61215 and safety test standards and
consistent production quality inspections are performed
periodically. Maintaining this certification has greatly
enhanced our sales in European countries. We obtained UL
certification issued by Underwriters Laboratories Inc., an
independent product-safety testing and certification
organization in the United States, which will enable us to sell
our products to customers in the United States.
Capacity
Expansion and Technology Upgrade Plans
We currently have eight PV cell production lines in commercial
operation. We plan to install four additional PV cell production
lines in 2008 to raise our manufacturing capacity to 360 MW
by the middle of 2008.
As one of our key strategies, we intend to continuously expand
our annual production capacity and improve the conversion
efficiency of our solar products. The following table shows our
major operational objectives by the end of each of the periods
indicated, based on our expansion and technology upgrade plans:
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
PV cell production lines completed or under construction
|
|
|
8
|
|
|
|
12
|
|
Annual PV cell production capacity including lines under
construction (in
MW)(1)(2)
|
|
|
240
|
|
|
|
360
|
|
|
|
|
(1)
|
|
Maximum manufacturing capacity
assuming 24 hours of operation per day for 350 days
per year.
|
(2)
|
|
Excludes capacity of Sichuan
Jiayang.
|
76
The expansion plans and capacities indicated in the table above
are indicative only of our current plans and are subject to
change due to a number of factors, including, among others,
market conditions and demand for our products. We plan to
finance these expansion plans with proceeds from our convertible
notes offering, additional borrowings from third parties and
cash from operations.
Sales and
Distribution
We sell our PV modules through distributors and directly to
system integrators. We do not sell our products to end users.
Our customers include prominent international solar power system
integrators and distributors. Our system integrator customers
provide value-added services and typically design and sell
complete systems that use our PV modules. Customers that
accounted for a significant portion of our total net revenue
included S.E. Project S.R.L., Social Capital S.L. and Solar
Projekt Energysystem GmbH in 2006 and Solar Projekt Energysystem
GmbH, Scatec, UB Garanty and Ecostream Switzerland GmbH in
the nine months ended September 30, 2007.
Details of the customers accounting for more than 10% of our net
revenue in 2006 and the nine months ended September 30,
2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
Year Ended
|
|
|
Ended
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
|
Net
|
|
|
|
|
|
Net
|
|
|
|
|
|
|
Revenue
|
|
|
%
|
|
|
Revenue
|
|
|
%
|
|
|
|
(in thousands of Renminbi, except percentages)
|
|
|
S.E. Project S.R.L
|
|
|
203,133
|
|
|
|
32.2
|
%
|
|
|
|
|
|
|
|
|
Social Capital S.L
|
|
|
175,939
|
|
|
|
27.9
|
%
|
|
|
|
|
|
|
|
|
Solar Projekt Energysystem GmbH
|
|
|
70,409
|
|
|
|
11.2
|
%
|
|
|
236,605
|
|
|
|
16.8
|
%
|
UB Garanty Project S.L.
|
|
|
|
|
|
|
|
|
|
|
143,777
|
|
|
|
10.2
|
%
|
Ecostream Switzerland GmbH
|
|
|
|
|
|
|
|
|
|
|
142,243
|
|
|
|
10.1
|
%
|
Scatec
|
|
|
|
|
|
|
|
|
|
|
163,263
|
|
|
|
11.6
|
%
|
In 2006 and the nine months ended September 30, 2007, 15.8%
and 51.2%, respectively, of our sales were made to distributors
and 82.6% and 48.8%, respectively, of our sales were made to
system integrators. We currently work with a limited number of
distributors that have specific expertise and capabilities in a
given market segment or geographic region. We have established a
sales and marketing office in Germany. We plan to further expand
our distribution network by actively exploring opportunities to
develop additional distributor relationships in other markets
and geographic regions, such as Spain, Italy and Austria.
77
Our products and services are primarily provided to European
customers and, to a lesser extent, to Chinese customers. The
following table sets forth our net revenue by geographic region,
and the percentage contribution of each of these regions to our
net revenue, for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
Year Ended
|
|
|
Ended September 30,
|
|
Region
|
|
December 31, 2006
|
|
|
2006
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
Net
|
|
|
|
|
|
Net
|
|
|
|
|
|
Net
|
|
|
|
|
|
|
Revenue
|
|
|
%
|
|
|
Revenue
|
|
|
%
|
|
|
Revenue
|
|
|
%
|
|
|
|
(in thousands of Renminbi, except percentages)
|
|
|
Germany
|
|
|
197,728
|
|
|
|
31.4
|
%
|
|
|
176,646
|
|
|
|
45.7
|
%
|
|
|
805,638
|
|
|
|
57.2
|
%
|
Spain
|
|
|
179,139
|
|
|
|
28.4
|
%
|
|
|
60,281
|
|
|
|
15.6
|
%
|
|
|
195,634
|
|
|
|
13.9
|
%
|
France
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55,517
|
|
|
|
3.9
|
%
|
Sweden
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54,747
|
|
|
|
3.9
|
%
|
Norway
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38,898
|
|
|
|
2.8
|
%
|
Switzerland
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,937
|
|
|
|
2.0
|
%
|
United States
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,243
|
|
|
|
1.9
|
%
|
Italy
|
|
|
204,715
|
|
|
|
32.4
|
%
|
|
|
122,993
|
|
|
|
31.8
|
%
|
|
|
92,900
|
|
|
|
6.6
|
%
|
China
|
|
|
36,219
|
|
|
|
5.7
|
%
|
|
|
24,171
|
|
|
|
6.3
|
%
|
|
|
23,340
|
|
|
|
1.7
|
%
|
Others
|
|
|
13,106
|
|
|
|
2.1
|
%
|
|
|
2,148
|
|
|
|
0.6
|
%
|
|
|
86,511
|
|
|
|
6.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
630,907
|
|
|
|
100
|
%
|
|
|
386,239
|
|
|
|
100
|
%
|
|
|
1,407,365
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In our report on
Form 6-K
submitted to the SEC on September 21, 2007, we announced
that we had secured three large multi-year framework commitments
for over 185 MW of our PV modules. We have entered into
written contracts for the sale of 38.5 MW of these PV
modules from 2007 to 2008.
After-Sales
Services and Warranties
We provide a two-year or, most recently, three-year unlimited
warranty for technical defects, a
10-year
warranty against declines of greater than 10%, and a 20- or
25-year
warranty against declines of greater than 20%, in the initial
power generation capacity of our PV modules. After-sales
services for our PV modules and solar application systems
covered by warranties are provided by our international sales
team. We provided RMB1.6 million, RMB6.0 million
(US$0.8 million) and RMB14.1 million
(US$1.9 million) in warranty costs in 2005, 2006 and the
nine months ended September 30, 2007, respectively.
Research
and Development
The solar industry is characterized by rapidly evolving
technology advancements. Achieving fast and continual technology
improvements is of critical importance to maintaining our
competitive advantage. Our research and development efforts
concentrate on lowering production costs per watt by increasing
the conversion efficiency rate of our products and reducing
silicon usage by reducing the thickness of PV cells. In
addition, we intend to develop production technologies for next
generation thin film PV cells, which are expected to
significantly reduce the consumption of silicon materials and
manufacturing costs.
We have been developing advanced technologies to improve the
conversion efficiency and reduce the thickness of our PV cells.
Through our continuous efforts, we have been able to increase
the average conversion efficiency rate of our monocrystalline PV
cells to the range of 16.1% to 16.6% in the nine months ended
September 30, 2007 and we are now able to process wafers as
thin as 200 microns.
Our technology department works closely with our manufacturing
department to lower production costs by improving our production
efficiency. All of our research and development personnel in our
technology department have undergraduate or higher education
degrees. In particular, Professor Guangfu Zheng, our senior
researcher, who
78
received his doctorate degree from the University of New South
Wales in Australia, has been engaged in photovoltaics research
since 1976. During his study and research in the University of
New South Wales in Australia from 1991 to 1999, Professor
Guangfu Zheng made significant advancements in conversion
efficiency for thin-film solar cells. Moreover, he currently
receives a special subsidy from the PRC government for foreign
experts.
In February 2006, we established the Linyang PV Research and
Development Center with Shanghai Jiaotong University. This
center, which is located at Shanghai Jiaotong University,
focuses on improving conversion efficiency rates of PV cells.
Under our agreement with Shanghai Jiaotong University, we are
jointly entitled to the intellectual property rights relating to
the research results of this center. Similarly, we entered into
a research and development cooperation agreement with Sun
Yat-sen University in Guangzhou, China, in September 2006, under
which we will conduct joint research on PV cell process
technology. In the same month, we set up a research and
development framework program with ISC Konstanz, a German solar
research institute, to improve our PV cell manufacturing. In
addition, we are sponsoring a masters degree program in
Photovoltaics at Shanghai Jiaotong University that will enhance
our profile among faculty and students, as well as facilitate
our recruitment of top graduates. We also entered into a
cooperation agreement with an institute under the Chinese
Academy of Sciences in February 2007 to jointly develop new PV
products.
Intellectual
Property and Proprietary Rights
Our intellectual property is an essential element of our
business. We rely on patent, copyright, trademark, trade secret
and other intellectual property law, as well as non-competition
and confidentiality agreements with our employees, suppliers,
business partners and others, to protect our intellectual
property rights.
As of September 30, 2007, we had been granted one patent by
the State Intellectual Property Office of China and had seven
other patent applications pending in China. Our issued and
pending patent applications relate primarily to process
technologies for manufacturing PV cells.
In March 2005, we applied for the registration of
Solarfun, our trademark for our PV cells and
modules, and our Solarfun logo. The application is currently
pending with the China Trademark Office. We are also in the
process of registering Solarfun and our Solarfun
logo in the European Union, the United States, Australia, Japan,
Singapore and South Korea.
We rely on trade secret protection and confidentiality
agreements to protect our proprietary information and know-how.
Our management and each of our research and development
personnel have entered into a standard annual employment
contract, which includes confidentiality undertakings and an
acknowledgement and agreement that all inventions, designs,
trade secrets, works of authorship, developments and other
processes generated by them on our behalf are our property, and
assigns to us any ownership rights that they may claim in those
works. Our supply contracts with our customers also typically
include confidentiality undertakings. Despite these precautions,
it may be possible for third parties to obtain and use
intellectual property that we own or license without consent.
Unauthorized use of our intellectual property by third parties,
and the expenses incurred in protecting our intellectual
property rights, may materially and adversely affect our
business, financial condition, results of operations and
prospects. See Risk Factors Risks Related to
Our Company and Our Industry Our failure to protect
our intellectual property rights may undermine our competitive
position, and litigation to protect our intellectual property
rights may be costly.
Competition
Due to various government incentive programs implemented in
China, Europe, the United States, Japan and other countries in
recent years, the global solar energy market has been rapidly
evolving and has become highly competitive. In particular, a
large number of manufacturers have entered the solar market.
According to Solarbuzz, there are over 100 companies which
engaged in PV products manufacturing or have announced plans to
do so.
Our main overseas competitors are, among others, BP Solar,
Kyocera Corporation, Mitsubishi Electric Corporation, Motech
Industries Inc., Sharp Corporation, Q-Cells AG, Sanyo Electric
Co., Ltd. and Sunpower Corporation. Our primary competitors in
China include Suntech Power Holdings Co., Ltd., JA Solar
Holdings Co.,
79
Ltd., Trina Solar Ltd., Baoding Tianwei Yingli New Energy
Resources Co., Ltd. and China Sunergy Co., Ltd. We compete
primarily on the basis of the power efficiency, quality,
performance and appearance of our products, price, strength of
supply chain and distribution network, after-sales service and
brand image. Many of our competitors have longer operating
histories and significantly greater financial or technological
resources than we do and enjoy greater brand recognition. Some
of our competitors are vertically integrated and design and
produce upstream silicon wafers, mid-stream PV cells and modules
and downstream solar application systems, which provide them
with greater synergies to achieve lower production costs. During
periods when there is a shortage of silicon and silicon wafers,
we compete intensely with our competitors in obtaining adequate
supplies of silicon wafers. We expect the current silicon
shortage will continue into 2008 and 2009.
Moreover, many of our competitors are developing next-generation
products based on new PV technologies, including amorphous
silicon, transparent conductive oxide thin film, carbon material
and nano-crystalline technologies, which, if successful, will
compete with the crystalline silicon technology we currently use
in our manufacturing processes. Through our research
collaborations, we are also seeking to develop new technologies
and products. If we fail to develop new technologies and
products in a timely manner, we may lose our competitive
advantage.
We, like other solar energy companies, also face competition
from traditional non-solar energy industries, such as the
petroleum and coal industries. The production cost per watt of
solar energy is significantly higher than other types of energy.
As a result, we cannot assure you that solar energy will be able
to compete with other energy industries, especially if there is
a reduction or termination of government incentives and other
forms of support.
Environmental
Matters
Our manufacturing processes generate noise, waste water, gaseous
wastes and other industrial wastes. Our manufacturing facilities
are subject to various pollution control regulations with
respect to noise and air pollution and the disposal of waste and
hazardous materials. We are also subject to periodic inspections
by local environmental protection authorities. We have
established a pollution control system and installed various
equipment to process and dispose of our industrial waste and
hazardous materials. We believe that we have obtained all
requisite environmental permits and approvals to conduct our
business. We also maintain an ISO 14001 environmental management
system certification, which is issued by International
Organization for Standardization to demonstrate our compliance
with international environmental standards. We have not been
subject to any material proceedings or fines for environmental
violations.
Employees
As of September 30, 2007, we had 1,745 full-time
employees. The following table sets forth the number of our
full-time employees by function as of December 31, 2004,
2005 and 2006 and September 30, 2007, respectively:
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As of
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December 31,
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September 30,
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2004
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2005
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2006
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2007
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Manufacturing and engineering
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72
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|
|
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169
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|
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535
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1,363
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General and administration
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3
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|
|
|
30
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|
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65
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92
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Quality control
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3
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|
|
|
17
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|
|
|
41
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|
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135
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Research and development
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2
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|
|
|
11
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|
|
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49
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58
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Purchasing and logistics
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1
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6
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31
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77
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Marketing and sales
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3
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8
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15
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20
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Total
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84
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241
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736
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1,745
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We offer our employees competitive compensation packages and
various training programs, and as a result we have generally
been able to attract and retain qualified personnel.
As required by PRC regulations, we participate in various
employee benefit plans that are organized by municipal and
provincial governments, including housing, pension, medical and
unemployment benefit plans. We are required under PRC law to
make contributions to the employee benefit plans at specified
percentages of the salaries, bonuses and certain allowances of
our employees, up to a maximum amount specified by the local
government from time to time. Members of the retirement plan are
entitled to a pension equal to a fixed proportion of the salary
prevailing at the members retirement date. The total
amount of contributions we made to employee benefit plans in
2005, 2006 and the nine months ended September 2007 was
approximately RMB0.9 million, RMB3.1 million
(US$0.4 million) and RMB5.1 million
(US$0.7 million), respectively.
We adopted our 2006 equity incentive plan in November 2006. It
provides an additional means to attract, motivate, retain and
reward selected directors, officers, managers, employees and
other eligible persons. As of November 30, 2006, an
aggregate of 10,799,685 ordinary shares has been reserved for
issuance under this plan. As of September 30, 2007, there
were outstanding options to purchase 8,772,998 ordinary shares
under our 2006 equity incentive plan.
We adopted our 2007 equity incentive plan in August 2007. It
provides for the grant of options, restricted stock, restricted
stock units, stock appreciation rights, performance units and
performance stock to our employees, directors and consultants.
The maximum aggregate number of our ordinary shares that may be
issued under the 2007 equity incentive plan is 10,799,685. In
addition, the plan provides for annual increases in the number
of shares available for issuance on the first day of each fiscal
year, beginning with our 2008 fiscal year, equal to (i) 2%
of our outstanding ordinary shares on the last day of the
immediately preceding fiscal year or (ii) such lesser
amount as our board of directors may determine.
We typically enter into a standard confidentiality and
non-competition agreement with our management and research and
development personnel. These contracts include a covenant that
prohibits these individuals from engaging in any activities that
compete with our business during, and for three years after, the
period of their employment with our company.
We believe we maintain a good working relationship with our
employees, and we have not experienced any significant labor
disputes or any difficulty in recruiting staff for our
operations. Our employees are not covered by any collective
bargaining agreement.
Insurance
We maintain property insurance for our equipment, automobiles,
facilities and inventory. A significant portion of our fixed
assets are covered by these insurance policies as of
September 30, 2007. We do not maintain business
interruption insurance, product quality insurance or key-man
life insurance. We believe our insurance coverage is customary
and standard for companies of comparable size in comparable
industries in China. However, we cannot assure you that our
existing insurance policies are sufficient to insulate us from
all losses and liabilities that we may incur.
Our
Principal Facilities
Our corporate headquarters and manufacturing facilities are
located in the Linyang Industrial Park, Qidong, Jiangsu
Province, China, where we hold the land use rights for a total
area of 73,938 square meters, which expire in 2054 or 2056.
We own office and manufacturing facilities for a total gross
floor area of 12,952 square meters. Furthermore, we
recently entered into an investment agreement with the local
government of Qidong under which we agreed to acquire the land
use rights for a total area of approximately 194,000 square
meters for a consideration of RMB55.9 million. Pursuant to
this investment agreement, we agreed to contribute
US$50.0 million to Linyang China as additional registered
capital, which will be used for the construction of Linyang
Industrial Park. In addition, Yangguang Solar holds the land use
rights for a total area of approximately 1,000,000 square
meters. We also leased a gross floor area of approximately
1,500 square meters for our Linyang PV Research and
Development Center in Shanghai in May 2006, which will expire in
May 2011. The annual rent is approximately RMB0.2 million
81
(US$0.02 million). In August 2006, we leased an office of
610 square meters for administration and international
business in Shanghai, the annual rent of which in 2006 and the
nine months ended September 30, 2007 was approximately
RMB1.1 million and RMB0.8 million, respectively. The
term of the lease is two years.
We believe that our existing facilities are adequate and
suitable to meet our present needs and that additional space can
be obtained on commercially reasonable terms to meet our future
requirements. The Linyang Industrial Park, which also
encompasses the facilities of Linyang Electronics, completed its
expansion project in July 2007.
Legal and
Administrative Proceedings
There are no material legal proceedings, regulatory inquiries or
investigations pending or threatened against us. We may from
time to time be subject to various legal or administrative
proceedings arising in the ordinary course of our business.
82
Directors
and Executive Officers
The following table sets forth information regarding our
directors and executive officers as of December 31, 2007.
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Name
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Age
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Position/Title
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Yonghua Lu
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45
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Chairman and Chief Executive Officer
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Hanfei Wang
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43
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Director and Chief Operating Officer
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Sven Michael Hansen
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43
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Director
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Terry McCarthy
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63
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Independent Director
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Ernst A. Bütler
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63
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Independent Director
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Thomas J. Toy
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52
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Independent Director
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Yinzhang Gu
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69
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Independent Director
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Philip Comberg
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Independent Director
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Amy Jing Liu
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35
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Chief Financial Officer
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Jianping Zhang
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42
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Vice President
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Paul W. Combs
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55
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Vice President
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Yuting Wang
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66
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Chief Engineer
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Directors
Mr. Yonghua Lu is our founder, chairman of our
board of directors and chief executive officer. He also has been
chairman of Linyang Electronics since 1997 and was general
manager of that company from 1997 to August 2006. Linyang
Electronics had been the parent company of Linyang China until
June 2, 2006. Mr. Lu was general manager of Qidong
Changtong Computer Group Company, and deputy manager of Qidong
Computer Factory, from 1988 to 1996. From 1983 to 1988, he was
deputy manager of the Lining Cloth Factory of Qidong Wu
Qi Farm and manager of the Cashmere Factory of Qidong
Wu Qi Farm. Mr. Lu has over 20 years of
experience in enterprise management. He has received many awards
and honors for his entrepreneurship, including being named one
of Jiangsu Provinces Top Ten Outstanding Young
Entrepreneurs and Fifth-term National Township Entrepreneur.
Mr. Lu has attended a
15-month
training course for Applied Social Studies at Soochow University
Graduate School of Humanities, and a
20-month
executive MBA course at Renmin University in China.
Mr. Hanfei Wang is our director and chief
operating officer. He joined our company in 2005. Mr. Wang
was chief operating officer of Hongdou Group Chituma Motorcycle
Co. from 2004 to 2005. He was manufacturing manager, marketing
manager, management representative and deputy production general
manager of Suntech Power Holdings Co., Ltd., a company currently
listed on the New York Stock Exchange, from 2001 to 2004. From
1995 to 2001, Mr. Wang was production and materials senior
supervisor of Wuxi Nemic-Lambda Electronics Co., Ltd., a PRC
subsidiary of Densei-Lambda K.K., a Japanese publicly listed
company, responsible for production and quality management.
Mr. Wang received his bachelors degree in physics
from Soochow University in China. He has also attended an
executive MBA course in Fudan University in China.
Dr. Sven Michael Hansen has served as our
director since August 2006. Dr. Hansen currently serves as
the chief investment officer of Good Energies AG. He also serves
as the chairman of Sunfilm AG (Germany), and a director of the
following companies which are active or which intend to be
active in the solar PV sphere: Norsun AS (Norway) and InErgies
Capital Inc., a Swiss company that advises on energy sector
investments. He is a member of the advisory board of the
Sustainable Energy Finance Initiative of the United Nations.
From 2001 to 2003, he was a managing partner of Black Emerald
Group in Switzerland. Dr. Hansen served as group finance
director and also a member of the executive board of Intels
Group from 1999 to 2001. From 1996 to 1999, he worked as an
executive director of UBS. Dr. Hansen received his
bachelors degree from the University of Basle, and MBA and
Ph.D. degrees from the University of St. Gallen.
83
Mr. Terry McCarthy has served as our
independent director since November 2006. From 1985 to 2006,
Mr. McCarthy worked for Deloitte & Touche LLP in
San Jose, California in various roles as a managing
partner, tax
partner-in-charge
and client services partner. Beginning in 1999, he worked
extensively with companies entering the China market and, from
2003 to 2006, he was associate managing partner of the Deloitte
US Chinese Services Group. In 1976, Mr. McCarthy co-founded
Hayes, Perisho & McCarthy, Inc., a CPA firm in
Sunnyvale, California, where he was an audit partner and
president from 1976 to 1985. From 1972 to 1976, he held several
positions at Hurdman & Cranstoun, CPAs, including
senior audit manager. He received a bachelors degree from
Pennsylvania State University, an MBA from the University of
Southern California and a masters degree in Taxation from
Golden Gate University. He is also a director of Hisoft
Technology International Limited and Agria Corp.
Mr. Ernst A. Bütler has served as our
independent director since November 2006. Mr. Bütler
has been an independent board member/consultant and owner of
E.A. Bütler Management in Zürich since 2005. His other
current positions include board member of Bank Frey &
Co. AG, Zürich, chairman of the board of Alegra Capital
Ltd., Zürich, board member of PHI Investment, Zürich,
chairman of the board of AA-Partners, Zürich, member of the
supervisory board of Sunfilm Power Ltd., Germany, member of the
advisory board of Frey Capital, Zürich, and advisor to the
executive board of Partners Group in Zug, Switzerland, the
largest independent Asset Manager of Alternative Investments in
Europe. From 1999 to 2005, he was a partner of Partners Group in
Zug, responsible for markets in Switzerland, Italy and France.
Mr. Bütler spent over 25 years with Credit Suisse
and Credit Suisse First Boston, with his last assignment being
managing director and co-head of the Corporate and Investment
Banking Division in Switzerland. He received a bachelors
degree from the School of Economics and Business Administration
in Zürich in 1973, and attended post-graduate programs at
the University of Massachusetts in the United States, The
European Institute of Business Administration in Paris, and
Massachusetts Institute of Technology.
Mr. Thomas J. Toy has served as our independent
director since November 2006. His other current positions
include director and chairman of the board, compensation
committee chairperson and audit committee member of UTStarcom
Inc. (Nasdaq: UTSI), director, corporate governance committee
chairperson and audit committee member of White Electronic
Designs Corp. (Nasdaq: WEDC) and director of several privately
held companies. Mr. Toy has also been co-founder and
managing director of PacRim Venture Partners, a venture capital
firm based in Menlo Park, California, since 1999, and he is a
partner with SmartForest Ventures, a venture capital firm based
in Portland, Oregon. From 1987 to 1999, he was partner and
managing director of the Corporate Finance Division of
Technology Funding, a venture capital firm based in
San Mateo, California. From 1979 to 1987, Mr. Toy held
several positions at Bank of America National Trust and Savings
Association, including vice president. He received his
bachelors and masters degrees from Northwestern
University in the United States.
Mr. Yinzhang Gu has served as our independent
director since August 2007. From 1962 to 1998, Mr. Gu
worked for Eastern China Electricity Administration, a
government agency overseeing power supply in eastern China, in
various roles, including as deputy director and director.
Mr. Gu retired from Shanghai Electricity Administration in
1998. Mr. Gu graduated from Zhejiang University in 1962.
Dr. Philip Comberg has served as our independent
director since December 2007. Dr. Philip Comberg is a
founding partner of Alcosa Capital GmbH & Co KG.
Previously, he worked as an investment banker with the financial
institutions group of Deutsche Bank Global Corporate Finance.
Prior to his investment banking career, Philip worked as a
lawyer with Freshfield Bruckhaus Deringer and Clifford Chance.
Philip holds a German law degree of the University of Heidelberg
and a Chinese Language Degree of Zhong Shan University,
Guangzhou, P.R. China. Furthermore, he holds a Master of Law
(LL.M.) from New York University School of Law. Philip received
his Doctor of Law from the University of Düsseldorf.
Executive
Officers
Ms. Amy Jing Liu is our chief financial officer.
Prior to joining our company in October 2007, Ms. Liu was
vice president and director of finance of Thermo Fisher
Scientific Inc. from 2004 to 2007, where she was in charge of
mainland China and Hong Kong regions. From 1997 to 2003, she was
a finance manager in several different business units of DuPont,
including Herberts, the coatings subsidiary of Hoechst, which
was acquired by DuPont in 1998. From 1996 to 1997, Ms. Liu
served as a finance supervisor at Swire CocaCola Dongguan. She
was a senior accountant at China Construction Bank (Dongguan
Branch) between 1994 and 1996. Ms. Liu received her
84
bachelors degree in economics from Beijing Nuclear
Industrial Administration University and an MBA from Columbia
Southern University in the United States.
Mr. Jianping Zhang is vice president of our
company. Prior to joining our company in 2006, Mr. Zhang
had served as a director and general manager in Topsun
Technologies Qidong Gaitianli Pharmaceutical Co., Ltd. since
2000. During the same period, he was also president of the
Chamber of Commerce of Qidong Food and Medicine Industry.
Mr. Zhang was a director and deputy general manager of
Qidong Gaitianli Pharmaceutical Co., Ltd. from 1998 to 2000.
Mr. Zhang received his bachelors degree from Nanjing
Agricultural University. He has also attended an executive MBA
course at Northwest University in China.
Mr. Paul W. Combs is our vice president of
strategic planning. Prior to joining our company in August 2007,
Mr. Combs was chief investment officer of Think Equity
Partners from 2004 to 2006. Mr. Combs was vice president of
Stephens Inc. between 1996 and 2004. Mr. Combs served as
vice president of Dain Bosworth, Inc. from 1991 to 1996. From
1989 to 1991, he was vice president of William K. Woodruff, Inc.
Mr. Combs was vice president of William Blair &
Co. between 1985 and 1989. Mr. Combs also worked at Morgan
Stanley & Co. from 1980 to 1985. Mr. Combs
received a bachelors degree of science from Purdue
University and an MBA from Indiana University.
Mr. Yuting Wang is our chief engineer. He
joined our company in 2004. From 2001 to 2004, he was associate
chief engineer of Hebei Tianwei Yingli Energy Source Co., Ltd.
From 1996 to 2000, Mr. Wang was a researcher at Beijing
Solar Research Institute and engaged in research on grooved PV
cells. From 1985 to 1996, Mr. Wang was chief engineer of
Hebei Province Qinhuangdao City Huamei Optoelectronic Device
Company, where he engaged in the development of monocrystalline
PV cells. He was section chief of Sichuan Qichuan 879 Plant from
1972 to 1985 and was a technician of Sichuan Guangyuan 779 Plant
from 1967 to 1972. Mr. Wang received his bachelors
degree from Xian Jiaotong University.
Duties of
Directors
Under Cayman Islands law, our directors have a duty of loyalty
to act honestly, in good faith and with a view to our best
interests. Our directors also have a duty to exercise the skill
they actually possess and such care and diligence that a
reasonably prudent person would exercise in comparable
circumstances. In fulfilling their duty of care to us, our
directors must ensure compliance with our memorandum and
articles of association, as amended and restated from time to
time. A shareholder has the right to seek damages if a duty owed
by our directors is breached.
The functions and powers of our board of directors include,
among others:
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convening shareholders annual general meetings and
reporting its work to shareholders at such meetings;
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declaring dividends and distributions;
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appointing officers and determining the term of office of
officers;
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exercising the borrowing powers of our company and mortgaging
the property of our company; and
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approving the transfer of shares of our company, including the
registering of such shares in our share register.
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Terms of
Directors and Executive Officers
Our directors are not subject to a term of office and hold
office until such time as they are removed from office by
ordinary resolution or the unanimous written resolution of all
shareholders. A director will be removed from office
automatically if, among other things, the director becomes
bankrupt or makes any arrangement or composition with his
creditors, or dies or is found by our company to be or to have
become of unsound mind. Our officers are appointed by and serve
at the discretion of our board of directors.
Committees
of the Board of Directors
Our board of directors has established an audit committee, a
compensation committee and a corporate governance and nominating
committee.
85
Audit
Committee
Our audit committee consists of Mr. Terry McCarthy,
Mr. Thomas J. Toy and Mr. Ernst A. Bütler, and is
chaired by Mr. Terry McCarthy, a director with accounting
and financial management expertise as required by the Nasdaq
corporate governance rules, or the Nasdaq Rules. Mr. Terry
McCarthy, Mr. Thomas J. Toy and Mr. Ernst A.
Bütler all satisfy the independence
requirements of the Nasdaq Rules. The audit committee will
oversee our accounting and financial reporting processes and the
audits of the financial statements of our company. The audit
committee will be responsible for, among other things:
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selecting our independent auditors and pre-approving all
auditing and non-auditing services permitted to be performed by
our independent auditors;
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reviewing with our independent auditors any audit problems or
difficulties and managements response;
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reviewing and approving all proposed related party transactions,
as defined in Item 404 of
Regulation S-K
under the Securities Act;
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discussing the annual audited financial statements with
management and our independent auditors;
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reviewing major issues as to the adequacy of our internal
control and any special audit steps adopted in light of material
control deficiencies;
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annually reviewing and reassessing the adequacy of our audit
committee charter;
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such other matters that are specifically delegated to our audit
committee by our board of directors from time to time;
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meeting separately and periodically with management and our
internal and independent auditors; and
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reporting regularly to our board of directors.
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Our audit committee was recently notified of anonymous
allegations of misconduct by our employees. Our audit committee
subsequently conducted an investigation and found no basis for
these allegations. Our audit committee has established a
whistleblower reporting system to allow individuals
to make anonymous communications to the audit committee
regarding financial and accounting matters relating to our
company.
Compensation
Committee
Our compensation committee consists of Mr. Ernst A.
Bütler, Mr. Thomas J. Toy and Mr. Yinzhang Gu,
and is chaired by Mr. Ernst A. Bütler. Mr. Ernst
A. Bütler, Mr. Thomas J. Toy and Mr. Yinzhang Gu
satisfy the independence requirements of the Nasdaq
Rules. Our compensation committee assists our board of directors
in reviewing and approving the compensation structure of our
directors and executive officers, including all forms of
compensation to be provided to our directors and executive
officers. Members of the compensation committee are not
prohibited from direct involvement in determining their own
compensation. Our chief executive officer may not be present at
any committee meeting during which his compensation is
deliberated. The compensation committee will be responsible for,
among other things:
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approving and overseeing the compensation package for our
executive officers;
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reviewing and making recommendations to our board of directors
with respect to the compensation of our directors;
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reviewing and approving corporate goals and objectives relevant
to the compensation of our chief executive officer, evaluating
the performance of our chief executive officer in light of those
goals and objectives, and setting the compensation level of our
chief executive officer based on this evaluation; and
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reviewing periodically and making recommendations to our board
of directors regarding any long-term incentive compensation or
equity plans, programs or similar arrangements, annual bonuses,
employee pension and welfare benefit plans.
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86
Corporate
Governance and Nominating Committee
Our corporate governance and nominating committee consists of
Mr. Yonghua Lu, Mr. Ernst A. Bütler and
Mr. Thomas J. Toy, and is chaired by Mr. Thomas J.
Toy. Mr. Ernst A. Bütler and Mr. Thomas J. Toy
satisfy the independence requirements of the Nasdaq
Rules. The corporate governance and nominating committee will
assist our board of directors in identifying individuals
qualified to become our directors and in determining the
composition of our board of directors and its committees. The
corporate governance and nominating committee will be
responsible for, among other things:
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identifying and recommending nominees for election or
re-election to our board of directors, or for appointment to
fill any vacancy;
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reviewing annually with our board of directors its current
composition in light of the characteristics of independence,
age, skills, experience and availability of service to us;
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identifying and recommending to our board the directors to serve
as members of committees;
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advising the board periodically with respect to significant
developments in the law and practice of corporate governance as
well as our compliance with applicable laws and regulations, and
making recommendations to our board of directors on all matters
of corporate governance and on any corrective action to be
taken; and
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monitoring compliance with our code of business conduct and
ethics, including reviewing the adequacy and effectiveness of
our procedures to ensure proper compliance.
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Interested
Transactions
A director may vote in respect of any contract or transaction in
which he or she is interested, provided that the nature of the
interest of any directors in such contract or transaction is
disclosed by him or her at or prior to its consideration and any
vote in that matter.
Remuneration
and Borrowing
The directors may determine remuneration to be paid to the
directors. The compensation committee will assist the directors
in reviewing and approving the compensation structure for the
directors. The directors may exercise all the powers of the
company to borrow money and to mortgage or charge its
undertaking, property and uncalled capital, and to issue
debentures or other securities whether outright or as security
for any debt obligations of our company or of any third party.
Qualification
There is no shareholding qualification for directors.
Employment
Agreements
We have entered into employment agreements with all of our
executive officers. Under these agreements, each of our
executive officers is employed for a specified time period. We
may terminate his or her employment for cause at any time for
certain acts of the employee. In addition, we have entered into
executive employment agreements with six of our executive
officers and key employees, under which these executive officers
and key employees may not terminate his employment for the
three-year period commencing from June 19, 2006.
Each executive officer has agreed to hold, both during and
subsequent to the terms of his or her agreement, in confidence
and not to use, except in pursuance of his or her duties in
connection with the employment, any of our confidential
information, technological secrets, commercial secrets and
know-how. Our executive officers have also agreed to disclose to
us all inventions, designs and techniques which resulted from
work performed by them, and to assign to us all right, title and
interest in and to such inventions, designs and techniques.
87
Compensation
of Directors and Executive Officers
In 2005, 2006 and the nine months ended September 30, 2007,
we paid aggregate cash compensation of RMB0.8 million,
RMB3.4 million (US$0.5 million) and
RMB9.1 million (US$1.2 million), respectively, to our
directors and executive officers. For options granted to
officers and directors, see 2006 Equity
Incentive Plan and 2007 Equity Incentive
Plan.
2006
Equity Incentive Plan
We adopted our 2006 equity incentive plan in November 2006. Our
2006 equity incentive plan provides for the grant of options to
purchase our ordinary shares, subject to vesting. The purpose of
the plan is to attract and retain the best available personnel
for positions of substantial responsibility, provide additional
incentive to employees, directors and consultants and promote
the success of our business. Our board of directors believes
that our companys long-term success is dependent upon our
ability to attract and retain superior individuals who, by
virtue of their ability, experience and qualifications, make
important contributions to our business.
Termination of Awards. Options granted under
our 2006 equity incentive plan have specified terms set forth in
a share option agreement. Each employee who has been granted
options shall undertake to work for our company for at least
five years starting from the grant date, or for such term as is
otherwise specified in the individuals share option
agreement. In the event that any employee resigns prior to the
expiration of such term, the employee shall only be entitled to
the vested options, and the options that have been granted to
but not yet vested in him or her will be forfeited to our
company.
Administration. Our 2006 equity incentive plan
is administered by the compensation committee of our board of
directors. The committee will determine the provisions, terms
and conditions of each option grant, including, but not limited
to, the exercise price for the options, vesting schedule,
forfeiture provisions, form of payment of exercise price and
other applicable terms. The exercise price may be adjusted in
the event of certain share or rights issuances by our company.
Option Exercise. The options granted will
generally be subject to vesting over five years in equal
portions, except that the vesting schedule of options granted to
certain of our professionals, independent directors and advisors
may be less than five years if our compensation committee deems
it necessary and appropriate. The options, once vested, are
exercisable at any time before November 30, 2016, at which
time the options will become null and void. The exercise prices
of the options are determined by the compensation committee.
Share Split or Combination. In the event of a
share split or combination of our ordinary shares, the options,
whether exercised or not, shall be split or combined at the same
ratio.
Amendment and Termination of Plan. Our
compensation committee may at any time amend, suspend or
terminate our 2006 equity incentive plan. Amendments to our 2006
equity incentive plan are subject to shareholder approval, to
the extent required by law, or by stock exchange rules or
regulations. Any amendment, suspension or termination of our
2006 equity incentive plan must not adversely affect awards
already granted without written consent of the recipient of such
awards.
88
Our board of directors authorized the issuance of up to
10,799,685 ordinary shares upon exercise of awards granted under
our 2006 equity incentive plan. The following table sets forth
certain information regarding our outstanding options under our
2006 equity incentive plan as of September 30, 2007.
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Ordinary
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Shares
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Underlying
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Outstanding
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Exercise
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Name
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Option
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|
Price
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Grant Date
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Expiration Date
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(US$/share)
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Terry McCarthy
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150,000
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1.80
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November 30, 2006
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November 29, 2016
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Thomas J. Toy
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180,000
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1.80
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November 30, 2006
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November 29, 2016
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Verena Maria Bütler (wife of Ernst A. Bütler)
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180,000
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1.80
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November 30, 2006
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November 29, 2016
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Kevin
Wei(1)
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1,799,998
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1.80
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November 30, 2006
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November 29, 2016
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Jianping Zhang
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300,000
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1.80
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November 30, 2006
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November 29, 2016
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Fei
Yun(1)
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800,000
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1.80
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November 30, 2006
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November 29, 2016
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Ru
Cai(1)
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313,000
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1.80
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November 30, 2006
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November 29, 2016
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Haiyang Yuan
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450,000
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2.02
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August 16, 2007
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November 29, 2016
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Paul W. Combs
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150,000
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2.02
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August 16, 2007
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November 29, 2016
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Yinzhang Gu
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180,000
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1.94
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August 16, 2007
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November 29, 2016
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Other employees as a group
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3,460,000
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1.80
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November 30, 2006
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November 29, 2016
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150,000
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2.44
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March 19, 2007
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November 29, 2016
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560,000
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2.87
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May 10, 2007
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November 29, 2016
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100,000
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2.11
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June 28, 2007
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November 29, 2016
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Total
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8,772,998
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(1)
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Mr. Kevin C. Wei was our
chief financial officer between July 2006 and October 2007 and
Ms. Ru Cai was our principal accounting officer between August
2006 and October 2007. Mr. Fei Yun was our director of
technology between September 2006 and November 2007.
3,168,665 options, including options held by Mr. Wei,
Ms. Cai and Mr. Yun, were cancelled due to the
resignation of certain employees.
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2007
Equity Incentive Plan
We adopted our 2007 equity incentive plan in August 2007. It
provides for the grant of options, restricted stock, restricted
stock units, stock appreciation rights, performance units and
performance stock to our employees, directors and consultants.
The maximum aggregate number of our ordinary shares that may be
issued under the 2007 equity incentive plan is 10,799,685. In
addition, the plan provides for annual increases in the number
of shares available for issuance on the first day of each fiscal
year, beginning with our 2008 fiscal year, equal to (i) 2%
of our outstanding ordinary shares on the last day of the
immediately preceding fiscal year or (ii) such lesser
amount as our board of directors may determine.
Administration. Different committees with
respect to different groups of service providers, comprised of
members of our board or other individuals appointed by the
board, may administer our 2007 equity incentive plan. The
administrator has the power to determine the terms of the
awards, including the exercise price, the number of shares
subject to each such award, the exercisability of the awards and
the form of consideration payable upon exercise.
Options. The exercise price of incentive stock
options must be at least equal to the fair market value of our
ordinary shares on the date of grant, however, the overseas
price of our non-statutory stock options may be as determined by
the administrator. The term of an incentive stock option may not
exceed ten years, except that with
89
respect to any participant who owns 10% of the voting power of
all classes of our outstanding shares as of the grant date, the
term must not exceed five years and the exercise price must
equal at least 110% of the fair market value on the grant date.
The administrator determines the term of all other options.
After termination of an employee, director or consultant, he or
she may exercise his or her option for the period of time stated
in the option agreement. Generally, if termination is due to
death or disability, the option will remain exercisable for
twelve months. In all other cases, the option will generally
remain exercisable for three months. However, an option
generally may not be exercised later than the expiration of its
term.
Restricted Stock. Restricted stock awards are
ordinary shares that vest in accordance with terms and
conditions established by the administrator and set forth in an
award agreement. The administrator will determine the number of
shares of restricted stock granted to any employee and may
impose whatever conditions to vesting it determines to be
appropriate.
Stock Appreciation Rights. Stock appreciation
rights allow the recipient to receive the appreciation in the
fair market value of our ordinary stock between the date of
grant and the exercise date. The exercise price of stock
appreciation rights granted under our plan may be as determined
by the administrator. Stock appreciation rights expire under the
same rules that apply to options on the date as determined by
the administrator.
Performance Units and Performance
Shares. Performance units and performance shares
are awards that will result in a payment to a participant only
if performance goals established by the administrator are
achieved or the awards otherwise vest. The administrator will
establish organizational or individual performance goals in its
discretion, which, depending on the extent to which they are
met, will determine the number and the value of performance
units and performance shares to be paid out to participants.
Restricted Stock Units. Restricted stock units
are similar to awards of restricted stock, but are not settled
unless the award vests. Restricted stock units may consist of
restricted stock, performance share or performance unit awards,
and the administrator may set forth restrictions based on the
achievement of specific performance goals.
Amendment and Termination. Our 2007 equity
incentive plan will automatically terminate in 2017, unless we
terminate it sooner. Our board of directors has the authority to
amend, alter, suspend or terminate the plan provided such action
does not impair the rights of any participant with respect to
any outstanding awards.
90
The following table sets forth information with respect to the
beneficial ownership, within the meaning of Rule 13(d)(3)
of the Exchange Act, of our ordinary shares, as of
December 31, 2007 by:
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each of our directors and executive officers who beneficially
owns our ordinary shares; and
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each person known to us to own beneficially more than 5% of our
ordinary shares.
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Ordinary Shares
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Beneficially Owned
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Shares Beneficially Owned
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Prior to this
Offering(1)(2)
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After This
Offering(1)(2)(3)
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Number
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%
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Number
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%
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Directors and Executive Officers:
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Yonghua
Lu(4)
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38,634,750
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16.10
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%
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38,634,750
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16.10
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%
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Hanfei
Wang(5)
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6,271,875
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2.61
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%
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6,271,875
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2.61
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%
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Yuting
Wang(6)
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501,750
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0.21
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%
|
|
|
501,750
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|
|
0.21
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%
|
All Directors and Executive Officers as a
Group(7)
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128,746,370
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53.64
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%
|
|
|
128,746,370
|
|
|
|
53.64
|
%
|
Principal Shareholders:
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|
Yonghua Solar Power Investment Holding
Ltd(8)
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38,634,750
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16.10
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%
|
|
|
38,634,750
|
|
|
|
16.10
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%
|
WHF Investment Co.,
Ltd(9)
|
|
|
6,271,875
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|
|
|
2.61
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%
|
|
|
6,271,875
|
|
|
|
2.61
|
%
|
Citigroup Venture Capital International Growth Partnership,
L.P.(10)
|
|
|
23,305,867
|
|
|
|
9.71
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%
|
|
|
23,305,867
|
|
|
|
9.71
|
%
|
Citigroup Venture Capital International Co-Investment,
L.P.(11)
|
|
|
1,271,809
|
|
|
|
0.53
|
%
|
|
|
1,271,809
|
|
|
|
0.53
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%
|
Hony Capital II,
L.P.(12)
|
|
|
12,645,482
|
|
|
|
5.27
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%
|
|
|
12,645,482
|
|
|
|
5.27
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%
|
LC Fund III,
L.P.(13)
|
|
|
9,467,206
|
|
|
|
3.93
|
%
|
|
|
9,467,206
|
|
|
|
3.93
|
%
|
Good Energies II
LP(14)
|
|
|
83,178,005
|
|
|
|
34.65
|
%
|
|
|
83,178,005
|
|
|
|
34.65
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%
|
|
|
|
(1)
|
|
Beneficial ownership is determined
in accordance with the rules of the SEC and includes voting or
investment power with respect to the ordinary shares.
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(2)
|
|
The number of ordinary shares
outstanding in calculating the percentages for each listed
person includes the ordinary shares underlying options held by
such person. Percentage of beneficial ownership of each listed
person prior to the offering is based on 240,024,754 ordinary
shares outstanding as of September 30, 2007, including
ordinary shares underlying share options exercisable by such
person within 60 days of the date of this prospectus, not
including share options that can be early exercised, at the
discretion of the holder, into unvested ordinary shares.
Percentage of beneficial ownership of each listed person after
the offering is based on ordinary shares outstanding immediately
after the closing of this offering and the ordinary shares
underlying share options exercisable by such person within
60 days of the date of this prospectus, not including share
options that can be early exercised, at the discretion of the
holder, into unvested ordinary shares.
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|
(3)
|
|
Assumes the underwriters
option to purchase additional ADSs is exercised in full and no
other change to the number of ADSs offered by us as set forth on
the cover page of this prospectus.
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|
(4)
|
|
Owns Yonghua Solar Power Investment
Holding Ltd, a British Virgin Islands company, which held
38,634,750 ordinary shares in our company as of
December 31, 2007. Mr. Lu is the sole director of
Yonghua Solar Power Investment Holding Ltd and has the right to
cast the vote for such company regarding all matters of our
company requiring shareholder approval. Mr. Lus
business address is 666 Linyang Road, Qidong, Jiangsu Province,
226200, Peoples Republic of China.
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|
(5)
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|
Owns WHF Investment Co., Ltd, a
British Virgin Islands company, which held 6,271,875 ordinary
shares in our company as of December 31, 2007.
Mr. Wang is the sole director of WHF Investment Co., Ltd
and has the right to cast the vote for such company regarding
all matters of our company requiring shareholder approval.
Mr. Wangs business address is 666 Linyang Road,
Qidong, Jiangsu Province, 226200, Peoples Republic of
China.
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91
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|
|
(6)
|
|
Owns YongGuan Solar Power
Investment Holding Ltd, a British Virgin Islands company, which
held 501,750 ordinary shares in our company as of
December 31, 2007. Mr. Wang is the sole director of
YongGuan Solar Power Investment Holding Ltd and has the right to
cast the vote for such company regarding all matters of our
company requiring shareholder approval. Mr. Wangs
business address is 666 Linyang Road, Qidong, Jiangsu Province,
226200, Peoples Republic of China.
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|
(7)
|
|
Includes ordinary shares (including
ordinary shares in the form of ADSs) held by all of our
directors and senior executive officers as a group.
|
|
|
|
(8)
|
|
Yonghua Solar Power Investment
Holding Ltd, a British Virgin Islands company, is owned by
Mr. Yonghua Lu. Mr. Lu is the sole director of Yonghua
Solar Power Investment Holding Ltd. The address of Yonghua Solar
Power Investment Holding Ltd is PO Box 173, Kingston
Chambers, Road Town, Tortola, British Virgin Islands.
|
(9)
|
|
WHF Investment Co., Ltd, a British
Virgin Islands company, is owned by Mr. Hanfei Wang.
Mr. Wang is the sole director of WHF Investment Co.,
Ltd. The address of WHF Investment Co., Ltd is
PO Box 173, Kingston Chambers, Road Town, Tortola,
British Virgin Islands.
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|
|
(10)
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|
Held 23,305,867 ordinary shares as
of December 31, 2007. The address of Citigroup Venture
Capital International Growth Partnership, L.P. is
c/o Citigroup
Venture Capital International Partnership G.P. Limited, 26 New
Street, St. Helier, Jersey, Channel Islands JE4 8PP. We have
been informed that voting and investment control over our shares
held by Citigroup Venture Capital International Growth
Partnership, L.P. is held by the four directors of its general
partner, Citigroup Venture Capital International Partnership
G.P. Limited, a company formed in Jersey, Channel Islands, who
are Dipak Kumar Rastogi, Susan Johnson, Michael Richardson and
Deryk Haithwaite. Citigroup Venture Capital International
Partnership G.P. Limited is a wholly owned Citigroup subsidiary.
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|
|
|
(11)
|
|
Held 1,271,809 ordinary shares as
of December 31, 2007. The address of Citigroup Venture
Capital International Co-Investment, L.P. is
c/o Citigroup
Venture Capital International Partnership G.P. Limited, 26 New
Street, St. Helier, Jersey, Channel Islands JE4 8PP. We have
been informed that voting and investment control over our shares
held by Citigroup Venture Capital International Co-Investment,
L.P. is held by the four directors of its general partner,
Citigroup Venture Capital International Partnership G.P.
Limited, a company formed in Jersey, Channel Islands, who are
Dipak Kumar Rastogi, Susan Johnson, Michael Richardson and Deryk
Haithwaite. Citigroup Venture Capital International Partnership
G.P. Limited is a wholly owned Citigroup subsidiary.
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|
(12)
|
|
Held 12,645,482 ordinary shares
(including ordinary shares in the form of ADSs) as of
December 31, 2007 through its wholly owned subsidiary
Brilliant Orient International Limited, a British Virgin Islands
company. The address of Hony Capital II, L. P. is 7th Floor,
Tower A, Raycom Info Tech Park, No. 2 Kexueyuan Nanlu,
Haidian District, Beijing, 100080, Peoples Republic of
China. We have been informed that voting and investment control
over our shares held by Hony Capital II, L.P. is held by its
five-seat investment committee. Among the five representatives
of such committee, three of them, Mr. Chuanzhi Liu,
Mr. Linan Zhu and Mr. John Huan Zhao, are nominees of
Hony Capital II, L.P.s general partner, Hony Capital II,
GP Limited, a company incorporated in the Cayman Islands, and
the other two representatives are nominees of The Goldman Sachs
Group, Inc. and Sun Hung Kai Properties Limited, which are two
of the limited partners of Hony Capital II, L.P. On
November 18, 2006, Linyang China entered into a management
consulting service agreement with Hony Capital II, L.P. under
which, for a period of one year, Hony Capital II, L.P. agreed to
provide certain management consulting services to Linyang China
and to second Ms. Xihong Deng, managing director of Hony
Capital II, GP Limited, the general partner of Hony Capital II,
L.P., to our company to serve as executive vice president in
charge of international business development. Linyang China
agreed to pay an aggregate of RMB4 million to Hony Capital
II, L.P. as consideration for these services under this
agreement. Ms. Deng recently resigned as a member of our
board of directors and as vice president in charge of
international sales.
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(13)
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Held 9,467,206 ordinary shares
(including ordinary shares in the form of ADSs) as of
December 31, 2007. The address of LC Fund III, L.P. is
c/o Legend
Capital Limited, 10th Floor, Tower A, Raycom Info. Tech Park,
No. 2 Kexueyuan Nanlu, Haidian District, Beijing, 100080,
Peoples Republic of China. We have been informed that
voting and investment control over our shares held by LC
Fund III, L.P. is held by Mr. Chuanzhi Liu,
Mr. Linan Zhu, Mr. John Huan Zhao, Mr. Hao Chen,
Mr. Nengguang Wang and Mr. Xiangyu Ouyang, the
partners and investment committee members of
LC Fund III, L.P.
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(14)
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Includes 15,027,312 ordinary shares
held by Good Energies Investment (Jersey) Limited as of
December 28, 2007. On December 31, 2007, Good Energies
Investment (Jersey) Limited transferred its 15,027,312 ordinary
shares in our company to its affiliate Good Energies II LP
acting by its general partner Good Energies General Partner
Jersey Limited. The directors of Good Energies General Partner
Jersey Limited are Mr. John Barrett, Mr. Paul
Bradshaw, Mr. John Drury, Mr. Fintan Kennedy,
Mr. John Hammill and Mr. Gert-Jan Pieters. The address
of each of Good Energies II LP and Good Energies General
Partner Jersey Limited is 3rd Floor, Britannic House, 9
Hope Street, St Helier, Jersey JE2 3NS, the Channel Islands. We
have been informed that voting and investment control over
securities directly owned by Good Energies II LP acting by
its general partner Good Energies General Partner Jersey Limited
is held by Cofra Jersey Limited, which wholly owns Good Energies
General Partner Jersey Limited and by Good Energies AG, Good
Energies Inc. and Good Energies (UK) LLP, acting by its managing
member Good Energies Investments Limited, which have been
appointed as joint investment managers of Good Energies II
LP pursuant to a management agreement with Good Energies Partner
Jersey Limited. The address of Good Energies AG is
Grafenauweg 4, Zug CH 6301, Switzerland. The address
of Good Energies Inc. is 1114 Avenue of the Americas,
Suite 2802, New York, NY 10036, USA. The business address
of each of Good Energies (UK) LLP and Good Energies Investments
Limited is Fifth Floor 29 Farm Street, London, W1J 5RL, England.
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None of our existing shareholders has voting rights that will
differ from the voting rights of other shareholders after the
closing of this offering. We are not aware of any arrangement
that may, at a subsequent date, result in a change of control of
our company.
On December 4, 2007, Good Energies Investments (Jersey)
Limited entered into an agreement to purchase 66,745,638
ordinary shares and 281,011 ADSs of our company, at a purchase
price of US$2.712 per ordinary share or US$13.56 per ADS, from
certain of our current shareholders, including, among others,
38,634,750 ordinary
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shares from Yonghua Solar Power Investment Holding Ltd,
6,271,875 ordinary shares from WHF Investment Co., Ltd,
12,574,660 ordinary shares from Citigroup Venture Capital
International Growth Partnership, L.P., 686,191 ordinary shares
from Citigroup Venture Capital International Co-Investment,
L.P., 281,011 ADSs from Brilliant Orient International Limited,
and 1,051,912 ordinary shares from LC Fund III, L.P.
Yonghua Solar Power Investment Holding Ltd is owned by
Mr. Yonghua Lu, our founder, chairman and chief executive
officer. WHF Investment Co., Ltd is owned by Mr. Hanfei
Wang, our director and chief operating officer. The share
purchase was completed in the end of December 2007. Pursuant to
the stock purchase agreement, Good Energies Investments (Jersey)
Limited designated Good Energies II LP acting by its
general partner Good Energies General Partner Jersey Limited to
receive the ordinary shares. Good Energies
Investments II LP and/or its affiliates owned an
approximate 34.65% interest, and Yonghua Solar Power Investment
Holding Ltd owned an approximately 16.10% interest, in our
company immediately after the completion of the transaction.
In connection with the share purchase by Good Energies
Investments (Jersey) Limited, our board of directors has agreed
to increase the number of directors from eight members to nine
members and granted Good Energies II LP the right, at
shareholding levels immediately after the completion of the
transaction, to designate an additional nominee for inclusion in
the slate of nominees to be considered by our shareholders for
election as director. In addition, subject to applicable law and
applicable regulatory and stock exchange requirements, we have
agreed to consult with Good Energies Investments (Jersey)
Limited prior to taking each of the following actions:
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the entry into any agreements that would have a value or
potential liability in excess of 5% of our net assets or is
otherwise likely to be material to us;
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any change in the nature or scope of our business;
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any joint ventures, strategic alliances, partnerships or similar
arrangements with a third party;
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any recapitalization, merger, asset swap, share sale or transfer
of substantially all of the intellectual properties rights or
other assets, or any other extraordinary transaction;
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any change to our articles of association; and
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entry into any agreement or understanding to do any of the
foregoing.
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93
RELATED
PARTY TRANSACTIONS
Series A
Convertible Preference Shares
In June and August 2006, we issued in a private placement an
aggregate of 79,644,754 series A convertible preference
shares to Citigroup Venture Capital International Growth
Partnership, L.P., Citigroup Venture Capital International
Co-Investment, L.P., Hony Capital II, L.P., LC Fund III,
L.P., Good Energies Investments (Jersey) Limited and two
individual investors at an average purchase price of
approximately US$0.67 per share for aggregate proceeds, before
deduction of transaction expenses, of US$53 million. All of
these 79,644,754 series A convertible preference shares
were converted to ordinary shares of our company upon the
completion of our initial public offering.
Registration
Rights
Pursuant to the registration rights agreement entered into in
connection with this private placement, dated June 27,
2006, we granted to the holders of our ordinary shares which
were converted from our series A convertible preference
shares certain registration rights, which primarily include:
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Demand Registrations. Upon request of any of
the non-individual holders of our ordinary shares which were
converted from our series A convertible preference shares,
we shall effect registration with respect to the registrable
securities held by such holders on a form other than
Form F-3
(or any comparable form for a registration for an offering in a
jurisdiction other than the United States), provided we shall
only be obligated to effect three such registrations.
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Piggyback Registrations. The holders of our
ordinary shares which were converted from our series A
convertible preference shares and their permitted transferees
are entitled to piggyback registration rights,
whereby they may require us to register all or any part of the
registrable securities that they hold at the time when we
register any of our ordinary shares. All of such holders have
waived their piggyback registration rights in this offering.
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Registrations on
Form F-3. We
have granted the holders of our ordinary shares which were
converted from our series A convertible preference shares
and their permitted transferees of the registrable securities
the right to an unlimited number of registrations under
Form F-3
(or any comparable form for a registration in a jurisdiction
other than the United States) to the extent we are eligible to
use such form to offer securities.
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Post-Initial
Public Offering
Lock-Up
Pursuant to the registration rights agreement, each of the
shareholders other than the holders of series A convertible
preference shares has agreed, for a period of 12 months
after completion of our initial public offering, not to sell,
exchange, assign, pledge, charge, grant a security interest,
make a hypothecation, gift or other encumbrance, or enter into
any contract or any voting trust or other agreement or
arrangement with respect to the transfer of voting rights or any
other legal or beneficial interest in any ordinary shares,
create any other claim or make any other transfer or
disposition, whether voluntary or involuntary, affecting the
right, title, interest or possession in, to or of such ordinary
shares, unless otherwise approved by the non-individual holders
of series A convertible preference shares in writing. This
lock-up period expired on December 20, 2007. In addition,
pursuant to the lock-up agreement dated June 20, 2006, Mr.
Yonghua Lu, our chairman and chief executive officer, and Mr.
Hanfei Wang, our chief operating officer, have agreed with us
not to sell, transfer or dispose of any ADSs, ordinary shares or
similar securities for a lock-up period of three years after
completion of this our initial public offering. Any amendment to
the lock-up agreement requires unanimous written consent of all
the individuals who were parties to the lock-up agreement. In
2007, the lock-up periods of Mr. Yonghua Lu and Mr. Hanfei Wang
were reduced to one year and two years, respectively, under the
first amendment to the lock-up agreement. On December 4,
2007, all the individuals who were parties to the lock-up
agreement further agreed that the lock-up agreement should not
apply to any share transfer made by a shareholder to Good
Energies Investments (Jersey) Limited or its affiliates.
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Equity
Incentive Plans
We have granted share options to purchase ordinary shares in our
company to certain of our employees, directors and officers. As
of September 30, 2007, there were outstanding options to
purchase an aggregate of 8,772,998 ordinary shares in our
company. See Management 2006 Equity Incentive
Plan and Management 2007 Equity
Incentive Plan.
We adopted our 2007 equity incentive plan in August 2007 which
provides for the grant of options, restricted stock, restricted
stock units, stock appreciation rights, performance units and
performance stock to our employees, directors and consultants.
The maximum aggregate number of our ordinary shares that may be
issued under the 2007 equity incentive plan is 10,799,685. See
Management 2007 Equity Incentive Plan.
Transactions
with Certain Shareholders
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During the period from August 27, 2004 to December 31,
2004, Linyang China made advances of RMB10.0 million to
Linyang Electronics, its parent company until June 2006, and
RMB8.0 million to Huaerli (Nantong), a company in which the
equity holder and chairman and chief executive officer of our
company, Mr. Yonghua Lu, had a beneficial interest as an
equity holder. These amounts were unsecured, interest-free and
were fully repaid in 2005. In the three months ended
March 31, 2006, Linyang China made cash advances of
RMB0.1 million (US$0.01 million) and
RMB2.1 million (US$0.3 million) to Mr. Yonghua Lu, our
chairman and chief executive officer, and Mr. Hanfei Wang,
our director and chief operating officer, respectively, and a
housing loan of RMB2.9 million (US$0.4 million) to
Mr. Longxing Huang, our purchasing director. These amounts
were unsecured, interest-free and repayable upon demand. All the
advances and the housing loan were fully repaid in April and May
2006. We do not intend to make such cash advances or loans to
any of our directors or shareholders in the future.
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Linyang Electronics made advances to Linyang China in an
aggregate amount of RMB119.4 million (US$15.7 million)
in 2005. We repaid RMB89.1 million and RMB30.2 million
(US$4.0 million) of these amounts in 2005 and 2006,
respectively. Linyang Electronics paid certain operating
expenses of RMB0.7 million (US$0.1 million) and
RMB0.5 million (US$0.07 million) on behalf of Linyang
China in 2005 and 2006 respectively, and Linyang China repaid
RMB0.06 million and RMB0.2 million
(US$0.03 million) in the same period. As of
December 31, 2005, the amount due to Linyang Electronics
was approximately RMB30.9 million. The amount due to
Linyang Electronics was unsecured, interest-free and had no
fixed terms of repayment. In 2006, Linyang Electronics and
Linyang Agricultural Development (Nantong) Co., Ltd., a company
in which the shareholder, chairman and chief executive officer
of our company, Mr. Yonghua Lu, had a beneficial interest
as an equity holder, made cash advances to Linyang China of
RMB105.9 million (US$14.1 million) and
RMB9.0 million (US$1.2 million), respectively, both of
which were fully repaid in the same period. During the same
period, Linyang Electronics paid approximately
RMB0.5 million (US$0.07 million) of operating expenses
on behalf of Linyang China, RMB0.2 million
(US$0.03 million) of which have been subsequently
reimbursed by Linyang China. In addition, Linyang China
purchased silicon wafers and other materials from Linyang
Electronics in the amount of RMB2.6 million in 2006, out of
which RMB1.0 million has been paid by Linyang China in the
same period. The purchase was made according to the published
prices and conditions offered by Linyang Electronics to its
customers. As of December 31, 2006, the amount due to
Linyang Electronics was approximately RMB2.6 million
(US$0.3 million), which was unsecured, interest-free and
had no stated terms of repayment. In October and November 2006,
Linyang China entered into entrusted loan agreements with
Linyang Electronics under which Linyang Electronics lent to
Linyang China an aggregate of RMB80.0 million
(US$10.7 million) through a third party PRC bank, all of
which have been subsequently reimbursed by Linyang China. Under
current PRC laws and regulations, PRC companies other than
licensed financial institutions are not permitted to make loans
to each other directly. As a result, companies commonly use
indirect entrusted loan arrangements under which funds are first
deposited by the lending company with a PRC commercial bank, and
the PRC commercial bank then loans the corresponding amount of
funds to the borrower pursuant to the instruction of the lending
company. As the principal and interest of the loan are repaid to
the bank, the bank makes corresponding repayments to the lending
company after deducting service fees.
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In September 2006, Sichuan Jiayang entered into a PV module
purchase agreement with Linyang Electronics in the amount of
RMB0.3 million. The purchase was made according to the
published prices and conditions offered by Linyang Electronics
to its customers. As of December 31, 2006, the amount due
to Linyang Electronics was RMB0.3 million.
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Linyang China entered into a number of agreements with Huaerli
(Nantong) to purchase silicon and silicon wafers in the
aggregate amounts of RMB15.9 million (US$2.1 million)
and RMB23.8 million (US$3.2 million), respectively, in
2005 and 2006. The purchase was made according to the published
prices and conditions offered by Huaerli (Nantong) to its
customers. As of December 31, 2005 and 2006, the amount due
to Huaerli (Nantong) under these purchase agreements was
approximately RMB1.7 million and nil, respectively. The
amount due to Huaerli (Nantong) was unsecured, interest-free and
repayable on demand. In 2006, Huaerli (Nantong) paid
approximately RMB7.6 million (US$1.0 million) of
operating expenses on behalf of Linyang China, all of which have
been subsequently reimbursed by Linyang China in the same period.
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In 2005, Huaerli (Nantong) made advances to Linyang China of
RMB27.0 million (US$3.6 million), which was
subsequently repaid by Linyang China in the same period.
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As of December 31, 2006, Linyang Chinas bank
borrowings were guaranteed by Linyang Electronics for up to
RMB280.0 million (US$37.4 million) for nil
consideration; RMB20.0 million (US$2.7 million) were
jointly guaranteed by Linyang Electronics and Mr. Yonghua
Lu, our chairman, chief executive officer and his wife;
RMB59.9 million (US$8.0 million) was jointly
guaranteed by Linyang Electronics and Huaerli (Nantong); and
RMB20.0 million (US$2.7 million) was secured by land
use rights and guaranteed by Linyang Electronics, Qidong Huahong
and our chairman and chief executive officer and his wife.
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As of December 31, 2005, for nil consideration, Linyang
Electronics had pledged RMB10.0 million to a commercial
bank for notes payable granted to Linyang China of
RMB10.0 million.
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In 2005, Linyang China paid RMB81,000 for raw material purchases
from Linyang Electronics according to the published prices and
conditions offered by Linyang Electronics to its customers.
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In 2005 and the three months ended March 31, 2006, Qidong
Huahong granted to Linyang China the use of a parcel of land
with a total area of 24,671 square meters for nil
consideration. As a result, in 2005 and the three months ended
March 31, 2006, we recorded a rental charge of RMB70,000
(US$9,342.3) and RMB23,000 (US$3,069.6), respectively, based on
the fair value of the rental cost incurred by Qidong Huahong and
a corresponding credit to additional paid-in capital. In April
2006, Qidong Huahong entered into a Land Use Rights Transfer
Agreement to transfer the use rights of this land until
December 23, 2054 to Linyang China for consideration of
RMB4.6 million (US$0.6 million). The full price of the
contract has been paid. In November 2006, Qidong Huahong entered
into two Land Use Rights Transfer Agreements to transfer the use
rights of two parcels of land with a total area of
36,841 square meters and a manufactory facility for a
consideration of RMB21.9 million (US$2.9 million).
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On August 30, 2004 and March 16, 2005, Linyang China
entered into two facility lease agreements with Qidong Huahong.
Linyang China incurred rental expenses of RMB25,000 in the
period from August 27, 2004 to December 31, 2004 and
RMB58,000 (US$7,740.8) in 2005. The rental agreement was entered
into with reference to market rental rates. The amounts due to
Qidong Huahong under this agreement were RMB25,000, RMB83,000
(US$11,077.3) and nil as of December 31, 2004,
December 31, 2005 and December 31, 2006, respectively.
These amounts were unsecured, interest-free and payable on
demand. In November 2005, the parties entered into a new
agreement to terminate the above two leases.
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In 2006, Nantong Linyang Ecological Cultural Co., Ltd., a
company controlled by our chairman and chief executive officer,
paid approximately RMB0.1 million of operating expenses on
behalf of Linyang China, all of which have been subsequently
reimbursed by Linyang China.
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In September 2006, Linyang China entered into a PV module sales
agreement with Shanghai Linyang Electronics Technology Co.,
Ltd., a company controlled by our chairman and chief executive
officer. The amount for 20 modules was RMB0.15 million. The
sale was made according to the published prices and
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conditions offered by Linyang China to its customers. As of
December 31, 2006, the amount due from Linyang Technology
was RMB0.15 million.
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On June 2, 2006, Linyang BVI agreed to pay
US$6.6 million to Linyang Electronics for the purchase of
the equity interests held by Linyang Electronics in Linyang
China and made such payment in August 2006. The price of the
transfer was based on the estimated net asset value of Linyang
China. This transaction was accounted for as a recapitalization.
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On November 18, 2006, Linyang China entered into a
management consulting service agreement with Hony Capital II,
L.P. under which, for a period of one year, Hony Capital II,
L.P. agreed to provide certain management consulting services to
Linyang China and to second Ms. Xihong Deng, managing
director of Hony Capital II, GP Limited, the general partner of
Hony Capital II, L.P., to our company to serve as executive vice
president in charge of international business development.
Linyang China agreed to pay an aggregate of RMB4 million to
Hony Capital II, L.P. as consideration for these services under
this agreement.
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On October 25, 2007, Linyang China entered into an
agreement with Linyang Electronics, a company controlled by
Mr. Yonghua Lu, our founder, chairman and chief executive
officer under which Linyang China agreed to pay Linyang
Electronics a guarantee fee equivalent to an annual interest of
2.0% of the total bank borrowings guaranteed by Linyang
Electronics.
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On July 31, 2007, we entered into a share transfer
agreement with Nanjing Linyang, a company controlled by Mr.
Yonghua Lu, our founder, chairman and chief executive officer,
and Lianyungang Suyuan Group Co., Ltd., to acquire 52% of equity
ownership of Yangguang Solar for a consideration of
RMB51.2 million.
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As of September 30, 2007, Linyang Chinas bank
borrowings of RMB317.9 million (US$42.4 million) were
guaranteed by Linyang Electronics. In addition, Linyang
Chinas bank borrowings of RMB60.0 million
(US$8.0 million) were jointly guaranteed by Linyang
Electronics and Huaerli (Nantong); RMB60.0 million
(US$8.0 million) was guaranteed by Huaerli (Nantong) and
RMB298.0 million (US$39.8 million) was jointly
guaranteed by Linyang Electronics and Qidong Huahong, a company
in which Mr. Yonghua Lu, our chairman, chief executive officer
and principal shareholder, and his wife have financial interest.
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In July 2007, Linyang China entered into an agreement with
Linyang Electronics, under which Linyang Solarfun agreed to pay
a guarantee fee with an annual rate of 2.0% of the total bank
borrowings guaranteed by Linyang Electronics. As of
September 30, 2007, we have accrued RMB2.6 million
(US$0.3 million) for the bank borrowings guaranteed by
Linyang Electronics of RMB675.9 million
(US$90.2 million).
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97
PRC
GOVERNMENT REGULATIONS
This section sets forth a summary of the most significant
regulations or requirements that affect our business activities
in China or our shareholders right to receive dividends
and other distributions from us.
Renewable
Energy Law and Other Government Directives
In February 2005, China enacted its Renewable Energy Law, which
has become effective on January 1, 2006. The Renewable
Energy law sets forth the national policy to encourage and
support the development and use of solar and other renewable
energy and the use of on-grid generation.
The law also sets forth the national policy to encourage the
installation and use of solar energy water-heating systems,
solar energy heating and cooling systems, solar photovoltaic
systems and other solar energy utilization systems. In addition,
the law provides financial incentives, such as national funding,
preferential loans and tax preferences for the development of
renewable energy projects.
In January 2006, the National Development and Reform Commission,
or the NDRC, issued two implementing rules relating to the
Renewable Energy Law: (1) the Trial Measures on the
Administration over the Pricing and Cost Allocation of Renewable
Energy Power Generation and (2) the Administrative
Regulations Relating to the Renewable Energy Power Generation.
These implementing rules, among other things, set forth general
policies for the pricing of on-grid power generated by solar and
other renewable energy. In addition, the PRC Ministry of Finance
issued the Provisional Measures for Administration of Specific
Funds for Development of Renewable Energy in June 2006, which
provides that the PRC government will establish a fund
specifically for the purpose of supporting the development of
the renewable energy industry, including the solar energy
industry.
Chinas Ministry of Construction also issued a directive in
June 2005 that sought to expand the use of solar energy in
residential and commercial buildings and encouraged the
increased application of solar energy in different townships. In
addition, Chinas State Council promulgated a directive in
July 2005 that set forth principles with regard to the
conservation of energy resources and the development and use of
solar energy in Chinas western areas, which have not been
covered by electricity transmission grids and rural areas.
Environmental
Regulations
We use, generate and discharge toxic, volatile or otherwise
hazardous chemicals and wastes in our research and development
and manufacturing activities. We are subject to a variety of
governmental regulations related to the storage, use and
disposal of hazardous materials. The major environmental
regulations applicable to us include the Environmental
Protection Law of the PRC, the Law of PRC on the Prevention and
Control of Water Pollution, Implementation Rules of the Law of
PRC on the Prevention and Control of Water Pollution, the Law of
PRC on the Prevention and Control of Air Pollution, the Law of
PRC on the Prevention and Control of Solid Waste Pollution, and
the Law of PRC on the Prevention and Control of Noise Pollution.
Restriction
on Foreign Businesses
The principal regulation governing foreign ownership of solar
photovoltaic businesses in the PRC is the Foreign Investment
Industrial Guidance Catalogue (effective as of January 1,
2005) and the Foreign Investment Industrial Guidance Catalogue
(effective as of December 1, 2007). Under the regulation,
the solar photovoltaic business falls into the category of
encouraged foreign investment industry.
Tax
PRC enterprise income tax is calculated based on taxable income
determined under PRC accounting principles. In accordance with
the PRC Income Tax Law for Enterprises with Foreign Investment
and Foreign Enterprises, or the Income Tax Law, and the related
implementing rules, foreign invested enterprises incorporated in
the PRC are generally subject to an enterprise income tax rate
of 33.0% (30.0% of state income tax plus 3.0% local income tax).
The Income Tax Law and the related implementing rules provide
certain favorable tax treatments to foreign invested
enterprises. Production-oriented foreign-invested enterprises,
which are scheduled to operate for a period of ten years or
more, are entitled to exemption from income tax for two years
commencing from the first
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profit-making year and 50% reduction of income tax for the
subsequent three years. In certain special areas such as coastal
open economic areas, special economic zones and economic and
technology development zones, foreign-invested enterprises are
entitle to reduced tax rates, namely: (1) in coastal open
economic zones, the tax rate applicable to production-oriented
foreign-invested enterprises is 24%; (2) in special
economic zones, the rate is 15%; and (3) certified high and
new technology enterprises incorporated and operated in economic
and technology development zones determined by the State Council
may enjoy a 50% reduction from the applicable rate.
As a foreign-invested production enterprise established in
Qidong, Nantong City, a coastal open economic area, Linyang
China is subject to a preferential enterprise income tax rate of
24%. In addition, Linyang China is exempted from enterprise
income tax for 2005 and 2006 and will be taxed at a reduced rate
of 12% in 2007, 2008 and 2009 and at a rate of 25% from 2010
onward. From 2005 until the end of 2009, Linyang China is also
exempted from the 3% local income tax applicable to
foreign-invested enterprises in Jiangsu Province. From 2010
onward, Linyang China will not be exempt from the 3% local
enterprise income tax. In addition, under relevant PRC tax rules
and regulations, Linyang China may apply for a two-year income
tax exemption on income generated from its increased capital
resulting from our contribution to Linyang China of the funds we
received as a result of our issuances of series A
convertible preference shares in a private placement in June and
August 2006, and a reduced tax rate of 12% for the three years
thereafter. We are currently in the process of applying for such
preferential tax treatment. In addition, our subsidiaries,
Shanghai Linyang and Sichuan Jiayang, are subject to an
enterprise income tax rate of 33%, consisting of 30% enterprise
income tax and 3% local enterprise income tax.
Pursuant to the Provisional Regulation of China on Value-Added
Tax and their implementing rules, all entities and individuals
that are engaged in the sale of goods, the provision of repairs
and replacement services and the importation of goods in China
are generally required to pay value-added tax at a rate of 17%
of the gross sales proceeds received, less any deductible
value-added tax already paid or borne by the taxpayer.
Furthermore, when exporting goods, the exporter is entitled to a
portion of or all the refund of value-added tax that it has
already paid or borne. Our imported raw materials that are used
for manufacturing export products and are deposited in bonded
warehouses are exempt from import value-added tax.
Foreign
Currency Exchange
Foreign currency exchange in China is primarily governed by the
following regulations:
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Foreign Exchange Administration Rules (1996), as
amended; and
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Regulations of Settlement, Sale and Payment of Foreign Exchange
(1996).
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Under the Foreign Exchange Administration Rules, the Renminbi is
convertible for current account items, including distribution of
dividends, payment of interest, trade and service-related
foreign exchange transactions. Conversion of Renminbi for
capital account items, such as direct investment, loan,
securities investment and repatriation of investment, however,
is still subject to the approval of SAFE.
Under the Regulations of Settlement, Sale and Payment of Foreign
Exchange, foreign-invested enterprises may only buy, sell
and/or remit
foreign currencies at those banks authorized to conduct foreign
exchange business after providing valid commercial documents
and, in the case of capital account item transactions, obtaining
approval from the SAFE. Capital investments by foreign-invested
enterprises outside of China are also subject to limitations,
which include approvals by the Ministry of Commerce, SAFE and
the NDRC.
Dividend
Distribution
The principal regulations governing distribution of dividends
paid by wholly foreign-owned enterprises include:
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Wholly Foreign-Owned Enterprise Law (1986), as amended; and
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Wholly Foreign-Owned Enterprise Law Implementation Rules (1990),
as amended.
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Under these regulations, wholly foreign-owned enterprises in
China may pay dividends only out of their accumulated profits,
if any, determined in accordance with PRC accounting standards
and regulations. In addition,
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wholly foreign-owned enterprises in China are required to set
aside at least 10% of their after-tax profit based on PRC
accounting standards each year to its general reserves until the
accumulated amount of such reserves reaches 50% of its
registered capital. These reserves are not distributable as cash
dividends. The board of directors of a foreign-invested
enterprise has the discretion to allocate a portion of its
after-tax profits to staff welfare and bonus funds, which may
not be distributed to equity owners except in the event of
liquidation.
Regulations
of Overseas Investments and Listings
SAFE issued a public notice in October 2005, or the SAFE notice,
requiring PRC residents, including both legal persons and
natural persons, to register with the relevant local SAFE branch
before establishing or controlling any company outside of China,
referred to as an offshore special purpose company,
for the purpose of acquiring any assets of or equity interest in
PRC companies and raising funds from overseas. In addition, any
PRC resident that is the shareholder of an offshore special
purpose company is required to amend its SAFE registration with
the local SAFE branch, with respect to that offshore special
purpose company in connection with any increase or decrease of
capital, transfer of shares, merger, division, equity or debt
investment or creation of any security interest. If any PRC
shareholder of any offshore special purpose company fails to
make the required SAFE registration and amendment, the PRC
subsidiaries of that offshore special purpose company may be
prohibited from distributing their profits and the proceeds from
any reduction in capital, share transfer or liquidation to the
offshore special purpose company. Moreover, failure to comply
with the SAFE registration and amendment requirements described
above could result in liability under PRC laws for evasion of
applicable foreign exchange restrictions. Our current beneficial
owners who are PRC residents have registered with the local SAFE
branch as required under the SAFE notice.
The NDRC promulgated a rule in October 2004, or the NDRC Rule,
which requires NDRC approvals for overseas investment projects
made by PRC entities. The NDRC Rule also provides that approval
procedures for overseas investment projects of PRC individuals
shall be implemented with reference to this rule. Our current
beneficial owners who are PRC individuals did not apply for NDRC
approval for their investment in our company.
On August 8, 2006, six PRC regulatory agencies, including
the MOFCOM, the SASAC, the State Administration for Taxation,
the State Administration for Industry and Commerce, the China
Securities Regulatory Commission, or the CSRC, and the SAFE,
jointly adopted the Regulations on Mergers and Acquisitions of
Domestic Enterprises by Foreign Investors, or the New M&A
Rule, which became effective on September 8, 2006. This
regulation, among other things, includes provisions that purport
to require that an offshore Special Purpose Vehicle, or SPV
formed for purposes of overseas listing of equity interest in
PRC companies and controlled directly or indirectly by PRC
companies or individuals obtain the approval of the CSRC prior
to the listing and trading of such SPVs securities on an
overseas stock exchange.
On September 21, 2006, the CSRC published on its official
website procedures regarding its approval of overseas listings
by SPVs. The CSRC approval procedures require the filing of a
number of documents with the CSRC and it would take several
months to complete the approval process.
The application of the New M&A Rule with respect to
overseas listings of SPVs remains unclear with no consensus
currently existing among the leading PRC law firms regarding the
scope of the applicability of the CSRC approval requirement.
Our PRC counsel, Grandall Legal Group, has advised us that,
based on their understanding of the current PRC laws,
regulations and rules and the procedures announced on
September 21, 2006:
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CSRC currently has not issued any definitive rule or
interpretation concerning whether offerings like ours under this
prospectus shall be subject to this new procedure;
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In spite of the above, given that we completed our restructuring
before September 8, 2006, the effective date of the new
regulation, this regulation does not require an application to
be submitted to the CSRC for the approval of the listing and
trading of our ADSs on the Nasdaq Global Market, unless we are
clearly required to do so by possible later rules of CSRC.
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DESCRIPTION
OF SHARE CAPITAL
We are a Cayman Islands exempted company with limited liability
and our affairs are governed by our memorandum and articles of
association, as amended and restated from time to time, and the
Companies Law (2007 Revision) of the Cayman Islands, which is
referred to as the Companies Law below.
As of December 31, 2007, our authorized share capital
consisted of 500,000,000 ordinary shares, with a par value of
US$0.0001 each. As of September 30, 2007, there were
240,024,754 ordinary shares issued and outstanding.
The following are summaries of material provisions of our
amended and restated memorandum and articles of association and
the Companies Law insofar as they relate to the material terms
of our ordinary shares.
Ordinary
Shares
General
All of our outstanding ordinary shares are fully paid and
non-assessable. Certificates representing the ordinary shares
are issued in registered form. Our shareholders who are
non-residents of the Cayman Islands may freely hold and vote
their ordinary shares.
Dividends
The holders of our ordinary shares are entitled to such
dividends as may be declared by our board of directors subject
to the Companies Law. Under our amended and restated memorandum
and articles of association, all dividends unclaimed for one
year after having been declared may be invested or otherwise
made use of by our board of directors for our exclusive benefit
until claimed, and we will not be deemed a trustee in respect of
such dividend or be required to account for any money earned.
All dividends unclaimed for six years after having been declared
may be forfeited by our board of directors and will revert to us.
Voting
Rights
Each ordinary share is entitled to one vote on all matters upon
which the ordinary shares are entitled to vote. Voting at any
meeting of shareholders is by show of hands unless a poll is
demanded. A poll may be demanded by the chairman of such meeting
or any other shareholder or shareholders present in person or by
proxy and holding at least 10% in par value of the shares giving
a right to attend and vote at the meeting.
A quorum required for a meeting of shareholders consists of at
least one shareholder present or by proxy or, if a corporation
or other non-natural person, by its duly authorized
representative holding not less than one-third of the
outstanding voting shares in our company. Shareholders
meetings may be convened by our board of directors on its own
initiative or upon a request to the directors by shareholders
holding in the aggregate 10% or more of our voting share
capital. Advance notice of at least 20 (but not more than
60) days is required for the convening of our annual
general shareholders meeting and any other general
shareholders meeting calling for the passing of a
resolution requiring two-thirds of shareholder votes, and
advance notice of at least 14 (but not more than 60) days
is required for the convening of other general shareholder
meetings.
An ordinary resolution to be passed by the shareholders requires
the affirmative vote of a simple majority of the votes attaching
to the ordinary shares cast in a general meeting, while a
special resolution requires the affirmative vote of no less than
two-thirds of the votes cast attaching to the ordinary shares. A
special resolution will be required for important matters such
as a change of name or making changes to our amended and
restated memorandum and articles of association.
Transfer
of Ordinary Shares
Subject to the restrictions of our amended and restated
memorandum of articles of association, as applicable, any of our
shareholders may transfer all or any of his or her ordinary
shares by an instrument of transfer in the usual or common form
or any other form approved by our board of directors.
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Our board of directors may, in its absolute discretion, decline
to register any transfer of any ordinary share which is not
fully paid up or on which we have a lien. Our board of directors
may also decline to register any transfer of any ordinary share
unless:
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the instrument of transfer is lodged with us, accompanied by the
certificate for the ordinary shares to which it relates and such
other evidence as our board of directors may reasonably require
to show the right of the transferor to make the transfer;
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the instrument of transfer is in respect of only one class of
ordinary shares;
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the instrument of transfer is properly stamped, if required;
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in the case of a transfer to joint holders, the number of joint
holders to whom the ordinary share is to be transferred does not
exceed four;
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the ordinary shares transferred are free of any lien in favor of
us;
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any fee related to the transfer has been paid to us; and
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the transfer to be registered is not to an infant or a person
suffering from mental disorder.
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If our directors refuse to register a transfer they shall,
within two months after the date on which the instrument of
transfer was lodged, send to each of the transferor and the
transferee notice of such refusal.
The registration of transfers may be suspended and the register
closed at such times and for such periods as our board of
directors may from time to time determine, provided, however,
that the registration of transfers shall not be suspended nor
the register closed for more than 45 days in any year.
Liquidation
On a return of capital on winding up or otherwise (other than on
conversion, redemption or purchase of ordinary shares), assets
available for distribution among the holders of ordinary shares
shall be distributed among the holders of the ordinary shares on
a pro rata basis. If our assets available for
distribution are insufficient to repay all of the
paid-up
capital, the assets will be distributed so that the losses are
borne by our shareholders proportionately.
Calls
on Ordinary Shares and Forfeiture of Ordinary
Shares
Our board of directors may from time to time make calls upon
shareholders for any amounts unpaid on their ordinary shares in
a notice served to such shareholders at least 14 days prior
to the specified time of payment. The ordinary shares that have
been called upon and remain unpaid are subject to forfeiture.
Redemption
of Ordinary Shares
Subject to the provisions of the Companies Law and other
applicable law, we may issue shares on terms that are subject to
redemption, at our option or at the option of the holders, on
such terms and in such manner as may be determined by special
resolution.
Variations
of Rights of Shares
If at any time, our share capital is divided into different
classes of shares, all or any of the special rights attached to
any class of shares may, subject to the provisions of the
Companies Law, be varied either with the consent in writing of
the holders of three-fourths of the issued shares of that class
or by a special resolution passed at a general meeting of the
holders of the shares of that class. Consequently, the rights of
any class of shares cannot be detrimentally altered without a
majority vote of all of the shares in that class. The rights
conferred upon the holders of the shares of any class issued
with preferred or other rights shall not, unless otherwise
expressly provided by the terms of issue of the shares of that
class, be deemed to be varied by the creation or issue of
further shares ranking pari passu with such existing
class of shares. The rights of holders of ordinary shares shall
not be deemed to be
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varied by the creation or issue of shares with preferred or
other rights which may be affected by the directors as provided
in the articles of association without any vote or consent of
the holders of ordinary shares.
General
Meetings of Shareholders
The directors may, and shall on the requisition of shareholders
holding at least 10% in par value of the capital of our company
carrying voting rights at general meetings, proceed to convene a
general meeting of such shareholders. If the directors do not
within 21 days from the deposit of the requisition duly
proceed to convene a general meeting, which will be held within
a further period of 21 days, the requisitioning
shareholders, or any of them holding more than 50% of the total
voting rights of all of the requisitioning shareholders, may
themselves convene a general meeting. Any such general meeting
must be convened within three months after the expiration of
such 21-day
period.
Inspection
of Books and Records
Holders of our ordinary shares will have no general right under
Cayman Islands law to inspect or obtain copies of our list of
shareholders or our corporate records. However, we will provide
our shareholders with annual audited financial statements. See
Where You Can Find Additional Information.
Changes
in Capital
We may from time to time by ordinary resolution:
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increase the share capital by such sum, to be divided into
shares of such classes and amounts, as the resolution shall
prescribe;
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consolidate and divide all or any of our share capital into
shares of a larger amount than our existing shares;
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convert all or any of our paid up shares into stock and
reconvert that stock into paid up shares of any denomination;
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sub-divide our existing shares, or any of them into shares of a
smaller amount provided that in the subdivision the proportion
between the amount paid and the amount, if any, unpaid on each
reduced share shall be the same as it was in case of the share
from which the reduced share is derived; or
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cancel any shares which, at the date of the passing of the
resolution, have not been taken or agreed to be taken by any
person and diminish the amount of our share capital by the
amount of the shares so cancelled.
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We may by special resolution reduce our share capital and any
capital redemption reserve in any manner authorized by law.
Exempted
Company
We are an exempted company with limited liability under the
Companies Law (2007 Revision) of the Cayman Islands. The
Companies Law in the Cayman Islands distinguishes between
ordinary resident companies and exempted companies. Any company
that is registered in the Cayman Islands but conducts business
mainly outside of the Cayman Islands may apply to be registered
as an exempted company. The requirements for an exempted company
are essentially the same as for an ordinary company except for
the exemptions and privileges listed below:
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an exempted company does not have to file an annual return of
its shareholders with the Registrar of Companies;
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an exempted companys register of members is not open to
inspection;
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an exempted company does not have to hold an annual general
meeting;
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an exempted company may issue no par value, negotiable or bearer
shares;
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an exempted company may obtain an undertaking against the
imposition of any future taxation (such undertakings are usually
given for 20 years in the first instance);
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an exempted company may register by way of continuation in
another jurisdiction and be deregistered in the Cayman Islands;
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an exempted company may register as a limited duration
company; and
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an exempted company may register as a segregated portfolio
company.
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Limited liability means that the liability of each
shareholder is limited to the amount unpaid by the shareholder
on the shares of the company. We are subject to reporting and
other informational requirements of the Exchange Act, as
applicable to foreign private issuers. We intend to comply with
the Nasdaq Rules in lieu of following home country practice
after the closing of our initial public offering. The Nasdaq
Rules require that every company listed on the Nasdaq hold an
annual general meeting of shareholders. In addition, our amended
and restated articles of association allow directors or
shareholders to call special shareholder meetings pursuant to
the procedures set forth in the articles.
Differences
in Corporate Law
The Companies Law is modeled after that of English law but does
not follow many recent English law statutory enactments. In
addition, the Companies Law differs from laws applicable to
United States corporations and their shareholders. Set forth
below is a summary of the significant differences between the
provisions of the Companies Law applicable to us and the laws
applicable to companies incorporated in the State of Delaware.
Mergers
and Similar Arrangements
Cayman Islands law does not provide for mergers as that
expression is understood under the Delaware General Corporation
law. However, there are statutory provisions that facilitate the
reconstruction and amalgamation of companies, provided that the
arrangement is approved by a majority in number of each class of
shareholders and creditors with whom the arrangement is to be
made, and who must in addition represent three-fourths in value
of each such class of shareholders or creditors, as the case may
be, that are present and voting either in person or by proxy at
a meeting, or meetings, convened for that purpose. The convening
of the meetings and subsequently the arrangement must be
sanctioned by the Grand Court of the Cayman Islands. While a
dissenting shareholder has the right to express to the court the
view that the transaction ought not to be approved, the court
can be expected to approve the arrangement if it determines that:
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the statutory provisions as to the due majority vote have been
met;
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the shareholders have been fairly represented at the meeting in
question;
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the arrangement is such that a businessman would reasonably
approve; and
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the arrangement is not one that would more properly be
sanctioned under some other provision of the Companies Law.
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When a take over offer is made and accepted by holders of 90% of
the shares within four months, the offeror may, within a
two-month period, require the holders of the remaining shares to
transfer such shares on the terms of the offer. An objection can
be made to the Grand Court of the Cayman Islands but this is
unlikely to succeed unless there is evidence of fraud, bad faith
or collusion.
If the arrangement and reconstruction is thus approved, the
dissenting shareholder would have no rights comparable to
appraisal rights, which would otherwise ordinarily be available
to dissenting shareholders of Delaware corporations, providing
rights to receive payment in cash for the judicially determined
value of the shares.
Shareholders
Suits
We are not aware of any reported class action or derivative
action having been brought in a Cayman Islands court. In
principle, we will normally be the proper plaintiff and as a
general rule a derivative action may not be
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brought by a minority shareholder. However, based on English
authorities, which would in all likelihood be of persuasive
authority in the Cayman Islands, there are exceptions to the
foregoing principle, including when:
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a company acts or proposes to act illegally or ultra
vires;
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the act complained of, although not ultra vires, could
only be effected duly if authorized by more than a simple
majority vote that has not been obtained; and
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those who control the company are perpetrating a fraud on
the minority.
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Indemnification
of Directors and Executive Officers and Limitation of
Liability
Cayman Islands law does not limit the extent to which a
companys articles of association may provide for
indemnification of officers and directors, except to the extent
any such provision may be held by the Cayman Islands courts to
be contrary to public policy, such as to provide indemnification
against civil fraud or the consequences of committing a crime.
Our amended and restated memorandum and articles of association
permit indemnification of officers and directors for losses,
damages, costs and expenses incurred in their capacities as such
unless such losses or damages arise from dishonesty, fraud or
default of such directors or officers. This standard of conduct
is generally the same as permitted under the Delaware General
Corporation Law for a Delaware corporation. In addition, we
intend to enter into indemnification agreements with our
directors and senior executive officers that will provide such
persons with additional indemnification beyond that provided in
our amended and restated memorandum and articles of association.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to our directors, officers or
persons controlling us under the foregoing provisions, we have
been informed that, in the opinion of the SEC, such
indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.
Anti-Takeover
Provisions in the Amended and Restated Memorandum and Articles
of Association
Some provisions of our amended and restated memorandum and
articles of association may discourage, delay or prevent a
change in control of our company or management that shareholders
may consider favorable, including provisions that authorize our
board of directors to issue preference shares in one or more
series and to designate the price, rights, preferences,
privileges and restrictions of such preference shares without
any further vote or action by our shareholders.
However, under Cayman Islands law, our directors may only
exercise the rights and powers granted to them under our amended
and restated memorandum and articles of association, as amended
and restated from time to time, for what they believe in good
faith to be in the best interests of our company.
Directors
Fiduciary Duties
Under Delaware corporate law, a director of a Delaware
corporation has a fiduciary duty to the corporation and its
shareholders. This duty has two components: the duty of care and
the duty of loyalty. The duty of care requires that a director
act in good faith, with the care that an ordinarily prudent
person would exercise under similar circumstances. Under this
duty, a director must inform himself of, and disclose to
shareholders, all material information reasonably available
regarding a significant transaction. The duty of loyalty
requires that a director act in a manner he or she reasonably
believes to be in the best interests of the corporation. He or
she must not use his or her corporate position for personal gain
or advantage. This duty prohibits self-dealing by a director and
mandates that the best interest of the corporation and its
shareholders take precedence over any interest possessed by a
director, officer or controlling shareholder and not shared by
the shareholders generally. In general, actions of a director
are presumed to have been made on an informed basis, in good
faith and in the honest belief that the action taken was in the
best interests of the corporation. However, this presumption may
be rebutted by evidence of a breach of one of the fiduciary
duties. Should such evidence be presented concerning a
transaction by a director, a director must prove the procedural
fairness of the transaction, and that the transaction was of
fair value to the corporation.
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As a matter of Cayman Islands law, a director of a Cayman
Islands company is in the position of a fiduciary with respect
to the company and therefore it is considered that he owes the
following duties to the company a duty to act
bona fide in the best interests of the company, a duty
not to make a profit based on his or her position as director
(unless the company permits him to do so) and a duty not to put
himself in a position where the interests of the company
conflict with his or her personal interest or his or her duty to
a third party. A director of a Cayman Islands company owes to
the company a duty to act with skill and care. It was previously
considered that a director need not exhibit in the performance
of his or her duties a greater degree of skill than may
reasonably be expected from a person of his or her knowledge and
experience. However, English and Commonwealth courts have moved
towards an objective standard with regard to the required skill
and care and these authorities are likely to be followed in the
Cayman Islands.
Shareholder
Action by Written Consent
Under the Delaware General Corporation Law, a corporation may
eliminate the right of shareholders to act by written consent by
amendment to its certificate of incorporation. Cayman Islands
law and our amended and restated articles of association provide
that shareholders may approve corporate matters by way of a
unanimous written resolution signed by or on behalf of each
shareholder who would have been entitled to vote on such matter
at a general meeting without a meeting being held.
Shareholder
Proposals
Under the Delaware General Corporation Law, a shareholder has
the right to put any proposal before the annual meeting of
shareholders, provided it complies with the notice provisions in
the governing documents. A special meeting may be called by the
board of directors or any other person authorized to do so in
the governing documents, but shareholders may be precluded from
calling special meetings.
Cayman Islands law and our amended and restated articles of
association allow our shareholders holding not less than 10% of
the paid-up
voting share capital of the company to requisition a
shareholders meeting. As an exempted Cayman Islands
company, we are not obliged by law to call shareholders
annual general meetings. However, our amended and restated
articles of association require us to call such meetings.
Cumulative
Voting
Under the Delaware General Corporation Law, cumulative voting
for elections of directors is not permitted unless the
corporations certificate of incorporation specifically
provides for it. Cumulative voting potentially facilitates the
representation of minority shareholders on a board of directors
since it permits the minority shareholder to cast all the votes
to which the shareholder is entitled on a single director, which
increases the shareholders voting power with respect to
electing such director. As permitted under Cayman Islands law,
our amended and restated articles of association do not provide
for cumulative voting. As a result, our shareholders are not
afforded any less protections or rights on this issue than
shareholders of a Delaware corporation.
Removal
of Directors
Under the Delaware General Corporation Law, a director of a
corporation with a classified board may be removed only for
cause with the approval of a majority of the outstanding shares
entitled to vote, unless the certificate of incorporation
provides otherwise. Under our amended and restated articles of
association, directors may be removed by ordinary resolution.
Transactions
with Interested Shareholders
The Delaware General Corporation Law contains a business
combination statute applicable to Delaware corporations whereby,
unless the corporation has specifically elected not to be
governed by such statute by amendment to its certificate of
incorporation, it is prohibited from engaging in certain
business combinations with an interested shareholder
for three years following the date that such person becomes an
interested shareholder. An interested shareholder generally is a
person or a group who or which owns or owned 15% or more of the
targets outstanding voting stock within the past three
years. This has the effect of limiting the ability of a
potential acquirer
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to make a two-tiered bid for the target in which all
shareholders would not be treated equally. The statute does not
apply if, among other things, prior to the date on which such
shareholder becomes an interested shareholder, the board of
directors approves either the business combination or the
transaction which resulted in the person becoming an interested
shareholder. This encourages any potential acquirer of a
Delaware corporation to negotiate the terms of any acquisition
transaction with the targets board of directors.
Cayman Islands law has no comparable statute. As a result, we
cannot avail ourselves of the types of protections afforded by
the Delaware business combination statute. However, although
Cayman Islands law does not regulate transactions between a
company and its significant shareholders, it does provide that
such transactions must be entered into bona fide in the
best interests of the company and not with the effect of
constituting a fraud on the minority shareholders.
Dissolution;
Winding Up
Under the Delaware General Corporation Law, unless the board of
directors approves the proposal to dissolve, dissolution must be
approved by shareholders holding 100% of the total voting power
of the corporation. Only if the dissolution is initiated by the
board of directors may it be approved by a simple majority of
the corporations outstanding shares. Delaware law allows a
Delaware corporation to include in its certificate of
incorporation a supermajority voting requirement in connection
with dissolutions initiated by the board. Under the Companies
Law of the Cayman Islands and our amended and restated articles
of association, our company may be dissolved, liquidated or
wound up by the vote of holders of two-thirds of our shares
voting at a meeting or the unanimous written resolution of all
shareholders.
Variation
of Rights of Shares
Under the Delaware General Corporation Law, a corporation may
vary the rights of a class of shares with the approval of a
majority of the outstanding shares of such class, unless the
certificate of incorporation provides otherwise. Under Cayman
Islands law and our amended and restated articles of
association, if our share capital is divided into more than one
class of shares, we may vary the rights attached to any class
only with the consent in writing of the holders of 75% of the
issued shares of that class or with the sanction of a special
resolution passed at a general meeting of the holders of the
shares of that class.
Amendment
of Governing Documents
Under the Delaware General Corporation Law, a corporations
governing documents may be amended with the approval of a
majority of the outstanding shares entitled to vote, unless the
certificate of incorporation provides otherwise. As permitted by
Cayman Islands law, our amended and restated memorandum and
articles of association may only be amended by special
resolution or the unanimous written resolution of all
shareholders.
Rights
of Non-Resident or Foreign Shareholders
There are no limitations imposed by our amended and restated
memorandum and articles of association on the rights of
non-resident or foreign shareholders to hold or exercise voting
rights on our shares. In addition, there are no provisions in
our amended and restated memorandum and articles of association
governing the ownership threshold above which shareholder
ownership must be disclosed.
Directors
Power to Issue Shares
Subject to applicable law, our board of directors is empowered
to issue or allot shares or grant options and warrants with or
without preferred, deferred, qualified or other special rights
or restrictions. However, if any issue of shares (including any
issue of ordinary shares or any shares with preferred, deferred,
qualified or other special rights or restrictions) is proposed
and such shares proposed to be issued are at least 20% by par
value of the par value of all then issued shares, then the prior
approval by ordinary resolution of the holders of the ordinary
shares, voting together as one class, will be required. These
provisions could have the effect of discouraging third parties
from seeking to obtain control of our company in a tender offer
or similar transaction.
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History
of Securities Issuances
The following is a summary of our securities issuances during
the past three years.
Ordinary
Shares
In June 2006, as part of our corporate restructuring, we issued
a total of 100,350,000 ordinary shares. These ordinary shares
were issued to Yonghua Solar Power Investment Holding Ltd, WHF
Investment Co., Ltd, YongGuan Solar Power Investment Holding
Ltd, Yongfa Solar Power Investment Holding Ltd, Yongliang Solar
Power Investment Holding Ltd, Yongqiang Solar Power Investment
Holding Ltd, YongXing Solar Power Investment Holding Ltd and
Forever-brightness Investments Limited.
Series A
Convertible Preference Shares
In June and August 2006, we issued in a private placement an
aggregate of 79,644,754 series A convertible preference
shares to Citigroup Venture Capital International Growth
Partnership, L.P., Citigroup Venture Capital International
Co-Investment, L.P., Hony Capital II L.P., LC Fund III
L.P., Good Energies Investments (Jersey) Limited and two
individual investors at an average purchase price of
approximately US$0.67 per share for aggregate proceeds, before
deduction of transaction expenses, of US$53 million. All of
these 79,644,754 series A convertible preference shares
were converted to ordinary shares of our company upon the
completion of our initial public offering.
Registration
Rights
Pursuant to the registration rights agreement entered into in
connection with this private placement, dated June 27,
2006, we granted to the holders of our ordinary shares which
were converted from our series A convertible preference
shares certain registration rights, which primarily include:
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Demand Registrations. Upon request of any of
the non-individual holders of our ordinary shares which were
converted from our series A convertible preference shares,
we shall effect registration with respect to the registrable
securities held by such holders on a form other than
Form F-3
(or any comparable form for a registration for an offering in a
jurisdiction other than the United States), provided we shall
only be obligated to effect three such registrations.
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Piggyback Registrations. The holders of our
ordinary shares which were converted from our series A
convertible preference shares and their permitted transferees
are entitled to piggyback registration rights,
whereby they may require us to register all or any part of the
registrable securities that they hold at the time when we
register any of our ordinary shares. All of such holders have
waived their piggyback registration rights in this offering.
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Registrations on
Form F-3. We
have granted the holders of our ordinary shares which were
converted from our series A convertible preference shares
and their permitted transferees of the registrable securities
the right to an unlimited number of registrations under
Form F-3
(or any comparable form for a registration in a jurisdiction
other than the United States) to the extent we are eligible to
use such form to offer securities.
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Post-Initial
Public Offering
Lock-Up
Pursuant to the registration rights agreement, each of the
shareholders other than the holders of series A convertible
preference shares has agreed, for a period of 12 months
after completion of our initial public offering, not to sell,
exchange, assign, pledge, charge, grant a security interest,
make a hypothecation, gift or other encumbrance, or enter into
any contract or any voting trust or other agreement or
arrangement with respect to the transfer of voting rights or any
other legal or beneficial interest in any ordinary shares,
create any other claim or make any other transfer or
disposition, whether voluntary or involuntary, affecting the
right, title, interest or possession in, to or of such ordinary
shares, unless otherwise approved by the non-individual holders
of series A convertible preference shares in writing. This
lock-up period expired on December 20, 2007. In addition,
pursuant to the lock-up agreement dated June 20, 2006, Mr.
Yonghua Lu, our chairman and chief executive officer, and Mr.
Hanfei Wang, our chief operating officer, have agreed with us
not to sell, transfer or dispose of any ADSs, ordinary
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shares or similar securities for a lock-up period of three
years after completion of this our initial public offering. Any
amendment to the lock-up agreement requires unanimous written
consent of all the individuals who were parties to the lock-up
agreement. In 2007, the lock-up periods of Mr. Yonghua Lu and
Mr. Hanfei Wang were reduced to one year and two years,
respectively, under the first amendment to the lock-up
agreement. On December 4, 2007, all the individuals who
were parties to the lock-up agreement further agreed that the
lock-up agreement should not apply to any share transfer made by
a shareholder to Good Energies Investments (Jersey) Limited or
its affiliates.
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DESCRIPTION
OF AMERICAN DEPOSITARY SHARES
American
Depositary Shares
The Bank of New York, as depositary, will register and deliver
American depositary shares, or ADSs. Each ADS will represent
five ordinary shares (or a right to receive five ordinary
shares) deposited with the Hong Kong office of the Hong Kong and
Shanghai Banking Corp., as custodian for the depositary. Each
ADS will also represent any other securities, cash or other
property which may be held by the depositary. The
depositarys corporate trust office at which the ADSs will
be administered is located at 101 Barclay Street, New York, New
York 10286. The Bank of New Yorks principal executive
office is located at One Wall Street, New York, New York 10286.
You may hold ADSs either (A) directly (i) by having an
American depositary receipt, which is a certificate evidencing a
specific number of ADSs, registered in your name, or
(ii) by holding ADSs in the Direct Registration System, or
(B) indirectly through your broker or other financial
institution. If you hold ADSs directly, you are an ADS holder.
This description assumes you hold your ADSs directly. If you
hold the ADSs indirectly, you must rely on the procedures of
your broker or other financial institution to assert the rights
of ADR holders described in this section. You should consult
with your broker or financial institution to find out what those
procedures are.
The Direct Registration System, is a system administered by DTC
pursuant to which the depositary may register the ownership of
uncertificated American depositary shares, which ownership shall
be evidenced by periodic statements issued by the depositary to
the ADS holders entitled thereto.
As an ADS holder, we will not treat you as one of our
shareholders and you will not have shareholder rights. Cayman
Islands law governs shareholder rights. The depositary will be
the holder of the shares underlying your ADSs. As a holder of
ADSs, you will have ADS holder rights. A deposit agreement among
us, the depositary and you, as an ADS holder, and the beneficial
owners of ADSs set out ADS holder rights as well as the rights
and obligations of the depositary. New York law governs the
deposit agreement and the ADSs.
The following is a summary of the material provisions of the
deposit agreement. For more complete information, you should
read the entire deposit agreement and the form of American
depositary receipt. Directions on how to obtain copies of those
documents are provided under Where You Can Find Additional
Information.
Dividends
and Other Distributions
How
Will You Receive Dividends and Other Distributions on the
Shares?
The depositary has agreed to pay to you the cash dividends or
other distributions it or the custodian receives on shares or
other deposited securities, after deducting its fees and
expenses. You will receive these distributions in proportion to
the number of shares your ADSs represent.
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Cash. The depositary will convert any cash
dividend or other cash distribution we pay on the shares into
U.S. dollars, if it can do so on a reasonable basis and can
transfer the U.S. dollars to the United States. If that is
not possible or if any government approval is needed and cannot
be obtained, the deposit agreement allows the depositary to
distribute the foreign currency only to those ADR holders to
whom it is possible to do so. It will hold the foreign currency
it cannot convert for the account of the ADS holders who have
not been paid. It will not invest the foreign currency and it
will not be liable for any interest.
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Before making a distribution, any withholding taxes, or other
governmental charges that must be paid will be deducted. See
Taxation. The depositary will distribute only whole
U.S. dollars and cents and will round fractional cents to
the nearest whole cent. If exchange rates fluctuate during a
time when the depositary cannot convert the foreign currency,
you may lose some or all of the value of the distribution.
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Shares. The depositary may distribute
additional ADSs representing any shares we distribute as a
dividend or free distribution. The depositary will only
distribute whole ADSs. It will sell shares which would require
it to deliver a fractional ADS and distribute the net proceeds
in the same way as it does with cash. If the depositary does not
distribute additional ADSs, the outstanding ADSs will also
represent the new shares.
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Rights to Purchase Additional Shares. If we
offer holders of our securities any rights to subscribe for
additional shares or any other rights, the depositary may make
these rights available to you. If the depositary decides it is
not legal and practical to make the rights available but that it
is practical to sell the rights, the depositary will use
reasonable efforts to sell the rights and distribute the
proceeds in the same way as it does with cash. The depositary
will allow rights that are not distributed or sold to lapse.
In that case, you will receive no value for them.
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If the depositary makes rights available to you, it will
exercise the rights and purchase the shares on your behalf. The
depositary will then deposit the shares and deliver ADSs to you.
It will only exercise rights if you pay it the exercise price
and any other charges the rights require you to pay.
U.S. securities laws may restrict transfers and
cancellation of the ADSs represented by shares purchased upon
exercise of rights. For example, you may not be able to trade
these ADSs freely in the United States. In this case, the
depositary may deliver restricted depositary shares that have
the same terms as the ADRs described in this section except for
changes needed to put the necessary restrictions in place.
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Other Distributions. The depositary will send
to you anything else we distribute on deposited securities by
any means it thinks is legal, fair and practical. If it cannot
make the distribution in that way, the depositary has a choice.
It may decide to sell what we distributed and distribute the net
proceeds, in the same way as it does with cash. Or, it may
decide to hold what we distributed, in which case ADSs will also
represent the newly distributed property. However, the
depositary is not required to distribute any securities (other
than ADSs) to you unless it receives satisfactory evidence from
us that it is legal to make that distribution.
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The depositary is not responsible if it decides that it is
unlawful or impractical to make a distribution available to any
ADS holders. We have no obligation to register ADSs, shares,
rights or other securities under the Securities Act. We also
have no obligation to take any other action to permit the
distribution of ADSs, shares, rights or anything else to ADS
holders. This means that you may not receive the
distributions we make on our shares or any value for them if it
is illegal or impractical for us to make them available to
you.
Deposit,
Withdrawal and Cancellation
How
Are ADSs Issued?
The depositary will deliver ADSs if you or your broker deposits
shares or evidence of rights to receive shares with the
custodian. Upon payment of its fees and expenses and of any
taxes or charges, such as stamp taxes or stock transfer taxes or
fees, the depositary will register the appropriate number of
ADSs in the names you request and will deliver the ADSs to or
upon the order of the person or persons entitled thereto.
How Do
ADS Holders Cancel an American Depositary Share?
You may turn in your ADSs at the depositarys corporate
trust office. Upon payment of its fees and expenses and of any
taxes or charges, such as stamp taxes or stock transfer taxes or
fees, the depositary will deliver the shares and any other
deposited securities underlying the ADSs to you or a person you
designate at the office of the custodian. Or, at your request,
risk and expense, the depositary will deliver the deposited
securities at its corporate trust office, if feasible.
How Do
ADS Holders Interchange Between Certificated ADSs and
Uncertificated ADSs?
You may surrender your ADR to the depositary for the purpose of
exchanging your ADR for uncertificated ADSs. The depositary will
cancel that ADR and will send you a statement confirming that
you are the owner of uncertificated ADSs. Alternatively, upon
receipt by the depositary of a proper instruction from a holder
of uncertificated ADSs requesting the exchange of uncertificated
ADSs for certificated ADSs, the depositary will execute and
deliver to you an ADR evidencing those ADSs.
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Voting
Rights
How Do
You Vote?
You may instruct the depositary to vote the deposited
securities, but only if we ask the depositary to ask for your
instructions. Otherwise, you wont be able to exercise
your right to vote unless you withdraw the shares. However, you
may not know about the meeting enough in advance to withdraw the
shares.
If we ask for your instructions, the depositary will notify you
of the upcoming vote and arrange to deliver our voting materials
to you. The materials will (1) describe the matters to be
voted on and (2) explain how you may instruct the
depositary to vote the shares or other deposited securities
underlying your ADSs as you direct. For instructions to be
valid, the depositary must receive them on or before the date
specified. The depositary will try, as far as practical, subject
to the laws of the Cayman Islands and of the Memorandum and
Articles of Association, to vote or to have its agents vote the
shares or other deposited securities as you instruct. The
depositary will only vote or attempt to vote as you instruct.
We cannot assure you that you will receive the voting materials
in time to ensure that you can instruct the depositary to vote
your shares. In addition, the depositary and its agents are not
responsible for failing to carry out voting instructions or for
the manner of carrying out voting instructions. This means
that you may not be able to exercise your right to vote and
there may be nothing you can do if your shares are not voted as
you requested.
In order to give you a reasonable opportunity to instruct the
depositary as to the exercise of voting rights relating to
deposited securities, if we request the depositary to act, we
will try to give the depositary notice of any such meeting and
details concerning the matters to be voted upon sufficiently in
advance of the meeting date.
Fees and
Expenses
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Persons Depositing or
Withdrawing Shares Must Pay:
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For:
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US$5.00 (or less) per 100 ADSs (or
portion of 100 ADSs)
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Issuance of ADSs, including issuances
resulting from a distribution of shares or rights or other
property
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Cancellation of ADSs for the purpose of
withdrawal, including if the deposit agreement terminates
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US$0.02 (or less) per ADS
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Any cash distribution to you
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A fee equivalent to the fee that would
be payable if securities distributed to you had been shares and
the shares had been deposited for issuance of ADSs
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Distribution of securities distributed
to holders of deposited securities which are distributed by the
depositary to ADS holders
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US$0.02 (or less) per ADS per calendar
year
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Depositary services
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Registration or transfer fees
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Transfer and registration of shares on
our share register to or from the name of the depositary or its
agent when you deposit or withdraw shares
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Expenses of the depositary
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Cable, telex and facsimile transmissions
(when expressly provided in the deposit agreement)
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Converting foreign currency to U.S.
dollars
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Taxes and other governmental charges the
depositary or the custodian have to pay on any ADS or share
underlying an ADS, for example, stock transfer taxes, stamp duty
or withholding taxes
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As necessary
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Any charges incurred by the depositary
or its agents for servicing the deposited securities
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As necessary
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The Bank of New York, as depositary, has agreed to reimburse us
for expenses we incur that are related to establishment and
maintenance of the ADR program, including investor relations
expenses and Nasdaq application and listing fees. There are
limits on the amount of expenses for which the depositary will
reimburse us, but the amount of reimbursement available to us is
not related to the amount of fees the depositary collects from
investors.
The depositary collects its fees for issuance and cancellation
of ADSs directly from investors depositing shares or
surrendering ADSs for the purpose of withdrawal or from
intermediaries acting for them. The depositary collects fees for
making distributions to investors by deducting those fees from
the amounts distributed or by selling a portion of distributable
property to pay the fees. The depositary may collect its annual
fee for depositary services by deduction from cash distributions
or by directly billing investors or by charging the book-entry
system accounts of participants acting for them. The depositary
may generally refuse to provide fee-attracting services until
its fees for those services are paid.
Payment
of Taxes
You will be responsible for any taxes or other governmental
charges payable on your ADSs or on the deposited securities
represented by any of your ADSs. The depositary may refuse to
register any transfer of your ADSs or allow you to withdraw the
deposited securities represented by your ADSs until such taxes
or other charges are paid. It may apply payments owed to you or
sell deposited securities represented by your American
depositary shares to pay any taxes owed and you will remain
liable for any deficiency. If the depositary sells deposited
securities, it will, if appropriate, reduce the number of ADSs
to reflect the sale and pay to you any proceeds, or send to you
any property, remaining after it has paid the taxes.
Reclassifications,
Recapitalizations and Mergers
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If we:
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Then:
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Change the nominal or par value of our
shares
Reclassify, split up or consolidate any
of the deposited securities
Distribute securities on the shares that
are not distributed to you
Recapitalize, reorganize, merge,
liquidate, sell all or substantially all of our assets, or take
any similar action
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The cash, shares or other securities
received by the depositary will become deposited securities.
Each ADS will automatically represent its equal share of the new
deposited securities
The depositary may, and will if we ask
it to, distribute some or all of the cash, shares or other
securities it received. It may also deliver new ADSs or ask you
to surrender your outstanding ADSs in exchange for new ADSs
identifying the new deposited securities.
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Amendment
and Termination
How
May the Deposit Agreement Be Amended?
We may agree with the depositary to amend the deposit agreement
and the ADSs without your consent for any reason. If an
amendment adds or increases fees or charges, except for taxes
and other governmental charges or expenses of the depositary for
registration fees, facsimile costs, delivery charges or similar
items, or prejudices a substantial right of ADS holders, it will
not become effective for outstanding ADSs until 30 days
after the depositary notifies ADS holders of the amendment.
At the time an amendment becomes effective, you are
considered, by continuing to hold your ADS, to agree to the
amendment and to be bound by the ADRs and the deposit agreement
as amended.
How
May the Deposit Agreement Be Terminated?
The depositary will terminate the deposit agreement at our
direction by mailing a notice of termination to the ADS holders
then outstanding at least 60 days prior to the date fixed
in such notice for such termination. The depositary may also
terminate the deposit agreement by mailing a notice of
termination to us and the ADS holders then outstanding if at any
time 30 days shall have expired after the depositary shall
have delivered to our company a
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written notice of its election to resign and a successor
depositary shall not have been appointed and accepted its
appointment.
After termination, the depositary and its agents will do the
following under the deposit agreement but nothing else: collect
distributions on the deposited securities, sell rights and other
property, and deliver shares and other deposited securities upon
cancellation of ADSs. Four months after termination, the
depositary may sell any remaining deposited securities by public
or private sale. After that, the depositary will hold the money
it received on the sale, as well as any other cash it is holding
under the deposit agreement for the pro rata benefit of
the ADS holders that have not surrendered their ADSs. It will
not invest the money and has no liability for interest. The
depositarys only obligations will be to account for the
money and other cash. After termination our only obligations
will be to indemnify the depositary and to pay fees and expenses
of the depositary that we agreed to pay.
Limitations
on Obligations and Liability
Limits
on Our Obligations and the Obligations of the Depositary; Limits
on Liability to Holders of ADSs
The deposit agreement expressly limits our obligations and the
obligations of the depositary. It also limits our liability and
the liability of the depositary. We and the depositary:
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are only obligated to take the actions specifically set forth in
the deposit agreement without negligence or bad faith;
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are not liable if either of us is prevented or delayed by law or
circumstances beyond our control from performing our obligations
under the deposit agreement;
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are not liable if either of us exercises discretion permitted
under the deposit agreement;
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have no obligation to become involved in a lawsuit or other
proceeding related to the ADSs or the deposit agreement on your
behalf or on behalf of any other party;
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may rely upon any documents we believe in good faith to be
genuine and to have been signed or presented by the proper party.
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In the deposit agreement, we and the depositary agree to
indemnify each other under certain circumstances.
Requirements
for Depositary Actions
Before the depositary will deliver or register a transfer of an
ADS, make a distribution on an ADS, or permit withdrawal of
shares, the depositary may require:
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payment of stock transfer or other taxes or other governmental
charges and transfer or registration fees charged by third
parties for the transfer of any shares or other deposited
securities;
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satisfactory proof of the identity and genuineness of any
signature or other information it deems necessary; and
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compliance with regulations it may establish, from time to time,
consistent with the deposit agreement, including presentation of
transfer documents.
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The depositary may refuse to deliver ADSs or register transfers
of ADSs generally when the transfer books of the depositary or
our transfer books are closed or at any time if the depositary
or we think it advisable to do so.
Your
Right to Receive the Shares Underlying Your ADRs
You have the right to cancel your ADSs and withdraw the
underlying shares at any time except:
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When temporary delays arise because: (i) the depositary has
closed its transfer books or we have closed our transfer books;
(ii) the transfer of shares is blocked to permit voting at
a shareholders meeting; or (iii) we are paying a
dividend on our shares.
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When you or other ADS holders seeking to withdraw shares owe
money to pay fees, taxes and similar charges.
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When it is necessary to prohibit withdrawals in order to comply
with any laws or governmental regulations that apply to ADSs or
to the withdrawal of shares or other deposited securities.
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This right of withdrawal may not be limited by any other
provision of the deposit agreement.
Pre-Release
of ADSs
The deposit agreement permits the depositary to deliver ADSs
before deposit of the underlying shares. This is called a
pre-release of the American depositary shares. The depositary
may also deliver shares upon cancellation of pre-released ADSs
(even if the ADSs are cancelled before the pre-release
transaction has been closed out). A pre-release is closed out as
soon as the underlying shares are delivered to the depositary.
The depositary may receive ADSs instead of shares to close out a
pre-release. The depositary may pre-release ADSs only under the
following conditions: (1) before or at the time of the
pre-release, the person to whom the pre-release is being made
represents to the depositary in writing that it or its customer
owns the shares or ADSs to be deposited; (2) the
pre-release is fully collateralized with cash or other
collateral that the depositary considers appropriate; and
(3) the depositary must be able to close out the
pre-release on not more than five business days notice. In
addition, the depositary will limit the number of ADSs that may
be outstanding at any time as a result of pre-release, although
the depositary may disregard the limit from time to time, if it
thinks it is appropriate to do so.
Direct
Registration System
In the deposit agreement, all parties to the deposit agreement
have acknowledged that the Direct Registration System and
Profile Modification System will apply to uncertificated ADSs
upon acceptance thereof to DRS by the DTC. The Direct
Registration System is the system administered by DTC pursuant
to which the depositary may register the ownership of
uncertificated American depositary shares, which ownership shall
be evidenced by periodic statements issued by the depositary to
the ADS holders entitled thereto. The Profile Modification
System is a required feature of the Direct Registration System
which allows a DTC participant, claiming to act on behalf of an
ADS holder, to direct the depositary to register a transfer of
those ADSs to DTC or its nominee and to deliver those ADSs to
the DTC account of that DTC participant without receipt by the
depositary of prior authorization from the ADS holder to
register such transfer.
In connection with and in accordance with the arrangements and
procedures relating to the Direct Registration System/Profile
Modification System, the parties to the deposit agreement
understand that the depositary will not verify, determine or
otherwise ascertain that the DTC participant which is claiming
to be acting on behalf of an ADS holder in requesting
registration of transfer and delivery described in the paragraph
above has the actual authority to act on behalf of the ADS
holder (notwithstanding any requirements under the Uniform
Commercial Code as in effect in the State of New York). In the
deposit agreement, the parties agree that the depositarys
reliance on and compliance with instructions received by the
depositary through the Direct Registration System Profile
Modification System and in accordance with the deposit
agreement, shall not constitute negligence or bad faith on the
part of the depositary.
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DESCRIPTION
OF SHARE ISSUANCE AND REPURCHASE AGREEMENT
AND CONCURRENT OFFERING OF OUR CONVERTIBLE NOTES
Concurrently with this offering of ADSs, we are offering
US$ million aggregate
principal amount of
our % Convertible Senior Notes
due ,
2017 by means of a private placement. The initial purchasers in
such offering also have a
30-day
option to purchase up to an additional
US$ million of our
convertible notes. We intend to use approximately
$25.0 million of the proceeds from offering of our
convertible notes for wafer and polysilicon pre-payments,
$25.0 million for capital expenditures and the remainder
for working capital and repayment of our existing bank
borrowings.
To facilitate transactions by which investors in our convertible
notes may hedge their investments, we have entered into a share
issuance and repurchase agreement,
dated ,
2008, with the ADS purchaser, an affiliate of Morgan
Stanley & Co. Incorporated, the underwriter in this
offering, under which we will issue, for payment of the par
value of the underlying ordinary shares by the ADS
purchaser, ADSs,
subject to our right to repurchase an equal number of our ADSs
for payment of the par value of the underlying ordinary shares.
Pursuant to the share issuance and repurchase agreement, we have
granted to the ADS purchasers an option, exercisable for
30 days from the date of this prospectus, to purchase up to
an
additional ADSs,
subject to our right to repurchase an equal number of our ADSs
for payment of the par value of the underlying ordinary shares.
An affiliate of the ADS purchaser has informed us that it
intends to use the short position created by the repurchase
provisions of the share issuance and repurchase agreement and
the concurrent sale of the purchased ADSs to facilitate
transactions by which investors in our convertible notes may
hedge their respective investments through privately negotiated
transactions.
The share issuance and repurchase agreement will terminate
on ,
20 , or, if earlier, the date as of which we have
notified the ADS purchaser in writing of our intention to
terminate the agreement at any time after the entire principal
amount of our convertible notes ceases to be outstanding as a
result of conversion, repurchase, cancellation or redemption, or
earlier in certain circumstances.
Morgan Stanley is permitted to use the ADSs sold to it under the
share issuance and repurchase agreement only for settling sales
executed under this prospectus. Morgan Stanley has advised us
that it intends to offer for sale pursuant to this prospectus
all ADSs
(or up
to ADSs
if the ADS purchaser exercises its option in full). See
Underwriter.
We will not receive any proceeds from
the ADSs
being offered and sold by this prospectus, which we refer to as
the purchased ADSs, but the ADS purchaser will pay
to us the nominal par value of US$0.0005 per ADS for the
purchase of those ADSs.
The ordinary shares underlying the purchased ADSs that we will
issue to the ADS purchaser will be issued and outstanding for
company law purposes, and accordingly, the holders of such ADSs
will have all of the rights of a holder of our outstanding ADSs,
including the right to vote the shares underlying such ADSs on
all matters submitted to a vote of our shareholders, and the
right to receive any dividends or other distributions that we
may pay or make on our issued and outstanding ordinary shares,
in each case subject to the limitations described under
Description of American Depositary Shares. However,
under the share issuance and repurchase agreement, the ADS
purchaser has agreed:
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to pay to us an amount equal to any cash dividends or cash
distributions (in liquidation or otherwise) that are paid on the
purchased ADSs, and
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to pay or deliver to us any other dividend distribution, in
liquidation or otherwise, on the purchased ADSs (other than a
dividend or distribution of ordinary shares or ADSs).
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The ADS purchaser may, at any time on three business days
notice, tender to us for repurchase for payment of the par value
of the underlying ordinary shares, subject to applicable law,
some or all of the ADSs issued to it under the share issuance
and repurchase agreement. We may require the ADS purchaser to
tender to us for repurchase for payment of the par value of the
underlying ordinary shares, subject to applicable law, some or
all of the ADSs issued under the share issuance and repurchase
agreement when our convertible notes are no longer outstanding
(whether as a result of conversion, redemption, repurchase,
cancellation or otherwise) or upon a default by the ADS
purchaser
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under the share issuance and repurchase agreement. Our right to
repurchase ADSs under the share issuance and repurchase
agreement will expire one month after the maturity date of the
convertible notes.
In view of the contractual undertakings of the ADS purchaser in
the share issuance and repurchase agreement, which have the
effect of substantially eliminating the economic dilution that
otherwise would result from the sale of the ADSs under that
agreement, we believe that under accounting principles generally
accepted in the United States of America currently in effect,
the ADSs sold thereunder will not be considered outstanding for
the purpose of computing and reporting our basic or diluted
earnings per share.
The existence of the share issuance and repurchase agreement
could have the effect of causing the market price of our ADSs to
be lower over the term of the agreement than it would have been
had we not entered into the agreement. See Risk
Factors Risks Related to This Offering
The effect of the issuance of our ADSs in this offering, which
issuance is being made to facilitate transactions by which
investors in our convertible notes may hedge their investments,
may be to lower the market price of our ADSs. However, we
have determined that the entry into the share issuance and
repurchase agreement is in our best interests as a means to
facilitate the offer and sale of our convertible notes pursuant
to the concurrent private placement on terms more favorable to
us than we could have otherwise obtained.
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SHARES
ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will
have
outstanding ordinary shares, including ordinary shares
represented by ADSs and ordinary shares. This calculation of
ordinary shares outstanding does not take into account our
obligations to repurchase the purchased ADSs (or the ordinary
shares underlying such ADSs) pursuant to the share issuance and
repurchase agreement.
All of the ADSs sold in the offering and the ordinary shares
they represent will be freely transferable by persons other than
our affiliates in the United States without
restriction or further registration under the Securities Act.
Ordinary shares or ADSs purchased by one of our
affiliates may not be resold, except pursuant to an
effective registration statement or an exemption from
registration, including an exemption under Rule 144 of the
Securities Act described below.
The ordinary shares held by existing shareholders prior to, and
those ordinary shares converted from our series A convertible
preference shares upon the completion of, our initial public
offering are restricted securities, as that term is
defined in Rule 144 under the Securities Act. These
restricted securities may be sold in the United States only if
they are registered or if they qualify for an exemption from
registration under Rule 144 or Rule 701 under the
Securities Act. These rules are described below.
Rule 144
In general, under the revised Rule 144 as to be effective
on February 15, 2007, beginning 90 days after the date
of this prospectus, a person who has beneficially owned
restricted securities for at least six months would
be entitled to sell within any three-month period a number of
shares, including ADSs representing such number of shares, that
is not more than the greater of:
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1% of the number of our ordinary shares then outstanding, in the
form of ADSs or otherwise, which will equal approximately
239,995 ordinary shares immediately after offering; or
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the average weekly reported trading volume of our ADSs on The
Nasdaq Global Market during the four calendar weeks before a
notice of the sale on Form 144 is filed with the SEC by
such person.
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Sales under Rule 144 are also subject to manner-of-sale
provisions, notice requirements and the availability of current
public information about us. However, these shares in the form
of ADSs or otherwise, would remain subject to
lock-up
arrangements and would only become eligible for sale when the
lock-up
period expires.
In addition, beginning 90 days after the date of this
prospectus, a person who is not deemed to have been our
affiliate at any time during the three months preceding a sale,
and who has beneficially owned ordinary shares in the form of
ADSs or otherwise, proposed to be sold for at least six months
but less than one year from the later of the date these shares
were acquired from us or from our affiliate, including the
holding period of any prior owner other than an affiliate, is
entitled to sell those shares without complying with the manner
of sale, volume limitation or notice provisions of
Rule 144, provided the current public information
provisions of Rule 144(c) are satisfied. An unaffiliated
person who has beneficially owned restricted shares for at least
one year, including the holding period of any prior owner except
an affiliate, is entitled to sell such shares without complying
with the manner of sale, public information, volume limitation
or notice provisions of Rule 144. However, these shares
would remain subject to
lock-up
arrangements and would only become eligible for sale when the
lock-up
period expires.
Rule 701
Beginning 90 days after the date of this prospectus,
persons other than affiliates who purchased ordinary shares
under a written compensatory plan or contract may be entitled to
sell such shares in reliance on Rule 701. Rule 701
permits affiliates to sell their Rule 701 shares under
Rule 144 without complying with the holding period
requirements of Rule 144. Rule 701 further provides
that non-affiliates may sell these shares in reliance on
Rule 144, subject only to its manner-of-sale requirements.
However, the Rule 701 shares would remain subject to
lock-up
arrangements and would only become eligible for sale when the
lock-up
period expires.
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Share
Options
As of September 30, 2007, options to purchase an aggregate
of 8,772,998 ordinary shares were outstanding.
Registration
Rights
Certain holders of our ordinary shares or their transferees are
entitled to request that we register their shares under the
Securities Act, following the expiration of the
lock-up
agreements described above. See Description of Share
Capital Registration Rights.
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The following summary of the material Cayman Islands and
United States federal tax consequences of an investment in our
ADSs or ordinary shares is based upon laws and relevant
interpretations thereof in effect as of the date of this
prospectus, all of which are subject to change. This summary
does not deal with all possible tax consequences relating to an
investment in our ADSs or ordinary shares, such as the tax
consequences under U.S., state, local and other tax laws. To the
extent that the discussion relates to matters of Cayman Islands
tax law, it represents the opinion of Maples and Calder, our
Cayman Islands counsel. To the extent the discussion relates to
PRC tax law, it represents the opinion of Grandall Legal Group,
our PRC counsel. To the extent that the discussion relates to
matters of U.S. federal income tax law, it represents the
opinion of Shearman & Sterling LLP, our special
U.S. counsel.
Cayman
Islands Taxation
The Cayman Islands currently levies no taxes on individuals or
corporations based upon profits, income, gains or appreciation
and there is no taxation in the nature of inheritance tax or
estate duty. There are no other taxes likely to be material to
us levied by the Government of the Cayman Islands except for
stamp duties which may be applicable on instruments executed in,
or brought within, the jurisdiction of the Cayman Islands. The
Cayman Islands is not party to any double tax treaties. There
are no exchange control regulations or currency restrictions in
the Cayman Islands.
PRC
Taxation
Under the Income Tax Law for Enterprises with Foreign Investment
and Foreign Enterprises currently in effect, any dividends
payable by foreign-invested enterprises to non-PRC investors are
exempt from any PRC withholding tax. In addition, under
currently effective PRC laws, any dividends payable, or
distributions made, by us to holders or beneficial owners of our
ADSs will not be subject to any PRC tax, provided that such
holders or beneficial owners, including individuals and
enterprises, are not deemed to be PRC residents under the PRC
tax law and have not become subject to PRC tax.
On March 16, 2007, the National Peoples Congress
approved and promulgated a new tax law named Enterprise
Income Tax Law of the PRC, or the EIT Law, which will take
effect beginning January 1, 2008. Under the EIT Law,
enterprises established under the laws of non-PRC jurisdictions
but whose de facto management body is located in the
PRC are considered resident enterprises for PRC tax
purposes. The EIT Law does not define the term de facto
management, and it is currently unclear under which
situation a non- PRC enterprises de facto management
body is considered to be located in the PRC. However,
substantially all of our management is currently based in the
PRC, and may remain in the PRC after the effectiveness of the
EIT Law. If we are treated as a resident enterprise
for PRC tax purposes, we will be subject to PRC income tax on
our worldwide income at a uniform tax rate of 25%, which will
include the dividend income we receive from our subsidiaries. In
addition, although the EIT Law provides that dividend income
between qualified resident enterprises is exempted
income, it is unclear what is considered to be a qualified
resident enterprise under the EIT Law.
Moreover, the EIT Law provides that an income tax rate of 10%
will normally be applicable to dividends payable to non-PRC
investors who are non-resident enterprise, to the
extent such dividends are derived from sources within the PRC,
although such income tax may be subsequently exempted or reduced
by the State Council. However, what will constitute income
derived from sources within the PRC and in what circumstances
such income may be exempted or reduced are currently unclear. We
are a Cayman Islands holding company and substantially all of
our income may be derived from dividends we receive from our
operating subsidiaries located in the PRC. Thus, dividends paid
to us by our subsidiaries in China may be subject to the 10%
income tax if we are considered as a non-resident
enterprise under the EIT Law. Further, if we declare
dividends from such income, it is unclear whether such dividends
will be deemed to be derived from sources within the PRC under
the EIT Law and be subject to the 10% income tax. In addition,
under the EIT Law, foreign shareholders and ADS holders may be
subject to a 10% income tax on any gains they realize from the
transfer of their shares or ADSs, if such income is regarded as
income from sources within the PRC.
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United
States Federal Income Taxation
The following discussion describes the material
U.S. federal tax consequences to U.S. Holders (defined
below) under present law of an investment in the ADSs or
ordinary shares. This summary applies only to investors that
hold the ADSs or ordinary shares as capital assets and that have
the U.S. dollar as their functional currency. This
discussion is based on the tax laws of the United States as in
effect on the date of this prospectus and on U.S. Treasury
regulations in effect as of the date of this prospectus, as well
as judicial and administrative interpretations thereof available
on or before such date. All of the foregoing authorities are
subject to change, which change could apply retroactively and
could affect the tax consequences described below.
The following discussion does not deal with the tax consequences
to any particular investor or to persons in special tax
situations such as:
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certain financial institutions;
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insurance companies;
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broker dealers;
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U.S. expatriates;
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traders that elect to mark-to-market;
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tax-exempt entities;
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persons liable for alternative minimum tax;
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persons whose functional currency is not the U.S. dollar;
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persons holding an ADS or ordinary share as part of a straddle,
hedging, conversion or integrated transaction;
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persons that actually or constructively own 10% or more of our
voting stock; or
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persons holding ADSs or ordinary shares through partnerships or
other entities treated as partnerships for U.S. federal
income tax purposes.
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PROSPECTIVE PURCHASERS ARE URGED TO CONSULT THEIR TAX
ADVISORS ABOUT THE APPLICATION OF THE U.S. FEDERAL TAX
RULES TO THEIR PARTICULAR CIRCUMSTANCES AS WELL AS THE
STATE, LOCAL AND FOREIGN TAX CONSEQUENCES TO THEM OF THE
PURCHASE, OWNERSHIP AND DISPOSITION OF ADSs OR ORDINARY
SHARES.
The discussion below of the U.S. federal income tax
consequences to U.S. Holders will apply if you
are a beneficial owner of ADSs or ordinary shares and you are,
for U.S. federal income tax purposes,
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a citizen or resident of the United States;
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a corporation (or other entity taxable as a corporation for
U.S. federal income tax purposes) organized under the laws
of the United States, any state in the United States or the
District of Columbia;
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an estate whose income is subject to U.S. federal income
taxation regardless of its source; or
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a trust that (1) is subject to the primary supervision of a
court within the United States and one or more U.S. persons
have the authority to control all substantial decisions of the
trust or (2) was in existence on August 20, 1996, was
treated as a U.S. person under the Internal Revenue Code on
the previous day and has a valid election in effect under
applicable U.S. Treasury regulations to be treated as a
U.S. person.
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If you are a partner in partnership or other entity taxable as a
partnership that holds ADSs or ordinary shares, your tax
treatment generally will depend on your status and the
activities of the partnership. If you are a partner or
partnership holding ADSs or ordinary shares, you should consult
your own tax advisors.
The U.S. Treasury has expressed concerns that parties to
whom ADSs are released may be taking actions that are
inconsistent with the claiming of foreign tax credits for U.S.
Holders of ADSs. Such actions would also be
121
inconsistent with the claiming of the reduced rate of tax,
described below, applicable to dividends received by certain
non-corporate holders. Accordingly, the analysis of the
creditability of any foreign taxes and the availability of the
reduced tax rate for dividends received by certain non-corporate
holders, each described below, could be affected by actions
taken by parties to whom the ADSs are released.
The discussion below assumes that the representations contained
in the deposit agreement are true and that the obligations in
the deposit agreement and any related agreement will be complied
with in accordance with their terms. If you hold ADSs, you
should be treated as the holder of the underlying ordinary
shares represented by those ADSs for U.S. federal income
tax purposes. Exchanges of ordinary shares for ADSs and ADSs for
ordinary shares generally will not be subject to
U.S. federal income tax.
Taxation
of Dividends and Other Distributions on the ADSs or Ordinary
Shares
Subject to the passive foreign investment company rules
discussed below, the gross amount of any distribution (including
constructive dividends) to you with respect to the ADSs or
ordinary shares generally will be included in your gross income
as dividend income on the date of actual or constructive receipt
by the depositary, in the case of ADSs, or by you, in the case
of ordinary shares, but only to the extent that the distribution
is paid out of our current or accumulated earnings and profits
(as determined under U.S. federal income tax principles).
The dividends will not be eligible for the dividends-received
deduction allowed to corporations in respect of dividends
received from other U.S. corporations.
With respect to certain non-corporate U.S. Holders,
including individual U.S. Holders, for taxable years
beginning before January 1, 2011, dividends may constitute
qualified dividend income and be taxed at the lower
applicable capital gains rate, provided that (1) the ADSs
or ordinary shares are readily tradable on an established
securities market in the United States, (2) we are not a
passive foreign investment company (as discussed below) for
either our taxable year in which the dividend was paid or the
preceding taxable year, and (3) certain holding period
requirements are met. Under Internal Revenue Service authority,
ordinary shares, or ADSs representing such shares, are
considered for the purpose of clause (1) above to be
readily tradable on an established securities market in the
United States if they are listed on the Nasdaq, as our ADSs are.
You should consult your tax advisors regarding the availability
of the lower rate for dividends paid with respect to our ADSs or
ordinary shares.
Dividends will constitute foreign source income for
U.S. foreign tax credit limitation purposes. If the
dividends are qualified dividend income (as discussed above),
the amount of the dividend taken into account for purposes of
calculating the U.S. foreign tax credit limitation will in
general be limited to the gross amount of the dividend,
multiplied by the reduced rate divided by the highest rate of
tax normally applicable to dividends. The limitation on foreign
taxes eligible for credit is calculated separately with respect
to specific classes of income. For this purpose, dividends
distributed by us with respect to the ADSs or ordinary shares
will generally constitute passive category income
but could, in the case of certain U.S. Holders, constitute
general category income.
If PRC withholding taxes apply to dividends paid to you with
respect to the ADSs or ordinary shares, you may be able to
obtain a reduced rate of PRC withholding taxes under the income
tax treaty between the PRC and the United States provided
certain requirements are met. In addition, subject to certain
conditions and limitations, PRC withholding taxes may be treated
as foreign taxes eligible for credit against your
U.S. federal income. Holders should consult their own tax
advisors regarding the applicability of any PRC tax.
To the extent that the amount of the distribution exceeds our
current and accumulated earnings and profits, it will be treated
first as a tax-free return of your tax basis in your ADSs or
ordinary shares, and to the extent the amount of the
distribution exceeds your tax basis, the excess will be taxed as
capital gain. We do not intend to calculate our earnings and
profits under U.S. federal income tax principles.
Therefore, you should expect that any distribution we make will
generally be treated as a dividend.
Taxation
of Disposition of Shares
Subject to the passive foreign investment company rules
discussed below, you will recognize taxable gain or loss on any
sale, exchange or other taxable disposition of an ADS or
ordinary share equal to the difference between the amount
realized for the ADS or ordinary share and your tax basis in the
ADS or ordinary share. The gain or loss
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generally will be capital gain or loss. If you are a
non-corporate U.S. Holder, including an individual
U.S. Holder, who has held the ADS or ordinary share for
more than one year, you will be eligible for reduced tax rates.
The deductibility of capital losses is subject to limitations.
Any such gain or loss that you recognize will generally be
treated as U.S. source income or loss for foreign tax
credit limitation purposes.
Passive
Foreign Investment Company
We do not expect to be a passive foreign investment company, or
PFIC, for U.S. federal income tax purposes for our current
taxable year or the foreseeable future. Our actual PFIC status
for the current taxable year ending December 31, 2007 will
not be determinable until the close of the current taxable year
ending December 31, 2007, and accordingly, there is no
guarantee that we will not be a PFIC for the current taxable
year or any future taxable year. A
non-U.S. corporation
is considered to be a PFIC for any taxable year if either:
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at least 75% of its gross income is passive income; or
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at least 50% of the value of its assets (based on an average of
the quarterly values of the assets during a taxable year) is
attributable to assets that produce or are held for the
production of passive income.
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We will be treated as owning our proportionate share of the
assets and earnings and our proportionate share of the income of
any other corporation in which we own, directly or indirectly,
more than 25% (by value) of the stock.
We must make a separate determination each year as to whether we
are a PFIC. As a result, our PFIC status may change. If we are a
PFIC for any year during which you hold ADSs or ordinary shares,
we generally will continue to be treated as a PFIC for all
succeeding years during which you hold ADSs or ordinary shares.
If we are a PFIC for any taxable year during which you hold ADSs
or ordinary shares, dividends paid by us to you will not be
eligible for the reduced rate of taxation applicable to
non-corporate U.S. holders, including individuals. See
Taxation of Dividends and Other Distributions on
the ADSs or Ordinary Shares. Additionally, you will be
subject to special tax rules with respect to any excess
distribution that you receive and any gain you realize
from a sale or other disposition (including a pledge) of the
ADSs or ordinary shares, unless you make a
mark-to-market election as discussed below.
Distributions you receive in a taxable year that are greater
than 125% of the average annual distributions you received
during the shorter of the three preceding taxable years or your
holding period for the ADSs or ordinary shares will be treated
as an excess distribution. Under these special tax rules:
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the excess distribution or gain will be allocated ratably over
your holding period for the ADSs or ordinary shares;
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the amount allocated to the current taxable year, and any
taxable year prior to the first taxable year in which we became
a PFIC, will be treated as ordinary income; and
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the amount allocated to each other year will be subject to the
highest tax rate in effect for that year and the interest charge
generally applicable to underpayments of tax will be imposed on
the resulting tax attributable to each such year.
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The tax liability for amounts allocated to years prior to the
year of disposition or excess distribution cannot be
offset by any net operating losses for such years, and gains
(but not losses) realized on the sale of the ADSs or ordinary
shares cannot be treated as capital, even if you hold the ADSs
or ordinary shares as capital assets.
Alternatively, a U.S. Holder of marketable
stock (as defined below) in a PFIC may make a
mark-to-market election for such stock of a PFIC to elect out of
the tax treatment discussed in the two preceding paragraphs. If
you make a mark-to-market election for the ADSs or ordinary
shares, you will include in income each year an amount equal to
the excess, if any, of the fair market value of the ADSs or
ordinary shares as of the close of your taxable year over your
adjusted basis in such ADSs or ordinary shares. You are allowed
a deduction for the excess, if any, of the adjusted basis of the
ADSs or ordinary shares over their fair market value as of the
close of the taxable year. However, deductions are allowable
only to the extent of any net mark-to-market gains on the ADSs
or ordinary shares included in your income for prior taxable
years. Amounts included in your income under a mark-to-market
election, as well as gain on the actual sale or other
disposition of the ADSs or ordinary shares, are treated as
ordinary
123
income. Ordinary loss treatment also applies to the deductible
portion of any mark-to-market loss on the ADSs or ordinary
shares, as well as to any loss realized on the actual sale or
disposition of the ADSs or ordinary shares, to the extent that
the amount of such loss does not exceed the net mark-to-market
gains previously included for such ADSs or ordinary shares. Your
basis in the ADSs or ordinary shares will be adjusted to reflect
any such income or loss amounts. The tax rules that apply to
distributions by corporations that are not PFICs would apply to
distributions by us.
The mark-to-market election is available only for
marketable stock, which is stock that is regularly
traded in other than de minimis quantities on at least
15 days during each calendar quarter on a qualified
exchange, including the Nasdaq, or other market, as defined in
applicable U.S. Treasury regulations. The ADSs are listed
on the Nasdaq, and we expect that they will be regularly traded
on the Nasdaq. Consequently, if you are a holder of ADSs, the
mark-to-market election should be available to you were we to be
or become a PFIC.
In addition, notwithstanding any election you make with regard
to the ADSs or ordinary shares, dividends that you receive from
us will not constitute qualified dividend income to you if we
are a PFIC either in the taxable year of the distribution or the
preceding taxable year. Moreover, your ADSs or ordinary shares
will be treated as stock in a PFIC if we were a PFIC at any time
during your holding period in your ADSs or ordinary shares, even
if we are not currently a PFIC. For purposes of this rule, if
you make a mark-to-market election with respect to your ADSs or
ordinary shares, you will be treated as having a new holding
period in your ADSs or ordinary shares beginning on the first
day of the first taxable year beginning after the last taxable
year for which the mark-to-market election applies. Dividends
that you receive that do not constitute qualified dividend
income are not eligible for taxation at the 15% maximum rate
applicable to qualified dividend income. Instead, you must
include the gross amount of any such dividend paid by us out of
our accumulated earnings and profits (as determined for United
States federal income tax purposes) in your gross income, and it
will be subject to tax at rates applicable to ordinary income.
If you hold ADSs or ordinary shares in any year in which we are
a PFIC, you will be required to file Internal Revenue Service
Form 8621 regarding distributions received on the ADSs or
ordinary shares and any gain realized on the disposition of the
ADSs or ordinary shares.
In addition, we do not intend to prepare or provide you with the
information necessary to make a qualified electing
fund election.
You are urged to consult your tax advisor regarding the
application of the PFIC rules to your investment in ADSs or
ordinary shares.
Information
Reporting and Backup Withholding
Dividend payments with respect to ADSs or ordinary shares and
proceeds from the sale, exchange or redemption of ADSs or
ordinary shares may be subject to information reporting to the
Internal Revenue Service and possible U.S. backup
withholding at a current rate of 28%. Backup withholding will
not apply, however, if you are a corporation or a
U.S. Holder who furnishes a correct taxpayer identification
number and makes any other required certification or if you are
otherwise exempt from backup withholding. If you are a
U.S. Holder who is required to establish exempt status, you
generally must provide such certification on Internal Revenue
Service
Form W-9.
U.S. Holders should consult their tax advisors regarding
the application of the U.S. information reporting and
backup withholding rules.
Backup withholding is not an additional tax. Amounts withheld as
backup withholding may be credited against your
U.S. federal income tax liability, and you may obtain a
refund of any excess amounts withheld under the backup
withholding rules by filing the appropriate claim for refund
with the Internal Revenue Service and furnishing any required
information in a timely manner.
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ENFORCEABILITY
OF CIVIL LIABILITIES
We are incorporated in the Cayman Islands to take advantage of
certain benefits associated with being a Cayman Islands exempted
company, such as:
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political and economic stability;
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an effective judicial system;
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a favorable tax system;
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the absence of exchange control or currency
restrictions; and
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the availability of professional and support services.
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However, certain disadvantages accompany incorporation in the
Cayman Islands. These disadvantages include:
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the Cayman Islands has a less developed body of securities laws
as compared to the United States and provides significantly less
protection to investors; and
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Cayman Islands companies may not have standing to sue before the
federal courts of the United States.
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Our constituent documents do not contain provisions requiring
that disputes, including those arising under the securities laws
of the United States, between us, our officers, directors and
shareholders, be arbitrated.
Substantially all of our current operations are conducted in
China, and substantially all of our assets are located in China.
A majority of our directors and officers are nationals or
residents of jurisdictions other than the United States, and a
substantial portion of their assets are located outside the
United States. As a result, it may be difficult for a
shareholder to effect service of process within the United
States upon such persons, or to enforce against us or them
judgments obtained in United States courts, including judgments
predicated upon the civil liability provisions of the securities
laws of the United States or any state in the United States.
We have appointed CT Corporation System, 111 Eighth Avenue, New
York, NY 10011, as our agent to receive service of process with
respect to any action brought against us in the United States
District Court for the Southern District of New York under the
federal securities laws of the United States or of any state in
the United States or any action brought against us in the
Supreme Court of the State of New York in the County of New York
under the securities laws of the State of New York.
Maples and Calder, our counsel as to Cayman Islands law, and
Grandall Legal Group, our counsel as to PRC law, have advised
us, respectively, that there is uncertainty as to whether the
courts of the Cayman Islands and the PRC, respectively, would:
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recognize or enforce judgments of United States courts obtained
against us or our directors or officers predicated upon the
civil liability provisions of the securities laws of the United
States or any state in the United States; or
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entertain original actions brought in each respective
jurisdiction against us or our directors or officers predicated
upon the securities laws of the United States or any state in
the United States.
|
Maples and Calder has further advised us that a final and
conclusive judgment in the federal or state courts of the United
States under which a sum of money is payable, other than a sum
payable in respect of taxes, fines, penalties or similar
charges, may be subject to enforcement proceedings as a debt in
the courts of the Cayman Islands under the common law doctrine
of obligation.
Grandall Legal Group has advised us further that the recognition
and enforcement of foreign judgments are provided for under the
PRC Civil Procedures Law. PRC courts may recognize and enforce
foreign judgments in accordance with the requirements of the PRC
Civil Procedures Law based either on treaties between the PRC
and the country where the judgment is made or on reciprocity
between jurisdictions.
125
Under the terms and subject to the conditions in an underwriting
agreement (the underwriting agreement) dated the
date of this prospectus, Morgan Stanley & Co.
Incorporated, the underwriter, has agreed to
purchase, and an affiliate of the ADS purchaser has agreed to
sell,
of our ADSs in this offering.
Under the terms of the share issuance and repurchase agreement,
we will issue ADSs in this offering to the ADS purchaser against
payment of the par value of the underlying ordinary shares,
equal to US$0.0005 per ADS, subject to our right to repurchase
an equal number of our ADSs for the same price per share. Morgan
Stanley is offering to sell the purchased ADSs to facilitate
transactions by which investors in our convertible notes may
hedge their investments.
The underwriter is offering the ADSs subject to its acceptance
of the ADSs and subject to prior sale. The underwriting
agreement provides that the obligations of the underwriter to
pay for and accept delivery of the ADSs offered by this
prospectus are subject to the approval of certain legal matters
by its counsel and to certain other conditions. The underwriter
is obligated to take and pay for all of the ADSs offered by this
prospectus if any such ADSs are taken. However, the underwriter
is not required to take or pay for the ADSs covered by the
underwriters over-allotment option described below.
The underwriter initially proposes to offer part of the ADSs
directly to the public at the offering price shown on the cover
page of this prospectus and part to certain dealers. After the
initial offering of the ADSs, the offering price and other
selling terms may from time to time be varied by the underwriter.
The ADS purchaser has granted to the underwriter an option,
exercisable when and if the ADS purchaser exercises its option
under the share issuance and repurchase agreement, to purchase
for US$0.0005 per ADS up
to
additional ADSs solely to cover over-allotments.
Morgan Stanley has informed us that it intends to use the short
position created by the repurchase provisions of the share
issuance and repurchase agreement and the concurrent sale of the
purchased ADSs in this offering to facilitate transactions by
which investors in our convertible notes may hedge their
investments through privately negotiated transactions. See
Description of Share Issuance and Repurchase Agreement and
Concurrent Offering of Our Convertible Notes. Morgan
Stanley will determine the offering price of the ADSs offered
pursuant to this prospectus by initially soliciting indications
of interest from potential purchasers of our ADSs and conducting
customary negotiations with those potential purchasers during
the offering period. The price at which investors in our
convertible notes establish their short positions through Morgan
Stanley will be the offering price of the ADSs offered hereby.
As a result, during the offering period, Morgan Stanley will
negotiate a purchase price with buyers of the ADSs, and will
solicit indications of interest, based on the purchase price
being negotiated with those potential buyers, from convertible
note investors seeking to establish a short position in our
ADSs. Morgan Stanley will establish a clearing price
at which purchasers are willing to buy the ADSs offered hereby
and investors in our convertible notes are willing to establish
short positions. The clearing price will be the offering price
hereunder, and is likely to be at a discount to the market price
of our ADSs at the time the offering is commenced.
In connection with facilitating such transactions, Morgan
Stanley expects to receive customary negotiated fees from
investors in our convertible notes, which may be deemed to be
underwriters compensation. These fees will not exceed 2.5%
of the aggregate offering price of the ADSs offered hereby.
We will not receive any proceeds from the sale of ADSs pursuant
to this offering, but we will receive the nominal value of
US$0.0005 per ADS from the ADS purchaser. The expenses of this
offering and the concurrent private placement of our convertible
notes that are payable by us are estimated to be
US$
(excluding underwriting discounts and commissions payable in
connection with the concurrent private placement of our
convertible notes), including SEC registration fees of
US$
, Financial Industry Regulatory Authority filing fees of
US$
, printing expenses of approximately
US$
, legal fees of approximately
US$
, accounting fees of approximately
US$
, and travel and other out-of-pocket expenses of approximately
US$
. All amounts are estimated except for the fees relating to the
SEC registration and the Financial Industry Regulatory Authority
filing.
Our ADSs are listed on The Nasdaq Global Market under the symbol
SOLF.
126
We and all of our directors and officers have agreed that,
without the prior written consent of the underwriter, we and
they will not, during the period ending 90 days after the
date of this prospectus:
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offer, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell,
grant any option, right or warrant to purchase lend or otherwise
transfer or dispose of, directly or indirectly, any of our
ordinary shares, ADSs or any securities convertible into or
exercisable or exchangeable for our ordinary shares or ADSs;
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file any registration statement with the Securities and Exchange
Commission relating to the offering of any of our ordinary
shares, ADSs or any securities convertible into or exercisable
or exchangeable for our ordinary shares or ADSs; or
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enter into any swap or other arrangement that transfers to
another, in whole or in part, any of the economic consequences
of ownership of our ordinary shares or ADSs,
|
whether any such transaction described above is to be settled by
delivery of our ordinary shares, ADSs or such other securities,
in cash or otherwise. In addition, we and each such person
agrees that, without the prior written consent of the
underwriter, it will not, during the period ending 90 days
after the date of this prospectus, make any demand for, or
exercise any right with respect to, the registration of any of
our ordinary shares, ADSs or any security convertible into or
exercisable or exchangeable for our ordinary shares or ADSs.
The restrictions described in the immediately preceding
paragraph do not apply to:
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a share repurchase program by us for our ADSs;
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the sale of ADSs hereunder and the share issuance and repurchase
agreement;
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|
the sale by us of the convertible notes in the concurrent
private placement;
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|
the issuance by us of ADSs, and the underlying ordinary shares,
upon the exercise of an option or a warrant or the conversion of
a security outstanding on the date of the underwriting agreement
of which the underwriter has been advised in writing;
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grants by us of employee stock options or other equity-based
compensation pursuant to the terms of a plan in effect on the
date of the underwriting agreement;
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transfers by any person other than us to an affiliate of such
person, a family member of such person or a trust created for
the benefit of such person or family member, provided that any
transferee agrees to be bound by the transfer restrictions
described here and subject to certain other conditions; and
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transactions by any person other than us relating to our
ordinary shares, ADSs or other securities acquired in open
market transactions after the completion of the offering of the
ADSs.
|
The 90 day restricted period described in the preceding
paragraph will be extended if:
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during the last 17 days of the 90 day restricted
period we issue an earnings release or material news event
relating to us occurs, or
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|
prior to the expiration of the 90 day restricted period, we
announce that we will release earnings results during the
16 day period beginning on the last day of the 90 day
period,
|
in which case the restrictions described in the preceding
paragraph will continue to apply until the expiration of the
18 day period beginning on the issuance of the earnings
release or the occurrence of the material news or material event.
In order to facilitate the offering of the ADSs, the underwriter
may engage in transactions that stabilize, maintain or otherwise
affect the price of the ADSs. Specifically, the underwriter may
sell more ADSs than it is obligated to purchase under the
underwriting agreement, creating a short position. A short sale
is covered if the short position is no greater than the number
of ADSs available for purchase by the underwriter under the
over-allotment option. The underwriter can close out a covered
short sale by exercising the over-allotment option or purchasing
ADSs in the open market. In determining the source of shares to
close out a covered short sale, the underwriter will
127
consider, among other things, the open market price of ADSs
compared to the price available under the over-allotment option.
The underwriter may also sell ADSs in excess of the
over-allotment option, creating a naked short position. The
underwriter must close out any naked short position by
purchasing ADSs in the open market. A naked short position is
more likely to be created if the underwriter is concerned that
there may be downward pressure on the price of the ADSs in the
open market after pricing that could adversely affect investors
who purchase in this offering. As an additional means of
facilitating this offering, the underwriter may bid for, and
purchase, ADSs in the open market to stabilize the price of the
ADSs. These activities may raise or maintain the market price of
the ADSs above independent market levels or prevent or retard a
decline in the market price of the ADSs. The underwriter may
also engage in passive market making in accordance with
Regulation M under the Exchange Act. In passive market
making, market makers in the shares who are underwriters or
prospective underwriters may, subject to limitations, make bids
for or purchase shares until the time, if any, at which a
stabilization bid is made. The underwriter is not required to
engage in these activities and may end any of these activities
at any time.
We cannot assure you that prices at which our ADSs sell in the
public market after this offering will not be lower than the
offering price.
We and Morgan Stanley have agreed to indemnify each other
against certain liabilities, including liabilities under the
Securities Act.
Because Morgan Stanley is receiving all of the proceeds of this
offering, this offering is being conducted in accordance with
NASD Rule 2710(h) of the Financial Industry Regulatory
Authority, or FINRA. Because a bona fide independent market
exists for our ADSs, the FINRA does not require that we use a
qualified independent underwriter for this offering.
128
The validity of the ADSs and certain other legal matters as to
the United States Federal and New York State law in connection
with this offering will be passed upon for us by
Shearman & Sterling LLP. The underwriters are being
represented by Davis Polk & Wardwell with respect to
matters of United States Federal and New York State law.
The validity of the ordinary shares represented by the ADSs
offered in this offering and certain other legal matters as to
Cayman Islands law will be passed upon for us by Maples and
Calder. Legal matters as to PRC law will be passed upon for us
by Grandall Legal Group. Shearman & Sterling LLP may
rely upon Maples and Calder with respect to matters governed by
Cayman Islands law and Grandall Legal Group with respect to
matters governed by PRC law.
129
The consolidated financial statements of Solarfun Power Holdings
Co., Ltd. as of December 31, 2005 and 2006, and for the
period from August 27, 2004 (date of inception) to
December 31, 2004, and the years ended December 31,
2005 and 2006 appearing in this prospectus and registration
statement have been audited by Ernst & Young Hua Ming,
an independent registered public accounting firm, as set forth
in their report thereon appearing elsewhere herein, and are
included in reliance upon such report given on the authority of
such firm as experts in accounting and auditing.
The offices of Ernst & Young Hua Ming are located at
23/F, The Center, 989 Chang Le Road, Shanghai 200031,
Peoples Republic of China.
130
WHERE
YOU CAN FIND ADDITIONAL INFORMATION
We are currently subject to periodic reporting and other
informational requirements of the Exchange Act as applicable to
foreign private issuers. Accordingly, we are required to file
reports, including annual reports on
Form 20-F,
and other information with the SEC. All information filed with
the SEC can be inspected and copied at the public reference
facilities maintained by the SEC at 100 F Street,
N.E., Washington, D.C. 20549. You can request copies of
these documents upon payment of a duplicating fee, by writing to
the SEC. Please call the SEC at
1-800-SEC-0330
for further information on the operation of the public reference
rooms. Additional information may also be obtained over the
Internet at the SECs website at www.sec.gov.
As a foreign private issuer, we are exempt under the Exchange
Act from, among other things, the rules prescribing the
furnishing and content of proxy statements, and our executive
officers, directors and principal shareholders are exempt from
the reporting and short-swing profit recovery provisions
contained in Section 16 of the Exchange Act. In addition,
we will not be required under the Exchange Act to file periodic
reports and financial statements with the SEC as frequently or
as promptly as U.S. companies whose securities are
registered under the Exchange Act. However, we intend to furnish
the depositary with our annual reports, which will include a
review of operations and annual audited consolidated financial
statements prepared in conformity with U.S. GAAP, and all
notices of shareholders meetings and other reports and
communications that are made generally available to our
shareholders. The depositary will make such notices, reports and
communications available to holders of ADSs and, upon our
written request, will mail to all record holders of ADSs the
information contained in any notice of a shareholders
meeting received by the depositary from us.
131
SOLARFUN
POWER HOLDINGS CO., LTD.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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Page
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Financial Statements
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F-2
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F-3
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F-4
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F-5
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F-6
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F-7 F-38
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INDEX TO
UNAUDITED INTERIM CONSOLIDATED FINANCIAL INFORMATION
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Page
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Unaudited Interim Consolidated Financial information
|
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|
|
|
|
|
F-39
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|
|
F-40
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|
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F-41
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F-42
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F-43 F-56
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F-1
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTNG FIRM
To the Board of Directors and Shareholders
Solarfun Power Holdings Co., Ltd.
We have audited the accompanying consolidated balance sheets of
Solarfun Power Holdings Co., Ltd. (the Company) and
its subsidiaries (together, the Group) as of
December 31, 2005 and 2006, and the related consolidated
statements of operations, changes in shareholders equity
and cash flows for the period from August 27, 2004 (date of
inception) to December 31, 2004, and for the years ended
December 31, 2005 and 2006. These financial statements are
the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. We were not engaged to perform an
audit of the Groups internal control over financial
reporting. Our audits included consideration of internal control
over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of
the Groups internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of the Group at December 31, 2005 and
2006 and the consolidated results of its operations and its cash
flows for the period from August 27, 2004 (date of
inception) to December 31, 2004, and for the years ended
December 31, 2005 and 2006, in conformity with U.S.
generally accepted accounting principles.
/s/ Ernst & Young Hua Ming
Shanghai, The Peoples Republic of China
June 29, 2007
F-2
SOLARFUN
POWER HOLDINGS CO., LTD.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands of Renminbi (RMB) and U.S.
dollar (US$),
except for number of shares and per share data)
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|
|
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|
|
|
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|
|
December 31,
|
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|
|
Note
|
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2005
|
|
|
2006
|
|
|
2006
|
|
|
|
|
|
|
(RMB)
|
|
|
(RMB)
|
|
|
(US$)
|
|
|
|
|
|
|
|
|
|
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|
|
(Unaudited)
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|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
|
|
|
7,054
|
|
|
|
1,137,792
|
|
|
|
151,851
|
|
Restricted cash
|
|
|
|
|
|
|
22,229
|
|
|
|
33,822
|
|
|
|
4,514
|
|
Accounts receivable (net of allowance for doubtful accounts of
RMB11,322,000 as of December 31, 2006 (2005: Nil))
|
|
|
|
|
|
|
|
|
|
|
147,834
|
|
|
|
19,730
|
|
Inventories
|
|
|
3
|
|
|
|
76,819
|
|
|
|
372,504
|
|
|
|
49,715
|
|
Advance to suppliers
|
|
|
4
|
|
|
|
61,312
|
|
|
|
238,178
|
|
|
|
31,788
|
|
Other current assets
|
|
|
5
|
|
|
|
20,705
|
|
|
|
75,525
|
|
|
|
10,080
|
|
Deferred tax assets
|
|
|
19
|
|
|
|
96
|
|
|
|
3,400
|
|
|
|
454
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|
Amount due from related parties
|
|
|
20
|
|
|
|
|
|
|
|
153
|
|
|
|
20
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|
Amount due from shareholders
|
|
|
20
|
|
|
|
|
|
|
|
578
|
|
|
|
78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
|
|
|
|
188,215
|
|
|
|
2,009,786
|
|
|
|
268,230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed assets net
|
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|
6
|
|
|
|
55,146
|
|
|
|
207,449
|
|
|
|
27,686
|
|
Intangible assets net
|
|
|
7
|
|
|
|
|
|
|
|
12,897
|
|
|
|
1,721
|
|
Investments
|
|
|
8
|
|
|
|
|
|
|
|
300
|
|
|
|
40
|
|
Total non-current assets
|
|
|
|
|
|
|
55,146
|
|
|
|
220,646
|
|
|
|
29,447
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
|
|
|
|
243,361
|
|
|
|
2,230,432
|
|
|
|
297,677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES, PREFERENCE SHARES AND SHAREHOLDERS
EQUITY
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term bank borrowings
|
|
|
9
|
|
|
|
20,000
|
|
|
|
379,900
|
|
|
|
50,702
|
|
Long-term bank borrowings, current portion
|
|
|
9
|
|
|
|
|
|
|
|
16,000
|
|
|
|
2,135
|
|
Accounts payable
|
|
|
|
|
|
|
18,794
|
|
|
|
51,452
|
|
|
|
6,867
|
|
Notes payable
|
|
|
10
|
|
|
|
20,000
|
|
|
|
14,020
|
|
|
|
1,871
|
|
Accrued expenses and other liabilities
|
|
|
11
|
|
|
|
22,920
|
|
|
|
33,619
|
|
|
|
4,487
|
|
Customer deposits
|
|
|
13
|
|
|
|
55,319
|
|
|
|
17
|
|
|
|
2
|
|
Amount due to related parties
|
|
|
20
|
|
|
|
32,658
|
|
|
|
24,486
|
|
|
|
3,268
|
|
Amount due to shareholders
|
|
|
20
|
|
|
|
|
|
|
|
7,572
|
|
|
|
1,011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
|
|
|
|
169,691
|
|
|
|
527,066
|
|
|
|
70,343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term bank borrowings, non-current portion
|
|
|
9
|
|
|
|
|
|
|
|
15,000
|
|
|
|
2,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interests
|
|
|
|
|
|
|
|
|
|
|
10,151
|
|
|
|
1,355
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(par value US$0.0001 per share; 400,000,000 and
500,000,000 shares authorized as at December 31, 2005
and 2006, respectively;
50,175,000 shares,100,350,000 shares and
239,994,754 shares issued and outstanding at
December 31, 2004, 2005 and 2006, respectively)
|
|
|
|
|
|
|
84
|
|
|
|
193
|
|
|
|
25
|
|
Additional paid-in capital
|
|
|
|
|
|
|
59,783
|
|
|
|
1,565,524
|
|
|
|
208,937
|
|
Statutory reserves
|
|
|
15
|
|
|
|
1,496
|
|
|
|
16,024
|
|
|
|
2,139
|
|
Retained earnings
|
|
|
|
|
|
|
12,307
|
|
|
|
96,474
|
|
|
|
12,876
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
|
|
|
|
73,670
|
|
|
|
1,678,215
|
|
|
|
223,977
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
|
|
|
|
|
243,361
|
|
|
|
2,230,432
|
|
|
|
297,677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
F-3
SOLARFUN
POWER HOLDINGS CO., LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands of Renminbi (RMB) and U.S.
dollar (US$),
except for number of shares and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
from August 27,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 (Date
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of Inception) to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
For the Year Ended December 31,
|
|
|
|
Note
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
|
|
|
|
|
(RMB)
|
|
|
(RMB)
|
|
|
(RMB)
|
|
|
(US$)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Photovoltaic modules
|
|
|
|
|
|
|
|
|
|
|
165,636
|
|
|
|
604,317
|
|
|
|
80,653
|
|
Photovoltaic cells
|
|
|
|
|
|
|
|
|
|
|
542
|
|
|
|
7,182
|
|
|
|
959
|
|
Photovoltaic cells processing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,408
|
|
|
|
2,590
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
|
|
|
|
|
|
|
|
|
166,178
|
|
|
|
630,907
|
|
|
|
84,202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Photovoltaic modules
|
|
|
|
|
|
|
|
|
|
|
(139,481
|
)
|
|
|
(434,493
|
)
|
|
|
(57,988
|
)
|
Photovoltaic cells
|
|
|
|
|
|
|
|
|
|
|
(422
|
)
|
|
|
(5,983
|
)
|
|
|
(799
|
)
|
Photovoltaic cells processing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,054
|
)
|
|
|
(808
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
|
|
|
|
|
|
|
|
|
(139,903
|
)
|
|
|
(446,530
|
)
|
|
|
(59,595
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
|
|
|
|
|
|
|
26,275
|
|
|
|
184,377
|
|
|
|
24,607
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling expenses
|
|
|
|
|
|
|
|
|
|
|
(5,258
|
)
|
|
|
(11,883
|
)
|
|
|
(1,586
|
)
|
General and administrative expenses
|
|
|
16
|
|
|
|
(629
|
)
|
|
|
(4,112
|
)
|
|
|
(52,214
|
)
|
|
|
(6,969
|
)
|
Research and development expenses
|
|
|
|
|
|
|
|
|
|
|
(750
|
)
|
|
|
(6,523
|
)
|
|
|
(870
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
|
|
|
|
(629
|
)
|
|
|
(10,120
|
)
|
|
|
(70,620
|
)
|
|
|
(9,425
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) profit
|
|
|
|
|
|
|
(629
|
)
|
|
|
16,155
|
|
|
|
113,757
|
|
|
|
15,182
|
|
Interest expenses
|
|
|
|
|
|
|
|
|
|
|
(123
|
)
|
|
|
(8,402
|
)
|
|
|
(1,121
|
)
|
Interest income
|
|
|
|
|
|
|
22
|
|
|
|
95
|
|
|
|
1,326
|
|
|
|
177
|
|
Exchange losses
|
|
|
|
|
|
|
|
|
|
|
(1,768
|
)
|
|
|
(4,346
|
)
|
|
|
(580
|
)
|
Other income
|
|
|
|
|
|
|
|
|
|
|
215
|
|
|
|
902
|
|
|
|
120
|
|
Other expenses
|
|
|
|
|
|
|
|
|
|
|
(260
|
)
|
|
|
(836
|
)
|
|
|
(112
|
)
|
Changes in fair value of embedded foreign currency derivatives
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
(163
|
)
|
|
|
(22
|
)
|
Government grant
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
852
|
|
|
|
114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes and minority interest
|
|
|
|
|
|
|
(607
|
)
|
|
|
14,314
|
|
|
|
103,090
|
|
|
|
13,758
|
|
Income tax benefit
|
|
|
19
|
|
|
|
|
|
|
|
96
|
|
|
|
3,132
|
|
|
|
418
|
|
Minority interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(301
|
)
|
|
|
(40
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
|
|
|
|
|
(607
|
)
|
|
|
14,410
|
|
|
|
105,921
|
|
|
|
14,136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to ordinary shareholders
|
|
|
|
|
|
|
(607
|
)
|
|
|
14,410
|
|
|
|
98,695
|
|
|
|
13,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
25
|
|
|
|
(0.01
|
)
|
|
|
0.26
|
|
|
|
0.95
|
|
|
|
0.13
|
|
Diluted
|
|
|
25
|
|
|
|
(0.01
|
)
|
|
|
0.22
|
|
|
|
0.74
|
|
|
|
0.10
|
|
Shares used in computation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net (loss) income per share
|
|
|
25
|
|
|
|
51,994,399
|
|
|
|
54,511,540
|
|
|
|
103,631,832
|
|
|
|
103,631,832
|
|
Diluted net (loss) income per share
|
|
|
25
|
|
|
|
51,994,399
|
|
|
|
66,366,469
|
|
|
|
142,108,460
|
|
|
|
142,108,460
|
|
Net (loss) income per ADS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
25
|
|
|
|
(0.05
|
)
|
|
|
1.32
|
|
|
|
4.76
|
|
|
|
0.64
|
|
Diluted
|
|
|
25
|
|
|
|
(0.05
|
)
|
|
|
1.09
|
|
|
|
3.72
|
|
|
|
0.50
|
|
Shares used in computation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net (loss) income per ADS
|
|
|
25
|
|
|
|
10,398,880
|
|
|
|
10,902,308
|
|
|
|
20,726,366
|
|
|
|
20,726,366
|
|
Diluted net (loss) income per ADS
|
|
|
25
|
|
|
|
10,398,880
|
|
|
|
13,273,294
|
|
|
|
28,421,692
|
|
|
|
28,421,692
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
F-4
SOLARFUN
POWER HOLDINGS CO., LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands of Renminbi (RMB) and U.S.
dollar (US$))
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
from August 27,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 (Date
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of Inception) to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
For the Year Ended December 31,
|
|
|
|
Note
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
|
|
|
|
|
(RMB)
|
|
|
(RMB)
|
|
|
(RMB)
|
|
|
(US$)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to holders of ordinary shares
|
|
|
|
|
|
|
(607
|
)
|
|
|
14,410
|
|
|
|
98,695
|
|
|
|
13,172
|
|
Dividends on Series A redeemable convertible preferred
shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,226
|
|
|
|
964
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
|
|
|
|
|
(607
|
)
|
|
|
14,410
|
|
|
|
105,921
|
|
|
|
14,136
|
|
Adjustments to reconcile net (loss) income to net cash used in
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
301
|
|
|
|
40
|
|
Depreciation and amortization
|
|
|
|
|
|
|
3
|
|
|
|
781
|
|
|
|
6,562
|
|
|
|
876
|
|
Stock compensation expenses
|
|
|
16,17
|
|
|
|
|
|
|
|
501
|
|
|
|
25,307
|
|
|
|
3,378
|
|
Provision for doubtful receivables
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,323
|
|
|
|
1,511
|
|
Deferred tax benefit
|
|
|
19
|
|
|
|
|
|
|
|
(96
|
)
|
|
|
(3,304
|
)
|
|
|
(441
|
)
|
Warranty provision
|
|
|
|
|
|
|
|
|
|
|
1,520
|
|
|
|
6,030
|
|
|
|
805
|
|
Others
|
|
|
|
|
|
|
|
|
|
|
70
|
|
|
|
197
|
|
|
|
26
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash
|
|
|
|
|
|
|
|
|
|
|
(22,229
|
)
|
|
|
(11,593
|
)
|
|
|
(1,547
|
)
|
Accounts receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(159,157
|
)
|
|
|
(21,241
|
)
|
Inventories
|
|
|
|
|
|
|
(4,511
|
)
|
|
|
(72,308
|
)
|
|
|
(295,685
|
)
|
|
|
(39,463
|
)
|
Advance to suppliers
|
|
|
|
|
|
|
(4,850
|
)
|
|
|
(56,462
|
)
|
|
|
(176,866
|
)
|
|
|
(23,605
|
)
|
Other current assets
|
|
|
|
|
|
|
(762
|
)
|
|
|
(19,943
|
)
|
|
|
(54,820
|
)
|
|
|
(7,316
|
)
|
Amount due from related parties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,889
|
|
|
|
3,856
|
|
Accounts payable
|
|
|
|
|
|
|
2,221
|
|
|
|
16,573
|
|
|
|
26,678
|
|
|
|
3,560
|
|
Accrued expenses and other liabilities
|
|
|
|
|
|
|
301
|
|
|
|
2,928
|
|
|
|
22,458
|
|
|
|
2,997
|
|
Amount due to related parties
|
|
|
|
|
|
|
25
|
|
|
|
2,354
|
|
|
|
|
|
|
|
|
|
Customer deposits
|
|
|
|
|
|
|
|
|
|
|
55,319
|
|
|
|
(55,302
|
)
|
|
|
(7,381
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
|
|
|
|
(8,180
|
)
|
|
|
(76,582
|
)
|
|
|
(523,061
|
)
|
|
|
(69,809
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of fixed assets
|
|
|
|
|
|
|
(295
|
)
|
|
|
(37,464
|
)
|
|
|
(177,872
|
)
|
|
|
(23,739
|
)
|
Acquisition of intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,988
|
)
|
|
|
(1,733
|
)
|
Investment in affiliate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(300
|
)
|
|
|
(40
|
)
|
Proceeds from disposal of fixed assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,113
|
|
|
|
148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
|
|
|
|
(295
|
)
|
|
|
(37,464
|
)
|
|
|
(190,047
|
)
|
|
|
(25,364
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital contributed by minority interest shareholder
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,850
|
|
|
|
1,314
|
|
Net proceeds from issuance of preference shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
420,028
|
|
|
|
56,057
|
|
Net proceeds from issuance of ordinary shares
|
|
|
|
|
|
|
30,000
|
|
|
|
29,296
|
|
|
|
1,060,515
|
|
|
|
141,538
|
|
Proceeds from short-term borrowings
|
|
|
|
|
|
|
|
|
|
|
20,000
|
|
|
|
475,720
|
|
|
|
63,490
|
|
Payment of short-term borrowings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(99,820
|
)
|
|
|
(13,322
|
)
|
Proceeds from long-term borrowings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,000
|
|
|
|
2,002
|
|
Utilization of notes payables
|
|
|
10
|
|
|
|
|
|
|
|
20,000
|
|
|
|
|
|
|
|
|
|
Payment of notes payables
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
(7,226
|
)
|
|
|
(964
|
)
|
Advances to related parties
|
|
|
20
|
|
|
|
(18,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of advances to related parties
|
|
|
20
|
|
|
|
|
|
|
|
18,000
|
|
|
|
|
|
|
|
|
|
Advances from related parties
|
|
|
20
|
|
|
|
|
|
|
|
146,400
|
|
|
|
114,900
|
|
|
|
15,335
|
|
Repayment of advances from related parties
|
|
|
20
|
|
|
|
|
|
|
|
(116,121
|
)
|
|
|
(145,121
|
)
|
|
|
(19,368
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
|
|
|
|
12,000
|
|
|
|
117,575
|
|
|
|
1,843,846
|
|
|
|
246,082
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
|
|
|
|
3,525
|
|
|
|
3,529
|
|
|
|
1,130,738
|
|
|
|
150,910
|
|
Cash and cash equivalents at the beginning of period/year
|
|
|
|
|
|
|
|
|
|
|
3,525
|
|
|
|
7,054
|
|
|
|
941
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at the end of period/ year
|
|
|
|
|
|
|
3,525
|
|
|
|
7,054
|
|
|
|
1,137,792
|
|
|
|
151,851
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
|
|
|
|
|
|
|
|
|
123
|
|
|
|
8,048
|
|
|
|
1,074
|
|
Supplemental schedule of non-cash activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of fixed assets included in accrued expenses and
other liabilities
|
|
|
|
|
|
|
33
|
|
|
|
18,171
|
|
|
|
|
|
|
|
|
|
Expense paid by a shareholder on behalf of the Group
|
|
|
20
|
|
|
|
|
|
|
|
70
|
|
|
|
|
|
|
|
|
|
Stock compensation expense
|
|
|
16,17
|
|
|
|
|
|
|
|
501
|
|
|
|
25,307
|
|
|
|
3,378
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
F-5
SOLARFUN
POWER HOLDINGS CO., LTD.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS
EQUITY
(Amounts in thousands of Renminbi (RMB) and U.S.
dollar (US$),
except for number of shares)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Retained
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
Ordinary
|
|
|
Ordinary
|
|
|
Paid-in
|
|
|
Statutory
|
|
|
Earnings
|
|
|
Put
|
|
|
Shareholders
|
|
|
|
Note
|
|
|
Shares
|
|
|
Shares
|
|
|
Capital
|
|
|
Reserves
|
|
|
(Deficits)
|
|
|
Options
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
(RMB)
|
|
|
(RMB)
|
|
|
(RMB)
|
|
|
(RMB)
|
|
|
(RMB)
|
|
|
(RMB)
|
|
|
Balance as of August 27, 2004 (date of inception)
|
|
|
|
|
|
|
50,175,000
|
|
|
|
42
|
|
|
|
29,958
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,000
|
|
Net loss for the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(607
|
)
|
|
|
|
|
|
|
(607
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2004
|
|
|
|
|
|
|
50,175,000
|
|
|
|
42
|
|
|
|
29,958
|
|
|
|
|
|
|
|
(607
|
)
|
|
|
|
|
|
|
29,393
|
|
Stock compensation expenses
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
501
|
|
Expenses paid on behalf of the Group by a shareholder
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70
|
|
Proceeds from issuance of common stock
|
|
|
|
|
|
|
50,175,000
|
|
|
|
42
|
|
|
|
29,254
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,296
|
|
Net income for the year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,410
|
|
|
|
|
|
|
|
14,410
|
|
Appropriation of statutory reserves
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,496
|
|
|
|
(1,496
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2005
|
|
|
|
|
|
|
100,350,000
|
|
|
|
84
|
|
|
|
59,783
|
|
|
|
1,496
|
|
|
|
12,307
|
|
|
|
|
|
|
|
73,670
|
|
Stock compensation expenses
|
|
|
14,16
|
|
|
|
|
|
|
|
|
|
|
|
22,425
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,425
|
|
Share-based compensation
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
2,882
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,882
|
|
Acquisition of put option
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
668
|
|
|
|
668
|
|
Exercise of put option
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(668
|
)
|
|
|
(668
|
)
|
Proceeds from issuance of common stock upon IPO
|
|
|
|
|
|
|
60,000,000
|
|
|
|
47
|
|
|
|
1,060,468
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,060,515
|
|
Conversion of preference shares
|
|
|
14
|
|
|
|
79,644,754
|
|
|
|
62
|
|
|
|
419,966
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
420,028
|
|
Net income for the year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
105,921
|
|
|
|
|
|
|
|
105,921
|
|
Cumulative dividends preference shares
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,226
|
)
|
|
|
|
|
|
|
(7,226
|
)
|
Appropriation of statutory reserves
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,528
|
|
|
|
(14,528
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2006
|
|
|
|
|
|
|
239,994,754
|
|
|
|
193
|
|
|
|
1,565,524
|
|
|
|
16,024
|
|
|
|
96,474
|
|
|
|
|
|
|
|
1,678,215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2006, in US$ (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
25
|
|
|
|
208,937
|
|
|
|
2,139
|
|
|
|
12,876
|
|
|
|
|
|
|
|
223,977
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
F-6
SOLARFUN
POWER HOLDINGS CO., LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the
period from August 27, 2004 (date of inception) to
December 31, 2004,
For the years ended December 31, 2005 and 2006
|
|
1.
|
ORGANIZATION
AND BASIS OF PRESENTATION
|
Jiangsu Linyang Solarfun Co., Ltd. (Linyang
Solarfun), a company established in the Peoples
Republic of China (the PRC) on August 27, 2004,
is engaged in the development, manufacturing and sales of
photovoltaic (PV) products to customers in the PRC
and overseas markets. On June 2, 2006, the shareholders of
Linyang Solarfun transferred their entire equity interest in
Linyang Solarfun in exchange for all the shares in Linyang Solar
Power Investment Holding Ltd. (Linyang Solar Power),
a British Virgin Islands company, on a pro-rata basis. As a
result of the exchange, the shareholders respective
interest in Linyang Solar Power was identical to their
respective interest in Linyang Solarfun immediately prior to the
share exchange. The share exchange was accounted for at
historical cost.
On June 12, 2006, the shareholders of Linyang Solar Power
transferred their entire equity interest in Linyang Solar Power
in exchange, on a pro-rata basis, for all the shares in Solarfun
Power Holdings Co., Ltd. (the Company), a Cayman
Islands company. As a result of the exchange, the
shareholders respective interest in the Company was
identical to their respective interest in Linyang Solar Power
immediately prior to the share exchange. The Company accounted
for the issuance of shares in connection with this transaction
as a reorganization of entities under common control in a manner
similar to a pooling-of-interests. Accordingly these financial
statements reflect the financial position and operating results
of the Company and its subsidiaries (together, the
Group) as if the above transactions were completed
on August 27, 2004 (date of inception). All share and per
share data presented have been presented to give retroactive
effect to these exchanges.
On December 20, 2006, the Company completed its initial
public offering of 12,000,000 American Depositary Shares
(ADS) at US$12.5 per ADS. Each ADS comprises five
ordinary shares. The net proceeds to the Company from the
offering amounted to RMB1,060,515,000 (US$141,537,876) net of
issuance costs paid and payable.
As of December 31, 2006, the Companys subsidiaries
include the following entities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Date of
|
|
|
Place of
|
|
|
Percentage of
|
|
|
|
|
|
Incorporation/
|
|
|
Incorporation/
|
|
|
Shareholding/
|
|
|
|
Subsidiary
|
|
Establishment
|
|
|
Establishment
|
|
|
Ownership
|
|
|
Principal Activities
|
|
Linyang Solar Power Investment Holding Ltd.
(Linyang Solar Power)
|
|
|
May 17, 2006
|
|
|
|
British Virgin Islands
|
|
|
|
100
|
%
|
|
Investment holding
|
Jiangsu Linyang Solarfun Co., Ltd.
(Linyang Solarfun)
|
|
|
Aug 27, 2004
|
|
|
|
PRC
|
|
|
|
100
|
%
|
|
Development, manufacturing and sales of PV products
|
Shanghai Linyang Solar Technology Co., Ltd.
(Shanghai Linyang)
|
|
|
March 29, 2006
|
|
|
|
PRC
|
|
|
|
83
|
%
|
|
Research and development, design, and provision services in
solar energy related products
|
Sichuan Leshan Jiayang New Energy Co., Ltd.
(Sichuan Leshan Jiayang)
|
|
|
April 22, 2006
|
|
|
|
PRC
|
|
|
|
55
|
%
|
|
Research and development, manufacturing and sales of solar
energy related products
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In March 2006, the Group injected RMB 4.15 million in
return for an 83% controlling interest in Shanghai Linyang, a
newly established entity in the PRC. The other 17% minority
interest is held by a group of individuals comprising of two
directors of the Company and the spouse of one of the directors.
Shanghai Linyang commenced operation in April 2006.
In April 2006, the Group injected RMB11 million in return
for a 55% controlling interest in Sichuan Leshan Jiayang, a
newly established entity in the PRC. At the same time, an
independent third party injected RMB6 million in return for
a 30% interest. The remaining 15% was subscribed for by an
individual, who at the time was senior manager of Jiangsu
Linyang Electronics Co., Ltd. (Linyang Electronics),
a PRC company whose controlling
F-7
SOLARFUN
POWER HOLDINGS CO., LTD.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
equity holder is also the chairman and significant shareholder
of the Company. The 15% interest was held on behalf of the
chairman of the Company. Sichuan Leshan Jiayang commenced
operation in June 2006.
The consolidated financial statements are prepared in accordance
with U.S. generally accepted accounting principles
(US GAAP).
|
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Principles
of Consolidation
The consolidated financial statements include the financial
statements of the Company and its subsidiaries. All significant
inter-company transactions and balances between the Company and
its subsidiaries are eliminated upon consolidation.
Investments
The Group applies Accounting Principles Board No. 18
The Equity Method of Accounting for Investments in Common
Stock (APB No. 18) in accounting for its
investments. Under APB No. 18, equity method is used for
investments in entities in which the Group has the ability to
exercise significant influence but does not own a majority
equity interest or otherwise controls. Cost method is used for
investments over which the Group does not have the ability to
exercise significant influence.
The Group monitors its investments for other-than-temporary
impairment by considering factors including, but not limited to,
current economic and market conditions, the operating
performance of the investee companies including current earnings
trends and other company-specific information.
Foreign
Currency
The functional currency of the Company and each of its
subsidiaries is RMB as determined based on the criteria of
Statement of Financial Accounting Standard (SFAS)
No. 52 Foreign Currency Translation. The
reporting currency of the Company is also RMB. Transactions
denominated in foreign currencies are remeasured into the
functional currency at the exchange rates prevailing on the
transaction dates. Foreign currency denominated financial assets
and liabilities are remeasured at the balance sheet date
exchange rate. Exchange gains and losses are included in foreign
exchange gains and losses in the consolidated statements of
operations.
Convenience
Translation
Amounts in United States dollars are presented for the
convenience of the reader and are translated at the noon buying
rate of US$1.00 to RMB7.4928 on September 28, 2007 in the
City of New York for cable transfers of RMB as certified for
customs purposes by the Federal Reserve Bank of New York. No
representation is made that the RMB amounts could have been, or
could be, converted into United States dollars at such rate.
Use of
Estimates
The preparation of financial statements in conformity with US
GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the period. Actual results could differ from
these estimates. Significant estimates reflected in the
Companys financial statements include, but are not limited
to, provision for doubtful accounts receivable, provision for
warranty, provision for advances to suppliers, useful lives of
fixed assets, valuation allowance of deferred tax assets and
stock compensation expense.
F-8
SOLARFUN
POWER HOLDINGS CO., LTD.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Cash
and Cash Equivalents
Cash and cash equivalents consist of cash on hand and bank
deposits, which are unrestricted as to withdrawal and use.
Restricted
Cash
Restricted cash represents amounts held by a bank which are not
available for the Groups use as security for letters of
credit facilities, notes payable and PRC Custom deposits. The
restriction on cash is expected to be released within the next
twelve months.
Accounts
Receivable
An allowance for doubtful accounts is recorded in the period in
which collection is determined to be not probable based on an
assessment of specific evidence indicating troubled collection,
historical experience, account balance aging and prevailing
economic conditions. An accounts receivable is charged off after
all collection efforts have ceased. As of December 31,
2006, RMB11,322,000 (equivalent to approximately US$1,511,051)
of specific allowance for doubtful accounts had been provided.
Inventories
Inventories are stated at the lower of cost or market value.
Cost is determined by the weighted average method. Raw material
cost is based on purchase costs while
work-in-progress
and finished goods, comprise direct materials, direct labor and
an allocation of manufacturing overhead costs.
Fixed
Assets
Fixed assets are stated at cost and are depreciated using the
straight-line method over the estimated useful lives of the
assets, as follows:
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|
|
|
|
Buildings
|
|
|
20 years
|
|
Plant and machinery
|
|
|
10 years
|
|
Furniture, fixtures and office equipment
|
|
|
5 years
|
|
Computer software
|
|
|
5 years
|
|
Motor vehicles
|
|
|
5 years
|
|
Repair and maintenance costs are charged to expense when
incurred, whereas the cost of renewals and betterment that
extend the useful life of fixed assets are capitalized as
additions to the related assets. Retirement, sale and disposals
of assets are recorded by removing the cost and accumulated
depreciation with any resulting gain or loss reflected in the
consolidated statements of operations.
Cost incurred in constructing new facilities, including progress
payment, interest and other costs relating to the construction
are capitalized and transferred to fixed assets on completion.
Total interest costs incurred during the period ended
December 31, 2004, the years ended December 31, 2005
and 2006 amounted to approximately RMB Nil, RMB123,000 and
RMB8,756,041 (US$1,168,594) respectively. Interest capitalized
at December 31, 2005 and 2006 amounted to RMB Nil and
RMB354,502 (US$47,312), respectively.
Intangible
Asset
Land use
rights
Land use rights represent amounts paid for the right to use land
in the PRC and are recorded at purchase cost less accumulated
amortization. Amortization is provided on a straight-line basis
over the term of the agreement.
F-9
SOLARFUN
POWER HOLDINGS CO., LTD.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Impairment
of Long-Lived Assets
The Group evaluates its long-lived assets or asset group for
impairment whenever events or changes in circumstances (such as
a significant adverse change to market conditions that will
impact the future use of the assets) indicate that the carrying
amount of a group of long-lived asset may not be recoverable.
When these events occur, the Group evaluates the impairment by
comparing the carrying amount of the assets to future
undiscounted net cash flows expected to result from the use of
the assets and their eventual disposition. If the sum of the
expected undiscounted cash flow is less than the carrying amount
of the assets, the Group would recognize an impairment loss
based on the excess of the carrying amount of the asset group
over its fair value.
Fair
Value of Financial Instruments
The carrying amounts of accounts receivable, accounts and notes
payable, other liabilities, customer deposits, short-term bank
borrowings and amounts due to/from related companies and
shareholders approximate their fair value due to the short-term
maturity of these instruments.
The long-term bank borrowings approximate their fair value since
interest rate approximates market interest rates.
Financial
Instruments Embedded Foreign Currency
Derivative
Certain of the Groups sales contracts are denominated in a
currency which is not the functional currency of either of the
parties to the contract nor the currency in which the products
being sold are routinely denominated in international commerce.
Accordingly, the contracts contain embedded foreign currency
forward contracts subject to bifurcation in accordance with
SFAS No. 133 Accounting for Derivative
Instruments and Hedging Activities. The embedded foreign
currency derivatives are separately accounted for and measured
at fair value with changes in such value recorded to the
statements of operations and reflected in the statements of cash
flows as an operating activity. Embedded foreign currency
derivatives are presented as current assets or liabilities with
the changes in their fair value recorded as a separate line item
in the statements of operations. The Group does not enter into
derivative contracts for speculative purposes and hedge
accounting has not been applied.
Revenue
Recognition
The Groups primary business activity is to produce and
sell PV modules. The Group periodically, upon special request
from customers, sells an insignificant amount of PV cells. The
Group records revenue related to the sale of PV modules or PV
cells when the criteria of Staff Accounting
Bulletin No. 104 Revenue Recognition are
met. These criteria include all of the following: persuasive
evidence of an arrangement exists, delivery has occurred, the
sales price is fixed or determinable and collectibility is
reasonably assured.
More specifically, the Groups sales arrangements are
evidenced by either framework sales agreements
and/or by
individual sales agreements for each transaction. The shipping
terms of the Groups sales arrangements are generally
free-on-board
shipping point whereby the customer takes title and assumes the
risks and rewards of ownership of the products upon delivery to
the shipper. Other than warranty obligations, the Group does not
have any commitments or obligations to deliver additional
products or services to the customers. The product sales price
agreed to at the sales order/ sales agreement date is final and
not subject to adjustment. The Group does not accept sales
returns and does not provide customers with price protection.
Historically, the Groups customers pay a portion of the
product sales price prior to shipment. The Group assesses
customers creditworthiness before accepting sales orders.
Based on the above, the Group records revenue related to product
sales upon delivery of the product to the shipper.
In the event the Group pays the shipping costs for the
convenience of the customer, the shipping costs are included in
the amount billed to the customer. In these cases, sales revenue
includes the amount of shipping costs passed on to the customer.
The Group records the shipping costs incurred as cost of revenue.
F-10
SOLARFUN
POWER HOLDINGS CO., LTD.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Group periodically enters into arrangements to process raw
material into PV cells, the Group views these arrangements as
service arrangements. For these service arrangements, the Group
purchases raw material from a customer and
contemporaneously agrees to sell a specified
quantity of PV cells back to the same customer. The quantity of
PV cells sold back to the customers under these processing
arrangements is consistent with the amount of raw materials
purchased from the customer based on current production
conversion rates. In accordance with Emerging Issues Task Force
(EITF) Issue
No. 04-13,
the Group records the amount of revenue on these processing
transactions based on the amount received for PV cells sold less
the amount paid for the raw materials purchased from the
customer. The revenue recognized is recorded as PV cells
processing revenue and the production costs incurred related to
providing the processing services are recorded as PV cells
processing costs within cost of revenue. These sales are subject
to all of the above-noted accounting policy disclosures relating
to revenue recognition.
Revenue is recognized net of all value-added taxes imposed by
governmental authorities and collected from customers concurrent
with revenue-producing transactions.
Cost
of Revenue
Cost of revenue includes direct and indirect production costs,
as well as shipping and handling costs for products sold.
Research
and Development Costs
Research and development costs are expensed as incurred.
Advertising
Expenditure
Advertising costs are expensed when incurred and are included in
selling expenses. Advertising expenses were RMB Nil
for the period from August 27, 2004 (date of inception) to
December 31, 2004; RMB166,000 and RMB152,000 (US$20,286)
for the years ended December 31, 2005 and 2006.
Warranty
Cost
The Group only provides standard warranty coverage on its PV
modules sold to customers. The standard warranty provides for a
2-year
unlimited warranty against technical defects, a
10-year
warranty against a decline from initial power generation
capacity of more than 10% and a 20 to
25-year
warranty against a decline from initial power generation
capacity of more than 20%. The Group considers various factors
when determining the likelihood of product defects including an
evaluation of its quality controls, technical analysis, industry
information on comparable companies and its own experience.
Based on the above considerations and managements ability
and intention to provide refunds for defective products, the
Group has accrued for warranty costs for the
2-year
unlimited warranty against technical defects based on 1% of
revenue for PV modules. No warranty cost accrual has been
recorded for the
10-year and
20 to
25-year
warranties because the Group has determined the likelihood of
claims arising from these warranties to be remote based on
internal and external testing of the PV modules and strong
quality control procedures in place in the production process.
The basis for the warranty accrual will be reviewed periodically
based on actual experience. The Group does not sell extended
warranty coverage that is separately priced or optional.
Government
Grant
Government grants are recognized as other income upon receipt
and when all the conditions attached to the grants have been
met. Conditions attached to the grants include increase in the
amount of capital investment and net assets, number of
employees, sales and tax payments.
F-11
SOLARFUN
POWER HOLDINGS CO., LTD.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Income
Taxes
The Group follows the liability method of accounting for income
taxes. Under this method, deferred tax assets and liabilities
are determined based on the difference between the financial
reporting and tax bases of assets and liabilities using enacted
tax rates that will be in effect in the period in which the
differences are expected to reverse. The Group records a
valuation allowance to offset deferred tax assets if based on
the weight of available evidence, it is more-likely-than-not
that some portion, or all, of the deferred tax assets will not
be realized. The effect on deferred taxes of a change in tax
rates is recognized in income in the period that includes the
enactment date.
Value-Added
Tax (VAT)
In accordance with the relevant tax laws in the PRC, VAT is
levied on the invoiced value of sales and is payable by the
purchaser. The Group is required to remit the VAT it collects to
the tax authority, but may deduct the VAT it has paid on
eligible purchases. To the extent the Group paid more than
collected, the difference represents net VAT recoverable
balance at the balance sheet date.
Leases
Leases are classified at the inception date as either a capital
lease or an operating lease. For the lessee, a lease is a
capital lease if any of the following conditions exist:
(i) ownership is transferred to the lessee by the end of
the lease term, (ii) there is a bargain purchase option,
(iii) the lease term is at least 75% of the propertys
estimated remaining economic life or (iv) the present value
of the minimum lease payments at the beginning of the lease term
is 90% or more of the fair value of the leased property to the
lessor at the inception date. A capital lease is accounted for
as if there was an acquisition of an asset and an incurrence of
an obligation at the inception of the lease. All other leases
are accounted for as operating leases wherein rental payments
are expensed on a straight-line basis over the periods of their
respective leases. The Group has no capital lease for any of the
periods stated herein.
Net
(Loss) Income Per Share
Net (loss) income per share is calculated in accordance with
SFAS No. 128, Earnings Per Share. Basic (loss)
income per ordinary share is computed by dividing income
attributable to holders of ordinary shares by the weighted
average number of ordinary shares outstanding during the period.
Diluted income per ordinary share reflects the potential
dilution that could occur if securities or other contracts to
issue ordinary shares were exercised or converted into ordinary
shares. Ordinary shares issuable upon the conversion of
convertible, redeemable preference shares are included in the
computation of diluted income per ordinary share on an
if-converted basis, when the impact is dilutive.
Unpaid ordinary shares that do not share in dividends until
fully paid are considered the equivalent of warrants and have
been included in the computation of diluted income (loss) per
ordinary share using the treasury stock method. Ordinary share
equivalents are excluded from the computation of diluted
earnings (loss) per share if their effects would be
anti-dilutive. For rights offerings made to all shareholders, a
bonus element exists when the subscription price is less than
the fair value of the shares. This bonus element is treated as a
stock dividend for reporting earnings (loss) per ordinary share
for all periods presented.
Stock
Compensation
Stock awards granted to employees and non-employees are
accounted for under SFAS No. 123(R)
Share-Based
Compensation and EITF Issue No.
96-18
Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services.
In November 2006, the Group adopted a stock option scheme (the
Option Plan) (see Note 17 for details of the
Option Plan).
In accordance with SFAS No. 123(R) Share-Based
Compensation, all grants of share options to employees are
recognized in the financial statements based on their grant date
fair values. The Group has elected to recognize
F-12
SOLARFUN
POWER HOLDINGS CO., LTD.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
compensation expense using the straight-line method for all
share options granted with service conditions that have a graded
vesting schedule.
SFAS No. 123(R) requires forfeitures to be estimated
at the time of grant and revised, if necessary, in subsequent
periods if actual forfeitures differ from initial estimates.
Share-based compensation expense was recorded net of estimated
forfeitures such that expense was recorded only for those
share-based awards that are expected to vest.
Under SFAS No. 123(R), the Group, with the assistance
of an independent third party valuation done by Censere Holdings
Limited, applied the Black-Scholes Option Price valuation model
in determining the fair value of the options granted. Risk-free
interest rates are based on zero coupon US risk free rate for
the terms consistent with the expected life of award at the time
of grant. The Company has no historical exercise patterns as
reference, expected life is based on managements
estimation, which the Company believes are representative of
future behavior. Expected dividend yield is determined based on
the Groups historical dividend payout rate. The Company
estimates expected volatility at the date of grant based on a
combination of historical and implied volatilities from the
comparable listed companies. Forfeiture rate is estimated based
on historical forfeiture patterns and adjusted to reflect future
change in circumstances and facts, if any.
Recent
Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board
(FASB) issued Interpretation No. 48, Accounting
for Uncertainty in Income Taxes, an interpretation of
FAS 109, Accounting for Income Taxes (FIN 48), to
create a single model to address accounting for uncertainty in
tax positions. FIN 48 clarifies the accounting for income
taxes, by prescribing a minimum recognition threshold a tax
position is required to meet before being recognized in the
financial statements. FIN 48 also provides guidance on
derecognition, measurement, classification, interest and
penalties, accounting in interim periods, disclosure and
transition. FIN 48 is effective for fiscal years beginning
after December 15, 2006. The Group will adopt FIN 48
as of January 1, 2007, as required. The cumulative effect
of adopting FIN 48 will be recorded in retained earnings
(or other appropriate components of equity or net assets in the
statement of financial position as applicable) in the year of
adoption. The Group is currently assessing the impact, if any,
that FIN 48 will have on its financial statements.
In September 2006, the FASB issued SFAS No. 157
Fair Value Measurements. SFAS No. 157
establishes a framework for measuring fair value in generally
accepted accounting principles, clarifies the definition of fair
value within that framework, and expands disclosures about the
use of fair value measurements. SFAS No. 157 is
effective for fiscal years beginning after November 15,
2007. The provisions are to be applied prospectively as of the
beginning of the fiscal year in which SFAS No. 157 is
initially applied, except as it pertains to a change in
accounting principles related to (i) large positions
previously accounted for using a block discount and
(ii) financial instruments (including derivatives and
hybrids) that were initially measured at fair value using the
transaction price in accordance with guidance in footnote 3 of
EITF 02-3
or similar guidance in SFAS No. 155 Accounting
for Certain Hybrid Financial Instruments, an amendment of FASB
Statements No. 133 and 140. For these transactions,
differences between the amounts recognized in the statement of
financial position prior to the adoption of
SFAS No. 157 and the amounts recognized after adoption
should be accounted for as a cumulative-effect adjustment to the
opening balance of retained earnings in the year of adoption.
The Company is currently assessing the impact, if any, that
SFAS No. 157 will have on its financial statements.
In October 2006, the FASB issued SFAS No. 158
Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans, an amendment of FASB
Statements No. 87, 88, 106 and 132(R). SFAS 158
requires an entity to (i) recognize in its statement of
financial position an asset for a defined benefit postretirement
plans overfunded status or a liability for a plans
underfunded status (ii) measure a defined benefit
postretirement plans assets and obligations that determine
its funded status as of the end of the employers fiscal
year and (iii) recognize changes in the funded status of a
defined benefit postretirement plan in comprehensive income in
the year in which the changes occur. SFAS 158 does not
change the amount of net periodic benefit cost included in net
income or
F-13
SOLARFUN
POWER HOLDINGS CO., LTD.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
address the various measurement issues associated with
postretirement benefit plan accounting. The requirement to
recognize the funded status of a defined benefit postretirement
plan and the disclosure requirements are effective for fiscal
years ending after December 15, 2006, for public entities,
and at the end of fiscal years ending after June 15, 2007,
for all other entities. The requirement to measure plan assets
and benefit obligations as of the date of the employers
fiscal year-end statement of financial position is effective for
fiscal years ending after December 15, 2008. The accounting
is not expected to have any impact on the Company.
In February 2007, the FASB issued FASB Statement No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities Including an amendment of FASB Statement
No. 115, (SFAS 159). This Statement permits
entities to choose to measure many financial instruments and
certain other items at fair value that are not currently
required to be measured at fair value. SFAS 159 is
effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods
within those fiscal years. The Company is currently assessing
the impact of this new standard on its financial statements.
In March 2007, EITF Topic D-109, Determining the Nature of
a Host Contract Related to a hybrid Financial Instrument Issued
in the Form of a Share under FASB Statement No. 133 was
released. EITF Topic D-109 provides the SEC staffs view as
to how one must evaluate whether a preferred stock
host contract is a debt host or an equity host. It
states that the determination of the nature of the host contract
for a hybrid financial instrument issued in the form of a share
should be based on a consideration of economic characteristics
and risks, and that the consideration of the economic
characteristics and risks of the host contract should be based
on all the stated and implied substantive terms and features of
the hybrid financial instrument including the same
features that have to be evaluated for bifurcation once the
nature of the host instrument is determined. EITF Topic D-109 is
effective at the beginning of the first fiscal quarter beginning
after June 15, 2007, even if that period is other than the
first fiscal quarter of the registrants fiscal year. The
accounting is not expected to have any impact on the Company.
Concentration
of Risks
Concentration
of credit risk
Assets that potentially subject the Group to significant
concentration of credit risk are primarily cash and cash
equivalents, advances made to suppliers and accounts receivable.
As of December 31, 2006, substantially all of the
Groups cash and cash equivalents were deposited with four
financial institutions. The Group places its cash and cash
equivalents with reputable financial institutions.
Advances made to suppliers are typically unsecured and arise
from deposits paid in advance for purchases of raw materials
from companies based in the PRC. As a percentage of total
advances, the top five suppliers accounted for 97.1% as of
December 31, 2004; 93.6% as of December 31, 2005; and
96.3% as of December 31, 2006. Due to the Groups
concentration of advances made to a limited number of suppliers,
any negative events or deterioration in financial strength with
respect to the Groups suppliers may cause material loss to
the Group and have a material adverse effect on the Groups
financial condition and results of operations. The risk with
respect to advances made to suppliers is mitigated by credit
evaluations that the Group performs on suppliers and ongoing
monitoring processes on outstanding balances.
The Group conducts credit evaluations of its customers but does
not require collateral or other security from its customers. The
Group makes an allowance for doubtful accounts primarily based
on the age of receivables and factors surrounding the credit
risk specific customers.
Concentration
of customers
The Group currently sells a substantial portion of its PV
products to a limited number of customers. As a percentage of
revenues, the top five customers accounted for 78.8% and 85.4%
for the years ended December 31, 2005 and 2006,
respectively. The loss of sales from any of these customers
would have a significant negative impact
F-14
SOLARFUN
POWER HOLDINGS CO., LTD.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
on the Groups business. Sales to customers are mostly made
through non-exclusive, short-term arrangements. Due to the
Groups dependence on a limited number of customers, any
negative events with respect to the Groups customers may
cause material fluctuations or declines in the Groups
revenue and have a material adverse effect on the Groups
financial condition and results of operations.
Concentration
of suppliers
A significant portion of the Groups raw materials are
sourced from five largest suppliers who collectively accounted
for 95.9% for the period from August 27, 2004 (date of
inception) to December 31, 2004; 71.3% and 50.9% for the
years ended December 31, 2005 and 2006, of our total raw
material purchases. Failure to develop or maintain the
relationships with these suppliers may cause the Group to be
unable to manufacture its products. Any disruption in the supply
of raw materials to the Group may adversely affect the
Groups business, financial condition and results of
operations.
Current
vulnerability due to certain other concentrations
The Group participates in a dynamic high technology industry and
believes that changes in any of the following areas could have a
material adverse effect on the Groups future financial
position, results of operations or cash flows; changes in the
overall demand for services and products; competitive pressures
due to excess capacity or price reductions; advances and new
trends in new technologies and industry standards; changes in
certain strategic relationships or customer relationships;
regulatory or other factors; risks associated with the ability
to obtain necessary raw materials; and risks associated with the
Groups ability to attract and retain employees necessary
to support its growth.
The Groups operations may be adversely affected by
significant political, economic and social uncertainties in the
PRC. Although the PRC government has been pursuing economic
reform policies for more than 20 years, no assurance can be
given that the PRC government will continue to pursue such
policies or that such policies may not be significantly altered,
especially in the event of a change in leadership, social or
political disruption or unforeseen circumstances affecting the
PRCs political, economic and social conditions. There is
also no guarantee that the PRC governments pursuit of
economic reforms will be consistent or effective.
The Group transacts part of its business in RMB, which is not
freely convertible into foreign currencies. On January 1,
1994, the PRC government abolished the dual rate system and
introduced a single rate of exchange as quoted daily by the
Peoples Bank of China (PBOC). However, the
unification of the exchange rates does not imply the RMB may be
readily convertible into United States dollars or other foreign
currencies. All foreign exchange transactions continue to take
place either through the PBOC or other banks authorized to buy
and sell foreign currencies at the exchange rates quoted by the
PBOC. Approval of foreign currency payments by the PBOC or other
institutions requires submitting a payment application form
together with suppliers invoices, shipping documents and
signed contracts.
Additionally, the value of the RMB is subject to changes in
central government policies and to international economic and
political developments affecting supply and demand in the PRC
foreign exchange trading system market.
F-15
SOLARFUN
POWER HOLDINGS CO., LTD.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Inventories consist of the following:
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December 31,
|
|
|
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2005
|
|
|
2006
|
|
|
2006
|
|
|
|
(RMB000)
|
|
|
(RMB000)
|
|
|
(US$000)
|
|
|
|
|
|
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|
(Unaudited)
|
|
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Raw materials
|
|
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64,975
|
|
|
|
295,087
|
|
|
|
39,383
|
|
Work-in-progress
|
|
|
5,736
|
|
|
|
56,921
|
|
|
|
7,597
|
|
Finished goods
|
|
|
6,108
|
|
|
|
20,496
|
|
|
|
2,735
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
76,819
|
|
|
|
372,504
|
|
|
|
49,715
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2005 and 2006, raw materials of
RMB4,296,000 and RMB13,522,000 (US$1,804,666), respectively, of
the Group were held in custody by other parties for processing.
No provision for inventory was made at December 31, 2006
(2005: Nil).
The advance to suppliers represent interest-free cash deposits
paid to suppliers for future purchase of raw materials. These
deposits are required in order to secure supply of silicon due
to limited availability. The risk of loss arising from
non-performance by or bankruptcy of the suppliers is assessed
prior to making the deposits and monitored on a regular basis by
management. A charge to cost of revenue will be recorded in the
period in which a loss has been incurred. To date, the Group has
not experienced any loss of supplier advances. However, as there
is currently an industry-wide shortage of silicon and silicon
wafers, certain of the Groups raw materials suppliers have
been delaying delivery or failed to deliver raw materials to the
Group under these supply contracts. Consequently, in November
2006, the Group canceled one of its raw materials purchase
contracts with its raw materials supplier amounting to
approximately RMB1,297,039,000 (US$173,104,714). Upon
termination of the contract, outstanding advances to this
supplier amounted to RMB31,609,000 (US$4,218,583) of which
RMB10,000,000 (US$1,334,615) was refunded in November 2006. The
remaining advances to this supplier have been transferred to
newly renegotiated contracts.
In November 2006, the Group has also renegotiated certain of its
raw materials supply contracts with its suppliers. Supply
contracts of silicon wafers and silicon ingots with purchase
commitment of RMB213,313,000 (US$28,469,064) and RMB25,230,000
(US$3,367,233) were renegotiated to RMB300,000,000
(US$40,038,437) and RMB6,898,000 (US$920,617), respectively. As
a result of such renegotiation, the average purchase price of
silicon wafers in these renegotiated contracts decreased by
5.8%, while the average purchase price of silicon ingots
increased by 18.1%.
Other commitments under supply contract may be subject to
renegotiation or cancellation in the future.
F-16
SOLARFUN
POWER HOLDINGS CO., LTD.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Other current assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
|
|
(RMB000)
|
|
|
(RMB000)
|
|
|
(US$000)
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
VAT recoverable
|
|
|
14,033
|
|
|
|
48,773
|
|
|
|
6,509
|
|
Other receivables
|
|
|
6,576
|
|
|
|
21,908
|
|
|
|
2,924
|
|
Prepaid expenses
|
|
|
96
|
|
|
|
4,844
|
|
|
|
647
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,705
|
|
|
|
75,525
|
|
|
|
10,080
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
VAT recoverable represents the excess of VAT expended on
purchases over the VAT collected from sales. This amount can be
applied against future VAT collected from customers or may be
reimbursed by the tax authorities under certain circumstances.
Other receivables as of December 31, 2005 included a
deposit held by a government agency to be used for capital
subscription upon the establishment of the Groups new
subsidiary, Shanghai Linyang, in March 2006 (see Note 1).
The balance as of December 31, 2006 included a deposit of
RMB9,558,000 (US$1,275,625) held by the Custom office of Qidong
city for raw materials imported for processing, and a receivable
of RMB9,605,000 (US$1,281,897) from Bank of New York arising
from reimbursement of partial IPO transaction costs.
Fixed assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
|
|
(RMB000)
|
|
|
(RMB000)
|
|
|
(US$000)
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Buildings
|
|
|
15,988
|
|
|
|
37,913
|
|
|
|
5,060
|
|
Plant and machinery
|
|
|
36,750
|
|
|
|
87,204
|
|
|
|
11,638
|
|
Furniture, fixtures and office equipment
|
|
|
1,517
|
|
|
|
3,218
|
|
|
|
429
|
|
Computer software
|
|
|
|
|
|
|
196
|
|
|
|
26
|
|
Motor vehicles
|
|
|
262
|
|
|
|
2,224
|
|
|
|
297
|
|
Construction in progress
|
|
|
1,413
|
|
|
|
83,949
|
|
|
|
11,204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55,930
|
|
|
|
214,704
|
|
|
|
28,654
|
|
Less: Accumulated depreciation
|
|
|
(784
|
)
|
|
|
(7,255
|
)
|
|
|
(968
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55,146
|
|
|
|
207,449
|
|
|
|
27,686
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense was RMB781,000 for the year ended
December 31, 2005 and RMB6,471,000 (US$863,629) for the
year ended December 31, 2006.
F-17
SOLARFUN
POWER HOLDINGS CO., LTD.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
7.
|
INTANGIBLE
ASSET NET
|
Amortized intangible asset, net consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
|
|
(RMB000)
|
|
|
(RMB000)
|
|
|
(US$000)
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Land use rights
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
|
|
|
|
|
12,988
|
|
|
|
1,733
|
|
Less: Accumulated amortization
|
|
|
|
|
|
|
(91
|
)
|
|
|
(12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,897
|
|
|
|
1,721
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land use rights represent amounts paid for the rights to use
four parcels of land in the PRC where the Groups premises
are located. Three land use rights were acquired from Qidong
Huahong Electronics Co., Ltd., a company whose controlling owner
is also a significant shareholder of the Company (see
Note 20) and the remaining one was acquired from
Bureau of Economic Development for Qidong city. The remaining
periods of these land use rights ranging from 48 to
49 years as of December 31, 2006.
As of December 31, 2006, land use rights with net book
value of RMB4,595,000 (US$613,255) was pledged for a short-term
bank borrowings of RMB20,000,000 (US$2,669,229) (see
Note 9).
For each of the next five years, annual amortization expenses of
the land use rights will be approximately RMB267,000 (US$35,076).
Investments represent equity ownership in Shanghai Yangneng New
Energy Technology Co., Ltd. (Shanghai Yangneng), a
joint venture company established by Shanghai Linyang and a
third party company on October 20, 2006. The registered
capital of Shanghai Yangneng is RMB3,000,000 and Shanghai
Linyang will contribute RMB900,000 (US$120,115) in cash as
capital contribution for its 30% share of equity ownership. As
of December 31, 2006, the capital contribution from
Shanghai Linyang to Shanghai Yangneng amounted to RMB300,000
(US$40,038). Shanghai Yangneng is principally engaged in the
manufacturing and selling of PV products. As of
December 31, 2006, Shanghai Yangneng was still in the
pre-operating stage.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
|
|
(RMB000)
|
|
|
(RMB000)
|
|
|
(US$000)
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Total bank borrowings
|
|
|
20,000
|
|
|
|
410,900
|
|
|
|
54,839
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprised of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
|
|
|
20,000
|
|
|
|
379,900
|
|
|
|
50,702
|
|
Long-term, current portion
|
|
|
|
|
|
|
16,000
|
|
|
|
2,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,000
|
|
|
|
395,900
|
|
|
|
52,837
|
|
Long-term, non-current portion
|
|
|
|
|
|
|
15,000
|
|
|
|
2,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,000
|
|
|
|
410,900
|
|
|
|
54,839
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-18
SOLARFUN
POWER HOLDINGS CO., LTD.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The short-term bank borrowings outstanding at December 31,
2006 bore an average interest rate of 5.96% (2005: 5.859%) per
annum and were denominated in RMB. These borrowings were
obtained from financial institutions which had terms of six
months to one year and expire at various times throughout the
year.
As of December 31, 2006, short-term bank borrowings were
secured/ guaranteed by the following:
|
|
|
Amount
|
|
Secured/guaranteed by
|
(RMB000)
|
|
|
|
60,000
|
|
Land use rights of RMB4,695,000 (US$626,602) (see Note 7) and
guaranteed by Linyang Electronics, Qidong Huahong Electronics
Co., Ltd., (companies whose controlling owner is also a
significant shareholder and chairman of the Company), a
significant shareholder and chairman of the Company and his
spouse.
|
59,900
|
|
Jointly guaranteed by Linyang Electronics and Huaerli (Nantong)
Electronics Co., Ltd., a company whose controlling owner is also
a significant shareholder of the Company.
|
20,000
|
|
Jointly guaranteed by Linyang Electronics, a significant
shareholder and chairman of the Company and his spouse.
|
240,000
|
|
Guaranteed by Linyang Electronics.
|
|
|
|
379,900
|
|
|
|
|
|
The Group paid no service charges for the provision of the above
guarantees.
As of December 31, 2006, unused short-term bank loan
facilities amounted to RMB70,000,000 (US$9,342,302).
The long-term bank borrowings outstanding at December 31,
2006 bore an average interest rate of 5.76% per annum and were
denominated in RMB. These borrowings were obtained from a
financial institution and represented the maximum amount of the
facility. These borrowings were guaranteed by Linyang
Electronics. The Group paid no service charges for the provision
of the guarantee. As of December 31, 2006, the maturity of
these long-term bank borrowings was as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2006
|
|
|
|
(RMB000)
|
|
|
(US$000)
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Within one year
|
|
|
16,000
|
|
|
|
2,135
|
|
Between one to two years
|
|
|
15,000
|
|
|
|
2,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31,000
|
|
|
|
4,137
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006, notes payable were non-interest
bearing and were secured by RMB14,020,000 (US$1,871,130) of the
Companys restricted cash. The Group paid a commission of
RMB7,010 (US$936) to the banks to obtain the notes payable
facilities. These notes payable would become payable on
February 27, 2007.
F-19
SOLARFUN
POWER HOLDINGS CO., LTD.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
11.
|
ACCRUED
EXPENSES AND OTHER LIABILITIES
|
The components of accrued expenses and other liabilities are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
|
|
(RMB000)
|
|
|
(RMB000)
|
|
|
(US$000)
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Accrued fixed asset purchases
|
|
|
18,171
|
|
|
|
|
|
|
|
|
|
Accrued professional service fees
|
|
|
800
|
|
|
|
16,311
|
|
|
|
2,177
|
|
Accrued warranty cost (see Note 12)
|
|
|
1,520
|
|
|
|
7,550
|
|
|
|
1,008
|
|
Other accrued expenses
|
|
|
1,603
|
|
|
|
5,369
|
|
|
|
716
|
|
Other liabilities
|
|
|
826
|
|
|
|
4,226
|
|
|
|
564
|
|
Embedded foreign currency derivatives
|
|
|
|
|
|
|
163
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,920
|
|
|
|
33,619
|
|
|
|
4,487
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006, the fair value of embedded foreign
currency derivatives related to sales contracts (see
Note 2) amounting to RMB163,000 (US$21,754) are
recorded as current liabilities. For the year ended
December 31, 2006, a loss of RMB163,000 (US$21,754)
relating to the embedded foreign currency derivatives has been
recorded to the statements of operations. For all the other
periods presented, there have not been any significant embedded
foreign currency derivatives due to fewer committed sales
contracts and the short duration to settlement of such contracts.
|
|
12.
|
ACCRUED
WARRANTY COSTS
|
The Groups warranty activity is summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
|
|
(RMB000)
|
|
|
(RMB000)
|
|
|
(US$000)
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Beginning balance
|
|
|
|
|
|
|
1,520
|
|
|
|
203
|
|
Warranty provision
|
|
|
1,600
|
|
|
|
6,030
|
|
|
|
805
|
|
Warranty claims paid
|
|
|
(80
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
|
1,520
|
|
|
|
7,550
|
|
|
|
1,008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer deposits represent cash payments received from
customers in advance of the delivery of PV modules. These
deposits are recognized as revenue when the conditions for
revenue recognition have been met. The customer deposits are
non-refundable unless the Group fails to fulfill the terms of
the sales contract.
|
|
14.
|
SERIES A
REDEEMABLE CONVERTIBLE PREFERENCE SHARES
|
During 2006, the Company and a group of third party investors
(the Investors) entered into a purchase agreement
(Preference Shares Purchase Agreement) whereby the
Company issued in aggregate 79,644,754 voting Series A
Redeemable Convertible Preference Shares (the Preference
Shares) for gross proceeds of US$53,000,000
(RMB397,118,400).
The Preference Shares Purchase Agreement outlined two separate
share closings. On June 27, 2006, 67,106,531 Preference
Shares were issued to the Investors for US$48 million
(price per share of US$0.71528)
F-20
SOLARFUN
POWER HOLDINGS CO., LTD.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(First Closing). This represented 40.074% of the
total share capital (based on the initial conversion of 1:1). A
second closing could take place within 3 months of the
First Closing whereby one of the Investors, Good Energies
Investment Limited (Good Energies), would subscribe
for an additional 8,037,048 Preference Shares for
US$5 million (Second Closing). However, this
Second Closing would only take place if Good Energies provided
certain services to the Company to the sole satisfaction of the
Chairman of the Company or if the service conditions were
otherwise waived by the Company. In addition, if the Second
Closing occurs, the other Investors (excluding Good Energies)
will receive, for nil consideration, additional Preference
Shares of 4,501,175. The additional Preference Shares issued to
the other Investors, in essence, resulted in an adjustment to
their conversion price per share. The Companys ability to
waive the service conditions and trigger the Second Closing has
been accounted for as a purchase put option (Put
Option) issued on June 27, 2006. The Company
exercised the Put Option and the Second Closing occurred on
August 2, 2006.
The Company determined the fair value of the Put Option,
Preference Shares and ordinary shares based on a valuation
performed by an independent appraiser, Censere Holdings Limited.
On June 27, 2006, the fair value of the Put Option was
determined to be approximately US$83,500 (US$0.0104 per share)
(RMB625,649) and was recorded in equity with an offsetting
increase to the amount recorded for the Preference Shares sold
as Traunche Two.
On August 2, 2006, when the Company exercised the Put
Option which resulted in the issuance of 8,037,048 Preference
Shares to Good Energies in return for cash consideration of
US$5 million (US$0.6221 or RMB4.6613 per share), the fair
value of the Preference Shares was determined to be US$0.81
(RMB6.069) per share. The difference between the fair value of
the Preference Shares and the cash consideration paid amounted
to RMB12,087,720 and has been recorded as a charge to general
and administrative expenses.
Upon the listing of the Companys shares on Nasdaq on
December 20, 2006 (the IPO), all of the issued
and outstanding Preferred Shares had been converted into
ordinary shares.
For the year ended December 31, 2006, accrued cumulative
dividends amounted to RMB7,226,000 (US$964,392) or RMB0.09
(US$0.01) per Preference Share.
In accordance with the Regulations on Enterprises with Foreign
Investment of China, a foreign invested enterprise established
in the PRC is required to provide certain statutory reserves,
namely (i) general reserve fund, (ii) enterprise
expansion fund and (iii) staff welfare and bonus fund,
which are appropriated from net profit as reported in the
enterprises PRC statutory accounts. A wholly-owned foreign
invested enterprise is required to allocate at least 10% of its
annual after-tax profit to the general reserve until such
reserve has reached 50% of its respective registered capital
based on the enterprises PRC statutory accounts. A non
wholly-own foreign invested enterprise is permitted to provide
the above allocation of annual after-tax profit at the
discretion of its board of directors. Appropriations to the
enterprise expansion fund and staff welfare and bonus fund are
at the discretion of the board of directors for all foreign
invested enterprises. The aforementioned reserves can only be
used for specific purposes and are not distributable as cash
dividends.
Linyang Solarfun became a wholly-owned foreign invested
enterprise in May 2006 and therefore is subject to the above
mandated restrictions on distributable profits. Prior to May
2006, although Linyang Solarfun was a Sino-foreign joint venture
enterprise, it was required to allocate at least 10% of its
after tax profit to general reserve fund in accordance with the
joint venture agreements entered into among the then
shareholders of Linyang Solarfun and the appropriations to the
enterprise expansion fund and staff welfare and bonus fund were
at the discretion of the board of directors. For the year ended
December 31, 2006, RMB13,779,000 (US$1,838,965) (2005:
RMB1,496,000) and RMB749,000 (US$99,963) (2005: Nil) have been
appropriated to reserve fund and enterprise expansion fund while
no appropriation has been made to the staff welfare and bonus
fund.
F-21
SOLARFUN
POWER HOLDINGS CO., LTD.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The boards of directors of Shanghai Linyang and Sichuan Leshan
Linyang (both being Sino-foregin joint venture enterprise) have
resolved that no appropriation to be made to the statutory
reserves for the year ended December 31, 2006.
|
|
16.
|
STOCK
COMPENSATION EXPENSE
|
On July 12, 2005, Linyang Solarfun issued a rights offering
to all of its then existing shareholders at a subscription price
of approximately US$36,260 per 1% of equity interest (equivalent
to 501,750 ordinary shares of the Company after the
restructuring as described in Note 1) for total
proceeds of US$3,626,000. Shareholders who were entitled to 20%
of the rights offering (equivalent to 10,035,000 ordinary
shares) did not purchase the shares being offered (the
Unsubscribed Shares). The Unsubscribed Shares were
offered to and purchased by Lianyang Electronics Co., Ltd. which
is controlled by the Chairman and director of the Group, who was
also the Groups ultimate controlling shareholder at that
time, at the subscription price of US$0.07 (RMB0.524) per share.
The fair value of the ordinary shares, at the time of the
offering, was determined to be RMB0.634 per share based on an
independent valuation by Censere Holdings Limited. The intrinsic
value of the Unsubscribed Shares has been recorded as
compensation expense and presented as part of general and
administrative expenses in 2005. Accordingly, RMB501,000 was
recorded as compensation expense with a corresponding credit to
additional paid-in capital in the year ended December 31,
2005.
On April 8, 2006, three of the then owners of Linyang
Solarfun sold their 5% equity interests (which approximates
5,017,500 ordinary shares of the Company) to Linyang Electronics
Co., Ltd., for US$72,533 per 1% equity interest. The fair value
of the equity interests transferred was determined to be
RMB2,648,681 (US$353,497) per 1% equity interest based on an
independent valuation by Censere Holdings Limited. The intrinsic
value of the transfer has been recorded as compensation expense
and presented as part of general and administrative expenses in
the year ended December 31, 2006. Accordingly,
RMB10,337,000 (US$1,379,591) was recorded as compensation
expense with a corresponding credit to additional paid-in
capital in the year ended December 31, 2006.
On August 2, 2006, when the Company exercised the Put
Option which resulted in the issuance of 8,037,048 Preference
Shares to Good Energies in return for cash consideration of
US$5 million (US$0.6221 or RMB4.6613 per share), the fair
value of the Preference Shares was determined to be US$0.81
(RMB6.069) per share. The difference between the fair value of
the Preference Shares and the cash consideration paid amounted
to RMB12,087,720 (US$1,613,245) and has been recorded as a
charge to general and administrative expenses in the year ended
December 31, 2006.
In November 2006, the Company adopted a stock option scheme (the
Option Plan) which allows the Company to offer a
variety of incentive awards to employees, directors and
consultants of the Company. As of November 30, 2006,
options to purchase not more than 10,799,685 ordinary shares are
authorized under the Option Plan. Under the terms of the Option
Plan, options are generally granted at exercise price of US$1.80
per share. All options granted would expire on November 30,
2016 and generally vest over 3-5 years. As of
December 31, 2006, options to purchase 8,012,998 ordinary
shares were granted and outstanding. Included in these options
are 540,000 options that can be early exercised, at the
discretion of the holders, into unvested 540,000 ordinary
shares. If the holders services to the Company are
terminated prior to the vesting of the unvested ordinary shares,
the Company can repurchase them for the same price paid by the
holders.
The fair value of the share option at grant date was determined
to be RMB111,065,497 (US$14,822,963) and such amount shall be
recognized as compensation expenses using the straight line
method with graded vesting based on service condition.
Accordingly, RMB2,882,200 (US$384,663) was recorded as
compensation expenses with a corresponding credit to additional
paid-in capital in the year ended December 31, 2006. No
option was exercised during the year ended December 31,
2006.
F-22
SOLARFUN
POWER HOLDINGS CO., LTD.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A
Summary of Option Activity Under the Share Option
Plans
The following table summarized the Companys share option
activity under all the option plans (in US$, except shares):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Contractual Life
|
|
|
Intrinsic
|
|
|
|
Options
|
|
|
Price
|
|
|
(Years)
|
|
|
Value
|
|
|
Outstanding, January 1, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
8,012,998
|
|
|
|
1.80
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited/Cancelled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2006
|
|
|
8,012,998
|
|
|
|
1.80
|
|
|
|
9.92
|
|
|
|
4,310,993
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected vest at December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value in the table above represents the
total intrinsic value (the aggregate difference between the
Companys closing stock price of US$2.338 per ordinary
share as of December 31, 2006 and the exercise price for
in-the-money options) that would have been received by the
option holders if all in-the-money options had been exercised on
December 31, 2006.
As of December 31, 2006, there was RMB108,255,291
(US$14,447,909) of unrecognized share-base compensation cost
related to share options. That deferred cost is expected to be
recognized over a
weighted-average
vesting period of 4.34 years. To the extent the actual
forfeiture rate is different from original estimate; actual
share-base compensation related to these awards may be different
from the expectation.
The Company calculated the estimated fair value of share options
on the date of grant using the Black-Scholes pricing model with
the following assumptions for the year ended December 31,
2006:
|
|
|
|
|
|
|
2006
|
|
Risk-free interest rate
|
|
|
4.4
|
%
|
Expected life (years)
|
|
|
5.24 - 6.25 years
|
|
Expected dividend yield
|
|
|
|
|
Volatility
|
|
|
73
|
%
|
Fair value of options at grant date per share
|
|
From US$
|
1.76 to US$1.85
|
|
Total compensation cost recognized for the year ended
December 31, 2006 is as follows:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
RMB
|
|
|
USD
|
|
|
Cost of revenue
|
|
|
123
|
|
|
|
16
|
|
Selling expenses
|
|
|
19
|
|
|
|
3
|
|
General and administrative expenses
|
|
|
2,223
|
|
|
|
297
|
|
Research and development expenses
|
|
|
517
|
|
|
|
69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,882
|
|
|
|
385
|
|
|
|
|
|
|
|
|
|
|
F-23
SOLARFUN
POWER HOLDINGS CO., LTD.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
During the year ended December 31, 2006, the Group received
RMB852,000 (US$113,709) in government subsidies which was
approved by the relevant PRC government authorities. These
subsidies were received because the Group qualifies as a
high technology enterprise in Qidong city of Jiangsu
province in the PRC and it met certain criteria such as increase
in the amount of capital investment and net assets, increase in
number of employees and increase in sales and tax payments. The
government subsidies are not subject to adjustment and do not
have any restrictions as to the use of funds. Accordingly, the
full amount of the subsidies has been recorded as other income.
The Company is a tax exempt company incorporated in the Cayman
Islands and conducts substantially all of its business through
its subsidiaries located in the PRC.
The Companys subsidiaries registered in the PRC are
subject to PRC enterprise income tax (EIT) on the
taxable income as reported in their PRC statutory accounts
adjusted in accordance with relevant PRC income tax laws.
Linyang Solarfun, the Companys major operating subsidiary,
was established as a domestic company in the PRC and was subject
to EIT at a rate of 33% (30% state income tax and a 3% local
income tax). In March 2005, Linyang Solarfun was converted to a
Sino-foreign joint venture entity. In accordance with the
relevant tax laws in the PRC, upon becoming a Sino-foreign joint
venture entity, Linyang Solarfuns tax position is governed
by the Income Tax Law of the PRC concerning Foreign
Investment and Foreign Enterprises (the Income Tax
Law) and according to which Linyang Solarfun is entitled
to a tax concession period (Tax Holiday) whereby it
is exempt from EIT for its first two profit making years (after
deducting losses incurred in previous years) and is entitled to
a 50% tax reduction for the succeeding three years. No EIT
provision has been made as Linyang Solarfun did not generate
assessable profits for the period prior to it becoming a
Sino-foreign joint venture entity from August 27, 2004
(date of establishment) to December 31, 2004. Under the
terms of the Tax Holiday, Linyang Solarfun is exempt from EIT
for its taxable profit in 2005 and 2006. Additionally, since
Linyang Solarfun is a Sino-foreign joint venture entity located
in coastal open economic zones in Qidong City, Jiangsu Province,
it is entitled to a preferential tax rate of 27% for its EIT
upon expiry of the Tax Holiday.
Shanghai Linyang was established as a domestic company in the
PRC and was subject to EIT at a rate of 33% (30% state income
tax and a 3% local income tax).
Leshan Jiayang was established as a domestic company in the PRC
and was subject to EIT at a rate of 33% (30% state income tax
and a 3% local income tax). However, as it qualifies as
encouraged business located in Western China, it is
entitled to a preferential EIT rate of 15%.
F-24
SOLARFUN
POWER HOLDINGS CO., LTD.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Group had minimal operations in jurisdictions other than the
PRC. (Loss) income before income taxes consists of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Period
|
|
|
|
|
|
|
|
|
from August 27,
|
|
|
|
|
|
|
|
|
2004 (Date
|
|
|
|
|
|
|
|
|
of Inception) to
|
|
|
|
|
|
|
|
|
December 31,
|
|
For the Year Ended December 31
|
|
|
2004
|
|
2005
|
|
2006
|
|
2006
|
|
|
(RMB000)
|
|
(RMB000)
|
|
(RMB000)
|
|
(US$000)
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
Cayman Islands
|
|
|
|
|
|
|
|
|
|
|
(28,234
|
)
|
|
|
(3,768
|
)
|
The PRC
|
|
|
(607
|
)
|
|
|
14,314
|
|
|
|
131,324
|
|
|
|
17,526
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(607
|
)
|
|
|
14,314
|
|
|
|
103,090
|
|
|
|
13,758
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The income tax benefit is comprised of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Period
|
|
|
|
|
from August 27,
|
|
|
|
|
2004 (Date
|
|
|
|
|
of Inception) to
|
|
|
|
|
December 31,
|
|
|
|
|
2004
|
|
For the Year Ended December 31
|
|
|
2005
|
|
2005
|
|
2006
|
|
2006
|
|
|
(RMB000)
|
|
(RMB000)
|
|
(RMB000)
|
|
(US$000)
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
171
|
|
|
|
23
|
|
Deferred
|
|
|
|
|
|
|
96
|
|
|
|
2,961
|
|
|
|
395
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
96
|
|
|
|
3,132
|
|
|
|
418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-25
SOLARFUN
POWER HOLDINGS CO., LTD.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The reconciliation of tax computed by applying the statutory
income tax rate of 33% applicable to PRC operations to income
tax benefit is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Period
|
|
|
|
|
|
|
|
|
from August 27,
|
|
|
|
|
|
|
|
|
2004 (Date
|
|
|
|
|
|
|
|
|
of Inception) to
|
|
|
|
|
|
|
|
|
December 31,
|
|
For the Year Ended December 31
|
|
|
2004
|
|
2005
|
|
2006
|
|
2006
|
|
|
(RMB000)
|
|
(RMB000)
|
|
(RMB000)
|
|
(US$000)
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
Income tax computed at the statutory tax rate at 33%
|
|
|
200
|
|
|
|
(4,723
|
)
|
|
|
(34,020
|
)
|
|
|
(4,540
|
)
|
Non-deductible expenses
|
|
|
|
|
|
|
(884
|
)
|
|
|
(4,337
|
)
|
|
|
(579
|
)
|
Tax holidays
|
|
|
|
|
|
|
5,407
|
|
|
|
48,444
|
|
|
|
6,465
|
|
Tax rate differences
|
|
|
|
|
|
|
|
|
|
|
(10,049
|
)
|
|
|
(1,341
|
)
|
Deferred tax benefit
|
|
|
|
|
|
|
96
|
|
|
|
3,304
|
|
|
|
441
|
|
Changes in the valuation allowance
|
|
|
(200
|
)
|
|
|
200
|
|
|
|
(210
|
)
|
|
|
(28
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
96
|
|
|
|
3,132
|
|
|
|
418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The benefit of the tax holiday per basic and diluted earnings
per share is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Period
|
|
|
|
|
|
|
|
|
from August 27,
|
|
|
|
|
|
|
|
|
2004 (Date
|
|
|
|
|
|
|
|
|
of Inception)
|
|
|
|
|
|
|
|
|
to December 31,
|
|
For the Year Ended December 31,
|
|
|
2004
|
|
2005
|
|
2006
|
|
2006
|
|
|
(RMB000)
|
|
(RMB000)
|
|
(RMB000)
|
|
(US$000)
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
Basic
|
|
|
|
|
|
|
0.10
|
|
|
|
0.47
|
|
|
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
0.08
|
|
|
|
0.34
|
|
|
|
0.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-26
SOLARFUN
POWER HOLDINGS CO., LTD.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Deferred tax assets reflect the tax effects of temporary
differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts
used for income tax purposes. The components of deferred tax
assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Period
|
|
|
|
|
|
|
|
|
from August 27,
|
|
|
|
|
|
|
|
|
2004 (Date
|
|
|
|
|
|
|
|
|
of Inception)
|
|
|
|
|
|
|
|
|
to December 31,
|
|
For the Year Ended December 31,
|
|
|
2004
|
|
2005
|
|
2006
|
|
2006
|
|
|
(RMB000)
|
|
(RMB000)
|
|
(RMB000)
|
|
(US$000)
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated losses
|
|
|
200
|
|
|
|
|
|
|
|
210
|
|
|
|
28
|
|
Warranty provision
|
|
|
|
|
|
|
96
|
|
|
|
820
|
|
|
|
109
|
|
Depreciation of fixed assets
|
|
|
|
|
|
|
|
|
|
|
258
|
|
|
|
35
|
|
Stock compensation expenses
|
|
|
|
|
|
|
|
|
|
|
693
|
|
|
|
93
|
|
Social welfare provision
|
|
|
|
|
|
|
|
|
|
|
367
|
|
|
|
49
|
|
Allowance for doubtful accounts
|
|
|
|
|
|
|
|
|
|
|
1,262
|
|
|
|
168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
200
|
|
|
|
96
|
|
|
|
3,610
|
|
|
|
482
|
|
Valuation allowance
|
|
|
(200
|
)
|
|
|
|
|
|
|
(210
|
)
|
|
|
(28
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current deferred tax assets
|
|
|
|
|
|
|
96
|
|
|
|
3,400
|
|
|
|
454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2004, the Group has net operating loss
carryforward of approximately RMB607,000, for tax purposes. As
of December 31, 2004, the Group recorded a valuation
allowance to reduce its deferred tax assets to RMB Nil, because
management believed the amount did not meet the more likely than
not criteria. During 2005, the Group fully utilized the net
operating loss carryforward and began the first year of the Tax
Holiday. During 2005, the Group adjusted its deferred tax assets
and valuation allowances based on the preferential tax rates
applied during the Tax Holiday, to reflect the net amount
management believed was more likely than not to be realizable.
As of December 31, 2006, the Group has a net operating loss
carryforward of approximately RMB637,000 (US$85,015) for tax
purposes, attributed to the operations of Shanghai Linyang which
was newly established in March 2006. The net operating loss
carryforward will expire 5 years after Shanghai
Linyangs first profitable year. As of December 31,
2006, the Group recorded a valuation allowance to reduce its
deferred tax assets to the net amount management believe was
more likely than not to be realized. Reversal of the valuation
allowance in a subsequent year will reduce income tax expense.
F-27
SOLARFUN
POWER HOLDINGS CO., LTD.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
20.
|
RELATED
PARTY TRANSACTIONS
|
|
|
|
Name of Related Party
|
|
Relationship with the
Group
|
|
Linyang Electronics Co., Ltd. (Linyang Electronics)
|
|
Controlling owner is also a significant shareholder of the
Company
|
Huaerli (Nantong) Electronics Co., Ltd. (Huaerli
Nantong)
|
|
Controlling owner is also a significant shareholder of the
Company
|
Qidong Huahong Electronics Co., Ltd. (Qidong Huahong)
|
|
Controlling owner is also a significant shareholder of the
Company
|
Linyang Agricultural Development (Nantong) Co., Ltd.
(Linyang Agricultural)
|
|
Controlling owner is also a significant shareholder of the
Company
|
Shanghai Linyang Electronics Technology Co., Ltd. (Linyang
Technology)
|
|
Controlling owner is also a significant shareholder of the
Company
|
Nantong Linyang Ecological Cultural Co., Ltd. (Linyang
Ecological)
|
|
Controlling owner is also a significant shareholder of the
Company
|
Citigroup Venture Capital International Growth Partnership L.P.
(Citi Growth)
|
|
Shareholder of the Company
|
Citigroup Venture Capital International Co. Investment L.P.
(Citi Investment)
|
|
Shareholder of the Company
|
Good Energies Investments Limited (Good Energies)
|
|
Shareholder of the Company
|
Hony Capital II L.P.
|
|
Shareholder of the Company
|
The Group had the following related party transactions and
balances during the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Linyang
|
|
|
Huaerli
|
|
|
Qidong
|
|
|
Linyang
|
|
|
Linyang
|
|
|
Linyang
|
|
|
|
Electronics
|
|
|
Nantong
|
|
|
Huahong
|
|
|
Agricultural
|
|
|
Ecological
|
|
|
Technology
|
|
|
|
(RMB000)
|
|
|
(RMB000)
|
|
|
(RMB000)
|
|
|
(RMB000)
|
|
|
(RMB000)
|
|
|
(RMB000)
|
|
|
|
(Amount due from (due to) related parties)
|
|
|
Balances at August 27, 2004 (date of inception)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advance for purchase of raw materials
|
|
|
|
|
|
|
8,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advance to a related party
|
|
|
10,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses paid on behalf of the Group
|
|
|
|
|
|
|
|
|
|
|
(25
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2004
|
|
|
10,000
|
|
|
|
8,000
|
|
|
|
(25
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of raw materials
|
|
|
(81
|
)
|
|
|
(14,813
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment for purchase of raw materials
|
|
|
3
|
|
|
|
14,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of advance
|
|
|
(10,000
|
)
|
|
|
(8,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advances from related parties
|
|
|
(77,600
|
)
|
|
|
(27,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of advance
|
|
|
21,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses paid on behalf of the Group
|
|
|
(68
|
)
|
|
|
|
|
|
|
(52
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of operating expenses paid on behalf of the Group
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of raw materials
|
|
|
|
|
|
|
(1,051
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment for purchase of raw materials
|
|
|
71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advances from a related party
|
|
|
(41,800
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of advances
|
|
|
68,121
|
|
|
|
27,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses paid on behalf of the Group
|
|
|
(619
|
)
|
|
|
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of operating expenses paid on behalf of the Group
|
|
|
60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
(30,911
|
)
|
|
|
(1,664
|
)
|
|
|
(83
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of raw materials
|
|
|
(2,631
|
)
|
|
|
(23,762
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-28
SOLARFUN
POWER HOLDINGS CO., LTD.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Linyang
|
|
|
Huaerli
|
|
|
Qidong
|
|
|
Linyang
|
|
|
Linyang
|
|
|
Linyang
|
|
|
|
Electronics
|
|
|
Nantong
|
|
|
Huahong
|
|
|
Agricultural
|
|
|
Ecological
|
|
|
Technology
|
|
|
|
(RMB000)
|
|
|
(RMB000)
|
|
|
(RMB000)
|
|
|
(RMB000)
|
|
|
(RMB000)
|
|
|
(RMB000)
|
|
|
|
(Amount due from (due to) related parties)
|
|
|
Payment for purchase of raw materials
|
|
|
1,012
|
|
|
|
25,426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advances from a related party
|
|
|
(105,900
|
)
|
|
|
|
|
|
|
|
|
|
|
(9,000
|
)
|
|
|
|
|
|
|
|
|
Repayment of advances
|
|
|
136,121
|
|
|
|
|
|
|
|
|
|
|
|
9,000
|
|
|
|
|
|
|
|
|
|
Operating expenses paid on behalf of the Group
|
|
|
(489
|
)
|
|
|
(7,633
|
)
|
|
|
|
|
|
|
|
|
|
|
(102
|
)
|
|
|
|
|
Repayment of operating expenses paid on behalf of the Group
|
|
|
208
|
|
|
|
7,633
|
|
|
|
83
|
|
|
|
|
|
|
|
102
|
|
|
|
|
|
Purchase of land use right
|
|
|
|
|
|
|
|
|
|
|
(26,460
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment for the purchase of land use right
|
|
|
|
|
|
|
|
|
|
|
4,564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales to a related party
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
(2,590
|
)
|
|
|
|
|
|
|
(21,896
|
)
|
|
|
|
|
|
|
|
|
|
|
153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006 (in US$000) (Unaudited)
|
|
|
(346
|
)
|
|
|
|
|
|
|
(2,922
|
)
|
|
|
|
|
|
|
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the year ended December 31, 2005, Qidong Huahong
granted the use of a parcel of its land to the Group for RMB nil
considerations. Rental charge of RMB70,000, based on the fair
value of the rental cost incurred by Qidong Huahong has been
recorded as an expense by the Group with a corresponding credit
to additional paid-in capital.
For the year ended December 31, 2005, notes payable of
RMB10,000,000 were secured by the pledge of bank deposit
amounting to RMB10,000,000 from Huaerli Nantong.
For the year ended December 31, 2006, short-term bank
borrowings of RMB59,900,000 (US$7,994,341) were jointly
guaranteed by Linyang Electronics and Huaerli Nantong. Short
term bank borrowings of RMB240,000,000 (US$32,030,750) and
long-term bank borrowings of RMB31,000,000 (US$4,137,305) were
guaranteed by Linyang Electronics. Short-term bank borrowings of
RMB60,000,000 (US$8,007,687) were jointly guaranteed by Linyang
Electronics and Qidong Huahong Electronics. Short-term bank
borrowings of RMB20,000,000 (US$2,669,229) were jointly
guaranteed by Linyang Electronics, a significant shareholder and
chairman of the Company and his spouse.
In relation to the issuance of the Preference Shares, the
Company obtained a purchase put option from Good Energies. The
put option was exercised by the Company on August 2, 2006
(see Note 14).
The weighted average balances due from (due to) related parties
are analyzed as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Linyang
|
|
|
Huaerli
|
|
|
Qidong
|
|
|
Linyang
|
|
|
|
Electronics
|
|
|
Nantong
|
|
|
Huahong
|
|
|
Technology
|
|
|
|
(RMB000)
|
|
|
(RMB000)
|
|
|
(RMB000)
|
|
|
(RMB000)
|
|
|
For the period from August 27, 2004 (date of inception) to
December 31, 2004
|
|
|
5,000
|
|
|
|
4,000
|
|
|
|
(12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2005
|
|
|
(21,950
|
)
|
|
|
(6,385
|
)
|
|
|
(60
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2006
|
|
|
(2,590
|
)
|
|
|
|
|
|
|
(21,896
|
)
|
|
|
153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2006 (in US$000)
(Unaudited)
|
|
|
(346
|
)
|
|
|
|
|
|
|
(2,922
|
)
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006, amount due from shareholders
represented reimbursement receivable from Citi Growth and Citi
Investment amounted to RMB549,000 (US$73,270) and RMB29,000
(US$3,870), respectively.
F-29
SOLARFUN
POWER HOLDINGS CO., LTD.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As of December 31, 2006, due to shareholders represented
RMB7,128,000 (US$951,313) dividends payable to preference
shareholders (see Note 14) and RMB444,000 (US$59,257)
management consulting fee payable to Hony Capital.
All balances with related parties at December 31, 2005 and
2006 were unsecured, non-interest bearing and without fixed
repayment term.
|
|
21.
|
EMPLOYEE
DEFINED CONTRIBUTION PLAN
|
Full time employees of the Groups subsidiaries in the PRC
participate in a government mandated defined contribution plan
pursuant to which certain pension benefits, medical care,
unemployment insurance, employee housing fund and other welfare
benefits are provided to employees. Chinese labor regulations
require that the PRC subsidiaries of the Group make
contributions to the government for these benefits based on 41%
of the employees salaries. The Groups PRC
subsidiaries have no legal obligation for the benefits beyond
the contributions made. The total amounts for such employee
benefits, which were expensed as incurred, were RMB8,000 for the
period from August 27, 2004 (date of inception) to
December 31, 2004; RMB927,000 for the year ended
December 31, 2005; and RMB3,155,000 (US$421,071) for the
year ended December 31, 2006.
|
|
22.
|
COMMITMENTS
AND CONTINGENCIES
|
Outstanding
Capital Contribution
On October 20, 2006, Shanghai Linyang and a third party
company established Shanghai Yangneng, a joint venture company
(see Note 8). Shanghai Linyang has committed to contribute
RMB900,000 (US$120,115) as capital contribution. As of
December 31, 2006, the outstanding capital contribution
amounted to RMB600,000 (US$80,077). The capital contribution
commitment is expected to be settled in the next twelve months.
Operating
Lease Commitments
The Group has entered into leasing arrangements relating to
office premises that are classified as operating leases. Future
minimum lease payments for non-cancelable operating leases as of
December 31, 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
|
|
(RMB000)
|
|
|
(RMB000)
|
|
|
(US$000)
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Within 1 year
|
|
|
58
|
|
|
|
1,326
|
|
|
|
177
|
|
Within 1-2 years
|
|
|
|
|
|
|
924
|
|
|
|
123
|
|
Within 2-3 years
|
|
|
|
|
|
|
228
|
|
|
|
30
|
|
Over 3 years
|
|
|
|
|
|
|
304
|
|
|
|
41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
58
|
|
|
|
2,782
|
|
|
|
371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The terms of the leases do not contain rent escalation or
contingent rents.
Acquisition
of Machinery
As of December 31, 2005 and 2006, the Group had commitments
of RMB11,000,000 and RMB119,874,000 (US$15,998,559),
respectively, related to acquisition of machinery. The
commitment for acquisition of machinery is expected to be
settled within the next twelve months.
F-30
SOLARFUN
POWER HOLDINGS CO., LTD.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Purchase
of Raw Materials
The commitments related to the purchase of raw materials are
listed as below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
|
|
(RMB000)
|
|
|
(RMB000)
|
|
|
(US$000)
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Within 1 year
|
|
|
75,329
|
|
|
|
819,564
|
|
|
|
109,380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In addition to the above, in October and November, 2006, the
Group entered into raw materials purchase contracts for silicon
wafers with
E-Mei
Semiconductors Material Factory
(E-Mei),
a third party supplier. According to these contracts, the Group
has committed to pay purchase advances totaling RMB220,000,000
(US$29,361,520) to
E-Mei in
return for a five-year exclusive procurement right to silicon
wafers produced by
E-Meis
new production facilities, which are currently under
construction. The procurement right entitles the Group to
purchase the abovementioned silicon wafers at 8% below the
market price at the time of purchase. The Group will have a
first right of refusal to purchase silicon wafers at market
price after the five-year period.
The RMB220,000,000 (US$29,361,520) committed purchase advances
will be paid to
E-Mei
according to progress of construction of the new production
facilities based on the construction progress status report
provided by
E-Mei. As of
December 31, 2006, all the RMB220,000,000 (US$29,361,520)
committed purchase advances remained unpaid. Future amount
payable from future purchases from
E-mei will
offset against the purchase advances. However, for each
purchase, the Group can only offset 30% of the purchase amount
against the purchase advances. After the Group has fully
utilized the advances, the discount on purchase will be adjusted
downwards to 3% to 5% of the market price at the time of
purchase.
In addition, according to the contracts, a bonus of up to
RMB3,600,000 (US$480,461) will be paid to
E-Mei should
E-Mei be
able to complete the construction of its new production
facilities and start supplying a certain quantity of the silicon
wafers to the Group within 18 to 20 months from the date of
the contact.
Guarantees
and Indemnification
In June 2006, the Company entered into a shareholders
agreement in connection with the issuance of the Series A
Redeemable Convertible Preference Shares and according to which
the Company has agreed to indemnify each of its shareholders and
their affiliates and each director and officer of the Company
(collectively, the Indemnified Persons) against any
losses that any Indemnified Persons may at any time become
subject to or liable for in connection with their status as a
shareholder, director or officer of the Company or any of their
service to or on behalf of the Company to the maximum extent
permitted under applicable law.
In accordance with FIN 45 Guarantors Accounting
and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, guarantor must
recognize a liability for the fair value of the obligations it
assumes under certain guarantees. The Company has determined the
fair value of the indemnification to be insignificant.
Accordingly, the Company has not recorded any liabilities for
these agreements as of December 31, 2006.
Contingencies
As of December 31, 2006, the Group was contingently liable
to the relevant local PRC government authorities with respect to
accumulated under-payment of social insurance and employee
welfare benefits which were estimated to be RMB3,654,471 and
recognized as a liability by the Group. The Group is in the
process of settling with the relevant local PRC government
authorities in relation to the outstanding payments. The Group
might be
F-31
SOLARFUN
POWER HOLDINGS CO., LTD.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
subject to fines or penalty for the underpayment in the past as
of December 31, 2006. However, no accrual has been made as
of December 31, 2006 as the amount cannot be reasonably
estimated.
The Group operates in a single business segment, which is the
development, manufacturing, and sale of PV products. The
following table summarizes the Groups net revenues by
geographic region based on the location of the customers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
|
|
(RMB000)
|
|
|
(RMB000)
|
|
|
(RMB000)
|
|
|
(US$000)
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Germany
|
|
|
|
|
|
|
126,555
|
|
|
|
197,728
|
|
|
|
26,389
|
|
Italy
|
|
|
|
|
|
|
5,946
|
|
|
|
204,715
|
|
|
|
27,322
|
|
Spain
|
|
|
|
|
|
|
|
|
|
|
179,139
|
|
|
|
23,908
|
|
The PRC
|
|
|
|
|
|
|
33,667
|
|
|
|
36,219
|
|
|
|
4,834
|
|
Others
|
|
|
|
|
|
|
10
|
|
|
|
13,106
|
|
|
|
1,749
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
|
|
|
|
|
166,178
|
|
|
|
630,907
|
|
|
|
84,202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All the identifiable assets of the Group are located in the PRC.
Details of the customers accounting for 10% or more of total net
revenue in any of the periods presented are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
|
|
(RMB000)
|
|
|
(RMB000)
|
|
|
(RMB000)
|
|
|
(US$000)
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
S.E. Project S.R.L.
|
|
|
|
|
|
|
|
|
|
|
203,133
|
|
|
|
27,110
|
|
Social Capital S.L.
|
|
|
|
|
|
|
|
|
|
|
175,939
|
|
|
|
23,481
|
|
Solar Projekt Energysystem GmbH
|
|
|
|
|
|
|
13,140
|
|
|
|
70,409
|
|
|
|
9,397
|
|
Suntaics
|
|
|
|
|
|
|
84,438
|
|
|
|
54,856
|
|
|
|
7,321
|
|
F-32
SOLARFUN
POWER HOLDINGS CO., LTD.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Basic and diluted net income per share for each period presented
are calculated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the period
|
|
|
|
|
|
|
|
|
|
|
|
|
from August 27,
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 (date
|
|
|
|
|
|
|
|
|
|
|
|
|
of inception) to
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
For the Year Ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
|
|
(RMB)
|
|
|
(RMB)
|
|
|
(RMB)
|
|
|
(US$)
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
(Amounts in thousands except for number of shares and per
share data)
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
|
(607
|
)
|
|
|
14,410
|
|
|
|
105,921
|
|
|
|
14,136
|
|
Dividends allocated to preference shareholders
|
|
|
|
|
|
|
|
|
|
|
(7,226
|
)
|
|
|
(964
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income attributable to ordinary shareholders
|
|
|
(607
|
)
|
|
|
14,410
|
|
|
|
98,695
|
|
|
|
13,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares outstanding, opening
|
|
|
50,175,000
|
|
|
|
50,175,000
|
|
|
|
100,350,000
|
|
|
|
100,350,000
|
|
Retroactive adjustment for bonus element in rights
offering July 12, 2005
|
|
|
1,819,399
|
|
|
|
1,819,399
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares issued (48,355,601 shares)
|
|
|
|
|
|
|
2,517,141
|
|
|
|
|
|
|
|
|
|
New ordinary shares issued from IPO (60,000,000 shares issued on
December 20, 2006)
|
|
|
|
|
|
|
|
|
|
|
1,972,603
|
|
|
|
1,972,603
|
|
Conversion of Convertible Preference Share
(79,644,754 shares converted on December 26, 2006)
|
|
|
|
|
|
|
|
|
|
|
1,309,229
|
|
|
|
1,309,229
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding basic
|
|
|
51,994,399
|
|
|
|
54,511,540
|
|
|
|
103,631,832
|
|
|
|
103,631,832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of partially paid share subscriptions
(50,175,000 shares)
|
|
|
|
|
|
|
11,854,929
|
|
|
|
|
|
|
|
|
|
Effect of Preference Shares
|
|
|
|
|
|
|
|
|
|
|
38,476,628
|
|
|
|
38,476,628
|
|
Effect of stock options (8,012,998 options issued on
November 30, 2006)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding diluted
|
|
|
51,994,399
|
|
|
|
66,366,469
|
|
|
|
142,108,460
|
|
|
|
142,108,460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net (loss) income per share
|
|
|
RMB(0.01
|
)
|
|
|
RMB0.26
|
|
|
|
RMB0.95
|
|
|
US$
|
0.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net (loss) income per share
|
|
|
RMB(0.01
|
)
|
|
|
RMB0.22
|
|
|
|
RMB0.74
|
|
|
US$
|
0.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-33
SOLARFUN
POWER HOLDINGS CO., LTD.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As of December 31, 2006, the potential dilutive ordinary
shares in relation to stock options were anti-diluted.
On July 12, 2005, Linyang Solarfun issued a rights offering
to its then existing ordinary shareholders. Since the
subscription price was less than the fair value of the shares,
as determined based on an independent appraisal performed by
Censere Holdings Limited, the rights offering is deemed to
contain a bonus element similar to a stock dividend and is
accounted for as such. Accordingly, the basic and diluted
earnings per share are adjusted retroactively for the bonus
element of the right offering for all periods presented. In
addition, ordinary shares which were not fully paid for until
December 12, 2005 were included in the computation of
diluted income per share using the treasury stock method.
Subsequent to December 31, 2006, the following events
occurred:
(i) On March 16, 2007, the PRC government promulgated
Law of the Peoples Republic of China on Enterprise
Income Tax (New Tax Law) , which will be
effective from January 1, 2008. Under the new tax law, FIEs
and domestic companies are subject to a uniform tax rate of 25%.
The Companys PRC subsidiaries will then measure and pay
enterprise income tax pursuant to the New Tax Law. In addition,
according to the New Tax Law, FIEs currently enjoying
preferential treatment in the form of enterprise income tax
reduction or exemption may continue to enjoy such treatment
until the end of the preferential treatment period.
(ii) On March 19, 2007, May 10, 2007 and
June 28, 2007, 150,000, 660,000 and 100,000 options,
respectively, were authorized to be granted to certain
employees. The options have an exercise price of US$2.44,
US$2.87 and US$2.11 per share, respectively, and have vesting
terms of five years.
(iii) In April 2007, the Group established Nantong Linyang
New Energy Construction and Technology R&D Centre Co., Ltd.
(Linyang R&D). The registered capital of the
Linyang R&D is RMB5 million of which all had been
contributed by the Group on April 4, 2007. The principal
activity of Linyang R&D is to develop PV products. As of
the date of this report, Linyang R&D has not yet commenced
its operation.
(iv) In May 2007, the Group incorporated Solarfun Power
Hong Kong Limited (Solarfun HK), a company
incorporated in Hong Kong. As of the date of this report,
Solarfun HK has not yet commenced its operation.
(v) Subsequent to December 31, 2006, the Group entered
into various one-year to two-year fixed quantity agreements with
certain domestic suppliers to procure silicon wafers or ingots,
with a planned total purchase amount of RMB531,000,000
(US$70,868,033). Certain of the contract prices are subject to
renegotiation on a quarterly basis.
|
|
27.
|
ADDITIONAL
FINANCIAL INFORMATION OF THE COMPANY
|
Under PRC laws and regulations, the Companys PRC
subsidiary, Linyang Solarfun, is restricted in its ability to
transfer certain of its net assets to the Company in the form of
dividend payments, loans, or advances. The amounts restricted
include paid up capital and statutory reserve, as determined
pursuant to PRC generally accepted accounting principles,
totaling RMB2,110,962,000 (US$281,732,063) as of
December 31, 2006.
F-34
SOLARFUN
POWER HOLDINGS CO., LTD.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Statements
of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the period
|
|
|
|
|
|
|
|
|
|
|
|
|
from August 27,
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 (date of
|
|
|
|
|
|
|
|
|
|
|
|
|
inception) to
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
For the Year Ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
|
|
(RMB000)
|
|
|
(RMB000)
|
|
|
(RMB000)
|
|
|
(US$000)
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Net revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
|
|
|
|
|
|
|
|
(123
|
)
|
|
|
(16
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
|
|
|
|
|
|
|
(123
|
)
|
|
|
(16
|
)
|
Operating expenses (Notes 16 and 15)
|
|
|
|
|
|
|
|
|
|
|
(27,514
|
)
|
|
|
(3,672
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
|
|
|
|
|
|
|
|
(27,637
|
)
|
|
|
(3,688
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in profit of subsidiary companies, net (Note a)
|
|
|
(607
|
)
|
|
|
14,410
|
|
|
|
137,046
|
|
|
|
18,290
|
|
Interest income
|
|
|
|
|
|
|
|
|
|
|
107
|
|
|
|
14
|
|
Exchange loss
|
|
|
|
|
|
|
|
|
|
|
(3,595
|
)
|
|
|
(480
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before tax
|
|
|
(607
|
)
|
|
|
14,410
|
|
|
|
105,921
|
|
|
|
14,136
|
|
Income tax benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
|
(607
|
)
|
|
|
14,410
|
|
|
|
105,921
|
|
|
|
14,136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to ordinary shareholders
|
|
|
(607
|
)
|
|
|
14,410
|
|
|
|
98,695
|
|
|
|
13,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-35
SOLARFUN
POWER HOLDINGS CO., LTD.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Balance
Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
|
|
(RMB000)
|
|
|
(RMB000)
|
|
|
(US$000)
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and bank
|
|
|
|
|
|
|
1,080,706
|
|
|
|
144,233
|
|
Other receivables
|
|
|
|
|
|
|
9,644
|
|
|
|
1,287
|
|
Deferred expenses
|
|
|
|
|
|
|
4,216
|
|
|
|
563
|
|
Amount due from subsidiaries (Note b)
|
|
|
|
|
|
|
18,741
|
|
|
|
2,501
|
|
Amount due from shareholders (Note b)
|
|
|
|
|
|
|
579
|
|
|
|
77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
|
|
|
|
1,113,886
|
|
|
|
148,661
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in subsidiaries (Note a)
|
|
|
73,670
|
|
|
|
608,914
|
|
|
|
81,266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-current assets
|
|
|
73,670
|
|
|
|
608,914
|
|
|
|
81,266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
73,670
|
|
|
|
1,722,800
|
|
|
|
229,927
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES, PREFERENCE SHARES AND SHAREHOLDERS
EQUITY:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other payables
|
|
|
|
|
|
|
16,311
|
|
|
|
2,177
|
|
Amount due to shareholders
|
|
|
|
|
|
|
7,572
|
|
|
|
1,010
|
|
Amount due to subsidiaries (Note b)
|
|
|
|
|
|
|
20,702
|
|
|
|
2,763
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
|
|
|
|
44,585
|
|
|
|
5,950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary shares (par value US$0.0001 per share; 400,000,000 and
500,000,000 shares authorized as at December 31, 2005
and 2006 respectively, 50,175,000 shares,
100,350,000 shares, 100,350,000 shares and
239,994,754 shares issued and outstanding at
December 31, 2004, 2005 and 2006, respectively)
|
|
|
84
|
|
|
|
193
|
|
|
|
25
|
|
Additional paid-in capital
|
|
|
59,783
|
|
|
|
1,565,524
|
|
|
|
208,937
|
|
Reserve fund
|
|
|
1,496
|
|
|
|
16,024
|
|
|
|
2,139
|
|
Retained earnings
|
|
|
12,307
|
|
|
|
96,474
|
|
|
|
12,876
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
73,670
|
|
|
|
1,678,215
|
|
|
|
223,977
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
|
73,670
|
|
|
|
1,722,800
|
|
|
|
229,927
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-36
SOLARFUN
POWER HOLDINGS CO., LTD.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Statements
of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the period
|
|
|
|
|
|
|
|
|
|
|
|
|
from August 27,
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 (date of
|
|
|
|
|
|
|
|
|
|
|
|
|
inception) to
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
For the Year Ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
|
|
(RMB000)
|
|
|
(RMB000)
|
|
|
(RMB000)
|
|
|
(US$000)
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(30,000
|
)
|
|
|
(29,296
|
)
|
|
|
(593,980
|
)
|
|
|
(79,274
|
)
|
Net cash provided by financing activities
|
|
|
30,000
|
|
|
|
29,296
|
|
|
|
1,674,579
|
|
|
|
223,492
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
|
|
|
|
|
|
|
|
|
1,080,599
|
|
|
|
144,218
|
|
Cash at the beginning of period/year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash at the end of period/year
|
|
|
|
|
|
|
|
|
|
|
1,080,599
|
|
|
|
144,218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Basis
of Presentation
|
In the Company-only financial statements, the Companys
investment in subsidiaries is stated at cost plus equity in
undistributed earnings of subsidiaries since inception. The
Company-only financial statements should be read in conjunction
with the Companys consolidated financial statements.
The Company records its investment in its subsidiaries under the
equity method of accounting as prescribed in APB Opinion
No. 18, The Equity Method of Accounting for
Investments in Common Stock. Such investment is presented
on the balance sheet as Investment in subsidiaries
and share of the subsidiaries profit or loss as
Equity in profit (loss) of subsidiary company on the
statements of operations.
The subsidiaries did not pay any dividend to the Company for the
periods presented.
Certain information and footnote disclosures normally included
in financial statements prepared in accordance with
U.S. generally accepted accounting principles have been
condensed or omitted.
|
|
(b)
|
Related
Party Balances
|
For the year ended December 31, 2006, the Company made
advances to its subsidiaries amounting to RMB18,741,000
(US$2,501,201). During the same period, a subsidiary of the
Company paid operating expenses amounting to RMB20,702,000
(US$2,762,919) on behalf of the Company. The Company did not
have any related party transaction for any of the other periods
presented.
During the year ended December 31, 2006, amount due from
shareholders represented reimbursement for preferred share
issuance cost receivable from Citi Growth and Citi Investment
amounted to RMB549,000 (US$73,270) and RMB29,000 (US$3,870),
respectively.
In the year ended December 31, 2006, the Company accrued
cumulative dividends of RMB7,226,000 (US$964,392) to its
Preference Shareholders. Unpaid dividends as of
December 31, 2006 amounted to RMB7,128,000 (US$951,313).
F-37
SOLARFUN
POWER HOLDINGS CO., LTD.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company does not have any significant commitments or
long-term obligations as of any of the periods presented.
The United States Dollar (US$) amounts disclosed in
the financial statement are presented solely for the convenience
of the readers. Translation of amounts from RMB into US$ for the
convenience of the readers were calculated at the noon buying
rate of US$1.00 = RMB7.4928 on September 28, 2007 in the
City of New York for cable transfers of RMB certified for
customs purposes by the Federal Reserve Bank of New York. No
representation is made that the RMB amounts could have been, or
could be, converted into US$ at such rate.
F-38
SOLARFUN
POWER HOLDINGS CO., LTD.
UNAUDITED CONSOLIDATED BALANCE SHEETS
(Amounts in Renminbi (RMB) and U.S. dollar
(US$),
except for number of shares and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
Note
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
|
|
|
|
|
RMB000
|
|
|
RMB000
|
|
|
US$000
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
|
|
|
1,137,792
|
|
|
|
345,448
|
|
|
|
46,104
|
|
Restricted cash
|
|
|
|
|
|
|
33,822
|
|
|
|
34,171
|
|
|
|
4,561
|
|
Accounts receivable (net of allowance for doubtful accounts of
RMB6,448,000 (US$847,084) as of September 30, 2007
(December 31, 2006: RMB11,322,000))
|
|
|
|
|
|
|
147,834
|
|
|
|
681,914
|
|
|
|
91,009
|
|
Inventories
|
|
|
3
|
|
|
|
372,504
|
|
|
|
522,955
|
|
|
|
69,794
|
|
Advance to suppliers
|
|
|
4
|
|
|
|
238,178
|
|
|
|
468,371
|
|
|
|
62,509
|
|
Other current assets
|
|
|
|
|
|
|
75,525
|
|
|
|
159,551
|
|
|
|
21,294
|
|
Deferred tax assets
|
|
|
7
|
|
|
|
3,142
|
|
|
|
3,522
|
|
|
|
470
|
|
Amount due from related parties
|
|
|
|
|
|
|
153
|
|
|
|
3,009
|
|
|
|
402
|
|
Amount due from shareholders
|
|
|
|
|
|
|
578
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
|
|
|
|
2,009,528
|
|
|
|
2,218,941
|
|
|
|
296,143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed assets net
|
|
|
|
|
|
|
207,449
|
|
|
|
503,424
|
|
|
|
67,188
|
|
Intangible assets net
|
|
|
|
|
|
|
12,897
|
|
|
|
94,930
|
|
|
|
12,670
|
|
Deferred tax assets
|
|
|
7
|
|
|
|
258
|
|
|
|
4,607
|
|
|
|
614
|
|
Long-term deferred expenses
|
|
|
|
|
|
|
|
|
|
|
109,000
|
|
|
|
14,547
|
|
Investments
|
|
|
5
|
|
|
|
300
|
|
|
|
300
|
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-current assets
|
|
|
|
|
|
|
220,904
|
|
|
|
712,261
|
|
|
|
95,059
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
|
|
|
|
|
2,230,432
|
|
|
|
2,931,202
|
|
|
|
391,202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term bank borrowings
|
|
|
6
|
|
|
|
379,900
|
|
|
|
752,887
|
|
|
|
100,482
|
|
Long-term bank borrowings, current portion
|
|
|
6
|
|
|
|
16,000
|
|
|
|
16,000
|
|
|
|
2,135
|
|
Accounts payable
|
|
|
|
|
|
|
51,452
|
|
|
|
146,400
|
|
|
|
19,539
|
|
Notes payable
|
|
|
|
|
|
|
14,020
|
|
|
|
5,000
|
|
|
|
667
|
|
Accrued expenses and other liabilities
|
|
|
|
|
|
|
33,619
|
|
|
|
70,635
|
|
|
|
9,427
|
|
Customer deposits
|
|
|
|
|
|
|
17
|
|
|
|
84,825
|
|
|
|
11,321
|
|
Amount due to related parties
|
|
|
|
|
|
|
24,486
|
|
|
|
18,971
|
|
|
|
2,532
|
|
Amount due to shareholders
|
|
|
|
|
|
|
7,572
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
|
|
|
|
527,066
|
|
|
|
1,094,718
|
|
|
|
146,103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term bank borrowings, non-current portion
|
|
|
6
|
|
|
|
15,000
|
|
|
|
7,000
|
|
|
|
934
|
|
Deferred tax liabilities
|
|
|
7
|
|
|
|
|
|
|
|
9,806
|
|
|
|
1,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,000
|
|
|
|
16,086
|
|
|
|
2,147
|
|
Commitments and contingencies
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interests
|
|
|
|
|
|
|
10,151
|
|
|
|
44,820
|
|
|
|
5,981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary shares (par value US$0.0001 per share;
500,000,000 shares authorized; 239,994,754 shares and
240,024,754 shares issued and outstanding at
December 31, 2006 and September 30, 2007, respectively)
|
|
|
|
|
|
|
193
|
|
|
|
193
|
|
|
|
25
|
|
Additional paid-in capital
|
|
|
|
|
|
|
1,565,524
|
|
|
|
1,581,294
|
|
|
|
211,042
|
|
Statutory reserves
|
|
|
|
|
|
|
16,024
|
|
|
|
28,309
|
|
|
|
3,779
|
|
Retained earnings
|
|
|
|
|
|
|
96,474
|
|
|
|
165,782
|
|
|
|
22,125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
|
|
|
|
1,678,215
|
|
|
|
1,775,578
|
|
|
|
236,971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
2,230,432
|
|
|
|
2,931,202
|
|
|
|
391,202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the unaudited
interim condensed consolidated financial statements.
F-39
SOLARFUN
POWER HOLDINGS CO., LTD.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in Renminbi (RMB) and U.S. dollar
(US$),
except for number of shares and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended September 30,
|
|
|
|
Note
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
|
|
|
|
|
RMB000
|
|
|
RMB000
|
|
|
US$000
|
|
|
Net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Photovoltaic modules
|
|
|
|
|
|
|
360,154
|
|
|
|
1,405,371
|
|
|
|
187,563
|
|
Photovoltaic cells
|
|
|
|
|
|
|
6,624
|
|
|
|
1,994
|
|
|
|
266
|
|
Photovoltaic cells processing
|
|
|
|
|
|
|
19,461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
|
|
|
|
|
386,239
|
|
|
|
1,407,365
|
|
|
|
187,829
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Photovoltaic modules
|
|
|
|
|
|
|
(255,867
|
)
|
|
|
(1,182,231
|
)
|
|
|
(157,782
|
)
|
Photovoltaic cells
|
|
|
|
|
|
|
(5,548
|
)
|
|
|
(1,856
|
)
|
|
|
(248
|
)
|
Photovoltaic cells processing
|
|
|
|
|
|
|
(6,014
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
|
|
|
|
|
(267,429
|
)
|
|
|
(1,184,087
|
)
|
|
|
(158,030
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
|
|
|
118,810
|
|
|
|
223,278
|
|
|
|
29,799
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling expenses
|
|
|
|
|
|
|
(6,023
|
)
|
|
|
(39,610
|
)
|
|
|
(5,287
|
)
|
General and administrative expenses
|
|
|
|
|
|
|
(31,585
|
)
|
|
|
(63,603
|
)
|
|
|
(8,488
|
)
|
Research and development expenses
|
|
|
|
|
|
|
(2,723
|
)
|
|
|
(18,934
|
)
|
|
|
(2,527
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
|
|
|
|
(40,331
|
)
|
|
|
(122,147
|
)
|
|
|
(16,302
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit
|
|
|
|
|
|
|
78,479
|
|
|
|
101,131
|
|
|
|
13,497
|
|
Interest expense
|
|
|
|
|
|
|
(3,855
|
)
|
|
|
(14,686
|
)
|
|
|
(1,960
|
)
|
Interest income
|
|
|
|
|
|
|
492
|
|
|
|
18,050
|
|
|
|
2,409
|
|
Exchange losses
|
|
|
|
|
|
|
(2,123
|
)
|
|
|
(22,322
|
)
|
|
|
(2,979
|
)
|
Other income
|
|
|
|
|
|
|
486
|
|
|
|
9,058
|
|
|
|
1,209
|
|
Other expenses
|
|
|
|
|
|
|
(474
|
)
|
|
|
(7,639
|
)
|
|
|
(1,020
|
)
|
Changes in fair value of embedded foreign currency derivative
|
|
|
|
|
|
|
(1,082
|
)
|
|
|
|
|
|
|
|
|
Government grant
|
|
|
|
|
|
|
640
|
|
|
|
720
|
|
|
|
96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and minority interest
|
|
|
7
|
|
|
|
72,563
|
|
|
|
84,312
|
|
|
|
11,252
|
|
Income tax benefit (expense)
|
|
|
7
|
|
|
|
574
|
|
|
|
(3,644
|
)
|
|
|
(486
|
)
|
Minority interest
|
|
|
|
|
|
|
(266
|
)
|
|
|
925
|
|
|
|
124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
72,871
|
|
|
|
81,593
|
|
|
|
10,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to ordinary shareholders
|
|
|
|
|
|
|
69,195
|
|
|
|
81,593
|
|
|
|
10,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
10
|
|
|
|
RMB0.69
|
|
|
|
RMB0.34
|
|
|
US$
|
0.05
|
|
Diluted
|
|
|
10
|
|
|
|
RMB0.55
|
|
|
|
RMB0.34
|
|
|
US$
|
0.05
|
|
Shares used in computation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share
|
|
|
10
|
|
|
|
100,350,000
|
|
|
|
240,024,754
|
|
|
|
240,024,754
|
|
Diluted net income per share
|
|
|
10
|
|
|
|
131,624,178
|
|
|
|
240,024,754
|
|
|
|
240,024,754
|
|
The accompanying notes are an integral part of the unaudited
interim condensed consolidated financial statements.
F-40
SOLARFUN
POWER HOLDINGS CO., LTD.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Renminbi (RMB) and U.S. dollar
(US$)
except for number of share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended September 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
|
|
RMB000
|
|
|
RMB000
|
|
|
US$000
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
72,871
|
|
|
|
81,593
|
|
|
|
10,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net income to net cash used in
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interest
|
|
|
|
|
|
|
(925
|
)
|
|
|
(124
|
)
|
Depreciation and amortization
|
|
|
3,974
|
|
|
|
16,389
|
|
|
|
2,188
|
|
Stock compensation expenses
|
|
|
22,425
|
|
|
|
15,354
|
|
|
|
2,049
|
|
Deferred tax benefit
|
|
|
(574
|
)
|
|
|
(969
|
)
|
|
|
(130
|
)
|
Warranty provision
|
|
|
3,595
|
|
|
|
13,280
|
|
|
|
1,772
|
|
Write down of inventories
|
|
|
|
|
|
|
4,575
|
|
|
|
611
|
|
Write off of doubtful debt
|
|
|
|
|
|
|
(11,323
|
)
|
|
|
(1,511
|
)
|
Others
|
|
|
336
|
|
|
|
(163
|
)
|
|
|
(22
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash
|
|
|
(2,877
|
)
|
|
|
(9,972
|
)
|
|
|
(1,331
|
)
|
Accounts receivable
|
|
|
(13,798
|
)
|
|
|
(522,757
|
)
|
|
|
(69,768
|
)
|
Inventories
|
|
|
(144,789
|
)
|
|
|
(157,532
|
)
|
|
|
(21,025
|
)
|
Advance to suppliers
|
|
|
(326,811
|
)
|
|
|
(226,416
|
)
|
|
|
(30,218
|
)
|
Other current assets
|
|
|
(10,302
|
)
|
|
|
(83,896
|
)
|
|
|
(11,197
|
)
|
Long-term deferred expenses
|
|
|
|
|
|
|
(109,000
|
)
|
|
|
(14,547
|
)
|
Amount due from related parties
|
|
|
(740
|
)
|
|
|
(2,276
|
)
|
|
|
(304
|
)
|
Accounts payable
|
|
|
1,111
|
|
|
|
76,866
|
|
|
|
10,259
|
|
Accrued expenses and other liabilities
|
|
|
5,705
|
|
|
|
21,940
|
|
|
|
2,928
|
|
Amount due to related parties
|
|
|
(2,043
|
)
|
|
|
(24,516
|
)
|
|
|
(3,272
|
)
|
Customer deposits
|
|
|
(22,742
|
)
|
|
|
84,808
|
|
|
|
11,319
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(414,659
|
)
|
|
|
(834,940
|
)
|
|
|
(111,433
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of fixed assets
|
|
|
(88,712
|
)
|
|
|
(285,841
|
)
|
|
|
(38,148
|
)
|
Restricted cash
|
|
|
(270
|
)
|
|
|
9,623
|
|
|
|
1,284
|
|
Acquisition of intangible assets
|
|
|
(6,643
|
)
|
|
|
|
|
|
|
|
|
Acquisition of subsidiary, net off cash acquired
|
|
|
|
|
|
|
(48,018
|
)
|
|
|
(6,409
|
)
|
Proceeds from disposal of fixed assets
|
|
|
238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(95,387
|
)
|
|
|
(324,236
|
)
|
|
|
(43,273
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital contributed by minority interest shareholder
|
|
|
9,850
|
|
|
|
|
|
|
|
|
|
Net proceeds from exercise of stock option
|
|
|
|
|
|
|
416
|
|
|
|
56
|
|
Net proceeds from issuance of preference shares
|
|
|
423,815
|
|
|
|
|
|
|
|
|
|
Payment of share issuance cost of preferred shares
|
|
|
(3,787
|
)
|
|
|
|
|
|
|
|
|
Payment of deferred initial public offering costs
|
|
|
(3,407
|
)
|
|
|
|
|
|
|
|
|
Proceeds from short-term borrowings
|
|
|
219,746
|
|
|
|
729,000
|
|
|
|
97,293
|
|
Repayment of short-term borrowings
|
|
|
(55,000
|
)
|
|
|
(356,013
|
)
|
|
|
(47,514
|
)
|
Proceeds from long-term borrowings
|
|
|
31,000
|
|
|
|
(8,000
|
)
|
|
|
(1,068
|
)
|
Payment of notes payables
|
|
|
(20,000
|
)
|
|
|
|
|
|
|
|
|
Advances from related parties
|
|
|
114,900
|
|
|
|
1,429
|
|
|
|
191
|
|
Repayment of advances from related parties
|
|
|
(145,179
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
571,938
|
|
|
|
366,832
|
|
|
|
48,958
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
61,892
|
|
|
|
(792,344
|
)
|
|
|
(105,748
|
)
|
Cash and cash equivalents at the beginning of year/period
|
|
|
7,054
|
|
|
|
1,137,792
|
|
|
|
151,852
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at the end of year/period
|
|
|
68,946
|
|
|
|
345,448
|
|
|
|
46,104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
|
3,658
|
|
|
|
13,005
|
|
|
|
1,736
|
|
Supplemental schedule of non-cash activities
Acquisition of fixed assets included in accrued expenses and
other liabilities
|
|
|
14,123
|
|
|
|
23,256
|
|
|
|
3,104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the unaudited
interim condensed consolidated financial statements.
F-41
SOLARFUN
POWER HOLDINGS CO., LTD.
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS EQUITY
(Amounts in Renminbi (RMB) and U.S. dollar
(US$),
except for number of shares)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
Number of
|
|
|
Ordinary
|
|
|
Additional
|
|
|
Statutory
|
|
|
Retained
|
|
|
|
|
|
shareholders
|
|
|
|
Note
|
|
|
ordinary shares
|
|
|
shares
|
|
|
paid-in capital
|
|
|
reserves
|
|
|
earnings
|
|
|
Put options
|
|
|
equity
|
|
|
|
|
|
|
|
|
|
(RMB)
|
|
|
(RMB)
|
|
|
(RMB)
|
|
|
(RMB)
|
|
|
(RMB)
|
|
|
(RMB)
|
|
|
Balance as of January 1, 2006
|
|
|
|
|
|
|
100,350,000
|
|
|
|
84
|
|
|
|
59,783
|
|
|
|
1,496
|
|
|
|
12,307
|
|
|
|
|
|
|
|
73,670
|
|
Stock compensation expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,425
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,425
|
|
Acquisition of put option
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
668
|
|
|
|
668
|
|
Exercise of put option
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(668
|
)
|
|
|
(668
|
)
|
Net income for the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72,871
|
|
|
|
|
|
|
|
72,871
|
|
Cumulative dividends preference shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,676
|
)
|
|
|
|
|
|
|
(3,676
|
)
|
Appropriation of statutory reserves
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
749
|
|
|
|
(749
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of September 30, 2006
|
|
|
|
|
|
|
100,350,000
|
|
|
|
84
|
|
|
|
82,208
|
|
|
|
2,245
|
|
|
|
80,753
|
|
|
|
|
|
|
|
165,290
|
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,882
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,882
|
|
Proceeds from issuance of common stock upon IPO
|
|
|
|
|
|
|
60,000,000
|
|
|
|
47
|
|
|
|
1,060,468
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,060,515
|
|
Conversion of preference shares
|
|
|
|
|
|
|
79,644,754
|
|
|
|
62
|
|
|
|
419,966
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
420,028
|
|
Net income for the year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,050
|
|
|
|
|
|
|
|
33,050
|
|
Cumulative dividends preference shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,550
|
)
|
|
|
|
|
|
|
(3,550
|
)
|
Appropriation of statutory reserves
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,779
|
|
|
|
(13,779
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2006
|
|
|
|
|
|
|
239,994,754
|
|
|
|
193
|
|
|
|
1,565,524
|
|
|
|
16,024
|
|
|
|
96,474
|
|
|
|
|
|
|
|
1,678,215
|
|
Exercise of stock option
|
|
|
8
|
|
|
|
30,000
|
|
|
|
|
|
|
|
416
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
416
|
|
Share-based compensation
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
15,354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,354
|
|
Net income for the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
81,593
|
|
|
|
|
|
|
|
81,593
|
|
Appropriation of statutory reserves
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,285
|
|
|
|
(12,285
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of September 30, 2007
|
|
|
|
|
|
|
240,024,754
|
|
|
|
193
|
|
|
|
1,581,294
|
|
|
|
28,309
|
|
|
|
165,782
|
|
|
|
|
|
|
|
1,775,578
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of September 30, 2007, in US$
|
|
|
|
|
|
|
|
|
|
|
25
|
|
|
|
211,042
|
|
|
|
3,779
|
|
|
|
22,125
|
|
|
|
|
|
|
|
236,971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the unaudited
interim condensed consolidated financial statements.
F-42
SOLARFUN
POWER HOLDINGS CO., LTD.
NOTES TO THE UNAUDITED INTERIM CONSOLIDATED FINANCIAL
INFORMATION
For the nine months ended September 30, 2007
The accompanying unaudited interim condensed consolidated
financial statements of Solarfun Power Holdings Co., Ltd. (the
Company) and subsidiaries (collectively the
Group) were prepared on a basis substantially
consistent with the Companys audited consolidated
financial statements for the year ended December 31, 2006.
These unaudited interim condensed consolidated financial
statements have been prepared in accordance with
U.S. generally accepted accounting principles (US
GAAP) for interim financial information and consequently
do not include all disclosures normally required by generally
accepted accounting principles for annual financial statements.
These financial statements and the notes thereto should be read
in conjunction with the Companys audited consolidated
financial statements for the year ended December 31, 2006.
In the opinion of management, these unaudited interim condensed
consolidated financial statements reflect all adjustments,
consisting only of normal and recurring adjustments, necessary
to present fairly the Groups consolidated financial
position at September 30, 2007, its consolidated results of
operations, cash flows and changes in shareholders equity
for the nine months ended September 30, 2007 and 2006.
Interim period results are not necessarily indicative of results
of operations or cash flows for a full-year period. The
information pertaining to the consolidated balance sheet as of
December 31, 2006 is derived from audited consolidated
financial statements as of that date.
The Company expects that its business growth and ongoing
operations require significant capital and in the past, the
Company has met such requirements through internally generated
cash flows and external debt and equity financing. The Company
believes its existing sources of liquidity will be sufficient to
fund its operations, working capital and other financing
requirements over the next twelve months. In the opinion of
management, if the existing cash and expected cash resources are
insufficient to meet the Groups working capital
requirements, or if future business developments require
additional liquidity, the Company will seek additional financing
but there cannot be any assurance that such financing will be
available to the Company on favorable terms, or at all. Should
the Company be unable to obtain financing at levels necessary to
meet its anticipated requirements or at commercially acceptable
terms, future business operations may be adversely affected and
may need to be curtailed or postponed.
As of September 30, 2007, the Companys subsidiaries
include the following entities:
|
|
|
|
|
|
|
|
|
|
|
Date of
|
|
Place of
|
|
Percentage of
|
|
|
|
|
incorporation/
|
|
incorporation/
|
|
shareholding/
|
|
|
Subsidiary
|
|
establishment
|
|
establishment
|
|
ownership
|
|
Principal activities
|
|
Linyang Solar Power Investment Holding Ltd. (Linyang Solar
Power)
|
|
May 17, 2006
|
|
British Virgin
Islands
|
|
100%
|
|
Investment holding
|
Jiangsu Linyang Solarfun Co., Ltd. (Linyang Solarfun)
|
|
Aug 27, 2004
|
|
PRC
|
|
100%
|
|
Development, manufacturing and sales of photovoltaic
(PV) products
|
Shanghai Linyang Solar Technology Co., Ltd. (Shanghai
Linyang)
|
|
March 29, 2006
|
|
PRC
|
|
83%
|
|
Research and development, design, and provision services in
solar energy related products
|
Sichuan Leshan Jiayang New Energy Co., Ltd. (Sichuan
Leshan Jiayang)
|
|
April 22, 2006
|
|
PRC
|
|
55%
|
|
Research and development, manufacturing and sales of solar
energy related products
|
F-43
SOLARFUN
POWER HOLDINGS CO., LTD.
NOTES TO THE UNAUDITED INTERIM CONSOLIDATED FINANCIAL
INFORMATION
For the nine months ended September 30, 2007
1. BASIS
OF PREPARATION (CONTD)
|
|
|
|
|
|
|
|
|
|
|
Date of
|
|
Place of
|
|
Percentage of
|
|
|
|
|
incorporation/
|
|
incorporation/
|
|
shareholding/
|
|
|
Subsidiary
|
|
establishment
|
|
establishment
|
|
ownership
|
|
Principal activities
|
|
Nantong Linyang New Energy Construction and Technology R&D
Centre Co., Ltd. (Linyang R&D)
|
|
April 9, 2007
|
|
PRC
|
|
100%
|
|
Research and development, manufacturing, sales of solar related
products and provision of technical consultancy, training and
skill transfer services.
|
Solarfun Power Hong Kong Limited (Solarfun HK)
|
|
May 16, 2007
|
|
Hong Kong
|
|
100%
|
|
International sales office.
|
Jiangsu Yangguang Solar Technology Co., Ltd. (Yangguang
Solar)
|
|
August 1, 2007*
|
|
PRC
|
|
52%
|
|
Research and development, manufacturing, sales of solar related
products and provision of technical consultancy, training and
skill transfer services
|
Solarfun USA, Inc
|
|
September 18,
2007
|
|
USA
|
|
100%
|
|
International sales office.
|
|
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
|
|
|
Principles
of Consolidation
|
The unaudited interim condensed consolidated financial
statements include the financial statements of the Company and
its subsidiaries. All significant inter-company transactions and
balances between the Company and its subsidiaries are eliminated
upon consolidation.
Amounts in US$ are presented for the convenience of the reader
and are calculated at the noon buying rate of US$1.00 to
RMB7.4928 on September 28, 2007 in the City of New York for
cable transfers of RMB as certified for customs purposes by the
Federal Reserve Bank of New York. No representation is made that
the RMB amounts could have been, or could be, converted into
United States dollars at such rate.
The preparation of the unaudited interim consolidated financial
statements in conformity with US GAAP requires management to
make estimates and assumptions that affect the reported amount
of assets and liabilities and disclosures of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the periods.
Actual results could differ from these estimates.
Leases
Leases are classified at the inception date as either a capital
lease or an operating lease. For the lessee, a lease is a
capital lease if any of the following conditions exist:
(i) ownership is transferred to the lessee by the end of
the
F-44
SOLARFUN
POWER HOLDINGS CO., LTD.
NOTES TO THE UNAUDITED INTERIM CONSOLIDATED FINANCIAL
INFORMATION
For the nine months ended September 30, 2007
|
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONTD)
|
lease term, (ii) there is a bargain purchase option,
(iii) the lease term is at least 75% of the propertys
estimated remaining economic life or (iv) the present value
of the minimum lease payments at the beginning of the lease term
is 90% or more of the fair value of the leased property to the
lessor at the inception date. A capital lease is accounted for
as if there was an acquisition of an asset and an incurrence of
an obligation at the inception of the lease. All other leases
are accounted for as operating leases wherein rental payments
are expensed on a straight-line basis over the periods of their
respective leases. The Group has no capital lease for any of the
periods stated herein.
|
|
|
Accounting
for Uncertain Income Tax Positions
|
In June 2006, the Financial Accounting Standards Board
(FASB) issued Interpretation No. 48,
Accounting for uncertainty in Income Taxes, an
interpretation of FAS 109, Accounting for Income
Taxes (FIN 48), which became effective on
January 1, 2007 for the Group. FIN 48 prescribes a
recognition threshold and a measurement attribute for the
financial statement recognition and measurement of tax positions
taken or expected to be taken in a tax return. For those
benefits to be recognized, a tax position must be
more-likely-than-not to be sustained upon examination by taxing
authorities. The amount recognized is measured as the largest
amount of benefit that is more likely than not of being realized
upon ultimate settlement. The Groups adoption of
FIN 48 did not result in any adjustment to the opening
balance of the Groups retained earnings as of
January 1, 2007 nor did it have any impact on the
Groups financial statements for the nine months ended
September 30, 2007.
The Companys accounting policy for interest
and/or
penalties related to underpayments of income taxes is to include
interest in interest expense and penalties in other operating
expenses. No such amounts have been incurred or accrued through
September 30, 2007 by the Company.
Based on existing PRC tax regulations, the tax years of Linyang
Solarfun, Shanghai Linyang, Sichuan Leshan Jiayang and Linyang
R&D for the years ended December 31, 2004, 2005 and
2006 remain subject to examination by the tax authorities.
|
|
|
Recent
Accounting Pronouncement
|
In September 2006, the FASB issued SFAS No. 157
Fair Value Measurements. SFAS No. 157
establishes a framework for measuring fair value in generally
accepted accounting principles, clarifies the definition of fair
value within that framework and expands disclosures about the
use of fair value measurements. SFAS No. 157 is
effective for fiscal years beginning after November 15,
2007. The provisions are to be applied prospectively as of the
beginning of the fiscal year in which SFAS No. 157 is
initially applied. The Group is currently assessing the impact,
if any, that SFAS No. 157 will have on its financial
statements.
In February 2007, the FASB issued FASB Statement No. 159
The Fair Value Option for Financial Assets and Financial
Liabilities Including an amendment of FASB Statement
No. 115 (SFAS 159). This Statement
permits entities to choose to measure many financial instruments
and certain other items at fair value that are not currently
required to be measured at fair value. SFAS 159 is
effective for financial statements issued for fiscal years
beginning after November 15, 2007 and interim periods
within those fiscal years. The Group is currently assessing the
impact, if any, of this new standard on its financial statements.
Certain figures have been reclassified to conform to the current
periods presentation.
F-45
SOLARFUN
POWER HOLDINGS CO., LTD.
NOTES TO THE UNAUDITED INTERIM CONSOLIDATED FINANCIAL
INFORMATION
For the nine months ended September 30, 2007
3. INVENTORIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
|
|
RMB000
|
|
|
RMB000
|
|
|
US$000
|
|
|
Raw materials
|
|
|
295,087
|
|
|
|
215,611
|
|
|
|
28,776
|
|
Work-in-progress
|
|
|
56,921
|
|
|
|
211,796
|
|
|
|
28,266
|
|
Finished goods
|
|
|
20,496
|
|
|
|
95,548
|
|
|
|
12,752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
372,504
|
|
|
|
522,955
|
|
|
|
69,794
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2007 and December 31, 2006, raw
materials of RMB1,226,000 (US$163,624) and RMB13,522,000,
respectively, were held in custody by other parties for
processing.
As of September 30, 2007 and December 31, 2006,
finished goods of RMB8,519,963 (US$1,137,087) and nil,
respectively, were carried at net realizable value.
4. ADVANCE
TO SUPPLIERS
The advance to suppliers represents interest-free cash deposits
paid to suppliers for future purchase of raw materials. These
deposits are required in order to secure supply of silicon due
to limited availability. The risk of loss arising from
non-performance by or bankruptcy of the suppliers is assessed
prior to making the deposits and monitored on a regular basis by
management. A charge to cost of revenue will be recorded in the
period in which a loss has been incurred. To date, the Group has
not experienced any loss of supplier advances. However, as there
is currently an industry-wide shortage of silicon and silicon
wafers, certain of the Groups raw materials suppliers have
delayed delivery or failed to deliver raw materials to the Group
under these supply contracts in 2006.
5. INVESTMENTS
Investments represent equity ownership in Shanghai Yangneng New
Energy Technology Co., Ltd. (Shanghai Yangneng), a
joint venture company established by Shanghai Linyang Solar
Technology Co., Ltd. (Shanghai Linyang), the
Companys PRC subsidiary, and a third party company on
October 20, 2006. The registered capital of Shanghai
Yangneng is RMB3,000,000. As of September 30, 2007, paid-in
capital of Shanghai Yangneng is RMB1,000,000 and the capital
contribution from Shanghai Linyang to Shanghai Yangneng amounted
to RMB300,000 representing a 30% voting interest. Shanghai
Yangneng is principally engaged in the manufacturing and selling
of PV products. As of September 30, 2007, Shanghai Yangneng
has not yet commenced operations.
F-46
SOLARFUN
POWER HOLDINGS CO., LTD.
NOTES TO THE UNAUDITED INTERIM CONSOLIDATED FINANCIAL
INFORMATION
For the nine months ended September 30, 2007
6. BANK
BORROWINGS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
|
|
RMB000
|
|
|
RMB000
|
|
|
US$000
|
|
|
Total bank borrowings
|
|
|
410,900
|
|
|
|
775,887
|
|
|
|
103,551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprised of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
|
|
|
379,900
|
|
|
|
752,887
|
|
|
|
100,482
|
|
Long-term, current portion
|
|
|
16,000
|
|
|
|
16,000
|
|
|
|
2,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
395,900
|
|
|
|
768,887
|
|
|
|
102,617
|
|
Long-term, non-current portion
|
|
|
15,000
|
|
|
|
7,000
|
|
|
|
934
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
410,900
|
|
|
|
775,887
|
|
|
|
103,551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The short-term bank borrowings outstanding at September 30,
2007 bore an average interest rate of 6.3751% (2006: 5.96%) per
annum and were denominated in RMB. These borrowings were
obtained from financial institutions which had terms of nine
months to one year and expire at various times before
September 30, 2008.
As of September 30, 2007, short-term bank borrowings were
secured/guaranteed by the following:
|
|
|
|
|
Amount
|
|
|
Secured/guaranteed by
|
RMB000
|
|
|
|
|
|
60,000
|
|
|
Guaranteed by Huaerli (Nantong) Electronics Co., Ltd.
(Huaerli), a company whose controlling owner is also
a significant shareholder of the Company.
|
|
|
|
|
|
|
297,988
|
|
|
Jointly guaranteed by (i) Linyang Electronics Co., Ltd.,
(Linyang Electronics), a company whose controlling
owner is also a significant shareholder of the Company,
(ii) a significant shareholder and chairman of the Company
together with his spouse, (iii) Qidong Huahong Electronics Co.,
Ltd., companies whose controlling owner is also a significant
shareholder and chairman of the Company, and (iv) the
Groups land use right of RMB4,620,690 (US$616,684).
|
|
|
|
|
|
|
60,000
|
|
|
Jointly guaranteed by (i) Linyang Electronics and
(ii) Huaerli.
|
|
|
|
|
|
|
20,000
|
|
|
Jointly guaranteed by (i) Mr. Lu Yonghua, significant
shareholder and chairman of the Company, and (ii) the
Groups land use right of RMB19,911,065 (US$2,657,360)
|
|
|
|
|
|
|
314,899
|
|
|
Guaranteed by Linyang Electronics.
|
|
|
|
|
|
|
752,887
|
|
|
|
|
|
|
|
|
As of September 30, 2007 and December 31, 2006, unused
short-term bank loan facilities amounted to RMB143,665,750
(US$19,173,840) and RMB70,000,000, respectively.
The long-term bank borrowings outstanding at September 30,
2007 and December 31, 2006 bore average interest rates of
6.65% and 5.76% per annum, respectively, and were
denominated in RMB. These borrowings were obtained from a
financial institution and represented the maximum amount of the
facility. These borrowings were
F-47
SOLARFUN
POWER HOLDINGS CO., LTD.
NOTES TO THE UNAUDITED INTERIM CONSOLIDATED FINANCIAL
INFORMATION
For the nine months ended September 30, 2007
6. BANK
BORROWINGS (CONTD)
guaranteed by Linyang Electronics. As of September 30, 2007
and December 31, 2006, the maturities of these long-term
bank borrowings were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
|
|
RMB000
|
|
|
RMB000
|
|
|
US$000
|
|
|
Within one year
|
|
|
16,000
|
|
|
|
16,000
|
|
|
|
2,136
|
|
Between one to two years
|
|
|
15,000
|
|
|
|
7,000
|
|
|
|
934
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31,000
|
|
|
|
23,000
|
|
|
|
3,070
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In July, 2007, Linyang Solarfun entered into an agreement with
Linyang Electronics, under which Linyang Solarfun agreed to pay
a guarantee fee with an annual rate of 2.0% of the total bank
borrowings guaranteed by Linyang Electronics. As of
September 30, 2007, the Group has accrued RMB2,558,845
(US$341,507) for the bank borrowings guaranteed by Linyang
Electronics of RMB675,886,840 (US$90,204,842).
The Group had minimal operations in jurisdictions other than the
PRC. Income before income taxes and minority interest consists
of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended September 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
|
|
RMB000
|
|
|
RMB000
|
|
|
US$000
|
|
|
Cayman Islands
|
|
|
(24,288
|
)
|
|
|
(31,507
|
)
|
|
|
(4,205
|
)
|
The PRC
|
|
|
96,851
|
|
|
|
115,819
|
|
|
|
15,457
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72,563
|
|
|
|
84,312
|
|
|
|
11,252
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The income tax benefit (expense) is comprised of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended September 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
|
|
RMB000
|
|
|
RMB000
|
|
|
US$000
|
|
|
Current
|
|
|
(143
|
)
|
|
|
(4,613
|
)
|
|
|
(616
|
)
|
Deferred
|
|
|
717
|
|
|
|
969
|
|
|
|
130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
574
|
|
|
|
(3,644
|
)
|
|
|
(486
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-48
SOLARFUN
POWER HOLDINGS CO., LTD.
NOTES TO THE UNAUDITED INTERIM CONSOLIDATED FINANCIAL
INFORMATION
For the nine months ended September 30, 2007
7. INCOME
TAXES (CONTD)
The reconciliation of tax computed by applying the statutory
income tax rate of 33% applicable to PRC operations to income
tax benefit (expenses) is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended September 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
|
|
RMB000
|
|
|
RMB000
|
|
|
US$000
|
|
|
Income tax computed at the statutory tax rate
|
|
|
(23,946
|
)
|
|
|
(27,823
|
)
|
|
|
(3,713
|
)
|
Non-deductible expenses
|
|
|
(5,968
|
)
|
|
|
(13
|
)
|
|
|
(2
|
)
|
Tax holidays
|
|
|
38,452
|
|
|
|
26,879
|
|
|
|
3,587
|
|
Preferential tax treatment
|
|
|
|
|
|
|
6,979
|
|
|
|
931
|
|
Tax rate differences
|
|
|
(7,846
|
)
|
|
|
(10,454
|
)
|
|
|
(1,395
|
)
|
Deferred tax benefit
|
|
|
|
|
|
|
1,157
|
|
|
|
155
|
|
Changes in valuation allowance
|
|
|
(118
|
)
|
|
|
(369
|
)
|
|
|
(49
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
574
|
|
|
|
(3,644
|
)
|
|
|
(486
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the 5th Session of the 10th National
Peoples Congress, which was conducted on March 16,
2007, the PRC Corporate Income Tax Law (the New Corporate
Income Tax Law) was approved and will become effective on
January 1, 2008. The New Corporate Income Tax Law
introduces a wide range of changes which include, but are not
limited to, the unification of the income tax rate for
domestic-invested and foreign-invested enterprises at 25%. The
tax rate changes resulting from the New Corporation Income Tax
Law did not materially impact the Groups cumulative
deferred tax assets and liabilities as of September 30,
2007.
Deferred tax assets reflect the tax effects of temporary
differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts
used for income tax purposes. The Company recognized
F-49
SOLARFUN
POWER HOLDINGS CO., LTD.
NOTES TO THE UNAUDITED INTERIM CONSOLIDATED FINANCIAL
INFORMATION
For the nine months ended September 30, 2007
7. INCOME
TAXES (CONTD)
deferred tax liabilities for the fixed assets,
construction-in-process
and intangible assets recorded at the fair value on the
acquisition date. The components of deferred tax assets and
deferred tax liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
|
|
RMB000
|
|
|
RMB000
|
|
|
US$000
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Warranty provision
|
|
|
820
|
|
|
|
2,199
|
|
|
|
293
|
|
Social welfare provision
|
|
|
367
|
|
|
|
774
|
|
|
|
103
|
|
Provision for inventory
|
|
|
|
|
|
|
549
|
|
|
|
74
|
|
Allowance for doubtful accounts
|
|
|
1,262
|
|
|
|
|
|
|
|
|
|
Stock compensation expenses
|
|
|
693
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current deferred tax assets
|
|
|
3,142
|
|
|
|
3,522
|
|
|
|
470
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-operating expenses
|
|
|
|
|
|
|
1,500
|
|
|
|
200
|
|
Tax losses
|
|
|
210
|
|
|
|
580
|
|
|
|
77
|
|
Fixed assets
|
|
|
|
|
|
|
6,202
|
|
|
|
827
|
|
Valuation allowance
|
|
|
(210
|
)
|
|
|
(3,675
|
)
|
|
|
(490
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net non-current deferred tax assets
|
|
|
|
|
|
|
4,607
|
|
|
|
614
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Land use rights
|
|
|
|
|
|
|
(9,086
|
)
|
|
|
(1,213
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2007 and December 31, 2006, the
Group had a net operating loss carryforward of approximately
RMB2,284,000 (US$304,826) and RMB637,000, respectively, for tax
purposes. The net operating losses may be carried forward for up
to five years and, as such, will expire if unutilized beginning
in 2013. As of September 30, 2007 and December 31,
2006, the Group recorded valuation allowances of RMB3,675,000
(US$490,471), an increase of RMB3,465,000 (US$462,444) from
December 31, 2006, including RMB3,096,000 (US$413,197)
related to an acquisition on July 31, 2007, to reduce its
deferred tax assets to the net amount management believed was
more likely than not to be realized based on the weight of
available evidence. In the event of a reversal of the valuation
allowance in a subsequent year of RMB3,096,000 (US$413,197),
related to the acquisition on July 31, will reduce
intangible assets, while a reversal of remaining valuation
allowance will reduce income tax expense.
As of September 30, 2007, the Group intends to permanently
reinvestment the earnings of its foreign subsidiaries. Beginning
in 2008, under the New Corporate Income Tax Law, distributions,
if made, from the Groups PRC subsidiary to its British
Virgin Islands subsidiary will be subject to a withholding tax
rate of 10%.
In November 2006, the Company adopted a stock option scheme (the
2006 Option Plan) which allows the Company to offer
a variety of incentive awards to employees, directors and
consultants of the Company and subsidiaries. As of
November 30, 2006, options to purchase not more than
10,799,865 ordinary shares were authorized under the 2006 Option
Plan. Under the terms of the 2006 Option Plan, options are
generally granted at exercise price of US$1.80 per share.
All options granted would expire on November 29, 2016 and
generally vest
F-50
SOLARFUN
POWER HOLDINGS CO., LTD.
NOTES TO THE UNAUDITED INTERIM CONSOLIDATED FINANCIAL
INFORMATION
For the nine months ended September 30, 2007
8. SHARE
OPTION PLAN (CONTD)
over 3 to 5 years. As of September 30, 2007, options
to purchase 8,772,998 ordinary shares were granted and
outstanding. Included in these options are 510,000 options that
can be early exercised, at the discretion of the holders, into
unvested 510,000 ordinary shares. If the holders services
to the Company are terminated prior to the vesting of the
unvested ordinary shares, the Company can repurchase the
unvested ordinary shares for the same price paid by the holders.
A
Summary of Option Activity Under the Share Option
Plans
The following table summarized the Companys share option
activity under the option plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
average
|
|
|
average
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
exercise
|
|
|
remaining
|
|
|
intrinsic
|
|
|
|
options
|
|
|
price
|
|
|
contractual life
|
|
|
value
|
|
|
|
|
|
|
(US$)
|
|
|
(Years)
|
|
|
(US$)
|
|
|
Outstanding, January 1, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
8,012,998
|
|
|
|
1.80
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited/Cancelled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2006
|
|
|
8,012,998
|
|
|
|
1.80
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,840,000
|
|
|
|
2.37
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(30,000
|
)
|
|
|
1.80
|
|
|
|
|
|
|
|
|
|
Forfeited/Cancelled
|
|
|
(1,050,000
|
)
|
|
|
1.95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, September 30, 2007
|
|
|
8,772,998
|
|
|
|
1.97
|
|
|
|
9.17
|
|
|
|
5,755,087
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and to be vested at September 30, 2007
|
|
|
90,000
|
|
|
|
1.80
|
|
|
|
9.17
|
|
|
|
74,340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2007
|
|
|
60,000
|
|
|
|
1.80
|
|
|
|
9.17
|
|
|
|
49,560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value in the table above represents the
total intrinsic value (the aggregate difference between the
Companys closing stock price of US$2.626 per ordinary
share as of September 28, 2007 and the exercise price for
in-the-money
options) that would have been received by the option holders if
all
in-the-money
options had been exercised on September 30, 2007.
The Company calculated the estimated fair value of share options
on the grant date using the Black-Scholes pricing model with the
following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted on
|
|
Granted on
|
|
Granted on
|
|
Granted on
|
|
Granted on
|
|
|
November 30,
|
|
March 19,
|
|
May 10,
|
|
June 28,
|
|
August 16,
|
|
|
2006
|
|
2007
|
|
2007
|
|
2007
|
|
2007
|
|
Risk-free interest rate
|
|
4.4%
|
|
4.53%
|
|
4.59%
|
|
5.05%
|
|
4.60%
|
Expected life (years)
|
|
5.24 6.25 years
|
|
6.08 years
|
|
6.15 6.29 years
|
|
6.20 years
|
|
5.75 6.21 years
|
Expected dividend yield
|
|
|
|
|
|
|
|
|
|
|
Volatility
|
|
73%
|
|
86%
|
|
87%
|
|
87%
|
|
87%
|
Fair value of options at grant date per share
|
|
From US$1.76
to US$1.85
|
|
US$1.83
|
|
From US$2.28
to US$2.30
|
|
US$1.68
|
|
From US$1.51
to US$1.54
|
The aggregate fair value of the outstanding share options at the
respective grant dates was determined to be RMB119,931,705
(US$16,006,260) and such amount shall be recognized as
compensation expenses using the
F-51
SOLARFUN
POWER HOLDINGS CO., LTD.
NOTES TO THE UNAUDITED INTERIM CONSOLIDATED FINANCIAL
INFORMATION
For the nine months ended September 30, 2007
8. SHARE
OPTION PLAN (CONTD)
straight line method with graded vesting based on service
condition. Accordingly, RMB15,353,874 (US$2,049,150) was
recorded as compensation expenses with a corresponding credit to
additional paid-in capital in the nine months ended
September 30, 2007.
Total compensation expense relating to share options recognized
for the nine months ended September 30, 2007 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended September 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
|
|
RMB000
|
|
|
RMB000
|
|
|
US$000
|
|
|
Cost of revenue
|
|
|
|
|
|
|
1,907
|
|
|
|
255
|
|
Selling expenses
|
|
|
|
|
|
|
444
|
|
|
|
59
|
|
General and administrative expenses
|
|
|
|
|
|
|
12,213
|
|
|
|
1,630
|
|
Research and development expenses
|
|
|
|
|
|
|
790
|
|
|
|
105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,354
|
|
|
|
2,049
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2007, there was RMB59,552,272
(US$7,947,933) of unrecognized share-base compensation cost
related to share options. That deferred cost is expected to be
recognized over a weighted-average vesting period of
4.07 years. To the extent the actual forfeiture rate is
different from original estimate; actual share-base compensation
related to these awards may be different from the expectation.
On August 22, 2007, the Companys Board of Directors
approved the 2007 Equity Incentive Plan (the
2007 Incentive Plan). The objective of the 2007
Incentive Plan is to attract and retain the best available
personnel of the substantial responsibility. The 2007 Incentive
Plan permits the grant of Incentive Stock Options, Non-statutory
Stock Options, Restricted Stock, Stock Appreciation Rights,
Restricted Stock Units, Performance Units, Performance Shares,
and other stock based awards to employees, directors and
consultants of the Company and subsidiaries (the
Participants). Under the 2007 Incentive Plan, the
Company may issue up to 10,799,685 ordinary shares plus an
annual increase of 2% of the outstanding ordinary shares on the
first day of the fiscal year, or such lesser amount of shares as
determined by the Board. The 2007 Incentive Plan will expire on
August 21, 2017.
By a resolution of the Board of Directors on July 23, 2007,
60,000 Restricted Stock Units(the RSU) were
authorized to be granted to the Companys independent
directors. Each RSU represents 1 ordinary share of the Company.
Among the 60,000 RSUs, 9,999 RSUs will be vested on the day of
grant, another 9,999 RSUs will be vested on November 30,
2007 and the remaining 40,002 RSUs will be vested in batches of
5,000 RSUs every six months thereafter. As of September 30,
2007, no RSU was granted
F-52
SOLARFUN
POWER HOLDINGS CO., LTD.
NOTES TO THE UNAUDITED INTERIM CONSOLIDATED FINANCIAL
INFORMATION
For the nine months ended September 30, 2007
9. COMMITMENTS
AND CONTINGENCIES
Operating
Lease Commitments
The Group has entered into lease arrangements relating to office
premises that are classified as operating leases. Future minimum
lease payments for non-cancelable operating leases as of
September 30, 2007 and December 31, 2006 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2007
|
|
|
|
RMB000
|
|
|
US$000
|
|
|
3 months to December 31, 2007
|
|
|
930
|
|
|
|
124
|
|
2008
|
|
|
3,162
|
|
|
|
422
|
|
2009
|
|
|
2,160
|
|
|
|
288
|
|
2010
|
|
|
2,160
|
|
|
|
288
|
|
2011 thereafter
|
|
|
2,051
|
|
|
|
274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,463
|
|
|
|
1,396
|
|
|
|
|
|
|
|
|
|
|
The terms of the leases do not contain rent escalation or
contingent rents.
Acquisition
of Machinery
As of September 30, 2007 and December 31, 2006, the
Group had commitments of RMB52,734,468 (US$7,038,019) and
RMB119,874,000, respectively, related to acquisition of
machinery. The commitment for acquisition of machinery is
expected to be settled within the next twelve months.
Purchase
of Raw Materials
The commitments related to the purchase of raw materials are
listed as below:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2007
|
|
|
|
RMB000
|
|
|
US$000
|
|
|
3 months to December 31, 2007
|
|
|
919,887
|
|
|
|
122,769
|
|
2008
|
|
|
612,839
|
|
|
|
81,790
|
|
2009
|
|
|
322,681
|
|
|
|
43,065
|
|
2010
|
|
|
312,975
|
|
|
|
41,770
|
|
2011 thereafter
|
|
|
1,145,776
|
|
|
|
152,918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,314,158
|
|
|
|
442,312
|
|
|
|
|
|
|
|
|
|
|
In addition to the above, in October and November, 2006, the
Group entered into raw materials purchase contracts for silicon
wafers with
E-Mei
Semiconductors Material Factory
(E-Mei),
a third party supplier. According to these contracts, the Group
has committed to pay purchase advances totaling RMB220,000,000
(US$28,901,734) to
E-Mei in
return for a five-year exclusive procurement right to silicon
wafers produced by
E-Meis
new production facilities, which are currently under
construction. The procurement right entitles the Group to
purchase the abovementioned silicon wafers at 8% below the
market price at the time of purchase. The Group will have a
first right of refusal to purchase silicon wafers at market
price after the five-year period.
The RMB220,000,000 (US$28,901,734) committed purchase advances
will be paid to
E-Mei
according to progress of construction of the new production
facilities based on the construction progress status report
provided
F-53
SOLARFUN
POWER HOLDINGS CO., LTD.
NOTES TO THE UNAUDITED INTERIM CONSOLIDATED FINANCIAL
INFORMATION
For the nine months ended September 30, 2007
9. COMMITMENTS
AND CONTINGENCIES (CONTD)
by E-Mei. As
of September 30, 2007, RMB100,000,000 (US$13,346,146)
committed purchase advances remained unpaid. Future amounts
payable for product purchases from
E-mei will
be offset against the purchase advances. However, for each
purchase, the Group can only offset 30% of the amount against
the purchase advances. After the Group has fully utilized the
advances, the discount on purchase will be adjusted downwards to
3% to 5% of the market price at the time of purchase.
In addition, according to the contracts, a bonus of up to
RMB3,600,000 (US$472,937) will be paid to
E-Mei should
E-Mei be
able to complete the construction of its new production
facilities and start supplying a certain quantity of the silicon
wafers to the Group within 18 to 20 months from the date of
the contact.
|
|
|
Guarantees
and Indemnification
|
In June 2006, the Company entered into a shareholders
agreement in connection with the issuance of Series A
Redeemable Convertible Preference Shares and according to which
the Company has agreed to indemnify each of its shareholders and
their affiliates and each director and officer of the Company
(collectively, the Indemnified Persons) against any
losses that any Indemnified Persons may at any time become
subject to or liable for in connection with their status as a
shareholder, director or officer of the Company or any of their
service to or on behalf of the Company to the maximum extent
permitted under applicable law.
In accordance with FIN 45 Guarantors Accounting
and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, guarantor must
recognize a liability for the fair value of the obligations it
assumes under certain guarantees. The Company has determined the
fair value of the indemnification to be insignificant.
Accordingly, the Company has not recorded any liabilities for
these agreements as of September 30, 2007.
Contingencies
As of September 30, 2007, the Group was liable to the
relevant local PRC government authorities with respect to fines
or penalty for the accumulated under-payment of social insurance
and employee welfare benefits which was estimated to be
RMB3,371,138 that has been recognized as a liability by the
Group. The Group is in the process of settling with the relevant
local PRC government authorities in relation to the outstanding
payments. However, no accrual for fines and penalty has been
made as of September 30, 2007 as the amount cannot be
reasonably estimated.
F-54
SOLARFUN
POWER HOLDINGS CO., LTD.
NOTES TO THE UNAUDITED INTERIM CONSOLIDATED FINANCIAL
INFORMATION
For the nine months ended September 30, 2007
Basic and diluted net income per share for each period presented
are calculated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended September 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
|
|
(RMB)
|
|
|
(RMB)
|
|
|
(US$)
|
|
|
|
(Amounts in thousands except for number of shares and per
share data)
|
|
|
Net income
|
|
|
72,871
|
|
|
|
81,593
|
|
|
|
10,890
|
|
Preference share dividends
|
|
|
(3,676
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income attributable to ordinary shareholders
|
|
|
69,195
|
|
|
|
81,593
|
|
|
|
10,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding basic
|
|
|
100,350,000
|
|
|
|
240,024,754
|
|
|
|
240,024,754
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible preference shares
|
|
|
31,274,178
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding diluted
|
|
|
131,624,178
|
|
|
|
240,024,754
|
|
|
|
240,024,754
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share
|
|
|
RMB0.69
|
|
|
|
RMB0.34
|
|
|
US$
|
0.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share
|
|
|
RMB0.55
|
|
|
|
RMB0.34
|
|
|
US$
|
0.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2007, the potential dilutive ordinary
shares in relation to stock options were anti-dilutive.
11. ACQUISITION
OF ASSETS
On July 31, 2007, the Company entered into an agreement
with Nanjing Linyang Electronics Investment Co., Ltd., a company
whose controlling owner is also a significant shareholder and
chairman of the Company, and Lianyungang Suyuan Group Co., Ltd.,
to acquire a 52% equity interest in Jiangsu Yangguang Solar
Technology Co., Ltd. (Yangguang Solar) for cash
consideration of RMB51,251,200 (US$6,840,060). Yangguang Solar
is mainly engaged in the manufacturing of PV cells and other
electronic components. As of September 30, 2007, Yangguang
Solar has not yet commenced operation. As of July 31, 2007,
the fair value of the net identifiable assets of Yangguang Solar
acquired is as follows:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2007
|
|
|
|
RMB000
|
|
|
US$000
|
|
|
Net assets acquired
|
|
|
|
|
|
|
|
|
Property, plant and equipment
|
|
|
17,685
|
|
|
|
2,360
|
|
Intangible assets
|
|
|
82,324
|
|
|
|
10,988
|
|
Deferred tax assets
|
|
|
3,792
|
|
|
|
506
|
|
Current assets
|
|
|
3,907
|
|
|
|
521
|
|
Cash and bank balances
|
|
|
3,233
|
|
|
|
431
|
|
Current liabilities
|
|
|
(14,979
|
)
|
|
|
(1,999
|
)
|
Deferred tax liability
|
|
|
(9,118
|
)
|
|
|
(1,217
|
)
|
Minority interest
|
|
|
(35,593
|
)
|
|
|
(4,750
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
51,251
|
|
|
|
6,840
|
|
|
|
|
|
|
|
|
|
|
Cash paid
|
|
|
51,251
|
|
|
|
6,840
|
|
|
|
|
|
|
|
|
|
|
The Group accounted for the above acquisition using the purchase
accounting method.
F-55
SOLARFUN
POWER HOLDINGS CO., LTD.
NOTES TO THE UNAUDITED INTERIM CONSOLIDATED FINANCIAL
INFORMATION
For the nine months ended September 30, 2007
11. PURCHASE
OF ASSETS (CONTD)
12. SEGMENT
REPORTING
The Group operates in a single business segment, which is the
development, manufacturing and sale of PV products. The
following table summarizes the Groups net revenues by
geographic region based on the location of the customers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended September 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
|
|
RMB000
|
|
|
RMB000
|
|
|
US$000
|
|
|
Germany
|
|
|
176,646
|
|
|
|
805,638
|
|
|
|
107,522
|
|
Spain
|
|
|
60,281
|
|
|
|
195,634
|
|
|
|
26,110
|
|
Italy
|
|
|
122,993
|
|
|
|
92,900
|
|
|
|
12,399
|
|
France
|
|
|
|
|
|
|
55,517
|
|
|
|
7,409
|
|
Sweden
|
|
|
|
|
|
|
54,747
|
|
|
|
7,307
|
|
Belgium
|
|
|
|
|
|
|
54,429
|
|
|
|
7,264
|
|
Norway
|
|
|
|
|
|
|
38,898
|
|
|
|
5,191
|
|
Switzerland
|
|
|
|
|
|
|
27,937
|
|
|
|
3,729
|
|
United States
|
|
|
|
|
|
|
26,243
|
|
|
|
3,502
|
|
England
|
|
|
|
|
|
|
22,157
|
|
|
|
2,957
|
|
China
|
|
|
24,171
|
|
|
|
23,340
|
|
|
|
3,115
|
|
Others
|
|
|
2,148
|
|
|
|
9,925
|
|
|
|
1,324
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
386,239
|
|
|
|
1,407,365
|
|
|
|
187,829
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All the identifiable assets of the Group are located in the PRC.
13. SUBSEQUENT
EVENTS
Subsequent to September 30, 2007, the following events
occurred:
|
|
|
|
a.
|
The Group entered into various one to five years fixed quantity
agreements with certain domestic suppliers to procure silicon
wafers or ingots, with a planned total purchase amount of
RMB4,626,718,696 (US$617,488,615). Certain of the contract
prices are subject to renegotiation on a quarterly basis.
|
|
|
|
|
b.
|
3,168,665 options with an exercise price of US$1.80 were
forfeited due to the resignation of certain employees. The fair
value at grant date of these forfeited options was approximately
RMB42,996,039 (US$5,738,314).
|
F-56
PART II
INFORMATION
NOT REQUIRED IN PROSPECTUS
|
|
ITEM 6.
|
INDEMNIFICATION
OF DIRECTORS AND OFFICERS.
|
Cayman Islands law does not limit the extent to which a
companys articles of association may provide for
indemnification of officers and directors, except to the extent
any such provision may be held by the Cayman Islands courts to
be contrary to public policy, such as to provide indemnification
against civil fraud or the consequences or committing a crime.
Our articles of association provide for indemnification of
officers and directors for losses, damages, costs and expenses
incurred in their capacities as such, except through their own
willful neglect or default.
We will agree to indemnify our directors and officers against
certain liabilities and expenses incurred by such persons in
connection with claims made by reason of their being such a
director or officer. We are also in the process of subscribing
for liability insurance on behalf of our directors and officers.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended (the Securities
Act), may be permitted to directors, officers or persons
controlling us pursuant to the foregoing provisions, we have
been informed that in the opinion of the SEC such
indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.
|
|
ITEM 7.
|
RECENT
SALES OF UNREGISTERED SECURITIES.
|
During the past three years, we have issued the following
securities (including options to acquire our common shares). No
underwriters were involved in these issuances. We believe that
each of the following issuances was exempt from registration
under the Securities Act in reliance on Regulation S under
the Securities Act or pursuant to Section 4(2) of the
Securities Act regarding transactions not involving a public
offering.
|
|
|
|
|
|
|
|
|
|
|
|
|
Date of Sale or
|
|
Number of
|
|
|
|
|
|
Purchaser
|
|
Issuance
|
|
Securities
|
|
|
Title of Securities
|
|
Consideration
|
|
Yonghua Solar Power Investment Holding Ltd.
|
|
June 12, 2006
|
|
|
77,269,500
|
|
|
ordinary shares
|
|
77% equity interest in Linyang BVI
|
Yongliang Solar Power Investment Holding Ltd.
|
|
June 12, 2006
|
|
|
1,505,250
|
|
|
ordinary shares
|
|
1.5% equity interest in Linyang BVI
|
Yongqiang Solar Power Investment Holding Ltd.
|
|
June 12, 2006
|
|
|
1,505,250
|
|
|
ordinary shares
|
|
1.5% equity interest in Linyang BVI
|
WHF Investment Co., Ltd.
|
|
June 12, 2006
|
|
|
12,543,750
|
|
|
ordinary shares
|
|
12.5% equity interest in Linyang BVI
|
Yongfa Solar Power Investment Holding Ltd.
|
|
June 12, 2006
|
|
|
501,750
|
|
|
ordinary shares
|
|
0.5% equity interest in Linyang BVI
|
YongGuan Solar Power Investment Holding Ltd.
|
|
June 12, 2006
|
|
|
1,003,500
|
|
|
ordinary shares
|
|
1% equity interest in Linyang BVI
|
II-1
|
|
|
|
|
|
|
|
|
|
|
|
|
Date of Sale or
|
|
Number of
|
|
|
|
|
|
Purchaser
|
|
Issuance
|
|
Securities
|
|
|
Title of Securities
|
|
Consideration
|
|
Forever-brightness Investments Limited
|
|
June 12, 2006
|
|
|
1,003,500
|
|
|
ordinary shares
|
|
1% equity interest in Linyang BVI
|
Citigroup Venture Capital International Growth Partnership,
L.P.
|
|
June 27, 2006 and August 2, 2006
|
|
|
37,761,742
|
|
|
series A convertible preference shares
|
|
US$25,128,740
|
Citigroup Venture Capital International Co-investment, L.P.
|
|
June 27, 2006 and August 2, 2006
|
|
|
2,060,635
|
|
|
series A convertible preference shares
|
|
US$1,371,260
|
Hony Capital II L.P.
|
|
June 27, 2006 and August 2, 2006
|
|
|
14,050,537
|
|
|
series A convertible preference shares
|
|
US$9,350,000
|
LC Fund III, L.P.
|
|
June 27, 2006 and August 2, 2006
|
|
|
10,519,118
|
|
|
series A convertible preference shares
|
|
US$7,000,000
|
Mohamed Nasser Haram
|
|
June 27, 2006 and August 2, 2006
|
|
|
112,705
|
|
|
series A convertible preference shares
|
|
US$75,000
|
Rasheed Yar Khan
|
|
June 27, 2006 and August 2, 2006
|
|
|
112,705
|
|
|
series A convertible preference shares
|
|
US$75,000
|
Good Energies Investments (Jersey) Limited
|
|
June 27, 2006 and August 2, 2006
|
|
|
15,027,312
|
|
|
series A convertible preference shares
|
|
US$10,000,000
|
II-2
|
|
ITEM 8.
|
EXHIBITS AND
FINANCIAL STATEMENT SCHEDULES.
|
(a) Exhibits
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description of Document
|
|
|
1
|
.1
|
|
Form of Underwriting
Agreement.(1)
|
|
3
|
.1*
|
|
Memorandum and Articles of Association of the Registrant.
|
|
3
|
.2*
|
|
Form of Amended and Restated Memorandum and Articles of
Association of the Registrant.
|
|
4
|
.1*
|
|
Form of American Depositary Receipt (included in
Exhibit 4.3).
|
|
4
|
.2*
|
|
Registrants Specimen Certificate for ordinary shares.
|
|
4
|
.3*
|
|
Form of Deposit Agreement, among the Registrant, the depositary
and owners and holders of the American Depositary Shares.
|
|
4
|
.4*
|
|
Share Purchase Agreement, dated as of June 6, 2006, in
respect of the issue of series A convertible preference
shares of the Registrant.
|
|
4
|
.5*
|
|
Shareholders Agreement, dated as of June 27, 2006, among
the Registrant and other parties therein.
|
|
4
|
.6*
|
|
Registration Rights Agreement, dated as of June 27, 2006,
among the Registrant and other parties therein.
|
|
4
|
.7*
|
|
Agreement Concerning the Limitations on Post-IPO Sale of Shares,
dated June 20, 2006, among certain holders of ordinary
shares.
|
|
4
|
.8
|
|
Second Shareholders Agreement, dated as of December 4,
2007, among the Registrant and other parties therein.
|
|
4
|
.9
|
|
The First Amendment to Lockup Agreement, dated 2007, among the
Registrant and other parties therein.
|
|
4
|
.10
|
|
Amendment to Lockup Agreement, dated as of December 4,
2007, among Yonghua Lu, Good Energies Investment (Jersey)
Limited and other parties therein.
|
|
5
|
.1*
|
|
Form of Opinion of Maples and Calder, Cayman Islands counsel to
the Registrant, regarding the validity of the ordinary shares
being registered.
|
|
8
|
.1*
|
|
Form of Opinion of Maples and Calder regarding certain Cayman
Islands tax matters (included in Exhibit 5.1)
|
|
8
|
.2*
|
|
Opinion of Shearman & Sterling LLP, United States
counsel to the Registrant, regarding certain U.S. tax matters.
|
|
10
|
.1*
|
|
2006 Share Incentive Plan.
|
|
10
|
.2*
|
|
Form of Employment Agreement between the Registrant and a Senior
Executive Officer of the Registrant.
|
|
10
|
.3*
|
|
Silicon Supply Agreement, dated as of November 11, 2006,
between Jiangsu Linyang Solarfun Co., Ltd. and Jiangxi LDK Solar
Hi-Tech Co., Ltd.
|
|
10
|
.4*
|
|
Silicon Supply Cooperation Agreement, dated as of
November 14, 2006, between Jiangsu Linyang Solarfun Co.,
Ltd and Jiangxi LDK Solar Hi-Tech Co., Ltd.
|
|
10
|
.5*
|
|
Silicon Supply Agreement, dated as of July 6, 2006, between
Jiangsu Linyang Solarfun Co., Ltd. and ReneSola Co., Ltd.
|
|
10
|
.6*
|
|
Silicon Supply Agreement, dated as of March 26, 2006,
between Jiangsu Linyang Solarfun Co., Ltd. and ReneSola Co., Ltd.
|
|
10
|
.7*
|
|
Silicon Supply Agreement, dated as of October 8, 2006,
between Jiangsu Linyang Solarfun Co., Ltd. and
E-mei
Semiconductor Material Factory.
|
|
10
|
.8*
|
|
Silicon Supply Agreement, dated as of June 2, 2006, and
Amendments No. 1, No. 2 and No. 3 thereto, dated
as of June 9, 2006, October 8, 2006 and
November 17, 2006, respectively, between Jiangsu Linyang
Solarfun Co., Ltd. and
E-mei
Semiconductor Material Factory.
|
II-3
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description of Document
|
|
|
10
|
.9*
|
|
Sales Agreement, dated as of June 10, 2006, between Jiangsu
Linyang Solarfun Co., Ltd. and Social Capital, S.L.
|
|
10
|
.10*
|
|
Sales Contract, dated as of November 19, 2006, between
Jiangsu Linyang Solarfun Co., Ltd. and Scatec AS.
|
|
10
|
.11*
|
|
Sales Contract, dated as of November 19, 2006, between
Jiangsu Linyang Solarfun Co., Ltd. and Scatec AS.
|
|
10
|
.12*
|
|
Agreement of Transfer of Land Use Rights, dated as of
April 8, 2006, between Jiangsu Linyang Solarfun Co., Ltd.
and Qidong Huahong Electronics Co., Ltd.
|
|
10
|
.13*
|
|
Summary of Share Transfer Agreements, dated May 27, 2006
and effective as of June 2, 2006, between Linyang Solar
Power Investment Holding Ltd. and the shareholders of Jiangsu
Linyang Solarfun Co., Ltd.
|
|
10
|
.14*
|
|
Share Transfer Agreement, dated June 9, 2006, among Linyang
Solar Power Investment Holding Ltd. and various other parties.
|
|
10
|
.15*
|
|
Share Issue and Transfer Agreement, dated June 12, 2006,
among Solarfun Power Holdings Co., Ltd., Linyang Solar Power
Investment Holding Ltd. and various other parties.
|
|
10
|
.16*
|
|
Deed of Share Transfer, effective as of July 15, 2006,
among Linyang Solar Power Investment Holding Ltd. and various
other parties.
|
|
10
|
.17*
|
|
Management Consulting Service Agreement, dated as of
November 18, 2006, between Jiangsu Linyang Solarfun Co.,
Ltd. and Hony Capital II, L.P.
|
|
10
|
.18*
|
|
Bid Invitation and Letter of Acceptance for Shanghai Chongming
Qianwei Village 960kW Solar PV Power Generation Model Project,
dated September 28, 2006 and November 9, 2006,
respectively.
|
|
10
|
.19*
|
|
Letter of Acceptance for Suyuan Group 74kW On-Grid Application
System Project, dated September 12, 2006.
|
|
10
|
.20*
|
|
Contract between Jiangsu Linyang Solarfun Co., Ltd. and ISC
Konstanz, dated September 5, 2006.
|
|
10
|
.21*
|
|
Entrusted Loan Contract, dated as of October 13, 2006,
among Jiangsu Linyang Electronics Co., Ltd., Bank of China Co.,
Ltd., Qidong Subbranch and Jiangsu Linyang Solarfun Co., Ltd.
|
|
10
|
.22*
|
|
Entrusted Loan Contract, dated as of October 18, 2006,
among Jiangsu Linyang Electronics Co., Ltd., Bank of China Co.,
Ltd., Qidong Subbranch and Jiangsu Linyang Solarfun Co., Ltd.
|
|
10
|
.23*
|
|
Entrusted Loan Contract, dated as of October 25, 2006,
among Jiangsu Linyang Electronics Co., Ltd., Bank of China Co.,
Ltd., Qidong Subbranch and Jiangsu Linyang Solarfun Co., Ltd.
|
|
10
|
.24*
|
|
Entrusted Loan Contract, dated as of November 20, 2006,
among Jiangsu Linyang Electronics Co., Ltd., Bank of China Co.,
Ltd., Qidong Subbranch and Jiangsu Linyang Solarfun Co., Ltd.
|
|
10
|
.25*
|
|
Silicon Purchase Agreement, dated as of May 15, 2005,
between Jiangsu Linyang Solarfun Co., Ltd. and Huaerli (Nantong)
Electronics Co., Ltd.
|
|
10
|
.26*
|
|
Silicon Purchase Agreement, dated as of January 12, 2006,
between Jiangsu Linyang Solarfun Co., Ltd. and Huaerli (Nantong)
Electronics Co., Ltd.
|
|
10
|
.27*
|
|
Silicon Purchase Agreement, dated as of July 2, 2006,
between Jiangsu Linyang Solarfun Co., Ltd. and Huaerli (Nantong)
Electronics Co., Ltd.
|
|
10
|
.28*
|
|
2007 Equity Incentive Plan.
|
|
10
|
.29*
|
|
Silicon Purchase Agreement, dated as of January 8, 2007,
between Jiangsu Linyang Solarfun Co., Ltd. and Shanghai Jiu Jing
Electronic Material Co., Ltd.
|
|
10
|
.30*
|
|
Silicon Purchase Agreement, dated as of March 6, 2007,
between Jiangsu Linyang Solarfun Co., Ltd. and Jiangxi LDR Solar
Hi-Tech Co., Ltd.
|
II-4
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description of Document
|
|
|
10
|
.31*
|
|
Share Transfer Agreement, dated as of July 31, 2007, among
Nanjing Linyang Electrics Investment Co., Ltd., Lianyungang
Suyuan Group Co., Ltd and Jiangsu Linyang Solarfun Co., Ltd.
|
|
10
|
.32
|
|
Form of Share Issuance and Repurchase
Agreement.(1)
|
|
10
|
.33*
|
|
Contract of Purchase between Schüco International KG and
Jiangsu Linyang Solarfun Co., Ltd.
|
|
10
|
.34*
|
|
Supply Agreement, date as of November 19, 2007 between
Solarfun Power Hong Kong Limited and Hoku Scientific, Inc.
|
|
10
|
.35
|
|
Investment Agreement, dated as of November 14, 2007,
between Jiangsu Linyang Solarfun Co., Ltd. and Management
Committee of Qidong Economic Development Zone, Jiangsu Province.
|
|
21
|
.1*
|
|
Subsidiaries of the Registrant.
|
|
23
|
.1
|
|
Consent of Ernst & Young Hua Ming, Independent
Registered Public Accounting Firm.
|
|
23
|
.2*
|
|
Form of Consent of Maples and Calder (included in
Exhibit 5.1).
|
|
23
|
.3*
|
|
Consent of Shearman & Sterling LLP (included in
Exhibit 8.2).
|
|
23
|
.4*
|
|
Consent of Grandall Legal Group, PRC counsel to the Registrant.
|
|
24
|
.1*
|
|
Powers of Attorney.
|
|
99
|
.1*
|
|
Code of Business Conduct and Ethics of the Registrant.
|
|
|
|
*
|
|
Previously filed
|
(1)
|
|
To be filed
|
(b) Financial Statement Schedules
Schedules have been omitted because the information required to
be set forth therein is not applicable or is shown in the
Consolidated Financial Statements or the Notes thereto.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and
controlling persons of the registrant pursuant to the provisions
described in Item 6, or otherwise, the registrant has been
advised that in the opinion of the SEC such indemnification is
against public policy as expressed in the Securities Act and is
therefore unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment
by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant
will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the
Securities Act, the information omitted from the form of
prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant under Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to
be part of this registration statement as of the time it was
declared effective.
(2) For the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a
form of prospectus shall be deemed to be a new registration
statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-5
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe
that it meets all of the requirements for filing on
Form F-1
and has duly caused this registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in
Shanghai, Peoples Republic of China, on December 31,
2007.
SOLARFUN POWER HOLDINGS CO., LTD.
Name: Yonghua Lu
|
|
|
|
Title:
|
Chairman and Chief Executive Officer
|
Pursuant to the requirements of the Securities Act, this
Registration Statement has been signed by the following persons
in the capacities and on the dates indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Yonghua
Lu
Name:
Yonghua Lu
|
|
Chairman and Chief Executive Officer
|
|
December 31, 2007
|
|
|
|
|
|
/s/ Hanfei
Wang
Name:
Hanfei Wang
|
|
Director and Chief Operating Officer
|
|
December 31, 2007
|
|
|
|
|
|
/s/ *
Name:
Terry McCarthy
|
|
Independent Director
|
|
December 31, 2007
|
|
|
|
|
|
/s/ *
Name:
Ernst A. Bütler
|
|
Independent Director
|
|
December 31, 2007
|
|
|
|
|
|
/s/ *
Name:
Yinzhang Gu
|
|
Independent Director
|
|
December 31, 2007
|
|
|
|
|
|
/s/ Amy
Jing Liu
Name:
Amy Jing Liu
|
|
Chief Financial Officer
|
|
December 31, 2007
|
|
|
|
|
|
/s/ Roger
Fan
Name:
Roger Fan
|
|
Financial Controller
|
|
December 31, 2007
|
|
|
|
|
|
*By: /s/ Yonghua
Lu
Yonghua
Lu
Attorney-in-Fact
|
|
|
|
|
II-6
SIGNATURE
OF AUTHORIZED REPRESENTATIVE IN THE UNITED STATES
Pursuant to the Securities Act of 1933, as amended, the
undersigned, the duly authorized representative in the United
States of Solarfun Power Holdings Co., Ltd., has signed this
registration statement or amendment thereto in Newark, Delaware,
on December 31, 2007.
Puglisi & Associates
|
|
|
|
By:
|
/s/ Donald
J. Puglisi
|
Name: Donald J. Puglisi
II-7