UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 20-F
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o
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REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE
SECURITIES EXCHANGE ACT OF 1934
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OR
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þ
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For the fiscal year ended: December 31, 2009
OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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OR
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o
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SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Date of event requiring this shell company report
For the transition period from
to
Commission file number: 1- 33208
SOLARFUN POWER
HOLDINGS CO., LTD.
(Exact name of Registrant as specified in its charter)
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Not Applicable
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Cayman Islands
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(Translation of Registrants name into English)
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(Jurisdiction of Incorporation or Organization)
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888 Linyang Road, Qidong, Jiangsu Province 226200, Peoples Republic of China
(Address of Principal Executive Offices)
Mr. Gareth Kung
Chief Financial Officer
Telephone: 8621-26022872
E-mail: Gareth.Kung@solarfun-power.com
Fax: 8621- 26022889
26th Fl. BM Tower
218 Wusong Road
Shanghai 200080
Peoples Republic of China
(Name, Telephone, E-mail and/or Facsimile Number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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American Depositary Shares
Ordinary Shares, par value US$0.0001 per share
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Nasdaq Global Market
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Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
Indicate the number of outstanding shares of each of the issuers classes of capital or common stock as of
the close of the period covered by the annual report.
290,708,739 Ordinary Shares, par value US$0.0001 per share, as of December 31, 2009
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yes
o
No
þ
If this report is an annual or transition report, indicate by check mark if the registrant is
not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934. Yes
o
No
þ
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
þ
No
o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes
o
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer
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Accelerated filer
þ
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Non-accelerated filer
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Indicate by check mark which basis of accounting the registrant has used to prepare the
financial statements included in this filing:
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U.S. GAAP
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International Financial Reporting Standards as issued
by the International Accounting Standards Board
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Other
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If Other has been checked in response to the previous question, indicate by check mark which
financial statement item the registrant has elected to follow.
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Item 17
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Item 18
If this is an annual report, indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act). Yes
o
No
þ
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents and reports required to
be filed by Sections 12,13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court.
Yes
o
No
o
INTRODUCTION
Unless otherwise indicated, references in this annual report 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 annual report 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 annual report, 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 125mm x 125mm PV cells
or 54 156mm x 156mm 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$0.0001 per share.
For the purpose of computing and reporting our outstanding ordinary shares and our basic or
diluted earnings per share, the 9,019,611 ADSs we issued to facilitate the convertible bond
offering are not considered outstanding;
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W
are to watt, a unit of power-generating capacity or consumption; and
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US$
and
U.S. dollars
are to the legal currency of the United States.
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References in this annual report on Form 20-F 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
Power Holdings Co., Ltd., its predecessor entities and its consolidated subsidiaries.
1
We completed the 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.
On January 29, 2008, we closed an offering of US$172.5 million 3.50% convertible senior notes
due 2018 to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933,
as amended, or the Securities Act, and received net proceeds of US$167.9 million. Concurrently with
this convertible bond offering, we closed an offering of 9,019,611 ADSs, representing 45,098,055
ordinary shares, to facilitate the convertible bond offering. We did not receive any proceeds,
other than the par value of the ADSs, from such offering of ADSs.
From July 17, 2008 to August 12, 2008, we issued and sold 5,421,093 ADSs with an aggregate
sale price of US$73.9 million.
From September 17, 2009 to November 18, 2009, we issued and sold 3,888,399 ADSs with an
aggregate sale price of US$23.1 million.
2
PART I
ITEM 1
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
Not applicable.
ITEM 2
OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3
KEY INFORMATION
A.
Selected Financial Data
The following selected consolidated financial data, except for Other Operating Data, have
been derived from our audited consolidated financial statements, which have been audited by Ernst &
Young Hua Ming, an independent registered public accounting firm. The report of Ernst & Young Hua
Ming on our consolidated financial statements as of December 31, 2008 and 2009 and for the years
ended December 31, 2007, 2008 and 2009 is included elsewhere in this annual report on Form 20-F.
The consolidated statements of income data for the years ended December 31, 2005 and 2006 and the consolidated balance sheet data as of December 31, 2005, 2006 and 2007 have been derived
from our audited consolidated financial statements, which are not included in this annual report on
Form 20-F. The selected consolidated financial information for those periods and as of those dates
are qualified by reference to those financial statements and the related notes, and should be read
in conjunction with them and with Item 5. Operating and Financial Review and Prospects. 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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Year Ended December 31,
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2005
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2006
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2007
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2008
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2009
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(RMB)
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(RMB)
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(RMB)
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(RMB)
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(RMB)
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(US$)
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(In thousands, except share and per share data)
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Consolidated
Statement of
Operations Data
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Net revenues
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166,178
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630,907
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2,395,135
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4,949,068
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3,778,316
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553,527
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Cost of revenues
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(139,903
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)
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(446,530
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)
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(1,997,355
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)
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(4,905,147
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)
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(3,341,936
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)
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(489,596
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Gross profit
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26,275
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184,377
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397,780
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43,921
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436,380
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63,931
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Operating expenses
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Selling expenses
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(5,258
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(11,883
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(62,777
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(87,913
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)
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(105,454
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)
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(15,449
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)
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General and administrative expenses
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(4,112
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)
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(52,214
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)
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(113,756
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(143,340
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)
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(180,989
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)
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(26,515
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Research and development expenses
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(750
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)
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(6,523
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)
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(27,440
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)
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(19,679
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)
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(32,025
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)
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(4,692
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Total operating expenses
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(10,120
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(70,620
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(203,973
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)
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(250,932
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)
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(318,468
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)
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(46,656
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)
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Operating profit (loss)
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16,155
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113,757
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193,807
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(207,011
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)
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117,912
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17,275
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Interest expenses
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(123
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)
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(8,402
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)
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(25,978
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)
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(103,146
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)
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(157,907
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)
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(23,134
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Interest income
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95
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1,326
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16,244
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10,004
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5,002
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|
733
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Exchange losses
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(1,768
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)
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(4,346
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)
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(25,628
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)
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(35,230
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)
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(23,814
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)
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(3,489
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Changes in fair value of
derivative contracts
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(163
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)
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83,090
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9,594
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1,406
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Changes in fair value of
conversion feature of convertible
bonds
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(73,887
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)
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(10,825
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Other income
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215
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|
902
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1,507
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15,018
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6,286
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|
921
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Other expenses
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(260
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)
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(836
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)
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(9,670
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)
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(25,604
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)
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(11,835
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)
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(1,734
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Government grants
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852
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2,089
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3,480
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7,661
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1,122
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Income (loss) before income taxes
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14,314
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103,090
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152,371
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(259,399
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)
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(120,988
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)
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(17,725
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)
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Income tax expenses
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|
96
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3,132
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(7,458
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)
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(6,519
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)
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(23,928
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)
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(3,505
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)
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Net income (loss) attributable to
shareholders
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14,410
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98,695
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148,037
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(280,491
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)
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(145,227
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)
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(21,276
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)
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1
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Year Ended December 31,
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2005
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2006
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2007
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2008
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2009
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(RMB)
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(RMB)
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(RMB)
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(RMB)
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(RMB)
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(US$)
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(In thousands, except share and per share data)
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Net income
(loss) attributable to
shareholders per share
Solarfun Power Holdings
Co., Ltd.
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Basic
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0.26
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|
0.95
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0.62
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(1.11
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)
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(0.53
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)
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(0.08
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)
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Diluted
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0.22
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0.74
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0.62
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(1.11
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)
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(0.53
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)
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(0.08
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)
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Number of shares used in
computation of net
income (loss) per share
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Basic
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54,511,540
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103,631,832
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|
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240,054,686
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252,659,614
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274,067,760
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274,067,760
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Diluted
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66,366,469
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142,108,460
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240,054,686
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252,659,614
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274,067,760
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274,067,760
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Net income (loss) per ADS
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Basic
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1.32
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4.76
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3.08
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(5.55
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)
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(2.65
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)
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(0.39
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)
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Diluted
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1.09
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|
3.72
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3.08
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(5.55
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)
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(2.65
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)
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(0.39
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)
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Number of ADS used in
computation of net
income (loss) per ADS
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|
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|
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Basic
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|
|
10,902,308
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|
|
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20,726,366
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|
|
|
48,010,937
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|
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|
50,531,923
|
|
|
|
54,813,552
|
|
|
|
54,813,552
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Diluted
|
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|
13,273,294
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|
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28,421,692
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|
|
|
48,010,937
|
|
|
|
50,531,923
|
|
|
|
54,813,552
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|
|
|
54,813,552
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|
2
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Year Ended December 31,
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2005
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|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
(RMB)
|
|
|
(RMB)
|
|
|
(RMB)
|
|
|
(RMB)
|
|
|
(RMB)
|
|
|
(US$)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
15.8
|
%
|
|
|
29.2
|
%
|
|
|
16.6
|
%
|
|
|
0.9
|
%
|
|
|
11.5
|
%
|
|
|
11.5
|
%
|
Operating margin
|
|
|
9.7
|
%
|
|
|
18.0
|
%
|
|
|
8.1
|
%
|
|
|
(4.2
|
)%
|
|
|
3.1
|
%
|
|
|
3.1
|
%
|
Net margin
|
|
|
8.7
|
%
|
|
|
16.8
|
%
|
|
|
6.2
|
%
|
|
|
(5.7
|
)%
|
|
|
(3.8
|
)%
|
|
|
(3.8
|
)%
|
Net cash (used in)
provided by
operating
activities (in
thousands)
|
|
|
(76,582
|
)
|
|
|
(523,061
|
)
|
|
|
(1,020,603
|
)
|
|
|
(674,040
|
)
|
|
|
689,333
|
|
|
|
100,988
|
|
Other Operating Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
(MW)
|
|
|
(MW)
|
|
|
(MW)
|
|
|
(MW)
|
|
|
(MW)
|
|
Amount of PV
modules shipped
(including PV
module processing)
|
|
|
|
|
|
|
19.0
|
|
|
|
78.4
|
|
|
|
172.8
|
|
|
|
313.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
(RMB/W)
|
|
|
(RMB/W)
|
|
|
(RMB/W)
|
|
|
(RMB/W)
|
|
|
(RMB/W)
|
|
|
(US$/W)
|
|
Average selling
price of PV modules
(excluding PV
module processing)
|
|
|
32.34
|
|
|
|
31.75
|
|
|
|
28.20
|
|
|
|
26.77
|
|
|
|
15.27
|
|
|
|
2.24
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
(RMB)
|
|
|
(RMB)
|
|
|
(RMB)
|
|
|
(RMB)
|
|
|
(RMB)
|
|
|
(US$)
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
7,054
|
|
|
|
1,137,792
|
|
|
|
272,928
|
|
|
|
410,901
|
|
|
|
645,720
|
|
|
|
94,599
|
|
Restricted cash
|
|
|
22,229
|
|
|
|
33,822
|
|
|
|
42,253
|
|
|
|
88,137
|
|
|
|
60,539
|
|
|
|
8,869
|
|
Accounts receivable net
|
|
|
|
|
|
|
147,834
|
|
|
|
430,692
|
|
|
|
319,537
|
|
|
|
587,488
|
|
|
|
86,066
|
|
Inventories-net
|
|
|
76,819
|
|
|
|
372,504
|
|
|
|
728,480
|
|
|
|
731,708
|
|
|
|
783,973
|
|
|
|
114,853
|
|
Advance to suppliers net
|
|
|
61,312
|
|
|
|
238,178
|
|
|
|
640,118
|
|
|
|
1,145,614
|
|
|
|
979,762
|
|
|
|
143,536
|
|
Other current assets
|
|
|
20,705
|
|
|
|
75,525
|
|
|
|
214,478
|
|
|
|
481,749
|
|
|
|
180,315
|
|
|
|
26,416
|
|
Deferred tax assets net
|
|
|
96
|
|
|
|
3,400
|
|
|
|
7,793
|
|
|
|
62,481
|
|
|
|
76,904
|
|
|
|
11,266
|
|
Derivative contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39,665
|
|
|
|
7,360
|
|
|
|
1,078
|
|
Amount due from related parties
|
|
|
|
|
|
|
153
|
|
|
|
920
|
|
|
|
19
|
|
|
|
12,458
|
|
|
|
1,825
|
|
Fixed assets net
|
|
|
55,146
|
|
|
|
207,449
|
|
|
|
702,884
|
|
|
|
1,492,575
|
|
|
|
1,586,283
|
|
|
|
232,392
|
|
Intangible asset net
|
|
|
|
|
|
|
12,897
|
|
|
|
94,282
|
|
|
|
212,736
|
|
|
|
208,563
|
|
|
|
30,555
|
|
Long-term deferred expenses
|
|
|
|
|
|
|
|
|
|
|
214,385
|
|
|
|
37,444
|
|
|
|
33,135
|
|
|
|
4,854
|
|
Goodwill
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
134,735
|
|
|
|
134,735
|
|
|
|
19,739
|
|
Total assets
|
|
|
243,361
|
|
|
|
2,230,432
|
|
|
|
3,349,513
|
|
|
|
5,157,301
|
|
|
|
5,297,235
|
|
|
|
776,048
|
|
Short-term bank borrowings
|
|
|
20,000
|
|
|
|
379,900
|
|
|
|
965,002
|
|
|
|
1,098,832
|
|
|
|
404,764
|
|
|
|
59,298
|
|
Long-term bank borrowings, current
portion
|
|
|
|
|
|
|
16,000
|
|
|
|
15,000
|
|
|
|
30,000
|
|
|
|
90,000
|
|
|
|
13,185
|
|
Accounts payable
|
|
|
18,794
|
|
|
|
51,452
|
|
|
|
141,709
|
|
|
|
217,026
|
|
|
|
441,768
|
|
|
|
64,719
|
|
Notes payable
|
|
|
20,000
|
|
|
|
14,020
|
|
|
|
|
|
|
|
39,341
|
|
|
|
186,921
|
|
|
|
27,384
|
|
Accrued expenses and other liabilities
|
|
|
22,920
|
|
|
|
33,619
|
|
|
|
135,395
|
|
|
|
189,028
|
|
|
|
191,895
|
|
|
|
28,113
|
|
Customer deposits
|
|
|
55,319
|
|
|
|
17
|
|
|
|
27,628
|
|
|
|
9,494
|
|
|
|
59,685
|
|
|
|
8,744
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
|
|
9,038
|
|
|
|
28,571
|
|
|
|
26,566
|
|
|
|
3,892
|
|
Unrecognized tax benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,385
|
|
|
|
27,385
|
|
|
|
4,012
|
|
Derivative contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,792
|
|
|
|
1,148
|
|
|
|
168
|
|
Amount due to related parties
|
|
|
32,658
|
|
|
|
24,486
|
|
|
|
92,739
|
|
|
|
39,766
|
|
|
|
16,765
|
|
|
|
2,456
|
|
Long-term bank borrowings
|
|
|
|
|
|
|
15,000
|
|
|
|
|
|
|
|
170,000
|
|
|
|
380,000
|
|
|
|
55,670
|
|
Convertible bonds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,178,969
|
|
|
|
658,653
|
|
|
|
96,493
|
|
Redeemable ordinary shares (par value
US$0.0001 per share; 45,098,055
shares issued and outstanding as of
December 31, 2008 and 2009)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32
|
|
|
|
32
|
|
|
|
5
|
|
Total shareholders equity
|
|
|
73,670
|
|
|
|
1,678,215
|
|
|
|
1,862,582
|
|
|
|
2,123,065
|
|
|
|
2,811,653
|
|
|
|
411,909
|
|
Total liabilities, mezzanine equity
and shareholders equity
|
|
|
243,361
|
|
|
|
2,230,432
|
|
|
|
3,349,513
|
|
|
|
5,157,301
|
|
|
|
5,297,235
|
|
|
|
776,048
|
|
Exchange Rate Information
This annual report on Form 20-F contains translations of certain RMB amounts into U.S. dollar
amounts at specified rates. All translations from RMB to U.S. dollars were made at the noon buying
rate in The City of New York for cable transfers of RMB as certified for customs purposes by the
Federal Reserve Bank of New York. Unless otherwise stated, the translations of RMB into U.S.
dollars have been made at the noon buying rate in effect on December 31, 2009, which was RMB6.8259
to US$1.00. We make no representation that the RMB or U.S. dollar amounts referred to in this
annual report on Form 20-F could have been or could be converted into U.S. dollars or RMB, as the
case may be, at any particular rate or at all. See Item 3.D. 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 and Item 3.D. Risk Factors Risks Related to
Doing Business in China Restrictions on currency exchange may limit our ability to receive and
use our revenue effectively for discussions of the effects of fluctuating exchange rates and
currency control on the value of our ADSs. On May 21, 2010, the noon buying rate was RMB6.8262 to US$1.00.
4
The following table sets forth information concerning exchange rates between the RMB and the
U.S. dollar for the periods indicated. These rates are provided solely for your convenience and are
not necessarily the exchange rates that we used in this annual report or will use in the
preparation of our periodic reports or any other information to be provided to you.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Renminbi per U.S. Dollar Noon Buying Rate
(1)
|
|
|
|
Period
|
|
|
|
|
|
|
|
|
|
|
|
|
End
|
|
|
Average
(2)
|
|
|
Low
|
|
|
High
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
8.0702
|
|
|
|
8.1826
|
|
|
|
8.0702
|
|
|
|
8.2765
|
|
2006
|
|
|
7.8041
|
|
|
|
7,9579
|
|
|
|
7.8041
|
|
|
|
8.0702
|
|
2007
|
|
|
7.2946
|
|
|
|
7.5806
|
|
|
|
7.2946
|
|
|
|
7.8127
|
|
2008
|
|
|
6.8225
|
|
|
|
6.9193
|
|
|
|
6.7800
|
|
|
|
7.2946
|
|
2009
|
|
|
6.8259
|
|
|
|
6.8295
|
|
|
|
6.8176
|
|
|
|
6.8470
|
|
November 2009
|
|
|
6.8265
|
|
|
|
6.8271
|
|
|
|
6.8255
|
|
|
|
6.8300
|
|
December 2009
|
|
|
6.8259
|
|
|
|
6.8275
|
|
|
|
6.8244
|
|
|
|
6.8299
|
|
January 2010
|
|
|
6.8268
|
|
|
|
6.8269
|
|
|
|
6.8258
|
|
|
|
6.8295
|
|
February 2010
|
|
|
6.8258
|
|
|
|
6.8285
|
|
|
|
6.8260
|
|
|
|
6.8330
|
|
March 2010
|
|
|
6.8258
|
|
|
|
6.8262
|
|
|
|
6.8254
|
|
|
|
6.8270
|
|
April 2010
|
|
|
6.8247
|
|
|
|
6.8256
|
|
|
|
6.8229
|
|
|
|
6.8275
|
|
May 2010 (through
May 21, 2010)
|
|
|
6.8262
|
|
|
|
6.8267
|
|
|
|
6.8245
|
|
|
|
6.8285
|
|
|
|
|
Notes:
|
|
(1)
|
|
For periods prior to January 1, 2009, the exchange rates reflect the noon buying rates as
reported by the Federal Reserve Bank of New York. For periods after January 1, 2009, the
exchange rates reflect the exchange rates as set forth in the H.10 statistical release of the
Federal Reserve Board.
|
|
(2)
|
|
Annual averages are calculated from month-end rates. Monthly averages are calculated using
the average of the daily rates during the relevant period.
|
B.
Capitalization and Indebtedness
Not Applicable.
C.
Reasons for the Offer and Use of Proceeds
Not Applicable.
D.
Risk Factors
Risks Related to Our Company and Our Industry
Demand for our PV products has been, and may continue to be, adversely affected by the current
economic and credit environment.
Demand for our PV products has been affected by recent global economic conditions, capital
markets fluctuations and credit disruptions. Beginning in the second half of 2008, many of our key
markets, including Germany, Spain and the United States, and other national economies have
experienced a period of economic contraction or significantly slower economic growth. The global
financial crisis, weak consumer confidence and diminished consumer and business spending have
contributed to a significant slowdown in the market demand for PV products due to decreased energy
requirements. Near-term economic recovery remains uncertain. We cannot provide assurance that when
an economic recovery does occur, the demand for our PV products will increase.
5
In addition, many of our customers and many end-users of our PV products depend on debt
financing to fund the initial capital expenditure required to purchase our PV products. Due to the
global credit crisis, many of our customers and many end-users of our PV products have experienced
difficulties in obtaining financing, and even if they have been able to obtain financing, the cost
of such financing has increased and they may change their decision or change the timing of their
decision to purchase our PV products. Furthermore, interest rates have fluctuated recently, which
could increase the cost of financing. Given the current credit environment, in particular the
tightening of the credit markets, there can be no assurance that our customers or end-users will be
able to obtain financing on a timely basis or on reasonable terms, which could have a negative
impact on their demand for our products. Rising interest rates may also make certain alternative
investments more attractive to investors, and therefore lead to a decline in demand for our PV
products. A protracted disruption in the ability of our customers to obtain financing could lead to
a significant reduction in future orders for our PV products, which in turn could have a material
adverse effect on our business, financial condition and results of operations.
As silicon supply increases, the corresponding increase in the global supply of PV modules may
cause substantial downward pressure on the price of PV products and reduce our revenues and net
income.
Silicon is an essential raw material used in the production of solar cells and modules. Prior
to mid-2008, there was an industry-wide shortage of silicon. Increases in the price of silicon have
in the past increased our production costs, and any significant price increase in the future may
adversely impact our business and results of operations. Due to the historical scarcity of silicon,
supply chain management and financial strength were the key barriers to entry. In late 2008 and
2009, however, newly available silicon capacity has resulted in an increased supply of silicon,
which resulted in downward pressure on the price of silicon. However, we cannot assure you that the
price of silicon will continue to decline or remain at its current levels, especially if the global
solar power market regains its growth momentum. As the shortage of silicon eases, industry barriers
to entry become less significant and PV module production may increase globally. A decrease in
silicon prices and an increase in PV module production may result in substantial downward pressure
on the price of PV modules. Such price reductions could have a negative impact on our revenues and
net income, and materially and adversely affect our business and results of operations.
Our ability to adjust our raw material costs may be limited as a result of our entering into
multi-year supply agreements with many of our silicon and silicon wafer suppliers, and it may be
difficult for us to respond in a timely manner to rapidly changing market conditions, which could
materially and adversely affect our cost of revenues and profitability.
Prior to mid-2008, there was an industry-wide shortage of silicon and silicon wafers, which
resulted in significant increases in the prices of these raw materials. To secure an adequate and
timely supply of silicon and silicon wafers during the earlier periods of supply shortage, we
entered into a number of multi-year supply agreements. The prices in these agreements were
generally pre-determined, but some of these agreements provided for adjustments in subsequent years
to reflect changes in market conditions or through mutual agreement. Since the fourth quarter of
2008, the market prices for silicon and silicon wafers have been decreasing significantly. Spot
market prices of silicon and silicon wafers have fallen below the prices we have contracted for
with our long-term suppliers and continued to decline in 2009. The rapid declines in the prices of
silicon and silicon wafers coupled with decreases in demand for PV products have hampered our
ability to pass on to our customers the cost of our raw materials which were procured at higher
prices during the earlier periods of supply shortage. Our write-down of inventories increased from
RMB0.8 million in 2007 to RMB282.6 million (US$41.4 million) in 2009.
6
Due to the significant decrease in prices of silicon and silicon wafers, we re-negotiated most
of our existing multi-year supply agreements. Currently, the pricing terms of these multi-year
agreements are generally subject to review either periodically or upon significant changes in
prices on
the spot market. While we have obtained reduced prices and other concessions from our
suppliers, we cannot assure you that we will be able to obtain reduced prices from all of our
suppliers in the future. If the prices of silicon and silicon wafers continue to decrease in the
future and we are unable to re-negotiate the prices of our existing multi-year supply agreements,
we may not be able to adjust our materials costs, and our cost of revenues would be materially and
adversely affected.
Furthermore, other PV module manufacturers may be able to purchase silicon and silicon wafers
on the spot market at lower prices than those we have contracted for with our suppliers. We expect
our commitments in connection with our multi-year supply agreements will continue to be
significant. In the event we are unable to re-negotiate or fulfill our obligations under our supply
agreements, we may be subject to significant inventory build-up and may be required to make further
inventory write-downs and provision for these commitments, which could have a material adverse
effect on our business, financial condition, results of operations and prospects. If the prices we
pay for silicon and silicon wafers are significantly higher than the prices paid by our
competitors, our competitive cost advantage of producing modules could decrease. Our inability to
reduce a key manufacturing cost to the same degree as our competitors could adversely affect our
ability to price our products competitively and generate favorable profit margins.
We may be subject to legal, administrative or other proceedings in connection with the multi-year
supply agreements we entered into previously and such proceedings can be both costly and time
consuming and may significantly divert the efforts and resources of our management personnel.
We may be subject to legal, administrative or other proceedings in connection with the multi-year
supply agreements we entered into previously. For example, on June 8, 2009, Jiangxi LDK Solar
Hi-Tech Co., Ltd., or LDK, one of our suppliers of silicon wafers, submitted an arbitration request
to the Shanghai Arbitration Commission, alleging that we had failed to perform under the terms of a
long-term supply agreement, seeking to enforce our performance and claiming for monetary relief. We
are in arbitration with respect to the alleged breaches. There is no assurance that we will be
able to successfully defend or resolve such legal or administrative proceedings in the near future
or at all. Such legal and administrative proceedings can be both costly and time consuming and may
significantly divert the efforts and resources of our management personnel.
Prepayments we have provided to our silicon and silicon wafer suppliers expose us to the credit
risks of such suppliers and may increase our costs and expenses, which could in turn have a
material adverse effect on our liquidity.
Most of our multi-year supply agreements that we entered into during the earlier periods of
supply shortage required us to make prepayments of a portion of the total contract price to our
suppliers without receiving collateral for such prepayments. As of December 2007, 2008 and 2009, we
had advanced RMB640.1 million, RMB1,145.6 million and RMB979.8 million (US$143.5 million),
respectively, to our suppliers. In 2009, we recorded a provision of RMB234.7 million (US$34.4
million) for doubtful collection of advances to suppliers due to non-performance by some of our
suppliers, which resulted in the prepayments we made to these suppliers being categorized as
unrecoverable. Our claims for such payments are unsecured claims, which expose us to the credit
risks of our suppliers in the event of their insolvency or bankruptcy. Our claims against the
defaulting suppliers would rank below those of secured creditors, which would undermine our chances
of obtaining the return of our prepayments. If such suppliers fail to fulfill their delivery
obligations under the contracts, our financial condition, results of operations and liquidity could
be materially and adversely affected.
7
The average selling price of our PV products may continue to decrease.
Beginning in the fourth quarter of 2008, demand for PV products has decreased as a result of
the global financial crisis, but the supply of PV products has increased significantly as many
manufacturers of PV products worldwide, including our company, have engaged in significant
production capacity expansion in recent years. As a result, this state of over-supply has
resulted in reductions in the prevailing market prices of PV products as manufacturers have reduced
their average selling prices in an attempt to obtain sales. The average selling price of our PV
modules per watt decreased from RMB28.20 in 2007 to RMB26.77 in 2008 and to RMB15.27 (US$2.24) in
2009. Our net profit margin decreased
from a positive margin of 6.2% in 2007 to a negative margin of 5.7% in 2008 and to a negative
margin of 3.8% in 2009. This trend may continue, which could cause our sales and/or our profit
margins to decline and have a material adverse effect on our business, financial condition, results
of operations and prospects.
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 February 2005 and November 2005, respectively. With the
rapid growth of the PV industry prior to the fourth quarter of 2008, our business has grown and
evolved at a rapid rate. 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, particularly in light of the significant economic
volatility in recent months in our target markets. 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 manage our production effectively and to
reduce our manufacturing costs. Our ability to achieve such goals is subject to a number of risks
and uncertainties.
Our future success depends on our ability to manage our production and facilities effectively
and to reduce our manufacturing costs. Our efforts to reduce our manufacturing costs include
lowering our silicon and auxiliary material costs, improving manufacturing productivity and
processes, and improving product quality. If we are unable to achieve these goals, we may be unable
to decrease our costs per watt, to maintain our competitive position or to improve our
profitability. Our ability to achieve such goals is subject to significant risks and uncertainties,
including:
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our ability to re-negotiate our existing multi-year supply agreements;
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our ability to maintain our quality level and keep pace with changes in technology;
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our ability to adjust inventory levels to respond to rapidly changing market demand;
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delays in obtaining or denial of required approvals by relevant government authorities; and
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diversion of significant management attention and other resources to other matters.
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8
If we are unable to establish or successfully make improvements to our manufacturing
facilities or to reduce our manufacturing costs, or if we encounter any of the risks described
above, we may be unable to improve our business as planned.
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.
Our five largest customers accounted for an aggregate of 43.0%, 53.2% and 65.7% of our net revenues
in 2007, 2008 and 2009, respectively.
Our largest customer in 2007, 2008 and 2009 accounted for 12.6%, 22.2% and
40.6% of our net revenues of the respective year.
Most of our large customers are located in Europe,
particularly in Germany, Spain and Italy. 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:
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reduction, delay or cancellation of orders from one or more of our significant customers;
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selection by one or more of our significant distributor customers of our competitors
products;
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loss of one or more of our significant customers and our failure to identify additional or
replacement customers;
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any adverse change in the bilateral or multilateral trade relationships between China and
European countries, particularly Germany; and
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failure of any of our significant customers to make timely payment for our products.
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We expect our operating results to continue to depend on sales to 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 PV products that incorporate our PV products.
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. However,
such framework agreements are only binding to the extent a purchase order for a specific amount of
our products is issued. In addition, certain sales terms of the framework agreements may be
adjusted from time to time. 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 re-negotiate these contracts. However, re-negotiation 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.
9
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 2007, 2008 and 2009, our five largest suppliers supplied in the aggregate 59.0%, 42.0% and
51.6%, 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, increased manufacturing costs, 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 adequate 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. 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.
Until mid-2008, there was an industry-wide shortage of silicon and silicon wafers. If we again
experience an industry-wide shortage of silicon and silicon wafers, our failure to obtain
sufficient quantities of silicon and silicon wafers in a timely manner could disrupt our
operations, prevent us from operating at full capacity or limit our ability to expand as planned,
which would reduce, and limit the growth of, our manufacturing output and revenue.
We depend on the timely delivery by our suppliers of silicon and silicon wafers in sufficient
volumes. Until mid-2008, there was an industry-wide shortage of silicon and silicon wafers,
subjecting us to the risk that our suppliers might fail to supply sufficient silicon and silicon
wafers to us. While we do not believe an industry-wide shortage of silicon and silicon wafers will
re-occur in the short term because of current market conditions and the expansion of silicon and
silicon wafer manufacturing capacity in recent years, we cannot assure you that market conditions
will not again rapidly change. We may experience actual shortages of silicon and silicon wafers or
late or failed delivery for the following reasons:
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the terms of our silicon and silicon wafer contracts with, or purchase orders to, our
suppliers may be altered or cancelled as a result of our ongoing re-negotiations with them;
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there are a limited number of silicon and silicon wafer suppliers, and many of our
competitors also purchase silicon and silicon wafers from these suppliers;
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our competitors may have longer and stronger relationship with these suppliers than we do;
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some of our silicon and silicon wafer suppliers do not manufacture silicon themselves, but
instead purchase their requirements from other vendors. It is possible that these suppliers
will not be able to obtain sufficient silicon or silicon wafers to satisfy their contractual
obligations to us;
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we do not have a long history with our silicon and silicon wafer suppliers and there can be
no assurance that they will be able to meet our production needs consistently or on a timely
basis; and
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our purchase of silicon and silicon wafers is subject to the business risk of our
suppliers, one or more of which may go out of business for any one of a number of reasons
beyond our control in the current economic environment.
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If we fail to obtain delivery of silicon and silicon wafers in amounts and according to time
schedules that we expect, we may be forced to reduce production, which will adversely affect our
revenues. Our failure to obtain the required amounts of silicon and silicon wafers on time and at
commercially reasonable prices can substantially limit our ability to meet our contractual
obligations to deliver PV products to our customers. Any failure by us to meet such obligations
could have a material adverse effect on our reputation, retention of customers, market share,
business and results of operations and may subject us to claims from our customers and other
disputes.
We currently have a significant amount of debt outstanding. Our substantial indebtedness may limit
our future financing capabilities and could adversely affect our business, financial condition and
results of operations.
The principal amount of our total bank borrowings outstanding was RMB874.8 million
(US$128.2 million), of which RMB404.8 million (US$59.3 million) was short-term bank borrowings, as
of December 31, 2009. In addition, we had US$172.5 million principal amount of convertible bonds,
with fair value of RMB658.7 million (US$96.5 million), outstanding as of December 31, 2009. Our
debt could have a significant impact on our future operations and cash flow, including:
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making it more difficult for us to fulfill payment and other obligations under our
outstanding debt, including repayment of our long- and short-term credit facilities should we
be unable to obtain extensions for any such facilities before they mature, as well as our
obligations under our convertible bonds;
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triggering an event of default if we fail to comply with any of our payment or other
obligations contained in our debt agreements, which could result in cross-defaults causing all
or a substantial portion of our debt to become immediately due and payable;
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reducing the availability of cash flow to fund working capital, capital expenditures,
acquisitions and other general corporate purposes, and adversely affecting our ability to
obtain additional financing for these purposes;
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potentially increasing the cost of any additional financing; and
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putting pressure on our ADS price due to concerns of our inability to repay our debt and
making it more difficult for us to conduct equity financings in the capital markets.
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Our ability to meet our payment and other obligations under our outstanding debt depends on
our ability to generate cash flow in the future or to refinance such debt. We may not be able to
generate sufficient cash flow from operations to enable us to meet our obligations under our
outstanding debt and to fund other liquidity needs. The global liquidity and credit crisis has had
a significant negative impact on our company. If we are not able to generate sufficient cash flow
to meet such obligations, we may need to refinance or restructure our debt, to sell our assets, to
reduce or delay our capital investments, or to seek additional equity or debt financing. The sale
of additional equity securities could result in dilution to our ADS holders. The incurrence of
additional indebtedness would result in increased interest rate risk and debt service obligations,
and could result in operating and financing covenants that would further restrict our operations.
In addition, the level of our indebtedness and the amount of our interest payments could limit our
ability to obtain the financing required to fund future capital expenditures and working capital. A
shortage of such funds could in turn impose limitations on our ability to plan for, or react
effectively to, changing market conditions. We cannot assure you that future financing will be
available in amounts or on terms acceptable to us, if at all.
11
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. We also require cash
generally to meet future capital requirements, which are difficult to plan in the rapidly changing
PV industry. The principal amount of our total bank borrowings outstanding was RMB874.8 million
(US$128.2 million) as of December 31, 2009. We cannot assure you that future financing will be
available on satisfactory terms, or at all. Our ability to obtain external financing in the future
is subject to a variety of uncertainties, including:
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our future financial condition, results of operations and cash flows;
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general market conditions for financing activities by manufacturers of PV and related
products; and
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economic, political and other conditions in the PRC and elsewhere.
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If we are unable to obtain necessary financing in a timely manner or on commercially
acceptable terms, or at all, 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 2007, 2008 and 2009, 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:
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fluctuations in currency exchange rates of the U.S. dollar, Euro and other foreign
currencies against the Renminbi;
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difficulty in engaging and retaining distributors and agents who are knowledgeable about,
and can function effectively in, overseas markets;
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increased costs associated with maintaining marketing and sales activities in various
countries;
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difficulty and costs relating to compliance with different commercial and legal
requirements in the jurisdictions in which we offer our products;
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inability to obtain, maintain or enforce intellectual property rights; and
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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.
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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.
12
If we are unable to compete in the highly competitive PV market, our revenue and profits may
decrease and we may lose market share.
The PV 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:
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manufacturing capacity;
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range and quality of products;
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strength of supply chain and distribution network;
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after-sales inquiry; and
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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 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 PV 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 addition, the PV 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 resources enjoy greater policy support than solar power, the PV market and our
business and prospects could suffer.
Our profitability depends on our ability to respond to rapid market changes in the PV industry,
including by developing new technologies and offering additional products and services.
The PV 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 technologies 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 technologies and develop new PV products, our existing products may
become uncompetitive and obsolete.
13
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 PV
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 PV industry, we plan to 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 PV market, as well as our results of operations
and profitability, will be materially and adversely affected.
Our future success also depends 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, revenue growth 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 PV system integration services through our wholly owned
subsidiary, Shanghai Linyang Solar Technology Co., Ltd., or Shanghai Linyang, and we may pursue
upstream silicon feedstock sourcing through strategic partnerships and investments in the future.
We may also establish strategic alliances with third parties in the PV industry to develop new
technologies and to expand our marketing channels. These types of transactions could require that
our management develop expertise in new areas, make significant investments in research and
development, 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 and
retaining key technical and managerial personnel of acquired companies. We may assume unknown
liabilities or other unanticipated events or circumstances through acquisitions and investments.
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.
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 PV industry, may also have a
material adverse effect on the success of our strategic acquisitions, investments and alliances.
14
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 to five-year warranty for technical defects, a
10-year limited warranty against declines of greater than 10%, and a 20 to 25-year limited warranty
against declines of greater than 20%, in their initial power generation capacity. 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, 2007, 2008 and 2009, our accrued warranty costs for the two to five-year warranty
against technical defects totaled RMB21.0 million, RMB48.6 million and RMB73.5 million (US$10.8
million), respectively. Any increase in the defect rate of our products would increase the amount
of our warranty costs and we may not have adequate warranty provision to cover such warranty costs,
which would have a negative impact on our results of operations.
In addition, as we purchase the silicon and silicon wafers and other components that we use in
our products from third parties. 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 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 PV product manufacturers, we are exposed to risks associated with product
liability claims if the use of the PV 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, in particular the
type of PV technology that we have adopted, proves unsuitable for
widespread adoption or if demand for PV products fails to
15
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 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 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, which could decrease demand for our products and reduce our revenue.
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The cost of solar energy currently 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, Spain, Italy, the United States, Australia, Korea, France and the
Czech Republic, 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 PV
products to promote the use of solar energy in on-grid applications and to reduce dependency on
other forms of energy. Certain of these government economic incentives are set to be reduced and may be
reduced further, or eliminated. For instance, in 2009, the German government reduced solar feed-in
tariffs by 9%. In June 2010, Germany adopted a further reduction in solar feed-in tariffs effective
on July 1, 2010, which may result in a significant decrease in the price of and demand for PV products
in Germany. In 2007, 2008 and 2009, Germany accounted for 49.9%, 53.3% and 70.6% of our net
revenues, respectively. In addition, 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 our proprietary technologies 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.
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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.
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 technologies 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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seek licenses from third parties;
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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 technologies 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
technologies in the PV cells and PV modules 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 April 30, 2010, we had 11 patents and 13 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.
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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. If we lose the services of one or
more of our current 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 PV industry experience similar to our current directors and officers, which could
severely disrupt our business and growth. In addition, if any of our 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 PV 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.
Any failure to achieve and maintain effective internal control could have a material adverse
effect on our business, results of operations and the market price of our ADSs.
The SEC, as required by Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley
Act, adopted rules requiring most public companies to include a management report on such companys
internal control over financial reporting in its annual report, which contains managements
assessment of the effectiveness of the companys internal control over financial reporting. In
addition, when a company meets the SECs criteria, an independent registered public accounting firm
must attest to and report on managements assessment and on the effectiveness of the companys
internal control over financial reporting.
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Our management and independent registered public accounting firm have concluded that our
internal control over financial reporting as of December 31, 2009 was effective. However, we cannot
assure you that in the future our management or our independent registered public accounting firm
will not identify material weakness during the Section 404 of the Sarbanes-Oxley Act audit process
or for other reasons. In addition, because of the inherent limitations of internal control over
financial reporting, including the possibility of collusion or improper management override of
controls, material misstatements due to error or fraud may not be prevented or detected on a timely
basis. As a result, if we fail to maintain effective internal control over financial reporting or
should we be unable to prevent or detect material misstatements due to error or fraud on a timely
basis, investors could lose confidence in the reliability of our financial statements, which in
turn could harm our business, results of operations and negatively impact the market price of our
ADSs, and harm our reputation. Furthermore, we have incurred and expected to continue to incur
considerable costs and to use
significant management time and other resources in an effort to comply with Section 404 and
other requirements of the Sarbanes-Oxley Act.
We have limited insurance coverage and may incur losses resulting from product liability claims or
business interruptions.
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. In
addition, a natural disaster such as floods or earthquakes, or other unanticipated catastrophic
events, including power interruption, telecommunications failures, equipment failures, explosions,
fires, break-ins, terrorist attacks or acts or wars, could significantly disrupt our ability to
manufacture our products and to operate our business. If any of our production facilities or
material equipment were to experience any significant damage or downtime, we might be unable to
meet our production targets and our business could suffer. As the insurance industry in China is
still in an early stage of development, business interruption insurance available in China offers
limited coverage compared to that offered in many other countries. Although we have obtained
business interruption insurance, any business disruption or natural disaster could result in
substantial costs and diversion of resources.
We are also exposed to risks associated with product liability claims in the event that the
use of the PV products we sell results in injury. Due to limited historical experience, we are
unable to predict whether product liability claims will be brought against us in the future or the
effect of any resulting adverse publicity on our business. Moreover, we only have limited product
liability insurance and may not have adequate resources to satisfy a judgment in the event of a
successful claim against us. The successful assertion of product liability claims against us could
result in potentially significant monetary damages and require us to make significant payments,
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.
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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.
On March 16, 2007, the PRC government promulgated the Law of the Peoples Republic of China on
the Enterprise Income Tax, or the EIT, which took effect on January 1, 2008. Under the EIT,
domestically owned enterprises and foreign-invested enterprises, or FIEs, are subject to a uniform
tax rate of 25%. While the EIT equalizes the tax rates for FIEs and domestically owned enterprises,
preferential tax treatment continues to be granted to companies in certain encouraged sectors, and
entities classified as high and new technology enterprises are entitled to a 15% enterprise
income tax rate, whether domestically owned enterprises or FIEs. The EIT also provides a five-year
transition period starting from its effective date for those enterprises which were established
before the promulgation date of the EIT and which were entitled to a preferential lower tax rate or
tax holiday under the then effective tax laws or regulations. The tax rate of such enterprises will
transition to the uniform tax rate within a five-year transition period and the tax holiday, which
has been enjoyed by such enterprises before the effective date of the EIT, may continue to be
enjoyed until the end of the holiday. Jiangsu Linyang Solarfun Co., Ltd., or Linyang China, our
wholly owned operating subsidiary in China, was approved to be qualified as a high and new
technology enterprise on October 21, 2008. The high and new technology enterprise status will be
valid for a period of three years from the date of issuance of the certificate. If there are
significant changes in the business operations, manufacturing technologies or other criteria that
cause the enterprise to no longer meet the criteria as a high and new technology enterprise, such
status will be terminated from the year of such change. If Linyang China fails to qualify as a
high and new technology enterprise in future periods, our income tax expenses would increase,
which could have a material and adverse effect on our net income and results of operations.
In accordance with the former PRC Income Tax Law for Enterprises with Foreign Investment and
Foreign Enterprises, or the FIE Tax Law, the EIT and the related implementing rules, Linyang China
was exempted from enterprise income tax in 2005 and 2006, was taxed at a reduced rate of 12% in
2007, 12.5% in 2008 and 12.5% in 2009, and is being taxed at a reduced rate of 15% in 2010. From
2005 until the end of 2009, Linyang China is also exempted from the 3% local income tax.
Furthermore, Linyang China was entitled to a two-year income tax exemption for 2006 and 2007 and is
entitled to a reduced tax rate of 12.5% for the following three years on income generated from
additional investment in the production capacity of Linyang China resulting from the funds we
received through the issuances of our series A convertible preference shares in June and
August 2006.
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Any reduction or elimination of the preferential tax treatments currently enjoyed by us may
significantly increase our income tax expenses and materially reduce our net income, which could
have a material adverse effect on our financial condition and results of operations.
Under the EIT, we may be classified as a Resident Enterprise of the PRC. Such classification
would likely result in negative tax consequences to us and could result in negative tax
consequences to our non-PRC enterprise shareholders and ADS holders.
Under the EIT, 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 and are subject to the EIT. According to the Implementation Regulations for the EIT of the
PRC issued by the State Council on December 6, 2007, de facto management body is defined as an
establishment that exerts substantial and comprehensive management and control over the business
operations, staff, accounting, assets and other aspects of the enterprise. Substantially all of our
operational management is currently based in the PRC and our operating subsidiaries are located in
the PRC. As of and for the year ended December 31, 2009, we recorded an unrecognized tax benefit of
approximately RMB27.4 million (US$4.0 million) because based on our judgment, Solarfun Power Hong
Kong Limited, or Solarfun Hong Kong, our wholly owned subsidiary, may be deemed as a PRC tax
resident pursuant to the EIT. If Solarfun Power Holdings Co., Ltd., or Solarfun, our holding
company, or any of its non-PRC subsidiaries is treated as a resident enterprise for PRC tax
purposes, Solarfun or such subsidiary will be subject to PRC income tax on worldwide income at a
uniform tax rate of 25%, which would have a material adverse effect on our financial condition and
results of operations.
In addition, although the EIT provides that dividend income between qualified resident
enterprises is exempted from the 10% withholding tax, it is still not free of doubt whether we
will be considered to be a qualified resident enterprise under the EIT. If we are considered a
non-resident enterprise, dividends paid to us by our subsidiaries in the PRC (through our holding
company structure) may be subject to the 10% withholding tax. If we are deemed by the PRC tax
authorities as a resident enterprise and declare dividends, under the existing implementation
rules of the EIT, dividends paid by us to our ultimate shareholders, which are non- resident
enterprises and do not have an establishment or place in the PRC, or which have such an
establishment or place but the relevant income is not effectively connected with the establishment
or place, might be subject to PRC withholding tax at 10% or a lower treaty rate.
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
17.5% 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.
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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. As a result, the
revaluation of the Renminbi in July 2005 has increased, and further revaluations could further
increase, our costs. The value of, and any dividends payable on, our ADSs in foreign currency terms
will also be affected. 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 RMB25.6 million,
RMB35.2 million and RMB23.8 million (US$3.5 million) in 2007, 2008 and 2009, respectively.
Since December 2009, the Euro has depreciated, and may continue to
depreciate against the Renminbi. As a result, we may incur foreign exchange losses.
Such foreign exchange losses may have a material adverse effect on our operating results.
Such depreciation of the Euro may also have a negative impact on the selling prices of our
products in Renminbi terms. 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.
While we started to enter into economic hedging transactions in 2008 to minimize the impact of
short-term foreign currency fluctuations on our revenues that are denominated in a currency other
than Renminbi, the effectiveness of these transactions may be limited and we may not be able to
successfully hedge all of our exposure. Our estimates of future revenues that are denominated in
foreign currencies may not be accurate, which could result in foreign exchange losses. Any default
by the counterparties to these transactions could also adversely affect our financial condition and
results of operations. 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.
As of April 30, 2010, Mr. Yonghua Lu, chairman of our board of directors, and Good Energies II
LP owned 13.29% and 30.33%, respectively, of our outstanding share capital. 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. In addition, without the consent of Mr. Lu and Good Energies II LP, we could be
prevented from entering into transactions that could be beneficial to us. Mr. Lu and Good Energies
II LP may cause us to take actions that are opposed by other shareholders as their interests may
differ from those of other shareholders.
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 control of foreign exchange; and
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the allocation of resources.
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While the PRC economy has grown significantly since the late 1970s, 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 towards the PV 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 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.
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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. 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, if Linyang China incurs debt on its own behalf in
the future, the instruments governing the debt may restrict 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 a substantial portion of our 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. Since a significant amount of our future revenue will be denominated in
Renminbi, 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.
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 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
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
25
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.
New labor laws in the PRC may adversely affect our results of operations.
On June 29, 2007, the PRC government promulgated the Labor Contract Law of the PRC, or the New
Labor Contract Law, which became effective on January 1, 2008. The New Labor Contract Law imposes
greater liabilities on employers and significantly impacts the cost of an employers decision to
reduce its workforce. Further, it requires certain terminations to be based upon seniority and not
merit. In the event we decide to significantly change or decrease our workforce, the New Labor
Contract Law could adversely affect our ability to enact such changes in a manner that is most
advantageous to our business or in a timely and cost effective manner, thus materially and
adversely affecting our financial condition and results of operations.
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. Some Asian countries, including China, encountered
incidents of the H5N1 strain of bird flu, or avian flu in 2007 and early 2008. From April 2009,
there have been outbreaks of swine flu, caused by H1N1 virus, in certain regions of the world,
including China. Any future outbreak of SARS, avian flu, swine 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 swine flu, avian flu, SARS or any other
epidemic.
Risks Related to Our Ordinary Shares and ADSs
The market price of 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 May 24, 2010, the trading price of our ADSs on
the Nasdaq Global Market has ranged from a low of US$2.30 per ADS to a high of US$37.64 per ADS.
26
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 or other material comments by securities analysts relating
to us, our competitors or our industry in general;
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announcements by other companies in our industry relating to their operations, strategic
initiatives, financial condition or financial performance or to our industry in general;
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announcements of acquisitions or consolidations involving industry competitors or industry
suppliers;
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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.
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 amended and restated 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, provided that, where any issue of shares is proposed and such shares proposed to be
issued are equal to or exceed 20% by par value of the par value of all then issued shares
(including ordinary shares and any preferred shares and, in the case of any preferred shares, where
appropriate whether considering such preferred shares before or after any conversion of such
preferred shares to ordinary shares in accordance with their terms), then the prior approval by
ordinary resolution of the holders of the ordinary shares, voting together as one class, shall be
required. 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.
27
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 an annual general meeting or any extraordinary general meeting
calling for the passing of a special resolution is 20 days and the minimum notice period required
to convene any other extraordinary 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 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.
28
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 as may be amended from time to time, the Cayman Islands Companies Law (as amended) 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, Cayman Islands companies may not have standing to initiate a shareholder
derivative action in a federal court of the United States.
There is also uncertainty as to whether the courts of the Cayman Islands would:
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recognize or enforce against us or our directors, judgments of courts of the United States
based on certain civil liability provisions of U.S. securities laws; and
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entertain 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, our public shareholders may have more difficulty in
protecting their interests in the face of actions taken against management, members of the board of
directors or controlling shareholders than they would as shareholders of a U.S. public company.
You may have difficulty enforcing judgments obtained against us.
We are a Cayman Islands company and substantially all of our assets are located outside of the
United States. Substantially all of our current operations are conducted in the PRC. In addition,
most of our directors and officers are nationals and residents of countries other than the United
States. A substantial portion of the assets of these persons are located outside the United States.
As a result, it may be difficult for you to effect service of process within the United States upon
these persons. It may also be difficult for you to enforce in U.S. courts judgments obtained in
U.S. courts based on the civil liability provisions of the U.S. federal securities laws against us
and our officers and directors, most of whom are not residents in the United States and the
substantial majority of whose assets are located outside of the United States. In addition, there
is uncertainty as to whether the courts of the Cayman Islands or the PRC would recognize or enforce
judgments of U.S. courts.
29
ITEM 4
INFORMATION ON THE COMPANY
A.
History and Development of the Company
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 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 May 16, 2007, Linyang BVI
established a wholly owned subsidiary, Solarfun Hong Kong. In March 2006, April 2006 and
April 2007, we established three majority-owned or wholly owned subsidiaries in China, Shanghai
Linyang, Sichuan Leshan Jiayang New Energy Co., Ltd., or Sichuan Jiayang, and Jiangsu Linyang
Solarfun Engineering Research and Development Center Co., Ltd., formerly Nantong Linyang Solarfun
Engineering Research and Development Center Co., Ltd., or Linyang Research Center, respectively, to
expand our business into new markets and sectors. We acquired a 52% interest in Yangguang Solar
Technology Co., Ltd., or Yangguang Solar, in July 2007 and acquired the remaining 48% in
August 2008. In September 2007, we established a wholly owned subsidiary, Solarfun Power U.S.A.
Inc., or Solarfun U.S.A., as part of our plan to enter the United States market. On November 30,
2007, Linyang BVI transferred all of the equity interests in Linyang China to Solarfun Hong Kong,
for a consideration of US$199.0 million. In February 2008, we established a wholly owned
subsidiary, Solarfun Power Deutschland GmbH., or Solarfun Deutschland, in Germany to sell solar
products in the European markets. We liquidated Sichuan Jiayang, one of our subsidiaries which
historically has had limited operations, in July 2008. In November 2009, we acquired the remaining
17% equity interest in Shanghai Linyang and Shanghai Linyang became our wholly owned subsidiary
after the completion of this transaction. We are in the process of establishing a new PRC
subsidiary under Linyang China to engage in the solar power project business.
Our principal executive offices are located at 888 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 Maples Corporate Services Limited, PO Box 309, Ugland House, Grand Cayman, KY1-1104, 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 annual report. Our agent for service of
process in the United States is CT Corporation System, located at 111 Eighth Avenue, New York, New
York 10011.
Our capital expenditures were RMB538.5 million, RMB1,169.0 million and RMB324.7 million
(US$45.6 million) in 2007, 2008 and 2009, respectively, all of which related primarily to the
purchases of manufacturing equipment. Based on the current market conditions, we expect to incur
capital expenditures of RMB655.3 million (US$96.0 million) for 2010, which will be used primarily
for purchasing manufacturing equipment, building two new manufacturing buildings and improving
product quality and production safety. We plan to fund the balance of our capital expenditure
requirements for 2010 with cash from operations, additional bank borrowings, equity offerings and
other forms of financing, if necessary.
30
B.
Business Overview
Overview
We are a vertically integrated manufacturer of silicon ingots, PV cells and PV modules in
China. We manufacture a variety of silicon ingots, PV cells and PV modules using advanced
manufacturing process technologies that have helped us to rapidly increase our operational
efficiency. We also provide PV cell processing services and PV module processing services. We sell
PV cells and PV modules both directly to system integrators and through third party distributors.
In 2009, we sold our products to over 40 customers, mostly in Germany, the Czech Republic,
Portugal, Australia and China. We conduct our business in China through our operating subsidiary,
Linyang China.
We currently have 700 MW of annual PV module production capacity and 360 MW of annual PV cell
production capacity. In addition, we have achieved improvements in process technology and product
quality since we commenced our commercial production in November 2005. Our
monocrystalline and multicrystalline PV cells achieved conversion efficiency rates in the
ranges of 16.5% to 17.8% and 15.3% to 16.3%, respectively, in 2009 and we are now able to process
wafers as thin as 180 microns. In addition, we currently have 300 MW of annual ingot production
capacity and 300 MW of annual wire sawing capacity.
Our net revenues increased from RMB2,395.1 million in 2007 to RMB4,949.1 million in 2008 but
decreased to RMB3,778.3 million (US$553.5 million) in 2009. Our consolidated net income decreased
from RMB144.9 million in 2007 to a net loss of RMB265.9 million in 2008 and then to a net loss of
RMB144.9 million (US$21.2 million) in 2009.
Our Products and Services
Our products primarily include silicon ingots, PV cells and PV modules. Since 2009, substantially all of the
ingots, wafers and PV cells we produced have been used for our own PV module production. We also
provide PV module processing services.
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:
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Dimensions
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Conversion
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Thickness
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Maximum
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PV Cell Type
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(mm×mm)
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Efficiency (%)
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(EM)
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Power (W)
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Monocrystalline silicon cell
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125 × 125
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16.5 17.8
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%
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180 200
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2.46 2.78
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156 × 156
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16.5 17.8
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%
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180 200
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3.90 4.21
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Multicrystalline silicon cell
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125 × 125
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15.3 16.3
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%
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180 200
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2.38 2.54
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156 × 156
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15.3 16.3
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%
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180 200
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3.69 3.93
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The key technical efficiency measurement of PV cells is the conversion efficiency rate.
Assuming other things being the same, 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 and multicrystalline PV cells achieved conversion efficiency rates in
the ranges of 16.5% to 17.8% and 15.3% to 16.3%, respectively, in 2009.
We are now able to process wafers as thin as 180 microns. In order to further lower our
production costs, we intend to focus on producing PV cells with decreasing thickness levels.
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In 2009, we introduced ECLIPSE, a new line of PV cells and modules with reduced light
induced degradation. This type of products reduces the impurity concentration in cells, thereby
reducing light induced degradation to approximately 1% from 2% to 3%, or less than 2 W compared to
approximately 4 W to 5 W for a 180 W module equipped with standard cells. This results in an
increase in electricity generation of approximately 1% to 2% over the long term when compared with
standard modules.
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 290W 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 175W and 235W. We sell approximately 51% of our PV modules under our proprietary
Solarfun brand, and approximately 49% of our PV modules under the brand names of our customers.
The following table sets forth the types of PV modules we manufacture with the specifications
indicated:
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Dimensions
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Weight
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PV Module Manufactured with:
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(mm)
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(Kg)
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Power (W)
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Monocrystalline silicon
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1580 × 808 × 45
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15
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150 190
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1494 × 1000 × 45
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18
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170 220
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1652 × 1000 × 50
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22
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200 245
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Multicrystalline silicon
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1580 × 808 × 45
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15
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155 190
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1494 × 1000 × 45
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18
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170 220
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1652 × 1000 × 50
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22
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200 245
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We believe our PV cells and modules are competitive with other products in the PV 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.
Ingots
We also manufacture monocrystalline ingots through Yangguang Solar, an ingot plant that
commenced operations in October 2007. We operate 40 monocrystalline ingot production furnaces and
50 multicrystalline ingot production furnaces, with up to 300 MW of annual manufacturing capacity.
All of the ingots manufactured by Yangguang Solar are used for our manufacture of PV cells and PV
modules.
In order to further integrate our production upstream, we have purchased and installed 60
units of wire saws equipment, which can be used to slice ingots into wafers, and achieved annual
wire sawing capacity of 300 MW.
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Our Services
We provide PV module processing services to convert PV cells into PV modules on behalf of a
third party. For these PV module processing services, we purchase PV cells from a customer and at
the same time agree to sell a specified quantity of PV modules back to the same customer. The
quantity of PV modules sold back to the customer under this processing arrangement is consistent
with the amount of PV cells purchased from the customer after factoring in conversion efficiency.
We record the amount of revenue from these processing transactions based on the amount received for
PV modules sold less the amount paid for the PV cells purchased from the customer. The production
costs incurred related to providing the module processing services are recorded within our cost of
revenues.
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 production costs incurred related to providing the cell processing services
were recorded within our cost of revenues.
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 material disruption of our
manufacturing process due to insufficient supply of raw materials. The aggregate costs attributable
to our five largest raw materials suppliers in 2007, 2008 and 2009 were 59.0%, 42.0% and 51.6%,
respectively, of our total raw material 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.
As of December 31, 2007, 2008 and 2009, we had RMB299.1 million, RMB488.6 million and RMB277.6
million (US$40.7 million), respectively, of raw materials in inventory.
Silicon-based Raw Materials
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 6-inch, 6.5-inch, 7-inch and 8-inch wafers in our production.
PV cells can be manufactured on our production lines using both types 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 all of our silicon and approximately 40% of our ingots and silicon wafers from
third-party suppliers. We purchase silicon, ingots and wafers from both domestic and overseas
suppliers, with the majority of our purchases being made in the domestic market. We use ingots
manufactured by Yangguang Solar, one of our wholly owned subsidiaries, in our manufacturing
process. Currently, our principal silicon suppliers include E-mei Semiconductor Material Factory,
or E-mei, GCL Silicon Technology Holdings Limited, or GCL, Gaojia Solar (Wuxi) Co., Ltd., or
Gaojia, Solar Power Industries, or SPI, LDK and Samsung.
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We procure a significant portion of our silicon and silicon wafers from suppliers under
multi-year supply agreements. The prices in these agreements were generally pre-determined, but
some of these agreements provided for adjustments in subsequent years to reflect changes in market
conditions or through mutual agreement. We procure our remaining silicon and silicon wafer supplies
from short-term supply agreements and the spot market.
Prior to mid-2008, there was an industry-wide shortage of silicon and silicon wafers, which
resulted in significant increases in the prices of these raw materials. To secure an adequate and
timely supply of silicon and silicon wafers during the earlier periods of supply shortage, we have
established supply arrangements with a number of silicon and silicon wafer suppliers, including a
11-year supply contract with Hoku, a seven-year supply contract with a non-PRC supplier and supply contracts
with LDK and E-mei. In December 2007, we also entered into three contracts for sale and delivery of
wafers totaling US$230 million over a seven-year period with a major Korean conglomerate, under
which we will receive a predetermined amount of wafers beginning in January 2008 with volumes
reaching over 30 MW per year in 2011. We entered into an approximate 140 MW long-term wafer
contract with WACKER SCHOTT Solar Vertriebs GmbH through Solarfun Hong Kong in January 2008, which
was terminated in June 2009.
Since the fourth quarter of 2008, the market prices for silicon and silicon wafers have been
decreasing significantly. Spot market prices of silicon and silicon wafers have fallen below the
prices we have contracted for with our long-term suppliers and continued to decline in 2009. We
re-negotiated most of our existing multi-year supply agreements. Currently, the terms of price of
these multi-year agreements are generally subject to review either periodically or upon significant
changes in prices on the spot market. See Item 3.D. Risk Factors Risks Related to Our Company
and Our Industry Our ability to adjust our raw material costs may be limited as a result of our
entering into multi-year supply agreements with many of our silicon and silicon wafer suppliers,
and it may be difficult for us to respond in a timely manner to rapidly changing market condition,
which could materially and adversely affect our cost of revenues and profitability.
We acquired a 52% equity interest in Yangguang Solar in July 2007 and acquired the remaining
48% equity interest in August 2008. The key raw material for our production of ingots is
polysilicon. We purchase polysilicon primarily from GCL and E-mei.
Other Raw Materials
In addition to silicon and silicon wafers, 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.
Production
We manufacture our wafers, PV cells and PV modules through Linyang China, our wholly owned PRC
subsidiary, with facilities occupying a gross floor area of 79,138 square meters in Qidong, Jiangsu
Province, China. We commenced commercial production on our first PV cell production line in
November 2005 and currently have 700 MW of annual PV module capacity and 360 MW of annual PV cell
production capacity.
We have 48 multicrystalline silicon wafer wire saws and 12
monocrystalline silicon wafer wire saws, with a total annual manufacturing capacity of 300MW. We
produce multicrystalline and monocrystalline silicon wafers with a dimension of 156 mm x 156 mm and
125 mm x 125 mm, respectively. The thickness of our silicon wafers is between 180 and 220 microns.
34
We manufacture our silicon ingots through Yangguang Solar, one of our wholly owned
subsidiaries, with facilities occupying a gross floor area of approximately 33,730 square meters.
Yangguang Solar commenced its operations in October 2007. We currently operate 40 monocrystalline
ingot production furnaces and 50 multicrystalline ingot production furnaces, with up to 300 MW of
annual manufacturing 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. 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:
35
The following diagram shows the production procedures for our PV modules:
The following diagram shows the general production stages for our ingots:
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 IEC 61730 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. Furthermore, in the United States, our modules
have been certified by the California Energy Commission, the states primary energy policy and
planning agency, and the Florida Solar Energy Center, a regional energy research and certification
organization of the United States. We also obtained a certification issued by KEMCO, an independent
product-safety testing and certification organization in Korea, which will enable us to sell our
products to customers in Korea.
36
Capacity Expansion and Technology Upgrade Plans
We currently have 700 MW of annual PV module production capacity and 360 MW of annual PV cell
production capacity in commercial operation. We plan to expand our PV module production capacity
from 700 MW to 900 MW by August 30, 2010 and our PV cell production capacity from 360 MW to 500 MW
by July 1, 2010. We also plan to expand our annual ingot production capacity from 300 MW to 360 MW and annual wire sawing capacity from 300 MW to 400 MW by May 31,
2010 through improvement on production technique. We plan to build two manufacturing buildings to
accommodate our planned expansion of production capacities. In August 2009, we signed a letter of
intent with the government of Hohhot City, the capital city of the Inner Mongolia Autonomous Region
in China, to build a 100 MW PV module production facility. In September 2009, we signed a letter
of intent with the government of Jiayuguan City, Gansu Province, to build a PV module production
facility. The commencement of the projects in Hohhot and Jiayuguan is subject to feasibility
studies, financing and further government approval. As one of our key strategies, we intend to
continuously improve the conversion efficiency of our solar products.
The expansion plans and capacities indicated 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 fund the
balance of our capital expenditure requirements for 2010 with cash from operations, additional bank
borrowings, equity offerings and other forms of financing, if necessary.
Sales and Distribution
We sell our PV modules through distributors and directly to system integrators. Our customers
include 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 revenues in 2009 included
Conergy, Martifer Solar SA, Nobility Solar Projects, Q-cell, Schüco and Sonnenzins Solar GMBH. Our
five largest customers accounted for an aggregate of 43.0%, 53.2% and 65.7% of our net revenues in
2007, 2008 and 2009, respectively. Our largest customer in 2007, 2008 and 2009 accounted for 12.6%, 22.2% and
40.6% of our net revenues of the respective year.
We have established two wholly owned subsidiaries, namely Solarfun U.S.A. and Solarfun
Deutschland, to expand our sales in these markets. Solarfun Deutschland was established in
February 2008 to promote our products in Europe.
37
The following table sets forth our net revenues by geographic region, based on the location
that our invoices are sent to, and the percentage contribution of each of these regions to our net
revenues, for the periods indicated:
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
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2007
|
|
|
2008
|
|
|
2009
|
|
|
|
Net
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|
|
|
|
|
|
Net
|
|
|
|
|
|
|
Net
|
|
|
Net
|
|
|
|
|
|
|
Revenues
|
|
|
% of Net
|
|
|
Revenues
|
|
|
% of Net
|
|
|
Revenues
|
|
|
Revenues
|
|
|
% of Net
|
|
Region
|
|
(RMB)
|
|
|
Revenues
|
|
|
(RMB)
|
|
|
Revenues
|
|
|
(RMB)
|
|
|
(US$)
|
|
|
Revenues
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|
|
|
(In thousands, except percentages)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Germany
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|
1,195,788
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|
|
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49.9
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%
|
|
|
2,637,434
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|
|
|
53.3
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%
|
|
|
2,668,477
|
|
|
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390,934
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|
|
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70.6
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%
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Spain
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|
584,525
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|
|
|
24.4
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%
|
|
|
1,246,305
|
|
|
|
25.2
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%
|
|
|
37,326
|
|
|
|
5,468
|
|
|
|
1.0
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%
|
PRC
|
|
|
200,615
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|
|
|
8.4
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%
|
|
|
329,153
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|
|
|
6.6
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%
|
|
|
177,478
|
|
|
|
26,001
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|
|
|
4.7
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%
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Italy
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|
|
92,900
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|
|
|
3.9
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%
|
|
|
119,272
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|
|
|
2.4
|
%
|
|
|
4,446
|
|
|
|
651
|
|
|
|
0.1
|
%
|
Czech Republic
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
245,814
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|
|
|
36,012
|
|
|
|
6.5
|
%
|
Others
|
|
|
321,307
|
|
|
|
13.4
|
%
|
|
|
616,904
|
|
|
|
12.5
|
%
|
|
|
644,775
|
|
|
|
94,461
|
|
|
|
17.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,395,135
|
|
|
|
100.0
|
%
|
|
|
4,949,068
|
|
|
|
100.0
|
%
|
|
|
3,778,316
|
|
|
|
553,527
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In 2009, we shipped our products to over 40 customers. In 2007, 2008 and 2009, customers
accounting for 10.0% or more of our net revenues collectively accounted for approximately 12.6%,
22.2% and 41.4% of our net revenues, respectively, and sales to our largest customer accounted for
approximately 12.6%, 22.2% and 41.4% 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.
Warranty
We provide a two to five-year warranty for technical defects and a 10-year limited warranty
against declines of greater than 10%, and a 20 to 25-year limited 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 RMB23.1 million, RMB46.6 million and RMB33.7 million (US$4.9
million) in warranty costs for the two to five-year warranty against technical defects in 2007,
2008 and 2009, respectively.
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 April 30, 2010, we had been granted 11 patents by the State Intellectual Property Office
of China and had 13 patent applications pending in China. Our issued patents and pending patent
applications relate primarily to process technologies for manufacturing PV cells.
We have registered Solarfun, our trademark for our PV cells and modules, with the China
Trademark Office and the International Bureau of the World Intellectual Property Organization,
which allow us to use this trademark in China, Singapore and the United States.
38
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 Item 3.D. 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 PV market has been rapidly evolving and has
become highly competitive. In particular, a large number of manufacturers have entered the solar
market.
Our main overseas competitors are, among others, Mitsubishi Electric Corporation, Sharp
Corporation and Sunpower Corporation. Our primary competitors in China include Suntech Power
Holdings Co., Ltd., Trina Solar Ltd., Yingli Green Energy Holdings Co., Ltd. and Canadian Solar
Inc. 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 was a supply shortage of
silicon and silicon wafers, we competed intensely with our competitors in obtaining adequate supplies of
silicon wafers.
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.
39
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. We also maintain
business interruption insurance and product liability insurance. We believe our insurance coverage
is customary and standard for companies of comparable size in comparable industries in China.
However, our existing insurance policies may not be sufficient to insulate us from all losses and
liabilities that we may incur.
Regulation
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, Chinas Standing Committee of National Peoples Congress, or SCNPC, enacted
the Renewable Energy Law, which has become effective on January 1, 2006. On December 26, 2009, the
Renewable Energy law was amended by SCNPC. The Renewable Energy law, as amended, 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.
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 the western part of China, which has not
been covered by electricity transmission grids and rural areas.
In January 2006, 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 PV industry.
On March 3, 2008, the NDRC issued the 11
th
Five-Year Plan for the Development of
Energy Resources, which announced the PRC governments support for the development of renewable
energy resources in China, including solar power.
40
On March 23, 2009, Chinas Ministry of Finance promulgated the Interim Measures for
Administration of Government Subsidy Funds for Application of Solar Photovoltaic Technology in
Building Construction, or the Interim Measures, to support the demonstration and the promotion of
solar photovoltaic application in China. Local governments are encouraged to issue and implement
supporting policies for the development of solar photovoltaic technology. Under these Interim
Measures, the Ministry of Finance provides subsidies for projects with individual solar
installations that are greater than 50 kilowatt-peak in size and have more than 16% conversion
efficiency for monocrystalline PV products, more than 14% conversion efficiency for
multicrystalline PV products and more than 6% conversion efficiency for amorphous silicon PV
products, and gives priority support to solar PV technology integrated into building construction,
grid-connected PV building applications and some public PV building applications such as schools,
hospitals and offices. For 2009, the standard subsidy is set at RMB20 per watt in principle and the
detailed standard is to be determined by factors including, but not limited to, the level of
integration of building with PV and the technology of PV products. The Interim Measures do not
apply to projects completed before March 23, 2009, the promulgation date of the Interim Measures.
On April 16, 2009, the General Offices of the PRC Ministry of Finance and the PRC Ministry of
Housing and Urban-Rural Development jointly issued the Guidelines for Declaration of Demonstration
Project of Solar Photovoltaic Building Applications. These guidelines set the subsidy given out in
2009 to qualified solar projects at no more than RMB20 per watt for projects involving the
integration of PV components into buildings structural elements and at no more than RMB15 per watt
for projects involving the installation of PV components onto building rooftops and wall surfaces.
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 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 FIE Tax Law and the related implementing rules,
foreign invested enterprises incorporated in the PRC were generally subject to an enterprise income
tax rate of 33.0% (30.0% of state income tax plus 3.0% local income tax) prior to January 1, 2008.
The FIE Tax Law and the related implementing rules provide certain favorable tax treatments to
foreign-invested enterprises. Production-oriented foreign-invested enterprises, which were
scheduled to operate for a period of ten years or more, were 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 were
entitled to reduced tax rates, namely: (1) in coastal open economic zones, the tax rate applicable
to production-oriented foreign-invested enterprises was 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 might enjoy a 50%
reduction from the applicable rate.
41
On March 16, 2007, the National Peoples Congress of the PRC passed the EIT, which took effect
as of January 1, 2008. In accordance with the EIT, a unified enterprise income tax rate of 25% and
unified tax deduction standards are 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 former tax laws and
administrative regulations shall, under the regulation 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 EIT. In accordance with the Notice of the State Council on the Implementation
of the Transitional Preferential Policies in respect of Enterprise Income Tax, foreign-invested
enterprises established prior to March 16, 2007 and eligible for preferential tax treatment, such
as Linyang China, will continue to enjoy the preferential tax treatment in the manner and during
the period as former laws and regulations provided until such period expires. While the EIT
equalizes the tax rates for FIEs and domestically owned enterprises, preferential tax treatment
continues to be granted to companies in certain encouraged sectors and to companies classified as
high and new technology enterprises, which enjoy a tax rate of 15% as compared to the uniform tax
rate of 25%. Linyang China was approved to be qualified as a high and new technology enterprise
on October 21, 2008.
In accordance with the FIE Tax Law, the EIT and other relevant tax regulations, Linyang China
was exempted from state and local enterprise income tax in 2005 and 2006, was taxed at a reduced
rate of 12% in 2007, 12.5% in 2008 and 12.5% in 2009, and is being taxed at a reduced rate of 15%
in 2010. 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. In addition, under relevant PRC tax
rules and regulations, Linyang China was entitled to a two-year income tax exemption on income
generated from additional investment in the production capacity of Linyang China 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 is entitled to a reduced tax
rate of 12.5% for the three years thereafter. In addition, our subsidiaries, Yangguang Solar and
Shanghai Linyang, were subject to an enterprise income tax rate of 33% for the years of 2006 and
2007, and are subject to a rate of 25% from 2008 onwards.
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:
|
|
Foreign Exchange Administration Rules (1996), as amended; and
|
|
|
|
Regulations of Settlement, Sale and Payment of Foreign Exchange (1996).
|
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.
42
Dividend Distribution
The principal regulations governing distribution of dividends paid by wholly foreign-owned
enterprises include:
|
|
Wholly Foreign-Owned Enterprise Law (1986), as amended; and
|
|
|
|
Wholly Foreign-Owned Enterprise Law Implementation Rules (1990), as amended.
|
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, 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.
C.
Organizational Structure
The
diagram below sets forth the entities directly or indirectly controlled by us.
Notes:
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|
|
(1)
|
|
Jiangsu Linyang Solarfun Engineering Research and Development Center Co., Ltd. was formerly
named Nantong Linyang Solarfun Engineering Research and Development Center Co., Ltd. It
changed its name on April 9, 2007.
|
43
D.
Property, Plant and Equipment
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
258,319 square meters, which expire between 2053 and 2060. We own office and manufacturing
facilities for a total gross floor area of 79,138 square meters in Qidong, Jiangsu Province. We leased an office of 3,600
square meters in Qidong, Jiangsu Province from Linyang Electronics, which will expire on January 8, 2012. In
addition, Yangguang Solar holds the land use rights for a total area of approximately 976,905
square meters and owns office and manufacturing facilities for a total gross floor area of 33,730
square meters in Lianyungang, Jiangsu Province. We have received a request from the local
government of Lianyungang City to purchase back the land use rights for part of
the land that was previously granted to Yangguang Solar, claiming that this part of the land has not been
developed in accordance with the relevant land use rights grant contract. The proposed purchase price is below
the book value of such land use right. We are currently under
negotiation with the local government of Lianyungang City to resolve this issue. 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. We leased an office of 800 square
meters for administration and international business in Shanghai, which will expire in August 2010.
We entered into a contract with Qidong Huahong Electronics Co., Ltd., a company controlled by Mr.
Yonghua Lu, to lease an office
with a gross floor area of 1,116 square meters from September 1, 2010 to August 31, 2013. In
2007, 2008 and 2009, our rental expenses were approximately RMB3.7 million, RMB6.3 million and
RMB9.6 million (US$1.4 million), respectively.
We currently have an annual PV module production capacity of 700 MW and an annual PV cell
production capacity of 360 MW. We also have 300 MW of annual ingot production capacity and 300 MW
of annual wire sawing capacity.
We believe that our existing facilities are adequate and suitable to meet our present needs.
We are now constructing two buildings to accommodate our planned expansion of production capacity.
ITEM 4A
UNRESOLVED STAFF COMMENTS
None.
ITEM 5
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The following discussion should be read in conjunction with the rest of this annual report,
including the consolidated financial statements and notes thereto contained elsewhere in this
annual report. The results discussed below are not necessarily indicative of the results to be
expected in any future periods.
A.
Operating Results
Overview
We are a vertically integrated manufacturer of silicon ingots, PV cells and PV modules in
China. We manufacture a variety of silicon ingots, PV cells and PV modules using advanced
manufacturing process technologies that have helped us to rapidly increase our operational
efficiency. Since 2009, substantially all of the ingots, wafers and PV cells we produced have been used for
our own PV module production. We also provide PV cell processing services and PV module processing services. We sell
PV cells and PV modules both directly to system integrators and through third-party distributors.
44
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 Hong Kong. In March 2006,
April 2006 and April 2007, we established three majority-owned or wholly owned subsidiaries in
China, Shanghai Linyang, Sichuan Jiayang and Linyang Research Center, respectively, to expand our
business into new markets and sectors. We acquired a 52% equity interest in Yangguang Solar in
July 2007 and acquired the remaining 48% in August 2008. In September 2007, we established a wholly
owned subsidiary, Solarfun U.S.A., as part of our plan to enter the United States market. On
November 30, 2007, Linyang BVI transferred all of the equity interests in Linyang China to Solarfun
Hong Kong for consideration of US$199.0 million. In February 2008, we established a wholly owned
subsidiary, Solarfun Deutschland in Germany, to sell solar products in the European markets. We
liquidated Sichuan Jiayang, one of our subsidiaries which historically has had limited operations,
in July 2008. In November 2009, we acquired the remaining 17% interest in Shanghai Linyang and
Shanghai Linyang became our wholly owned subsidiary after the completion of this transaction. We
are in the process of establishing a new PRC subsidiary under Linyang China to engage in the solar
power project business.
We shipped 78.4 MW, 172.8 MW and 313.4 MW of PV modules (including PV module processing) in
2007, 2008 and 2009, respectively. The average selling price of our PV modules (excluding PV module
processing) was RMB28.20, RMB26.77 and RMB15.27 (US$2.24) per watt in 2007, 2008 and 2009,
respectively. In 2007, 2008 and 2009, approximately 91.6%, 93.4% and 95.3%, respectively, of our
net revenues were attributable to sales to customers outside of the PRC. Moreover, in 2007, 2008
and 2009, customers accounting for more than 10% of our net revenues accounted in the aggregate for
12.6%, 22.2% and 41.4%, respectively, of our net revenues.
Our net revenues increased from RMB2,395.1 million in 2007 to RMB4,949.1 million in 2008 but
decreased to RMB3,778.3 million (US$553.5 million) in 2009. Our consolidated net income decreased
from RMB144.9 million in 2007 to a net loss of RMB265.9 million in 2008 and then to a net loss of
RMB144.9 million (US$21.2 million) in 2009.
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.
45
Key Factors Affecting Our Financial Performance
The most significant factors affecting our financial performance are:
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industry demand;
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average selling price of our PV products;
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price and availability of silicon and silicon wafers;
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manufacturing capacity; and
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process technologies.
|
Industry Demand
Our business and revenue growth depends on PV industry demand. There has been significant
growth in the PV market in the past decade. However, beginning in the second half of 2008, many of
our key markets, including Germany, Spain and the United States, and other national economies have
experienced a period of economic contraction or significantly slower economic growth. In
particular, the current credit crisis, weak consumer confidence and diminished consumer and
business spending have contributed to a significant slowdown in the market demand for PV products
due to decreased energy requirements. Many of our customers have experienced difficulty in
obtaining financing, and even if they have been able to obtain financing, the cost of such
financing has increased and our customers may change their decision or change the timing of their
decision to purchase our products. As a result, this lack of and increase in the cost of financing
have lowered and may continue to lower demand for our products and reduced our net revenues. A
protracted disruption in the ability of our customers to obtain financing could lead to a
significant reduction in their future orders for our products, which in turn could have a material
adverse effect on our business, financial condition and results of operations.
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 manufacturing costs, including the costs of silicon and
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 our customers
issue purchase orders, taking into account the size of the purchase order, the strength and history
of our relationship with each customer and our capacity utilization. Beginning in the fourth
quarter of 2008, demand for PV products decreased as a result of the global financial crisis, but
the supply of PV products increased significantly as many manufacturers of PV products worldwide,
including our company, engaged in significant production capacity expansion in recent years. This
state of over-supply has resulted in reductions in the prevailing market prices of PV products as
manufacturers have reduced their average selling prices in an attempt to obtain sales. The average
selling prices of our products started to decline in the fourth quarter of 2008. The average
selling price per watt of our PV modules (excluding PV module processing) decreased from RMB28.20
in 2007 to RMB26.77 in 2008 and to RMB15.27 (US$2.24) in 2009. The changes in the average selling
prices of our PV modules primarily reflected the prevailing market trend. We expect that the prices
of PV products will continue to decline over time due to increased supply of PV products, reduced
manufacturing costs from improving technology and economies of scale, and continuing decreases in
the prices of silicon and silicon wafers.
46
Price and Availability of Silicon and Silicon Wafers
Prior to mid-2008, there was an industry-wide shortage of silicon and silicon wafers, which
resulted in significant price increases. To secure an adequate and timely supply of silicon and
silicon wafers during the earlier periods of supply shortage, we entered into a number of
multi-year supply agreements. Silicon and silicon wafers secured through such multi-year supply
agreements provided a significant portion of our silicon and silicon wafer needs in 2009, and we
expect these contracts will provide a significant portion of our anticipated silicon and silicon
wafer needs for 2010. The prices in these agreements were generally pre-determined, but some of
these agreements provided for adjustments in subsequent years to reflect changes in market
conditions or through mutual agreement. Since the fourth quarter of 2008, the market prices for
silicon and silicon wafers have been decreasing significantly. Spot market prices of silicon and
silicon wafer prices have fallen below the price we have contracted for with our long-term
suppliers and continued to decline in 2009. The rapid declines in the prices of silicon and silicon
wafers coupled with decreases in demand for PV products have hampered our ability to pass on to our
customers the cost of our raw materials which were procured at higher prices during the earlier
period of supply shortage. As a result, our write-down of inventories increased from RMB0.8 million
in 2007 to RMB413.8 million in 2008. Our write-down of inventories amounted to RMB282.6 million
(US$41.4 million) in 2009.
Due to the significant decrease in prices of silicon and silicon wafers, we have re-negotiated
most of our existing multi-year supply agreements. Currently, the terms of price of these
multi-year agreements are generally subject to review either periodically or upon significant
changes in prices on the spot market. If we are unable to re-negotiate the prices of our existing
multi-year supply agreements and the prices of silicon and silicon wafers continue to decrease in
the future, we may not be able to adjust our materials costs, and our cost of revenues would be
materially and adversely affected.
We have historically also acquired a portion of our polysilicon and silicon wafers through
short-term supply arrangements for periods ranging from several months to one year and spot market
purchases. The prices we pay for silicon and silicon wafers pursuant to short-term supply
arrangements and spot market purchases vary according to the prevailing market price around the
time of delivery, which can be subject to significant fluctuations. Most of our short-term supply
arrangements have expired pursuant to their terms, and due to our expectations of market
conditions,
we anticipate fulfilling any needs for silicon and silicon wafers in excess of the volumes to
be delivered under our multi-year supply agreements through purchases on the spot market, rather
than through new short-term supply arrangements.
Manufacturing Capacity
Capacity and capacity utilization are key factors in growing our net revenues and gross
profit. In order to accommodate the growing demand for our products, we have significantly
expanded, our manufacturing capacity in recent years. 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 revenues, and by lowering our manufacturing costs as a result of increased
economies of scale.
We have been seeking 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.
47
We have expanded rapidly our manufacturing capacity since our establishment in August 2004. As
a result, we produced 87.2 MW, 177.3 MW and 342.8 MW of PV modules in 2007, 2008 and 2009,
respectively. The following table sets forth the production volume of silicon ingots, wafer PV
cells and PV modules for the periods indicated:
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|
Year Ended December 31,
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|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
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|
|
(MW)
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|
(MW)
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|
|
(MW)
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|
|
(MW)
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|
|
(MW)
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Amount of ingots produced
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
48.0
|
|
|
|
154.1
|
|
Amount of wafer produced
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23.5
|
|
|
|
164.6
|
|
Amount of PV cells
produced (including PV
cell processing)
|
|
|
1.0
|
(1)
|
|
|
26.2
|
(2)
|
|
|
99.6
|
(3)
|
|
|
191.5
|
(4)
|
|
|
260.2
|
(5)
|
Amount of PV modules
produced (including PV
module processing)
|
|
|
5.5
|
|
|
|
19.6
|
|
|
|
87.2
|
|
|
|
177.3
|
|
|
|
342.8
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Notes:
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|
(1)
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Of which 0.9 MW was used in our PV module production.
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(2)
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Of which 19.9 MW was used in our PV module production.
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(3)
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Of which 86.9 MW was used in our PV module production.
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(4)
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Of which 190.5 MW was used in our PV module production.
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(5)
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Of which 240.2 MW was used in our PV module production.
|
We currently have an annual PV module production capacity of 700 MW and an annual PV cell
production capacity of 360 MW. We also have 300 MW of annual ingot production capacity and 300 MW
of annual wire sawing capacity.
Process Technologies
Advancements of process technologies have enhanced conversion efficiencies of PV products.
Assuming other things being the same, 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 and multicrystalline PV cells achieved
conversion efficiency rates in the ranges of 16.5% to 17.8% and 15.3% to 16.3%, respectively, in
2009 and we are now able to process wafers as thin as 180 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.
Net Revenues
We currently generate a substantial majority of our net revenues from the production and sale
of PV modules. We also generate a small portion of our net revenues from the sale of PV cells and
raw materials to third parties.
We commenced manufacturing and selling PV modules in February 2005, and had net revenues of
RMB2,209.5 million, RMB4,626.4 million and RMB3,375.6 million (US$494.5 million) in 2007, 2008 and
2009, respectively.
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 in manufacturing our PV modules and will maintain our sale of
PV cells to third parties at a relatively low level. In 2007, 2008 and 2009, our net revenues from
the sale of PV cells was RMB52.0 million, RMB253.1 million and RMB38.4 million (US$5.6 million),
respectively.
48
We began to provide PV module processing services to produce PV modules from PV cells provided
by our customers in 2007. We recorded the amount of net revenues on PV module processing
transactions based on the amount received from a customer for PV modules sold less the amount paid
for PV cells purchased from the same customer.
In providing PV module processing services, 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 net revenues.
In 2007, 2008 and 2009, a portion of our net revenues was derived from the sale of raw
materials to our customers. We record revenue net of all value-added taxes imposed by governmental
authorities and collected by us from customers concurrent with revenue-producing transactions.
We currently depend on a limited number of customers for a high percentage of our net
revenues. Customers who individually accounted for more than 10% of our net revenues accounted for
an aggregate of 12.6%, 22.2% and 41.4% of our net revenues in 2007, 2008 and 2009, respectively.
From a geographic standpoint, Europe, particularly Germany, has been our largest market. Based on
the location that our invoices are sent to, in 2007, 2008 and 2009, our sales to European customers
accounted for 88.6%, 93.3% and 85.8%, respectively, of our net revenues, with German customers
accounting for 49.9%, 53.3% and 70.6%, 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 PV markets, such as the
United States, Spain, Italy, France and China.
Sales to our customers are typically made through non-exclusive, short-term arrangements.
Before the beginning of 2009, we generally required deposits of a certain percentage of the
contract price from our customers which we recorded under customer deposits in our consolidated
balance sheets. Once the revenue recognition criteria are met, we then recognize these payments as
net revenues. In line with market trends, this practice of requiring our customers to make deposits
is on the decline. Deposits we received increased from 2008 to 2009 despite the current market
trends, primarily because we required deposits from certain of our
customers based on their credit quality. As of December 31, 2007, 2008 and 2009, we had received deposits of RMB27.6 million,
RMB9.5 million and RMB59.7 million (US$8.7 million), respectively.
Cost of Revenues and Operating Expenses
Cost of Revenues
The following table sets forth our cost of revenues and operating expenses and these amounts
as percentages of our net revenues for the periods indicated.
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|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
Amount
|
|
|
% of Net
|
|
|
Amount
|
|
|
% of Net
|
|
|
Amount
|
|
|
% of Net
|
|
|
|
(RMB)
|
|
|
Revenues
|
|
|
(RMB)
|
|
|
Revenues
|
|
|
(RMB)
|
|
|
(US$)
|
|
|
Revenues
|
|
|
|
(In thousands, except percentages)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
(1,997,355
|
)
|
|
|
83.4
|
%
|
|
|
(4,905,147
|
)
|
|
|
99.1
|
%
|
|
|
(3,341,936
|
)
|
|
|
(489,596
|
)
|
|
|
88.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling expenses
|
|
|
(62,777
|
)
|
|
|
2.6
|
%
|
|
|
(87,913
|
)
|
|
|
1.8
|
%
|
|
|
(105,454
|
)
|
|
|
(15,449
|
)
|
|
|
2.8
|
%
|
General and
administrative
expenses
|
|
|
(113,756
|
)
|
|
|
4.8
|
%
|
|
|
(143,340
|
)
|
|
|
2.9
|
%
|
|
|
(180,989
|
)
|
|
|
(26,515
|
)
|
|
|
4.8
|
%
|
Research and
development
expenses
|
|
|
(27,440
|
)
|
|
|
1.1
|
%
|
|
|
(19,679
|
)
|
|
|
0.4
|
%
|
|
|
(32,025
|
)
|
|
|
(4,692
|
)
|
|
|
0.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
(203,973
|
)
|
|
|
8.5
|
%
|
|
|
(250,932
|
)
|
|
|
5.1
|
%
|
|
|
(318,468
|
)
|
|
|
(46,656
|
)
|
|
|
8.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49
Our cost of revenues includes the cost of raw materials used for our PV module and PV cell
production and PV module processing, such as silicon and 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 module processing services were recorded within cost of revenues. We expect the
cost of silicon and silicon wafers, our primary raw material for the manufacturing of PV products,
will continue to constitute a substantial portion of our cost of revenues in the near future.
Other items contributing to our cost of revenues 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.
We expect our cost of revenues to increase as we increase our production volume. Future
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 revenues.
Silicon and silicon wafers are the most important raw materials for our products. We record
the purchase price of silicon and silicon wafers and other raw materials initially as inventory in
our consolidated balance sheets, and then transfer this amount to our cost of revenues after the
raw materials are consumed in our manufacturing process and the finished products are sold and
delivered. As of December 31, 2007, 2008 and 2009, our inventory of raw materials totaled
RMB299.1 million, RMB488.6 million and RMB277.6 million (US$40.7 million), respectively, of which
RMB197.8 million, RMB353.3 million and RMB146.8 million (US$21.5 million), respectively,
represented 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.
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. In 2007, 2008 and 2009, our selling expenses were RMB62.8 million, RMB87.9 million and
RMB105.5 million (US$15.4 million), respectively. 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.
50
We provide a two to five-year warranty for technical defects and a 10-year limited warranty
against declines of greater than 10%, and a 20 to 25-year limited warranty against declines of
greater than 20%, in the initial power generation capacity of our PV modules. 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, 2007, 2008 and 2009, our accrued warranty costs for the two to five-year
warranty against technical defects totaled RMB21.0 million, RMB48.6 million and RMB73.5 million
(US$10.8 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 2007, 2008 and 2009, we provided RMB23.1 million, RMB46.6 million and RMB33.7 million
(US$4.9 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 consumables, traveling expenses, insurance and
share compensation expenses. In 2007, 2008 and 2009, our general and administrative expenses were
RMB113.8 million, RMB143.3 million and RMB181.0 million (US$26.5 million), respectively.
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 the travel expenses incurred by our research and development staff or
otherwise in connection with our research and development activities. We expense our research and
development costs as incurred. In 2007, 2008 and 2009, our research and development expenses were
RMB27.4 million, RMB19.7 million and RMB32.0 million (US$4.7 million), respectively. We
believe that research and development is critical to our strategic objectives of enhancing our
technologies, reducing manufacturing costs and meeting the changing requirements of our customers.
As a result, we expect that our total research and development expenses will be similar or will
increase in the future.
Share Compensation Expenses
We adopted our 2006 share option 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 December 31, 2009,
options to purchase 5,398,900 ordinary shares have been granted and were outstanding under this
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. In addition,
the plan provides for an 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 2% of our then
outstanding ordinary shares or such lesser amount as our board of directors may determine. As of
December 31, 2009, options to purchase 10,817,265 ordinary shares have been granted and were
outstanding under this plan.
In 2007, 2008 and 2009, we recorded RMB29.6 million, RMB34.8 million and RMB42.7 million
(US$6.3 million), respectively, as share compensation expenses.
51
Taxation
PRC Enterprise Income Tax
PRC enterprise income tax is calculated based on taxable income determined under PRC
accounting principles. In accordance with the FIE Tax Law, and the related implementing rules,
foreign-invested enterprises incorporated in the PRC were generally subject to an enterprise income
tax rate of 33%, consisting of 30% state enterprise income tax and 3% local enterprise income tax
prior to January 1, 2008. The FIE Tax Law and the related implementing rules provided certain
favorable tax treatments to foreign-invested enterprises. Production-oriented foreign-invested
enterprises, which were scheduled to operate for a period of ten years or more, were 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 and special economic zones, foreign-invested enterprises were entitled to
reduced enterprise income tax rates, namely, in coastal open economic areas, the tax rate
applicable to production-oriented foreign-invested enterprises was 24%; in special economic zones,
the rate was 15%. Linyang China is a foreign-invested production-oriented enterprise established in
Qidong, Nantong City, a coastal open economic area. In addition, according to the FIE Tax Law,
local governments at the provincial level were authorized to waive or reduce the 3% local income
tax on foreign-invested enterprises that operate in an encouraged industry.
On March 16, 2007, the National Peoples Congress of the PRC passed the EIT, which took effect
as of January 1, 2008. On December 6, 2007, the State Council of the PRC issued implementation
regulations regarding the EIT which took effect as of January 1, 2008. In accordance with the EIT
and its implementation regulations, a unified enterprise income tax rate of 25% and unified tax
deduction standards are applied equally to both domestic-invested enterprises and foreign-invested
enterprises such as Linyang China. Enterprises established prior to March 16, 2007 and eligible for
preferential tax treatment in accordance with the former 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 EIT. In
accordance
with the Notice of the State Council on the Implementation of the Transitional Preferential
Policies in respect of Enterprise Income Tax, foreign-invested enterprises established prior to
March 16, 2007 and eligible for preferential tax treatment, such as Linyang China, will continue to
enjoy the preferential tax treatment in the manner and during the period as former laws and
administrative regulations provided until such period expires. While the EIT equalizes the tax
rates for FIEs and domestically owned enterprises, preferential tax treatment continues to be
granted to companies in certain encouraged sectors and to companies classified as high and new
technology enterprises, which enjoy a tax rate of 15% as compared to the uniform tax rate of 25%.
Linyang China was approved to be qualified as a high and new technology enterprise on October 21,
2008.
In accordance with the FIE Tax Law, the EIT and other relevant tax regulations, Linyang China
was exempted from state and local enterprise income tax in 2005 and 2006, was taxed at a reduced
rate of 12% in 2007, 12.5% in 2008 and 12.5% in 2009, and is being taxed at a reduced rate of 15%
in 2010. 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. In addition, under relevant PRC tax
rules and regulations, Linyang China was entitled to a two-year income tax exemption on income
generated from additional investment in the production capacity of Linyang China 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 is entitled to a reduced tax
rate of 12.5% for the three years thereafter. Our subsidiaries, Yangguang Solar and Shanghai
Linyang, were subject to an enterprise income tax rate of 33% for the years of 2006 and 2007, and
are subject to a rate of 25% from 2008 onwards.
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.
52
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 and raw materials. We record
revenue related to the sale of PV modules, PV cells or raw materials when the criteria of
Accounting Standard Codification, or ASC, subtopic 605-10, 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, our sales arrangements are evidenced by either framework sales agreements
and/or by individual sales agreements for each transaction. 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 unconditional sales returns.
Generally, our customers provide letters of credit in the amount of the full product sales price
prior to
shipment. We assess customers creditworthiness before accepting sales orders. Historically,
we have not experienced any significant 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 revenues.
We periodically enter into processing service arrangements to process PV cells into PV
modules. For these service arrangements, we purchase PV cells from a customer and
contemporaneously agree to sell a specified quantity of PV modules back to the same customer. The
quantity of PV modules sold back to the customers under these processing arrangements is consistent
with the amount of PV cells purchased from the customer based on current production conversion
rates. In accordance with ASC subtopic 845-15, Accounting for Purchases and Sales of Inventory
with the Same Counterparty, we record the amount of revenue on these processing transactions based
on the amount received for PV modules sold less the amount paid for the PV cells purchased from the
customer. These sales are subject to all of the above-noted accounting policy 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. We do not offer
explicit nor implicit rights of return not due to product defects.
53
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
|
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.
Costs incurred in constructing new facilities, including progress payments, interest and other
costs relating to the construction are capitalized and transferred to fixed assets upon completion
of the new facilities, the depreciation of which commences immediately.
Interest costs are capitalized if they are incurred during the acquisition, construction or
production of a qualifying asset and such costs could have been avoided if expenditures for the
assets have not been made. Capitalization of interest costs commences when the activities to
prepare the asset are in progress and expenditures and borrowing costs are being incurred. Interest
costs are capitalized until the assets are ready for their intended use. Interest capitalized as of
December 31, 2007, 2008 and 2009 amounted to approximately RMB6.9 million, RMB22.5 million and
RMB4.3 million (US$0.6 million), respectively.
Warranty Costs
Our standard warranty on PV modules sold to customers provides for a two to five-year warranty
against technical defects, a 10-year limited warranty against a decline from initial power
generation capacity of more than 10% and a 20 to 25-year limited warranty against a decline from
initial power generation capacity of 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 to five-year 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 limited 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. Based on our review of the historical
warranty accrual, we have reversed approximately RMB1.5 million relating to expired warranty
accrual in 2007. 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.
54
Goodwill
We account for goodwill in accordance with ASC 350, Goodwill and Other Intangible Assets. We
conduct impairment test on an annual basis and, in addition, if we notice any indication of
impairment, we conduct such test immediately.
The application of the impairment test requires judgment, including the identification of
reporting units, assignments of assets and liabilities to reporting units and the determination of
the fair value of each reporting unit. Fair value is primarily determined by computing the future
discounted cash flows expected to be generated by the reporting unit that are believed to be
reasonable under current and forecasted circumstances, the results of which form the basis for
making judgments about carrying values of the reported net assets of our reporting units.
We conducted an impairment test as of December 31, 2009 and no impairment loss was identified.
We will continue to closely monitor the projections for our reporting units and the economic
conditions of the product end-markets. Any significant change in market conditions and estimates or
judgments could give rise to impairment in the period that the change becomes known.
Financial Instruments Currency Derivative Contracts
Our derivative instruments are principally used to manage currency exchange rate risk and are
not used for speculative or trading purposes. Accounting for derivative instruments requires
significant estimates and judgments relating to measuring the fair values of the derivative
instruments. As of December 31, 2009, notional amounts of Euro105 million were outstanding under
these foreign
currency derivative contracts. We record these derivative instruments as current assets or
current liabilities, measured at fair value. We estimate the fair value of these foreign currency
derivative instruments using a pricing model based on market observable inputs, which include
mark-to-market forward rates at each balance sheet date, spot foreign exchange rates at each
balance sheet date, and strike foreign exchange rates and maturity terms of our foreign currency
derivative instruments.
Share-based Compensation
We account for the share options granted under our 2006 share option plan and our 2007 equity
incentive plan in accordance with ASC subtopic 718-10, Share-Based Compensation and ASC subtopic
505-50, Accounting for Equity Instruments that Are Entered to Offer the Employees for Acquiring,
or in conjunction with Selling Goods or Services, respectively. In accordance with ASC subtopic
718-10, 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.
With the assistance of an independent third party valuer, we have applied the Black-Scholes
option valuation model in determining the fair value of the options granted before January 1, 2008.
We estimate expected volatility at the date of grant based on a combination of historical and
implied volatilities from comparable publicly listed companies. Forfeiture rate is estimated based
on historical forfeiture patterns and adjusted to reflect future change in circumstances and facts,
if any.
For share options and restricted stock units granted after January 1, 2008, the fair value of
each grant is estimated on the date of grant using a binomial-lattice model. Similar to the
Black-Scholes model, the binomial-lattice option model takes into account variables such as
expected volatility, dividend yield, and risk-free interest rates. Risk-free interest rates are
based on zero coupon U.S. risk-free rates for the terms consistent with the expected life of the
award at the time of grant. Expected life is computed based on our estimation of exercise patterns
which we believe are representative of future behavior. Expected dividend yield is determined based
on our historical dividend payout rate.
55
In addition, the binomial-lattice model considers the contractual term of the option, the
probability that the option will be exercised prior to the end of its contractual life, and the
probability of termination or retirement of the option holder in computing the value of the option.
Accounting for Income Taxes and Uncertain Income Tax Positions
We account for income taxes in accordance with ASC 740, Accounting for Income Taxes. We
consider many factors when assessing the likelihood of future realization of our deferred tax
assets, including our recent cumulative earnings experience by taxing jurisdiction, expectations of
future taxable income, the carry-forward periods available to us for tax reporting purposes, and
other relevant factors. Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or all of the deferred tax
assets will not be realized.
ASC subtopic 740-10 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. As of
and for the year ended December 31, 2009, our uncertain tax position amounted to approximately
RMB27.4 million (US$4.0 million) because Solarfun Hong Kong may be considered a PRC tax resident
based on the facts and circumstances, including the uncertainty of the interpretation of and
administrative practices associated with the applicable PRC tax law, as of December 31, 2009.
Our accounting policy for interest and/or penalties related to an uncertain position is to
include interest and penalties in other operating expenses. No such amounts have been incurred or
accrued by us through December 31, 2009. Based on existing PRC tax regulations, the tax returns of
Linyang China, Shanghai Linyang, Yangguang Solar and Linyang Research Center for the years ended
December 31, 2004 through 2009 remain open for examination by the tax authorities.
Advance to Suppliers
Advance to suppliers represents interest-free cash deposits paid to suppliers for future
purchases of raw materials. These deposits were 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 credit quality of the suppliers is
continually assessed. If there is any deterioration in the creditworthiness of the suppliers, we
will seek to recover the advances from the suppliers and provide for losses on advances which are
akin to receivables in cost of revenue because of the suppliers inability to return the advances.
A charge to cost of revenues will be recorded in the period in which a loss is determined to be
probable and the amount can be reasonably estimated. We recorded a charge to cost of revenues of
approximately RMB nil, RMB42.0 million and RMB234.7 million (US$34.4 million) in 2007, 2008 and
2009, respectively, to reflect the probable loss arising from the suppliers failure to perform
under the contracts.
56
Consolidated Results of Operations
Since all of our revenues are derived from the sale of PV products instead of the delivery of
services, we presented our net revenues and cost of revenues for all product sales on a combined
basis in accordance with U.S. GAAP. We believe that this presentation provides sufficient
information in assessing our operating and financial performance. The following table sets forth
our summary consolidated statements of operations for the periods indicated:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
(In RMB
|
|
|
% of Net
|
|
|
(In RMB
|
|
|
% of Net
|
|
|
(In RMB
|
|
|
(In US$
|
|
|
% of Net
|
|
|
|
Thousands)
|
|
|
Revenues
|
|
|
Thousands)
|
|
|
Revenues
|
|
|
Thousands)
|
|
|
Thousands)
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statement
of Operations Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
|
2,395,135
|
|
|
|
100.0
|
%
|
|
|
4,949,068
|
|
|
|
100.0
|
%
|
|
|
3,778,316
|
|
|
|
553,527
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
(1,997,355
|
)
|
|
|
(83.4
|
)%
|
|
|
(4,905,147
|
)
|
|
|
(99.1
|
)%
|
|
|
(3,341,936
|
)
|
|
|
(489,596
|
)
|
|
|
88.5
|
%
|
Gross profit
|
|
|
397,780
|
|
|
|
16.6
|
%
|
|
|
43,921
|
|
|
|
0.9
|
%
|
|
|
436,380
|
|
|
|
63,931
|
|
|
|
11.5
|
%
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling expenses
|
|
|
(62,777
|
)
|
|
|
(2.6
|
)%
|
|
|
(87,913
|
)
|
|
|
(1.8
|
)%
|
|
|
(105,454
|
)
|
|
|
(15,449
|
)
|
|
|
(2.8
|
)%
|
General and
administrative expenses
|
|
|
(113,756
|
)
|
|
|
(4.8
|
)%
|
|
|
(143,340
|
)
|
|
|
(2.9
|
)%
|
|
|
(180,989
|
)
|
|
|
(26,515
|
)
|
|
|
(4.8
|
)%
|
Research and
development expenses
|
|
|
(27,440
|
)
|
|
|
(1.1
|
)%
|
|
|
(19,679
|
)
|
|
|
(0.4
|
)%
|
|
|
(32,025
|
)
|
|
|
(4,692
|
)
|
|
|
(0.8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
(203,973
|
)
|
|
|
(8.5
|
)%
|
|
|
(250,932
|
)
|
|
|
(5.1
|
)%
|
|
|
(318,468
|
)
|
|
|
(46,656
|
)
|
|
|
(8.4
|
)%
|
Operating profit (loss)
|
|
|
193,807
|
|
|
|
8.1
|
%
|
|
|
(207,011
|
)
|
|
|
(4.2
|
)%
|
|
|
117,912
|
|
|
|
17,275
|
|
|
|
3.1
|
%
|
Interest expenses
|
|
|
(25,978
|
)
|
|
|
(1.1
|
)%
|
|
|
(103,146
|
)
|
|
|
(2.1
|
)%
|
|
|
(157,907
|
)
|
|
|
(23,134
|
)
|
|
|
(4.2
|
)%
|
Interest income
|
|
|
16,244
|
|
|
|
0.7
|
%
|
|
|
10,004
|
|
|
|
0.2
|
%
|
|
|
5,002
|
|
|
|
733
|
|
|
|
0.1
|
%
|
Exchange losses
|
|
|
(25,628
|
)
|
|
|
(1.1
|
)%
|
|
|
(35,230
|
)
|
|
|
(0.7
|
)%
|
|
|
(23,814
|
)
|
|
|
(3,489
|
)
|
|
|
(0.6
|
)%
|
Changes in fair value
of derivative contracts
|
|
|
|
|
|
|
|
|
|
|
83,090
|
|
|
|
1.7
|
%
|
|
|
9,594
|
|
|
|
1,406
|
|
|
|
0.3
|
%
|
Changes in fair value
of conversion feature
of convertible bonds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(73,887
|
)
|
|
|
(10,825
|
)
|
|
|
(2.0
|
)%
|
Other income
|
|
|
1,507
|
|
|
|
0.1
|
%
|
|
|
15,018
|
|
|
|
0.3
|
%
|
|
|
6,286
|
|
|
|
921
|
|
|
|
0.2
|
%
|
Other expenses
|
|
|
(9,670
|
)
|
|
|
(0.4
|
)%
|
|
|
(25,604
|
)
|
|
|
(0.5
|
)%
|
|
|
(11,835
|
)
|
|
|
(1,734
|
)
|
|
|
(0.3
|
)%
|
Government grants
|
|
|
2,089
|
|
|
|
0.1
|
%
|
|
|
3,480
|
|
|
|
|
|
|
|
7,661
|
|
|
|
1,122
|
|
|
|
0.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before
income taxes
|
|
|
152,371
|
|
|
|
6.4
|
%
|
|
|
(259,399
|
)
|
|
|
(5.3
|
)%
|
|
|
(120,988
|
)
|
|
|
(17,725
|
)
|
|
|
(3.2
|
)%
|
Income tax expenses
|
|
|
(7,458
|
)
|
|
|
(0.3
|
)%
|
|
|
(6,519
|
)
|
|
|
(0.1
|
)%
|
|
|
(23,928
|
)
|
|
|
(3,505
|
)
|
|
|
(0.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
attributable to
non-controlling
interest
|
|
|
3,124
|
|
|
|
0.1
|
%
|
|
|
(14,573
|
)
|
|
|
(0.3
|
)%
|
|
|
(311
|
)
|
|
|
(46
|
)
|
|
|
|
|
Net income (loss)
attributable to
Solarfun Power Holdings
Co., Ltd. shareholders
|
|
|
148,037
|
|
|
|
6.2
|
%
|
|
|
(280,491
|
)
|
|
|
(5.7
|
)%
|
|
|
(145,227
|
)
|
|
|
(21,276
|
)
|
|
|
(3.8
|
)%
|
2009 Compared to 2008
Net Revenues
Our total net revenues decreased by 23.7% to RMB3,778.3 million (US$553.5 million) in 2009
from RMB4,949.1 million in 2008. Our net revenues derived from our PV module business (excluding PV
module processing) decreased by 27.0% to RMB3,375.6 million (US$494.5 million) in 2009 from
RMB4,626.4 million in 2008, due primarily to the decrease in the average selling price of our PV
modules to RMB15.27 (US$2.24) per watt in 2009 from RMB26.77 per watt in 2008. The decrease in the
average selling price of our PV modules (excluding PV module processing) was partially offset by
the increase in our PV module sales volume by 28.0% to 221.1 MW in 2009 from 172.8 MW in 2008. In
2009, we derived 89.3% of our total net revenues from the sale of PV modules, compared to 93.5% in
2008.
57
Cost of Revenues and Gross Profit
Our cost of revenues decreased by 31.9% to RMB3,341.9 million (US$489.6 million) in 2009 from
RMB4,905.1 million in 2008. In particular, the costs associated with PV module production decreased
by 34.9% to RMB2,990.7 million (US$438.1 million) in 2009 from RMB4,592.9 million in 2008, due
primarily to the decreases in unit costs of silicon, silicon wafers and other raw materials, and
because our write-down of inventories decreased to RMB282.6 million (US$41.4 million) in 2009 from
RMB413.8 million in 2008. Cost of revenues as a percentage of our total net revenues decreased to
88.5% in 2009 from 99.1% in 2008.
As a result of the foregoing, our gross profit increased to RMB436.4 million (US$63.9 million)
in 2009 from RMB43.9 million in 2008. Our gross profit margin increased to 11.5% in 2009 from 0.9%
in 2008 primarily because we benefited from the decreases in unit costs of silicon, silicon wafers
and other raw materials, as well as our improvements in operational efficiency.
Operating Expenses and Operating Profit
Our operating expenses increased by 26.9% to RMB318.5 million (US$46.7 million) in 2009 from
RMB250.9 million in 2008. Our operating expenses as a percentage of our total net revenues
increased to 8.4% in 2009 from 5.1% in 2008.
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 20.0% to RMB105.5 million
(US$15.4 million) in 2009 from RMB87.9 million in 2008, due primarily to increases in commissions
as a result of increases in sales volume of our PV products, insurance premiums covering the
collection of our accounts receivable and transportation costs, as well as rental expenses for a
warehouse in Germany, which we started to lease in 2009 and is used as our distribution center in
Europe. Selling expenses as a percentage of our total net revenues increased to 2.8% in 2009 from
1.8% in 2008.
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 26.3% to RMB181.0 million (US$26.5 million) in 2009 from
RMB143.3 million in 2008, due primarily to increases in cash and non-cash compensation paid to our
administrative staff, professional fees and depreciation and amortization charges, attributable to
the revaluation of the fixed assets of Yangguang Solar after the completion of our acquisition of
the remaining 48% interest in Yangguang Solar in August 2008. General and administrative expenses
as a percentage of our total net revenues increased to 4.8% in 2009 from 2.9% in 2008.
Our research and development expenses primarily consist of materials used for research and
development purposes, salaries and benefits of our research and development staff, depreciation
charges, 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 by 62.7% to RMB32.0 million (US$4.7 million) in 2009 from RMB19.7 million in 2008. The
increase was primarily because we conducted additional research and development activities in 2009.
Research and development expenses as a percentage of our total net revenues increased to 0.8% in
2009 from 0.4% in 2008.
As a result of the foregoing, our operating profit was RMB117.9 million (US$17.3 million) in
2009, compared to an operating loss of RMB207.0 million in 2008. Our operating profit margin
increased to 3.1% in 2009 from a negative margin of 4.2% in 2008.
Interest Expenses, Exchange Losses, Other Income (Expenses), Changes in Fair Value of Derivative
Contracts, Changes in Fair Value of Conversion Feature of Convertible Bonds and Government Grants
We generated interest income of RMB5.0 million (US$0.7 million) and at the same time incurred
interest expenses of RMB157.9 million (US$23.1 million) in 2009, compared to interest income of
RMB10.0 million and interest expenses of RMB103.1 million in 2008. The increase in interest
expenses was due primarily to our increased bank borrowings.
58
We incurred exchange losses of RMB23.8 million (US$3.5 million) in 2009, compared to exchange
losses of RMB35.2 million in 2008, primarily due to the fluctuation of the Euro against the
Renminbi.
Our other income decreased to RMB6.3 million (US$0.9 million) in 2009 from RMB15.0 million in
2008 due primarily to a decrease in our sale of scrap materials in 2009. Our other expenses
decreased to RMB11.8 million (US$1.7 million) in 2009 from RMB25.6 million in 2008 primarily
because we paid guarantee fees of RMB10.1 million to Linyang Electronics in 2008. We did not incur
any guarantee fees in 2009.
We recorded a decrease of RMB9.6 million (US$1.4 million) in changes in fair value of
derivative contracts to reflect the realized and unrealized net gain arising from the changes of
fair value of our foreign currency derivative instruments in 2009.
We recorded a decrease of RMB73.9 million (US$10.8 million) in changes in fair value of
convertible feature of convertible bonds in 2009 as a result of our adoption of a new accounting
standard on January 1, 2009.
Our government grants increased to RMB7.7 million (US$1.1 million) in 2009 from RMB3.5 million
in 2008 primarily because Yangguang Solar was approved as a high and new technology enterprise in
2009.
Income Tax Expenses
Our income tax expenses increased to RMB23.9 million (US$3.5 million) in 2009 from
RMB6.5 million in 2008, due primarily to the increase in our taxable income under the EIT in 2009.
Consolidated Net Loss
As a result of the cumulative effect of the above factors, we had a consolidated net loss of
RMB145.2 million (US$21.3 million) in 2009, compared to RMB280.5 million in 2008. Our net profit
margin increased to a negative margin of 3.8% in 2009 from a negative margin of 5.7% in 2008.
2008 Compared to 2007
Net Revenues
Our total net revenues increased by 106.6% to RMB4,949.1 million in 2008 from
RMB2,395.1 million in 2007. 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 during the first nine months of 2008. Our net revenues derived from
our PV module business increased by 109.4% to RMB4,626.4 million in 2008 from RMB2,209.5 million in
2007. Our PV module sales volume increased by 120.4% to 172.8 MW in 2008 from 78.4 MW in 2007. The
increase in sales volume was partially offset by the decrease in the average selling price of our
PV modules of RMB26.77 per watt in 2008 from RMB28.20 per watt in 2007. In 2008, we derived 93.5%
of our total net revenues from the sale of PV modules, compared to 92.3% in 2007.
59
Cost of Revenues and Gross Profit
Our cost of revenues increased by 145.6% to RMB4,905.1 million in 2008 from RMB1,997.4 million
in 2007. 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 and silicon wafers. In
particular, the costs associated with PV module production increased by 127.7% to
RMB4,179.2 million in 2008 from RMB1,835.7 million in 2007, due to a significant increase in raw
material costs as the sales volume of our PV modules increased in 2008. Cost of revenues as a
percentage of our total net revenues increased to 99.1% in 2008 from 83.4% in 2007, due primarily
to our write-down of inventories in the amount of RMB413.8 million in 2008 as a result of the
decrease of silicon and silicon wafer prices in the fourth quarter of 2008.
As a result of the foregoing, our gross profit decreased by 89.0% to RMB43.9 million in 2008
from RMB397.8 million in 2007. Our gross profit margin decreased to 0.9% in 2008 from 16.6% in 2007
primarily because the increases in raw material costs outpaced the increases of the selling prices
of our products and due to our inventory write-downs of RMB413.8 million in 2008.
Operating Expenses and Operating Profit
Our operating expenses increased by 23.0% to RMB250.9 million in 2008 from RMB204.0 million in
2007. The increase in our operating expenses was due primarily to increases in our general and
administrative expenses and selling expenses. Our operating expenses as a percentage of our total
net revenues decreased to 5.1% in 2008 from 8.5% in 2007.
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 40.0% to RMB87.9 million in
2008 from RMB62.8 million in 2007, due primarily to the increase in our sales volume and our hiring
of sales personnel in a variety of locations. Selling expenses as a percentage of our total net
revenues decreased to 1.8% in 2008 from 2.6% in 2007.
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 25.9% to RMB143.3 million in 2008 from RMB113.8 million in
2007, due primarily to the increase in our headcount, which resulted in an increase in salaries and
benefits of our administrative staff. General and administrative expenses as a percentage of our
total net revenues decreased to 2.9% in 2008 from 4.8% in 2007.
Our research and development expenses primarily consist of materials used for research and
development purposes, salaries and benefits of our research and development staff, depreciation
charges, 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
decreased to RMB19.7 million in 2008 from RMB27.4 million in 2007. The decrease was due primarily
to our lower spending on purchases of materials used for research and development purposes.
Research and development expenses as a percentage of our total net revenues decreased to 0.4% in
2008 from 1.1% in 2007.
As a result of the foregoing, our operating loss was RMB207.0 million in 2008, compared to an
operating profit of RMB193.8 million in 2007. Our operating profit margin decreased to a negative
margin of 4.2% in 2008 from a positive margin of 8.1% in 2007.
Interest Expenses, Exchange Losses, Other Income (Expenses), Changes in Fair Value of Derivative
Contracts and Government Grants
We generated interest income of RMB10.0 million and at the same time incurred interest
expenses of RMB103.1 million in 2008, compared to interest income of RMB16.2 million and interest
expenses of RMB26.0 million in 2007. The increase in interest expenses was due primarily to our
increased bank borrowings and the issuance of the convertible bonds in 2008.
60
We incurred exchange losses of RMB35.2 million in 2008, compared to exchange losses of
RMB25.6 million in 2007, primarily due to the appreciation of the Renminbi against Euro and the
U.S. dollar.
Our other income increased to RMB15.0 million in 2008 from RMB1.5 million in 2007 due
primarily to our sale of scrap materials in 2008. Our other expenses increased to RMB25.6 million
in 2008 from RMB9.7 million in 2007 due primarily to increased bank charges and guarantee fees we
paid to Linyang Electronics in connection with our bank borrowings that were guaranteed by Linyang
Electronics.
We recorded an increase of RMB83.1 million in changes in fair value of derivative contracts to
reflect the realized and unrealized net gain arising from the changes of fair value of our foreign
currency derivative instruments in 2008. There were no foreign currency derivative instruments
outstanding as of December 31, 2007.
Our government grants increased to RMB3.5 million in 2008 from RMB2.1 million in 2007
primarily because Linyang China was approved as a high and new technology
enterprise in 2008.
Income Tax Expenses
Our income tax expenses decreased to RMB6.5 million in 2008 from RMB7.5 million in 2007, due
primarily to the increase in deferred income tax assets, as a result of our write-down of
inventories in 2008, but was partially offset by the increase in current income tax, as a result of
the increase in our taxable income under the EIT in 2008.
Consolidated Net Income (Loss)
As a result of the cumulative effect of the above factors, we had a consolidated net loss of
RMB280.5 million in 2008, compared to net income of RMB148.0 million in 2007. Our net profit margin
decreased to a negative margin of 5.7% in 2008 from a positive margin of 6.2% in 2007.
Inflation
Since our inception, inflation in China has not materially affected our results of operations.
According to the National Bureau of Statistics of China, changes in the consumer price index in
China were 4.8%, 5.9% and negative 0.7% in 2007, 2008 and 2009, respectively.
B.
Liquidity and Capital Resources
We are a holding company, and conduct substantially all of our business through Linyang China,
our wholly owned PRC operating subsidiary. 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 December 31, 2009, a total of
RMB69.6 million (US$10.2 million) was not available for distribution to us in the form of dividends
due to these PRC regulations.
61
Liquidity
From September 17, 2009 to November 18, 2009, we issued and sold 3,888,399 ADSs with an
aggregate sale price of US$23.1 million to finance our activities in the future.
The following table sets forth a summary of our cash flows for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
(RMB)
|
|
|
(RMB)
|
|
|
(RMB)
|
|
|
(US$)
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by
operating activities
|
|
|
(1,020,603
|
)
|
|
|
(674,040
|
)
|
|
|
689,333
|
|
|
|
100,988
|
|
Net cash used in investing activities
|
|
|
(538,465
|
)
|
|
|
(1,169,045
|
)
|
|
|
(324,723
|
)
|
|
|
(47,572
|
)
|
Net cash provided by (used in)
financing activities
|
|
|
694,204
|
|
|
|
1,981,058
|
|
|
|
(129,791
|
)
|
|
|
(19,014
|
)
|
Net (decrease) increase in cash and
cash equivalents
|
|
|
(864,864
|
)
|
|
|
137,973
|
|
|
|
234,819
|
|
|
|
34,402
|
|
Cash Flows from Operating Activities
Net cash (used in) provided by operating activities primarily consists of consolidated net
income (loss), as adjusted for non-cash items such as change in fair value of the conversion
feature of our convertible bonds, depreciation and amortization, warranty provision, share
compensation expenses 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 accounts receivable), amounts due to related parties, accounts payable, customer
deposits, accrued expenses and other liabilities.
Our net cash provided by operating activities was RMB689.3 million (US$101.0 million) in 2009,
which was derived from a consolidated net loss of RMB144.9 million (US$21.2 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 write-down of inventories of RMB282.6 million (US$41.4 million),
depreciation and amortization of RMB153.2 million (US$22.4 million) and provision for doubtful
collection of supplier advances of RMB234.7 million (US$34.4 million). The adjustments relating to
changes in operating assets and liabilities, which resulted in a net decrease of RMB51.4 million
(US$7.5 million), were primarily comprised of:
|
|
an increase of RMB271.7 million (US$39.8 million) in accounts receivable, primarily because
we granted our customers longer credit terms to enhance the competitiveness of our PV
products;
|
|
|
|
an increase of RMB334.8 million (US$49.1 million) in inventories primarily as a result of
increased purchases of silicon, silicon wafers and other raw materials in anticipation of
increased operational scale as a result of our capacity expansion in 2009;
|
|
|
|
an increase of RMB238.8 million (US$35.0 million) in accounts payable, primarily due to
longer payment terms we obtained from our suppliers; and
|
|
|
|
an increase of RMB215.1 million (US$31.5 million) in other current assets, primarily
because we were able to receive additional cash refund of VAT tax for our export sales by
December 31, 2009.
|
62
Our net cash used in operating activities was RMB674.0 million in 2008, which was derived from
a consolidated net loss of RMB265.9 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 write-down of
inventories of RMB413.8 million, depreciation and amortization of RMB67.2 million, provision for
doubtful collection of supplier advances of RMB42.0 million, share compensation expenses of
RMB34.8 million and warranty provision of RMB27.7 million, which was partially offset by unrealized
loss from derivative contracts of RMB33.9 million. The adjustments relating to changes in operating
assets and liabilities, which resulted in a net decrease of RMB939.1 million, were primarily
comprised of:
|
|
an increase of RMB547.5 million in advances to suppliers, primarily due to increased
prepayments to our suppliers for purchases of silicon and silicon wafers; and
|
|
|
|
an increase of RMB417.0 million in inventories primarily as a result of increased purchases
of silicon and silicon wafers.
|
Our net cash used in operating activities was RMB1,020.6 million in 2007, which was derived
from consolidated net income of RMB144.9 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 RMB29.6 million, depreciation and amortization of RMB27.7 million,
warranty provision of RMB23.1 million and provision for doubtful collection of accounts receivable
of RMB2.1 million. The adjustments relating to changes in operating assets and liabilities, which
resulted in a net decrease of RMB1,246.6 million, were primarily comprised of:
|
|
an increase of RMB398.2 million in advances to suppliers, primarily due to increased
prepayments to our suppliers for purchases of silicon and silicon wafers;
|
|
|
|
an increase of RMB359.3 million in inventories principally as a result of increased
purchases of silicon and silicon wafers;
|
|
|
|
an increase of RMB290.6 million in accounts receivable, primarily due to increased sales on
credit in 2007; and
|
|
|
|
an increase of RMB170.0 million in prepaid rent associated with the supply agreement we
entered into with E-mei in June 2006, under which we agreed to make prepayments of
RMB220.0 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.
|
Cash Flows from Investing Activities
Our net cash used in investing activities primarily consists of cash used for the acquisition
of fixed assets and the acquisition of a subsidiary.
Our net cash used in investing activities was RMB324.7 million (US$47.6 million) in 2009,
primarily consisting of RMB260.1 million (US$38.1 million) of cash used for the acquisition of
fixed assets, primarily our manufacturing machinery and equipment.
Our net cash used in investing activities was RMB1,169.0 million in 2008, consisting of
RMB849.5 million of cash used for the acquisition of fixed assets, primarily our manufacturing
machinery and equipment, and RMB267.6 million of cash used for the acquisition of Yangguang Solar.
63
Our net cash used in investing activities was RMB538.5 million in 2007, consisting of
RMB495.0 million of cash used for the acquisition of fixed assets, primarily our manufacturing
machinery and equipment.
Cash Flows from Financing Activities
Our net cash generated from financing activities primarily consists of capital contributions
by shareholders and proceeds from short-term bank borrowings, as offset by payments of short-term
and long-term bank borrowings.
Our net cash used in financing activities was RMB129.8 million (US$19.0 million) in 2009. This
was mainly attributable to our payments of short-term bank borrowings of RMB2,594.7 million
(US$380.1 million), partially offset by proceeds from short-term bank borrowings of RMB1,900.7
million (US$278.5 million) and proceeds from our continuous ADS offering of RMB149.0 million
(US$21.8 million).
Our net cash provided by financing activities was RMB1,981.1 million in 2008. This was mainly
attributable to proceeds from short-term bank borrowings of RMB3,119.7 million, proceeds from our
convertible bond offering of RMB1,179.0 million and proceeds from our continuous ADS offering of
RMB489.9 million, partially offset by our payments of short-term bank borrowings of
RMB2,985.9 million.
Our net cash provided by financing activities was RMB694.2 million in 2007. This was mainly
attributable to proceeds from short-term bank borrowings of RMB1,570.1 million, partially offset by
our payments of short-term bank borrowings of RMB985.0 million.
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, the convertible
bond offering in January 2008 and the continuous ADS offerings from July 2008 to August 2008 and
from September 2009 to November 2009. We believe that, if we are able to renew our bank borrowings
when due, our current cash, cash equivalents, short-term and long-term borrowings, unused credit
facilities and anticipated cash flow from operations will be sufficient to meet our anticipated
cash needs, including our cash needs for working capital and capital expenditures, for at least the
next 12 months. As of December 31, 2009, we had short-term bank borrowings from various commercial
banks with an aggregate outstanding balance of RMB404.8 million (US$59.3 million). Our short-term
bank borrowings bore average interest rates of 6.39%, 6.86% and 4.99% per annum, respectively, in
2007, 2008 and 2009. These short-term bank borrowings have terms of six months to one year, and
expire at various times throughout the year. Some of our short-term bank borrowings were secured by
land use rights and building ownership. 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 funding in the future.
As of December 31, 2009, the aggregate outstanding balance of the current portion of our
long-term bank borrowings was RMB90.0 million (US$13.2 million), which will be due from March 25,
2010 to December 27, 2010, and the aggregate outstanding balance of the non-current portion of our
long-term bank borrowings was RMB380.0 million (US$55.7 million), which will be due from March 25,
2011 to September 13, 2012. Our long-term bank borrowings outstanding as of December 31, 2009 bore
an average interest rate of 5.60% per annum.
As of December 31, 2009, we had RMB658.7 million (US$96.5 million) principal amount of 2018
convertible bonds outstanding. The holders of the 2018 convertible bonds have the right to require
us to repurchase all or a portion of their notes on January 15, 2015 at a repurchase price equal to
100% of the principal amount of the notes to be repurchased, plus accrued and unpaid interest, if
any.
64
As of December 31, 2009, we had cash and cash equivalents in the amount of RMB645.7 million
(US$94.6 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
RMB640.1 million as of December 31, 2007 to RMB1,145.6 million as of December 31, 2008, as we made
more prepayments to our silicon and silicon wafer suppliers in order to satisfy our increased
manufacturing capacity, but decreased to RMB979.8 million (US$143.5 million) as of December 31,
2009. Our fixed assets increased from RMB702.9 million as of December 31, 2007 to
RMB1,492.6 million as of December 31, 2008 and to RMB1,586.3 million (US$232.4 million) as of
December 31, 2009. 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 RMB538.5 million, RMB1,169.0 million and RMB324.7 million
(US$47.6 million) in 2007, 2008 and 2009, respectively, all of which related primarily to the
purchases of manufacturing equipment for the production of PV cells and modules. Based on the
current market conditions, we expect to incur capital expenditures of RMB655.3 million
(US$96.0 million) for 2010, which will be used primarily for purchasing manufacturing equipment,
building two new manufacturing buildings and improving product quality and production safety. We
plan to fund the balance of our capital expenditure requirements for 2010 with cash from
operations, additional bank borrowings, equity offering and other forms of financing, if necessary.
Recent Accounting Pronouncements
In October 2009, the FASB issued Accounting Standards Update, or ASU, No. 2009-13,
Multiple-Deliverable Revenue Arrangements, or ASU 2009-13. ASU 2009-13 amends ASC 605-25,
Revenue Recognition: Multiple-Element Arrangements, regarding revenue arrangements with
multiple deliverables. The update addresses how to determine whether an arrangement
involving multiple deliverables contains more than one unit of accounting, and how the arrangement
consideration should be allocated among the separate units of accounting. ASU 2009-13 is effective
for fiscal years beginning after June 15, 2010 and may be applied retrospectively or
prospectively for new or materially modified arrangements. In addition, early adoption is
permitted. We are currently evaluating the potential impact of ASU 2009-13 on our financial
statements.
In October 2009, the FASB issued ASU No. 2009-15, Accounting for Own-Share Lending
Arrangements in Contemplation of Convertible Debt Issuance or Other Financing, or ASU 2009-15.
ASU 2009-15 amends ASC 470-20 Debt: Debt with Conversion and Other Options, to include the
accounting for own-share lending arrangements in contemplation of convertible debt issuance or
other financing. ASU 2009-15 is effective for fiscal years beginning on or after December 15, 2009
and shall be applied retrospectively for all arrangements outstanding as of the beginning of fiscal
years beginning on or after December 15, 2009 and for arrangements entered into on or after the
beginning of the first reporting period that begins on or after June 15, 2009. Early adoption is
not permitted. We have determined that upon the adoption of ASU 2009-15 on January 1, 2010, the
redeemable ordinary shares issued in January 2008 concurrent with our convertible bond issuance are
regarded as an own-share lending arrangement. As such, the share-lending arrangement is measured at
fair value, and recognized as an issuance cost with an offset to equity. Such issuance cost will
be amortized as interest expenses over the life of the financing arrangement. Retrospective
adjustment of opening retained earnings as of January 1, 2010 will be recorded for the difference
between the amount previously recognized and the amount that would have been recognized if ASU
2009-15 had been applied from the issuance date of the redeemable ordinary shares. We are currently evaluating the
requirements of ASU 2009-15 and have not yet determined the impact,
if any, that it will have on our
financial statements.
65
In January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures:
Improving Disclosures about Fair Value Measurements, or ASU 2010-06. ASU 2010-06 amends ASC 820 to
require a number of additional disclosures regarding (1) the different classes of assets and
liabilities measured at fair value, (2) the valuation techniques and inputs used, (3) the activity
in Level 3 fair value measurements, and (4) the transfers between Levels 1, 2, and 3. Under most circumstances, the new
disclosures and clarifications of existing disclosures are effective for interim and annual
reporting periods beginning after December 15, 2009. We do not expect that the adoption of ASU
2010-06 will have a material impact on our consolidated financial statements.
C.
Research and Development, Patents and Licenses
The PV 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. In 2009, we introduced ECLIPSE, a new line of PV cells and modules
with reduced light induced degradation. ECLIPSE reduces the impurity concentration in cells,
thereby reducing the light induced degradation to approximately 1% from 2% to 3%, or less than 2 W
compared to approximately 4 W to 5 W for a 180 W module equipped with standard cells. This results
in an increase in electricity generation of approximately 1% to 2% over the long term when compared
with standard modules. Through our continuous efforts, we have been able to increase the average
conversion efficiency rate of our monocrystalline and multicrystalline PV cells to the ranges of
16.2% to 17.5% and 15.3% to 16.3%, respectively, in 2009 and we are now able to
process wafers as thin as 180 microns. In 2007, 2008 and 2009, our research and development
expenses were RMB27.4 million, RMB19.7 million and RMB32.0 million (US$4.7 million), respectively.
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 July 2007, we established
the Solarfun PV Engineering Center, also known as the Jiangsu Engineering Research Center for Solar
Cell and PV Application. The Solarfun PV Engineering Center is located near our manufacturing
facilities in Qidong, Jiangsu Province, and equipped with a pilot production line and various
characterization tools. The center focuses on improving cell conversion efficiency and expanding the
application of solar cells. We are also working together with universities and research institutes
to develop new technology and products. 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. 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.
We plan to donate RMB1 million over the next five years to the Physics department of Shanghai
Jiaotong University to sponsor scholarships. These scholarships are intended to help support
research of PV technology, foster technology exchange between the university and us and expedite
the commercialization of new technology developed by the university.
66
D.
Trend Information
Other than as disclosed elsewhere in this annual report, we are not aware of any trends,
uncertainties, demands, commitments or events since January 1, 2009 that are reasonably likely to
have a material adverse effect on our net revenues, income, profitability, liquidity or capital
resources, or that caused the disclosed financial information to be not necessarily indicative of
future operating results or financial conditions.
E.
Off-Balance Sheet Arrangements
We have not entered into any financial guarantees or other commitments to guarantee the
payment obligations of third parties. We have not entered into any derivative contracts that are
indexed to our shares and classified as shareholders equity, or that are not reflected in our
consolidated financial statements. Furthermore, we do not have any retained or contingent interest
in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk
support to such entity. We do not have any variable interest in any unconsolidated entity that
provides financing, liquidity, market risk or credit support to us or that engages in leasing,
hedging or research and development services with us.
F.
Tabular Disclosure of Contractual Obligations
The following table sets forth our contractual obligations as of December 31, 2009:
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Payment Due by Period
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Less Than
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More Than
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Total
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1 Year
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1 to 3 Years
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3 to 5 Years
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5 Years
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(In RMB thousands)
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Purchase obligations
relating to raw materials
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7,182,732
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2,814,859
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1,331,952
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1,443,858
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1,592,063
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Operating lease obligations
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5,502
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3,451
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2,051
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Total
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7,188,234
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2,818,310
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1,334,003
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1,443,858
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1,592,063
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G.
Safe Harbor
This annual report on Form 20-F contains forward-looking statements that relate to future
events, including our future operating results and conditions, our prospects and our future
financial performance and condition, all of which are largely based on our current expectations and
projections. The forward-looking statements are contained principally in the sections entitled
Item 3.D. Risk Factors, Item 4. Information on the Company and Item 5. Operating and Financial
Review and Prospects. These statements are made under the safe harbor provisions of the U.S.
Private Securities Litigation Reform Act of 1995. You can identify these forward-looking statements
by terminology such as may, will, expect, anticipate, future, intend, plan,
believe, estimate, is/are likely to or other and similar expressions. Forward-looking
statements involve inherent risks and uncertainties. A number of factors could cause actual results
to differ materially from those contained in any forward-looking statement, including but not
limited to the following:
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our expectation with respect to our ability to re-negotiate the terms of our multi-year
supply agreements;
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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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67
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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 revenue growth and profitability;
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our expectations with respect to our ability to secure raw materials, especially silicon
and silicon wafers, in the future;
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competition from other manufacturers of PV products and conventional energy suppliers;
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our future business development, results of operations and financial condition; and
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future economic or capital market conditions.
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This annual report on Form 20-F also contains data related to the PV market worldwide and in
China taken from third-party reports. 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 annual report on Form 20-F relate only to events
or information as of the date on which the statements are made in this annual report on Form 20-F.
Except as required by law, 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 annual report on Form 20-F completely and with the understanding that
our actual future results may be materially different from what we expect.
68
ITEM 6
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A.
Directors and Senior Management
Directors and Executive Officers
The following table sets forth information regarding our directors and executive officers.
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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
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John Breckenridge
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48
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Director
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Thomas J. Toy
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54
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Independent Director
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Ernst A. Bütler
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65
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Independent Director
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Terry McCarthy
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65
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Independent Director
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Yinzhang Gu
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70
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Independent Director
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David N.K. Wang
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62
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Independent Director
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Rongqiang Cui
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67
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Independent Director
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Ping Peter Xie
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45
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President
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Gareth Kung
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45
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Chief Financial Officer
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Zhoumiao Gao
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42
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Senior Vice President of Operations
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Directors
Mr. Yonghua Lu
is our founder and chairman of our board of directors. Mr. Lu has been chairman
of Linyang Electronics since 2000 and general manager of that company since 1996. 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. John Breckenridge
is our director. He has served on our management committee since the
second quarter of 2009, where he has helped to oversee our day-to-day business activities and
strategic direction. He has been a managing director of our largest shareholder, Good Energies II
LP, since December 2007. He joined Good Energies from CCMP Capital Advisors, formerly known as J.P.
Morgan Partners, where he served as operating partner and managing director in both Tokyo and New
York. During his seven years at the firm, Mr. Breckenridge was responsible for leading many of the
firms portfolio companies, as well as advising on all aspects of the purchase and sales of
investments in the U.S., Asia and Europe. While at CCMP Capital Advisors, Mr. Breckenridge led the
development of companies in the renewable energy, traditional energy, industrial service,
manufacturing and chemicals sectors, among others. He also provided guidance to companies expanding
into China or other Asian countries. Prior to joining JP Morgan Partners in Tokyo, Mr. Breckenridge
was chief operating officer of Densei Lambda KK, a publicly traded Japanese corporation. Before
that he was the manager of several large divisions of Invensys plc and Exide Electronics in the
U.S. Earlier in his career he held engineering, sales and general management positions at AT&T,
International Power Machines, Inc., and Strafor Facom SA. Mr. Breckenridge received his bachelors
degree in Mechanical Engineering from the University of Vermont.
Mr. Thomas J. Toy
has served as our independent director since November 2006. He also serves
as the chairman of our audit committee and as a member of our compensation committee and corporate
governance and nominating committee. 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.
69
Mr. Ernst A. Bütler
has served as our independent director since November 2006. He also serves
as the chairman of our compensation committee and as a member of our audit committee. 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, Frey Group
Holding, Zurich and Sunfilm Power Ltd., Germany, chairman of the board of Alegra Capital Ltd.,
Zürich, AA-Partners, Zürich and Swiss Alternative Capital AG, or SACA, Zurich, and member of the
advisory board of XBiotech Inc., Austin, Texas. From 1999 to 2005, he was a partner of Partners
Group in Zug, the largest independent asset manager of alternative investments in Europe.
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 Corporate and Investment Banking 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. Terry McCarthy
is our independent director. He served as our director and interim chief
financial officer from March 2009 to November 2009 and independent director and the chairman of our
audit committee from November 2006 to March 2009. He currently serves as a member of our audit
committee. 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.
Mr. Yinzhang Gu
has served as our independent director since June 2007. He also serves as the
chairman of our corporate governance and nominating committee and a member of our compensation
committee. 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. David N.K. Wang
has served as our independent director since April 2, 2009. He also serves
as a member of our corporate governance and nominating committee. Dr. Wang is currently the
chairman of the board of Ether Optronics Inc., president and chief executive officer of
Semiconductor Manufacturing International Corporation (SMIC) and an overseas advisor to the
Ministry of Science and Technology of the Peoples Republic of China. He is also an advisor to the
Greater China Innovation and Entrepreneurship project of Stanford University in the United States.
He was a member of the board of directors of Semiconductor Equipment and Materials International
(SEMI) and chairman of its China Regional Advisory Board. From September 2005 to June 2007, Dr.
Wang served as the chief executive officer of Huahong Group and concurrently chairman of Huahong
NEC, a subsidiary of Huahong Group. Prior to joining Hua Hong Group, Dr. Wang served as executive
vice president of Applied Materials and president of Applied Materials Asia. Dr. Wang was
responsible for Applied Materials business strategy, planning and execution throughout Asia. Dr.
Wang has also been a member of, chaired and helped found a variety of councils, committees and
associations related to technology and Asia-Pacific business and economy. He received his Ph.D.
degree in Materials Science from the University of California, Berkeley.
70
Mr. Rongqiang Cui
has served as our independent director since April 2, 2009. Mr. Cui is a
professor and Ph.D. candidates supervisor at Shanghai Jiao Tong University. Mr. Cui is also the
deputy head of the Solar Power Generation and Refrigeration Research Center of the Ministry of
Education, executive director of the Chinese Solar Energy Society and president of the Shanghai
Solar Energy Society. Mr. Cui joined Shanghai Jiao Tong University in 1996 and worked as the head
of the Solar Energy Institute from 1996 to 2006. He previously worked as an assistant tutor,
lecturer, professor and head of the Solar Energy Research Center of the Physics department of Xian
Jiao Tong University from 1964 to 1996. He graduated from Xian Jiao Tong University with a degree
in Engineering Physics in 1964.
Executive Officers
Dr. Ping Peter Xie
is our president. Dr. Xie served as our president of China from March 2009
to September 2009. He joined our company in March 2009 from NeoPhotonics Corporation, a Shenzhen,
China-based provider of integrated optics products that use standard semiconductor silicon wafer
technology. He most recently worked as NeoPhotonics Corporations global chief technology officer
and general manager of China, where he was responsible for the companys overall operations in
China and its world-wide product development programs. During his six years at NeoPhotonics
Corporation, he also held various engineering, product development, sales and business development
roles. Earlier in his career, Dr. Xie acquired a broad range of experience in both management and
research, including working at Bookham Inc., JDS Uniphase and Los Alamos National Lab. He received
a Ph.D. in Applied Physics and an M.S. in Physics from the University of Michigan, Ann Arbor and a
B.S. in Electrical Engineering from Tsinghua University in Beijing.
Mr. Gareth Kung
is our chief financial officer. Mr. Kung joined our company from
Semiconductor Manufacturing International Corporation where he first worked as group treasurer and
subsequently as group controller, primarily in charge of treasury and financing operations,
financial reporting and planning, budget control, Sarbanes-Oxley compliance and PRC and
international tax planning. Prior to that, Mr. Kung served as an investment manager at AIG
Investment Corporation in Hong Kong, where he was responsible for the origination, structuring and
execution of private equity transactions in the Asia Pacific region. From 1997 to 2000, Mr. Kung
worked in the corporate banking and capital markets division of ABN Amro Bank N.V., where he
executed debt financed transactions for corporations based in Hong Kong and China. Mr. Kung worked
at UOB Asia Limited from 1995 to 1997 and executed IPO and M&A transactions for Hong Kong-based
corporations. Between 1987 and 1993, Mr. Kung held positions as a senior internal auditor at the
Royal Bank of Canada and senior auditor at Pricewaterhouse. Mr. Kung earned his MBA from The
University of Western Ontario and a bachelors degree in Accountancy from the National University
of Singapore. Mr. Kung is a certified public accountant in Hong Kong, Australia and Singapore as
well as a fellow of the Association of Chartered Certified Accountants and a chartered financial
analyst.
Mr. Zhoumiao Gao
is our senior vice president of operations, in charge of manufacturing
productions of Linyang China and Yangguang Solar. He joined us in September 2007 as our vice
president of operations and served as our director on an interim basis from August 2008 to March
2009. Before joining us, Mr. Gao had been working in the semiconductor industry for more than 18
years. He joined Advanced Semiconductor Manufacturing Corporation in 1989 and held various
positions including engineering manager, manufacturing manager, and vice president of operations.
He holds a bachelors degree from Fudan University and an EMBA degree from China European
International Business School.
71
B.
Compensation
Compensation
In 2007, 2008 and 2009, we paid aggregate cash compensation of RMB8.7 million, RMB9.2 million
and RMB26.6 million (US$3.9 million), respectively, to our directors and executive officers. For
options granted to officers and directors, see 2006 Share Option Plan and 2007 Equity
Incentive Plan.
The purposes of our 2006 share option plan and 2007 equity incentive plan are 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.
2006 Share Option Plan
We adopted our 2006 share option plan in November 2006. Our 2006 share option plan provides
for the grant of options to purchase our ordinary shares, subject to vesting.
Administration.
Our 2006 share option 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.
Our 2006 Share Option Plan requires the options be vested 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.
Termination of Awards.
Options granted under our 2006 share option 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 the employees
employment with our company terminates without cause, the employee shall be entitled to exercise
his or her vested options within three months of his or her termination, and any unvested options
will be forfeited to our company. However, if instead the employees employment is terminated by
our company for cause, all of his or her unexercised options, whether vested or unvested, will be
forfeited to our company.
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 share option plan. Amendments to our 2006 share option 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 share option plan may not adversely affect awards
already granted without written consent of the recipient of such awards.
72
Our board of directors authorized the issuance of up to 10,799,685 ordinary shares upon
exercise of awards granted under our 2006 share option plan. The following table sets forth certain
information regarding our outstanding options under our 2006 share option plan as of April 30,
2010.
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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
|
|
|
Price
|
|
|
Grant Date
|
|
Expiration Date
|
|
|
|
|
|
|
(US$/share)
|
|
|
|
|
|
Yonghua Lu
|
|
|
|
|
|
|
|
|
|
|
|
|
John Breckenridge
|
|
|
|
|
|
|
|
|
|
|
|
|
Thomas J. Toy
|
|
|
*
|
|
|
|
1.8
|
|
|
November 30, 2006
|
|
November 30, 2016
|
Verena Maria Bütler (wife of Ernst A.
Bütler)
|
|
|
*
|
|
|
|
1.8
|
|
|
November 30, 2006
|
|
November 30, 2016
|
Terry McCarthy
|
|
|
*
|
|
|
|
1.8
|
|
|
November 30, 2006
|
|
November 30, 2016
|
Yinzhang Gu
|
|
|
*
|
|
|
|
1.94
|
|
|
August 16, 2007
|
|
August 16, 2017
|
David N.K. Wang
|
|
|
|
|
|
|
|
|
|
|
|
|
Rongqiang Cui
|
|
|
|
|
|
|
|
|
|
|
|
|
Ping Peter Xie
|
|
|
|
|
|
|
|
|
|
|
|
|
Gareth Kung
|
|
|
|
|
|
|
|
|
|
|
|
|
Zhoumiao Gao
|
|
|
*
|
|
|
|
2.15
|
|
|
October 10, 2007
|
|
October 10, 2017
|
Directors and executive officers as a group
|
|
|
900,000
|
|
|
|
|
|
|
|
|
|
Other individuals as a group
|
|
|
1,993,900
|
|
|
|
1.8
|
|
|
November 30, 2006
|
|
November 30, 2016
|
|
|
|
150,000
|
|
|
|
2.02
|
|
|
August 16, 2007
|
|
August 16, 2017
|
|
|
|
150,000
|
|
|
|
2.06
|
|
|
October 10, 2007
|
|
October 10, 2017
|
|
|
|
300,000
|
|
|
|
2.58
|
|
|
October 26, 2007
|
|
October 26, 2017
|
|
|
|
100,000
|
|
|
|
2.58
|
|
|
October 26, 2007
|
|
October 26, 2017
|
|
|
|
50,000
|
|
|
|
2.73
|
|
|
November 1, 2007
|
|
November 1, 2017
|
|
|
|
260,000
|
|
|
|
2.21
|
|
|
November 27, 2007
|
|
|
|
|
|
160,000
|
|
|
|
5.31
|
|
|
December 13, 2007
|
|
December 13, 2017
|
|
|
|
125,000
|
|
|
|
5.31
|
|
|
December 13, 2007
|
|
December 13, 2017
|
|
|
|
300,000
|
|
|
|
6.016
|
|
|
January 8, 2008
|
|
January 8, 2018
|
|
|
|
200,000
|
|
|
|
3.55
|
|
|
January 29, 2008
|
|
January 29, 2018
|
|
|
|
230,000
|
|
|
|
2.15
|
|
|
March 6, 2008
|
|
March 6, 2018
|
|
|
|
300,000
|
|
|
|
2.04
|
|
|
March 14, 2008
|
|
March 14, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
5,218,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Upon exercise of all share options, would beneficially own 1% or less of our ordinary shares.
|
|
|
|
No outstanding share option was held by such person.
|
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 an 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 2% of our then
outstanding ordinary shares or 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 which individuals are
eligible to receive an award, the terms of the awards, including the exercise price (if any), the
number of shares subject to an award, the exercisability of the awards and the form of
consideration payable upon exercise.
73
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 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. Upon the termination of the
service of a participant, he or she may exercise his or her vested options for the period of time
stated in the option agreement, and any unvested options are forfeited to our company. 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 shares 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.
Performance Units and Performance Shares.
Performance units and performance shares are awards
that will result in a payment to a participant generally only if performance goals established by
the administrator are achieved. 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.
74
Our board of directors authorized the issuance of up to 10,799,685 ordinary shares upon
exercise of awards granted under our 2007 equity incentive plan. The following table sets forth
certain information regarding our outstanding options under our 2007 equity incentive plan as of
April 30, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
|
|
|
|
|
|
|
|
Underlying
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
Exercise
|
|
|
|
|
|
Name
|
|
Option
|
|
|
Price
|
|
|
Grant Date
|
|
Expiration Date
|
|
|
|
|
|
|
|
|
|
|
(US$/share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yonghua Lu
|
|
|
|
|
|
|
|
|
|
|
|
|
John Breckenridge
|
|
|
|
|
|
|
|
|
|
|
|
|
Thomas J. Toy
|
|
|
|
|
|
|
|
|
|
|
|
|
Ernst A. Bütler
|
|
|
|
|
|
|
|
|
|
|
|
|
Terry McCarthy
|
|
|
*
|
|
|
|
2.686
|
|
|
May 1, 2008
|
|
May 1, 2018
|
Yinzhang Gu
|
|
|
|
|
|
|
|
|
|
|
|
|
David N.K. Wang
|
|
|
*
|
|
|
|
0.880
|
|
|
April 2, 2009
|
|
April 2, 2019
|
Rongqiang Cui
|
|
|
*
|
|
|
|
0.880
|
|
|
April 2, 2009
|
|
April 2, 2019
|
Peter Ping Xie
|
|
|
*
|
|
|
|
0.610
|
|
|
March 17, 2009
|
|
March 17, 2019
|
|
|
|
|
|
|
|
1.010
|
|
|
March 17, 2009
|
|
March 17, 2019
|
|
|
|
|
|
|
|
1.506
|
|
|
March 4, 2010
|
|
March 4, 2020
|
Gareth Kung
|
|
|
*
|
|
|
|
1.278
|
|
|
November 27, 2009
|
|
November 27, 2019
|
Zhoumiao Gao
|
|
|
*
|
|
|
|
1.344
|
|
|
October 16, 2008
|
|
October 16, 2018
|
|
|
|
|
|
|
|
1.188
|
|
|
September 11, 2009
|
|
September 11, 2019
|
Directors and executive officers
|
|
|
2,735,000
|
|
|
|
|
|
|
|
|
|
Other individuals as a group
|
|
|
533,335
|
|
|
|
2.820
|
|
|
April 15, 2008
|
|
April 15, 2018
|
|
|
|
20,000
|
|
|
|
2.770
|
|
|
April 28, 2008
|
|
April 28, 2018
|
|
|
|
20,000
|
|
|
|
4.376
|
|
|
May 28, 2008
|
|
May 28, 2018
|
|
|
|
20,000
|
|
|
|
2.502
|
|
|
July 28, 2008
|
|
July 28, 2018
|
|
|
|
300,000
|
|
|
|
2.420
|
|
|
September 26, 2008
|
|
September 26, 2018
|
|
|
|
1,266,820
|
|
|
|
1.344
|
|
|
October 16, 2008
|
|
October 16, 2018
|
|
|
|
180,000
|
|
|
|
0.936
|
|
|
October 28, 2008
|
|
October 28, 2018
|
|
|
|
20,000
|
|
|
|
1.138
|
|
|
November 28, 2008
|
|
November 28, 2018
|
|
|
|
20,000
|
|
|
|
0.960
|
|
|
December 29, 2008
|
|
December 29, 2018
|
|
|
|
200,000
|
|
|
|
0.996
|
|
|
January 28, 2009
|
|
January 28, 2019
|
|
|
|
71,000
|
|
|
|
1.344
|
|
|
March 17, 2009
|
|
March 17, 2019
|
|
|
|
200,000
|
|
|
|
0.900
|
|
|
April 1, 2009
|
|
April 1, 2019
|
|
|
|
20,000
|
|
|
|
0.742
|
|
|
April 28, 2009
|
|
April 28, 2019
|
|
|
|
70,000
|
|
|
|
1.452
|
|
|
May 27, 2009
|
|
May 27, 2019
|
|
|
|
150,000
|
|
|
|
1.440
|
|
|
July 28, 2009
|
|
July 28, 2019
|
|
|
|
940,000
|
|
|
|
1.188
|
|
|
September 11, 2009
|
|
September 11, 2019
|
|
|
|
250,000
|
|
|
|
1.010
|
|
|
October 29, 2009
|
|
October 29, 2019
|
|
|
|
625,000
|
|
|
|
1.278
|
|
|
November 27, 2009
|
|
November 27, 2019
|
|
|
|
1,944,300
|
|
|
|
1.372
|
|
|
December 3, 2009
|
|
December 3, 2019
|
|
|
|
400,000
|
|
|
|
1.588
|
|
|
December 28, 2009
|
|
December 28, 2019
|
|
|
|
500,000
|
|
|
|
1.480
|
|
|
January 27, 2010
|
|
January 27, 2020
|
|
|
|
200,000
|
|
|
|
1.392
|
|
|
March 26, 2010
|
|
March 26, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
10,685,455
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Upon exercise of all share options, would beneficially own 1% or less of our ordinary shares.
|
|
|
|
No outstanding share option was held by such person.
|
75
The following table sets forth certain information regarding our granted restricted stock
units under our 2007 equity incentive plan as of April 30, 2010.
|
|
|
|
|
|
|
|
|
|
|
Ordinary
|
|
|
|
|
|
|
|
Shares
|
|
|
|
|
|
|
|
Underlying
|
|
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
Restricted
|
|
|
|
|
|
Name
|
|
Stock Units
|
|
|
Grant Date
|
|
Expiration Date
|
|
|
|
|
|
|
|
|
|
Yonghua Lu
|
|
|
|
|
|
|
|
|
John Breckenridge
|
|
|
|
|
|
|
|
|
Thomas J. Toy
|
|
|
*
|
|
|
November 30, 2007
|
|
November 30, 2017
|
|
|
|
|
|
|
January 1, 2008
|
|
January 1, 2018
|
|
|
|
|
|
|
January 1, 2009
|
|
January 1, 2019
|
|
|
|
|
|
|
January 1, 2010
|
|
January 1, 2020
|
Verena Maria Bütler (wife of Ernst A Bütler)
|
|
|
*
|
|
|
November 30, 2007
|
|
November 30, 2017
|
|
|
|
|
|
|
January 1, 2008
|
|
January 1, 2018
|
|
|
|
|
|
|
January 1, 2009
|
|
January 1, 2019
|
|
|
|
|
|
|
January 1, 2010
|
|
January 1, 2020
|
Terry McCarthy
|
|
|
*
|
|
|
November 30, 2007
|
|
November 30, 2017
|
|
|
|
|
|
|
May 1, 2008
|
|
May 1, 2018
|
|
|
|
|
|
|
January 1, 2008
|
|
January 1, 2018
|
|
|
|
|
|
|
January 1, 2009
|
|
January 1, 2019
|
|
|
|
|
|
|
January 1, 2010
|
|
January 1, 2020
|
Yinzhang Gu
|
|
|
*
|
|
|
January 1, 2008
|
|
January 1, 2018
|
|
|
|
*
|
|
|
January 1, 2009
|
|
January 1, 2019
|
|
|
|
*
|
|
|
January 1, 2010
|
|
January 1, 2020
|
David N.K. Wang
|
|
|
37,500
|
|
|
January 1, 2010
|
|
January 1, 2020
|
Rongqiang Cui
|
|
|
37,500
|
|
|
January 1, 2010
|
|
January 1, 2020
|
Directors and executive officers
|
|
|
849,970
|
|
|
|
|
|
Other individuals as a group
|
|
|
37,500
|
|
|
January 1, 2009
|
|
January 1, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
887,470
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Upon vesting of all restricted stock units, would beneficially own 1% or less of our ordinary shares.
|
|
|
|
No restricted stock units have been granted to such person.
|
C.
Board Practices
Committees of the Board of Directors
Audit Committee
Our audit committee consists of Mr. Thomas J. Toy, Mr. Ernst A. Bütler and Mr. Terry McCarthy,
and is chaired by Mr. Thomas J. Toy, a director with accounting and financial management expertise
as required by the Nasdaq corporate governance rules, or the Nasdaq Rules. All of the members of
our audit committee 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 is responsible for, among other things:
|
|
selecting our independent auditors and pre-approving all auditing and non-auditing services
permitted to be performed by our independent auditors;
|
|
|
|
reviewing with our independent auditors any audit problems or difficulties and managements
response;
|
|
|
|
reviewing and approving all proposed related party transactions, as defined in Item 404 of
Regulation S-K under the Securities Act;
|
|
|
|
discussing the annual audited financial statements with management and our independent
auditors;
|
|
|
|
reviewing major issues as to the adequacy of our internal control and any special audit
steps adopted in light of material control deficiencies;
|
|
|
|
annually reviewing and reassessing the adequacy of our audit committee charter;
|
|
|
|
such other matters that are specifically delegated to our audit committee by our board of
directors from time to time;
|
|
|
|
meeting separately and periodically with management and our internal and independent
auditors; and
|
|
|
|
reporting regularly to our board of directors.
|
76
Our audit committee was notified of anonymous allegations of misconduct by our employees in
November 2006. Our audit committee subsequently conducted an investigation and found no basis for
these allegations. See Item 8.A. Consolidated Statements and Other Financial Information Legal
and Administrative Proceedings. 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. All of the members of our compensation committee 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 is responsible
for, among other things:
|
|
approving and overseeing the compensation package for our executive officers;
|
|
|
|
reviewing and making recommendations to our board of directors with respect to the
compensation of our directors;
|
|
|
|
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
|
|
|
|
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.
|
Corporate Governance and Nominating Committee
Our corporate governance and nominating committee consists of David N.K. Wang, Mr. Thomas J.
Toy and Mr. Yinzhang Gu, and is chaired by Yinzhang Gu. All of the members of our corporate
governance and nominating committee satisfy the independence requirements of the Nasdaq Rules.
The corporate governance and nominating committee assists 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 is responsible for,
among other things:
|
|
identifying and recommending nominees for election or re-election to our board of
directors, or for appointment to fill any vacancy;
|
|
|
|
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;
|
|
|
|
identifying and recommending to our board the directors to serve as members of committees;
|
|
|
|
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
|
|
|
|
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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77
Duties of Directors
Under Cayman Islands law, our directors have a fiduciary duty 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.
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.
The service contracts of our directors do not provide for benefits upon termination of their
directorship.
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.
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 us all right, title and
interest of such inventions, designs and techniques.
Additionally, our executive officers are typically bound by non-competition provisions
contained in their employment agreements that prohibit them from engaging in activities that
compete with our business during and for a certain period after their employment with our company.
On June 29, 2007, China has adopted the New Employment Contract Law, or the New Employment
Law, which came into effect on January 1, 2008. The New Employment Law sets forth certain key
requirements, such as the requirement for a written employment contract, limitations on probation
period, and clauses on severance pay that might marginally affect the cost of employment in China.
However, we do not expect the New Employment Law will substantially impact our business.
D.
Employees
As of December 31, 2009, we had 5,310 full-time employees. The following table sets forth the
number of our full-time employees by function as of December 31, 2007, 2008 and 2009, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
Manufacturing and engineering
|
|
|
1,618
|
|
|
|
3,254
|
|
|
|
4,465
|
|
General and administration
|
|
|
96
|
|
|
|
183
|
|
|
|
163
|
|
Quality control
|
|
|
158
|
|
|
|
225
|
|
|
|
339
|
|
Research and development
|
|
|
84
|
|
|
|
126
|
|
|
|
125
|
|
Purchasing and logistics
|
|
|
84
|
|
|
|
178
|
|
|
|
192
|
|
Marketing and sales
|
|
|
29
|
|
|
|
23
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,069
|
|
|
|
3,989
|
|
|
|
5,310
|
|
|
|
|
|
|
|
|
|
|
|
78
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 their salaries. The
total amount of contributions we made to employee benefit plans in 2007, 2008 and 2009 was
approximately RMB7.3 million, RMB18.7 million and RMB29.4 million (US$4.3 million), respectively.
We adopted our 2006 share option plan in November 2006, which provides an additional means to
attract, motivate, retain and reward selected directors, officers, managers, employees and other
eligible persons. An aggregate of 10,799,685 ordinary shares has been reserved for issuance under
this plan. As of December 31, 2009, there were outstanding options to purchase 5,398,900 ordinary
shares under our 2006 share option 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 an 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 2% of our then
outstanding ordinary shares or such lesser amount as our board of directors may determine. As of
December 31, 2009, there were outstanding options to purchase 10,817,265 ordinary shares under our
2007 share option plan.
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. On March 9, 2010, Linyang China signed a collective bargaining agreement in
accordance with the guidelines of the PRC labor law. The collective bargaining agreement
covers all of the employees of Linyang China who are PRC citizens and is effective from
February 1, 2010 to January 31, 2011.
79
E.
Share Ownership
The following table sets forth information with respect to the beneficial ownership of our
ordinary shares as of April 30, 2010, the latest practicable date, by:
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each of our directors and executive officers; and
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|
|
each person known to us to own beneficially more than 5.0% of our ordinary shares.
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|
|
|
|
|
|
|
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|
|
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Shares Beneficially
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|
|
|
Owned
(1)(2)
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|
|
|
Number
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
Directors and Executive Officers:
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|
|
|
|
|
|
|
|
Yonghua Lu
(3)
|
|
|
38,634,750
|
|
|
|
13.29
|
%
|
John Breckenridge
|
|
|
|
|
|
|
|
|
Thomas J. Toy
|
|
|
276,240
|
|
|
|
0.095
|
%
|
Verena Maria Bütler (wife of Ernst A. Bütler)
|
|
|
366,238
|
|
|
|
0.126
|
%
|
Terry McCarthy
|
|
|
163,750
|
|
|
|
0.056
|
%
|
Yinzhang Gu
|
|
|
206,250
|
|
|
|
0.071
|
%
|
David N.K. Wang
|
|
|
*
|
|
|
|
*
|
%
|
Rongqiang Cui
(4)
|
|
|
332,125
|
|
|
|
0.114
|
%
|
Ping Peter Xie
|
|
|
*
|
|
|
|
*
|
%
|
Gareth Kung
|
|
|
|
|
|
|
|
|
Zhoumiao Gao
|
|
|
*
|
|
|
|
*
|
%
|
All Directors and Executive Officers as a Group
(5)
|
|
|
41,225,603
|
|
|
|
14.18
|
%
|
Major Shareholders:
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|
|
|
|
|
|
|
|
Good Energies II LP
(6)
|
|
|
88,178,005
|
|
|
|
30.33
|
%
|
Yonghua Solar Power Investment Holding Ltd
(7)
|
|
|
38,634,750
|
|
|
|
13.29
|
%
|
Citigroup Venture Capital International Growth Partnership, L.P.
(8)
|
|
|
15,209,191
|
|
|
|
5.23
|
%
|
LC Fund III, L.P.
(9)
|
|
|
4,327,341
|
|
|
|
1.49
|
%
|
WHF Investment Co., Ltd
(10)
|
|
|
6,271,875
|
|
|
|
2.16
|
%
|
Citigroup Venture Capital International Co-Investment, L.P.
(11)
|
|
|
829,960
|
|
|
|
0.29
|
%
|
Notes
:
*
|
|
The person beneficially owns less than 1% of our outstanding shares.
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|
|
|
The person does not beneficially own any ordinary share or options exercisable within 60 days of the date of this
annual report.
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(1)
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|
Beneficial ownership is determined in accordance with Rule 13d-3 of the General Rules and
Regulations under the Securities Exchange Act of 1934, as amended, and includes voting or
investment power with respect to the securities.
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(2)
|
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The number of ordinary shares outstanding in calculating the percentages for each listed
person includes the ordinary shares underlying options exercisable by such person within
60 days of the date of this annual report on Form 20-F. Percentage of beneficial ownership of
each listed person is based on 290,708,739 ordinary shares outstanding as of April 30, 2010,
as well as the ordinary shares underlying share options exercisable by such person within
60 days of the date of this annual report on Form 20-F. This does not include the 9,019,611
ADSs issued pursuant to the offering of our ADSs in January 2008 as we do not believe that
such transaction will increase the number of ordinary shares considered outstanding for the
purpose of calculating beneficial ownership as a result of our arrangement with an affiliate
of Morgan Stanley. Our total outstanding ordinary shares will be 335,806,794 if the 9,019,611
ADSs are to be included.
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|
(3)
|
|
Owns Yonghua Solar Power Investment Holding Ltd., a British Virgin Islands company, which
held 38,634,750 ordinary shares in our company as of April 30, 2010. 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 888 Linyang Road, Qidong, Jiangsu Province, 226200, Peoples Republic of
China.
|
|
(4)
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|
Owns Yongqiang Solar Power Investment Holding Ltd., a British Virgin Islands company, which
held 50,175 ADSs in our company as of April 30, 2010. Mr. Cui is the sole director of
Yongqiang 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. Cuis
business address is 888 Linyang Road, Qidong, Jiangsu Province, 226200, Peoples Republic of
China.
|
80
(5)
|
|
Includes ordinary shares held by all of our directors and senior executive officers as a
group, as well as the ordinary shares underlying share options held by such directors and
senior executive officers exercisable within 60 days of the date of this annual report on Form
20-F. Except Mr. Yonghua Lu, each of our directors and senior executive officers beneficially
owns less than 1% of our ordinary shares.
|
|
(6)
|
|
Held 81,772,950 ordinary shares and 1,281,011 ADSs as of April 30, 2010. This includes the
1,000,000 ADSs purchased by Good Energies II LP as part of the offering of our ADSs in
January 2008. If these 1,000,000 ADSs are not to be taken into account, Good Energies II LP
would hold 81,772,950 ordinary shares and 1,281,011 ADSs in our company. On December 31, 2007,
Good Energies Investments (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 (Jersey) Limited,
which have been appointed as joint investment managers of Good Energies II LP pursuant to a
management agreement with Good Energies General 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 (Jersey)
Limited is Fifth Floor 29 Farm Street, London, W1J 5RL, England.
|
|
(7)
|
|
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.
|
|
(8)
|
|
Held one ordinary share and 3,041,838 ADSs as of April 30, 2010. 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.
|
|
(9)
|
|
Held one ordinary share and 865,468 ADSs as of April 30, 2010. The address of LC Fund III,
L.P. is c/o Legend Capital Limited, 10th Floor, Tower A, Raycom Info. Tech Center, 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.
|
|
(10)
|
|
WHF Investment Co., Ltd., a British Virgin Islands company, is owned by the estate of
Mr. Hanfei Wang. Mr. Hanfei Wang, our former director and chief operating officer, was the
sole director of WHF Investment Co., Ltd. Mr. Hanfei Wang died of natural causes on July 14,
2008. The address of WHF Investment Co., Ltd. is PO Box 173, Kingston Chambers, Road Town,
Tortola, British Virgin Islands.
|
|
(11)
|
|
Held 165,992 ADSs as of April 30, 2010. 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.
|
81
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 shareholders, including, among
others, 38,634,750 ordinary 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 chairman. WHF Investment Co., Ltd. was owned by Mr.
Hanfei Wang, our former director and chief operating officer. The share purchase was completed in
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. As of April 30, 2010, Good Energies Investments II LP
and/or its affiliates owned an approximate 30.33% interest, and Yonghua Solar Power Investment
Holding Ltd. owned an approximately 13.29% interest, in our company. All the individuals who were
parties to the lock-up agreement dated June 20, 2006 agreed to waive the share transfer
restrictions on Yonghua Solar Power Investment Holding Ltd. and WHF Investment Co., Ltd. with
respect to any share transfer made to Good Energies Investments (Jersey) Limited or its affiliates.
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:
|
|
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;
|
|
|
any change in the nature or scope of our business;
|
|
|
any joint ventures, strategic alliances, partnerships or similar arrangements with a third
party;
|
|
|
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;
|
|
|
any change to our articles of association; and
|
|
|
entry into any agreement or understanding to do any of the foregoing.
|
As of April 30, 2010, approximately 62.0% of our outstanding ordinary shares, represented by
41,648,920 ADSs, were held by 51 record holders in the United States.
82
ITEM 7 MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A.
Major Shareholders
Please refer to Item 6.E. Share Ownership.
B.
Related Party Transactions
After the completion of our initial public offering on December 26, 2006, we adopted an audit
committee charter, which requires that the audit committee review all related party transactions on
an ongoing basis and all such transactions be approved by the committee.
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 series A convertible preference shares
certain registration rights, which primarily include:
|
|
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 that we shall only be obligated to effect three such
registrations.
|
|
|
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.
|
|
|
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.
|
Equity Incentive Plan
See Item 6.B. Compensation 2006 Share Option Plan and Item 6.B. Compensation 2007
Equity Incentive Plan.
Transactions with Certain Shareholders
|
|
On March 8, 2007, Linyang China and Qidong Jiaotong Engineer Co., Ltd., a company
controlled by Mr. Yonghua Lu, our chairman, entered into a construction service agreement
whereby Qidong Jiaotong Engineer Co., Ltd. provided construction services to Linyang China
for RMB1.3 million.
|
83
|
|
On March 16, 2007, Linyang China entered into a sales agreement with Qitian Group, a
company which then held a 20% interest in Yangguang Solar, under which Linyang China agreed to
supply certain products to Qitian Group for RMB4.0 million.
|
|
|
In April 2007, Linyang China paid RMB1.2 million for equipment purchases from Linyang
Electronics, a company controlled by Mr. Yonghua Lu, our chairman.
|
|
|
On June 19, 2007, Yangguang Solar entered into a loan agreement with Nantong Linyang, a
company controlled by Mr. Yonghua Lu, our chairman, under which Nantong Linyang agreed to loan
RMB7.0 million to Yangguang Solar at an annual interest rate of 5.85%. The loan was fully
repaid in June 2008.
|
|
|
On June 19, 2007, Yangguang Solar entered into a loan agreement with Qitian Group, under
which Qitian Group agreed to loan RMB3.0 million to Yangguang Solar at an annual interest rate
of 5.85%. This loan was fully repaid in June 2008.
|
|
|
On July 31, 2007, we entered into a share transfer agreement with Nantong Linyang and
Qitian Group, to acquire 52% of equity ownership of Yangguang Solar for a consideration of
RMB51.2 million. Nantong Linyang continues to own an 18% interest in Yangguang Solar. On June
23, 2008, Linyang China entered into an agreement to acquire the remaining 48% equity interest
in Yangguang Solar from Nantong Linyang, for an aggregate consideration of approximately
RMB355.9 million.
|
|
|
On August 28, 2007, Yangguang Solar entered into a loan agreement with Qitian Group, under
which Qitian Group agreed to loan RMB1.3 million to Yangguang Solar at an annual interest rate
of 5.85%. This loan was fully repaid in June 2008.
|
|
|
In October 2007, Linyang China entered into an agreement with Linyang Electronics, under
which Linyang China agreed to pay a guarantee fee with an annual rate of 2.0% of the total
bank borrowings guaranteed by Linyang Electronics. In 2008, we have incurred RMB10.1 million
for the bank borrowings guaranteed by Linyang Electronics.
|
|
|
On December 26, 2007, Linyang China entered into a supply agreement with Linyang
Electronics, under which Linyang China purchased raw materials from Linyang Electronics for
RMB23.7 million.
|
|
|
On December 29, 2007, Solarfun Hong Kong entered into a loan agreement with Hong Kong
Huaerli Trading Company Limited, or Hong Kong Huaerli, a company controlled by Mr. Yonghua Lu,
our chairman, under which Hong Kong Huaerli agreed to loan US$10 million to Solarfun Hong Kong
at an annual interest rate of 8%. The loan was fully repaid in February 2008.
|
|
|
On January 8, 2007, April 10, 2007, November 1, 2007, November 23, 2007 and January 11,
2008, Linyang China entered into six facility lease agreements with Linyang Electronics.
Linyang China incurred rental expenses of RMB1.2 million and RMB2.4 million in 2007 and 2008,
respectively.
|
|
|
On January 11, 2008, Solarfun Hong Kong, our 100% indirect subsidiary, entered into a
short-term loan agreement with Hong Kong Huaerli, under which Hong Kong Huaerli agreed to loan
US$9 million to Solarfun Hong Kong at an annual interest rate of 8%. The loan was fully repaid
in February 2008.
|
84
|
|
On May 7, 2008, Linyang China entered into an equipment purchase agreement with Linyang
Electronics whereby Linyang China purchased certain equipment from Linyang Electronics for
RMB0.5 million.
|
|
|
On April 12, 2008, July 8, 2008 and October 13, 2008, Linyang China entered into four
service agreements with Nantong Linyang Labor Service Company, a company controlled by Mr.
Yonghua Lu, our chairman, under which Linyang China agreed to pay an aggregate amount of
RMB1.8 million to Nantong Linyang Labor Service Company for its provision of construction
services.
|
|
|
On September 1, 2008 and October 20, 2008, Linyang China entered into two service
agreements with Nantong Linyang Ecological Cultural Co., Ltd., a company controlled by Mr.
Yonghua Lu, our chairman, under which Linyang China agreed to pay an aggregate amount of
RMB0.6 million to Nantong Linyang Ecological Cultural Co., Ltd. for its provision of
construction and labor services.
|
|
|
On October 30, 2008, Linyang China entered into a polysilicon purchase agreement with Ya An
Yongwang Silicon Co., Ltd., a company controlled by Mr. Yonghua Lu, our chairman, under which
Linyang China purchased certain polysilicon from Ya An Yongwang Silicon Co., Ltd. for RMB8.7
million.
|
|
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On December 18, 2008, Linyang China entered into two service agreements with Qidong
Jiaotong Engineering Co., Ltd., under which Linyang China agreed to pay an aggregate amount of
RMB0.6 million to Qidong Jiaotong Engineering Co., Ltd. for its provision of construction
services.
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On December 25, 2008, Linyang China entered into a framework supply agreement with Linyang
Electronics, under which Linyang China agreed to purchase raw materials from Linyang
Electronics in the year 2009.
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On February 26, 2009, Solarfun Hong Kong, our 100% indirect subsidiary, amended a
manufacturing service agreement entered into on December 30, 2008 with Q-Cells International
GmbH, or Q-cells, a company controlled by Good Energies II LP, under which Solarfun Hong Kong
agreed to supply, using PV cells supplied by Q-Cells, on a fixed-price basis no less than 100
MW of PV modules to Q-Cells in each of 2009 and 2010 and granted Q-Cells International GmbH an
option to extend the agreement for one additional year. As a result, as of December 31, 2009,
the amount of manufacturing service fee due from Q-cells under this agreement was RMB12.0
million. On December 29, 2009, all of the rights and obligations of Q-Cells under this
agreement were assigned to Q-Cells SE.
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On January 1 and April 3, 2009, Linyang China entered into two facility lease agreements
with Linyang Electronics. Under these agreements, Linyang China incurred rental expenses of
RMB2 million (US$0.3 million) in 2009.
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On November 16, 2009, Linyang China entered into equity transfer agreements with Mr.
Rongqiang Cui, our independent director, Ms. Guoyu Wang, Mr. Cuis spouse and Mr. Yongliang
Gu, our shareholder, to purchase from them a 17% equity interest in Shanghai Linyang for
consideration of RMB0.85 million (US$0.1 million). Shanghai Linyang became our wholly owned
subsidiary after the completion of this transaction.
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On December 4 and 28, 2009, Linyang China entered into two equipment purchase agreements
with Linyang Electronics whereby Linyang China purchased certain equipment from Linyang
Electronics for an aggregate amount of RMB1.2 million (US$0.2 million).
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On June 30, July 2, 9 and 31, August 10 and October 22, 2009, Shanghai Linyang entered into
six purchase agreements with Linyang Electronics, under which Shanghai Linyang purchased
certain raw materials from Linyang Electronics for an aggregate amount of RMB0.3 million
(US$0.04 million).
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On February 5, 20 and 23, and April 27 and 30, 2010, Linyang China entered into five
polysilicon purchase agreement with Ya An Yongwang Silicon Co., Ltd., under which Linyang
China purchased certain polysilicon from Ya An Yongwang Silicon Co., Ltd. for RMB88.7 million
(US$13.0 million).
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On January 1, 2010, Linyang China entered into a framework purchase agreement with Linyang
Electronics, under which Linyang China agreed to purchase raw materials from Linyang
Electronics in the year 2010.
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On January 3, 18 and 28, February 9 and March 17, 2010, Linyang China entered into five
equipment purchase agreements with Linyang Electronics whereby Linyang China purchased certain
equipment from Linyang Electronics for an aggregate amount of RMB4.0 million (US$0.6 million).
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On March 25, 2010, Linyang China entered into a service agreement with Nantong Huahong
Ecological Gardening Co., Ltd., a company controlled by Mr. Yonghua Lu, our chairman, under
which Linyang China agreed to pay an aggregate amount of RMB0.1 million (US$0.01 million) to
Nantong Linyang Ecological Gardening Co., Ltd. for its provision of construction and labor
services.
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In April 2010, Linyang China entered into a lease agreement with Qidong Huahong Electronics
Co., Ltd., a company controlled by Mr. Yonghua Lu, for a three-year term under which the
annual rental payment is RMB1.5 million (US$0.2 million).
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On April 30, 2010, Linyang China entered into an equipment purchase agreement with SMIC
Energy Technology (Shanghai), or SMIC ET, a wholly owned subsidiary of
SMIC, a company where David N.K. Wang, our independent
director, serves as president and chief executive officer. Under this agreement, Linyang China
agreed to purchase a 25 MW cell line from SMIC ET for an amount of US$4.25 million. Linyang China
also signed a human resource service agreement with a one-month term
with SMIC ET in connection
with the equipment purchase agreement, under which SMIC ET agreed to second employees to Linyang
China to manage and operate the equipment sold by SMIC ET and Linyang China agreed to pay for
those employees compensation. Pursuant to the equipment purchase agreement, Linyang China
also entered into a lease agreement with SMIC (Shanghai) Corporation, or SMIC Shanghai, to
lease the premises and facilities where the equipment is located for a 12-month term from May
1, 2010 to April 30, 2011. In
addition, Linyang China assumed three PV cell supply contracts originally entered into between
SMIC ET Shanghai and its customers.
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C.
Interests of Experts and Counsel
Not applicable.
86
ITEM 8 FINANCIAL INFORMATION
A.
Consolidated Statements and Other Financial Information
We have appended consolidated financial statements filed as part of this annual report.
Legal and Administrative Proceedings
Most of our multi-year supply agreements that we entered into during the earlier periods of
supply shortage required us to make prepayments of a portion of the total contract price to our
suppliers without receiving collateral for such prepayments. Due to non-performance by some of such
suppliers, we recorded a provision of RMB234.7 million (US$34.4 million) for doubtful collection of
supplier advances in 2009. While we are filing claims against such suppliers to resolve these
disputes, the outcome of such potential litigation may not be in our favor.
On June 8, 2009, LDK, one of our suppliers of silicon, submitted an arbitration request to the
Shanghai Arbitration Commission, alleging that we had failed to perform under the terms of a
long-term supply agreement, seeking to enforce our performance and claiming for monetary relief. We
are in dispute over the alleged breaches. There is no assurance that we will be able to successfully defend or
resolve such legal or administrative proceedings in the near future or at all. See Item 3.D. Risk Factors Risks Related to Our Company and Our
Industry Our ability to adjust our raw material costs may be limited as a result of our entering
into multi-year supply agreements with many of our silicon and silicon wafer suppliers, and it may
be difficult for us to respond in a timely manner to rapidly changing market condition, which could
materially and adversely affect our cost of revenues and profitability.
Other than as described above, 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.
In November 2006, our audit committee was notified by our independent auditors, Ernst & Young
Hua Ming, that they received non-detailed anonymous allegations that our company illegally borrowed
money from state-owned commercial banks in the PRC. The audit committee undertook what it believes
to be appropriate measures to address these allegations, including retaining an independent
international law firm as special counsel to conduct an investigation, and found no basis for these
allegations. The special counsel issued a report in respect of the results of its investigation
concluding that it did not discover any information in the course of its investigation that
substantiates in any way the anonymous allegations. In addition, Ernst & Young Hua Ming also
conducted its own internal investigation in connection with these allegations, and this
investigation did not produce any information that would lend credence to the allegations. As a
result of these investigations and other internal inquiries, our audit committee did not find any
basis for these anonymous allegations.
Dividend Policy
We made a one-time cash dividend payment in the aggregate amount of RMB7.2 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
all of our available funds and any future earnings to operate and expand our business.
The holders of our ordinary shares are entitled to such dividends as may be declared by our
board of directors subject to the Cayman Islands Companies Law. 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.
There have been no significant changes since December 31, 2009, the date of the annual
consolidated financial statements in this annual report.
87
ITEM 9 THE OFFER AND LISTING
A.
Offering and Listing Details
Our ADSs, each representing five of our ordinary shares, have been listed on the Nasdaq Global
Market since December 20, 2006 under the symbol SOLF.
In 2009, the trading price of our ADSs on the Nasdaq Global Market ranged from US$2.30 to
US$8.48 per ADS.
The following table provides the high and low trading prices for our ADSs on the Nasdaq Global
Market for (1) each year of 2007, 2008 and 2009, (2) each quarter in 2007, 2008 and 2009 and the
first quarter in 2010, and (3) each of the past six months.
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Share Price
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High
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Low
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Annually High and Low
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2007
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35.96
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8.28
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2008
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37.64
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2.68
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2009
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8.48
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2.30
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Quarterly High and Low
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First Quarter 2007
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16.45
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10.29
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Second Quarter 2007
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17.68
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8.28
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Third Quarter 2007
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14.64
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9.10
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Fourth Quarter 2007
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35.96
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10.26
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First Quarter 2008
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37.64
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8.97
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Second Quarter 2008
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26.50
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12.31
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Third Quarter 2008
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19.99
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10.20
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Fourth Quarter 2008
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11.57
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2.68
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First Quarter 2009
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6.12
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2.30
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Second Quarter 2009
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8.48
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3.71
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Third Quarter 2009
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7.98
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4.79
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Fourth Quarter 2009
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7.94
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4.60
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First Quarter 2010
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10.42
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6.33
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Monthly Highs and Lows
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November 2009
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6.81
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4.60
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December 2009
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7.94
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6.84
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January 2010
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10.42
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7.08
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February 2010
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7.94
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6.42
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March 2010
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7.85
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6.33
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April 2010
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9.23
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7.73
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May 2010
(through May 24, 2010)
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9.00
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5.98
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B.
Plan of Distribution
Not applicable.
C.
Markets
Our ADSs, each representing five of our ordinary shares, have been listed on the Nasdaq Global
Market since December 20, 2006 under the symbol SOLF.
D.
Selling Shareholders
Not applicable.
88
E.
Dilution
Not applicable.
F.
Expenses of the Issue
Not applicable.
ITEM 10 ADDITIONAL INFORMATION
A.
Share Capital
Not applicable.
B.
Memorandum and Articles of Association
We incorporate by reference into this annual report the description of our amended and
restated memorandum of association contained in our F-1 registration statement (File No.
333-139258), as amended, initially filed with the Commission on December 11, 2006. Our shareholders
adopted our amended and restated memorandum and articles of association by special resolutions
passed on December 18, 2006. The amended and restated memorandum and articles of association became
effective on December 26, 2006.
C.
Material Contracts
We have not entered into any material contracts other than in the ordinary course of business
and other than those described in Item 4. Information on the Company or elsewhere in this annual
report on Form 20-F.
D.
Exchange Controls
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.
89
E.
Taxation
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. No Cayman Islands stamp duty will be payable unless an instrument is executed in,
brought to, or produced before a court 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 EIT, which took effect as of January 1, 2008, 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 does not define the term de facto
management. However, the Implementation Regulations for the Enterprise Income Tax Law of the PRC
issued by the State Council on December 6, 2007 defined de facto management body as an
establishment that exerts substantial and comprehensive management and control over the business
operations, staff, accounting, assets and other aspects of the enterprise. Since substantially all
of our management is currently based in the PRC, and may remain in the PRC in the foreseeable
future, it is likely that we will be regarded as a resident enterprise on a strict application of
the EIT and its implementation regulations. If Solarfun or any of its non-PRC subsidiaries is
treated as a resident enterprise for PRC tax purposes, Solarfun or such subsidiary will be
subject to PRC income tax on worldwide income at a uniform tax rate of 25%, excluding the dividend
income received from our PRC subsidiaries which should have been subject to PRC income tax already.
Moreover, the EIT provides that an income tax rate of 10% is normally applicable to dividends
payable to non-PRC investors who are non-resident enterprises, to the extent such dividends are
derived from sources within the PRC. 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 (through our holding company structure). Thus, dividends paid to us by our subsidiaries in
China may be subject to the 10% income tax if we are considered a non-resident enterprise under
the EIT.
Similarly, any gain realized on the transfer of ADSs or shares by such investors is also
subject to 10% PRC withholding income tax if such gain is regarded as income derived from sources
within the PRC. If we are considered a resident enterprise, it is unclear whether the interest or
dividends we pay with respect to our convertible bonds outstanding, ordinary shares or ADSs, or the
gain you may realize from the transfer of our ordinary shares or ADSs, would be treated as income
derived from sources within the PRC and subject to PRC tax.
If we are deemed by the PRC tax authorities as a resident enterprise and declare dividends,
under the existing implementation rules of the EIT, dividends paid by us to our ultimate
shareholders, which are non- resident enterprises and do not have an establishment or place in
the PRC, or which have such an establishment or place but the relevant income is not effectively
connected with the establishment or place, might be subject to PRC withholding tax at 10% or a
lower treaty rate.
U.S. Federal Income Taxation
The following discussion describes the material U.S. federal income 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. This
discussion is based on the tax laws of the United States as in effect on the date of this
annual report and on U.S. Treasury regulations in effect as of the date of this annual report, 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.
90
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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traders that elect to mark-to-market;
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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; or
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persons that actually or constructively own 10% or more of our voting stock.
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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 U.S.
Internal Revenue Code of 1986, as amended, 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 a partnership or other entity taxable as a partnership for U.S.
federal income tax purposes 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 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.
91
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 U.S. 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 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.
Dividends will constitute foreign source income for U.S. foreign tax credit limitation
purposes and will generally constitute passive category income but could, in the case of certain
U.S. Holders, constitute general category income.
Subject to certain conditions and limitations, PRC withholding taxes on dividends may be
treated as foreign taxes eligible for credit against your U.S. federal income tax. Holders should
consult their own tax advisors regarding the creditability 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.
92
Taxation of Disposition of ADSs or Ordinary 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 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.
If PRC withholding tax were to apply to a sale, exchange or other taxable disposition of an
ADS or ordinary share, as described above under PRC Taxation, you generally would only be able
to claim a foreign tax credit for the amount withheld to the extent that you have foreign source
income. However, in the event that PRC tax is withheld from a sale, exchange or other taxable
disposition of an ADS or ordinary share, a U.S. Holder that is eligible for the benefits of the
income tax treaty between the United States and the PRC may be able to treat the gain from such a
disposition as foreign source for foreign tax credit limitation purposes. If PRC tax is withheld,
you should consult your own tax advisor regarding your eligibility for the benefits of the income
tax treaty between the United States and the PRC and the creditability of any PRC tax.
Passive Foreign Investment Company
We do not believe that we were a passive foreign investment company, or PFIC, for U.S. federal
income tax purposes for the taxable year that ended December 31, 2009, and we do not expect to be a
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, 2010 will not be
determinable until the close of the current taxable year ending December 31, 2010, 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 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, unless you make a mark-to-market election as discussed below, 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, 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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93
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 under the excess
distribution regime. 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 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 U.S. federal income 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 continue
to 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.
If you hold ADSs or ordinary shares in any year in which we are a PFIC, you will be required
to file U.S. Internal Revenue Service Form 8621 regarding distributions received on the ADSs or
ordinary shares, any gain realized on the disposition of the ADSs or ordinary shares and any
reportable election with respect to the ADSs or ordinary shares in accordance with the
instructions to such form. In addition, each U.S. shareholder of a PFIC is required to file such
annual information as is specified by the U.S. Treasury Department. You should consult your own tax
advisor concerning the reporting requirements that would apply if we were to be considered a PFIC
for any taxable year.
In addition, if we are a PFIC, we do not intend to prepare or provide you with the information
necessary to make a qualified electing fund election.
Information Reporting and Backup Withholding and Other Reporting Requirements
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 U.S.
Internal Revenue Service and possible U.S. backup withholding. 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 U.S. 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.
94
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 U.S. Internal Revenue Service and furnishing any required information in a timely manner.
In addition, for taxable years beginning after March 18, 2010, certain U.S. Holders who are
individuals that hold certain foreign financial assets (which may include the ADSs or ordinary
shares) are required to report information relating to such assets, subject to certain exceptions.
You should consult your own tax advisor regarding the effect, if any, of these rules on your
ownership and disposition of the ADSs or ordinary shares.
F.
Dividends and Paying Agents
Not applicable.
G.
Statement by Experts
Not applicable.
H.
Documents on Display
You may read and copy documents referred to in this annual report on Form 20-F that have been
filed with the U.S. Securities and Exchange Commission at the Commissions public reference room
located at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. Please call the Commission at
1-800-SEC-0330 for further information on the public reference rooms and their copy charges.
The Commission allows us to incorporate by reference the information we file with the
Commission. This means that we can disclose important information to you by referring you to
another document filed separately with the Commission. The information incorporated by reference is
considered to be part of this annual report on Form 20-F.
I.
Subsidiary Information
For a listing of our significant subsidiaries, see Item 4.C. Organizational Structure.
ITEM 11 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Exchange Risk
A portion of our revenue and a significant portion of 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 SAFE. However, the relevant PRC government authorities may limit or
eliminate our ability to purchase foreign currencies in the future. Since a significant amount of
our future revenue will be denominated in Renminbi, 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.
95
In 2009, we entered into foreign currency derivative contracts to manage risks associated with
foreign currency fluctuations for our sales contracts denominated in a currency other than
Renminbi. As of December 31, 2009, notional amounts of Euro105 million were outstanding under these
foreign currency derivative contracts. We may enter into additional forward contracts or enter into
economic hedges in the future.
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 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.
Interest Rate Risk
Our exposure to interest
rate risk primarily relates to the interest rates for our short-term and long term borrowings, as well
as 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 expense may be higher than expected due to changes in market interest rates.
ITEM 12 DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
A.
Debt Securities
Not applicable.
B.
Warrants and Rights
Not applicable.
C.
Other Securities
Not applicable.
D.
American Depositary Shares
The Bank of New York Mellon, the depositary of our ADS program, collects its fees for
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 deducting 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.
96
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Persons depositing or withdrawing shares must pay:
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For:
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$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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|
|
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Cancellation of ADSs for the purpose of
withdrawal, including if the deposit agreement
terminates
|
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$0.02 (or less) per ADS
|
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Any cash distribution to ADS holders
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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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$0.02 (or less) per ADSs 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
|
The fees described above may be amended from time to time.
The depositary has agreed to reimburse us annually for our expenses incurred in connection
with ADR program. The amount of such reimbursements is subject to certain limits, but the amount of
reimbursement available to us is not related to the amounts of fees the depositary collects from
investors. In 2009, we did not receive any reimbursement from the depositary.
PART II
ITEM 13 DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None.
ITEM 14
MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
See Item 10. Additional Information for a description of the rights of securities holders,
which remain unchanged.
We completed our initial public offering of 60,000,000 ordinary shares, in the form of ADSs,
at US$12.50 per ADS on December 26, 2006, after our ordinary shares and American Depositary
Receipts were registered under the Securities Act. The aggregate price of the offering amount
registered and sold was US$150 million, of which we received net proceeds of US$135.9 million. The
effective date of our registration statement on Form F-1 (File number: 333-139258) was December 19,
2006. Goldman Sachs (Asia) L.L.C. was the sole global coordinator and bookrunner for the global
offering of our ADSs.
97
The net proceeds from our initial public offering have been used as follows:
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approximately US$68 million to purchase or prepay for raw materials;
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|
approximately US$40 million to expand our manufacturing capacity;
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approximately US$17.9 million to acquire Yangguang Solar; and
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approximately US$10 million to invest in our research and development activities.
|
On January 29, 2008, we closed an offering of US$172.5 million 3.50% convertible senior notes
due 2018 to qualified institutional buyers pursuant to Rule 144A under the Securities Act and
received net proceeds of US$167.9 million. Holders may convert the notes into our ADSs.
Concurrently with this convertible bond offering, we closed an offering of 9,019,611 ADSs,
representing 45,098,055 ordinary shares, to facilitate the convertible bond offering. We did not
receive any proceeds, other than the par value of the ADSs, from such offering of ADSs. The
effective date of our registration statement on Form F-1 (File number: 333-147627) was January 23,
2008. Morgan Stanley & Co. Incorporated was the sole bookrunning manager of this offering.
The net proceeds from the January 2008 convertible bond offering have been used as follows:
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approximately US95.6 million for wafer and polysilicon pre-payments;
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approximately US37.4 million for capital expenditure;
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US$19.2 million to repay loans from Hong Kong Huaerli, a company controlled by Mr. Yonghua
Lu, our chairman, to Solarfun Hong Kong, our 100% indirect subsidiary; and
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the remainder for working capital and repayment of our existing bank borrowings.
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From July 17, 2008 to August 12, 2008, we issued and sold 5,421,093 ADSs with an aggregate
sale price of US$73.9 million, of which we received net proceeds of US$71.8 million. The effective
date of our registration statement on Form F-3 (File number: 333-152005) was July 16, 2008. Morgan
Stanley & Co. Incorporated acted as our sales agent. The net proceeds from this offering have been
used for silicon and silicon wafer pre-payments and working capital.
From September 17, 2009 to November 18, 2009, we issued and sold 3,888,399 ADSs with an
aggregate sale price of US$23.1 million, of which we received net proceeds of US$21.8 million. The
effective date of our registration statement on Form F-3 (File number: 333-152005) was July 16,
2008. Morgan Stanley & Co. Incorporated acted as manager for the sale. The net proceeds from this
offering have been used for capital expenditures, working capital and partial repayment of our
existing bank loans.
As of December 31, 2009, our cash resources amounted to RMB645.7 million (US$94.6 million),
comprising cash on hand and demand deposits.
98
ITEM 15 CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our chief
executive officer and our chief financial officer, we conducted an evaluation of our disclosure
controls and procedures, as such term is defined under Rule 13a-15(e) under the Securities Exchange
Act of 1934, as amended. Based on that evaluation, our chief executive officer and chief financial
officer have concluded that our disclosure controls and procedures were effective as of the end of
the period covered by this annual report.
Managements Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined under Rule 13a-15(f) under the Securities Exchange Act
of 1934, as amended, for our company. Internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of consolidated financial statements in accordance with generally accepted accounting
principles and includes those policies and procedures that (1) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions
of a companys assets, (2) provide reasonable assurance that transactions are recorded as necessary
to permit preparation of consolidated financial statements in accordance with generally accepted
accounting principles, and that a companys receipts and expenditures are being made only in
accordance with authorizations of a companys management and directors, and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition
of a companys assets that could have a material effect on the consolidated financial statements.
Because of its inherent limitations, a system of internal control over financial reporting can
provide only reasonable assurance with respect to the preparation and presentation of consolidated
financial statement and may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
As required by Section 404 of the Sarbanes-Oxley Act and related rules as promulgated by the
SEC, our companys management assessed the effectiveness of our internal control over financial
reporting as of December 31, 2009 using criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on
this assessment, our companys management concluded that our internal control over financial
reporting was effective as of December 31, 2009.
Our independent registered public accounting firm, Ernst & Young Hua Ming, has audited the
effectiveness of internal control over financial reporting as of December 31, 2009, as stated in
its report, which is included immediately below. Ernst & Young Hua Ming has also audited our
consolidated financial statements for the year ended December 31, 2009, as stated in its
report which is included on page F-2 in this annual report.
Attestation Report of the Registered Public Accounting Firm
To the Board of Directors and Shareholders of
Solarfun Power Holdings Co., Ltd.
We have audited Solarfun Power Holdings Co., Ltd.s (the Company) internal control over
financial reporting as of December 31, 2009, based on criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (the COSO criteria). The Companys management is responsible for maintaining effective
internal control over financial reporting, and for its assessment of the effectiveness of internal
control over financial reporting included in the accompanying Managements Annual Report on
Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the
Companys internal control over financial reporting based on our audit.
99
We conducted our audit 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 effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting
principles. A companys internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the companys assets that could have
a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Solarfun Power Holdings Co., Ltd. maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2009, based on the COSO
criteria.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of the Company as of December 31,
2009 and 2008, and the related consolidated statements of operations, shareholders equity and cash
flows for each of the three years in the period ended December 31, 2009, and our report dated
May 25, 2010, expressed an unqualified opinion thereon.
/s/ Ernst & Young Hua Ming
Shanghai, The Peoples Republic of China
May 25, 2010
Changes in Internal Controls
There were no changes in our internal control over financial reporting that occurred during
the year ended December 31, 2009 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
100
ITEM 16A AUDIT COMMITTEE FINANCIAL EXPERT
Our Board of Directors has determined that Mr. Thomas J. Toy qualifies as an audit committee
financial expert as defined in Item 16A. of Form 20-F. Each of the members of the Audit Committee
is an independent director as defined in the Nasdaq Marketplace Rules.
ITEM 16B CODE OF ETHICS
Our board of directors has adopted a code of ethics that applies to our directors, officers,
employees and agents. We have previously filed our code of business conduct and ethics, and posted
the code on our website www.solarfun.com.cn. We hereby undertake to provide to any person without
charge, a copy of our code of business conduct and ethics within ten working days after we receive
such persons written request.
ITEM 16C PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table sets forth the aggregate fees by categories specified below in connection
with certain professional services rendered by Ernst & Young Hua Ming, our principal external
auditors, for the periods indicated. We did not pay any tax related fees to our auditors during the
periods indicated below.
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Year Ended December 31,
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2007
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2008
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2009
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(RMB)
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(RMB)
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(RMB)
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(US$)
|
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Audit fees
|
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7,854,600
|
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6,820,000
|
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|
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5,500,000
|
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|
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805,755
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Audit-related fees
|
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|
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Tax fees
|
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|
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688,000
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100,792
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All other fees
(1)
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1,458,920
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1,700,000
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2,290,000
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335,487
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Notes:
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(1)
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All other fees means the aggregate fees for services rendered in connection with our
public offering in 2006 and our convertible bond offering and continuous ADS offering in 2008.
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The policy of our audit committee is to pre-approve all audit and non-audit services provided
by Ernst & Young Hua Ming, including audit services and other services as described above, other
than those for
de minimus
services which are approved by the Audit Committee prior to the
completion of the audit.
ITEM 16D EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
Nasdaq Marketplace Rule 5605(c)(2)(A)(iii) requires that each audit committee member must not
have participated in the preparation of the financial statements of the company or any current
subsidiary of the company at any time during the past three years. However, Nasdaq Marketplace
Rule 5615(a)(3) allows a foreign private issuer to follow its home country practice in lieu of the
requirement under Nasdaq Marketplace Rule 5605(c)(2)(A)(iii). We have obtained an exemption from
Nasdaq with respect to Mr. Terry McCarthy, who served as our interim chief financial officer from
March 2009 to November 2009. We believe that the previous employment of Mr. McCarthy as chief
financial officer on an interim basis will not interfere with his exercise of independent judgment
in carrying out the responsibilities as an audit committee member.
ITEM 16E PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
None.
101
ITEM 16F CHANGE IN REGISTRANTS CERTIFYING ACCOUNTANT
Not applicable.
ITEM 16G CORPORATE GOVERNANCE
Except as set forth under Item 16D., we have followed and intend to continue to follow the
applicable corporate governance standards under Nasdaq Marketplace Rules.
PART III
ITEM 17
FINANCIAL STATEMENTS
We have elected to provide financial statements pursuant to Item 18.
ITEM 18
FINANCIAL STATEMENTS
The following financial statements are filed as part of this Annual Report on Form 20-F,
together with the report of the independent auditors:
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Report of Independent Registered Public Accounting Firm
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Consolidated Balance Sheets as of December 31, 2008 and 2009
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Consolidated Statements of Operations for the Years Ended December 31, 2007, 2008 and 2009
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Consolidated Statements of Cash Flows for the Years Ended December 31, 2007, 2008 and 2009
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Consolidated Statements of Changes in Shareholders Equity for the Years Ended December 31,
2007, 2008 and 2009
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Notes to the Consolidated Financial Statements
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ITEM 19
EXHIBITS
The following exhibits are furnished along with annual report or are incorporated by reference
as indicated.
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Exhibit
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Number
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Description of Document
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1.1
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Memorandum and Articles of Association of Solarfun Power Holdings Co.,
Ltd. (incorporated by reference to Exhibit 3.1 from our F-1 registration
statement (File No. 333-139258), as amended, initially filed with the
Commission on December 11, 2006)
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1.2
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Form of Second Amended and Restated Memorandum and Articles of Solarfun
Power Holdings Co., Ltd. (incorporated by reference to Exhibit 3.2 from
our F-1 registration statement (File No. 333-139258), as amended,
initially filed with the Commission on December 11, 2006)
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2.1
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Specimen Certificate for Ordinary Shares of Solarfun Power Holdings Co.,
Ltd. (incorporated by reference to Exhibit 4.2 from our F-1 registration
statement (File No. 333-139258), as amended, initially filed with the
Commission on December 11, 2006)
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102
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Exhibit
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Number
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Description of Document
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2.2
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Form of American Depositary Receipt of Solarfun Power Holdings Co., Ltd.
(incorporated by reference to Exhibit 4.1 from our F-1 registration
statement (File No. 333-139258), as amended, initially filed with the
Commission on December 11, 2006)
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2.3
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Form of Deposit Agreement Form of Deposit Agreement, among Solarfun Power
Holdings Co., Ltd., the depositary and owners and holders of the American
Depositary Shares (incorporated by reference to Exhibit 4.3 from our F-1
registration statement (File No. 333-139258), as amended, initially filed
with the Commission on December 11, 2006)
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4.1
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Share Purchase Agreement, dated June 6, 2006, in respect of the issue of
series A convertible preference shares of Solarfun Power Holdings Co.,
Ltd. (incorporated by reference to Exhibit 4.4 from our F-1 registration
statement (File No. 333-139258), as amended, initially filed with the
Commission on December 11, 2006)
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4.2
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Shareholders Agreement, dated June 27, 2006, among Solarfun Power Holdings
Co., Ltd. and other parties therein (incorporated by reference to Exhibit
4.5 from our F-1 registration statement (File No. 333-139258), as amended,
initially filed with the Commission on December 11, 2006)
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4.3
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Registration Rights Agreement, dated June 27, 2006, among Solarfun Power
Holdings Co., Ltd. and other parties therein (incorporated by reference to
Exhibit 4.6 from our F-1 registration statement (File No. 333-139258), as
amended, initially filed with the Commission on December 11, 2006)
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4.4
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Agreement Concerning the Limitations on Post-IPO Sale of Shares, dated
June 20, 2006, among certain holders of ordinary shares (incorporated by
reference to Exhibit 4.7 from our F-1 registration statement (File No.
333-139258), as amended, initially filed with the Commission on December
11, 2006)
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4.5
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Second Shareholders Agreement, dated December 4, 2007, among Solarfun
Power Holding Co., Ltd. and the other parties therein (incorporated by
reference to Exhibit 4.8 from our F-1 registration statement (File No.
333-147627), as amended, initially filed with the Commission on November
27, 2007)
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4.6
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The First Amendment to Lock-up Agreement, dated 2007, among Solarfun Power
Holding Co., Ltd. and other parties therein (incorporated by reference to
Exhibit 4.9 from our F-1 registration statement (File No. 333-147627), as
amended, initially filed with the Commission on November 27, 2007)
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4.7
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Amendment to Lock-up Agreement, dated December 4, 2007, among Yonghua Lu,
Good Energies Investment (Jersey) Limited and other parties therein
(incorporated by reference to Exhibit 4.10 from our F-1 registration
statement (File No. 333-147627), as amended, initially filed with the
Commission on November 27, 2007)
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4.8
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2006 Share Incentive Plan (incorporated by reference to Exhibit 10.1 from
our F-1 registration statement (File No. 333-139258), as amended,
initially filed with the Commission on December 11, 2006)
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4.9
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2007 Equity Incentive Plan (incorporated by reference to Exhibit 99.2 from
our Form S-8 registration statement (File No. 333-147644), as amended,
initially filed with the Commission on November 27, 2007)
|
103
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description of Document
|
|
|
|
|
|
|
4.10
|
|
|
Form of Employment Agreement between Solarfun Power Holdings Co., Ltd. and
a Senior Executive Officer of the Registrant (incorporated by reference to
Exhibit 10.2 from our F-1 registration statement (File No. 333-139258), as
amended, initially filed with the Commission on December 11, 2006)
|
|
|
|
|
|
|
4.11
|
|
|
Silicon Supply Agreement, dated June 2, 2006, and Amendments No. 1, No. 2
and No. 3 thereto, dated June 9, 2006, October 8, 2006 and November 17,
2006, respectively, between Jiangsu Linyang Solarfun Co., Ltd. and E-mei
(incorporated by reference to Exhibit 10.8 from our F-1 registration
statement (File No. 333-139258), as amended, initially filed with the
Commission on December 11, 2006)
|
|
|
|
|
|
|
4.12
|
|
|
Sales Agreement, dated June 10, 2006, between Jiangsu Linyang Solarfun
Co., Ltd. and Social Capital, S.L. (incorporated by reference to Exhibit
10.9 from our F-1 registration statement (File No. 333-139258), as
amended, initially filed with the Commission on December 11, 2006)
|
|
|
|
|
|
|
4.13
|
|
|
Sales Contract, dated November 19, 2006, between Jiangsu Linyang Solarfun
Co., Ltd. and Scatec AS (incorporated by reference to Exhibit 10.10 from
our F-1 registration statement (File No. 333-139258), as amended,
initially filed with the Commission on December 11, 2006)
|
|
|
|
|
|
|
4.14
|
|
|
Sales Contract, dated November 19, 2006, between Jiangsu Linyang Solarfun
Co., Ltd. and Scatec AS (incorporated by reference to Exhibit 10.11 from
our F-1 registration statement (File No. 333-139258), as amended,
initially filed with the Commission on December 11, 2006)
|
|
|
|
|
|
|
4.15
|
|
|
Agreement of Transfer of Land Use Rights, dated April 8, 2006, between
Jiangsu Linyang Solarfun Co., Ltd. and Qidong Huahong Electronics Co.,
Ltd. (incorporated by reference to Exhibit 10.12 from our F-1 registration
statement (File No. 333-139258), as amended, initially filed with the
Commission on December 11, 2006)
|
|
|
|
|
|
|
4.16
|
|
|
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. (incorporated by
reference to Exhibit 10.13 from our F-1 registration statement (File No.
333-139258), as amended, initially filed with the Commission on December
11, 2006)
|
|
|
|
|
|
|
4.17
|
|
|
Share Transfer Agreement, dated June 9, 2006, among Linyang Solar Power
Investment Holding Ltd. and various other parties (incorporated by
reference to Exhibit 10.14 from our F-1 registration statement (File No.
333-139258), as amended, initially filed with the Commission on December
11, 2006)
|
|
|
|
|
|
|
4.18
|
|
|
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 (incorporated by reference to Exhibit 10.15 from our
F-1 registration statement (File No. 333-139258), as amended, initially
filed with the Commission on December 11, 2006)
|
|
|
|
|
|
|
4.19
|
|
|
Deed of Share Transfer, effective as of July 15, 2006, among Linyang Solar
Power Investment Holding Ltd. and various other parties (incorporated by
reference to Exhibit 10.16 from our F-1 registration statement (File No.
333-139258), as amended, initially filed with the Commission on December
11, 2006)
|
104
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description of Document
|
|
|
|
|
|
|
4.20
|
|
|
Management Consulting Service Agreement, dated November 18, 2006, between
Jiangsu Linyang Solarfun Co., Ltd. and Hony Capital II, L.P. (incorporated
by reference to Exhibit 10.17 from our F-1 registration statement (File
No. 333-139258), as amended, initially filed with the Commission on
December 11, 2006)
|
|
|
|
|
|
|
4.21
|
|
|
Bid Invitation and Letter of Acceptance for Shanghai Chongming Qianwei
Village 960 KW Solar PV Power Generation Model Project, dated September
28, 2006 and November 9, 2006, respectively (incorporated by reference to
Exhibit 10.18 from our F-1 registration statement (File No. 333-139258),
as amended, initially filed with the Commission on December 11, 2006)
|
|
|
|
|
|
|
4.22
|
|
|
Letter of Acceptance for Qitian Group 74 KW On-Grid Application System
Project, dated September 12, 2006 (incorporated by reference to Exhibit
10.19 from our F-1 registration statement (File No. 333-139258), as
amended, initially filed with the Commission on December 11, 2006)
|
|
|
|
|
|
|
4.23
|
|
|
Contract between Jiangsu Linyang Solarfun Co., Ltd. and ISC Konstanz,
dated September 5, 2006 (incorporated by reference to Exhibit 10.20 from
our F-1 registration statement (File No. 333-139258), as amended,
initially filed with the Commission on December 11, 2006)
|
|
|
|
|
|
|
4.24
|
|
|
Share Transfer Agreement, dated July 31, 2007, among Nantong Linyang,
Lianyungang Suyuan Group Co., Ltd. and Jiangsu Linyang Solarfun Co., Ltd.
(incorporated by reference to Exhibit 10.31 from our F-1 registration
statement (File No. 333-147627), as amended, initially filed with the
Commission on November 27, 2007)
|
|
|
|
|
|
|
4.25
|
|
|
Contract of Purchase between Schüco International KG and Jiangsu Linyang
Solarfun Co., Ltd. (incorporated by reference to Exhibit 10.33 from our
F-1 registration statement (File No. 333-147627), as amended, initially
filed with the Commission on November 27, 2007)
|
|
|
|
|
|
|
4.26
|
|
|
Second and Restated Supply Agreement, dated May 13, 2008, between Solarfun
Hong Kong Power Ltd. and Hoku (Exhibit 4.39 from our 20-F annual report filed with
the Commission on June 27, 2008)
|
|
|
|
|
|
|
4.27
|
|
|
Investment Agreement, dated November 14, 2007, between Jiangsu Linyang
Solarfun Co., Ltd. and Management Committee of Qidong Economic Development
Zone, Jiangsu Province (incorporated by reference to Exhibit 10.35 from
our F-1 registration statement (File No. 333-147627), as amended,
initially filed with the Commission on November 27, 2007)
|
|
|
|
|
|
|
4.28
|
|
|
Contract, dated October 30, 2007, between Yangguang Solar and Ald Vacuum
Technologies GmbH (Exhibit 4.41 from our 20-F annual report filed with the
Commission on June 27, 2008)
|
|
|
|
|
|
|
4.29
|
|
|
State-owned Land Use Right Grant Contract, dated January 28, 2005, between
Lianyungang Municipal Administration of Land and Resources and Yangguang
Solar Technology Co., Ltd. (Exhibit 4.42 from our 20-F annual report filed
with the Commission on June 27, 2008)
|
105
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description of Document
|
|
|
|
|
|
|
4.30
|
|
|
Equity
Transfer Agreement, dated June 23, 2008, among Nantong Linyang
Electric Power Investment Co., Ltd., Jiangsu Qitian Group Co., Ltd.,
Jiangsu Guangyi Technology Co., Ltd. and Jiangsu Linyang Solarfun Co., Ltd. (Exhibit 4.43 from our
20-F/A amendment to annual report filed with the Commission on June 30,
2008)
|
|
|
|
|
|
|
4.31
|
*
|
|
Equity Transfer Agreement, dated November 16, 2009, between Rongqiang Cui
and Jiangsu Linyang Solarfun Co., Ltd.
|
|
|
|
|
|
|
4.32
|
*
|
|
Equity Transfer Agreement, dated November 16, 2009, between Guoyu Wang and
Jiangsu Linyang Solarfun Co., Ltd.
|
|
|
|
|
|
|
4.33
|
*
|
|
Equipment Sales Agreement, dated April 30, 2010, between SMIC Energy
Technology (Shanghai) and Jiangsu Linyang Solarfun Co., Ltd.
|
|
|
|
|
|
|
4.34
|
*
|
|
Lease Agreement, dated April 3, 2009, between Jiangsu Linyang Electronics Co., Ltd. and
Jiangsu Linyang Solarfun Co., Ltd.
|
|
|
|
|
|
|
4.35
|
*
|
|
Lease Agreement, dated April 2010, between Qidong Huahong Electronics Co., Ltd. and
Jiangsu Linyang Solarfun Co., Ltd.
|
|
|
|
|
|
|
8.1
|
*
|
|
Subsidiaries of Solarfun Power Holdings Co., Ltd.
|
|
|
|
|
|
|
11.1
|
|
|
Code of Business Conduct and Ethics of Solarfun Power Holdings Co.,
Ltd.(incorporated by reference to Exhibit 99.1 from our F-1 registration
statement (File No. 333-139258), as amended, initially filed with the
Commission on December 5, 2006)
|
|
|
|
|
|
|
12.1
|
*
|
|
CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
|
12.2
|
*
|
|
CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
|
13.1
|
*
|
|
CEO and CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
|
|
|
|
|
|
|
23.1
|
*
|
|
Consent of Independent Registered Public Accounting Firm
|
|
|
|
Notes:
|
|
*
|
|
Filed with this Annual Report on Form 20-F
|
106
SIGNATURE
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F
and that it has duly caused and authorized the undersigned to sign this annual report on its
behalf.
|
|
|
|
|
|
SOLARFUN POWER HOLDINGS CO., LTD.
|
|
|
/s/ Ping Peter Xie
|
|
|
Name:
|
Ping Peter Xie
|
|
|
Title:
|
President
|
|
Date: May
25, 2010
107
SOLARFUN POWER HOLDINGS CO., LTD.
CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2008 and 2009
and for the years ended December 31, 2007, 2008 and 2009
SOLARFUN POWER HOLDINGS CO., LTD.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
Page
|
|
|
|
|
|
|
Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
F-2
|
|
|
|
|
|
|
|
|
|
F-3
|
|
|
|
|
|
|
|
|
|
F-4
|
|
|
|
|
|
|
|
|
|
F-5 6
|
|
|
|
|
|
|
|
|
|
F-7
|
|
|
|
|
|
|
|
|
|
F-8 50
|
|
- F-1 -
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of
Solarfun Power Holdings Co., Ltd.
We have audited the accompanying consolidated balance sheets of Solarfun Power Holdings Co., Ltd.
(the Company) as of December 31, 2009 and 2008, and the related consolidated statements of
operations, shareholders equity and cash flows for each of the three years in the period ended
December 31, 2009. 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. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as 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 Solarfun Power Holdings Co., Ltd. at December 31,
2009 and 2008, and the consolidated results of its operations and its cash flows for each of the
three years in the period ended December 31, 2009, in conformity with U.S. generally accepted
accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the Companys internal control over financial reporting as of December 31,
2009, based on the criteria established in Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report dated May 25, 2010
expressed an unqualified opinion thereon.
Ernst & Young Hua Ming
Shanghai, The Peoples Republic of China
May 25, 2010
- F-2 -
SOLARFUN POWER HOLDINGS CO., LTD.
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
Note
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
|
|
|
|
(RMB000)
|
|
|
(RMB000)
|
|
|
(US$000)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
|
|
|
410,901
|
|
|
|
645,720
|
|
|
|
94,599
|
|
Restricted cash
|
|
|
|
|
|
|
88,137
|
|
|
|
60,539
|
|
|
|
8,869
|
|
Accounts receivable net
|
|
|
4
|
|
|
|
319,537
|
|
|
|
587,488
|
|
|
|
86,066
|
|
Inventories net
|
|
|
5
|
|
|
|
731,708
|
|
|
|
783,973
|
|
|
|
114,853
|
|
Advance to suppliers net
|
|
|
6
|
|
|
|
1,145,614
|
|
|
|
979,762
|
|
|
|
143,536
|
|
Other current assets
|
|
|
7
|
|
|
|
481,749
|
|
|
|
180,315
|
|
|
|
26,416
|
|
Deferred tax assets net
|
|
|
24
|
|
|
|
57,992
|
|
|
|
63,115
|
|
|
|
9,246
|
|
Derivative contracts
|
|
|
17
|
|
|
|
39,665
|
|
|
|
7,360
|
|
|
|
1,078
|
|
Amount due from related parties
|
|
|
25
|
|
|
|
19
|
|
|
|
12,458
|
|
|
|
1,825
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
|
|
|
|
3,275,322
|
|
|
|
3,320,730
|
|
|
|
486,488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed assets net
|
|
|
8
|
|
|
|
1,492,575
|
|
|
|
1,586,283
|
|
|
|
232,392
|
|
Intangible assets net
|
|
|
9
|
|
|
|
212,736
|
|
|
|
208,563
|
|
|
|
30,555
|
|
Deferred tax assets net
|
|
|
24
|
|
|
|
4,489
|
|
|
|
13,789
|
|
|
|
2,020
|
|
Long-term deferred expenses
|
|
|
11
|
|
|
|
37,444
|
|
|
|
33,135
|
|
|
|
4,854
|
|
Goodwill
|
|
|
10
|
|
|
|
134,735
|
|
|
|
134,735
|
|
|
|
19,739
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-current assets
|
|
|
|
|
|
|
1,881,979
|
|
|
|
1,976,505
|
|
|
|
289,560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
|
|
|
|
5,157,301
|
|
|
|
5,297,235
|
|
|
|
776,048
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term bank borrowings
|
|
|
12
|
|
|
|
1,098,832
|
|
|
|
404,764
|
|
|
|
59,298
|
|
Long-term bank borrowings, current portion
|
|
|
12
|
|
|
|
30,000
|
|
|
|
90,000
|
|
|
|
13,185
|
|
Accounts payable
|
|
|
|
|
|
|
217,026
|
|
|
|
441,768
|
|
|
|
64,719
|
|
Notes payable
|
|
|
16
|
|
|
|
39,341
|
|
|
|
186,921
|
|
|
|
27,384
|
|
Accrued expenses and other liabilities
|
|
|
13
|
|
|
|
189,028
|
|
|
|
191,895
|
|
|
|
28,113
|
|
Customer deposits
|
|
|
15
|
|
|
|
9,494
|
|
|
|
59,685
|
|
|
|
8,744
|
|
Deferred tax liabilities
|
|
|
24
|
|
|
|
1,416
|
|
|
|
|
|
|
|
|
|
Unrecognized tax benefit
|
|
|
24
|
|
|
|
27,385
|
|
|
|
27,385
|
|
|
|
4,012
|
|
Derivative contracts
|
|
|
17
|
|
|
|
5,792
|
|
|
|
1,148
|
|
|
|
168
|
|
Amount due to related parties
|
|
|
25
|
|
|
|
39,766
|
|
|
|
16,765
|
|
|
|
2,456
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
|
|
|
|
1,658,080
|
|
|
|
1,420,331
|
|
|
|
208,079
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term bank borrowings
|
|
|
12
|
|
|
|
170,000
|
|
|
|
380,000
|
|
|
|
55,670
|
|
Deferred tax liability
|
|
|
24
|
|
|
|
27,155
|
|
|
|
26,566
|
|
|
|
3,892
|
|
Convertible bonds
|
|
|
22
|
|
|
|
1,178,969
|
|
|
|
658,653
|
|
|
|
96,493
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-current liabilities
|
|
|
|
|
|
|
1,376,124
|
|
|
|
1,065,219
|
|
|
|
156,055
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable ordinary shares
(par value US$0.0001 per share; 45,098,055
shares issued and outstanding at December 31, 2008 and 2009)
|
|
|
21
|
|
|
|
32
|
|
|
|
32
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Solarfun Power Holdings Co., Ltd. shareholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary shares (par value US$0.0001 per share; 500,000,000 and
500,000,000 shares authorized; 269,060,209 shares and 290,708,739
shares issued and outstanding at December 31, 2008 and 2009,
respectively)
|
|
|
|
|
|
|
214
|
|
|
|
227
|
|
|
|
33
|
|
Additional paid-in capital
|
|
|
|
|
|
|
2,138,624
|
|
|
|
2,331,797
|
|
|
|
341,610
|
|
Statutory reserves
|
|
|
19
|
|
|
|
47,638
|
|
|
|
69,564
|
|
|
|
10,191
|
|
(Accumulated deficit) retained earnings
|
|
|
|
|
|
|
(67,594
|
)
|
|
|
410,065
|
|
|
|
60,075
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Solarfun Power Holdings Co., Ltd. shareholders equity
|
|
|
|
|
|
|
2,118,882
|
|
|
|
2,811,653
|
|
|
|
411,909
|
|
Non-controlling interest
|
|
|
|
|
|
|
4,183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
|
|
|
|
2,123,065
|
|
|
|
2,811,653
|
|
|
|
411,909
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities, mezzanine equity and shareholders equity
|
|
|
|
|
|
|
5,157,301
|
|
|
|
5,297,235
|
|
|
|
776,048
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements.
- F-3 -
SOLARFUN POWER HOLDINGS CO., LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
|
|
Note
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
|
|
|
|
(RMB000)
|
|
|
(RMB000)
|
|
|
(RMB000)
|
|
|
(US$000)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
|
|
|
|
|
2,395,135
|
|
|
|
4,949,068
|
|
|
|
3,778,316
|
|
|
|
553,527
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
|
|
|
|
(1,997,355
|
)
|
|
|
(4,905,147
|
)
|
|
|
(3,341,936
|
)
|
|
|
(489,596
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
|
|
|
397,780
|
|
|
|
43,921
|
|
|
|
436,380
|
|
|
|
63,931
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling expenses
|
|
|
|
|
|
|
(62,777
|
)
|
|
|
(87,913
|
)
|
|
|
(105,454
|
)
|
|
|
(15,449
|
)
|
General and administrative expenses
|
|
|
|
|
|
|
(113,756
|
)
|
|
|
(143,340
|
)
|
|
|
(180,989
|
)
|
|
|
(26,515
|
)
|
Research and development expenses
|
|
|
|
|
|
|
(27,440
|
)
|
|
|
(19,679
|
)
|
|
|
(32,025
|
)
|
|
|
(4,692
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
|
|
|
|
(203,973
|
)
|
|
|
(250,932
|
)
|
|
|
(318,468
|
)
|
|
|
(46,656
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit (loss)
|
|
|
|
|
|
|
193,807
|
|
|
|
(207,011
|
)
|
|
|
117,912
|
|
|
|
17,275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
|
|
|
|
(25,978
|
)
|
|
|
(103,146
|
)
|
|
|
(157,907
|
)
|
|
|
(23,134
|
)
|
Interest income
|
|
|
|
|
|
|
16,244
|
|
|
|
10,004
|
|
|
|
5,002
|
|
|
|
733
|
|
Exchange losses
|
|
|
|
|
|
|
(25,628
|
)
|
|
|
(35,230
|
)
|
|
|
(23,814
|
)
|
|
|
(3,489
|
)
|
Changes in fair value of derivative contracts
|
|
|
17
|
|
|
|
|
|
|
|
83,090
|
|
|
|
9,594
|
|
|
|
1,406
|
|
Changes in fair value of conversion feature of
convertible bonds
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
(73,887
|
)
|
|
|
(10,825
|
)
|
Other income
|
|
|
|
|
|
|
1,507
|
|
|
|
15,018
|
|
|
|
6,286
|
|
|
|
921
|
|
Other expenses
|
|
|
|
|
|
|
(9,670
|
)
|
|
|
(25,604
|
)
|
|
|
(11,835
|
)
|
|
|
(1,734
|
)
|
Government grants
|
|
|
23
|
|
|
|
2,089
|
|
|
|
3,480
|
|
|
|
7,661
|
|
|
|
1,122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
|
|
|
|
152,371
|
|
|
|
(259,399
|
)
|
|
|
(120,988
|
)
|
|
|
(17,725
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expenses
|
|
|
24
|
|
|
|
(7,458
|
)
|
|
|
(6,519
|
)
|
|
|
(23,928
|
)
|
|
|
(3,505
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net income (loss)
|
|
|
|
|
|
|
144,913
|
|
|
|
(265,918
|
)
|
|
|
(144,916
|
)
|
|
|
(21,230
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to non-controlling interest
|
|
|
|
|
|
|
3,124
|
|
|
|
(14,573
|
)
|
|
|
(311
|
)
|
|
|
(46
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Solarfun
Power Holdings Co., Ltd. shareholders
|
|
|
|
|
|
|
148,037
|
|
|
|
(280,491
|
)
|
|
|
(145,227
|
)
|
|
|
(21,276
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Solarfun
Power Holdings Co., Ltd. shareholders
per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
30
|
|
|
RMB
|
0.62
|
|
|
RMB
|
(1.11
|
)
|
|
RMB
|
(0.53
|
)
|
|
US$
|
(0.08
|
)
|
Diluted
|
|
|
30
|
|
|
RMB
|
0.62
|
|
|
RMB
|
(1.11
|
)
|
|
RMB
|
(0.53
|
)
|
|
US$
|
(0.08
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares used in computation of net income (loss)
per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
30
|
|
|
|
240,054,686
|
|
|
|
252,659,614
|
|
|
|
274,067,760
|
|
|
|
274,067,760
|
|
Diluted
|
|
|
30
|
|
|
|
240,054,686
|
|
|
|
252,659,614
|
|
|
|
274,067,760
|
|
|
|
274,067,760
|
|
The accompanying notes are an integral part of the consolidated financial statements.
- F-4 -
SOLARFUN POWER HOLDINGS CO., LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
|
|
Note
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
|
|
|
|
(RMB000)
|
|
|
(RMB000)
|
|
|
(RMB000)
|
|
|
(US$000)
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net income (loss)
|
|
|
|
|
|
|
144,913
|
|
|
|
(265,918
|
)
|
|
|
(144,916
|
)
|
|
|
(21,230
|
)
|
Adjustments to reconcile net income (loss) to net cash (used in)
provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss from derivative contracts
|
|
|
17
|
|
|
|
|
|
|
|
(33,873
|
)
|
|
|
27,661
|
|
|
|
4,052
|
|
Changes in fair value of conversion feature of convertible bonds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73,887
|
|
|
|
10,825
|
|
Loss from disposal of a subsidiary
|
|
|
|
|
|
|
|
|
|
|
384
|
|
|
|
|
|
|
|
|
|
Loss from disposal of fixed assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
719
|
|
|
|
105
|
|
Gain from disposal of intangible asset
|
|
|
9
|
|
|
|
|
|
|
|
(3,403
|
)
|
|
|
|
|
|
|
|
|
Amortization of convertible bonds discount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,788
|
|
|
|
7,440
|
|
Depreciation and amortization
|
|
|
|
|
|
|
27,686
|
|
|
|
67,170
|
|
|
|
153,174
|
|
|
|
22,440
|
|
Amortization of long-term deferred expense
|
|
|
|
|
|
|
|
|
|
|
5,145
|
|
|
|
6,670
|
|
|
|
977
|
|
Stock compensation expense
|
|
|
20
|
|
|
|
29,640
|
|
|
|
34,826
|
|
|
|
42,671
|
|
|
|
6,251
|
|
Write-down of inventories
|
|
|
5
|
|
|
|
815
|
|
|
|
413,789
|
|
|
|
282,574
|
|
|
|
41,397
|
|
Provision for doubtful collection of account receivables
|
|
|
4
|
|
|
|
2,070
|
|
|
|
|
|
|
|
3,723
|
|
|
|
545
|
|
Provision for doubtful collection of supplier advances
|
|
|
6
|
|
|
|
|
|
|
|
41,962
|
|
|
|
234,724
|
|
|
|
34,387
|
|
Deferred tax benefit
|
|
|
24
|
|
|
|
(700
|
)
|
|
|
(50,068
|
)
|
|
|
(15,792
|
)
|
|
|
(2,314
|
)
|
Warranty provision
|
|
|
14
|
|
|
|
23,109
|
|
|
|
27,678
|
|
|
|
24,824
|
|
|
|
3,637
|
|
Warranty reversal
|
|
|
14
|
|
|
|
(1,520
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized tax benefit
|
|
|
|
|
|
|
|
|
|
|
27,385
|
|
|
|
|
|
|
|
|
|
Others
|
|
|
|
|
|
|
6
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash
|
|
|
|
|
|
|
(12,968
|
)
|
|
|
(44,602
|
)
|
|
|
2,011
|
|
|
|
295
|
|
Accounts receivable
|
|
|
|
|
|
|
(290,604
|
)
|
|
|
111,157
|
|
|
|
(271,674
|
)
|
|
|
(39,800
|
)
|
Inventories
|
|
|
|
|
|
|
(359,298
|
)
|
|
|
(417,016
|
)
|
|
|
(334,839
|
)
|
|
|
(49,054
|
)
|
Advance to suppliers
|
|
|
|
|
|
|
(398,163
|
)
|
|
|
(547,458
|
)
|
|
|
(68,872
|
)
|
|
|
(10,090
|
)
|
Prepaid rent
|
|
|
|
|
|
|
(170,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
|
|
|
|
|
|
|
|
|
(50,000
|
)
|
|
|
86,375
|
|
|
|
12,654
|
|
Other current assets
|
|
|
|
|
|
|
(138,823
|
)
|
|
|
(47,271
|
)
|
|
|
215,059
|
|
|
|
31,508
|
|
Amount due from related parties
|
|
|
|
|
|
|
(188
|
)
|
|
|
901
|
|
|
|
(12,439
|
)
|
|
|
(1,822
|
)
|
Accounts payable
|
|
|
|
|
|
|
80,094
|
|
|
|
103,199
|
|
|
|
238,804
|
|
|
|
34,985
|
|
Accrued expenses and other liabilities
|
|
|
|
|
|
|
39,668
|
|
|
|
(27,857
|
)
|
|
|
33,648
|
|
|
|
4,929
|
|
Amount due to related parties
|
|
|
|
|
|
|
(23,951
|
)
|
|
|
(2,038
|
)
|
|
|
10,362
|
|
|
|
1,518
|
|
Customer deposits
|
|
|
|
|
|
|
27,611
|
|
|
|
(18,134
|
)
|
|
|
50,191
|
|
|
|
7,353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities
|
|
|
|
|
|
|
(1,020,603
|
)
|
|
|
(674,040
|
)
|
|
|
689,333
|
|
|
|
100,988
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of fixed assets
|
|
|
|
|
|
|
(494,984
|
)
|
|
|
(849,544
|
)
|
|
|
(260,054
|
)
|
|
|
(38,098
|
)
|
Acquisition of intangible assets
|
|
|
|
|
|
|
|
|
|
|
(48,517
|
)
|
|
|
(438
|
)
|
|
|
(64
|
)
|
Acquisition of a subsidiary
|
|
|
|
|
|
|
(48,018
|
)
|
|
|
(267,566
|
)
|
|
|
(89,818
|
)
|
|
|
(13,159
|
)
|
Restricted cash
|
|
|
|
|
|
|
4,537
|
|
|
|
(1,282
|
)
|
|
|
25,587
|
|
|
|
3,749
|
|
Disposal of affiliate
|
|
|
|
|
|
|
|
|
|
|
300
|
|
|
|
|
|
|
|
|
|
Disposal of a subsidiary
|
|
|
|
|
|
|
|
|
|
|
(9,394
|
)
|
|
|
|
|
|
|
|
|
Proceeds from disposal of intangible assets
|
|
|
|
|
|
|
|
|
|
|
6,958
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
|
|
|
|
(538,465
|
)
|
|
|
(1,169,045
|
)
|
|
|
(324,723
|
)
|
|
|
(47,572
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements.
- F-5 -
SOLARFUN POWER HOLDINGS CO., LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS CONTD
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
|
|
Note
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
|
|
|
|
(RMB000)
|
|
|
(RMB000)
|
|
|
(RMB000)
|
|
|
(US$000)
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital contributed by minority interest shareholder
|
|
|
|
|
|
|
57,800
|
|
|
|
65,560
|
|
|
|
|
|
|
|
|
|
Net proceeds from issuance of redeemable ordinary shares
|
|
|
|
|
|
|
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
Net proceeds from issuance of convertible bonds
|
|
|
|
|
|
|
|
|
|
|
1,178,969
|
|
|
|
|
|
|
|
|
|
Net proceeds from issuance of ordinary shares
|
|
|
18
|
|
|
|
|
|
|
|
489,875
|
|
|
|
148,994
|
|
|
|
21,828
|
|
Dividends paid to minority shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,400
|
)
|
|
|
(498
|
)
|
Proceeds from exercise of stock options
|
|
|
|
|
|
|
6,690
|
|
|
|
12,091
|
|
|
|
1,103
|
|
|
|
162
|
|
Proceeds from short-term borrowings
|
|
|
|
|
|
|
1,570,106
|
|
|
|
3,119,682
|
|
|
|
1,900,675
|
|
|
|
278,450
|
|
Payment of short-term borrowings
|
|
|
|
|
|
|
(985,005
|
)
|
|
|
(2,985,852
|
)
|
|
|
(2,594,743
|
)
|
|
|
(380,132
|
)
|
Proceeds from long-term borrowings
|
|
|
|
|
|
|
|
|
|
|
200,000
|
|
|
|
300,000
|
|
|
|
43,950
|
|
Payment of long-term borrowings
|
|
|
|
|
|
|
(16,000
|
)
|
|
|
(15,000
|
)
|
|
|
(30,000
|
)
|
|
|
(4,395
|
)
|
Utilization of notes payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
147,580
|
|
|
|
21,621
|
|
Payment of notes payable
|
|
|
|
|
|
|
(14,020
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Advances from related parties
|
|
|
|
|
|
|
74,633
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of advances from related parties
|
|
|
|
|
|
|
|
|
|
|
(84,299
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
|
|
|
|
694,204
|
|
|
|
1,981,058
|
|
|
|
(129,791
|
)
|
|
|
(19,014
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
|
|
|
|
(864,864
|
)
|
|
|
137,973
|
|
|
|
234,819
|
|
|
|
34,402
|
|
Cash and cash equivalents at the beginning of year
|
|
|
|
|
|
|
1,137,792
|
|
|
|
272,928
|
|
|
|
410,901
|
|
|
|
60,197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at the end of year
|
|
|
|
|
|
|
272,928
|
|
|
|
410,901
|
|
|
|
645,720
|
|
|
|
94,599
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
|
|
|
|
|
31,372
|
|
|
|
102,440
|
|
|
|
156,143
|
|
|
|
22,875
|
|
Income tax paid
|
|
|
|
|
|
|
3,728
|
|
|
|
51,273
|
|
|
|
39,159
|
|
|
|
5,737
|
|
Realized gain from derivative contracts
|
|
|
|
|
|
|
|
|
|
|
49,216
|
|
|
|
37,255
|
|
|
|
5,458
|
|
Supplemental schedule of non-cash activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of fixed assets included in accounts payable,
accrued expenses and other liabilities
|
|
|
|
|
|
|
24,212
|
|
|
|
35,904
|
|
|
|
21,842
|
|
|
|
3,200
|
|
Conversion of convertible bonds into ordinary shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
179
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfer of unamortized debt issuance costs to equity
upon conversion of convertible bonds into ordinary shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5
|
)
|
|
|
(1
|
)
|
The accompanying notes are an integral part of the consolidated financial statements.
- F-6 -
SOLARFUN POWER HOLDINGS CO., LTD.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Solarfun Power Holdings Co., Ltd.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
earnings
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
Additional paid-
|
|
|
Statutory
|
|
|
(Accumulated
|
|
|
Non controlling
|
|
|
shareholders
|
|
|
|
Note
|
|
|
ordinary shares
|
|
|
Ordinary shares
|
|
|
in capital
|
|
|
reserves
|
|
|
losses)
|
|
|
Interest
|
|
|
equity
|
|
|
|
|
|
|
|
|
|
(RMB000)
|
|
|
(RMB000)
|
|
|
(RMB000)
|
|
|
(RMB000)
|
|
|
(RMB000)
|
|
|
(RMB000)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2007
|
|
|
|
|
|
|
239,994,754
|
|
|
|
193
|
|
|
|
1,565,524
|
|
|
|
16,024
|
|
|
|
96,474
|
|
|
|
10,151
|
|
|
|
1,688,366
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock option and vesting of
restricted stock units
|
|
|
20
|
|
|
|
604,490
|
|
|
|
1
|
|
|
|
6,689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,690
|
|
Capital contributed by non-controlling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57,800
|
|
|
|
57,800
|
|
Share-based compensation
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
29,640
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,640
|
|
Shares issued to depository bank
|
|
|
|
|
|
|
1,355,500
|
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of associated company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,593
|
|
|
|
35,593
|
|
Net income for the year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
148,037
|
|
|
|
(3,124
|
)
|
|
|
144,913
|
|
Appropriation of statutory reserves
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,524
|
|
|
|
(21,524
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2007
|
|
|
|
|
|
|
241,954,744
|
|
|
|
195
|
|
|
|
1,601,852
|
|
|
|
37,548
|
|
|
|
222,987
|
|
|
|
100,420
|
|
|
|
1,963,002
|
|
Exercise of stock option and vesting of
restricted stock units
|
|
|
20
|
|
|
|
1,040,590
|
|
|
|
1
|
|
|
|
12,090
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,091
|
|
Capital contributed by non-controlling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65,560
|
|
|
|
65,560
|
|
Disposal of subsidiary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,750
|
)
|
|
|
(8,750
|
)
|
Purchase of subsidiary shares from non
controlling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(167,620
|
)
|
|
|
(167,620
|
)
|
Settlement of stock options exercised with
shares held by depository bank
|
|
|
|
|
|
|
(1,040,590
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net proceeds from issuance of common stock
from additional equity offering
|
|
|
18
|
|
|
|
27,105,465
|
|
|
|
18
|
|
|
|
489,857
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
489,875
|
|
Share-based compensation
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
34,825
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34,825
|
|
Net loss for the year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(280,491
|
)
|
|
|
14,573
|
|
|
|
(265,918
|
)
|
Appropriation of statutory reserves
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,090
|
|
|
|
(10,090
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2008
|
|
|
|
|
|
|
269,060,209
|
|
|
|
214
|
|
|
|
2,138,624
|
|
|
|
47,638
|
|
|
|
(67,594
|
)
|
|
|
4,183
|
|
|
|
2,123,065
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment to retained earnings upon
adoption of ASC 815-40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
644,812
|
|
|
|
|
|
|
|
644,812
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of January 1, 2009
|
|
|
|
|
|
|
269,060,209
|
|
|
|
214
|
|
|
|
2,138,624
|
|
|
|
47,638
|
|
|
|
577,218
|
|
|
|
4,183
|
|
|
|
2,767,877
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options and
vesting of restricted stock units
|
|
|
20
|
|
|
|
893,760
|
|
|
|
|
|
|
|
1,101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,101
|
|
Settlement of stock option exercised
with shares held by depository bank
|
|
|
|
|
|
|
(893,760
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of convertible bonds
into ordinary shares
|
|
|
|
|
|
|
6,535
|
|
|
|
|
|
|
|
174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
174
|
|
Share-based compensation
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
42,671
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42,671
|
|
Shares issued to depository bank
|
|
|
|
|
|
|
2,200,000
|
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net proceeds from issuance of
common shares
|
|
|
19
|
|
|
|
19,441,995
|
|
|
|
12
|
|
|
|
148,982
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
148,994
|
|
Purchase of subsidiary shares from
non-controlling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
245
|
|
|
|
|
|
|
|
|
|
|
|
(1,094
|
)
|
|
|
(849
|
)
|
Net loss for the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(145,227
|
)
|
|
|
311
|
|
|
|
(144,916
|
)
|
Appropriation of statutory reserves
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,926
|
|
|
|
(21,926
|
)
|
|
|
|
|
|
|
|
|
Appropriation of retained earnings to
non-controlling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,400
|
)
|
|
|
(3,400
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2009
|
|
|
|
|
|
|
290,708,739
|
|
|
|
227
|
|
|
|
2,331,797
|
|
|
|
69,564
|
|
|
|
410,065
|
|
|
|
|
|
|
|
2,811,653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2009, in US$000
|
|
|
|
|
|
|
|
|
|
|
33
|
|
|
|
341,610
|
|
|
|
10,191
|
|
|
|
60,075
|
|
|
|
|
|
|
|
411,909
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements.
- F-7 -
SOLARFUN POWER HOLDINGS CO., LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2008 AND 2009 AND
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2009
1. ORGANIZATION AND BASIS OF PRESENTATION
Solarfun Power Holdings Co., Ltd. (the Company) was incorporated under the laws of the Cayman
Islands on May 12, 2006 and its principal activity is investment holding. The principal
activities of its subsidiaries are described in the table below. The Company together with its
subsidiaries listed below are referred to as the Group hereinafter.
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 net of issuance costs.
On July 31, 2007, the Group acquired in aggregate 52% of the equity interest in Jiangsu Yangguang
Solar Technology Co., Ltd. for total cash consideration of approximately RMB51,251,000 from Nantong
Linyang Electric Power Investment Co., Ltd., a company whose controlling owner is also the chairman
and a significant shareholder of the Company, and Lianyungang Suyuan Group Co., Ltd., a third party
company. The Group accounted for this transaction as an acquisition of assets.
On November 30, 2007, Linyang Solar Power Investment Holding Ltd. (Linyang Solar Power), a
wholly-owned subsidiary of the Company, transferred all of its 100% equity interest in Jiangsu
Linyang Solarfun Co., Ltd. (Linyang Solarfun) to Solarfun Power Hong Kong Limited, a wholly-owned
subsidiary of Linyang Solar Power newly established in Hong Kong on May 16, 2007, for cash
consideration of RMB199 million. The Group accounted for this transaction as a reorganization of
entities under common control in a manner similar to a pooling-of-interests. Accordingly, the
transaction was accounted for at historical cost.
Pursuant to a written resolution of Leshan Jiayangs board of directors dated January 1, 2008, the
Group would establish a working group for the purpose to liquidate the Companys subsidiary, Leshan
Jiayang which is dormant and has insignificant operations and net assets. The liquidation process
was completed during the year ended 31 December 2008.
In February 2008, the Group established Solarfun Power Deutschland GmbH (Solarfun Deutschland).
The registered capital of the Solarfun Deutschland is Euro100,000 of which all had been contributed
by the Group on February 14, 2008. The principal activity of Solarfun Deutschland is to sell PV
products in the European markets. Solarfun Deutschland has not yet commenced operation as of 31
December 2009.
On August 1, 2008, the Group acquired the remaining 48% equity interest in Yangguang Solar for
total cash consideration of approximately RMB355,872,000 from Nantong Linyang Electric Power
Investment Co., Ltd. (Nantong Linyang), Jiangsu Qitian Group Co., Ltd. (Qitian Group) and
Jiangsu Guangyi Technology Co., Ltd. (Jiangsu Guangyi). Subsequent to this acquisition, Yangguang
Solar became a wholly-owned subsidiary of the Company. The Group accounted for this transaction as
a business combination.
Pursuant to a share transfer agreement signed between one subsidiary of the Group, Shanghai Linyang
Solar Technology Co., Ltd. (Shanghai Linyang), with three individual non-controlling shareholders
of Shanghai Linyang (i.e. Cui Rongqiang, Gu Yongliang, Wang Guoyu) on 16 November 2009, the three
individual shareholders agreed to transfer 10%, 5% and 2% shares, respectively, to Jiangsu Linyang
Solarfun Co., Ltd.(Lingyang Solarfun). The cash consideration for the share transfer was
RMB500,000, RMB250,000 and RMB100,000, respectively, which is the original paid-in-capital of the
three individual shareholders when Shanghai Linyang was set up in 2006. Before the share transfer,
Shanghai Linyang has distributed dividend to the three individual shareholders for RMB3,400,000 by
cash, representing the profit attributed to the non controlling shareholders from the date of
inception to the date of share transfer. After the share transfer, Shanghai Linyang became a
wholly-owned subsidiary of the Group.
- F-8 -
SOLARFUN POWER HOLDINGS CO., LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2008 AND 2009 AND
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2009
1. ORGANIZATION AND BASIS OF PRESENTATION (CONTD)
As of December 31, 2009, the Companys subsidiaries included the following entities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Date of incorporation/
|
|
Place of
|
|
Percentage of
|
|
|
|
|
|
establishment/
|
|
incorporation/
|
|
shareholding/
|
|
|
|
Name of subsidiary
|
|
acquisition
|
|
establishment
|
|
ownership
|
|
|
Principal activities
|
|
|
|
|
Linyang Solar Power Investment Holding Ltd. (Linyang Solar Power)
|
|
May 17, 2006
|
|
British Virgin Islands
|
|
|
100
|
%
|
|
Investment holding
|
|
|
|
|
|
|
|
|
|
|
|
Solarfun Power Hong Kong Limited (Solarfun HK)
|
|
May 16, 2007
|
|
Hong Kong
|
|
|
100
|
%
|
|
Investment holding and international procurement
|
|
|
|
|
|
|
|
|
|
|
|
Solarfun USA, Inc. (Solarfun USA)
|
|
September 18,
2007
|
|
United States of America
|
|
|
100
|
%
|
|
International sales
|
|
|
|
|
|
|
|
|
|
|
|
Solarfun Power Deutschland GmbH (Solarfun Deutschland)
|
|
February 14, 2008
|
|
Deutschland
|
|
|
100
|
%
|
|
International sales
|
|
|
|
|
|
|
|
|
|
|
|
Jiangsu Linyang Solarfun Co., Ltd. (Linyang Solarfun)
|
|
August 27, 2004
|
|
The Peoples Republic of China (the PRC)
|
|
|
100
|
%
|
|
Development, manufacturing and sales of photovoltaic (PV) products to overseas customers
|
|
|
|
|
|
|
|
|
|
|
|
Shanghai Linyang Solar Technology Co., Ltd. (Shanghai Linyang)
|
|
March 29, 2006
|
|
The PRC
|
|
|
100
|
%
|
|
Sales of PV products to PRC customers
|
|
|
|
|
|
|
|
|
|
|
|
Jiangsu Linyang Solarfun Engineering Research and Development Center Co., Ltd. (Linyang R&D)
|
|
April 9, 2007
|
|
The PRC
|
|
|
100
|
%
|
|
Research and development
|
|
|
|
|
|
|
|
|
|
|
|
Jiangsu Yangguang Solar Technology Co., Ltd. (Yangguang Solar)
|
|
July 31, 2007
|
|
The PRC
|
|
|
100
|
%
|
|
Manufacturing of silicon ingots
|
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements are prepared in accordance with U.S. generally accepted
accounting principles (US GAAP).
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 Standards Codification (ASC) subtopic 323-10 (ASC 323-10)
The
Equity Method of Accounting for Investments in Common Stock
in accounting for its investments.
Under ASC 323-10, 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
control. Cost method is used for investments over which the Group does not have the ability to
exercise significant influence or control.
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.
- F-9 -
SOLARFUN POWER HOLDINGS CO., LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2008 AND 2009 AND
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2009
2.
|
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTD)
|
Foreign Currency
The functional currency of the Company and each of its subsidiaries is Renminbi as determined based
on the criteria of ASC 830
Foreign Currency Translation
. The reporting currency of the Company is
also Renminbi. 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 RMB6.8259 on December 31, 2009 in the City of New York for
cable transfers of Renminbi as certified for customs purposes by the Federal Reserve Bank of New
York. No representation is made that the Renminbi amounts could have been, or could be, converted
into United States dollars at such rate.
Use of Estimates
The preparation of the 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. Significant estimates and assumptions reflected in the Groups
financial statements include, but are not limited to, provision for doubtful debts, provision for
advances to suppliers, provision for warranty, inventory write-down, useful lives of fixed assets
and intangible assets, impairment of fixed assets, intangible assets and goodwill, valuation
allowances on deferred tax assets, stock compensation expenses and fair values of derivative
contracts.
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 as security for letters of credit facilities,
notes payable and PRC Custom deposits and therefore are not available for the Groups use. 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 historical experience, account balance aging, prevailing economic
conditions and an assessment of specific evidence indicating troubled collection. Accounts
receivable is written-off after all collection efforts have ceased.
- F-10 -
SOLARFUN POWER HOLDINGS CO., LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2008 AND 2009 AND
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2009
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTD)
Debt Issuance Costs
Debt issuance costs represent the incurred costs directly attributable to the issuance of the
convertible notes. These costs, presented as non-current assets, are deferred and amortized
ratably using the effective interest method from the debt issuance date over the life of the
convertible notes. Upon the conversion of the notes, the related debt issuance costs will be
debited to shareholders equity.
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:
|
|
|
|
|
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 disposal 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 payments, interest and other costs
relating to the construction are capitalized and transferred to fixed assets upon completion and
depreciation commences when the asset is available for its intended use.
Interest costs are capitalized if they are incurred during the acquisition, construction or
production of a
qualifying asset and such costs could have been avoided if expenditures for the assets have not
been
made. Capitalization of interest costs commences when the activities to prepare the asset are in
progress
and expenditures and borrowing costs are being incurred. Interest costs are capitalized until the
assets are ready for their intended use. Interest capitalized as of December 31, 2008 and 2009
amounted to approximately RMB22,504,000 and RMB4,290,000 (US$628,489), respectively.
Intangible Assets
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 lives of the land use rights agreements, which have terms of tenure ranging from 45 to 50
years.
- F-11 -
SOLARFUN POWER HOLDINGS CO., LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2008 AND 2009 AND
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2009
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTD)
Goodwill
Goodwill represents the excess of the purchase price over the amounts assigned to the fair value of
the assets acquired and the liabilities assumed of the acquired business.
Goodwill is reviewed at least annually for impairment, or earlier if there is an indication of
impairment, in accordance with ASC 350,
Goodwill and Other
Intangible Assets
. The Group assigns
and assesses goodwill for impairment at the reporting unit level. As of December 31, 2009, goodwill
relates to the acquisition of Yangguang Solar.
The performance of the impairment test involves a two-step process. The first step of the
impairment test involves comparing the fair value of the reporting unit with its carrying amount,
including goodwill. Fair value is primarily determined by computing the future discounted cash
flows expected to be generated by the reporting unit. If the reporting units carrying value
exceeds its fair value, goodwill may be impaired. If this occurs, the Group performs the second
step of the goodwill impairment test to determine the amount of impairment loss.
The fair value of the reporting unit is allocated to its assets and liabilities in a manner similar
to a purchase price allocation in order to determine the implied fair value of the reporting units
goodwill. If the implied goodwill fair value is less than its carrying value, the difference is
recognize an impairment loss.
The Group performed a goodwill impairment test as of December 31, 2009 and no impairment loss was
recognized.
Impairment of Long-Lived Assets
The Group evaluates its long-lived assets or asset groups, including intangible assets with finite
lives, 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 for impairment by comparing the carrying amount of the assets to the 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 flows 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
Financial instruments include cash and cash equivalents, restricted cash, accounts receivable,
accounts and notes payable, short-term bank borrowings, amounts due to/from related parties and
convertible notes. The financial instruments other than convertible bonds approximate their fair
values due to the short-term maturity of these instruments. Upon the adoption of ASC subtopic
815-40 (ASC 815-40)
, Derivatives and Hedging: Contracts in Entitys Own Equity
on January 1,
2009, the conversion option was bifurcated from the convertible bonds and was accreted to the
redemption using the effective interest method. The Group determined the fair value of the
conversion option based on a valuation performed by an independent third-party valuation firm.
The long-term bank borrowings approximate their fair value since they bear interest rates which
approximate market interest rates.
- F-12 -
SOLARFUN POWER HOLDINGS CO., LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2008 AND 2009 AND
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2009
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTD)
Financial Instruments Embedded Foreign Currency Derivatives
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 which are required to be separately accounted for in accordance
with ASC 815-10 (ASC 815-10)
Derivatives and
Hedging: Overall
. The embedded foreign currency
derivatives are separately accounted for and measured at fair value with changes in fair value
recorded as a separate line item in the consolidate statements of operations and presented in the
consolidated statements of cash flows as an operating activity. Embedded foreign currency
derivatives are presented as current assets or liabilities. The Group does not enter into
derivative contracts for speculative purposes and hedge accounting has not been applied.
Financial Instruments Foreign Currency Derivative Contracts
The Groups primary objective for holding foreign currency derivative contracts is to manage its
foreign currency risk principally arising from sales contracts denominated in Euros. The Group
records these derivative instruments as current assets or current liabilities, measured at fair
value.
During the years ended December 31, 2008 and 2009, the Group entered into cross-currency exchange
rate agreements to receive RMB and sell other currencies. Changes in the fair values of these
derivative instruments are recognized in the consolidated statements of operations and presented in
the consolidated statements of cash flows as an operating activity. The Group has elected not to
apply hedge accounting to these derivative instruments. As of December 31, 2008, the Group had
outstanding cross-currency exchange rate contracts with notional amounts of Euro169 million and
US$57 million. As of December 31, 2009, the Group had outstanding cross-currency exchange rate
contracts with notional amounts of Euro105 million. The Group estimates the fair value of its
foreign currency derivatives using a pricing model based on market observable inputs.
Revenue Recognition
The Groups primary business activity is to produce and sell PV modules. The Group periodically,
upon special request from customers, sells PV cells and silicon ingots. The Group records revenue
related to the sale of PV modules, PV cells and silicon ingots when the criteria of ASC 605-10
Revenue Recognition: Overall
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 collectability 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 Cost, Insurance and Freight (CIF) and Freight on Board (FOB) shipping point
whereby the customer takes title and assumes the risks and rewards of ownership of the products
upon delivery to the shipper. The customer bears all costs and risks of loss or damage to the goods
from that point. Under some sales arrangements, the Group requires its customers to prepay prior to
shipment. Other than warranty obligations, the Group does not have any commitments or obligations
to deliver additional products or services to the customers. Based on the above, the Group records
revenue related to product sales upon delivery of the product to the shipper.
- F-13 -
SOLARFUN POWER HOLDINGS CO., LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2008 AND 2009 AND
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2009
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTD)
Revenue Recognition (Contd)
In limited situations where the Group provides products to the customers as incentives, such
incentives are recognized as a reduction to the agreed unit purchase price and only subsequently
recognized as sales upon the delivery of these products. 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.
The Group enters into processing service arrangement to process PV cells into PV modules. For this
service arrangement, the Group purchases PV cells from a customer and contemporaneously agrees to
sell a specified quantity of PV modules back to the same customer. The quantity of PV modules
sold back to the customers under these processing arrangements is consistent with the amount of PV
cells purchased from the customer based on current production conversion rates. In accordance with
ASC 845-15,
Accounting for Purchases and Sales of Inventory with the Same Counterparty
, the Group
records the amount of revenue on these processing transactions based on the amount received for PV
modules sold less the amount paid for the PV cells purchased from the customer. These sales are
subject to all of the above-noted criteria 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. The Group does not offer
implicit or explicit rights of return, regardless of whether goods were shipped to the distributors
or shipped directly to the end user, other than due to product defect.
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 Expenditures
Advertising costs are expensed when incurred and are included in selling expenses. Advertising
expenses were approximately RMB658,000, RMB1,383,500 and RMB1,962,000 (US$287,435) for the years
ended December 31, 2007, 2008 and 2009, respectively.
- F-14 -
SOLARFUN POWER HOLDINGS CO., LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2008 AND 2009 AND
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2009
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTD)
Warranty Cost
The Group primarily provides standard warranty coverage on its PV modules sold to customers. The
standard warranty provides for a 2 to 5-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 warranty claim experience. Based on the above considerations and managements
ability and intention to provide refunds for defective products, the Group accrues for warranty
costs for the 2 to 5-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 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 its 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 Grants
Government grants are recognized when all the conditions attached to the grants have been met.
Accounting for Income Taxes and Uncertain Tax Positions
The Group accounts for income taxes in accordance with ASC 740,
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.
Effective January 1, 2007, the Group adopted ASC 740-10,
Accounting for Uncertainty in Income
Taxes
, which clarifies the accounting for uncertainty in income taxes by prescribing the
recognition threshold a tax position is required to meet before being recognized in the financial
statements. The cumulative effects of applying ASC 740-10 is recorded as an adjustment to retained
earnings as of the beginning of the period of adoption. The Groups adoption of ASC 740-10 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 year ended December 31,
2007. As of December 31, 2008 and 2009, the Group recorded unrecognized tax benefits of
approximately RMB27,385,000 and RMB27,385,000 (US$4,011,925), respectively.
The Group has elected to classify interest and/or penalties related to an uncertain position, if
and when required, as part of other operating expenses in the consolidated statements of
operations. No such amounts have been incurred or accrued through December 31, 2009 by the Group.
Based on existing PRC tax regulations, the tax years of Linyang Solarfun, Shanghai Linyang,
Yangguang Solar and Linyang R&D for the years ended December 31, 2004 through 2009 remain open for
examination by the tax authorities.
- F-15 -
SOLARFUN POWER HOLDINGS CO., LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2008 AND 2009 AND
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2009
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTD)
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 a 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: a) ownership is
transferred to the lessee by the end of the lease term; b) there is a bargain purchase option; c)
the lease term is at least 75% of the propertys estimated remaining economic life; or d) 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. Rental
expenses were approximately RMB3,742,000, RMB6,307,000 and RMB9,644,000 (US$1,412,854) for the
years ended December 31, 2007, 2008 and 2009, respectively. The Group has no capital lease for any
of the periods stated herein.
Net Income (Loss) Per Share
Net income (loss) per share is calculated in accordance with ASC 260-10,
Earnings Per Share
.
Basic income (loss) 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 (loss) 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 bonds are included in the
computation of diluted income (loss) per ordinary share on an if-converted basis, when the impact
is dilutive. Dilutive ordinary equivalent shares consist of ordinary shares issuable upon the
exercise of outstanding share options and restricted stock units. Ordinary share equivalents are
excluded from the computation of diluted income (loss) per share if their effects would be
anti-dilutive.
Stock Compensation
Stock awards granted to employees and non-employee are accounted for under ASC 718-10,
Share-Based
Payment
and ASC 505-50,
Accounting for Equity Instruments That Are Issued to Other Than Employees
for Acquiring, or in Conjunction with Selling, Goods or Services
, respectively.
In accordance with ASC 718-10, 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
compensation expense using the straight-line method for all share options granted with service
conditions that have a graded vesting schedule.
ASC 718-10 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.
- F-16 -
SOLARFUN POWER HOLDINGS CO., LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2008 AND 2009 AND
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2009
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTD)
Comparative Financial Statements
Certain comparative amounts in the consolidated financial statements have been reclassified to
conform to the current years presentation.
Recent Accounting Pronouncements
In October 2009, the FASB issued Accounting Standards Update (ASU) No. 2009-13,
Multiple-Deliverable Revenue Arrangements
(ASU 2009-13). ASU 2009-13 amends ASC 605-25,
Revenue Recognition: Multiple-Element Arrangements
, regarding revenue arrangements with multiple
deliverables. These updates addresses how to determine whether an arrangement involving multiple
deliverables contains more than one unit of accounting, and how the arrangement consideration
should be allocated among the separate units of accounting. These updates are effective for fiscal
years beginning after June 15, 2010 and may be applied retrospectively or prospectively for new or
materially modified arrangements. In addition, early adoption is permitted. The Group is currently
evaluating the potential impact of ASU 2009-13 on its financial statements.
In October 2009, the FASB issued ASU No. 2009-15,
Accounting for Own-Share Lending Arrangements in
Contemplation of Convertible Debt Issuance or Other Financing
(ASU 2009-15). ASU 2009-15 amends
ASC 470-20,
Debt: Debt with Conversion and Other Options
, to include the accounting for own-share
lending arrangements in contemplation of convertible debt issuance or other financing. ASU 2009-15
is effective for fiscal years beginning on or after December 15, 2009 and shall be applied
retrospectively for all arrangements outstanding as of the beginning of fiscal years beginning on
or after December 15, 2009 and for arrangements entered into on or after the beginning of the first
reporting period that begins on or after June 15, 2009. Early adoption is not permitted. The
Group has determined that upon the adoption of ASU 2009-15 on January 1, 2010, the redeemable
ordinary shares issued in January 2008 concurrent with the convertible bond issuance (see Note 11)
is regarded as an own-share lending arrangement. As such, the share-lending arrangement is measured
at fair value, and recognized as an issuance cost with an offset to equity. Such issuance cost
will be amortized as interest expense over the life of the financing arrangement. Retrospective
adjustment of opening retained earnings as of January 1, 2010 will be recorded for the difference
between the amounts previously recognized and the amount that would have been recognized if ASU
2009-15 had been applied from the issuance date of the redeemable ordinary shares.
In January 2010, the FASB issued ASU No. 2010-06 (ASU 2010-06),
Fair Value Measurements and
Disclosures: Improving Disclosures about Fair Value Measurements
. ASU 2010-06 amends ASC 820 to
require a number of additional disclosures regarding (1) the different classes of assets and
liabilities measured at fair value, (2) the valuation techniques and inputs used, (3) the activity
in Level 3 fair value measurements, and (4) the transfers between Levels 1, 2, and 3. The new
disclosures and clarifications of existing disclosures are effective for interim and annual
reporting periods beginning after December 15, 2009, except for the disclosures about purchases,
sales, issuances, and settlements in the roll forward of activity in Level 3 fair value
measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010,
and for interim periods within those fiscal years. The Group does not expect that the adoption of
ASU 2010-06 will have a material impact on its consolidated financial statements.
- F-17 -
SOLARFUN POWER HOLDINGS CO., LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2008 AND 2009 AND
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2009
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTD)
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.
The Group has approximately RMB431,252,000 (US$63,178,775) of cash and bank deposits in the PRC,
which constitute about 67% of total cash and cash equivalents. Historically, deposits in Chinese
banks are secured due to the state policy on protecting depositors interests. However, China
promulgated a new Bankruptcy Law in August 2006 that came into effect on June 1, 2007, which
contains a separate article expressly stating that the State Council promulgates implementation
measures for the bankruptcy of Chinese banks based on the Bankruptcy Law when necessary. Under the
new Bankruptcy Law, a Chinese bank can go into bankruptcy. In addition, since Chinas concession to
the World Trade Organization (WTO), foreign banks have been gradually permitted to operate in
China which has led to increased competition for Chinese banks. Further, the global financial
crisis arising in the third quarter of 2008 has increase the risk of bank bankruptcy in the PRC.
In the event of bankruptcy, it is uncertain whether the Group will be able to receive its deposits
back in full since it is unlikely to be classified as a secured creditor based on PRC laws. The
Group mitigates its risk of loss by continuing to monitor the financial strength of the financial
institutions in which it makes deposits.
Advances made to suppliers are typically unsecured and arise from deposits paid in advance for
future purchases of raw materials. As a percentage of total advances, the top five suppliers
accounted for an aggregate of 42.3% and 41.9% as of December 31, 2008 and 2009, respectively. Due
to the Groups concentration of advances made to a limited number of suppliers and the significant
prepayments that are made to them, any negative events or deterioration in financial strength with
respect to the Groups suppliers may cause a 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 its
suppliers prior to making any advances and the ongoing monitoring of its suppliers performance.
With respect to accounts receivable, the Group conducts periodic credit evaluation of its customers
but does not require collateral or other security from its 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 an aggregate of
43.0%, 53.2% and 65.3% for the years ended December 31, 2007, 2008 and 2009, respectively. The loss
of sales from any of these customers would have a significant negative impact 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.
- F-18 -
SOLARFUN POWER HOLDINGS CO., LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2008 AND 2009 AND
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2009
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTD)
Concentration of Risks (contd)
Concentration of suppliers
A significant portion of the Groups raw materials are sourced from its five largest suppliers who
collectively accounted for an aggregate of 59.0%, 42.0% and 51.6% of the Groups total raw material
purchases for the years ended December 31, 2007, 2008 and 2009, respectively. Failure to develop
or maintain relationships with these suppliers may cause the Group to be unable to source adequate
raw materials needed to manufacture its PV products. Any disruption in the supply of raw materials
to the Group may adversely affect the Groups business, financial condition and results of
operations.
3. ACQUISITIONS
On July 31, 2007, the Group entered into an agreement with Nantong Linyang Electric Power
Investment Co., Ltd. (Nantong Linyang), a company whose controlling owner is also a significant
shareholder and chairman of the Company, and Lianyungang Suyuan Group Co., Ltd. (Qitian Group),
to acquire in aggregate a 52% equity interest in Yangguang Solar from Nantong Linyang for cash
consideration of RMB51,251,200. At the date of acquisition, as Yangguang Solar did not possess all
the elements that are necessary to conduct normal operations as a business and had not yet
commenced operations, such acquisition was accounted for as an acquisition of assets. On August 1,
2008, the Group acquired the remaining 48% equity interest in Yangguang Solar for total cash
consideration of approximately RMB355,872,000 from Nantong Linyang, Qitian Group and Jiangsu
Guangyi Technology Co., Ltd. (Jiangsu Guangyi). The transaction was completed on August 1, 2008
and has been accounted for as a business combination as the acquiree meets the definition of a
business. The excess purchase price over the fair value was recorded as goodwill. The acquired
assets and liabilities were recorded at their fair value at the date of acquisition. Yangguang
Solar is mainly engaged in the manufacturing of PV cells and other electronic components.
As of July 31, 2007, the fair values of the net identifiable assets of Yangguang Solar acquired
were as follows:
|
|
|
|
|
|
|
|
|
|
|
RMB000
|
|
|
US$000
|
|
|
|
|
|
|
|
|
|
|
Net assets acquired:
|
|
|
|
|
|
|
|
|
Fixed assets
|
|
|
17,685
|
|
|
|
2,592
|
|
Intangible assets
|
|
|
82,324
|
|
|
|
12,066
|
|
Deferred tax assets
|
|
|
3,792
|
|
|
|
556
|
|
Current assets
|
|
|
3,907
|
|
|
|
573
|
|
Cash and bank balances
|
|
|
3,233
|
|
|
|
474
|
|
Current liabilities
|
|
|
(14,979
|
)
|
|
|
(2,196
|
)
|
Deferred tax liabilities
|
|
|
(9,118
|
)
|
|
|
(1,336
|
)
|
Minority interest
|
|
|
(35,593
|
)
|
|
|
(5,217
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51,251
|
|
|
|
7,512
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid
|
|
|
51,251
|
|
|
|
7,512
|
|
|
|
|
|
|
|
|
- F-19 -
SOLARFUN POWER HOLDINGS CO., LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2008 AND 2009 AND
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2009
3. ACQUISITIONS (CONTD)
On August 1, 2008, the acquired assets and liabilities were recorded at their fair values at the
date of acquisition. The purchase price was allocated as follows:
|
|
|
|
|
|
|
|
|
|
|
RMB000
|
|
|
US$000
|
|
|
|
|
|
|
|
|
|
|
Fixed assets
|
|
|
162,313
|
|
|
|
23,791
|
|
Intangible assets
|
|
|
96,657
|
|
|
|
14,167
|
|
Deferred tax assets
|
|
|
3,843
|
|
|
|
563
|
|
Current assets
|
|
|
157,295
|
|
|
|
23,055
|
|
Current liabilities
|
|
|
(90,386
|
)
|
|
|
(13,248
|
)
|
Non-current liabilities
|
|
|
(88,800
|
)
|
|
|
(13,015
|
)
|
Deferred tax liabilities
|
|
|
(19,125
|
)
|
|
|
(2,803
|
)
|
Goodwill
|
|
|
134,735
|
|
|
|
19,749
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
356,532
|
|
|
|
52,259
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash consideration (Note a)
|
|
|
355,872
|
|
|
|
52,162
|
|
Cost of acquisition
|
|
|
660
|
|
|
|
97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total purchase consideration
|
|
|
356,532
|
|
|
|
52,259
|
|
|
|
|
|
|
|
|
Note a:
The cash consideration was agreed to be settled within 180 days after August 1, 2008. As of
December 31, 2008, the remaining unpaid consideration owed to the third party and related parties
amounted to approximately RMB55,605,000 (US$8,150,238) (Note 15) and RMB33,363,000 (US$4,890,143)
(Note 29), respectively. Such amount was subsequently settled in April 2009.
4. ACCOUNTS RECEIVABLE
The Groups accounts receivable is net of the allowance for doubtful accounts. The allowance for
doubtful accounts activity is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
|
(RMB000)
|
|
|
(RMB000)
|
|
|
(US$000)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
|
2,619
|
|
|
|
2,267
|
|
|
|
332
|
|
Provision for doubtful debt
|
|
|
|
|
|
|
3,723
|
|
|
|
546
|
|
Written-off
|
|
|
(352
|
)
|
|
|
(1,807
|
)
|
|
|
(265
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
|
2,267
|
|
|
|
4,183
|
|
|
|
613
|
|
|
|
|
|
|
|
|
|
|
|
- F-20 -
SOLARFUN POWER HOLDINGS CO., LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2008 AND 2009 AND
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2009
5. INVENTORIES NET
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
|
(RMB000)
|
|
|
(RMB000)
|
|
|
(US$000)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Raw materials
|
|
|
488,582
|
|
|
|
277,553
|
|
|
|
40,662
|
|
Work-in-progress
|
|
|
56,498
|
|
|
|
129,500
|
|
|
|
18,972
|
|
Finished goods
|
|
|
186,628
|
|
|
|
376,920
|
|
|
|
55,219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
731,708
|
|
|
|
783,973
|
|
|
|
114,853
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008 and 2009, raw materials of approximately RMB53,288,000 and RMB15,131,000
(US$2,216,704), respectively, of the Group were held in custody by other parties for processing.
The write-down of inventories amounted to RMB815,000, RMB413,789,000 and RMB282,574,000
(US$41,397,325) for the years ended December 31, 2007, 2008 and 2009, respectively.
6. ADVANCE TO SUPPLIERS
Advance to suppliers represents interest-free cash deposits paid to suppliers for future purchases
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 credit quality of the suppliers is continually assessed.
If there is deterioration in the creditworthiness of the suppliers, the Group will seek to recover
the advances from the suppliers and provide for losses on advances which are akin to receivables in
cost of revenue because of the suppliers inability to return the advances. A charge to cost of
revenue will be recorded in the period in which a loss is determined to be probable and the amount
can be reasonably estimated. The Group has recorded a charge to cost of revenue amounting to
approximately RMB nil, RMB41,962,000 and RMB234,724,000 (US$34,387,260), for the years ended
December 31, 2007, 2008 and 2009, respectively, to reflect the probable loss arising from the
suppliers failure to perform under the contracts.
7. OTHER CURRENT ASSETS
Other current assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
|
(RMB000)
|
|
|
(RMB000)
|
|
|
(US$000)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
VAT recoverable
|
|
|
141,868
|
|
|
|
37,686
|
|
|
|
5,521
|
|
Other receivables
|
|
|
123,989
|
|
|
|
13,115
|
|
|
|
1,921
|
|
Prepaid expenses
|
|
|
215,892
|
|
|
|
129,514
|
|
|
|
18,974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
481,749
|
|
|
|
180,315
|
|
|
|
26,416
|
|
|
|
|
|
|
|
|
|
|
|
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.
- F-21 -
SOLARFUN POWER HOLDINGS CO., LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2008 AND 2009 AND
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2009
7. OTHER CURRENT ASSETS (CONTD)
The balance of other receivables as of December 31, 2008 and 2009 included an amount of
approximately RMB79,081,000 and nil, respectively, for export VAT refund receivable. The balance
also included an amount of approximately RMB9,642,000 and nil as of December 31, 2008 and 2009,
respectively, for an insurance claim for certain damaged fixed assets. The remaining balances of
other receivables as of December 31, 2008 and 2009, primarily consist of deposits provided to the
customs office of approximately RMB7,546,000 and nil, respectively, deposits provided to
consumables suppliers of approximately RMB6,000,000 and RMB6,000,000 (US$879,005), respectively,
and deposits provided to Bank of New York for provision of trust service to ADS holders of
approximately RMB1,739,000 and RMB3,083,000 (US$451,662), respectively.
Prepaid expenses mainly represent advances made to E-mei Semiconductors Material Factory (E-mei)
for silicon wafers purchasing. In October and November, 2006, the Group entered into raw materials
purchase contracts for silicon wafers with E-mei, a third-party supplier. According to these
contracts, the Group committed to pay advances totaling RMB220 million to E-mei in return for a
five-year exclusive procurement right to silicon wafers produced by E-meis new production
facilities. The procurement right entitles the Group to purchase the above mentioned 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 million committed advances was 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.
Construction of the new production facilities were completed in October 2008. Amounts payable from
future raw material purchases from E-mei will be offset against the advances. However, for each
purchase, the Group can only offset 30% of the amount against the purchase advances. After the
Group has fully utilized all of the advances, the discount on purchase will be adjusted downwards
to 3% to 5% of the market price at the time of purchase.
In December 2008, the Group commenced a renegotiation of the arrangement with E-mei and a
renegotiated contract was subsequently signed in March 2009. The Group is entitled to purchase the
silicon wafers at a discount of 5% below market price at the time of purchase and can offset 55% of
the amount against the purchase advances. The remaining balance of 45% of the cost of raw materials
would be settled in cash by the Group. After the Group has fully utilized the advances, the Group
is no longer entitled to purchase silicon wafers at the above discount.
The above arrangement, comprising of a lease component and a raw material supply component, is
accounted for in accordance to ASC 840-10,
Determining Whether an Arrangement Contains a Lease
which requires the advanced payments to be allocated to the lease and non-lease components on a
relative fair value basis. The lease component is accounted for as an operating lease in
accordance with ASC 840-10
Accounting for Leases
. As of December 31, 2009, the Group expects the
full amount of its advanced payments to be utilized in the next 12 months based on an assessment of
its raw material needs and the expected available output to be received from E-mei. Accordingly,
the full amount of advanced payments is presented as a current asset as at December 31, 2009.
- F-22 -
SOLARFUN POWER HOLDINGS CO., LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2008 AND 2009 AND
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2009
8. FIXED ASSETS NET
Fixed assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
|
(RMB000)
|
|
|
(RMB000)
|
|
|
(US$000)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Buildings
|
|
|
190,933
|
|
|
|
232,344
|
|
|
|
34,039
|
|
Plant and machinery
|
|
|
881,210
|
|
|
|
1,489,108
|
|
|
|
218,155
|
|
Furniture, fixtures and office equipment
|
|
|
23,769
|
|
|
|
35,059
|
|
|
|
5,136
|
|
Computer software
|
|
|
1,764
|
|
|
|
2,202
|
|
|
|
323
|
|
Motor vehicles
|
|
|
7,542
|
|
|
|
8,203
|
|
|
|
1,202
|
|
Construction-in-progress
|
|
|
485,877
|
|
|
|
67,086
|
|
|
|
9,828
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,591,095
|
|
|
|
1,834,002
|
|
|
|
268,683
|
|
Less: Accumulated depreciation
|
|
|
(98,520
|
)
|
|
|
(247,719
|
)
|
|
|
(36,291
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,492,575
|
|
|
|
1,586,283
|
|
|
|
232,392
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense amounted to approximately RMB26,731,000, RMB64,929,000 and RMB 149,854,000
(US$21,953,735) for the years ended December 31, 2007, 2008 and 2009, respectively. As of December
31, 2008 and 2009, buildings with a net book value of RMB29,645,723 and RMB28,138,995
(US$4,122,386), respectively, were pledged for short-term bank borrowings of RMB355,000,000 and
RMB200,000,000 (US$29,300,166), respectively (Note 12).
9. INTANGIBLE ASSETS NET
Intangible assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
|
(RMB000)
|
|
|
(RMB000)
|
|
|
(US$000)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land use rights
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
|
219,253
|
|
|
|
215,062
|
|
|
|
31,507
|
|
Less: Land use rights disposal
|
|
|
(3,555
|
)
|
|
|
|
|
|
|
|
|
Less: Accumulated amortization
|
|
|
(2,962
|
)
|
|
|
(6,499
|
)
|
|
|
(952
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
212,736
|
|
|
|
208,563
|
|
|
|
30,555
|
|
|
|
|
|
|
|
|
|
|
|
Land use rights represent amounts paid for the rights to use eleven parcels of land in the PRC
where the Groups premises are located. Three land use rights were acquired from Huaerli (Nantong)
Electronics Co., Ltd., a company whose controlling owner is also a significant shareholder of the
Company (Note 25).
As of December 31, 2008 and 2009, land use rights with net book value of RMB6,835,475 and
RMB6,699,211 (US$981,440) was pledged for short-term bank borrowings of RMB355,000,000 and
RMB200,000,000 (US$29,300,166), respectively
(Note 12).
For each of the next five years, annual amortization expense of the land use rights will be
approximately RMB4,474,855 (US$655,570).
- F-23 -
SOLARFUN POWER HOLDINGS CO., LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2008 AND 2009 AND
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2009
10. GOODWILL
The changes in the carrying amount of goodwill for the years ended December 31, 2008 and 2009 were
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
|
(RMB000)
|
|
|
(RMB000)
|
|
|
(US$000)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
|
|
|
|
|
134,735
|
|
|
|
19,739
|
|
Goodwill acquired during the year
|
|
|
134,735
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
|
134,735
|
|
|
|
134,735
|
|
|
|
19,739
|
|
|
|
|
|
|
|
|
|
|
|
11. LONG-TERM DEFERRED EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
|
(RMB000)
|
|
|
(RMB000)
|
|
|
(US$000)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible bond issuance costs (Note 22)
|
|
|
36,871
|
|
|
|
31,375
|
|
|
|
4,596
|
|
Others
|
|
|
573
|
|
|
|
1,760
|
|
|
|
258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,444
|
|
|
|
33,135
|
|
|
|
4,854
|
|
|
|
|
|
|
|
|
|
|
|
12. BANK BORROWINGS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
|
(RMB000)
|
|
|
(RMB000)
|
|
|
(US$000)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total bank borrowings
|
|
|
1,298,832
|
|
|
|
874,764
|
|
|
|
128,153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprised of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
|
|
|
1,098,832
|
|
|
|
404,764
|
|
|
|
59,298
|
|
Long-term, current portion
|
|
|
30,000
|
|
|
|
90,000
|
|
|
|
13,185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,128,832
|
|
|
|
494,764
|
|
|
|
72,483
|
|
Long-term, non-current portion
|
|
|
170,000
|
|
|
|
380,000
|
|
|
|
55,670
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,298,832
|
|
|
|
874,764
|
|
|
|
128,153
|
|
|
|
|
|
|
|
|
|
|
|
The short-term bank borrowings outstanding as of December 31, 2008 and 2009 bore an average
interest rate of 6.860% and 4.992% per annum, respectively and were denominated in Renminbi. These
borrowings were obtained from financial institutions and have terms of six months to one year. As
of December 31, 2008 and 2009, unused short-term bank loan facilities amounted to approximately
RMB533,458,204 and RMB853,000,000 (US$124,965,206), respectively.
- F-24 -
SOLARFUN POWER HOLDINGS CO., LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2008 AND 2009 AND
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2009
12. BANK BORROWINGS (CONTD)
The long-term bank borrowings outstanding as of December 31, 2008 and 2009 bore average interest
rates of 6.747% and 5.597% per annum, respectively, and were denominated in Renminbi. These
borrowings were obtained from financial institutions and represented the maximum amount of the
facility. The current portion and non-current portion of the long-term bank borrowings as of 31
December 2009 will be due from March 25, 2010 to December 27, 2010 and March 25, 2011 to September
13, 2012, respectively.
Bank borrowings as of 31 December 2008 and 2009 were secured/guaranteed by the following:
December 31, 2008
|
|
|
|
|
Amount
|
|
|
Secured/guaranteed by
|
(RMB000)
|
|
|
|
|
|
|
|
|
|
430,000
|
|
|
Jointly guaranteed by (i) Solarfun Power Holdings Co., Ltd. and
(ii) the Groups factory premises and land-use rights with net
book value of RMB29,645,723 and RMB6,835,475, respectively (Note
9)
|
|
|
|
|
|
|
160,832
|
|
|
Guaranteed by Solarfun Power Holdings Co., Ltd.
|
|
|
|
|
|
|
73,000
|
|
|
Guaranteed by Yangguang Solar
|
|
|
|
|
|
|
550,000
|
|
|
Guaranteed by Linyang Solarfun
|
|
|
|
|
|
|
30,000
|
|
|
Jointly guaranteed by (i) Linyang Solarfun (ii) Letter of credit
provided by the Groups customer which amounted to RMB30,000,000
(US$4,397,215)
|
|
|
|
|
|
|
55,000
|
|
|
Guaranteed by letter of credit provided by the Groups customer
which amounted to RMB50,000000 (US$7,328,692)
|
|
|
|
|
|
|
|
|
|
|
1,298,832
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
|
Amount
|
|
|
Secured/guaranteed by
|
(RMB000)
|
|
|
|
|
|
|
|
|
|
200,000
|
|
|
Jointly guaranteed by (i) Solarfun Power Holdings Co., Ltd. and
(ii) the Groups factory premises and land-use rights with net
book value of RMB28,138,995 (US$4,122,386) and RMB6,699,211
(US$981,440), respectively (Note 9)
|
|
|
|
|
|
|
87,000
|
|
|
Guaranteed by Yangguang Solar
|
|
|
|
|
|
|
280,000
|
|
|
Guaranteed by Linyang Solarfun
|
|
|
|
|
|
|
300,000
|
|
|
Guaranteed by Solarfun Power Holdings Co., Ltd.
|
|
|
|
|
|
|
7,764
|
|
|
Guaranteed by restricted cash of RMB7,478,800 (US$1,095,650)
|
|
|
|
|
|
|
|
|
|
|
874,764
|
|
|
|
|
|
|
|
- F-25 -
SOLARFUN POWER HOLDINGS CO., LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2008 AND 2009 AND
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2009
12. BANK BORROWINGS (CONTD)
As of December 31, 2008 and 2009, the maturities of these long-term bank borrowings were as
follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2009
|
|
|
|
(RMB000)
|
|
|
(US$000)
|
|
|
|
|
|
|
|
|
|
|
Within 1 year
|
|
|
90,000
|
|
|
|
13,185
|
|
Within 1-2 years
|
|
|
80,000
|
|
|
|
11,720
|
|
Within 2-3 years
|
|
|
300,000
|
|
|
|
43,950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
470,000
|
|
|
|
68,855
|
|
|
|
|
|
|
|
|
In October 2007, Linyang Solarfun entered into an agreement with Linyang Electronics, under which
Linyang Solarfun agreed to pay an annual fee of 2.0% of the total bank borrowings guaranteed by
Linyang Electronics. As of December 31, 2008, the Group has paid annual guarantee fees of
RMB10,063,635 for the bank borrowings guaranteed by Linyang Electronics. No bank borrowing was
guaranteed by Linyang Electronics for the year ended December 31, 2009.
13. ACCRUED EXPENSES AND OTHER LIABILITIES
The components of accrued expenses and other liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
|
(RMB000)
|
|
|
(RMB000)
|
|
|
(US$000)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consideration payable*
|
|
|
55,605
|
|
|
|
|
|
|
|
|
|
Accrued warranty costs (Note 14)
|
|
|
48,635
|
|
|
|
73,459
|
|
|
|
10,762
|
|
Accrued wages
|
|
|
23,947
|
|
|
|
33,699
|
|
|
|
4,937
|
|
Interest payable for convertible bonds
|
|
|
19,246
|
|
|
|
19,000
|
|
|
|
2,784
|
|
Income tax payable
|
|
|
6,306
|
|
|
|
7,149
|
|
|
|
1,047
|
|
Accrued professional service fees
|
|
|
7,958
|
|
|
|
6,928
|
|
|
|
1,015
|
|
Accrued land estate tax
|
|
|
7,534
|
|
|
|
733
|
|
|
|
107
|
|
VAT payable
|
|
|
1,779
|
|
|
|
1,193
|
|
|
|
175
|
|
Accrued interest expenses for bank borrowings
|
|
|
1,339
|
|
|
|
1,105
|
|
|
|
162
|
|
Accrued insurance expense
|
|
|
|
|
|
|
6,201
|
|
|
|
908
|
|
Accrued freight expense
|
|
|
187
|
|
|
|
3,666
|
|
|
|
537
|
|
Accrued compensation expense
|
|
|
|
|
|
|
4,801
|
|
|
|
703
|
|
Accrued import and export expense
|
|
|
1,009
|
|
|
|
3,163
|
|
|
|
463
|
|
Accrued processing cost
|
|
|
|
|
|
|
1,234
|
|
|
|
181
|
|
Accrued sales commission
|
|
|
|
|
|
|
7,644
|
|
|
|
1,120
|
|
Accrued utilities expenses
|
|
|
2,627
|
|
|
|
5,864
|
|
|
|
859
|
|
Other accrued expenses
|
|
|
12,094
|
|
|
|
14,257
|
|
|
|
2,089
|
|
Other liabilities
|
|
|
762
|
|
|
|
1,799
|
|
|
|
264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
189,028
|
|
|
|
191,895
|
|
|
|
28,113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Consideration payable relates to the remaining balance of the purchase consideration for the
acquisition of the remaining 48% equity interest in Yangguang Solar in the year 2008, which was
fully paid in April 2009.
|
- F-26 -
SOLARFUN POWER HOLDINGS CO., LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2008 AND 2009 AND
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2009
14. ACCRUED WARRANTY COSTS
The Groups warranty activity is summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
|
(RMB000)
|
|
|
(RMB000)
|
|
|
(US$000)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
|
20,957
|
|
|
|
48,635
|
|
|
|
7,125
|
|
Warranty provision
|
|
|
46,565
|
|
|
|
33,728
|
|
|
|
4,941
|
|
Warranty claims paid
|
|
|
(18,887
|
)
|
|
|
(8,904
|
)
|
|
|
(1,304
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
|
48,635
|
|
|
|
73,459
|
|
|
|
10,762
|
|
|
|
|
|
|
|
|
|
|
|
15. CUSTOMER DEPOSITS
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.
16. NOTES PAYABLE
As of December 31, 2009, notes payable were non-interest bearing and were secured by RMB45,114,677
(US$6,609,338) of the Groups restricted cash. The Group did not pay any commission to the banks to
obtain the notes payable facilities. As of December 31, 2009, these notes will be due for payment
over the next 12 months.
17. DERIVATIVE CONTRACTS
The Group is exposed to certain risks related to its business operations. The primary risk that the
Group seeks to manage by using derivative instruments is foreign exchange rate risk. The Group does
not use derivatives for speculative trading purposes and is not a party to any leveraged
derivatives. The Group recognizes all derivative instruments as either assets or liabilities at
fair value in the consolidated balance sheets (see Note 31). The Groups derivatives are not
designated and do not qualify as hedges and are adjusted to fair value through current earnings.
The following table reflects the location in the consolidated statement of operations and the
amount of loss recognized in income for the derivative contracts not designated as hedging
instruments for the year ended December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of operations
|
|
Year ended
|
|
|
|
location
|
|
December 31, 2009
|
|
|
|
|
|
(RMB000)
|
|
|
(US$000)
|
|
Foreign exchange derivative contracts
(not designated as hedging instruments)
|
|
Changes in fair value of derivative contracts
|
|
|
9,594
|
|
|
|
1,406
|
|
- F-27 -
SOLARFUN POWER HOLDINGS CO., LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2008 AND 2009 AND
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2009
17. DERIVATIVE CONTRACTS (CONTD)
The following table reflects the fair values of derivatives included in the consolidated balance
sheets as of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value as of
|
|
|
|
Balance sheet location
|
|
December 31, 2009
|
|
|
|
|
|
(RMB000)
|
|
|
(US$000)
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative assets:
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange derivative contracts
(not designated as hedging instruments)
|
|
Current assets: Derivative contracts
|
|
|
7,360
|
|
|
|
1,078
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities:
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange derivative contracts
(not designated as hedging instruments)
|
|
Current liabilities: Derivative contracts
|
|
|
1,148
|
|
|
|
168
|
|
18. ISSUANCE OF ORDINARY SHARES FROM ADDITIONAL EQUITY OFFERING
In 2008, the Company issued 5,421,093 ADSs, representing 27,105,465 of the Companys ordinary
shares at the par value per share of US$0.0001. Total proceeds from this additional equity offering
was US$73,877,875 (approximately RMB504 million). Net proceeds was approximately US$71,521,000
(approximately RMB490 million) after deduction of related issuance costs.
In 2009, the Company issued 3,888,399 ADSs, representing 19,441,995 of the Companys ordinary
shares at the par value per share of US$0.0001. Total proceeds from this equity offering was
US$23,101,918 (approximately RMB158 million). Net proceeds was approximately US$21,820,704
(approximately RMB149 million) after deduction of related issuance costs.
19. STATUTORY RESERVES
In accordance with the PRC Regulations on Enterprises with Foreign Investment, an enterprise
established in the PRC with foreign investment is required to provide for 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 enterprise (WOFE) is required to allocate at least
10% of its annual after-tax profit to the General Reserve Fund until the balance of such fund has
reached 50% of its respective registered capital. A non-wholly own foreign invested enterprise is
permitted to provide for the above allocation 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.
- F-28 -
SOLARFUN POWER HOLDINGS CO., LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2008 AND 2009 AND
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2009
19. STATUTORY RESERVES (CONTD)
Linyang Solarfun became a WOFE 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 the General Reserve Fund in accordance with the joint venture agreements entered into
among the then joint venture partners and the appropriations to the Enterprise Expansion Fund and
Staff Welfare and Bonus Fund were at the discretion of the board of directors.
Details of appropriation are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
|
(RMB000)
|
|
|
(RMB000)
|
|
|
(RMB000)
|
|
|
(US$000)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General Reserve Fund
|
|
|
21,524
|
|
|
|
10,090
|
|
|
|
21,926
|
|
|
|
3,212
|
|
Enterprise Expansion Fund
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Staff Welfare and Bonus Fund
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,524
|
|
|
|
10,090
|
|
|
|
21,926
|
|
|
|
3,212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20. SHARE OPTION PLANS
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 (the 2006 Option Plan Participants). Under the 2006 Option Plan, the Company may issue
options to the 2006 Option Plan Participants to purchase not more than 10,799,685 ordinary shares.
All options granted under the 2006 Option Plan would expire on November 30, 2016 and generally vest
over 3 to 5 years.
On August 22, 2007, the Companys Board of Directors approved the 2007 Equity Incentive Plan (the
2007 Incentive Plan). 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 Group (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 of
Directors. The 2007 Incentive Plan will expire on August 21, 2017.
By a resolution of the Board of Directors on November 30, 2007, 59,994 Restricted Stock Units (the
RSU) were granted to the Companys existing three independent directors and 7,500 RSUs were
authorized to be granted to each of the independent directors annually from January 1, 2008. Each
RSU represents one ADS of the Company, which equals to five ordinary shares. As of December 31,
2009, the 59,994 RSUs have all been vested. The 7,500 RSUs granted on January 1, 2008 to each of
the independent directors would vest in batches of 2,500 RSUs each year beginning on January 1,
2009. The 7,500 RSUs granted on January 1, 2009 to each of the independent director would vest in
batches of 1,250 RSUs each half year beginning on July 1, 2009.
- F-29 -
SOLARFUN POWER HOLDINGS CO., LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2008 AND 2009 AND
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2009
20. SHARE OPTION PLANS (CONTD)
The following table summarized the Companys share option activity under 2006 Option Plan and 2007
Incentive Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
average
|
|
|
|
|
|
|
|
|
|
|
average
|
|
|
remaining
|
|
|
|
|
|
|
Number of
|
|
|
exercise
|
|
|
contractual
|
|
|
Aggregate
|
|
|
|
options
|
|
|
price
|
|
|
life
|
|
|
intrinsic value
|
|
|
|
|
|
|
(US$)
|
|
|
(Years)
|
|
|
(US$)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, January 1, 2008
|
|
|
8,105,500
|
|
|
|
2.48
|
|
|
|
8.92
|
|
|
|
32,827,275
|
|
Granted
|
|
|
5,687,900
|
|
|
|
2.12
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(915,600
|
)
|
|
|
1.86
|
|
|
|
|
|
|
|
2,350,166
|
|
Forfeited/Cancelled
|
|
|
(1,493,000
|
)
|
|
|
2.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2008
|
|
|
11,384,800
|
|
|
|
2.35
|
|
|
|
8.22
|
|
|
|
12,000
|
|
Granted
|
|
|
7,682,300
|
|
|
|
1.17
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(175,020
|
)
|
|
|
0.95
|
|
|
|
|
|
|
|
122,487
|
|
Forfeited
|
|
|
(2,907,165
|
)
|
|
|
2.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2009
|
|
|
15,984,915
|
|
|
|
1.76
|
|
|
|
7.41
|
|
|
|
3,147,919
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to be
vested at December 31, 2009
|
|
|
15,984,915
|
|
|
|
1.76
|
|
|
|
7.41
|
|
|
|
3,147,919
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2009
|
|
|
5,485,116
|
|
|
|
2.28
|
|
|
|
7.20
|
|
|
|
403,521
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value in the table above represents the total intrinsic value (the
aggregate difference between the Companys closing stock price of US$1.526 per ordinary share as of
December 31, 2009 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, 2009.
The aggregate fair value of vested share options for the year 2007, 2008 and 2009,was determined to
be US$2,420,999, US$3,673,830 and RMB38,211,313 (US$5,597,989) respectively. The weighted-average
grant-date fair value of options granted during the years 2008 and 2009 were US$1.51 and US$0.79,
respectively.
During the year ended December 31, 2009, the Company accelerated the vesting of 1,024,666 stock
options of certain terminated employees. As a result of that modification, the Company recognized
additional compensation expense of approximately RMB12,656,430 (US$1,854,177) for the year ended
December 31, 2009.
The aggregate fair value of the outstanding share options at the respective grant dates was
determined to be RMB268,263,529 (US$39,300,829) and such amount shall be recognized as compensation
expense using the straight-line method with graded vesting based on service conditions.
Accordingly, approximately RMB27,312,000 and RMB23,775,999 (US$3,483,204) were recorded as
compensation expense in general and administrative expenses with a corresponding credit to
additional paid-in capital in the years ended December 31, 2008 and 2009, respectively.
- F-30 -
SOLARFUN POWER HOLDINGS CO., LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2008 AND 2009 AND
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2009
20. SHARE OPTION PLANS (CONTD)
As of December 31, 2009, there was RMB68,908,123 (US$10,095,097) of unrecognized share-based
compensation cost related to share options which is expected to be recognized over a
weighted-average vesting period of 3.93 years. To the extent the actual forfeiture rate is
different from the current estimate, actual share-base compensation related to these awards may be
different from the expectation.
The following table summarized the Companys RSU activity under 2007 Incentive Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
Number of
|
|
|
average grant
|
|
|
|
RSUs
|
|
|
date fair value
|
|
|
|
|
|
|
(US$)
|
|
Unvested, January 1, 2008
|
|
|
39,996
|
|
|
|
16.35
|
|
Granted
|
|
|
122,500
|
|
|
|
20.06
|
|
Vested
|
|
|
(24,998
|
)
|
|
|
15.69
|
|
Forfeited/Cancelled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested, December 31, 2008
|
|
|
137,498
|
|
|
|
19.78
|
|
Granted
|
|
|
52,500
|
|
|
|
5.08
|
|
Vested
|
|
|
(143,748
|
)
|
|
|
16.28
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested, December 31, 2009
|
|
|
46,250
|
|
|
|
13.97
|
|
|
|
|
|
|
|
|
The aggregate fair value of vested RSUs for the year 2007, 2008 and 2009 was determined to be
US$326,967, US$800,442 and RMB11,177,360 (US$1,637,492), respectively. The aggregate fair value of
the unvested RSUs as of December 31, 2009 was determined to be RMB 4,411,668 (US$646,313) based on
the quoted market price of the Companys ordinary shares at the respective grant dates, and such
amount shall be recognized as compensation expenses using the straight line method with graded
vesting based on service conditions. For the years ended December 31, 2008 and 2009, RMB7,512,000
and RMB9,476,050 (US$1,388,429) was recorded as compensation expenses in general and administrative
expenses with a corresponding credit to additional paid-in capital.
As of December 31, 2009, there was RMB3,083,600 (US$451,750) of unrecognized share-based
compensation cost related to RSUs which is expected to be recognized over a weighted-average
vesting period of 3.00 years. To the extent the actual forfeiture rate is different from current
estimate, actual share-based compensation related to these awards may be different from the
expectation.
For stock options granted before January 1, 2008, the fair value of each share option grant was
estimated on the date of grant using the Black-Scholes option pricing model. For share options
granted after January 1, 2008, the fair value of each award is estimated on the date of grant using
a binomial-lattice option valuation model. The binomial-lattice model considers characteristics of
fair value option pricing that are not available under the Black-Scholes model. Similar to the
Black-Scholes model, the binomial-lattice model takes into account variables such as volatility,
dividend yield, and risk-free interest rate. However, in addition, the binomial-lattice model
considers the contractual term of the option, the probability that the option will be exercised
prior to the end of its contractual life, and the probability of termination or retirement of the
option holder in computing the value of the option. For these reasons, the Company believes that
the binomial-lattice model provides a fair value for its share-based compensation plans that is
more representative of actual experience and future expected experience than the value calculated
in previous years using the Black-Scholes model.
- F-31 -
SOLARFUN POWER HOLDINGS CO., LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2008 AND 2009 AND
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2009
20. SHARE OPTION PLANS (CONTD)
The Company calculated the estimated fair value of share options on the grant date using the
Black-Scholes Option valuation model or the binomial-lattice model for 2008 and 2009, respectively,
with the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
Granted in 2008
|
|
|
Granted in 2009
|
|
|
|
|
|
|
|
|
|
|
Risk-free interest rate
|
|
|
2.12% - 4.03%
|
|
|
|
1.14% - 3.81%
|
|
Expected dividend yield
|
|
|
0%
|
|
|
|
0%
|
|
Expected volatility
|
|
|
75% - 80%
|
|
|
|
80%
|
|
Sub-optimal early exercise factor
|
|
4 times
|
|
|
4 times
|
|
Fair value of options at grant date per share
|
|
From US$0.69 to US$4.19
|
|
|
From US$0.15 to US$1.08
|
|
Risk-free interest rates are based on zero coupon US risk-free rate for the terms consistent with
the expected life of the award at the time of grant. Expected dividend yield is determined in view
of the Companys historical dividend payout rate. The Company estimates expected volatility at the
date of grant based on a combination of historical and implied volatilities from comparable
publicly listed companies. Forfeiture rate is estimated based on historical forfeiture patterns
and adjusted to reflect future change in circumstances and facts, if any. Sub-optimal early
exercise factor is determined based on the times of historical exercise price over corresponding
stock price at the exercise date.
Total compensation expense relating to share options and RSUs recognized for the years ended
December 31, 2007, 2008 and 2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
|
(RMB000)
|
|
|
(RMB000)
|
|
|
(RMB000)
|
|
|
(US$000)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
3,200
|
|
|
|
3,825
|
|
|
|
5,808
|
|
|
|
851
|
|
Selling expenses
|
|
|
905
|
|
|
|
3,617
|
|
|
|
2,252
|
|
|
|
330
|
|
General and administrative expenses
|
|
|
24,489
|
|
|
|
26,414
|
|
|
|
33,252
|
|
|
|
4,871
|
|
Research and development expenses
|
|
|
1,046
|
|
|
|
969
|
|
|
|
1,359
|
|
|
|
199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,640
|
|
|
|
34,825
|
|
|
|
42,671
|
|
|
|
6,251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- F-32 -
SOLARFUN POWER HOLDINGS CO., LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2008 AND 2009 AND
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2009
21. REDEEMABLE ORDINARY SHARES
On January 29, 2008 and concurrently with the convertible bond issuance (see Note 22), the Company
issued and sold 9,019,611 ADSs, representing 45,098,055 of the Companys ordinary shares at the par
value per share of US$0.0001.
The Company is entitled to repurchase any or all of the ADSs at par value on any business day after
the entire principal amount of the convertible bonds ceases to be outstanding. Such rights will
expire one month after the maturity of the convertible bonds. In addition, the holders of the ADSs
have the right to request the Company to repurchase the ADSs at par value at any time by giving
prior notice. Since the holders have the ability to require the repurchase of the ADSs, which is
outside the control of the Company, the ordinary shares underlying the ADSs have been classified as
mezzanine equity. The holders are entitled to receive all cash and non-cash distribution that an
ordinary shareholder would receive but such distributions are required to be paid back to the
Company upon repurchase of the ADSs.
22. CONVERTIBLE BONDS
On January 29, 2008, the Company issued in aggregate principal amount of US$172,500,000 Convertible
Senior Notes (Notes) due January 15, 2018 to third-party investors (the Holders). The Notes
bear interest at a rate of 3.5% per annum, payable on January 15 and July 15 of each year,
commencing on July 15, 2008.
The Holder may require the Company to redeem all or a portion of the Notes on January 15, 2015, at
a price equal to 100% of the principal amount of the Notes to be repurchased plus accrued and
unpaid interest. The Holder may also require the Company to redeem all or a portion of the Notes at
a price equal to 100% of principal amount of the Notes to be repurchased plus accrued and unpaid
interest upon the occurrence of a fundamental change, which is defined as a change in control or a
termination of trading.
In addition, the Company may redeem part or all of the Notes on and after January 20, 2015, at a
price equal to 100% of principal amount of the Notes to be repurchased plus accrued and unpaid
interest, provided the Companys ADSs trading price meets certain conditions.
At the Holders option, the principal amount of the Notes may be converted into the Companys ADSs
initially at a conversion rate of 52.2876 ADSs (equivalent to an initial conversion price of
approximately $19.125 per ADS) per US$1,000 principal amount of the Notes, at any time prior to
maturity. The applicable conversion rate will be subject to adjustments in certain circumstances.
The Notes were initially recorded at the principal amount of RMB1,211,380,889 (US$177,468,303).
Direct debt issuance costs of RMB40,459,198 (US$5,927,306) are deferred and amortized over the life
of the Notes using the effective interest method. For the year ended December 31, 2009, the
interest expense for the Notes was approximately RMB98,066,000 (US$14,366,750).
At the commitment date on January 29, 2008, the Company evaluated and determined that the
redemption and put options do not require bifurcation from the Notes under the requirements of ASC
815-10 because they are clearly and closely related to the debt host instrument.
- F-33 -
SOLARFUN POWER HOLDINGS CO., LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2008 AND 2009 AND
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2009
22. CONVERTIBLE BONDS (CONTD)
No beneficial conversion feature was recognized as the effective conversion price of US$19.125 was
higher than the fair value per ADS of the Company at the commitment date (January 29, 2008) of
US$17.73.
The adoption of ASC 815-40 (ASC 815-40)
, Derivatives and Hedging: Contracts in Entitys Own
Equity
on January 1, 2009 revised the Companys accounting for the conversion option of the Notes.
The Company evaluated the conversion option of the Notes upon adoption of ASC 815-40 and determined
that the conversion option qualified for derivative accounting because the conversion option, if
freestanding, is not considered to be indexed to the Companys own stock.
Accordingly, the conversion option was bifurcated from the Notes upon adoption of ASC 815-40 as a
derivative liability at an initial fair value of RMB962,993,000 (US$141,079,000). Changes in fair
value of the conversion options are recognized through the statements of operations. For the year
ended December 31, 2009, the Company recorded a loss of RMB73,887,000 (US$10,824,507) resulting
from the change in fair value of the conversion option. ASC 815-40 requires the Company to
recognize the cumulative effect of the change in accounting principle as an adjustment to the
opening balance of retained earnings. An adjustment of RMB644,812,000 (US$94,465,492), which
represents the cumulative gains on re-measurement that would have been recognized if the guidance
in ASC 815-40 had been applied from the Notes issuance date on January 29, 2008, was recorded on
January 1, 2009 to accumulated deficit. As of December 31, 2009, the conversion option, which has
been combined with the Notes on the balance sheet, was recorded at a fair value of RMB309,189,000
(US$45,296,444).
23. GOVERNMENT GRANTS
During the years ended December 31, 2007, 2008 and 2009, the Group received approximately
RMB2,088,681, RMB3,479,000 and RMB7,661,000 (US$1,122,343), respectively, in government subsidies
which were approved by the relevant PRC government authorities. These subsidies were received
because the Group qualifies as a high technology enterprise in Lianyungang City of Jiangsu
Province in the PRC and it met certain criteria such as increases in the amount of capital
investment, net assets, number of employees, 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 was recorded as government grants in 2007, 2008 and 2009, upon
receipt.
24. INCOME TAXES
Current taxation
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. Pursuant to the PRC Income Tax Laws, the Groups PRC subsidiaries are
subject to EIT at a statutory rate of 25%.
- F-34 -
SOLARFUN POWER HOLDINGS CO., LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2008 AND 2009 AND
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2009
24. INCOME TAXES (CONTD)
Current taxation (contd)
In March 2005, Linyang Solarfun was granted a 5-year tax holiday commencing in 2005 which entitles
it to a two-year EIT exemption followed by a three-year 50% reduced EIT rate (tax holiday).
During 2008, Linyang Solarfun received approval from the PRC taxation authorities as a New and
High Technology Enterprise (NHTE) and obtained the NHTE certificate. In accordance with the PRC
Income Tax Laws, an enterprise awarded with the NHTE status may enjoy a reduced EIT rate of 15%.
However, in the event that any of the various provisions of the transitional preferential
enterprise income tax policies, the new tax law and the implementing regulations overlap, an
enterprise may choose the most advantageous policy to apply at its sole and absolute discretion.
Linyang Solarfun has chosen to apply the tax holiday.
Shanghai Linyang, Yangguang Solar and Linyang R&D, domestic companies in the PRC, are subject to
EIT at a rate of 33% for the year ended December 31, 2007 and 25% for the years ended December 31,
2008 and 2009.
In accordance with the new PRC Enterprise Income Tax Laws (the PRC Income Tax Laws) effective
from January 1, 2008, enterprises established under the laws of foreign countries or regions and
whose place of effective management is located within the PRC territory are considered PRC
resident enterprises and subject to the PRC income tax at the rate of 25% on worldwide income. The
definition of place of effective management shall refer to an establishment that exercises, in
substance, overall management and control over the production and business, personnel, accounting,
properties, etc. of an enterprise. As of December 31, 2008 and 2009, no detailed interpretation or
guidance has been issued to define place of effective management. Furthermore, as of December 31,
2009, the administrative practice associated with interpreting and applying the concept of place
of effective management is unclear. The Group has analyzed the applicability of this law and will
continue to monitor the related development and application.
The PRC Income Tax Laws also impose a 10% withholding income tax for dividends distributed by a
foreign-invested enterprise to its immediate holding company outside China, which were exempted
under the previous income tax law and regulations. A lower withholding tax rate will be applied if
there is a tax treaty arrangement between mainland China and the jurisdiction of the foreign
holding company. The foreign-invested enterprise is subject to the withholding tax starting from
January 1, 2008.
Income (loss) before income taxes and minority interest consists of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
|
(RMB000)
|
|
|
(RMB000)
|
|
|
(RMB000)
|
|
|
(US$000)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-PRC
|
|
|
(59,395
|
)
|
|
|
5,562
|
|
|
|
(468,907
|
)
|
|
|
(68,695
|
)
|
PRC
|
|
|
211,766
|
|
|
|
(264,961
|
)
|
|
|
347,919
|
|
|
|
50,970
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
152,371
|
|
|
|
(259,399
|
)
|
|
|
(120,988
|
)
|
|
|
(17,725
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- F-35 -
SOLARFUN POWER HOLDINGS CO., LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2008 AND 2009 AND
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2009
24. INCOME TAXES (CONTD)
Current taxation (contd)
The income tax expense is comprised of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
|
(RMB000)
|
|
|
(RMB000)
|
|
|
(RMB000)
|
|
|
(US$000)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
(8,158
|
)
|
|
|
(65,940
|
)
|
|
|
(40,375
|
)
|
|
|
(5,915
|
)
|
Deferred
|
|
|
700
|
|
|
|
59,421
|
|
|
|
16,447
|
|
|
|
2,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,458
|
)
|
|
|
(6,519
|
)
|
|
|
(23,928
|
)
|
|
|
(3,505
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The reconciliation of tax computed by applying the statutory income tax rate of 25% (33% 2007)
applicable to PRC operations to income tax expenses is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
|
(RMB000)
|
|
|
(RMB000)
|
|
|
(RMB000)
|
|
|
(US$000)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax computed at the statutory
tax rate at 33% for 2007 and 25% for
2008 and 2009
|
|
|
(50,282
|
)
|
|
|
64,850
|
|
|
|
30,247
|
|
|
|
4,431
|
|
Non-deductible expenses
|
|
|
(1,600
|
)
|
|
|
(2,804
|
)
|
|
|
(3,348
|
)
|
|
|
(490
|
)
|
Tax holidays
|
|
|
51,708
|
|
|
|
(32,533
|
)
|
|
|
28,123
|
|
|
|
4,120
|
|
Research & development expense
|
|
|
|
|
|
|
1,104
|
|
|
|
1,923
|
|
|
|
282
|
|
Preferential tax rate
|
|
|
13,018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax rate differences
|
|
|
(19,601
|
)
|
|
|
(24,870
|
)
|
|
|
(53,941
|
)
|
|
|
(7,902
|
)
|
Deferred tax benefit including change in
tax rate
|
|
|
355
|
|
|
|
2,130
|
|
|
|
10,111
|
|
|
|
1,481
|
|
Tax credit
|
|
|
|
|
|
|
16,923
|
|
|
|
|
|
|
|
|
|
Changes in the valuation allowance
|
|
|
(1,056
|
)
|
|
|
(31,319
|
)
|
|
|
(37,043
|
)
|
|
|
(5,427
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,458
|
)
|
|
|
(6,519
|
)
|
|
|
(23,928
|
)
|
|
|
(3,505
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The benefit of the tax holiday per basic and diluted earnings per share is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
|
(RMB)
|
|
|
(RMB)
|
|
|
(RMB)
|
|
|
(US$)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
0.22
|
|
|
|
(0.13
|
)
|
|
|
0.10
|
|
|
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
0.22
|
|
|
|
(0.13
|
)
|
|
|
0.10
|
|
|
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- F-36 -
SOLARFUN POWER HOLDINGS CO., LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2008 AND 2009 AND
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2009
24. INCOME TAXES (CONTD)
Deferred taxation
Deferred tax assets (liabilities) 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 (liabilities) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
|
(RMB000)
|
|
|
(RMB000)
|
|
|
(US$000)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
- Tax credit
|
|
|
7,569
|
|
|
|
7,569
|
|
|
|
1,109
|
|
- Warranty provision
|
|
|
6,079
|
|
|
|
11,019
|
|
|
|
1,614
|
|
- Inventory write-off
|
|
|
63,890
|
|
|
|
35,086
|
|
|
|
5,140
|
|
- Allowance for advances to supplier
|
|
|
5,245
|
|
|
|
63,170
|
|
|
|
9,254
|
|
- Allowance for doubtful accounts
|
|
|
284
|
|
|
|
627
|
|
|
|
92
|
|
- Idle capacity cost
|
|
|
187
|
|
|
|
3,277
|
|
|
|
480
|
|
- Other
|
|
|
128
|
|
|
|
6,797
|
|
|
|
996
|
|
Valuation allowance
|
|
|
(25,390
|
)
|
|
|
(64,430
|
)
|
|
|
(9,439
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current deferred tax assets
|
|
|
57,992
|
|
|
|
63,115
|
|
|
|
9,246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current:
|
|
|
|
|
|
|
|
|
|
|
|
|
- Pre-operating expenses
|
|
|
1,047
|
|
|
|
755
|
|
|
|
111
|
|
- Tax losses
|
|
|
999
|
|
|
|
3,592
|
|
|
|
526
|
|
- Fixed assets
|
|
|
9,886
|
|
|
|
13,533
|
|
|
|
1,983
|
|
- Long-term deferred expense
|
|
|
258
|
|
|
|
194
|
|
|
|
28
|
|
- Other
|
|
|
35
|
|
|
|
16
|
|
|
|
2
|
|
Valuation allowance
|
|
|
(7,736
|
)
|
|
|
(4,301
|
)
|
|
|
(630
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net non-current deferred tax assets
|
|
|
4,489
|
|
|
|
13,789
|
|
|
|
2,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
- Other
|
|
|
1,416
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current deferred tax liabilities
|
|
|
1,416
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current:
|
|
|
|
|
|
|
|
|
|
|
|
|
- Land use rights
|
|
|
27,155
|
|
|
|
26,566
|
|
|
|
3,892
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current deferred tax liabilities
|
|
|
27,155
|
|
|
|
26,566
|
|
|
|
3,892
|
|
|
|
|
|
|
|
|
|
|
|
In assessing the realizability of deferred tax assets, the Group has considered whether it is
more-likely-than-not that some portion or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become deductible. The Group records
a valuation allowance to reduce deferred tax assets to a net amount that management believes is
more-likely-than-not of being realizable based on the weight of all available evidence.
- F-37 -
SOLARFUN POWER HOLDINGS CO., LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2008 AND 2009 AND
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2009
24. INCOME TAXES (CONTD)
As of December 31, 2008 and 2009, the Group has a net tax operating loss from its non-PRC
subsidiaries of RMB3,996,000 and RMB14,206,000, respectively which starts to expire in 2029.
As of December 31, 2009, the Group intends to permanently reinvest the undistributed earnings from
its foreign subsidiaries to fund future operations. The amount of unrecognized deferred tax
liabilities for temporary differences related to investments in foreign subsidiaries is not
determined because such a determination is not practicable.
ASC 740-10 Implementation
As of December 31, 2009, the Groups unrecognized tax benefit is RMB27,385,000 related to its Hong
Kong subsidiary, which based on the facts and circumstances, including, notably, the uncertainty of
the interpretation of and administrative practices associated with the applicable PRC tax law as of
December 31, 2009, may be considered a PRC tax resident. It is possible that the amount accrued
will change in the next 12 months as a result of new interpretive guidance released by the PRC tax
authorities; however, an estimate of the range of the possible change cannot be made at this time.
The unrecognized tax benefits, if ultimately recognized, will impact the effective tax rate.
Reconciliation of accrued unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
|
(RMB000)
|
|
|
(RMB000)
|
|
|
(US$000)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
|
|
|
|
|
27,385
|
|
|
|
4,012
|
|
Incurred during the year
|
|
|
27,385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
|
27,385
|
|
|
|
27,385
|
|
|
|
4,012
|
|
|
|
|
|
|
|
|
|
|
|
Based on existing PRC tax regulations, the tax periods of Linyang Solarfun, Shanghai Linyang,
Yangguang Solar and Linyang R&D for the fiscal years ended December 31, 2005 to 2009 remain open to
potential examination by the tax authorities. The tax periods for the Companys non-PRC
subsidiaries for the fiscal years ended December 31, 2006 to December 31, 2009 remain open to
potential examination by the respective tax authorities.
- F-38 -
SOLARFUN POWER HOLDINGS CO., LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2008 AND 2009 AND
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2009
25. RELATED PARTY TRANSACTIONS
Name and Relationship with Related Parties
|
|
|
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
|
|
|
|
Nantong Huahong Ecological Gardening Co., Ltd. (Nantong Huahong)*
|
|
Controlling owner is also a significant shareholder of the Company
|
|
|
|
Nantong Linyang Electric Power Investment Co., Ltd. (Nantong Linyang)
|
|
Controlling owner is also a significant shareholder of the Company
|
|
|
|
Hong Kong Huaerli Trading Co., Ltd. (Hong Kong Huaerli)
|
|
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
|
|
|
|
Qidong Jiaotong Engineering Co., Ltd. (Jiaotong Engineering)
|
|
Controlling owner is also a significant shareholder of the Company
|
|
|
|
Nantong Linyang Labor Service Company (Linyang Labor Service)
|
|
Controlling owner is also a significant shareholder of the Company
|
|
|
|
Ya An Yongwang Silicon Co., Ltd. (Ya An)
|
|
Controlling owner is also a significant shareholder of the Company
|
|
|
|
Q-Cells International GmbH (Q-Cells)
|
|
Controlling owner is also a significant shareholder of the Company
|
|
|
|
Jiangsu Qitian Group Co., Ltd. (Qitian Group)**
|
|
Shareholder of a subsidiary of the Company
|
|
|
|
*
|
|
Prior name: Nantong Linyang Ecological Cultural Co., Ltd. (Linyang Ecological)
|
|
**
|
|
Subsequent to the acquisition of Yangguang Solars minority interests in year 2008, this
company no longer is a related party to the Group.
|
- F-39 -
SOLARFUN POWER HOLDINGS CO., LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2008 AND 2009 AND
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2009
25. RELATED PARTY TRANSACTIONS (CONTD)
Significant Related Party Transactions
The Group had the following significant related party transactions and balances during the periods
presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
|
(RMB000)
|
|
|
(RMB000)
|
|
|
(RMB000)
|
|
|
(US$000)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of raw materials from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- Linyang Electronics
|
|
|
24,355
|
|
|
|
39,156
|
|
|
|
33,124
|
|
|
|
4,853
|
|
- Ya An
|
|
|
|
|
|
|
7,436
|
|
|
|
9,600
|
|
|
|
1,406
|
|
- Nantong Huahong
|
|
|
|
|
|
|
58
|
|
|
|
|
|
|
|
|
|
- Jiaotong Engineering
|
|
|
297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of services from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- Linyang Electronics
|
|
|
|
|
|
|
|
|
|
|
2,335
|
|
|
|
342
|
|
- Qidong Huahong
|
|
|
|
|
|
|
|
|
|
|
2,800
|
|
|
|
410
|
|
- Nantong Huahong
|
|
|
|
|
|
|
444
|
|
|
|
642
|
|
|
|
94
|
|
- Linyang Labor Service
|
|
|
|
|
|
|
1,803
|
|
|
|
2,205
|
|
|
|
323
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of fixed assets and land use rights from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- Linyang Electronics
|
|
|
1,207
|
|
|
|
2,374
|
|
|
|
567
|
|
|
|
83
|
|
- Jiaotong Engineering
|
|
|
681
|
|
|
|
615
|
|
|
|
|
|
|
|
|
|
- Nantong Huahong
|
|
|
|
|
|
|
314
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- Q-Cells
|
|
|
|
|
|
|
|
|
|
|
336,485
|
|
|
|
49,295
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- Hong Kong Huaerli
|
|
|
73,046
|
|
|
|
64,668
|
|
|
|
|
|
|
|
|
|
- Nantong Linyang
|
|
|
7,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- Qitian Group
|
|
|
4,253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan interest:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- Hong Kong Huaerli
|
|
|
|
|
|
|
1,385
|
|
|
|
|
|
|
|
|
|
- Nantong Linyang
|
|
|
221
|
|
|
|
137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses incurred in relation to guarantee provided by:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- Linyang Electronics
|
|
|
6,717
|
|
|
|
10,064
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Factory leased from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- Linyang Electronics
|
|
|
1,234
|
|
|
|
6,084
|
|
|
|
3,932
|
|
|
|
576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of Yangguang Solar from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- Nantong Linyang
|
|
|
|
|
|
|
133,452
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Disposal of an associate to the related party:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- Linyang Technology
|
|
|
|
|
|
|
200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advance paid to the related party:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- Linyang Labor Service
|
|
|
|
|
|
|
309
|
|
|
|
|
|
|
|
|
|
- Linyang Electronics
|
|
|
6,326
|
|
|
|
9,026
|
|
|
|
6,043
|
|
|
|
885
|
|
- Nantong Huahong
|
|
|
800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- F-40 -
SOLARFUN POWER HOLDINGS CO., LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2008 AND 2009 AND
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2009
25. RELATED PARTY TRANSACTIONS (CONTD)
Balances with Related Parties
As of December 31, 2008 and 2009, balances with related parties are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
|
(RMB000)
|
|
|
RMB000)
|
|
|
(US$000)
|
|
Amount due from related parties:
|
|
|
|
|
|
|
|
|
|
|
|
|
- Linyang Electronics
|
|
|
19
|
|
|
|
369
|
|
|
|
54
|
|
- Q-Cells
|
|
|
|
|
|
|
12,022
|
|
|
|
1,761
|
|
- Linyang Labor Service
|
|
|
|
|
|
|
67
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
|
|
|
|
12,458
|
|
|
|
1,825
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount due to related parties:
|
|
|
|
|
|
|
|
|
|
|
|
|
- Linyang Electronics
|
|
|
4,098
|
|
|
|
15,879
|
|
|
|
2,326
|
|
- Nantong Linyang
|
|
|
33,363
|
|
|
|
|
|
|
|
|
|
- Nantong Huahong
|
|
|
668
|
|
|
|
421
|
|
|
|
62
|
|
- Jiaotong Engineering
|
|
|
679
|
|
|
|
|
|
|
|
|
|
- Others
|
|
|
958
|
|
|
|
465
|
|
|
|
68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39,766
|
|
|
|
16,765
|
|
|
|
2,456
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008, the amount owed to Nantong Linyang relates to the remaining balance of the
purchase consideration for the acquisition of the remaining 48% equity interest in Yangguang Solar.
The weighted-average balances due from related parties and due to related parties are analyzed as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
|
(RMB000)
|
|
|
(RMB000)
|
|
|
(RMB000)
|
|
|
(US$000)
|
|
Weighted-average balance due from related parties:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- Linyang Electronics
|
|
|
|
|
|
|
5
|
|
|
|
964
|
|
|
|
141
|
|
- Q-Cells
|
|
|
|
|
|
|
|
|
|
|
14,927
|
|
|
|
2,187
|
|
- Linyang Labor Service
|
|
|
|
|
|
|
|
|
|
|
13
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
|
(RMB000)
|
|
|
(RMB000)
|
|
|
(RMB000)
|
|
|
(US$000)
|
|
Weighted-average balance due to related parties:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- Linyang Electronics
|
|
|
3,192
|
|
|
|
6,107
|
|
|
|
10,079
|
|
|
|
1,477
|
|
- Nantong Linyang
|
|
|
2,844
|
|
|
|
15,407
|
|
|
|
6,673
|
|
|
|
978
|
|
- Nantong Huahong
|
|
|
65
|
|
|
|
305
|
|
|
|
318
|
|
|
|
47
|
|
- Hong Kong Huaerli
|
|
|
14,609
|
|
|
|
14,609
|
|
|
|
|
|
|
|
|
|
- Qidong Huahong
|
|
|
4,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- Qitian Group
|
|
|
1,244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- Jiaotong Engineering
|
|
|
207
|
|
|
|
244
|
|
|
|
160
|
|
|
|
23
|
|
- Others
|
|
|
19
|
|
|
|
130
|
|
|
|
432
|
|
|
|
63
|
|
As of December 31, 2008 and 2009, all balances with related parties were unsecured, non-interesting
bearing and repayable on demand.
- F-41 -
SOLARFUN POWER HOLDINGS CO., LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2008 AND 2009 AND
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2009
26. EMPLOYEE DEFINED CONTRIBUTION PLAN
Full-time employees of the Companys 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 Company make contributions to the
government for these benefits based on 41% of the employees salaries on a monthly basis. 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 approximately
RMB7,334,000, RMB18,686,000 and RMB29,402,000 (US$4,307,417) for the years ended December 31, 2007,
2008 and 2009, respectively.
27. COMMITMENTS AND CONTINGENCIES
Acquisition of machineries
As of December 31, 2009, the Group had commitments of approximately RMB14,421,392 (US$2,112,746)
related to the acquisition of machineries. The commitment for acquisition of machineries is
expected to be settled within the next twelve months.
Operating lease commitments
The Group has entered into leasing arrangements relating to office premises and other facilities
that are classified as operating leases. Future minimum lease payments for non-cancelable
operating leases as of December 31, 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009
|
|
|
|
(RMB000)
|
|
|
(US$000)
|
|
|
|
|
|
|
|
|
|
|
Year 2010
|
|
|
3,451
|
|
|
|
506
|
|
Year 2011
|
|
|
2,008
|
|
|
|
294
|
|
Year 2012
|
|
|
43
|
|
|
|
6
|
|
Year 2013
|
|
|
|
|
|
|
|
|
Year 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
5,502
|
|
|
|
806
|
|
|
|
|
|
|
|
|
The terms of the leases do not contain rent escalation or contingent rents.
- F-42 -
SOLARFUN POWER HOLDINGS CO., LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2008 AND 2009 AND
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2009
27. COMMITMENTS AND CONTINGENCIES (CONTD)
Purchase of raw materials
The commitments related to framework contracts to purchase raw materials as of December 31, 2009
are as follows:
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009
|
|
|
|
(RMB000)
|
|
|
(US$000)
|
|
|
|
|
|
|
|
|
|
|
Year 2010
|
|
|
2,814,859
|
|
|
|
412,379
|
|
Year 2011
|
|
|
623,303
|
|
|
|
91,314
|
|
Year 2012
|
|
|
708,649
|
|
|
|
103,818
|
|
Year 2013
|
|
|
793,864
|
|
|
|
116,302
|
|
Year 2014
|
|
|
649,994
|
|
|
|
95,225
|
|
Year 2015 and thereafter
|
|
|
1,592,063
|
|
|
|
233,238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,182,732
|
|
|
|
1,052,276
|
|
|
|
|
|
|
|
|
The above listing of amounts and timing of purchases are based on managements best estimate using
existing terms in the framework contracts. To the extent the terms of the contracts are revised
through negotiation or agreement between the Group and its suppliers, the amount or timing of
purchases could change.
Income Taxes
Effective from January 1, 2007, the Group adopted ASC 740-10, which prescribes a
more-likely-than-not threshold for financial statement recognition and measurement of a tax
position taken in the tax return. ASC 740-1 also provides guidance on de-recognition of income tax
assets and liabilities, classification current and deferred income tax assets and liabilities,
accounting for interest and penalties associated with tax positions, accounting for income taxes in
interim periods and income tax disclosures. As of December 31, 2008 and 2009, the Group has
recorded an unrecognized tax benefit for approximately RMB27,385,000 and RMB27,385,000
(US$4,011,925), respectively.
28. SEGMENT REPORTING
The Group operates in a single business segment, which is the development, manufacturing, and sale
of PV-related 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,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
|
(RMB000)
|
|
|
(RMB000)
|
|
|
(RMB000)
|
|
|
(US$000)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Germany
|
|
|
1,195,788
|
|
|
|
2,637,434
|
|
|
|
2,668,477
|
|
|
|
390,934
|
|
Spain
|
|
|
584,525
|
|
|
|
1,246,305
|
|
|
|
37,326
|
|
|
|
5,468
|
|
The PRC
|
|
|
200,615
|
|
|
|
329,153
|
|
|
|
177,478
|
|
|
|
26,001
|
|
Italy
|
|
|
92,900
|
|
|
|
119,272
|
|
|
|
4,446
|
|
|
|
651
|
|
The Czech Republic
|
|
|
|
|
|
|
|
|
|
|
245,814
|
|
|
|
36,012
|
|
Others
|
|
|
321,307
|
|
|
|
616,904
|
|
|
|
644,775
|
|
|
|
94,461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
|
2,395,135
|
|
|
|
4,949,068
|
|
|
|
3,778,316
|
|
|
|
553,527
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- F-43 -
SOLARFUN POWER HOLDINGS CO., LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2008 AND 2009 AND
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2009
28. SEGMENT REPORTING (CONTD)
All the long-lived assets of the Group are located in the PRC.
29. MAJOR CUSTOMERS
Details of the customers accounting for 10% or more of total net revenue are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
|
(RMB000)
|
|
|
(RMB000)
|
|
|
(RMB000)
|
|
|
(US$000)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer A
|
|
|
*
|
|
|
|
1,099,736
|
|
|
|
1,562,883
|
|
|
|
228,964
|
|
Customer B
|
|
|
300,742
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
30. INCOME (LOSS) PER SHARE
Basic and diluted net income (loss) per share for each period presented are calculated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
|
(RMB000)
|
|
|
(RMB000)
|
|
|
(RMB000)
|
|
|
(US$000)
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) attributable to ordinary shareholders
|
|
|
148,036
|
|
|
|
(280,491
|
)
|
|
|
(145,227
|
)
|
|
|
(21,276
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares outstanding, opening
|
|
|
239,994,754
|
|
|
|
240,599,244
|
|
|
|
268,745,299
|
|
|
|
268,745,299
|
|
Weighted-average number of shares issued during the year
|
|
|
|
|
|
|
11,293,944
|
|
|
|
4,826,493
|
|
|
|
4,826,493
|
|
Conversion of convertible bonds
|
|
|
|
|
|
|
|
|
|
|
4,630
|
|
|
|
4,630
|
|
New ordinary shares issued in connection with exercise
of options and vesting of RSUs
|
|
|
59,932
|
|
|
|
766,426
|
|
|
|
491,338
|
|
|
|
491,338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of shares outstanding basic
|
|
|
240,054,686
|
|
|
|
252,659,614
|
|
|
|
274,067,760
|
|
|
|
274,067,760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of shares outstanding diluted
|
|
|
240,054,686
|
|
|
|
252,659,614
|
|
|
|
274,067,760
|
|
|
|
274,067,760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share
|
|
RMB
|
0.62
|
|
|
RMB
|
(1.11
|
)
|
|
RMB
|
(0.53
|
)
|
|
USD
|
(0.08
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share
|
|
RMB
|
0.62
|
|
|
RMB
|
(1.11
|
)
|
|
RMB
|
(0.53
|
)
|
|
USD
|
(0.08
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2009, the Company issued 2,200,000 ordinary shares to its share depository bank which will
be used to settle stock option awards upon their exercise. No consideration was received by the
Company for this issuance of ordinary shares. These ordinary shares are legally issued and
outstanding but are treated as escrowed shares for accounting purposes and therefore, have been
excluded from the computation of earnings per share. Any ordinary shares not used in the
settlement of stock option awards will be returned to the Company.
For the years ended December 31, 2008 and 2009, the potential dilutive effect in relation to the
stock options, unvested RSUs and convertible bonds were excluded as they have an anti-dilutive
effect. The redeemable shares have been excluded in both basic and diluted net income (loss) per
share as they are not entitled to the earnings of the Company.
- F-44 -
SOLARFUN POWER HOLDINGS CO., LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2008 AND 2009 AND
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2009
31. FAIR VALUE MEASUREMENT
Effective January 1, 2008, the Group adopted ASC 820-10 (ASC 820-10),
Fair Value Measurements
defines fair value, establishes a framework for measuring fair value and expands disclosures about
fair value measurements. Although the adoption of ASC 820-10 did not impact the Groups financial
condition, results of operations, or cash flows, ASC 820-10 requires additional disclosures to be
provided on fair value measurements.
ASC 820-10 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in
measuring fair value as follows:
|
|
|
Level 1
|
Observable inputs that reflect quoted prices (unadjusted) for identical assets or
liabilities in active markets
|
|
|
|
Level 2
|
Include other inputs that are directly or indirectly observable in the marketplace
|
|
|
|
Level 3
|
Unobservable inputs which are supported by little or no market activity
|
ASC 820-10 describes three main approaches to measuring the fair value of assets and liabilities:
(1) market approach; (2) income approach and (3) cost approach. The market approach uses prices and
other relevant information generated from market transactions involving identical or comparable
assets or liabilities. The income approach uses valuation techniques to convert future amounts to a
single present value amount. The measurement is based on the value indicated by current market
expectations about those future amounts. The cost approach is based on the amount that would
currently be required to replace an asset.
Foreign currency derivatives are classified within Level 2 because foreign currency derivatives are
valued using models utilizing market observable and other inputs.
Assets / liabilities measured at fair value on a recurring basis are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value measurement at December 31, 2009 Using
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Active Markets
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
for Identical
|
|
|
Observable
|
|
|
unobservable
|
|
|
|
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
Total Fair Value at
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
December 31, 2009
|
|
|
|
|
|
|
(RMB000)
|
|
|
(RMB000)
|
|
|
(RMB000)
|
|
|
(US$000)
|
|
Cash and cash equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- Time deposit
|
|
|
675,720
|
|
|
|
|
|
|
|
|
|
|
|
675,720
|
|
|
|
94,599
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency derivative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- Financial assets
|
|
|
|
|
|
|
7,360
|
|
|
|
|
|
|
|
7,360
|
|
|
|
1,078
|
|
- Financial liabilities
|
|
|
|
|
|
|
1,148
|
|
|
|
|
|
|
|
1,148
|
|
|
|
168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion option of
convertible Bonds
|
|
|
|
|
|
|
|
|
|
|
309,189
|
|
|
|
309,189
|
|
|
|
45,296
|
|
- F-45 -
SOLARFUN POWER HOLDINGS CO., LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2008 AND 2009 AND
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2009
31. FAIR VALUE MEASUREMENT (CONTD)
The following is a reconciliation for the liabilities measured at fair value on a recurring basis
using significant unobservable inputs (Level 3) for the year ended December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
Conversion option of convertible
|
|
|
|
bonds
|
|
|
|
(RMB000)
|
|
|
(US$000)
|
|
|
|
|
|
|
|
|
|
|
Balance as of January 1, 2009
|
|
|
235,311
|
|
|
|
34,472
|
|
Conversion of convertible bonds
|
|
|
(9
|
)
|
|
|
(1
|
)
|
Realized or unrealized loss
|
|
|
73,887
|
|
|
|
10,825
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2009
|
|
|
309,189
|
|
|
|
45,296
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amount of total loss for the period
included in statements of operations
|
|
|
73,887
|
|
|
|
10,825
|
|
|
|
|
|
|
|
|
The loss of RMB73,887,000 is included in the statement of operations for the year ended December
31, 2009 in Changes in fair value of conversion feature of convertible bonds.
32. SUBSEQUENT EVENTS
The Group has evaluated all events or transactions that occurred after December 31, 2009 up through
the date the consolidated financial statements are issued. There were no significant subsequent
events occurred.
- F-46 -
SOLARFUN POWER HOLDINGS CO., LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2008 AND 2009 AND
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2009
33. ADDITIONAL FINANCIAL INFORMATION OF THE COMPANY
Under PRC laws and regulations, the Companys PRC subsidiaries are restricted in their ability to
transfer their net assets to the Company in the form of dividend payments, loans, or advances. As
determined pursuant to PRC generally accepted accounting principles, net assets of the Companys
PRC subsidiaries (excluding subsidiaries with net accumulated losses) which are restricted from
transfer amounted to RMB2,840,924,884 (US$416,197,847) as of December 31, 2009.
Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
Note
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
|
|
|
(RMB000)
|
|
|
(RMB000)
|
|
|
(US$000)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
|
10,133
|
|
|
|
5,593
|
|
|
|
819
|
|
Other receivables
|
|
|
|
|
1,773
|
|
|
|
3,187
|
|
|
|
467
|
|
Deferred expenses
|
|
|
|
|
1,863
|
|
|
|
106
|
|
|
|
15
|
|
Amount due from subsidiaries
|
|
b
|
|
|
2,594,889
|
|
|
|
2,728,948
|
|
|
|
399,794
|
|
Financial assets
|
|
|
|
|
33,787
|
|
|
|
5,878
|
|
|
|
861
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
|
|
2,642,445
|
|
|
|
2,743,712
|
|
|
|
401,956
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term deferred expenses
|
|
c
|
|
|
36,871
|
|
|
|
31,375
|
|
|
|
4,596
|
|
Investment in subsidiaries
|
|
a
|
|
|
659,087
|
|
|
|
723,257
|
|
|
|
105,958
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-current assets
|
|
|
|
|
695,958
|
|
|
|
754,632
|
|
|
|
110,554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
|
|
3,338,403
|
|
|
|
3,498,344
|
|
|
|
512,510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other payables
|
|
d
|
|
|
19,805
|
|
|
|
21,468
|
|
|
|
3,146
|
|
Amount due to subsidiaries
|
|
b
|
|
|
20,715
|
|
|
|
6,538
|
|
|
|
958
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
|
|
40,520
|
|
|
|
28,006
|
|
|
|
4,104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible bonds
|
|
|
|
|
1,178,969
|
|
|
|
658,653
|
|
|
|
96,493
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-current liabilities
|
|
|
|
|
1,178,969
|
|
|
|
658,653
|
|
|
|
96,493
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
|
|
1,219,489
|
|
|
|
686,659
|
|
|
|
100,597
|
|
- F-47 -
SOLARFUN POWER HOLDINGS CO., LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2008 AND 2009 AND
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2009
33. ADDITIONAL FINANCIAL INFORMATION OF THE COMPANY (CONTD)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
Note
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
|
|
|
(RMB000)
|
|
|
(RMB000)
|
|
|
(US$000)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable ordinary shares
(par value US$0.0001 per share; 45,098,055
shares issued and outstanding at December 31, 2008 and December 31,
2009)
|
|
|
|
|
32
|
|
|
|
32
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary shares (par value US$0.0001 per share; 500,000,000 and
500,000,000 shares authorized; 269,060,209 shares and 290,708,739 shares issued and outstanding at December 31, 2008 and 2009,
respectively)
|
|
|
|
|
214
|
|
|
|
227
|
|
|
|
33
|
|
Additional paid-in capital
|
|
|
|
|
2,138,624
|
|
|
|
2,331,797
|
|
|
|
341,610
|
|
(Accumulated deficit) retained earnings
|
|
|
|
|
(19,956
|
)
|
|
|
479,629
|
|
|
|
70,266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
|
|
2,118,882
|
|
|
|
2,811,653
|
|
|
|
411,909
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities, mezzanine equity and shareholders equity
|
|
|
|
|
3,338,403
|
|
|
|
3,498,344
|
|
|
|
512,510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
|
|
Note
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
|
|
|
(RMB000)
|
|
|
(RMB000)
|
|
|
(RMB000)
|
|
|
(US$000)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
(11,842
|
)
|
|
|
(11,548
|
)
|
|
|
(22,969
|
)
|
|
|
(3,365
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
|
|
(11,842
|
)
|
|
|
(11,548
|
)
|
|
|
(22,969
|
)
|
|
|
(3,365
|
)
|
|
|
|
|
Share of profit (loss) from subsidiaries
|
|
|
|
|
215,826
|
|
|
|
(232,412
|
)
|
|
|
21,254
|
|
|
|
3,114
|
|
Interest income
|
|
|
|
|
13,757
|
|
|
|
23
|
|
|
|
4
|
|
|
|
1
|
|
Interest expense
|
|
|
|
|
|
|
|
|
(43,397
|
)
|
|
|
(98,066
|
)
|
|
|
(14,367
|
)
|
Change in fair value of derivative contracts
|
|
|
|
|
|
|
|
|
71,673
|
|
|
|
30,506
|
|
|
|
4,469
|
|
Changes in fair value of conversion feature
of convertible bonds
|
|
|
|
|
|
|
|
|
|
|
|
|
(73,887
|
)
|
|
|
(10,824
|
)
|
Exchange losses
|
|
|
|
|
(69,704
|
)
|
|
|
(64,830
|
)
|
|
|
(2,069
|
)
|
|
|
(304
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before tax
|
|
|
|
|
148,037
|
|
|
|
(280,491
|
)
|
|
|
(145,227
|
)
|
|
|
(21,276
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
|
|
148,037
|
|
|
|
(280,491
|
)
|
|
|
(145,227
|
)
|
|
|
(21,276
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Solarfun
Power Holdings Co., Ltd. shareholders
|
|
|
|
|
148,037
|
|
|
|
(280,491
|
)
|
|
|
(145,227
|
)
|
|
|
(21,276
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- F-48 -
SOLARFUN POWER HOLDINGS CO., LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2008 AND 2009 AND
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2009
33. ADDITIONAL FINANCIAL INFORMATION OF THE COMPANY (CONTD)
Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
|
(RMB000)
|
|
|
(RMB000)
|
|
|
(RMB000)
|
|
|
(US$000)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(9,787
|
)
|
|
|
(19,326
|
)
|
|
|
(6,401
|
)
|
|
|
(938
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(1,070,996
|
)
|
|
|
(1,642,640
|
)
|
|
|
(134,059
|
)
|
|
|
(19,640
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
6,690
|
|
|
|
1,665,486
|
|
|
|
135,920
|
|
|
|
19,912
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(1,074,093
|
)
|
|
|
3,520
|
|
|
|
(4,540
|
)
|
|
|
(666
|
)
|
Cash and cash equivalents at the beginning of year
|
|
|
1,080,706
|
|
|
|
6,613
|
|
|
|
10,133
|
|
|
|
1,485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at the end of year
|
|
|
6,613
|
|
|
|
10,133
|
|
|
|
5,593
|
|
|
|
819
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes to the Financial Statements of the Company
(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 or acquisition. 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 ASC 323-10,
Investments-Equity Method and Joint Ventures
. Such investment is
presented on the balance sheet as Investment in subsidiaries and share of the subsidiaries
profit or loss as Share of profit (loss) from subsidiaries on the statements of operations.
The subsidiaries did not pay any dividends to the Company for the periods presented.
Certain information and footnote disclosures normally included in financial statements prepared in
accordance with US GAAP have been condensed or omitted.
(b) Related party transactions and balances
For the years ended December 31, 2008 and 2009, the Company made advances to its subsidiaries
amounting to approximately RMB2,594,889,000 and RMB2,728,948 (US$399,794), respectively. During
the same period, a subsidiary of the Company paid operating expenses amounting to approximately
RMB20,715,000 and RMB6,538,000 (US$957,822), respectively, on behalf of the Company.
As of December 31, 2008 and 2009, all balances with related parties were unsecured, non-interesting
bearing and repayable on demand.
- F-49 -
SOLARFUN POWER HOLDINGS CO., LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2008 AND 2009 AND
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2009
33. ADDITIONAL FINANCIAL INFORMATION OF THE COMPANY (CONTD)
Notes to the Financial Statements of the Company
(contd)
(c) Long-term deferred expenses
As of December 31, 2007, the Company accrued for the costs related to the issuance of convertible
bonds (Note 22) amounting to approximately RMB44,385,000 and such issuance costs are to be
amortized over 10 years using the effective interest rate method. These issuance costs have been
recorded as long-term deferred expenses.
As of December 31, 2009, the unamortized costs related to the issuance of convertible bonds
amounted to approximately RMB31,375,000.
(d) Other payables
As of December 31, 2009, other payables mainly included interest payable to holders of convertible
bonds for approximately RMB19,000,000 (US$2,783,515).
(e) Commitments
The Company did not have any significant commitments or long-term obligations, other than the
convertible bonds, as of any of the periods presented.
(f) Foreign currencies
The United States dollar amounts disclosed in the Company-only financial statements are presented
solely for the convenience of the readers. Translation of amounts from Renminbi into United States
dollars for the convenience of the readers were calculated at the noon buying rate of US$1.00 =
RMB6.8259 on December 31, 2009 in the City of New York for cable transfers of Renminbi certified
for customs purposes by the Federal Reserve Bank of New York. No representation is made that the
Renminbi amounts could have been, or could be, converted into United States dollars at such rate.
- F-50 -