Hanwha SolarOne Co., Ltd
Solarfun Power Holdings Co., Ltd. (Form: 424B2, Received: 11/12/2010 08:36:27)
Table of Contents

Filed Pursuant to Rule 424(b)(2)
Registration Numbers 333-152005 and 333-170539
PROSPECTUS SUPPLEMENT
(To Prospectus Dated July 16, 2008)
 
8,000,000 American Depositary Shares
 
(SOLARFUN LOGO)
 
Solarfun Power Holdings Co., Ltd.
REPRESENTING 40,000,000 ORDINARY SHARES
 
We are offering 8,000,000 American Depositary Shares, or ADSs, by this prospectus supplement and the accompanying prospectus dated July 16, 2008. Each ADS represents five ordinary shares, par value US$0.0001 per ordinary share. The ADSs are evidenced by American Depositary Receipts, or ADRs.
 
Our ADSs are listed on the Nasdaq Global Market under the symbol “SOLF.” The last reported sale price of our ADSs on November 10, 2010 was US$10.13 per ADS.
 
 
 
 
Investing in the ADSs involves risks. See “Risk Factors” beginning on page S-10.
 
 
 
 
PRICE $9.00 PER ADS
 
 
 
 
                         
        Underwriting
   
        Discounts and
   
    Price to Public   Commissions   Proceeds to Company
 
Per ADS
  $ 9.00     $ 0.36     $ 8.64  
Total
  $ 72,000,000     $ 2,880,000     $ 69,120,000  
 
We have granted the underwriters the right to purchase up to 1,200,000 ADSs to cover over-allotments.
 
The Securities and Exchange Commission and state securities regulators have not approved or disapproved of these securities, or determined if this prospectus supplement or the accompanying prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
 
The underwriters expect to deliver the shares to purchasers on November 16.
 
 
 
 
MORGAN STANLEY UBS INVESTMENT BANK
HSBC WELLS FARGO SECURITIES
 
 
 
 
November 10, 2010


 

 
TABLE OF CONTENTS
 
         
PROSPECTUS SUPPLEMENT
       
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INDEX TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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PROSPECTUS
 
         
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ABOUT THIS PROSPECTUS SUPPLEMENT
 
This document contains two parts. The first part is this prospectus supplement, which describes the specific terms of the offering and other matters relating to us and our financial condition. The second part is the attached base prospectus, which gives more general information about securities we may offer from time to time, some of which may not apply to the ADSs we are offering. The information in this prospectus supplement replaces any inconsistent information included in the accompanying prospectus. Generally, when we refer to the prospectus, we are referring to both parts of this document combined. If information in the prospectus supplement differs from information in the accompanying prospectus, you should rely on the information in this prospectus supplement.
 
In this prospectus, unless otherwise indicated or unless the context otherwise requires,
 
  •  “ADRs” are to the American depositary receipts that evidence our ADSs;
 
  •  “ADSs” are to our American depositary shares, each of which represents five ordinary shares;
 
  •  “China” or the “PRC” are to the People’s Republic of China, excluding, for the purpose of this prospectus only, Taiwan and the special administrative regions of Hong Kong and Macau;
 
  •  “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;
 
  •  “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;
 
  •  “GW” are to gigawatt, representing 1,000,000,000 watts, a unit of power-generating capacity or consumption;
 
  •  “MW” are to megawatt, representing 1,000,000 watts, a unit of power-generating capacity or consumption. In this prospectus, it is assumed that, based on a yield rate of 95%, 420,000 125mm x 125mm or 280,000 156mm x 156mm silicon wafers are required to produce PV products capable of generating 1 MW, that each 125mm x 125mm and 156mm x 156mm PV cell generates 2.4 watts and 3.7 watts of power, respectively, and that each PV module contains 72 125mm x 125mm PV cells or 54 156mm x 156mm PV cells;
 
  •  “PV” are to photovoltaic. The photovoltaic effect is a process by which sunlight is converted into electricity;
 
  •  “RMB” and “Renminbi” are to the legal currency of China;
 
  •  “series A convertible preference shares” are to our series A convertible preference shares, par value US$0.0001 per share;
 
  •  “shares” or “ordinary shares” are to our ordinary shares, par value US$0.0001 per share. For the purpose of computing 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 and the 30,672,689 ordinary shares issued to Hanwha Solar are not considered outstanding;
 
  •  “W” are to watt, a unit of power-generating capacity or consumption; and
 
  •  “US$” and “U.S. dollars” are to the legal currency of the United States.
 
Unless otherwise stated, the translations of RMB into U.S. dollars have been made at the exchange rate as set forth on September 30, 2010 in the H.10 statistical release of the Federal Reserve Board, which was RMB6.6905 to US$1.00. We make no representation that the RMB or dollar amounts referred to in this prospectus supplement could have been or could be converted into dollars or RMB, as the case may be, at any particular rate or at all.


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References in this prospectus to our annual manufacturing capacity assume 24 hours of operation per day for 350 days per year.
 
Unless the context indicates otherwise, “we,” “us,” “our company” and “our” refer to Solarfun Power Holdings Co., Ltd., its predecessor entities and its consolidated subsidiaries.
 
You should rely only on the information contained or incorporated by reference in this prospectus supplement, the prospectus or any free writing prospectus prepared by us. We and the underwriters have not authorized anyone else to provide you with different or additional information. We are not making an offer of the ADSs in any jurisdiction where the offer is not permitted. You should not assume that the information contained or incorporated by reference in this prospectus supplement or in the prospectus is accurate as of any date other than the date on the front of that document. Our business, financial condition, results of operations and prospectus may have changed since that date. Neither this prospectus supplement nor the accompanying prospectus constitutes an offer, or an invitation on our behalf or on behalf of the underwriters to subscribe for and purchase, any of the ADSs and may not be used for or in connection with an offer or solicitation by anyone, in any jurisdiction in which such an offer or solicitation is not authorized or to any person to whom it is unlawful to make such an offer or solicitation.


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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
 
This prospectus supplement and the documents incorporated by reference contain statements of a forward-looking nature. These statements are made under the “safe harbor” provisions of the U.S. Private Securities Litigation Reform Act of 1995.
 
In some cases, these forward-looking statements can be identified by words or phrases such as “aim,” “anticipate,” “believe,” “continue,” “estimate,” “expect,” “intend,” “is/are likely to,” “may,” “plan,” “potential,” “will” or other similar expressions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements include, among other things, statements relating to:
 
  •  our expectations with respect to our ability to re-negotiate the terms of our multi-year supply agreements;
 
  •  our expectations regarding the worldwide demand for electricity and the market for solar energy;
 
  •  our beliefs regarding the effects of environmental regulation, lack of infrastructure reliability and long-term fossil fuel supply constraints;
 
  •  our beliefs regarding the inability of traditional fossil fuel-based generation technologies to meet the demand for electricity;
 
  •  our beliefs regarding the importance of environmentally friendly power generation;
 
  •  our expectations regarding governmental support for the deployment of solar energy;
 
  •  our beliefs regarding the acceleration of adoption of solar technologies;
 
  •  our expectations with respect to advancements in our technologies;
 
  •  our beliefs regarding the competitiveness of our solar products;
 
  •  our expectations regarding the scaling of our manufacturing capacity;
 
  •  our expectations with respect to revenue growth and profitability;
 
  •  our expectations with respect to our ability to secure raw materials, especially silicon-related materials, in the future;
 
  •  competition from other manufacturers of PV products and conventional energy suppliers;
 
  •  our future business development, results of operations and financial condition; and
 
  •  future economic or capital market conditions.
 
We would like to caution you not to place undue reliance on these statements and you should read these statements in conjunction with the risk factors disclosed in this prospectus supplement for a more complete discussion of the risks of an investment in our ADSs and other risks outlined in our other filings with the Securities and Exchange Commission, or the SEC. The forward-looking statements included in this prospectus supplement or incorporated by reference into this prospectus supplement are made only as of the date of this prospectus supplement or the date of the incorporated document, and we do not undertake any obligation to update the forward-looking statements except as required under applicable law.


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PROSPECTUS SUPPLEMENT SUMMARY
 
The following summary highlights selected information contained elsewhere in this prospectus supplement, the accompanying prospectus and in the documents incorporated by reference in this prospectus supplement and does not contain all the information you will need in making your investment decision. You should read carefully this entire prospectus supplement, including the “Risk Factors” section, the accompanying prospectus and the documents incorporated by reference in this prospectus supplement, which are described under “Where You Can Find More Information About Us.”
 
Our Company
 
We are a leading manufacturer of silicon ingots, wafers, PV cells and PV modules in China. We manufacture a variety of silicon ingots, wafers, 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 to third parties. We sell our high quality PV cells and PV modules both directly to system integrators and through third party distributors. In the nine months ended September 30, 2010, we sold our products to over 40 customers, mostly in Germany, Italy, Australia, the United States, China, Portugal and the Czech Republic. We conduct our business in China through our operating subsidiary, Linyang China.
 
We currently have 900 MW of annual PV module production capacity and 500 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 17.0% to 17.8% and 15.5% to 16.3%, respectively, in the nine months ended September 30, 2010. In addition, we currently have 360 MW of annual ingot production capacity and 400 MW of annual wire sawing capacity. We plan to expand our PV module production capacity from 900 MW to 1,500 MW, PV cell production capacity from 500 MW to 1,300 MW, ingot production capacity from 360 MW to 800 MW and wire sawing capacity from 400 MW to 800 MW by the end of 2011. In an effort to further improve our technological capability, we plan to adopt selective emitter technology in the fourth quarter of 2010 and rear passivation technology in 2011.
 
Our principal executive offices are located at 888 Linyang Road, Qidong, Jiangsu Province, 226200, People’s 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 prospectus supplement. 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 Industry
 
The PV industry has experienced continued robust growth in both established and emerging solar markets in recent years. According to Solarbuzz, an independent solar energy research firm, the global PV market increased from 2.4 GW in 2007 to 7.3 GW in 2009 in terms of total annual PV installations, representing a compound annual growth rate of 74.4% from 2007 to 2009 and is expected to increase to 20.9 GW in 2012. According to Solarbuzz, manufacturers based in Asia are gaining market share due to their cost competitiveness. Our annual module shipment has increased from 78 MW in 2007 to 313 MW in 2009, representing a compound annual growth rate of 100.3% from 2007 to 2009.


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THE OFFERING
 
The offering 8,000,000 ADSs.
 
Offering price US$9.00 per ADS.
 
The ADSs Each ADS represents five ordinary shares, par value US$0.0001 per ordinary share. The offered ADSs are evidenced by American Depositary Receipts.
 
ADSs outstanding immediately after this offering 40,686,250 ADSs, assuming no exercise of the over-allotment option by the underwriters. 1
 
Ordinary shares outstanding immediately after this offering 367,067,668 ordinary shares (including ordinary shares represented by ADSs), assuming no exercise of the over-allotment option by the underwriters. 2
 
Depositary The Bank of New York Mellon.
 
Private placement to Hanwha Solar Contingent upon and within seven days after the completion of this offering, we plan to issue and sell to Hanwha Solar Holdings Co., Ltd., or Hanwha Solar, a certain number of additional ordinary shares at the public offering price of this offering that will allow Hanwha Solar to maintain its level of equity ownership in our company at 49.99%, pursuant to Regulation S of the Securities Act of 1933, as amended, or the Securities Act. See “Recent Developments — Strategic Investment by Hanwha Solar.”
 
Use of proceeds We intend to use the proceeds of this offering for capital expenditures and general working capital purposes.
 
Risk factors See “Risk Factors” and other information included in this prospectus supplement and the accompanying prospectus for a discussion of factors you should carefully consider before deciding to invest in our ADSs.
 
Nasdaq Global Market Symbol for our ADSs Our ADSs are listed on the Nasdaq Global Market under the symbol “SOLF.”
 
Over-allotment option We have granted to the underwriters an option, exercisable not later than 30 days after the date of this prospectus supplement, to purchase up to 1,200,000 additional ADSs at the public offering price less the underwriting discounts and commissions set forth on the cover page of this prospectus supplement.
 
 
1  Calculated using 32,686,250 ADSs outstanding as of November 8, 2010. The number of ADSs that will be outstanding immediately after this offering excludes (i) the 9,019,611 ADSs which were issued to facilitate our convertible bond offering in January 2008 and (ii) the 319,232 ADSs which have been reserved by our company to allow for the participation in the ADS programe by our employees pursuant to our equity incentive plans. Such ADSs have been classified as being excluded from shareholders’ equity for accounting purposes.
2  Calculated using 327,067,668 ordinary shares (including ordinary shares represented by ADSs) outstanding as of November 8, 2010. The number of ordinary shares that will be outstanding immediately after this offering excludes (i) the 9,019,611 ADSs which were issued to facilitate our convertible bond offering in January 2008; (ii) the 30,672,689 ordinary shares issued to Hanwha Solar in connection with Hanwha Solar’s purchase of 36,455,089 ordinary shares of our company, at par value of US$0.0001 per ordinary share, in September 2010; and (iii) the 319,232 ADSs which have been reserved by our company to allow for the participation in the ADS program by our employees pursuant to our equity incentive plans, from time to time. Such ADSs and ordinary shares have been classified as being excluded from shareholders’ equity for accounting purposes


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RECENT DEVELOPMENTS
 
The following condensed consolidated balance sheet data as of December 31, 2009 has been derived from our audited consolidated financial statements, which have been audited by Ernst & Young Hua Ming, an independent registered public accounting firm. The following condensed consolidated statement of operation data for the nine months ended September 30, 2009 and 2010 and the condensed consolidated balance sheet data as of September 30, 2010 have been derived from our unaudited condensed consolidated financial statements included elsewhere in this prospectus supplement. We have prepared the unaudited condensed consolidated financial statements on the same basis as our audited consolidated financial statements and in accordance with United States generally accepted accounting principles (“U.S. GAAP”). Results for the nine months ended September 30, 2010 may not be indicative of our full year results for 2010 or for future periods. See “Operating and Financial Review and Prospects” included in our annual report on Form 20-F for the year ended December 31, 2009 and filed with the SEC on May 25, 2010 (as amended on June 29, 2010), incorporated by reference into this prospectus supplement, for information regarding trends and other factors that may influence our results of operations.
 
                         
    Nine Months Ended September 30,
    2009   2010
    (RMB)   (RMB)   (US$)
    (In thousands, except share and per share data)
 
Condensed Consolidated Statement of Operation Data
                       
Net revenues
    2,525,605       5,414,289       809,252  
Cost of revenues
    (2,324,795 )     (4,276,595 )     (639,204 )
Gross profit
    200,810       1,137,694       170,048  
Operating expenses
                       
Selling expenses
    (59,340 )     (112,914 )     (16,877 )
General and administrative expenses
    (130,123 )     (135,835 )     (20,303 )
Research and development expenses
    (19,182 )     (38,878 )     (5,811 )
Total operating expenses
    (208,645 )     (287,627 )     (42,991 )
Operating (loss) profit
    (7,835 )     850,067       127,057  
Interest expenses
    (118,245 )     (121,019 )     (18,088 )
Interest income
    3,704       3,791       567  
Exchange losses
    (9,120 )     (53,049 )     (7,929 )
Changes in fair value of derivative contracts
    (5,803 )     40,026       5,983  
Changes in fair value of conversion feature of convertible bonds
    (2,608 )     (223,968 )     (33,476 )
Other income
    5,021       17,290       2,584  
Other expenses
    (9,789 )     (3,771 )     (564 )
Government grants
    5,661       26,229       3,920  
(Loss) income before income taxes
    (139,014 )     535,596       80,054  
Income tax expenses
    (16,590 )     (149,055 )     (22,279 )
Net (loss) income
    (155,604 )     386,541       57,775  
Net (income) attributable to non-controlling interest
    (244 )            
Net (loss) income attributable to Solarfun Power Holdings Co., Ltd. shareholders
    (155,848 )     386,541       57,775  
Net (loss) income attributable to Solarfun Power Holdings Co., Ltd. shareholders per share
                       
Basic
    (0.58 )     1.32       0.20  
Diluted
    (0.58 )     1.32       0.20  
Number of shares used in computation of net (loss) income per share
                       
Basic
    269,395,297       291,904,408       291,904,408  
Diluted
    269,395,297       292,740,592       292,740,592  
 


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    As of
  As of
    December 31,
  September 30,
    2009   2010
    (RMB)   (RMB)   (US$)
        (In thousands)    
 
Condensed Consolidated Balance Sheet Data
                       
Assets
                       
Cash and cash equivalents
    645,720       1,296,734       193,817  
Restricted cash
    60,539       63,858       9,545  
Accounts receivable — net
    587,488       1,289,932       192,800  
Inventories — net
    783,973       689,566       103,066  
Advance to suppliers — net
    979,762       1,246,336       186,284  
Other current assets
    180,315       236,285       35,318  
Deferred tax assets — net
    63,115       75,734       11,320  
Derivative contracts
    7,360       1,910       285  
Amount due from related parties
    12,458              
Fixed assets — net
    1,586,283       1,829,395       273,432  
Intangible assets — net
    208,563       206,856       30,918  
Deferred tax assets — net
    13,789       16,239       2,427  
Long-term deferred expenses
    33,158       29,639       4,430  
Goodwill
    134,735       134,735       20,138  
Total assets
    5,297,258       7,117,219       1,063,780  
Short-term bank borrowings
    404,764       748,010       111,802  
Long-term bank borrowings, current portion
    90,000       202,500       30,267  
Accounts payable
    441,768       528,902       79,053  
Notes payable
    186,921       142,509       21,300  
Accrued expenses and other liabilities
    191,895       356,860       53,338  
Customer deposits
    59,685       127,498       19,057  
Deferred tax liabilities
          766       115  
Unrecognized tax benefit
    27,385       27,385       4,093  
Derivative contracts
    1,148       70,605       10,553  
Amount due to related parties
    16,765       13,767       2,058  
Long-term bank borrowings
    380,000       200,000       29,893  
Deferred tax liabilities
    26,566       26,124       3,905  
Convertible bonds
    658,653       928,369       138,759  
Total Liabilities
    2,485,550       3,373,295       504,193  
Redeemable ordinary shares (par value US$0.0001 per share; 45,098,055 shares issued and outstanding as of December 31, 2009 and September 30, 2010)
    55       55       8  
Total shareholders’ equity
    2,811,653       3,743,869       559,579  
Total liabilities, redeemable ordinary shares and shareholders’ equity
    5,297,258       7,117,219       1,063,780  

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The following table set forth a summary of our cash flows for the periods indicated:
 
                         
    Nine Months Ended September 30,
    2009   2010
    (RMB)   (RMB)   (US$)
    (In thousands, except share
    and per share data)
 
Net cash provided by operating activities
    383,682       218,042       32,589  
Net cash used in investing activities
    (362,112 )     (363,243 )     (54,292 )
Net cash provided by financing activities
    360,715       796,215       119,007  
Net increase in cash and cash equivalents
    382,285       651,014       97,304  
 
Nine Months Ended September 30, 2010 Compared to Nine Months Ended September 30, 2009
 
Net Revenues
 
Our total net revenues increased to RMB5,414.3 million (US$809.3 million) in the nine months ended September 30, 2010 from RMB2,525.6 million in the nine months ended September 30, 2009. Our net revenues derived from our PV module business (excluding PV module processing) increased to RMB4,806.7 million (US$718.4 million) in the nine months ended September 30, 2010 from RMB2,222.5 million in the nine months ended September 30, 2009, due primarily to the increase in our PV module sales volume to 413.4MW in the nine months ended September 30, 2010 from 134.5 MW in the nine months ended September 30, 2009. The increase in our PV module sales volume was partially offset by a decrease in the average selling price of our PV modules (excluding PV module processing) by 29.6% to RMB11.63 (US$1.74) per watt in the nine months ended September 30, 2010 from RMB16.52 per watt in the nine months ended September 30, 2009 in accordance with the changes in market prices of PV products. In the nine months ended September 30, 2010, we derived 88.8% of our total net revenues from the sale of PV modules, compared to 88.0% in the nine months ended September 30, 2009.
 
Cost of Revenues and Gross Profit
 
Our cost of revenues increased by 84.0% to RMB4,276.6 million (US$639.2 million) in the nine months ended September 30, 2010 from RMB2,324.8 million in the nine months ended September 30, 2009. In particular, the costs associated with PV module production increased by 81.3% to RMB3,781.4 million (US$565.2 million) in the nine months ended September 30, 2010 from RMB2,085.2 million in the nine months ended September 30, 2009, due primarily to an increase in our expenditures on raw materials, which was caused by an increase in the sales volume of our PV products. Our write-down of inventories decreased to RMB99.2 (US$14.8 million) in the nine months ended September 30, 2010 from RMB242.2 million in the nine months ended September 30, 2009 which mainly represented the unqualified silicon materials down-grade and low-effeciency PV cells and PV modules.
 
As a result of the foregoing, our gross profit increased to RMB1,137.7 million (US$170.0 million) in the nine months ended September 30, 2010 from RMB200.8 million in the nine months ended September 30, 2009. Our gross profit margin increased to 21.0% in the nine months ended September 30, 2010 from 8.0% in the nine months ended September 30, 2009, primarily because we benefited from a decreases in the unit costs of silicon, silicon wafers and other raw materials, which more than offset the decrease in the average selling price of our PV products, and because we were able to achieve higher operational efficiency and a higher utilization rate for our manufacturing facilities.
 
Operating Expenses and Operating (Loss) Profit
 
Our operating expenses increased by 37.9% to RMB287.6 million (US$43.0 million) in the nine months ended September 30, 2010 from RMB208.6 million in the nine months ended September 30, 2009. Our operating expenses as a percentage of our total net revenues decreased to 5.3% in the nine months ended September 30, 2010 from 8.3% in the nine months ended September 30, 2009.
 
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


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personnel. Our selling expenses increased by 90.3% to RMB112.9 million (US$16.9 million) in the nine months ended September 30, 2010 from RMB59.3 million in the nine months ended September 30, 2009, due primarily to an increase in warranty costs of RMB26.1 million (US$3.9 million), as a result of the increase in our net revenues, and our additional marketing activities and hiring of sales personnel in order to expand our customer base and geographic coverage. Selling expenses as a percentage of our total net revenues decreased to 2.1% in the nine months ended September 30, 2010 from 2.3% in the nine months ended September 30, 2009.
 
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 4.4% to RMB135.8 million (US$20.3 million) in the nine months ended September 30, 2010 from RMB130.1 million in the nine months ended September 30, 2009, due primarily to an increase in professional fees we incurred in the nine months ended September 30, 2010. General and administrative expenses as a percentage of our total net revenues decreased to 2.5% in the nine months ended September 30, 2010 from 5.2% in the nine months ended September 30, 2009.
 
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 to RMB38.9 million (US$5.8 million) in the nine months ended September 30, 2010 from RMB19.2 million in the nine months ended September 30, 2009. The increase was primarily because we hired additional research and development staff to conduct additional research and development activities in the nine months ended September 30, 2010. Research and development expenses as a percentage of our total net revenues decreased to 0.7% in the nine months ended September 30, 2010 from 0.8% in the nine months ended September 30, 2009.
 
As a result of the foregoing, our operating profit was RMB850.1 million (US$127.1 million) in the nine months ended September 30, 2010, compared to an operating loss of RMB7.8 million in the nine months ended September 30, 2009. Our operating profit margin increased to 15.7% in the nine months ended September 30, 2010 from a negative margin of 0.3% in the nine months ended September 30, 2009.
 
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 RMB3.8 million (US$0.6 million) and at the same time incurred interest expenses of RMB121.0 million (US$18.1 million) in the nine months ended September 30, 2010, compared to interest income of RMB3.7 million and interest expenses of RMB118.2 million in the nine months ended September 30, 2009. The increase in interest expenses was due primarily to our increased bank borrowings.
 
We incurred exchange losses of RMB53.0 million (US$7.9 million) in the nine months ended September 30, 2010, compared to exchange losses of RMB9.1 million in the nine months ended September 30, 2009, due primarily to the depreciation of the Euro against the Renminbi.
 
Our other income increased to RMB17.3 million (US$2.6 million) in the nine months ended September 30, 2010 from RMB5.0 million in the nine months ended September 30, 2009, due primarily to an increase in sales of scrap materials as we expanded our operations. Our other expenses decreased to RMB3.8 million (US$0.6 million) in the nine months ended September 30, 2010 from RMB9.8 million in the nine months ended September 30, 2009 primarily because a decrease in bank charges.
 
We recorded an increase of RMB40.0 million (US$6.0 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 the nine months ended September 30, 2010.
 
We recorded a decrease of RMB224.0 million (US$33.5 million) in changes in fair value of conversion feature of convertible bonds in the nine months ended September 30, 2010 as a result of changes in our ADS price.


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Our government grants increased to RMB26.2 million (US$3.9 million) in the nine months ended September 30, 2010 from RMB5.7 million in the nine months ended September 30, 2009, primarily because we received unconditional government grants from various government entities in the nine months ended September 30, 2010.
 
Income Tax Expenses
 
Our income tax expenses increased to RMB149.1 million (US$22.3 million) in the nine months ended September 30, 2010 from RMB16.6 million in the nine months ended September 30, 2009, due primarily to the increase in our taxable income. In addition, Jiangsu Linyang Solarfun Co., Ltd., our operating subsidiary in China, is subject to an income tax rate of 15% starting from January 1, 2010, compared to 12.5% in the year ended December 31, 2009.
 
Consolidated Net (Loss) Income
 
As a result of the cumulative effect of the above factors, we had consolidated net income of RMB386.5 million (US$57.8 million) in the nine months ended September 30, 2010, compared to a loss of RMB155.6 million in the nine months ended September 30, 2009. Our net profit margin increased to 7.1% in the nine months ended September 30, 2010 from a negative margin of 6.2% in the nine months ended September 30, 2009.
 
Liquidity and Financial Resources
 
Our net cash provided by operating activities was RMB218.0 million (US$32.6 million) in the nine months ended September 30, 2010, which was derived from consolidated net income of RMB386.5 million (US$57.8 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 changes in fair value of conversion feature of convertible bonds of RMB224.0 million (US$33.5 million), depreciation and amortization of RMB136.1 million (US$20.3 million), write-down of inventories of RMB99.2 million (US$14.8 million) and unrealized loss from derivative contracts of RMB74.9 million (US$11.2 million). The adjustments relating to changes in operating assets and liabilities, which resulted in a net decrease of RMB814.3 million (US$121.7 million), were primarily comprised of:
 
  •  an increase of RMB703.2 million (US$105.1 million) in accounts receivable, primarily as a result of the increase in our net revenues and because we granted our customers longer credit terms to enhance the competitiveness of our PV products;
 
  •  an increase of RMB266.7 million (US$39.9 million) in advance to suppliers primarily as a result of increased prepayments to our suppliers for purchases of silicon-related materials;
 
  •  an increase of RMB116.7 million (US$17.4 million) in accrued expenses and other liabilities, primarily due to an increase in income tax payables, as a result of the increase in our taxable income, and warranty costs, as a result of the increase in our net revenues; and
 
  •  an increase of RMB114.5 million (US$17.1 million) in other current assets, primarily because the increase of tax recoverables in relation to the export tax rebates.
 
Our net cash used in investing activities was RMB363.2 million (US$54.3 million) in the nine months ended September 30, 2010, primarily consisting of RMB355.0 million (US$53.1 million) of cash used for the acquisition of fixed assets, primarily our manufacturing machinery and equipment.
 
Our net cash provided by financing activities was RMB796.2 million (US$119.0 million) in the nine months ended September 30, 2010. This was mainly attributable to proceeds from short-term bank borrowings of RMB1,066.2 million (US$159.4 million) and proceeds from our issuance of ordinary shares of RMB510.3 million (US$76.3 million), partially offset by our payments of short-term bank borrowings of RMB723.0 million (US$108.1 million).


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As of September 30, 2010, we had outstanding short-term bank borrowings of RMB748.0 million (US$111.8 million), which bore an average interest rate of 4.48% per annum. These short-term bank borrowings have terms of one month to one year.
 
As of September 30, 2010, we had outstanding long-term bank borrowings of RMB402.5 million (US$60.2 million), of which the current portion amounted to RMB202.5 million (US$30.3 million), which will be due from December 29, 2010 to September 29, 2011, and the non-current portion amounted to RMB200.0 million (US$29.9 million), which will be due from December 26, 2011 to September 13, 2012. Our long-term bank borrowings outstanding as of September 30, 2010 bore an average interest rate of 5.51% per annum.
 
As of September 30, 2010, we had RMB1,155.8 million (US$172.5 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 bonds 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.
 
In addition, as of September 30, 2010, we had amount due to related parties of RMB13.8 million (US$2.1 million), consisting of RMB9.3 million (US$1.4 million) due to Ya An Yongwang Silicon Co., Ltd., in which our largest shareholder Hanwha Solar holds a 49.99% equity interest, in relation to our purchase of polysilicon, and RMB4.4 million (US$0.7 million) due to SMIC Energy Technology (Shanghai), a wholly owned subsidiary of SMIC, a company where David N.K. Wang, our independent director, serves as president and chief executive officer, in relation to lease and service payments.
 
As of September 30, 2010, we had cash and cash equivalents in the amount of RMB1,296.7 million (US$193.8 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.
 
Strategic Investment by Hanwha Solar
 
We entered into a share purchase agreement on August 3, 2010 with Hanwha Chemical Corporation, or Hanwha Chemical, a leading global chemical company headquartered in Korea, under which Hanwha Chemical agreed to purchase 36,455,089 ordinary shares from us at a price of US$2.144 per ordinary share, which corresponds to a price of US$10.72 per ADS. Hanwha Chemical subsequently assigned and transferred its rights and obligations under the share purchase agreement to Hanwha Solar Holdings Co., Ltd., or Hanwha Solar, a wholly owned subsidiary of Hanwha Chemical and the sale and purchase of these ordinary shares was consummated on September 16, 2010. In addition, we entered into a share issuance and repurchase agreement on September 16, 2010 with Hanwha Solar, under which we agreed to issue to Hanwha Solar a total of 45,080,019 ordinary shares at par value of US$0.0001 per ordinary share, which shares shall remain outstanding so long as and to the extent that the 9,019,611 ADSs we issued to facilitate our convertible bond offering in January 2008 remain outstanding. Pursuant to the share issuance and repurchase agreement, we issued to Hanwha Solar 30,672,689 ordinary shares on September 16, 2010 and an additional 14,407,330 ordinary shares are expected to be issued to Hanwha Solar at par value upon obtaining shareholder approval for this issuance. The total proceeds to us from these transactions amounted to approximately US$78 million. At the same time, Hanwha Solar completed the acquisitions from Good Energies II LP and Yonghua Solar Power Investment Holding Ltd. of a total of 120,407,700 ordinary shares and 1,281,011 ADSs of our company, representing all of the ordinary shares and ADSs held by them. As a result of these transactions, Hanwha Solar owns a 49.99% equity interest in our company, taking into account the previously agreed issuance of an additional 14,407,330 ordinary shares to Hanwha Solar at par value.
 
In connection with the share issuance to Hanwha Solar, we and Hanwha Solar entered into a shareholder agreement on September 16, 2010 that provides for certain rights for Hanwha Solar, including:
 
  •  Registration rights, see “Description of Share Capital — Registration Rights”;
 
  •  A preemptive right to acquire additional ordinary shares of our company;


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  •  A right to designate three directors, including one director to serve on our nominating committee; and
 
  •  A right to veto major corporate actions, including the amendment of our memorandum and articles of association, declaration of dividends and liquidation.
 
Pursuant to the shareholder agreement, Hanwha Solar agreed not to commence an offer to acquire control of a majority of our company during a one-year period starting from September 16, 2010. Hanwha Solar has also agreed to be subject to a lock-up arrangement. See “Description of Share Capital — Lock-Up.”
 
Changes in Board of Directors
 
In connection with the investment by Hanwha Solar, effective September 16, 2010, Mr. Yonghua Lu and Mr. John Breckenridge resigned as directors and Mr. Terry McCarthy and Professor Rongqiang Cui resigned as independent directors of our company. On the same date, three designees of Hanwha Solar, Mr. Ki-Joon Hong, Mr. Dong Kwan Kim and Mr. Wook Jin Yoon, were appointed as directors of our company.


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RISK FACTORS
 
You should consider carefully the following factors, as well as the other information set forth in this prospectus supplement, the accompanying prospectus and in the documents incorporated by reference in this prospectus supplement before making an investment decision. Some of the following risks relate principally to the industry in which we operate and our business in general. Other risks relate principally to the securities market and ownership of our ADSs. Any of the risk factors could significantly and negatively affect our business, financial condition or operating results and the trading price of our ADSs. You could lose all or part of your investment.
 
Risks Related to Our Company and Our Industry
 
Demand for our PV products has been, and may continue to be, adversely affected by volatile market and industry trend.
 
Demand for our PV products has been affected by global economic conditions, capital markets fluctuations and credit disruptions. During the second half of 2008 and the first half of 2009, many of our key markets, including Germany, Spain and the United States, and other national economies 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. 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. During the global credit crisis, many of our customers and many end-users of our PV products experienced difficulties in obtaining financing, and even if they were able to obtain financing, the cost of such financing had increased such that they changed their decision or changed the timing of their decision to purchase our PV products. 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 make it difficult for end-users to finance the cost of PV systems and therefore reduce the demand for our PV products and/or lead to a reduction in the average selling price of 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.
 
The average selling price of our PV products may continue to decrease.
 
Beginning in the fourth quarter of 2008, demand for PV products had decreased, 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 in 2009. The average selling price of our PV modules (excluding PV module processing) in the nine months ended September 30, 2010 was RMB11.63 (US$1.73) per watt. 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. Our net profit margin in the nine months ended September 30, 2010 was 7.1%. The average selling prices of our PV products may decline further, 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.
 
As silicon supply increases, the corresponding increase in the global supply of PV modules may adversely affect our ability to increase our maintain market share.
 
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


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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 the PV market may become more competitive. If we fail to compete successfully, our business may suffer and we may lose or be unable to gain market share and our financial condition and results of operations may be materially and adversely affected. 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.
 
The reduction or elimination of government subsidies and economic incentives for on-grid solar energy applications could have a material 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 customer’s 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.
 
The cost of solar energy currently exceeds the cost of power furnished by the electric utility grid in many countries. 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 July 2010, the government of Germany reduced feed-in tariffs for rooftop installations, ground-mounted installations on commercial land and ground-mounted installations on converted land by 13%, 12% and 8%, respectively. Beginning in October 2010, each category of feed-in tariff will be reduced by a further 3%. Installations on agricultural land are ineligible for incentives. In 2007, 2008, 2009 and the nine months ended September 30, 2010, Germany accounted for 49.9%, 53.3%, 70.6% and 65.3% 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 net revenues to decline, and have a material adverse effect on our business, financial condition, results of operations and prospects.
 
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-related materials including silicon, silicon wafers and PV cells, which resulted in significant increases in the prices of these raw materials. To secure an adequate and timely supply of silicon-related materials 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-related materials have been decreasing significantly. Spot market prices of silicon-related materials 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-related materials 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 RMB413.8 million in 2008, then decreased to RMB282.6 million in 2009. Our inventory write-downs amounted to RMB99.2 million (US$14.8 million) in the nine months ended September 30, 2010.


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Due to the significant decrease in prices of silicon-related materials, 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-related materials 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 could be materially and adversely affected. In addition, the prices of our other raw materials are also subject to market forces beyond our control. If the prices of these materials increase in the future, our cost of revenues could be materially and adversely affected.
 
Furthermore, other PV module manufacturers may be able to purchase silicon-related materials 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-related materials 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 our 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.
 
During the course of renegotiation of some of the multi-year supply agreements we entered into previously, we may be subject to legal, administrative or other proceedings if mutual agreement cannot be reached between us and our suppliers. 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 of contract value of approximately RMB800 million, seeking to enforce our performance and claiming for monetary relief. We are in arbitration with respect to the alleged breaches and expect the arbitration to be concluded by the end of 2010. 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. If there is any adverse judgments, our financial condition, results of operations and liquidity could be materially and adversely affected.
 
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 31, 2007, 2008, 2009 and September 30, 2010, we had advanced RMB640.1 million, RMB1,145.6 million, RMB979.8 million and RMB1,246.3 million (US$186.3 million), respectively, to our suppliers. In 2008, 2009 and the nine months ended September 30, 2010, we recorded a provision of RMB42.0 million, RMB234.7 million and RMB0.1 million (US$0.01 million), respectively, 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.


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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:
 
  •  our ability to re-negotiate our existing multi-year supply agreements;
 
  •  our ability to maintain our quality level and keep pace with changes in technology;
 
  •  our ability to adjust inventory levels to respond to rapidly changing market demand;
 
  •  delays in obtaining or denial of required approvals by relevant government authorities; and
 
  •  diversion of significant management attention and other resources to other matters.
 
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%, 65.7% and 56.9% of our net revenues in 2007, 2008, 2009 and the nine months ended September 30, 2010, respectively. Our largest customer in 2007, 2008, 2009 and the nine months ended September 30, 2010 accounted for 12.6%, 22.2%, 40.6% and 37.3% of our net revenues of the respective period. Most of our large customers are located in Europe, particularly in Germany, Italy, Portugal and the Czech Republic. The loss of sales to any one of these customers would have a significant negative impact on our business. Sales to our customers are mostly made through non-exclusive arrangements. Due to our dependence on a limited number of customers, any one of the following events may cause material fluctuations or declines in our revenue and have a material adverse effect on our financial condition and results of operations:
 
  •  reduction, delay or cancellation of orders from one or more of our significant customers;
 
  •  selection by one or more of our significant distributor customers of our competitors’ products;
 
  •  loss of one or more of our significant customers and our failure to identify additional or replacement customers;


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  •  any adverse change in the bilateral or multilateral trade relationships between China and European countries, particularly Germany; and
 
  •  failure of any of our significant customers to make timely payment for our products.
 
We expect 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.
 
We enter into framework agreements with many of our customers 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 key sales terms of the framework agreements may be adjusted from time to time. In addition, we have in the past had to re-negotiate some of our framework agreements due to the disagreements with our customers relating to the volumes, delivery schedules and pricing terms contained in such agreements. However, it may not always be in our best interests to re-negotiate our framework agreements and disagreements on terms may 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. 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.
 
Our dependence on a limited number of suppliers for a substantial majority of silicon-related materials may 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, 2009 and the nine months ended September 30, 2010, our five largest suppliers supplied in the aggregate 59.0%, 42.0%, 51.6% and 56.5%, respectively, of our total silicon and silicon wafer purchases. If we fail to develop or maintain our relationships with these or our other suppliers and we are unable to obtain these materials from alternative sources in a timely manner or on commercially reasonable terms, we may be unable to manufacture our products, in a timely manner or at a reasonable cost, or at all, and as a result, we may not be able to deliver 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 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 on their silicon wafer supply commitments to us where there was an industry-wide shortage of silicon and silicon wafers. As a result, we 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-related materials from our suppliers in the future or that, in the event of such shortfalls, we will be able to find other silicon suppliers to satisfy our production needs. Any disruption in the supply of silicon wafers to us may adversely affect our business, financial condition and results of operations.
 
Our failure to obtain sufficient quantities of silicon-related materials 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-related materials in sufficient volumes. Until mid-2008, there was an industry-wide shortage of silicon-related materials. While we do not believe a similar industry-wide shortage of silicon-related materials 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 or we will always obtain sufficient quantities of silicon-related materials in


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a timely manner. We may experience actual shortages of silicon-related materials or late or failed delivery for the following reasons:
 
  •  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;
 
  •  there are a limited number of silicon and silicon wafer suppliers, and many of our competitors also purchase silicon-related materials from these suppliers and may have longer and stronger relationship with these suppliers than we do;
 
  •  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; and
 
  •  our purchase of silicon-related materials 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.
 
If we fail to obtain delivery of silicon-related materials 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-related materials on time and at commercially reasonable prices could 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 and RMB1,150.5 million (US$172.0 million) as of December 31, 2009 and September 30, 2010, respectively, of which RMB404.8 million and RMB748.0 million (US$111.8 million), respectively, was short-term bank borrowings. In addition, we had US$172.5 million principal amount of convertible bonds, with fair value of RMB658.7 million and RMB928.4 million (US$138.8 million), outstanding as of December 31, 2009 and September 30, 2010, respectively. Our debt could have a significant impact on our future operations and cash flow, including:
 
  •  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;
 
  •  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;
 
  •  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;
 
  •  potentially increasing the cost of any additional financing; and
 
  •  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.
 
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. 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. We


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cannot assure you that future financing will be available in amounts or on terms acceptable to us, if at all. In addition, 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 and limit our ability to obtain the financing required to fund future capital expenditures and working capital. As a result, our ability to plan for, or react effectively to, changing market conditions may be adversely and materially affected.
 
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 and RMB1,150.5 million (US$172.0 million) as of December 31, 2009 and September 30, 2010, respectively. 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:
 
  •  our future financial condition, results of operations and cash flows;
 
  •  general market conditions for financing activities by manufacturers of PV and related products; and
 
  •  economic, political and other conditions in the PRC and elsewhere in the world.
 
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, our expansion may be materially and adversely affected.
 
A substantial majority of our revenue has been generated by sales to customers outside of China. The marketing, distribution and sale of our PV products overseas expose us to a number of risks, including:
 
  •  fluctuations in currency exchange rates of the U.S. dollar, Euro and other foreign currencies against the Renminbi;
 
  •  difficulty in engaging and retaining distributors and agents who are knowledgeable about, and can function effectively in, overseas markets;
 
  •  increased costs associated with maintaining marketing and sales activities in various countries;
 
  •  difficulty and costs relating to compliance with different commercial and legal requirements in the jurisdictions in which we offer our products;
 
  •  inability to obtain, maintain or enforce intellectual property rights; and
 
  •  trade barriers, such as export requirements, tariffs, taxes and other restrictions and expenses, which could increase the prices of our products and make us less competitive in some countries.
 
If we are unable to effectively manage these risks, our ability to conduct or expand our business abroad would be impaired, which may in turn have a material adverse effect on our business, financial condition, results of operations and prospects.
 
Changes in international trade policies and international barriers to trade may adversely affect our ability to export our products worldwide.
 
As our manufacturing facility and some of our customers are located in China, we and our customers may be affected by any claims of unfair trade practices that are brought against the PRC government through the imposition of tariffs, non-tariff barriers to trade or other trade remedies. On September 9, 2010, the United Steel Workers filed a petition with the United States Trade Representative, or USTR, alleging the PRC government has engaged in unfair


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trade policies and practices with respect to certain domestic industries, including the solar power industry. Subsequently, USTR initiated an investigation under Section 301 of the 1974 Trade Act, which is ongoing as of the date of this prospectus. Although we believe we will not be directly affected by the results of this investigation, there can be no assurance that any government or international trade body will not institute adverse trade policies or remedies against exports from China in the future. Any significant changes in international trade policies, practices or trade remedies, especially those instituted in our target markets or markets where our major customers are located, could increase the price of our products compared to our competitors or decrease our customers’ demand for our products, which may adversely affect our business prospects and results of operations.
 
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 PV manufacturers, including domestic, foreign and multinational corporations. We believe that the principal competitive factors in the markets for our products are:
 
  •  manufacturing capacity;
 
  •  power efficiency;
 
  •  product offerings and quality of products;
 
  •  price;
 
  •  strength of supply chain and distribution network;
 
  •  after-sales services; and
 
  •  brand name recognition.
 
Many of our current and potential competitors have longer operating histories, access to larger customer bases and resources and significantly greater economies of scale 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 more 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. It is possible that new competitors or alliances among existing competitors could emerge and rapidly acquire significant market share, which would harm our business. For instance, several semiconductor manufacturers have already announced their intention to commence production of PV cells and PV modules. 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 be materially and adversely affected.
 
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 changes 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 develop, or obtain access to, advances in technologies on a continuous basis in order for us to respond to competitive market conditions and customer demands. In addition, advances in technologies typically lead to


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declining average selling prices for products using older technologies or make our current products less competitive or obsolete. As a result, the profitability of any given product, and our overall profitability, may decrease over time.
 
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 started to expand our business downstream to provide system integration products and services in 2010. 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 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. They may also require significant attention from our management, which 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.
 
Strategic acquisitions, investments and alliances with third parties may be expensive to implement and 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. We may assume unknown liabilities or other unanticipated events or circumstances through acquisitions and investments. Moreover, strategic acquisitions, investments and alliances 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. As a result, 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, results of operations and profitability.
 
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 products are typically sold with a two to five-year unlimited 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


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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, 2009 and September 30, 2010, our accrued warranty costs for the two to five years warranty against technical defects totaled RMB21.0 million, RMB48.6 million, RMB73.5 million and RMB121.8 million (US$18.2 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, we purchase silicon-related materials and other components that we use in our products from third parties. Unlike PV modules, which are subject to certain uniform international standards, silicon-related materials generally do not have uniform international standards, and it is often difficult to determine whether product defects are caused by defects in silicon, silicon wafers or other components of our products or caused by other reasons. Even assuming that our product defects are caused by defects in raw materials, we may not be able to recover our warranty costs from our suppliers because the agreements we entered into with our suppliers typically contain 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, or 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 whether product liability claims will be brought against us in the future or the effect of any resulting negative publicity on our business. See “— We have limited insurance coverage and may incur losses resulting from product liability claims or business interruptions.”
 
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 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:
 
  •  cost-effectiveness of PV products compared to conventional and other non-solar energy sources and products;
 
  •  performance and reliability of PV products compared to conventional and other non-solar energy sources and products;
 
  •  availability of government subsidies and incentives to support the development of the PV industry or other energy resource industries;
 
  •  success of other alternative energy generation technologies, such as fuel cells, wind power and biomass;
 
  •  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;
 
  •  capital expenditures by end users of PV products, which tend to decrease when the overall economy slows down; and
 
  •  deregulation of the electric power industry and the broader energy industry.


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One of our existing shareholders has substantial influence over our company and its interests may not be aligned with the interests of our other shareholders.
 
Hanwha Solar owns 49.99% of our outstanding share capital, taking into account the previously agreed issuance of an additional 14,407,330 ordinary shares to Hanwha Solar at par value. Pursuant to a shareholder agreement between Hanwha Solar and our company dated September 16, 2010, Hanwha Solar has the right to designate three directors to our board and veto major corporate actions. Hanwha Solar has 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 its shares as part of a sale of our company and might reduce the price of our ADSs. In addition, without the consent of Hanwha Solar, we could be prevented from entering into transactions that could be beneficial to us. Hanwha Solar may cause us to take actions that are opposed by other shareholders as its interests may differ from those of other shareholders.
 
Existing regulations and policies governing the electricity utility industry, as well as changes to regulations and policies affecting PV products, 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 lack or inaccessibility of subsidies or 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 subsidies or 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 may cause our sales to decline.
 
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, implementation of PRC intellectual property-related laws has historically been lacking, primarily because of ambiguities in the PRC laws and difficulties in


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enforcement. Accordingly, intellectual property rights and confidentiality protections in China may not be as effective as in the United States or other countries. 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. An adverse determination in any such litigation will impair our intellectual property rights and may harm our business, prospects and reputation. Furthermore, any such litigation may be costly and may divert management attention away from our business as well as require us to expend other resources. 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.
 
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:
 
  •  pay damage awards;
 
  •  seek licenses from third parties;
 
  •  pay ongoing royalties;
 
  •  redesign our products; or
 
  •  be restricted by injunctions,
 
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 November 8, 2010, we had 17 issued patents and 14 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


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patents may not have claims of the scope we seek. In addition, any issued patents may be challenged, invalidated or declared unenforceable. As a result, our present and future patents may provide only limited protection for our technologies, and may not be sufficient to provide competitive advantages to us.
 
We depend on our key personnel, and our business and growth may be severely disrupted if we lose their services or fail to recruit new qualified personnel.
 
Our future success depends substantially on the continued services of some of our directors and key executives. 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 company’s internal control over financial reporting in its annual report, which contains management’s assessment of the effectiveness of the company’s internal control over financial reporting. In addition, when a company meets the SEC’s criteria, an independent registered public accounting firm must report on the effectiveness of the company’s internal control over financial reporting.
 
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 weaknesses 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.


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We have limited insurance coverage and may incur losses resulting from business interruptions or product liability claims.
 
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. Although we have obtained business interruption insurance, it may not be able to fully cover losses caused by the business interruption because business interruption insurance available in China offers limited coverage compared to that offered in many other countries.
 
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, death or damage to property. 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 all material respects in compliance with current PRC environmental regulations to conduct our business as it is presently conducted. Although we have not suffered material environmental claims in the past, failure to comply with any present or future regulations could result in the assessment of damages or imposition of fines against us, suspension of production or a cessation of our operations. New regulations could also require us to acquire costly equipment or to incur other significant expenses. Any failure by us to control the use of, or to adequately restrict the discharge of, hazardous substances could subject us to potentially significant monetary damages and fines or suspension of our business, as well as our financial condition and results of operations.
 
The use of certain hazardous substances, such as lead, in various products is also coming under increasingly stringent governmental regulation. Increased environmental regulation in this area could adversely impact the manufacture and sale of solar modules that contain lead and could require us to make unanticipated environmental expenditures. For example, the European Union Directive 2002/96/EC on Waste Electrical and Electronic Equipment, or the WEEE Directive, requires manufacturers of certain electrical and electronic equipment to be financially responsible for the collection, recycling, treatment and disposal of specified products placed on the market in the European Union. In addition, European Union Directive 2002/95/EC on the Restriction of the use of Hazardous Substances in electrical and electronic equipment, or the RoHS Directive, restricts the use of certain hazardous substances, including lead, in specified products. Other jurisdictions are considering adopting similar legislation. Currently, we are not required under the WEEE or RoHS Directives to collect, recycle or dispose any of our products. However, the Directives allow for future amendments subjecting additional products to the Directives’ requirements. If, in the future, our PV products 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 PV products 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 fines and penalties, inability to sell our PV products 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.


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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 People’s 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. 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 and is subject to an annual self-review process whereby a form is submitted to relevant tax authority for approval to use a benefitial income tax rate. 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 taxed at a reduced rate of 15% in 2010. From 2005 until the end of 2007, Linyang China was also exempted from the 3% local income tax.
 
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 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. 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. As of December 31, 2009 and September 30, 2010, we recorded unrecognized tax benefits of approximately RMB27.4 million and RMB27.4 million (US$4.1 million), respectively, because based on our judgment, we 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 payments between qualified “resident enterprises” are 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


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by our subsidiaries in the PRC (through our holding company structure), if any, 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 shareholders and ADS holders, which are “non-resident enterprises” and do not have an establishment or place of business in the PRC, or which have such an establishment or place of business but the relevant income is not effectively connected with the establishment or place of business, might be subject to PRC withholding tax at 10% or a lower treaty rate.
 
Similarly, any gain realized on the transfer of ADSs or shares by non-PRC investors, which are “non-resident enterprises,” is also subject to PRC withholding income tax at 10% or a lower treaty rate if such gain is regarded as income derived from sources within the PRC.
 
According to the Law of the People’s Republic of China on the Individual Income Tax, or the IIT, as amended, PRC income tax at the rate of 20% is applicable to dividends payable to individual investors if such dividends are regarded as income derived from sources within the PRC. Similarly, any gain realized on the transfer of ADSs or ordinary shares by individual investors is also subject to PRC tax at 20% if such gain is regarded as income derived from sources within the PRC. If we are deemed by the PRC tax authorities as a “resident enterprise,” the dividends we pay to our individual investors with respect to our ordinary shares or ADSs, or the gain the individual investors may realize from the transfer of our ordinary shares or ADSs, might be treated as income derived from sources within the PRC and be subject to PRC tax at 20% 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 China’s 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.
 
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, RMB23.8 million and RMB53.0 million (US$7.9 million) in 2007, 2008, 2009 and the nine months ended September 30, 2010, respectively. In particular, a substantial portion of our net revenues is currently denominated in Euros. Since December 2009, the Euro has fluctuated significantly. A 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.


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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.
 
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:
 
  •  the amount of government involvement;
 
  •  the level of development;
 
  •  the growth rate;
 
  •  the control of foreign exchange; and
 
  •  the allocation of resources.
 
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 government’s 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


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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.
 
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, if any, 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 annual 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 subsidiary’s 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


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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 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 subsidiary’s 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 individual’s overseas investment, and in practice, we are not aware of any precedents that a PRC individual’s 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 employer’s 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 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 November 8, 2010, the closing 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.


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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:
 
  •  announcements of technological or competitive developments;
 
  •  regulatory developments in our target markets affecting us, our customers or our competitors;
 
  •  announcements regarding patent litigation or the issuance of patents to us or our competitors;
 
  •  announcements of studies and reports relating to the conversion efficiencies of our products or those of our competitors;
 
  •  actual or anticipated fluctuations in our quarterly operating results;
 
  •  changes in financial estimates or other material comments by securities analysts relating to us, our competitors or our industry in general;
 
  •  announcements by other companies in our industry relating to their operations, strategic initiatives, financial condition or financial performance or to our industry in general;
 
  •  announcements of acquisitions or consolidations involving industry competitors or industry suppliers;
 
  •  changes in the economic performance or market valuations of other PV technology companies;
 
  •  addition or departure of our executive officers and key research personnel; and
 
  •  sales or perceived sales of additional ordinary shares or ADSs.
 
In addition, the stock market in recent years has experienced extreme price and trading volume fluctuations that often have been unrelated or disproportionate to the operating performance of individual companies. These broad market fluctuations may adversely affect the price of our ADSs, regardless of our operating performance.
 
Future issuances of ordinary shares, ADSs or equity-related securities may depress the trading price of our ADSs.
 
Any issuance of equity securities after this offering could dilute the interests of our existing shareholders and could substantially decrease the trading price of our ADSs. We may issue equity securities in the future for a number of reasons, including to finance our operations and business strategy (including in connection with acquisitions, strategic collaborations or other transactions), to adjust our ratio of debt to equity and to satisfy our obligations upon the exercise of outstanding warrants or options or for other reasons.
 
Sales of a substantial number of ADSs or other equity-related securities in the public market could depress the market price of our ADSs, and impair our ability to raise capital through the sale of additional equity securities. We cannot predict the effect that future sales of our ADSs or other equity-related securities would have on the market price of our ADSs. In addition, the price of our ADSs could be affected by possible sales of our ADSs by investors who view the convertible notes as a more attractive means of obtaining equity participation in our company and by hedging or arbitrage trading activity that we expect to develop involving our convertible notes.
 
Our articles of association contain anti-takeover provisions that could have a material adverse effect on the rights of holders of our ordinary shares and ADSs.
 
Our articles of association limit the ability of others to acquire control of our company or cause us to engage in change-of-control transactions. These provisions could have the effect of depriving our shareholders of an opportunity to sell their shares at a premium over prevailing market prices by discouraging third parties from seeking to obtain control of our company in a tender offer or similar transaction. For example, our board of directors has the authority, without further action by our shareholders, to issue preferred shares in one or more series and to fix their designations, powers, preferences, privileges, and relative participating, optional or special rights and the qualifications, limitations or restrictions, including dividend rights, conversion rights, voting rights, terms of redemption and liquidation preferences, any or all of which may be greater than the rights associated with our ordinary shares, in the form of ADS or otherwise. Preferred shares could be issued quickly with terms calculated to


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delay or prevent a change in control of our company or make removal of management more difficult. If our board of directors decides to issue preferred shares, the price of our ADSs may fall and the voting and other rights of the holders of our ordinary shares and ADSs may be materially and adversely affected.
 
Holders of ADSs have fewer rights than shareholders and must act through the depositary to exercise those rights.
 
Holders of ADSs do not have the same rights of our shareholders and may only exercise the voting rights with respect to the underlying ordinary shares in accordance with the provisions of the deposit agreement. Under our amended and restated articles of association, the minimum notice period required to convene a general meeting is 14 days. When a general meeting is convened, ADS holders may not receive sufficient notice of a shareholders’ meeting to permit such holders to withdraw their ordinary shares to allow them to cast their vote with respect to any specific matter. If requested in writing by us, the depositary will mail a notice of such a meeting to ADS holders. In addition, the depositary and its agents may not be able to send voting instructions to ADS holders or carry out ADS holders’ voting instructions in a timely manner. We will make all reasonable efforts to cause the depositary to extend voting rights to ADS holders in a timely manner, but you may not receive the voting materials in time to ensure that you can instruct the depositary to vote the ADSs in a timely manner. 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 the ADSs are not voted as you requested. In addition, in your capacity as an ADS holder, you will not be able to call a shareholder 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 cash dividends 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, shareholders and ADS holders in the United States will not be able to exercise these rights 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 ADS holders 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 holders of ADSs or may dispose of such rights and make the net proceeds available to such holders. As a result, ADS holders may be unable to participate in our rights offerings and may experience dilution in their holdings.
 
In addition, the depositary of our ADSs has agreed to pay to ADS holders 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. ADS holders will receive these distributions in proportion to the number of ordinary shares their 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 ADS holders will not receive such distribution.


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We are a Cayman Islands company and, because judicial precedent regarding the rights of shareholders is more limited under Cayman Islands law than that under U.S. law, ADS holders may have less protection for their shareholder rights than such holders would under U.S. law.
 
Our corporate affairs are governed by our amended and restated memorandum and articles of association, the Cayman Islands Companies Law and the common law of the Cayman Islands. The rights of shareholders to take action against the directors, actions by minority shareholders and the fiduciary responsibilities of our directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as that from English common law, which has persuasive, but not binding, authority on a court in the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedent in some jurisdictions in the United States. In particular, the Cayman Islands has a less developed body of securities laws than the United States. In addition, some U.S. states, such as Delaware, have more fully developed and judicially interpreted bodies of corporate law than the Cayman Islands. In addition, Cayman Islands companies may not have standing to initiate a shareholder derivative action in a federal court of the United States.
 
In addition, most of our directors and officers are nationals and residents of countries other than the United States. Substantially all of our assets and a substantial portion of the assets of these persons are located outside the United States.
 
The Cayman Islands courts are also unlikely:
 
  •  to recognize or enforce against us judgments of courts of the United States based on certain civil liability provisions of U.S. securities laws; and
 
  •  to impose liabilities against us, in original actions brought in the Cayman Islands, based on certain civil liability provisions of U.S. securities laws that are penal in nature.
 
There is no statutory recognition in the Cayman Islands of judgments obtained in the United States, although the courts of the Cayman Islands will generally recognize and enforce a non-penal judgment of a foreign court of competent jurisdiction without retrial on the merits.
 
As a result of all of the above, public shareholders may have more difficulty in protecting their interests in the face of actions taken by management, members of the board of directors or controlling shareholders than they would as shareholders of a U.S. public company.
 
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 against us or such persons predicated upon the civil liability provisions of the securities laws of the United States or any state. In addition, it is uncertain whether such Cayman Islands or PRC courts would be competent to hear original actions brought in the Cayman Islands or the PRC against us or such persons predicated upon the securities laws of the United States or any state. See “Enforceability of Civil Liabilities” in the accompanying prospectus.


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USE OF PROCEEDS
 
We intend to use the proceeds of this offering for capital expenditures and general working capital purposes.


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PRICE RANGE OF OUR AMERICAN DEPOSITARY SHARES
 
For the period from December 20, 2006 to November 10, 2010, the closing price of our ADSs on the Nasdaq Global Market ranged from US$2.30 to US$37.64 per ADS.
 
Set forth below, for the applicable periods indicated, are the high and low closing prices per ADS.
 
                 
    High   Low
    US$   US$
 
2006 (from December 20)
    12.14       9.96  
2007
               
Quarterly Highs and Lows
               
First Quarter 2007
    16.45       10.29  
Second Quarter 2007
    17.68       8.28  
Third Quarter 2007
    14.64       9.10  
Fourth Quarter 2007
    35.96       10.26  
2008
               
Quarterly Highs and Lows
               
First Quarter 2008
    37.64       8.97  
Second Quarter 2008
    26.50       12.31  
Third Quarter 2008
    19.99       10.20  
Fourth Quarter 2008
    11.57       2.68  
2009
               
Quarterly Highs and Lows
               
First Quarter 2009
    6.12       2.30  
Second Quarter 2009
    8.48       3.71  
Third Quarter 2009
    7.98       4.79  
Fourth Quarter 2009
    7.94       4.60  
2010
               
Monthly Highs and Lows
               
May 2010
    9.00       6.00  
June 2010
    8.30       6.77  
July 2010
    10.28       7.18  
August 2010
    11.34       9.79  
September 2010
    13.15       10.92  
October 2010
    12.61       10.05  
November (through November 10, 2010)
    11.47       9.92  
 
On November 10, 2010, the last reported closing sale price of our ADSs on the Nasdaq Global Market was US$10.13 per ADS.


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DIVIDEND POLICY
 
We made a one-time cash dividend payment in the aggregate amount of RMB7.2 million to holders of the series A convertible preference shares on December 31, 2006. Except for the foregoing, we have never declared or paid any cash dividends, nor do we have any present plan to pay any cash dividends on our share capital in the foreseeable future. We currently intend to retain most, if not all, of our available funds and any future earnings to operate and expand our business.
 
Our board of directors has complete discretion on whether to pay dividends, subject to the approval of our shareholders. Even if our board of directors decides to pay dividends, the form, frequency and amount will depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that the board of directors may deem relevant. If we pay any dividends, we will pay our ADS holders to the same extent as holders of our ordinary shares, subject to the terms of the deposit agreement, including the fees and expenses payable thereunder. See “Description of American Depositary Shares” in the accompanying prospectus. Cash dividends on our ordinary shares, if any, will be paid in U.S. dollars.
 
We rely on dividends paid by Linyang China for our cash needs, including the funds necessary to pay dividends to our shareholders. The payment of dividends by Linyang China is subject to limitations. See “Risk Factors — Risks Related to Doing Business in China — 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.”


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CAPITALIZATION
 
You should read this table in conjunction with our consolidated financial statements and the related notes included in our Annual Report on Form 20-F for the year ended December 31, 2009 (as amended), our unaudited condensed consolidated financial statements as of and for the nine months ended September 30, 2010 included elsewhere in this prospectus supplement, and our condensed consolidated financial information as of and for the three months ended March 31, 2010, June 30, 2010 and September 30, 2010 contained in our current reports on Form 6-K submitted to the SEC on May 28, 2010, August 3, 2010 and November 9, 2010, respectively, which are incorporated by reference herein.
 
The following table sets forth our capitalization as of September 30, 2010:
 
  •  on an actual basis; and
 
  •  on an adjusted basis giving effect to our issuance and sale of 8,000,000 ADSs assuming no exercise of the over-allotment option by the underwriters, after deducting commissions and estimated offering expenses.
 
                                 
    As of September 30, 2010
    Actual   Actual(1)   As Adjusted   As Adjusted(1)
    (RMB)   (US$)   (RMB)   (US$)
    (In thousands)
 
Shareholders’ equity
                               
Ordinary shares, US$0.0001 par value, 500,000,000 shares authorized; 326,970,568 (2) shares issued and outstanding; and 366,970,568 shares issued and outstanding on an as adjusted basis
    252       38       279       42  
Additional paid-in capital
    2,877,477       430,079       3,333,102       498,184  
Statutory reserve
    151,541       22,650       151,541       22,650  
Retained earnings
    714,629       106,812       714,629       106,812  
Total shareholders’ equity
    3,743,869       559,579       4,199,551       627,688  
Total capitalization
    3,743,869       559,579       4,199,551       627,688  
 
 
(1) The translations of RMB into U.S. dollars are based on the exchange rate on September 30, 2010 as set forth in the H.10 statistical release of the Federal Reserve Board, which was RMB6.6905 to US$1.00.
 
(2) The number of shares issued and outstanding as stated within “Shareholders’ equity” excludes the following: (i) the 45,098,055 ordinary shares represented by 9,019,611 ADSs which were issued to facilitate our convertible bond offering; (ii) the 30,672,689 ordinary shares issued to Hanwha Solar in connection with Hanwha Solar’s purchase of 36,455,089 ordinary shares of our company in September 2010; and (iii) the 1,693,260 ordinary shares represented by 338,652 ADSs which have been reserved by our company to allow for the participation in the ADS program by our employees pursuant to our equity incentive plans, from time to time. Such ADSs and ordinary shares have been classified as being excluded from shareholders’ equity for accounting purposes.
 
As of the date of this prospectus supplement, there has been no material change to our capitalization as set forth above.


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DESCRIPTION OF SHARE CAPITAL
 
We are a Cayman Islands exempted company with limited liability and our affairs are governed by our memorandum and articles of association, as amended and restated from time to time, and the Companies Law (2010 Revision) of the Cayman Islands, which is referred to as the Companies Law below.
 
As of September 30, 2010, our authorized share capital consisted of 500,000,000 ordinary shares, with a par value of US$0.0001 each.
 
The following are summaries of material provisions of our amended and restated memorandum and articles of association and the Companies Law insofar as they relate to the material terms of our ordinary shares.
 
Description of Ordinary Shares
 
General
 
All of our outstanding ordinary shares are fully paid and non-assessable. Certificates representing the ordinary shares are issued in registered form. Our shareholders who are non-residents of the Cayman Islands may freely hold and vote their ordinary shares.
 
Dividends
 
The holders of our ordinary shares are entitled to such dividends as may be declared by our board of directors subject to the Companies Law. Under our amended and restated memorandum and articles of association, all dividends unclaimed for one year after having been declared may be invested or otherwise made use of by our board of directors for our exclusive benefit until claimed, and we will not be deemed a trustee in respect of such dividend or be required to account for any money earned thereon. All dividends unclaimed for six years after having been declared may be forfeited by our board of directors and thereon will revert to us.
 
Voting Rights
 
The holder of each ordinary share is entitled to one vote for each ordinary share held by such holder on all matters upon which the ordinary shares are entitled to vote. Voting at any meeting of shareholders is by show of hands unless a poll is demanded. A poll may be demanded by the chairman of such meeting or any other shareholder or shareholders present in person or by proxy and holding at least 10% in par value of the shares giving a right to attend and vote at the meeting.
 
A quorum required for a meeting of shareholders consists of at least one shareholder present or by proxy or, if a corporation or other non-natural person, by its duly authorized representative holding not less than one-third of the outstanding voting shares in our company. Shareholders’ meetings may be convened by our board of directors on its own initiative or upon a request to the directors by shareholders holding in the aggregate 10% or more of our voting share capital. Advance notice of at least 20 (but not more than 60) days is required for the convening of our annual general shareholders’ meeting and any other general shareholders’ meeting calling for the passing of a resolution requiring two-thirds of shareholder votes, and advance notice of at least 14 (but not more than 60) days is required for the convening of other general shareholder meetings.
 
An ordinary resolution to be passed by the shareholders requires the affirmative vote of a simple majority of the votes attaching to the ordinary shares cast in a general meeting, while a special resolution requires the affirmative vote of no less than two-thirds of the votes cast attaching to the ordinary shares. A special resolution will be required for important matters such as a change of name or making changes to our amended and restated memorandum and articles of association.
 
Transfer of Ordinary Shares
 
Subject to the restrictions of our amended and restated memorandum and articles of association, as applicable, any of our shareholders may transfer all or any of his or her ordinary shares by an instrument of transfer in the usual or common form or any other form approved by our board of directors.


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Our board of directors may, in its absolute discretion, decline to register any transfer of any ordinary share which is not fully paid up or on which we have a lien. Our board of directors may also decline to register any transfer of any ordinary share unless:
 
  •  the instrument of transfer is lodged with us, accompanied by the certificate for the ordinary shares to which it relates and such other evidence as our board of directors may reasonably require to show the right of the transferor to make the transfer;
 
  •  the instrument of transfer is in respect of only one class of ordinary shares;
 
  •  the instrument of transfer is properly stamped, if required;
 
  •  in the case of a transfer to joint holders, the number of joint holders to whom the ordinary share is to be transferred does not exceed four;
 
  •  the ordinary shares transferred are free of any lien in favor of us;
 
  •  any fee related to the transfer has been paid to us; and
 
  •  the transfer to be registered is not to an infant or a person suffering from mental disorder.
 
If our directors refuse to register a transfer they shall, within two months after the date on which the instrument of transfer was lodged, send to each of the transferor and the transferee notice of such refusal.
 
The registration of transfers may be suspended and the register closed at such times and for such periods as our board of directors may from time to time determine, provided, however, that the registration of transfers shall not be suspended nor the register closed for more than 45 days in any year.
 
Liquidation
 
On a return of capital on winding up or otherwise (other than on conversion, redemption or purchase of ordinary shares), assets available for distribution among the holders of ordinary shares shall be distributed among the holders of the ordinary shares on a pro rata basis. If our assets available for distribution are insufficient to repay all of the paid-up capital, the assets will be distributed so that the losses are borne by our shareholders proportionately.
 
Calls on Ordinary Shares and Forfeiture of Ordinary Shares
 
Our board of directors may from time to time make calls upon shareholders for any amounts unpaid on their ordinary shares in a notice served to such shareholders at least 14 days prior to the specified time of payment. The ordinary shares that have been called upon and remain unpaid are subject to forfeiture.
 
Redemption of Ordinary Shares
 
Subject to the provisions of the Companies Law and other applicable law, we may issue shares on terms that are subject to redemption, at our option or at the option of the holders, on such terms and in such manner as may be determined by special resolution.
 
Variations of Rights of Shares
 
If at any time, our share capital is divided into different classes of shares, all or any of the special rights attached to any class of shares may, subject to the provisions of the Companies Law, be varied either with the consent in writing of the holders of three-fourths of the issued shares of that class or by a special resolution passed at a general meeting of the holders of the shares of that class. The rights conferred upon the holders of the shares of any class issued with preferred or other rights shall not, unless otherwise expressly provided by the terms of issue of the shares of that class, be deemed to be varied by the creation or issue of further shares ranking pari passu with such existing class of shares. The rights of holders of ordinary shares shall not be deemed to be varied by the creation or issue of shares with preferred or other rights which may be affected by the directors as provided in the articles of association without any vote or consent of the holders of ordinary shares.


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General Meetings of Shareholders
 
The directors may, and shall on the requisition of shareholders holding at least 10% in par value of the capital of our company carrying voting rights at general meetings, proceed to convene a general meeting of such shareholders. If the directors do not within 21 days from the deposit of the requisition duly proceed to convene a general meeting, which will be held within a further period of 21 days, the requisitioning shareholders, or any of them holding more than 50% of the total voting rights of all of the requisitioning shareholders, may themselves convene a general meeting. Any such general meeting must be convened within three months after the expiration of such 21-day period.
 
Inspection of Books and Records
 
Holders of our ordinary shares will have no general right under Cayman Islands law to inspect or obtain copies of our list of shareholders or our corporate records. However, we will provide our shareholders with annual audited financial statements. See “Where You Can Find Additional Information About Us.”
 
Changes in Capital
 
We may from time to time by ordinary resolution:
 
  •  increase the share capital by such sum, to be divided into shares of such classes and amounts, as the resolution shall prescribe;
 
  •  consolidate and divide all or any of our share capital into shares of a larger amount than our existing shares;
 
  •  sub-divide our existing shares, or any of them into shares of a smaller amount provided that in the subdivision the proportion between the amount paid and the amount, if any, unpaid on each reduced share shall be the same as it was in case of the share from which the reduced share is derived; or
 
  •  cancel any shares which, at the date of the passing of the resolution, have not been taken or agreed to be taken by any person and diminish the amount of our share capital by the amount of the shares so cancelled.
 
We may by special resolution reduce our share capital and any capital redemption reserve in any manner authorized by law.
 
Exempted Company
 
We are an exempted company with limited liability under the Companies Law. The Companies Law distinguishes between ordinary resident companies and exempted companies. Any company that is registered in the Cayman Islands but conducts business mainly outside of the Cayman Islands may apply to be registered as an exempted company. The requirements for an exempted company are essentially the same as for an ordinary company except for the exemptions and privileges listed below:
 
  •  an exempted company does not have to file an annual return of its shareholders with the Registrar of Companies;
 
  •  an exempted company’s register of members is not open to inspection;
 
  •  an exempted company does not have to hold an annual general meeting;
 
  •  an exempted company may issue no par value, negotiable or bearer shares;
 
  •  an exempted company may obtain an undertaking against the imposition of any future taxation (such undertakings are usually given for 20 years in the first instance);
 
  •  an exempted company may register by way of continuation in another jurisdiction and be deregistered in the Cayman Islands;
 
  •  an exempted company may register as a limited duration company; and
 
  •  an exempted company may register as a segregated portfolio company.


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“Limited liability” means that the liability of each shareholder is limited to the amount unpaid by the shareholder on the shares of the company. We are subject to reporting and other informational requirements of the Exchange Act, as applicable to foreign private issuers. We intend to comply with the Nasdaq Rules in lieu of following home country practice. The Nasdaq Rules require that every company listed on the Nasdaq hold an annual general meeting of shareholders. In addition, our amended and restated articles of association allow directors or shareholders to call special shareholder meetings pursuant to the procedures set forth in the articles.
 
Differences in Corporate Law
 
The Companies Law is modeled after that of English law but does not follow many recent English law statutory enactments. In addition, the Companies Law differs from laws applicable to United States corporations and their shareholders. Set forth below is a summary of the significant differences between the provisions of the Companies Law applicable to us and the laws applicable to companies incorporated in the State of Delaware and their shareholders.
 
Mergers and Similar Arrangements
 
The Companies Law permits mergers and consolidations between Cayman Islands companies and between Cayman Islands companies and non-Cayman Islands companies. For these purposes, (a) “merger” means the merging of two or more constituent companies and the vesting of their undertaking, property and liabilities in one of such companies as the surviving company and (b) a “consolidation” means the combination of two or more constituent companies into a consolidated company and the vesting of the undertaking, property and liabilities of such companies to the consolidated company. In order to effect such a merger or consolidation, the directors of each constituent company must approve a written plan of merger or consolidation (a “Plan”), which must then be authorized by either (a) a special resolution of the shareholders of each constituent company voting together as one class if the shares to be issued to each shareholder in the consolidated or surviving company will have the same rights and economic value as the shares held in the relevant constituent company or (b) a shareholder resolution of each constituent company passed by a majority in number representing 75% in value of the shareholders voting together as one class. The Plan must be filed with the Registrar of Companies together with a declaration as to the solvency of the consolidated or surviving company, a list of the assets and liabilities of each constituent company and an undertaking that a copy of the certificate of merger or consolidation will be given to the members and creditors of each constituent company and published in the Cayman Islands Gazette. Dissenting shareholders have the right to be paid the fair value of their shares (which, if not agreed between the parties, will be determined by the Cayman Islands court) if they follow the required procedures, subject to certain exceptions. Court approval is not required for a merger or consolidation which is effected in compliance with these statutory procedures.
 
In addition, there are statutory provisions that facilitate the reconstruction and amalgamation of companies, provided that the arrangement is approved by a majority in number of each class of shareholders and creditors with whom the arrangement is to be made, and who must in addition represent three-fourths in value of each such class of shareholders or creditors, as the case may be, that are present and voting either in person or by proxy at a meeting, or meetings, convened for that purpose. The convening of the meetings and subsequently the arrangement must be sanctioned by the Grand Court of the Cayman Islands. While a dissenting shareholder has the right to express to the court the view that the transaction ought not to be approved, the court can be expected to approve the arrangement if it determines that:
 
  •  the statutory provisions as to the due majority vote have been met;
 
  •  the shareholders have been fairly represented at the meeting in question;
 
  •  the arrangement is such that a businessman would reasonably approve; and
 
  •  the arrangement is not one that would more properly be sanctioned under some other provision of the Companies Law.
 
When a takeover offer is made and accepted by holders of 90% of the shares within four months, the offeror may, within a two-month period, require the holders of the remaining shares to transfer such shares on the terms of


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the offer. An objection can be made to the Grand Court of the Cayman Islands but this is unlikely to succeed unless there is evidence of fraud, bad faith or collusion.
 
If the arrangement and reconstruction is thus approved, the dissenting shareholder would have no rights comparable to appraisal rights, which would otherwise ordinarily be available to dissenting shareholders of Delaware corporations, providing rights to receive payment in cash for the judicially determined value of the shares.
 
Shareholders’ Suits
 
The Cayman Islands courts can be expected to follow English case law precedents. The common law principles (namely the rule in Foss v. Harbottle and the exceptions thereto) which permit a minority shareholder to commence a class action against or derivative actions in the name of the Company to challenge (a) an act which is ultra vires the Company or illegal, (b) an act which constitutes a fraud against the minority where the wrongdoers are themselves in control of the Company, and (c) an action which requires a resolution with a qualified (or special) majority which has not been obtained) have been applied and followed by the courts in the Cayman Islands.
 
Indemnification of Directors and Executive Officers and Limitation of Liability
 
Cayman Islands law does not limit the extent to which a company’s articles of association may provide for indemnification of officers and directors, except to the extent any such provision may be held by the Cayman Islands courts to be contrary to public policy, such as to provide indemnification against civil fraud or the consequences of committing a crime. Our amended and restated memorandum and articles of association permit indemnification of officers and directors for losses, damages, costs and expenses incurred in their capacities as such unless such losses or damages arise from willful or gross negligence, or unlawful conduct of such directors or officers. This standard of conduct is generally the same as permitted under the Delaware General Corporation Law for a Delaware corporation. In addition, we intend to enter into indemnification agreements with our directors and senior executive officers that will provide such persons with additional indemnification beyond that provided in our amended and restated memorandum and articles of association.
 
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers or persons controlling us under the foregoing provisions, we have been informed that, in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable as a matter of United States law.
 
Anti-Takeover Provisions in the Amended and Restated Memorandum and Articles of Association
 
Some provisions of our amended and restated memorandum and articles of association may discourage, delay or prevent a change in control of our company or management that shareholders may consider favorable, including provisions that authorize our board of directors to issue preference shares in one or more series and to designate the price, rights, preferences, privileges and restrictions of such preference shares without any further vote or action by our shareholders.
 
However, under Cayman Islands law, our directors may only exercise the rights and powers granted to them under our amended and restated memorandum and articles of association, as amended and restated from time to time, for what they believe in good faith to be in the best interests of our company.
 
Directors’ Fiduciary Duties
 
Under Delaware corporate law, a director of a Delaware corporation has a fiduciary duty to the corporation and its shareholders. This duty has two components: the duty of care and the duty of loyalty. The duty of care requires that a director act in good faith, with the care that an ordinarily prudent person would exercise under similar circumstances. Under this duty, a director must inform himself of, and disclose to shareholders, all material information reasonably available regarding a significant transaction. The duty of loyalty requires that a director act in a manner he or she reasonably believes to be in the best interests of the corporation. He or she must not use his or her corporate position for personal gain or advantage. This duty prohibits self-dealing by a director and mandates that the best interest of the corporation and its shareholders take precedence over any interest possessed by a


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director, officer or controlling shareholder and not shared by the shareholders generally. In general, actions of a director are presumed to have been made on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the corporation. However, this presumption may be rebutted by evidence of a breach of one of the fiduciary duties. Should such evidence be presented concerning a transaction by a director, a director must prove the procedural fairness of the transaction, and that the transaction was of fair value to the corporation.
 
As a matter of Cayman Islands law, a director of a Cayman Islands company is in the position of a fiduciary with respect to the company and therefore it is considered that he owes the following duties to the company — a duty to act bona fide in the best interests of the company, a duty not to make a profit based on his or her position as director (unless the company permits him to do so) and a duty not to put himself in a position where the interests of the company conflict with his or her personal interest or his or her duty to a third party. A director of a Cayman Islands company owes to the company a duty to act with skill and care. It was previously considered that a director need not exhibit in the performance of his or her duties a greater degree of skill than may reasonably be expected from a person of his or her knowledge and experience. However, English and Commonwealth courts have moved towards an objective standard with regard to the required skill and care and these authorities are likely to be followed in the Cayman Islands.
 
Shareholder Action by Written Consent
 
Under the Delaware General Corporation Law, a corporation may eliminate the right of shareholders to act by written consent by amendment to its certificate of incorporation. Cayman Islands law and our amended and restated articles of association provide that shareholders may approve corporate matters by way of a unanimous written resolution signed by or on behalf of each shareholder who would have been entitled to vote on such matter at a general meeting without a meeting being held.
 
Shareholder Proposals
 
Under the Delaware General Corporation Law, a shareholder has the right to put any proposal before the annual meeting of shareholders, provided it complies with the notice provisions in the governing documents. A special meeting may be called by the board of directors or any other person authorized to do so in the governing documents, but shareholders may be precluded from calling special meetings.
 
Cayman Islands law and our amended and restated articles of association allow our shareholders holding not less than 10% of the paid-up voting share capital of the company to requisition a shareholders’ meeting. As an exempted Cayman Islands company, we are not obliged by law to call shareholders’ annual general meetings. However, our amended and restated articles of association require us to call such meetings if required by the Companies Law, other applicable law, rules or regulations or the Nasdaq Rules.
 
Cumulative Voting
 
Under the Delaware General Corporation Law, cumulative voting for elections of directors is not permitted unless the corporation’s certificate of incorporation specifically provides for it. Cumulative voting potentially facilitates the representation of minority shareholders on a board of directors since it permits the minority shareholder to cast all the votes to which the shareholder is entitled on a single director, which increases the shareholder’s voting power with respect to electing such director. As permitted under Cayman Islands law, our amended and restated articles of association do not provide for cumulative voting. As a result, our shareholders are not afforded any less protections or rights on this issue than shareholders of a Delaware corporation.
 
Removal of Directors
 
Under the Delaware General Corporation Law, a director of a corporation with a classified board may be removed only for cause with the approval of a majority of the outstanding shares entitled to vote, unless the certificate of incorporation provides otherwise. Under our amended and restated articles of association, directors may be removed by ordinary resolution of the shareholders or all directors (other than the one who is removed) passing a resolution or signing a notice effecting the removal of such a director from his office.


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Transactions with Interested Shareholders
 
The Delaware General Corporation Law contains a business combination statute applicable to Delaware corporations whereby, unless the corporation has specifically elected not to be governed by such statute by amendment to its certificate of incorporation, it is prohibited from engaging in certain business combinations with an “interested shareholder” for three years following the date that such person becomes an interested shareholder. An interested shareholder generally is a person or a group who or which owns or owned 15% or more of the target’s outstanding voting stock within the past three years. This has the effect of limiting the ability of a potential acquirer to make a two-tiered bid for the target in which all shareholders would not be treated equally. The statute does not apply if, among other things, prior to the date on which such shareholder becomes an interested shareholder, the board of directors approves either the business combination or the transaction which resulted in the person becoming an interested shareholder. This encourages any potential acquirer of a Delaware corporation to negotiate the terms of any acquisition transaction with the target’s board of directors.
 
Cayman Islands law has no comparable statute. As a result, we cannot avail ourselves of the types of protections afforded by the Delaware business combination statute. However, although Cayman Islands law does not regulate transactions between a company and its significant shareholders, it does provide that such transactions must be entered into bona fide in the best interests of the company and not with the effect of constituting a fraud on the minority shareholders.
 
Dissolution; Winding Up
 
Under the Delaware General Corporation Law, unless the board of directors approves the proposal to dissolve, dissolution must be approved by shareholders holding 100% of the total voting power of the corporation. Only if the dissolution is initiated by the board of directors may it be approved by a simple majority of the corporation’s outstanding shares. Delaware law allows a Delaware corporation to include in its certificate of incorporation a supermajority voting requirement in connection with dissolutions initiated by the board. Under the Companies Law of the Cayman Islands and our amended and restated articles of association, our company may be dissolved, liquidated or wound up by the passing of a special resolution.
 
Variation of Rights of Shares
 
Under the Delaware General Corporation Law, a corporation may vary the rights of a class of shares with the approval of a majority of the outstanding shares of such class, unless the certificate of incorporation provides otherwise. Under Cayman Islands law and our amended and restated articles of association, if our share capital is divided into more than one class of shares, we may vary the rights attached to any class only with the consent in writing of the holders of 75% of the issued shares of that class or with the sanction of a special resolution passed at a general meeting of the holders of the shares of that class.
 
Amendment of Governing Documents
 
Under the Delaware General Corporation Law, a corporation’s governing documents may be amended with the approval of a majority of the outstanding shares entitled to vote, unless the certificate of incorporation provides otherwise. As permitted by Cayman Islands law, our amended and restated memorandum and articles of association may only be amended by the passing of a special resolution.
 
Rights of Non-Resident or Foreign Shareholders
 
There are no limitations imposed by our amended and restated memorandum and articles of association on the rights of non-resident or foreign shareholders to hold or exercise voting rights on our shares. In addition, there are no provisions in our amended and restated memorandum and articles of association governing the ownership threshold above which shareholder ownership must be disclosed.


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Directors’ Power to Issue Shares
 
Subject to applicable law, our board of directors is empowered to issue or allot shares or grant options and warrants with or without preferred, deferred, qualified or other special rights or restrictions. However, if any issue of shares (including any issue of ordinary shares or any shares with preferred, deferred, qualified or other special rights or restrictions) is proposed and such shares proposed to be issued are at least 20% by par value of the par value of all then issued shares, then the prior approval by ordinary resolution of the holders of the ordinary shares, voting together as one class, will be required. These provisions could have the effect of discouraging third parties from seeking to obtain control of our company in a tender offer or similar transaction.
 
Ordinary Shares
 
In June 2006, as part of our corporate restructuring, we issued a total of 100,350,000 ordinary shares. These ordinary shares were issued to Yonghua Solar Power Investment Holding Ltd., WHF Investment Co., Ltd., YongGuan Solar Power Investment Holding Ltd., Yongfa Solar Power Investment Holding Ltd., Yongliang Solar Power Investment Holding Ltd., Yongqiang Solar Power Investment Holding Ltd., YongXing Solar Power Investment Holding Ltd. and Forever-brightness Investments Limited.
 
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.
 
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.
 
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 note offering, we closed an offering of 9,019,611 ADSs, representing 45,098,055 ordinary shares, to facilitate the note 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 in “at-the-market” offerings with an aggregate sale price of US$73.9 million, of which we received net proceeds of US$71.8 million.
 
From September 17, 2009 to November 18, 2009, we issued and sold 3,888,399 ADSs in “at-the-market” offerings with an aggregate sale price of US$23.1 million, of which we received net proceeds of US$21.8 million.
 
In September 2010, we issued in a private placement an aggregate of 36,455,089 ordinary shares to Hanwha Solar at a purchase price of US$2.144 per share for an aggregate sale price of US$78.2 million. Concurrently with the closing of this offering, we issued 30,672,689 ordinary shares to Hanwha Solar at par value of the ordinary shares and an additional 14,407,330 ordinary shares are expected to be issued to Hanwha Solar at par value upon obtaining shareholder approval for this issuance.
 
Registration Rights
 
Pursuant to the registration rights agreement dated June 27, 2006, we granted to the holders of our ordinary shares which were converted from our series A convertible preference shares certain registration rights, which primarily include:
 
  •  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


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  registration for an offering in a jurisdiction other than the United States), provided 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. All of such holders have waived their piggyback registration rights in this offering.
 
  •  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.
 
Pursuant to a shareholder agreement between Hanwha Solar and our company dated September 16, 2010, we granted to Hanwha Solar certain registration rights, which primarily include:
 
  •  Demand Registrations.   Upon the request of Hanwha Solar, we shall effect registration with respect to the registrable securities held on a form other than Form F-3 (or any comparable form for a registration for an offering in a jurisdiction other than the United States), provided we shall only be obligated to effect three such registrations.
 
  •  Demand Registrations on Form F-3.   We have granted Hanwha Solar the right to register 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.
 
  •  Piggyback Registrations.   Hanwha Solar is entitled to “piggyback” registration rights, whereby it may require us to register all or any part of the registrable securities that it holds at the time when we register any of our ordinary shares.
 
Lock-Up
 
Pursuant to a shareholder agreement between Hanwha Solar and our company dated September 16, 2010, for a period of one year, Hanwha Solar agreed not to sell, assign, transfer, distribute or otherwise dispose of, or convey legal or beneficial interest in, or create, incur or assume any lien with respect to, whether voluntary or involuntary, our ordinary shares, unless otherwise approved by our independent directors, subject to certain exceptions. In addition, after the expiration of this one-year period, Hanwha Solar agreed not to sell, assign, transfer, distribute or otherwise dispose of, or convey legal or beneficial interest in, or create, incur or assume any lien with respect to, whether voluntary or involuntary, our ordinary shares exceeding 25% of the total number of our ordinary shares issued and outstanding in any 12-month period, subject to certain exceptions.


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EXCHANGE RATE INFORMATION
 
The following table sets forth information regarding the rates in Renminbi per U.S. dollar for the periods indicated.
 
                                 
    Renminbi per U.S. Dollar 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  
2010
                               
May
    6.8305       6.8275       6.8245       6.8310  
June
    6.7815       6.8184       6.7815       6.8323  
July
    6.7735       6.7762       6.7709       6.7807  
August
    6.8069       6.7873       6.7670       6.8069  
September
    6.6905       6.7396       6.6869       6.8102  
October
    6.6705       6.6675       6.6397       6.6912  
November (through November 5, 2010)
    6.6622       6.6756       6.6622       6.6906  
 
 
(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.
 
This prospectus contains translations of certain RMB amounts into U.S. dollar amounts at specified rates. Unless otherwise stated, the translations of RMB into U.S. dollars have been made at the exchange rate as set forth on September 30, 2010 in the H.10 statistical release of the Federal Reserve Board, which was RMB6.6905 to US$1.00. We make no representation that the RMB or U.S. dollar amounts referred to in this prospectus 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 “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 “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 November 5, 2010, the exchange rate as set forth in the H.10 statistical release of the Federal Reserve Board was RMB6.6622 to US$1.00.


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SHARES ELIGIBLE FOR FUTURE SALE
 
All of the ADSs sold in this offering and the ordinary shares they represent will be freely transferable by persons other than our “affiliates” without restriction in the United States or further registration under the Securities Act. Sales of substantial amounts of our ADSs in the public market could adversely affect prevailing market prices of our ADSs.
 
The ordinary shares held by existing shareholders prior to, and those ordinary shares converted from our series A convertible preference shares upon the completion of, our initial public offering are “restricted securities,” as that term is defined in Rule 144 under the Securities Act. These restricted securities may be sold in the United States only if they are registered or if they qualify for an exemption from registration under Rule 144 or Rule 701 under the Securities Act. These rules are described below.
 
Rule 144
 
In general, under Rule 144, a person (or persons whose shares are aggregated) who is not deemed to have been an affiliate of ours at any time during the three months preceding a sale, and who has beneficially owned restricted securities within the meaning of Rule 144 for at least six months (including any period of consecutive ownership of preceding non-affiliated holders) would be entitled to sell those shares, subject only to the availability of current public information about us. A non-affiliated person who has beneficially owned restricted securities within the meaning of Rule 144 for at least one year would be entitled to sell those shares without regard to the provisions of Rule 144.
 
In general, under Rule 144, our affiliates or persons selling shares on behalf of our affiliates are entitled to sell upon expiration of the lock-up agreements described above, a number of shares that does not exceed the greater of:
 
  •  1% of the number of ordinary shares then outstanding, in the form of ADSs or otherwise; or
 
  •  the average weekly trading volume of the ADSs representing our ordinary shares on the Nasdaq Global Market during the four calendar weeks preceding the filing of a notice on Form 144 with respect to such sale.
 
Sales under Rule 144 by our affiliates or persons selling shares on behalf of our affiliates are also subject to certain manner of sale provisions and notice requirements and to the availability of current public information about us.
 
Rule 701
 
Beginning 90 days after the date of this prospectus, persons other than affiliates who purchased ordinary shares under a written compensatory plan or contract may be entitled to sell such shares in reliance on Rule 701. Rule 701 permits affiliates to sell their Rule 701 shares under Rule 144 without complying with the holding period requirements of Rule 144. Rule 701 further provides that non-affiliates may sell these shares in reliance on Rule 144, subject only to its manner-of-sale requirements. However, the Rule 701 shares would remain subject to lock-up arrangements and would only become eligible for sale when the lock-up period expires.


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TAXATION
 
The following summary of the material Cayman Islands, PRC and United States federal tax consequences of an investment in our ADSs or ordinary shares is based upon laws and relevant interpretations thereof in effect as of the date of this prospectus supplement, all of which are subject to change. This summary does not deal with all possible tax consequences relating to an investment in our ADSs or ordinary shares, such as the tax consequences under U.S., state, local and other tax laws. To the extent that the discussion relates to matters of Cayman Islands tax law, it represents the opinion of Maples and Calder, our Cayman Islands counsel. To the extent the discussion relates to PRC tax law, it represents the opinion of Grandall Legal Group (Shanghai). To the extent that the discussion relates to matters of U.S. federal income tax law, it represents the opinion of Shearman & Sterling LLP, our special U.S. counsel.
 
Cayman Islands Taxation
 
The Cayman Islands currently levies no taxes on individuals or corporations based upon profits, income, gains or appreciation and there is no taxation in the nature of inheritance tax or estate duty. 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 that are applicable to any payments made to or by our company. 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 is expected to 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.
 
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 shareholders or ADS holders, which are “non- resident enterprises” and do not have an establishment or place of business in the PRC, or which have an establishment or place of business in the PRC but the relevant income is not effectively connected with that establishment or place of business, might be subject to PRC withholding tax at 10% or a lower treaty rate.
 
Similarly, any gain realized on the transfer of ADSs or shares by non-PRC investors who are “non-resident enterprises,” 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 dividends we pay with respect to our 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.
 
According to the EIT, PRC income tax at the rate of 20% is applicable to dividends payable to individual investors if such dividends are regarded as income derived from sources within the PRC. Any gain realized on the transfer of ADSs or shares by individual investors is also subject to PRC tax at 20% if such gain is regarded as income derived from sources within the PRC. If we are deemed by the PRC tax authorities as a “resident enterprise,”


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the dividends we pay to our individual investors with respect to our ordinary shares or ADSs, or the gain the individual investors may realize from the transfer of our ordinary shares or ADSs, might be treated as income derived from sources within the PRC and be subject to PRC tax at 20% or a lower treaty rate. Under the current double taxation treaty between the PRC and the United States, for beneficial owners of shares who are tax-resident in the United States who qualify for the benefits of the treaty, and whose ownership of the shares is not attributable to an establishment or place of business in the PRC, the applicable treaty rate on dividends is 10% (the “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 prospectus supplement and on U.S. Treasury regulations in effect or in some cases, proposed, as of the date of this prospectus supplement, as well as judicial and administrative interpretations thereof available on or before such date. All of the foregoing authorities are subject to change, which change could apply retroactively and could affect the tax consequences described below.
 
The following discussion does not deal with the tax consequences to any particular investor or to persons in special tax situations such as:
 
  •  certain financial institutions;
 
  •  insurance companies;
 
  •  broker dealers;
 
  •  U.S. expatriates;
 
  •  traders that elect to mark-to-market;
 
  •  tax-exempt entities;
 
  •  persons liable for alternative minimum tax;
 
  •  persons whose functional currency is not the U.S. dollar;
 
  •  persons holding an ADS or ordinary share as part of a straddle, hedging, conversion or integrated transaction; or
 
  •  persons that actually or constructively own 10% or more of our voting stock.
 
PROSPECTIVE PURCHASERS ARE URGED TO CONSULT THEIR TAX ADVISORS ABOUT THE APPLICATION OF THE U.S. FEDERAL TAX RULES TO THEIR PARTICULAR CIRCUMSTANCES AS WELL AS THE STATE, LOCAL AND FOREIGN TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF ADSs OR ORDINARY SHARES.
 
The discussion below of the U.S. federal income tax consequences to “U.S. Holders” will apply if you are a beneficial owner of ADSs or ordinary shares and you are, for U.S. federal income tax purposes:
 
  •  an individual who is a citizen or resident of the United States;
 
  •  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;
 
  •  an estate whose income is subject to U.S. federal income taxation regardless of its source; or
 
  •  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 partnership or a partner in a partnership holding ADSs or ordinary shares, you should consult your own tax advisors.
 
The U.S. Treasury has expressed concerns that parties to whom depositary shares are released before shares are delivered to the depositary (“pre-release”), or intermediaries in the chain of ownership between owners and the issuer of the security underlying the depositary shares may be taking actions that are inconsistent with the claiming of foreign tax credits by owners of depositary shares. 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 owners. Accordingly, the analysis of the creditability of any foreign taxes and the availability of the reduced tax rate for dividends received by certain U.S. Holders of ADSs, each described below, could be affected by actions taken by parties to whom the ADSs are released.
 
The discussion below assumes that the representations contained in the deposit agreement are true and that the obligations in the deposit agreement and any related agreement will be complied with in accordance with their terms. If you hold ADSs, you should be treated as the holder of the underlying ordinary shares represented by those ADSs for U.S. federal income tax purposes. Exchanges of ordinary shares for ADSs and ADSs for ordinary shares generally will not be subject to U.S. federal income tax.
 
Taxation of Dividends and Other Distributions on the ADSs or Ordinary Shares
 
Subject to the passive foreign investment company rules discussed below, the gross amount of any distribution (including constructive dividends) to you with respect to the ADSs or ordinary shares generally will be included in your gross income as dividend income on the date of actual or constructive receipt by the depositary, in the case of ADSs, or by you, in the case of ordinary shares, but only to the extent that the distribution is paid out of our current or accumulated earnings and profits (as determined under U.S. federal income tax principles). The dividends will not be eligible for the dividends-received deduction allowed to corporations in respect of dividends received from 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 Global Market, as our ADSs are. You should consult your tax advisors regarding the availability of the lower rate for dividends paid with respect to our ADSs or ordinary shares.
 
Dividends will constitute foreign source income for U.S. foreign tax credit limitation purposes. If the dividends are qualified dividend income (as discussed above), the amount of the dividend taken into account for purposes of calculating the U.S. foreign tax credit limitation will in general be limited to the gross amount of the dividend, multiplied by the reduced rate divided by the highest rate of tax normally applicable to dividends. The limitation on foreign taxes eligible for credit is calculated separately with respect to specific classes of income. For this purpose, dividends distributed by us with respect to the ADSs or ordinary shares will generally constitute “passive category income” but could, in the case of certain U.S. Holders, constitute “general category income.”
 
Subject to certain conditions and limitations, PRC withholding taxes on dividends at a rate not exceeding the Treaty Rate may be treated as foreign taxes eligible for credit against your U.S. federal income tax. U.S. Holders should consult their own tax advisors regarding the creditability of any PRC tax, in their particular circumstances.
 
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.


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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 sufficient foreign source income. 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 elect 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 in your particular circumstances.
 
Passive Foreign Investment Company
 
We do not expect to be a passive foreign investment company, or PFIC, for U.S. federal income tax purposes for our current taxable year ending December 31, 2010 or in the foreseeable future. Our actual PFIC status for the current taxable year ending December 31, 2010 and any future taxable year depends on the composition of our income and assets for the applicable taxable year and cannot be determined until the close of the applicable taxable year. 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:
 
  •  at least 75% of its gross income is passive income; or
 
  •  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.
 
We will be treated as owning our proportionate share of the assets and our receiving 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:
 
  •  the excess distribution or gain will be allocated ratably over your holding period for the ADSs or ordinary shares;
 
  •  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
 
  •  the amount allocated to each other year will be subject to the highest tax rate in effect for that year and the interest charge generally applicable to underpayments of tax will be imposed on the resulting tax attributable to each such year.


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The tax liability for amounts allocated to years prior to the year of disposition or “excess distribution” cannot be offset by any net operating losses for such years, and gains (but not losses) realized on the sale of the ADSs or ordinary shares cannot be treated as capital, even if you hold the ADSs or ordinary shares as capital assets.
 
Alternatively, a U.S. Holder of “marketable stock” (as defined below) in a PFIC may make a mark-to-market election for such stock of a PFIC to elect out of the tax treatment 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 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.
 
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.


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UNDERWRITING
 
Subject to the terms and conditions of the underwriting agreement, the underwriters named below, through their representatives, namely, Morgan Stanley & Co. International plc and UBS Securities LLC, have severally agreed to purchase from us the following respective number of ADSs:
 
         
Underwriters
  Number of ADSs  
 
Morgan Stanley & Co. International plc
    4,400,000  
UBS Securities LLC
    2,800,000  
HSBC Securities (USA) Inc. 
    400,000  
Wells Fargo Securities, LLC
    400,000  
         
Total
    8,000,000  
         
 
The underwriting agreement provides that the obligations of the several underwriters to purchase ADSs offered hereby are subject to certain conditions precedent and that the underwriters will purchase all of the ADSs offered by this prospectus supplement and the accompanying prospectus, other than those covered by the over-allotment option described below, if any of these ADSs are purchased.
 
We have been advised by the managers for the underwriters that the underwriters propose to offer the ADSs to the public at the public offering price set forth on the cover of this prospectus supplement and to dealers at a price that represents a concession not in excess of US$0.216 per ADS under the public offering price. After the initial public offering, representatives of the underwriters may change the offering price and other selling terms.
 
We have granted to the underwriters an option, exercisable not later than 30 days after the date of this prospectus supplement, to purchase up to 1,200,000 additional ADSs at the public offering price less the underwriting discounts and commissions set forth on the cover page of this prospectus supplement. The underwriters may exercise this option only to cover over-allotments made in connection with the sale of the ADSs offered by this prospectus supplement and the accompanying prospectus. To the extent that the underwriters exercise this option, each of the underwriters will become obligated, subject to conditions, to purchase approximately the same percentage of these additional ADSs as the number of ADSs to be purchased by it in the above table bears to the total number of ADSs offered by this prospectus supplement and the accompanying prospectus. We are required, pursuant to the option, to sell these additional ADSs to the underwriters to the extent the option is exercised. If any additional ADSs are purchased, the underwriters will offer the additional ADSs on the same terms as those on which the ADSs are being offered.
 
The underwriting discounts and commissions per ADS are equal to the public offering price per ADS less the amount paid by the underwriters to us per ADS. The underwriting discounts and commissions are 4% of the public offering price. We have agreed to pay the underwriters the following discounts and commissions, assuming either no exercise or full exercise by the underwriters of the underwriters’ over-allotment option:
 
                         
        Total Fees
            With Full
        Without Exercise of
  Exercise of
        Over-Allotment
  Over-Allotment
    Fee per ADS   Option   Option
    US$   US$   US$
 
Discounts and commissions
    0.36       2,880,000       3,312,000  
 
We have agreed to indemnify the underwriters against some specified types of liabilities, including liabilities under the Securities Act, and to contribute to payments the underwriters may be required to make in respect of any of these liabilities.
 
We have agreed that, without the prior written consent of the managers on behalf of the underwriters, for a period of 90 days after the date of this prospectus supplement, subject to the exceptions specified below, we will not:
 
  •  offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend, or otherwise transfer or dispose of, directly or


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  indirectly, any ordinary shares or ADSs or any securities convertible into or exercisable or exchangeable for ordinary shares or ADSs;
 
  •  enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the ordinary shares or ADSs; or
 
  •  any ordinary shares or ADSs or any securities convertible into or exercisable or exchangeable for ordinary shares or ADSs;
 
whether any such transaction described above is to be settled by delivery of ADSs, ordinary shares or such other securities, in cash or otherwise. The foregoing restrictions will not apply to (1) the ordinary shares or ADSs to be sold pursuant to this prospectus supplement; (2) the issuance by us of ordinary shares or ADSs upon the exercise of an option or warrant or the conversion of a security outstanding on the date hereof of which the underwriters have been advised in writing, or (3) the establishment of a trading plan pursuant to Rule 10b5-1 under the Exchange Act for the transfer of ordinary shares or ADSs. Notwithstanding the foregoing, if (i) during the last 17 days of the 90-day lock-up period we issue an earnings release or material news or a material event relating to us occurs, or (ii) prior to the expiration of the 90-day lock-up period, we announce that we will release earnings results during the 16-day period beginning on the last day of the 90-day lock-up period, the lock-up will continue to apply until the expiration of the 18-day period beginning on the issuance of the earnings release or the occurrence of the material news or material event.
 
In addition, each of our executive officers, directors and Hanwha Solar, have agreed that, without the prior written consent of the managers on behalf of the underwriters, they will not, during the period ending 90 days after the date of this prospectus supplement:
 
  •  offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend, or otherwise transfer or dispose of, directly or indirectly, any ordinary shares or ADSs beneficially owned (as such term is used in the Exchange Act) by them or any other securities so owned convertible into or exercisable or exchangeable for ordinary shares or ADSs; or
 
  •  enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the ordinary shares or ADSs;
 
whether any such transaction described above is to be settled by delivery of ordinary shares, ADSs or such other securities, in cash or otherwise. The foregoing restrictions will not apply to (1) transactions relating to shares of ordinary shares or ADSs or other securities acquired in open market transactions after the completion of this offering; (2) transfers of any ordinary shares or ADSs or any security convertible into ordinary shares as a bona fide gift; (3) distributions of any ordinary shares, ADSs or any security convertible into ordinary shares or ADSs to limited partners or stockholders of the undersigned; provided that in the case of any transfer or distribution pursuant to (2) or (3), each donee or distributee shall sign and deliver a lock-up letter substantially in the form of this letter; or (4) the establishment of a trading plan pursuant to Rule 10b5-l under the Exchange Act for the transfer of ordinary shares or ADSs, provided that such plan does not provide for the transfer of ordinary shares or ADSs during the restricted period and no public announcement or filing under the Exchange Act regarding the establishment of such plan shall be required of or voluntarily made by or on behalf of such officer, director, shareholder or us. Notwithstanding the foregoing, if (i) during the last 17 days of the 90-day lock-up period we issue an earnings release or material news or a material event relating to us occurs, or (ii) prior to the expiration of the 90-day lock-up period, we announce that we will release earnings results during the 16-day period beginning on the last day of the 90-day lock-up period, the lock-up will continue to apply until the expiration of the 18-day period beginning on the issuance of the earnings release or the occurrence of the material news or material event.
 
In connection with the offering, the underwriters may purchase and sell ADSs in the open market. These transactions may include short sales, purchases to cover positions created by short sales and stabilizing transactions.
 
Short sales involve the sale by the underwriters of a greater number of ADSs than they are required to purchase in the offering. Covered short sales are sales made in an amount not greater than the underwriters’ option to purchase additional ADSs from us in the offering. The underwriters may close out any covered short position by


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either exercising their option to purchase additional ADSs or purchasing ADSs in the open market. In determining the source of ADSs to close out the covered short position, the underwriters will consider, among other things, the price of ADSs available for purchase in the open market as compared to the price at which they may purchase ADSs through the over-allotment option.
 
Naked short sales are any sales in excess of the over-allotment option. The underwriters must close out any naked short position by purchasing ADSs in the open market. A naked short position is more likely to be created if underwriters are concerned that there may be downward pressure on the price of the ADSs in the open market prior to the completion of this offering.
 
Stabilizing transactions consist of various bids for or purchases of our ADSs made by the underwriters in the open market prior to the completion of this offering.
 
The underwriters may impose a penalty bid. This occurs when a particular underwriter repays to the other underwriters a portion of the underwriting discount received by it because the managers for the underwriters have repurchased ADSs sold by or for the account of that underwriter in stabilizing or short covering transactions.
 
Purchases to cover a short position and stabilizing transactions may have the effect of preventing or slowing a decline in the market price of our ADSs. Additionally, these purchases, along with the imposition of the penalty bid, may stabilize, maintain or otherwise affect the market price of our ADSs. As a result, the price of our ADSs may be higher than the price that might otherwise exist in the open market. These transactions may be effected on the Nasdaq Global Market, in the over-the-counter market, or otherwise.
 
A prospectus in electronic format is being made available on Internet web sites maintained by one or more of the underwriters of this offering and may be made available on web sites maintained by other underwriters. Other than the prospectus in electronic format, the information on any underwriter’s web site and any information contained in any other web site maintained by an underwriter is not part of this prospectus supplement or accompanying prospectus or the registration statement of which this prospectus supplement and accompanying prospectus forms a part.
 
Our ADSs are listed on Nasdaq Global Market under the symbol “SOLF.”
 
Some of the underwriters or their affiliates have provided investment banking or commercial banking services to us in the past and may do so in the future. They receive customary fees and commissions for these services.
 
Morgan Stanley & Co. International plc’s address is 25 Cabot Square, Canary Wharf, London E14 4QA, United Kingdom and UBS Securities LLC’s address is 299 Park Avenue, New York, New York 10171-0026.
 
Selling Restrictions
 
No action may be taken in any jurisdiction other than the United States that would permit a public offering of the ADSs. This prospectus supplement and the accompanying prospectus do not constitute an offer of, or an invitation by or on behalf of, us or the underwriters, to subscribe for or purchase any of the ADSs in any jurisdiction to any person to whom it is unlawful to make such an offer or solicitation in that jurisdiction. The distribution of this prospectus supplement and the accompanying prospectus and the offering of the ADSs in certain jurisdictions may be restricted by law, and we and the underwriters require persons into whose possession this prospectus supplement and the accompanying prospectus come to observe such restrictions.
 
Australia
 
This prospectus supplement and the accompanying prospectus is not a disclosure document under Chapter 6D of the Corporations Act 2001 (Cth), or the Australian Corporations Act, has not been lodged with the Australian Securities and Investments Commission and does not purport to include the information required of a disclosure document under Chapter 6D of the Australian Corporations Act. Accordingly, (i) the offer of the ADSs under this prospectus supplement and the accompanying prospectus is only made to persons to whom it is lawful to offer the ADSs without disclosure under Chapter 6D of the Australian Corporations Act under one or more exemptions set out in section 708 of the Australian Corporations Act, (ii) this prospectus supplement and the accompanying prospectus is made available in Australia only to those persons as set forth in clause (i) above, and (iii) the offeree


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must be sent a notice stating in substance that by accepting this offer, the offeree represents that the offeree is such a person as set forth in clause (i) above, and, unless permitted under the Australian Corporations Act, agrees not to sell or offer for sale within Australia any of the ADSs sold to the offeree within 12 months after its transfer to the offeree under this prospectus supplement and the accompanying prospectus.
 
Cayman Islands
 
Neither this prospectus supplement nor the accompanying prospectus constitutes an invitation or offer to the public in the Cayman Islands of the ADSs, whether by way of sale or subscription. The underwriters have not offered or sold, and will not offer or sell, directly or indirectly, any shares in the Cayman Islands.
 
European Economic Area
 
In relation to each Member State of the European Economic Area which has implemented the Prospectus Directive (each, a “Relevant Member State”) an offer to the public of any ADSs which are the subject of this offering may not be made in that Relevant Member State except that an offer to the public in the Relevant Member State of any ADSs may be made at any time under the following exemptions under the Prospectus Directive, if they have been implemented in that Relevant Member State:
 
(a) to legal entities which are authorized or regulated to operate in the financial markets or, if not authorized or regulated, whose corporate purpose is solely to invest in securities;
 
(b) to any legal entity which has two or more of (1) an average of at least 250 employees during the last financial year; (2) a total balance sheet of more than EUR43,000,000 and (3) an annual net turnover of more than EUR50,000,000, as shown in its last annual or consolidated accounts;
 
(c) by the underwriters to fewer than 100 natural or legal persons (other than qualified investors as defined in the Prospectus Directive) subject to obtaining the prior consent of the underwriters for any such offer; or
 
(d) in any other circumstances falling within Article 3(2) of the Prospectus Directive.
 
For the purposes of this provision, the expression an “offer to the public” in relation to any ADSs in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and any ADSs to be offered so as to enable an investor to decide to purchase the ADSs, as the same may be varied in that Member State by any measure implementing the Prospectus Directive in that Member State and the expression “Prospectus Directive” means Directive 2003/71/EC and includes any relevant implementing measure in each Relevant Member State.
 
Hong Kong
 
(a) The ADSs may not be offered or sold in Hong Kong, by means of any document, other than (i) to “professional investors” as defined in the Securities and Futures Ordinance (Cap. 571) of Hong Kong and any rules made under that Ordinance; or (ii) in other circumstances which do not result in the document being a “prospectus” as defined in the Companies Ordinance (Cap. 32) of Hong Kong or which do not constitute an offer to the public within the meaning of that Ordinance; and
 
(b) No advertisement, invitation or document relating to the ADSs may be issued, whether in Hong Kong or elsewhere, which is directed at or the contents of which are likely to be accessed or read by, the public of Hong Kong (except if permitted to do so under the securities laws of Hong Kong) other than with respect to the ADSs which are or are intended to be disposed of only to persons outside Hong Kong or only to “professional investors” as defined in the Securities and Futures Ordinance (Cap. 571) of Hong Kong and any rules made under that Ordinance.
 
Kingdom of Saudi Arabia
 
This prospectus supplement and the accompanying prospectus may not be distributed in Saudi Arabia or to any national of Saudi Arabia except in strict compliance with part 5 exempt offers Article 17 of the Offers of Securities Regulations enacted under the laws of Saudi Arabia.


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People’s Republic of China
 
This prospectus supplement and the accompanying prospectus have not been and will not be circulated or distributed in the PRC, and ADSs may not be offered or sold, and will not be offered or sold to any person for re-offering or resale, directly or indirectly, to any resident of the PRC except pursuant to applicable laws and regulations of the PRC.
 
Singapore
 
This prospectus supplement and the accompanying prospectus have not been registered as a prospectus with the Monetary Authority of Singapore. Accordingly, this prospectus supplement and the accompanying prospectus and any other document or material in connection with the offer or sale, or invitation for subscription or purchase, of the ADSs may not be circulated or distributed, nor may the ADSs be offered or sold, or be made the subject of an invitation for subscription or purchase, whether directly or indirectly, to persons in Singapore other than (i) to an institutional investor under Section 274 of the Securities and Futures Act, Chapter 289 of Singapore (the “SFA”), (ii) to a relevant person, or any person pursuant to Section 275(1A), and in accordance with the conditions, specified in Section 275 of the SFA or (iii) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA.
 
Where the ADSs are subscribed or purchased under Section 275 by a relevant person which is:
 
(a) a corporation (which is not an accredited investor) the sole business of which is to hold investments and the entire share capital of which is owned by one or more individuals, each of whom is an accredited investor; or
 
(b) a trust (where the trustee is not an accredited investor) whose sole purpose is to hold investments and each beneficiary is an accredited investor,
 
shares, debentures and units of shares and debentures of that corporation or the beneficiaries’ rights and interest in that trust shall not be transferable for six months after that corporation or that trust has acquired the ADSs under Section 275 except:
 
(1) to an institutional investor or to a relevant person, or to any person pursuant to an offer that is made on terms that such rights or interest are acquired at a consideration of not less than $200,000 (or its equivalent in a foreign currency) for each transaction, whether such amount is to be paid for in cash or by exchange of securities or other assets;
 
(2) where no consideration is given for the transfer; or
 
(3) by operation of law.
 
State of Kuwait
 
Unless all of the approvals and licenses which are required pursuant to Law No. 31/1990 are obtained from the Kuwait Ministry of Commerce and Industry, no ADSs may be marketed, offered for sale or sold in Kuwait, either directly or indirectly.
 
Switzerland
 
This prospectus supplement and the accompanying prospectus does not constitute a prospectus within the meaning of Article 652a or 1156 of the Swiss Code of Obligations (Schweizerisches Obligationenrecht), and none of this offering and the ADSs has been or will be approved by any Swiss regulatory authority.
 
United Arab Emirates
 
This prospectus supplement and the accompanying prospectus are not intended to constitute an offer, sale or delivery of shares or other securities under the laws of the United Arab Emirates, or the UAE. The ADSs have not been and will not be registered under Federal Law No. 4 of 2000 Concerning the Emirates Securities and


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Commodities Authority and the Emirates Security and Commodity Exchange, or with the UAE Central Bank, the Dubai Financial Market, the Abu Dhabi Securities Market or with any other UAE exchange.
 
The offering, the ADSs and interests therein have not been approved or licensed by the UAE Central Bank or any other relevant licensing authorities in the UAE, and do not constitute a public offer of securities in the UAE in accordance with the Commercial Companies Law, Federal Law No. 8 of 1984 (as amended) or otherwise.
 
In relation to its use in the UAE, this prospectus supplement and the accompanying prospectus are strictly private and confidential and is being distributed to a limited number of investors and must not be provided to any person other than the original recipient, and may not be reproduced or used for any other purpose. The interests in the ADSs may not be offered or sold directly or indirectly to the public in the UAE.
 
United Kingdom
 
The ADSs may not be offered or sold other than to persons whose ordinary activities involve them in acquiring, holding, managing or disposing of investments (as principal or agent) for the purposes of their businesses or who it is reasonable to expect will acquire, hold, manage or dispose of investments (as principal or agent) for the purposes of their businesses where the issue of the ADSs would otherwise constitute a contravention of Section 19 of the Financial Services and Markets Act 2000, or FSMA, by the issuer. In addition, no person may communicate or cause to be communicated any invitation or inducement to engage in investment activity (within the meaning of Section 21 of the FSMA) received by it in connection with the issue or sale of the ADSs other than in circumstances in which Section 21(1) of the FSMA does not apply to the issuer.


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LEGAL MATTERS
 
We are being represented by Shearman & Sterling LLP with respect to legal matters of United States federal securities and New York State law. Certain legal matters in connection with the offering of the ADSs will be passed upon for the underwriters by Davis Polk & Wardwell LLP. The validity of the ordinary shares represented by ADSs offered in this offering will be passed upon for us by Maples and Calder. Legal matters as to PRC law will be passed upon by Grandall Legal Group (Shanghai).


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EXPERTS
 
Our consolidated financial statements appearing in our annual report on Form 20-F for the year ended December 31, 2009 and the effectiveness of our internal control over financial reporting as of December 31, 2009 have been audited by Ernst & Young Hua Ming, independent registered public accounting firm, as set forth in their reports thereon, included therein, and incorporated herein by reference. Such consolidated financial statements and our management’s assessment of the effectiveness of internal control over financial reporting as of December 31, 2009 are incorporated herein by reference in reliance upon such reports given on the authority of such firm as experts in accounting and auditing.
 
The offices of Ernst & Young Hua Ming are located at 50th floor, Shanghai World Financial Center, 100 Century Avenue, Pudong New Area, Shanghai, China.


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WHERE YOU CAN FIND MORE INFORMATION ABOUT US
 
We have filed a registration statement with the SEC on Form F-3 under the Securities Act relating to the ADSs and underlying ordinary shares to be sold in this offering. This prospectus supplement, which constitutes a part of that registration statement, does not contain all of the information contained in the registration statement. You should read the registration statement, its exhibits and schedules and documents incorporated by reference in the registration statement for further information with respect to us, our ordinary shares and our ADSs.
 
We are currently subject to periodic reporting and other information requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, as applicable to foreign private issuers. Accordingly, we are required to file or furnish reports, including annual reports on Form 20-F, reports on Form 6-K, and other information with the SEC. As a foreign private issuer, we are exempt from the rules of the Exchange Act prescribing the furnishing and content of proxy statements and our officers, directors and principal shareholders will be exempt from the reporting and “short-swing” profit recovery provisions of the Exchange Act.
 
All information filed with the SEC can be inspected and copied at the public reference facilities of the SEC, at 100 F Street, N.E., Washington D.C. 20549. You can request copies of these documents upon payment of a duplicating fee, by writing to the SEC. Please call the SEC at 1-800-SEC-0330 for further information on the public reference rooms. We file reports with the SEC electronically. The reports that we have filed with the SEC electronically are available to you over the Internet at the SEC’s website at http://www.sec.gov. Our SEC filings, including this prospectus supplement, and other information may also be inspected at the offices of the Nasdaq Global Market, Reports Section, 1735 K Street, N.W. Washington, D.C. 20006.
 
We furnish to The Bank of New York Mellon, as the depositary for the ADSs, annual reports, which include annual audited consolidated financial statements prepared in accordance with U.S. GAAP. The depositary has agreed that, at our request, it will promptly mail these reports to all registered holders of ADSs. We also furnish to the depositary all notices of shareholders’ meetings and other reports and communications that are made generally available to our shareholders. The depositary, upon our written request, will arrange for the mailing of these documents to record holders of ADSs.
 
The SEC allows us to “incorporate by reference” information into this prospectus supplement. This means that we can disclose important information to you by referring you to another document that we have filed separately with the SEC. The information incorporated by reference is considered to be part of this prospectus supplement, and certain later information that we file with the SEC will automatically update and supersede this information. We incorporate by reference the following documents:
 
  •  our annual report on Form 20-F for the fiscal year ended December 31, 2009, filed with the SEC on May 25, 2010, as amended on June 29, 2010;
 
  •  our current report on Form 6-K, submitted to the SEC on May 28, 2010;
 
  •  our current report on Form 6-K/A, submitted to the SEC on July 1, 2010;
 
  •  our current reports on Form 6-K, submitted to the SEC on July 20, 2010;
 
  •  our current report on Form 6-K, submitted to the SEC on July 22, 2010;
 
  •  our current report on Form 6-K, submitted to the SEC on July 27, 2010;
 
  •  our current reports on Form 6-K, submitted to the SEC on August 3, 2010;
 
  •  our current report on Form 6-K, submitted to the SEC on August 9, 2010;
 
  •  our current report on Form 6-K, submitted to the SEC on August 17, 2010;
 
  •  our current reports on Form 6-K, submitted to the SEC on October 12, 2010;
 
  •  our current reports on Form 6-K, submitted to the SEC on November 9, 2010; and
 
  •  any future information contained in filings on Form 6-K made with the SEC under the Exchange Act after the date of this prospectus supplement and prior to the termination of the offering as described in this


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  prospectus supplement, that is identified in such forms as being incorporated into this prospectus supplement.
 
We will provide, without charge, to each person, including any beneficial owner, to whom this prospectus supplement is delivered, upon written or oral request, a copy of any document incorporated by reference into this prospectus supplement but not delivered with this prospectus supplement. You may also obtain these filings electronically at the SEC’s website at http://www.sec.gov.


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SOLARFUN POWER HOLDINGS CO., LTD.

INDEX TO UNAUDITED INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2009 AND SEPTEMBER 30, 2010
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2010
 
         
    Page
 
Unaudited Interim Condensed Consolidated Financial Statements
       
    F-2  
    F-3  
    F-4  
    F-5  
    F-6 – F-18  

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SOLARFUN POWER HOLDINGS CO., LTD.
 
INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS
 
                                 
          As of
    As of
 
          December 31,
    September 30,  
    Note     2009     2010     2010  
          (RMB’000)     (RMB’000)
    (US$’000)
 
                (Unaudited)     (Unaudited)  
 
ASSETS:
Current assets:
                               
Cash and cash equivalents
            645,720       1,296,734       193,817  
Restricted cash
            60,539       63,858       9,545  
Accounts receivable — net
            587,488       1,289,932       192,800  
Inventories — net
    3       783,973       689,566       103,066  
Advance to suppliers — net
    4       979,762       1,246,336       186,284  
Other current assets
            180,315       236,285       35,318  
Deferred tax assets — net
            63,115       75,734       11,320  
Derivative contracts
    11       7,360       1,910       285  
Amount due from related parties
            12,458              
                                 
Total current assets
            3,320,730       4,900,355       732,435  
Non-current assets:
                               
Fixed assets — net
            1,586,283       1,829,395       273,432  
Intangible assets — net
            208,563       206,856       30,918  
Deferred tax assets — net
            13,789       16,239       2,427  
Long-term deferred expenses
            33,158       29,639       4,430  
Goodwill
            134,735       134,735       20,138  
                                 
Total non-current assets
            1,976,528       2,216,864       331,345  
Total assets
            5,297,258       7,117,219       1,063,780  
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
                               
Short-term bank borrowings
    5       404,764       748,010       111,802  
Long-term bank borrowings, current portion
    5       90,000       202,500       30,267  
Accounts payable
            441,768       528,902       79,053  
Notes payable
            186,921       142,509       21,300  
Accrued expenses and other liabilities
            191,895       356,860       53,338  
Customer deposits
            59,685       127,498       19,057  
Deferred tax liabilities
                  766       115  
Unrecognized tax benefit
    6       27,385       27,385       4,093  
Derivative contracts
    11       1,148       70,605       10,553  
Amount due to related parties
            16,765       13,767       2,058  
                                 
Total current liabilities
            1,420,331       2,218,802       331,636  
Non-current liabilities:
                               
Long-term bank borrowings
    5       380,000       200,000       29,893  
Deferred tax liabilities
            26,566       26,124       3,905  
Convertible bonds
    8       658,653       928,369       138,759  
                                 
Total non-current liabilities
            1,065,219       1,154,493       172,557  
Total liabilities
            2,485,550       3,373,295       504,193  
Commitments and contingencies
    10                          
Redeemable ordinary shares (par value US$0.0001 per share; 45,098,055 shares issued and outstanding at December 31, 2009 and September 30, 2010 (unaudited))
    13       55       55       8  
Shareholders’ equity
                               
Ordinary shares (par value US$0.0001 per share; 500,000,000, and 500,000,000 shares authorized; 290,708,739 shares and 328,663,828 shares issued and outstanding at December 31, 2009, and September 30, 2010 (unaudited), respectively)
            227       252       38  
Additional paid-in capital
            2,331,797       2,877,447       430,079  
Statutory reserves
            69,564       151,541       22,650  
Retained earnings
            410,065       714,629       106,812  
                                 
Total shareholders’ equity
            2,811,653       3,743,869       559,579  
Total liabilities, redeemable ordinary shares and shareholders’ equity
            5,297,258       7,117,219       1,063,780  
 
The accompanying notes are an integral part of the unaudited interim condensed consolidated financial statements


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SOLARFUN POWER HOLDINGS CO., LTD.
 
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
                                 
          For the Nine Months Ended September 30,  
    Note     2009     2010     2010  
          (RMB’000)
    (RMB’000)
    (US$’000)
 
          (Unaudited)     (Unaudited)     (Unaudited)  
 
Net revenues
            2,525,605       5,414,289       809,252  
Cost of revenues
            (2,324,795 )     (4,276,595 )     (639,204 )
                                 
Gross profit
            200,810       1,137,694       170,048  
Operating expenses:
                               
Selling expenses
            (59,340 )     (112,914 )     (16,877 )
General and administrative expenses
            (130,123 )     (135,835 )     (20,303 )
Research and development expenses
            (19,182 )     (38,878 )     (5,811 )
                                 
Total operating expenses
            (208,645 )     (287,627 )     (42,991 )
                                 
Operating (loss) profit
            (7,835 )     850,067       127,057  
Interest expense
            (118,245 )     (121,019 )     (18,088 )
Interest income
            3,704       3,791       567  
Exchange losses
            (9,120 )     (53,049 )     (7,929 )
Changes in fair value of derivative contracts
    11       (5,803 )     40,026       5,983  
Changes in fair value of conversion feature of convertible bonds
    8       (2,608 )     (223,968 )     (33,476 )
Other income
            5,021       17,290       2,584  
Other expenses
            (9,789 )     (3,771 )     (564 )
Government grants
    9       5,661       26,229       3,920  
                                 
(Loss) income before income taxes
            (139,014 )     535,596       80,054  
Income tax expenses
            (16,590 )     (149,055 )     (22,279 )
                                 
Consolidated net (loss) income
            (155,604 )     386,541       57,775  
Net income attributable to non-controlling interest
            (244 )            
                                 
Net (loss) income attributable to Solarfun Power Holdings Co., Ltd. shareholders
            (155,848 )     386,541       57,775  
                                 
Net (loss) income attributable to Solarfun Power Holdings Co., Ltd. shareholders per share:
                               
Basic
    15       (0.58 )     1.32       0.20  
Diluted
    15       (0.58 )     1.32       0.20  
Number of shares used in computation of net (loss) income per share:
                               
Basic
    15       269,395,297       291,904,408       291,904,408  
Diluted
    15       269,395,297       292,740,592       292,740,592  
 
The accompanying notes are an integral part of the unaudited interim condensed consolidated financial statements


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SOLARFUN POWER HOLDINGS CO., LTD.
 
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
                             
        For the Nine Months Ended September 30,  
    Note   2009     2010     2010  
        (RMB’000)
    (RMB’000)
    (US$’000)
 
        (Unaudited)     (Unaudited)     (Unaudited)  
 
Cash flows from operating activities:
                           
Consolidated net (loss) income
        (155,604 )     386,541       57,775  
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
                           
Unrealized loss from derivative contracts
  11     75,362       74,907       11,196  
Changes in fair value of conversion feature of convertible bonds
        2,608       223,968       33,476  
Loss from disposal of fixed assets
        623       818       122  
Amortization of convertible bonds discount
        36,855       45,748       6,838  
Depreciation and amortization
        110,102       136,098       20,342  
Amortization of long-term deferred expense
        5,100       5,378       804  
Stock compensation expenses
  7     34,162       25,227       3,771  
Write-down of inventories
        242,233       99,223       14,830  
Provision for doubtful collection of accounts receivable
              1,005       150  
Reversal of doubtful debt for accounts receivable
        (18,091 )     (278 )     (42 )
Provision for doubtful collection of supplier advances
  4     234,561       117       17  
Deferred tax benefit
        10,105       (14,745 )     (2,204 )
Warranty provision
        15,128       48,305       7,220  
Unrecognized tax benefit
        1,082              
Changes in operating assets and liabilities:
                           
Restricted cash
        (3,155 )     3,261       487  
Accounts receivable
        (387,698 )     (703,171 )     (105,100 )
Inventories
        (318,940 )     (4,816 )     (720 )
Advance to suppliers
        83,173       (266,691 )     (39,861 )
Prepaid expenses
        67,712       58,556       8,752  
Other current assets
        130,994       (114,526 )     (17,118 )
Amount due from related parties
        (42,571 )     12,458       1,862  
Accounts payable
        218,091       19,205       2,870  
Accrued expenses and other liabilities
        22,837       116,639       17,434  
Amount due to related parties
        7,161       (2,998 )     (448 )
Customer deposits
        11,852       67,813       10,136  
                             
Net cash provided by operating activities
        383,682       218,042       32,589  
Cash flows from investing activities:
                           
Acquisition of fixed assets
        (232,480 )     (354,985 )     (53,058 )
Acquisition of intangible assets
        (419 )     (1,678 )     (251 )
Acquisition of a subsidiary
        (88,968 )            
Increase in restricted cash
        (40,245 )     (6,580 )     (983 )
                             
Net cash used in investing activities
        (362,112 )     (363,243 )     (54,292 )
Cash flows from financing activities:
                           
Proceeds from Share Issuance and Repurchase Agreement with Hanwha Solar Holdings Co., Ltd. 
  14           21       3  
Proceeds from issuance of ordinary shares
  12,14     78,607       510,330       76,277  
Proceeds from exercise of stock options
        1,080       10,118       1,512  
Proceeds from short-term borrowings
        1,835,578       1,066,224       159,364  
Payment of short-term borrowings
        (1,920,672 )     (722,978 )     (108,060 )
Proceeds from long-term borrowings
        300,000              
Payment of long-term borrowings
        (22,500 )     (67,500 )     (10,089 )
Utilization of notes payable
        88,622              
                             
Net cash provided by financing activities
        360,715       796,215       119,007  
Net increase in cash and cash equivalents
        382,285       651,014       97,304  
Cash and cash equivalents at the beginning of period
        410,901       645,720       96,513  
                             
Cash and cash equivalents at the end of period
        793,186       1,296,734       193,817  
                             
Supplemental disclosure of cash flow information:
                           
Interest paid
        134,875       78,235       11,693  
Income tax paid
        8,181       81,535       12,187  
Realized gain from derivate contracts
        69,560       114,934       17,179  
Supplemental schedule of non-cash activities:
                           
Acquisition of fixed assets included in accounts payable, accrued expenses and other liabilities
        20,719       23,517       3,515  
Conversion of convertible bonds into ordinary shares
        179              
Transfer of unamortized debt issuance costs to equity upon conversion of convertible bonds into ordinary shares
        (5 )            
 
The accompanying notes are an integral part of the unaudited interim condensed consolidated financial statements


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Table of Contents

SOLARFUN POWER HOLDINGS CO., LTD.
 
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS’ EQUITY
 
                                                                 
          Solarfun Power Holdings Co., Ltd.              
                                  Retained
             
          Number of
          Additional
          Earnings
    Non-
    Total
 
          Ordinary
    Ordinary
    Paid-in
    Statutory
    (Accumulated
    Controlling
    Shareholders’
 
    Note     Shares     Shares     Capital     Reserves     Losses)     Interest     Equity  
                (RMB’000)     (RMB’000)     (RMB’000)     (RMB’000)     (RMB’000)     (RMB’000)  
 
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
    7       803,863             1,080                         1,080  
Settlement of stock options exercised with shares held by depository bank
            (803,863 )                                    
Conversion of convertible bonds into ordinary shares
            6,535             175                         175  
Shares issued to depository bank
            2,200,000       1       (1 )                        
Share-based compensation
    7                   34,162                         34,162  
Net loss for the period
                                    (155,848 )     244       (155,604 )
Appropriation of statutory reserves
                              9,525       (9,525 )            
Net proceeds from issuance of common shares
    12       9,776,550       6       78,601                         78,607  
                                                                 
Balance as of September 30, 2009
            281,043,294       221       2,252,641       57,163       411,845       4,427       2,726,297  
Exercise of stock options and vesting of restricted stock units
    7       89,897             21                         21  
Settlement of stock option exercised with shares held by depository bank
            (89,897 )                                    
Net proceeds from issuance of common share
    12       9,665,445       6       70,381                         70,387  
Share-based compensation
    7                   8,509                         8,509  
Purchase of subsidiary shares from non-controlling interest
                        245                   (1,094 )     (849 )
Appropriation of retained earnings to non-controlling interest
                                          (3,400 )     (3,400 )
Net income (loss) for the period
                                    10,621       67       10,688  
Appropriation of statutory reserves
                              12,401       (12,401 )            
                                                                 
Balance as of December 31, 2009
            290,708,739       227       2,331,797       69,564       410,065             2,811,653  
Exercise of stock options and vesting of restricted stock units
    7       1,421,000             10,118                         10,118  
Settlement of stock options exercised with shares held by depository bank
            (1,421,000 )                                    
Shares issued to depository bank
            1,500,000       1       (1 )                        
Net proceeds from issuance of common shares
    14       36,455,089       24       510,306                         510,330  
Share-based compensation
    7                   25,227                         25,227  
Net income for the period
                                    386,541             386,541  
Appropriation of statutory reserves
                              81,977       (81,977 )            
                                                                 
Balance as of September 30, 2010
            328,663,828       252       2,877,447       151,541       714,629             3,743,869  
                                                                 
Balance as of September 30, 2010, in US$’000
                    38       430,079       22,650       106,812             559,579  
                                                                 
 
The accompanying notes are an integral part of the unaudited interim condensed consolidated financial statements


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Table of Contents

SOLARFUN POWER HOLDINGS CO., LTD.

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2009 AND SEPTEMBER 30, 2010
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2010
 
1.   ORGANIZATION AND BASIS OF PREPARATION
 
The accompanying unaudited interim condensed consolidated financial statements of Solarfun Power Holdings Co., Ltd. (the “Company”) and subsidiaries (collectively the “Group”) were prepared on a basis substantially consistent with the Company’s audited consolidated financial statements for the year ended December 31, 2009. These unaudited interim condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“US GAAP”) for interim financial information and consequently do not include all disclosures normally required by US GAAP for annual financial statements. These financial statements and the notes thereto should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2009. In the opinion of management, these unaudited interim condensed consolidated financial statements reflect all adjustments, consisting only of normal and recurring adjustments, necessary to present fairly the Group’s consolidated financial position at September 30, 2010, its consolidated results of operations, cash flows and changes in shareholders’ equity for the nine-month periods ended September 30, 2009 and 2010. Interim period results are not necessarily indicative of results for a full-year period. The information pertaining to the condensed consolidated balance sheet as of December 31, 2009 was derived from audited consolidated financial statements as of that date.
 
In May 2010, the Group established Jiangsu Linyang Solar Electric Power Engineering Co., Ltd. (“Linyang Engineering”). The registered capital of Linyang Engineering is RMB50,000,000, all of which had been contributed by the Group on May 25, 2010. The principal activity of Linyang Engineering is to design and install solar projects in China.
 
2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Principles of Consolidation
 
The unaudited interim condensed consolidated financial statements include the financial statements of the Company and its subsidiaries. All significant inter-company transactions and balances between the Company and its subsidiaries are eliminated upon consolidation.
 
Convenience Translation
 
Amounts in US$ are presented for the convenience of the reader and are calculated at the noon buying rate of US$1.00 to RMB6.6905 on September 30, 2010 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.
 
3.   INVENTORIES
 
                         
    As of
    As of
 
    December 31,
    September 30,  
    2009     2010     2010  
    (RMB’000)     (RMB’000)
    (US$’000)
 
          (Unaudited)     (Unaudited)  
 
Raw materials
    277,553       468,526       70,028  
Work-in-progress
    129,500       40,436       6,044  
Finished goods
    376,920       180,604       26,994  
                         
      783,973       689,566       103,066  
                         


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SOLARFUN POWER HOLDINGS CO., LTD.
 
NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
 
As of December 31, 2009 and September 30, 2010, raw materials of approximately RMB15,131,000 and RMB18,854,000 (US$2,818,026), respectively, of the Group were held in custody by other parties for processing. As of December 31, 2009 and September 30, 2010, the write-down of inventories amounted to approximately RMB282,574,000 and RMB117,002,000 (US$17,487,781), respectively.
 
4.   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 credit-worthiness 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 RMB234,561,000 and RMB117,000 (US$17,487) for nine months ended September 30, 2009 and 2010, respectively, to reflect the probable loss arising from the suppliers’ failure to perform under the contracts.
 
5.   BANK BORROWINGS
 
                         
    As of
    As of
 
    December 31,
    September 30,  
    2009     2010     2010  
    (RMB’000)     (RMB’000)
    (US$’000)
 
          (Unaudited)     (Unaudited)  
 
Total bank borrowings
    874,764       1,150,510       171,962  
                         
Comprised:
                       
Short-term
    404,764       748,010       111,802  
Long-term, current portion
    90,000       202,500       30,267  
Long-term, non-current portion
    380,000       200,000       29,893  
                         
      874,764       1,150,510       171,962  
                         
 
The short-term bank borrowings outstanding as of December 31, 2009 and September 30, 2010 bore an average interest rate of 4.9915% and 4.4762% per annum, respectively, and were denominated in Renminbi. These borrowings were obtained from financial institutions and had terms of one month to one year. As of December 31, 2009 and September 30, 2010, unused short-term bank loan facilities amounted to approximately RMB853,000,000 and RMB831,990,000 (US$124,353,935), respectively.
 
The long-term bank borrowings outstanding as of December 31, 2009 and September 30, 2010 bore average interest rates of 5.5973% and 5.5140% 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 long-term borrowings as of September 30, 2010 will be due in installments from December 29, 2010 to September 29, 2011, and December 26, 2011 to September 13, 2012, respectively.


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SOLARFUN POWER HOLDINGS CO., LTD.
 
NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
 
As of September 30, 2010, the maturities of these long-term bank borrowings were as follows:
 
                 
    As of September 30,  
    2010     2010  
    (RMB’000)
    (US$’000)
 
    (Unaudited)     (Unaudited)  
 
Within 1 year
    202,500       30,267  
Between 1 and 2 years
    200,000       29,893  
                 
      402,500       60,160  
                 
 
6.   INCOME TAXES
 
As of December 31, 2009 and September 30, 2010, the Group has recognized approximately RMB27,385,000 and RMB27,385,000 (US$4,093,117) as an accrual for unrecognized tax benefits, which has been classified as a current liability. The final outcome of the tax uncertainty is dependent upon various matters including tax examinations, interpretation of tax laws or expiration of status of limitation. However, due to the uncertainties associated with the status of examinations, including the protocols of finalizing audits by the relevant tax authorities, there is a high degree of uncertainty regarding the future cash outflows associated with these tax uncertainties.
 
The Group has total income tax expense of RMB16,590,000 and RMB149,055,000 (US$22,278,604) for the nine months ended September 30, 2009 and 2010, respectively. The Group’s effective tax rates are (12%) and 28% for the nine months ended September 30, 2009 and 2010, respectively. The increase in the effective tax rate is mainly due to the significant profit derived by the Group’s PRC subsidiaries and a smaller change in the valuation allowances as a percentage of profit-before-tax during the nine months ended September 30, 2010.
 
Total income tax expense for the nine months ended September 30, 2010 included a deferred tax benefit of RMB14,745,000 (US$2,203,871) (2009: RMB14,939,000) and a current tax expense of RMB163,800,000 (US$24,482,475) (2009: RMB31,529,000). The Group continues to conduct most of its business through its major PRC subsidiaries whose applicable income tax rates are 15% and 25%. A full valuation allowance is recorded for deferred tax assets of those entities within the group that continue to be in cumulative loss positions. The Group’s current tax expense for the nine months ended September 30, 2010 included an amount of RMB nil (2009: RMB nil) relating to the provision for unrecognized tax benefits.
 
7.   SHARE OPTION PLANS
 
For the nine months ended September 30, 2010, 1,387,500 options were granted to the employees of the Group under the share incentive plan adopted by the Company on August 22, 2007 (the “2007 Incentive Plan”). 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. As of September 30, 2010, options to purchase 15,614,235 ordinary shares were granted and outstanding with an average exercise price of US$1.78 per share.


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Table of Contents

SOLARFUN POWER HOLDINGS CO., LTD.
 
NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
 
The following table summarized the Company’s share option activity under the existing plans:
 
                 
    Number of
    Number of
 
    Options
    Options
 
    2009     2010  
    (Unaudited)     (Unaudited)  
 
Outstanding, January 1
    11,384,800       15,984,915  
Granted
    3,936,000       1,387,500  
Exercised
    (172,620 )     (1,196,000 )
Forfeited
    (2,738,615 )     (562,180 )
                 
Outstanding, September 30
    12,409,565       15,614,235  
                 
Vested and expected to be vested at September 30
    12,409,565       15,614,235  
                 
Exercisable at September 30
    4,630,895       6,240,005  
                 
 
The Company calculated the estimated fair value of share options on the grant date using the binomial-lattice model for the nine months ended September 30, 2009 and 2010 with the following respective assumptions:
 
         
    Granted in the Nine Months
    Ended September 30,
    2009   2010
 
Risk-free interest rate
  1.46% - 3.69%   2.47% - 3.31%
Withdraw rate
  0% - 10%   10%
Expected dividend yield
  0%   0%
Expected volatility
  80%   80%
Sub-optimal early exercise factor
  4 times   4 times
Fair value of options at grant date per share
  From US$0.38 to US$1.07   From US$0.98 to US$1.61
 
The 2007 Incentive Plan also permits the grant of Restricted Stock Units (“RSU”) to employees, directors and consultants of the Group. The fair value of RSU is based on the quoted market price of the Company’s ordinary shares at the respective grant dates.
 
The following table summarized the Company’s RSU activity under existing plans:
 
                 
    Number of
    Number of
 
    RSUs 2009     RSUs 2010  
    (Unaudited)     (Unaudited)  
 
Unvested, January 1
    137,498       46,250  
Granted
    45,000       45,000  
Vested
    (126,249 )     (51,250 )
Forfeited
           
                 
Unvested, September 30
    56,249       40,000  
                 


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Table of Contents

SOLARFUN POWER HOLDINGS CO., LTD.
 
NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
 
Total compensation expense relating to share options and RSUs recognized for the nine months ended September 30, 2009 and 2010 is as follows:
 
                         
    For the Nine Months Ended September 30,  
    2009     2010     2010  
    (RMB’000)
    (RMB’000)
    (US$’000)
 
    (Unaudited)     (Unaudited)     (Unaudited)  
 
Cost of revenue
    4,282       5,905       883  
Selling expenses
    1,626       3,121       466  
General and administrative expenses
    27,320       15,032       2,247  
Research and development expenses
    934       1,169       175  
                         
      34,162       25,227       3,771  
                         
 
8.   CONVERTIBLE BONDS
 
The Convertible Senior Notes (“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 nine months ended September 30, 2009 and 2010, the interest expense for the Notes was approximately RMB72,402,000 and RMB88,081,000 (US$13,165,084), respectively.
 
The adoption of ASC 815-40 (“ASC 815-40”) , “Derivatives and Hedging: Contracts in Entity’s Own Equity,” on January 1, 2009 revised the Company’s 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 Company’s 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 in the condensed consolidated statements of operations. For the nine months ended September 30, 2009 and 2010, the Company recorded a loss of RMB2,608,000 and a loss of RMB223,968,000 (US$33,475,525) 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 retained earnings. As of September 30, 2010, the conversion option, which has been combined with the Notes on the condensed consolidated balance sheet, was recorded at a fair value of RMB533,157,000 (US$79,688,663).
 
9.   GOVERNMENT GRANTS
 
During the nine months ended September 30, 2009 and 2010, the Group received approximately RMB5,661,000 and RMB26,229,000 (US$3,920,335), 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 has been recorded as “government grants” when received.


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Table of Contents

SOLARFUN POWER HOLDINGS CO., LTD.
 
NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
 
10.   COMMITMENTS AND CONTINGENCIES
 
Acquisition of machineries
 
As of September 30, 2010, the Group had commitments of approximately RMB88,666,000 (US$13,252,522) 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 September 30, 2010 are as follows:
 
                 
    As of September 30, 2010  
    (RMB’000)
    (US$’000)
 
    (Unaudited)     (Unaudited)  
 
October 1, 2010 to December 31, 2010
    2,403       359  
Year 2011
    6,884       1,029  
Year 2012
    1,567       234  
Year 2013
    333       50  
Year 2014
           
Year 2015 and thereafter
           
                 
Total
    11,187       1,672  
                 
 
The terms of the leases do not contain rent escalation or contingent rents.
 
Purchase of raw materials
 
The commitments related to framework contracts to purchase of raw materials as of September 30, 2010 are as follows:
 
                 
    As of September 30, 2010  
    (RMB’000)
    (US$’000)
 
    (Unaudited)     (Unaudited)  
 
October 1, 2010 to December 31, 2010
    2,392,713       357,628  
Year 2011
    717,613       107,258  
Year 2012
    774,159       115,710  
Year 2013
    803,128       120,040  
Year 2014
    629,755       94,127  
Year 2015 and thereafter
    1,372,787       205,185  
                 
Total
    6,690,155       999,948  
                 
 
The above listing of amounts and timing of purchases are based on management’s 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.
 
11.   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


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Table of Contents

SOLARFUN POWER HOLDINGS CO., LTD.
 
NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
 
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 condensed consolidated balance sheets (see Note 16). The Group’s 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 condensed consolidated statements of operations and the amount of loss recognized in income for the derivative contracts not designated as hedging instruments for the nine months ended September 30, 2009 and 2010:
 
                             
        Nine Months Ended September 30,
   
Statement of Operations Location
  2009   2010
        (RMB’000)   (RMB’000)   (US$’000)
        (Unaudited)   (Unaudited)   (Unaudited)
 
Foreign exchange derivative contracts (not designated as hedging instruments)
  Changes in fair value of
derivative contracts
    (5,803 )     40,026       5,983  
 
The following table reflects the fair values of derivatives included in the consolidated balance sheets as of December 31, 2009 and September 30, 2010:
 
                             
        Fair Value As of
        December 31,
  September 30,
   
Balance Sheet Location
  2009   2010
        (RMB’000)   (RMB’000)
  (US$’000)
            (Unaudited)   (Unaudited)
 
Derivative assets:
                           
Foreign exchange derivative contracts (not designated as hedging instruments)
  Current assets:
Derivative contracts
    7,360       1,910       285  
Derivative liabilities:
                           
Foreign exchange derivative contracts (not designated as hedging instruments)
  Current liabilities:
Derivative contracts
    1,148       70,605       10,553  
 
12.   ISSUANCE OF ORDINARY SHARES FROM ADDITIONAL EQUITY OFFERING
 
In the three-month-periods ended September 30 and December 31, 2009, the Company issued 1,955,310 ADSs and 1,933,089 ADSs, representing 9,776,550 and 9,665,445, respectively, of the Company’s ordinary shares at the par value per share of US$0.0001. Total proceeds from these equity offerings were US$12,528,830 (approximately RMB86 million) and US$10,573,088 (approximately RMB72 million), respectively, for the nine months ended September 30 and the three months ended December 31, 2009. Net proceeds were approximately US$11,512,291 (approximately RMB79 million) and US$10,308,413 (approximately RMB70 million), respectively, for the nine months ended September 30, 2010 and the three months ended December 31, 2009, after deduction of related issuance costs.
 
13.   REDEEMABLE ORDINARY SHARES
 
On January 29, 2008 and concurrently with the convertible bond issuance (see Note 8), the Company issued and sold 9,019,611 ADSs, representing 45,098,055 of the Company’s 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 Notes cease to be outstanding. Such rights will expire one month after the maturity of the Notes. In addition, the holders of the ADSs has 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


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Table of Contents

SOLARFUN POWER HOLDINGS CO., LTD.
 
NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
 
outside the control of the Company, the ordinary shares underlying the ADSs have been classified as mezzanine equity. All distributions received by the ADS holders are to be paid back to the Company.
 
The adoption of ASU No. 2009-15 , “Accounting for Own-Share Lending Arrangements in Contemplation of Convertible Debt Issuance or Other Financing” (“ASU 2009-15”) on January 1, 2010 revised the Company’s accounting for the redeemable ordinary shares. The Company evaluated the redeemable ordinary shares concurrently with Notes upon adoption of ASU 2009-15 and determined that the redeemable ordinary shares issued qualified for own-share lending arrangement because the purpose of issuance of share is to facilitate the ability of the holders to hedge the conversion option in the Company’s convertible debt and 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 Notes cease to be outstanding.
 
Accordingly, the share-lending arrangement upon adoption of ASU 2009-15 is measured at fair value, and recognized as an issuance cost with an offset to redeemable ordinary shares. ASU 2009-15 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 US$3,076 (RMB22,000), which represents the fair value that would have been recognized if the guidance in ASU 2009-15 had been applied from the issuance date on January 29, 2008, was recorded on January 1, 2010 to issuance cost with an offset to redeemable ordinary shares. As of December 31, 2009 and September 30, 2010, the redeemable ordinary shares, were recorded at a fair value of RMB22,000 and RMB22,000 (US$3,288), respectively.
 
14.   SHARE ISSUANCE AND REPURCHASE AGREEMENT
 
On August 3, 2010, a major shareholder of the Company, Good Energies Investments (Jersey) Limited (“Good Energies”) entered into a Share Purchase Agreement (the “GE Sales Agreement”) with Hanwha Chemical Corporation (“Hanwha Chemical”), a Korean Company, pursuant to which Good Energies agreed to sell its 81,772,950 ordinary shares and 1,281,011 ADSs to Hanwha. Concurrently with the execution of the GE Sales Agreement, Hanwha entered into (i) a Share Purchase Agreement with the Company (the “Issuer Sales Agreement”), pursuant to which the Company agreed to sell to Hanwha 36,455,089 ordinary shares and (ii) a Share Purchase Agreement with Yonghua Solar Power Investment Holding Ltd. (“Yonghua”), pursuant to which Yonghua agreed to sell to Hanwha 38,634,750 ordinary shares (the “Yonghua Sales Agreement”). Hanwha Chemical subsequently assigned and transferred to Hanwha Solar Holdings Co., Ltd. (or Hanwha Solar), a wholly owned subsidiary of Hanwha Chemical, its rights and obligations under the Issuer Sales Agreement, the GE Sales Agreement and the Yonghua Sales Agreement. In connection with the transaction, Hanwha Solar requested the Company to issue 45,080,019 new ordinary shares at par value of US$0.0001 per share in a Share Issuance and Repurchase Agreement (“Share Issuance and Repurchase Agreement”).
 
Pursuant to the GE Sales Agreement and the Yonghua Sales Agreement, Hanwha Solar paid cash consideration of approximately US$202 million and US$90 million to Good Energies and Yonghua, respectively. Concurrently, pursuant to the Issuer Sales Agreement, the Company received net proceeds of approximately US$76 million for the issuance of 36,455,089 ordinary shares. On September 16, 2010, the respective parties to the GE Sales Agreement, the Issuer Sales Agreement and the Yonghua Sales Agreement consummated the purchase and sale of the ordinary shares and ADSs contemplated thereby. As a result, Good Energies and Yonghua cease to own any ordinary shares or ADSs of the Company as of September 16, 2010.


F-13


Table of Contents

SOLARFUN POWER HOLDINGS CO., LTD.
 
NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
 
The changes in the shareholder structure of the Company upon execution of the above arrangement are as follows:
 
                                 
    Before the Arrangement     After the Arrangement  
    Number of Shares     %     Number of Shares     %  
 
Yonghua
    38,634,750       11.53 %            
Good Energies
    81,772,950       24.39 %            
Morgan Stanley & Co. International PLC (see Note 13)
    45,098,055       13.45 %     45,098,055       10.82 %
Yongqiang Solar Power Investment Holding Ltd. 
    250,875       0.07 %     250,875       0.06 %
WHF Investment Co., Ltd. 
    6,271,875       1.87 %     6,271,875       1.51 %
Yongguan Solar Power Investment Holding Ltd. 
    501,750       0.15 %     501,750       0.12 %
Bank of New York*
    162,713,719       48.54 %     156,308,664       37.50 %
Hanwha Solar
                208,347,863       49.99 %
                                 
Total
    335,243,974       100 %     416,779,082       100 %
                                 
 
 
* Shares held by Bank of New York mainly consist of shares held in trust for individual public shareholders and shares issued as depository, which will be used to settle stock option awards upon their exercise. Any ordinary shares not used in the settlement of stock option awards will be returned to the Company.
 
The Company recorded the shares issued in the Share Issuance and Repurchase Agreement with Hanwha Solar as a liability in accordance ASC 480-10, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity,” as there is an unconditional obligation that requires the Company to redeem the shares by transferring assets at a determinable date at the par value per share of US$0.0001. As of September 30, 2010, the Company has issued 30,672,689 ordinary shares to Hanwha Solar by recording a liability of approximately RMB20,554 (US$3,072) in other current liabilities in connection with the Share Issuance and Repurchase Agreement.


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Table of Contents

SOLARFUN POWER HOLDINGS CO., LTD.
 
NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
 
15.   INCOME (LOSS) PER SHARE
 
Basic and diluted net income (loss) per share for each period presented are calculated as follows:
 
                         
    For the Nine Months Ended September 30,  
    2009     2010  
    RMB
    RMB
    US$
 
    (Unaudited)     (Unaudited)     (Unaudited)  
    (In thousands, except per share amounts)  
 
Numerator:
                       
Income (loss) attributable to ordinary shareholders — basic and diluted
    (155,848 )     386,541       57,775  
                         
Denominator:
                       
Number of shares outstanding, opening
    268,745,299       289,087,589       289,087,589  
Weighted-average number of shares issued during the period
    267,307       2,025,283       2,025,283  
Conversion of convertible bonds
    3,994              
New ordinary shares issued in connection with exercise of options and vesting of RSUs
    378,697       791,536       791,536  
                         
Weighted-average number of shares outstanding — basic
    269,395,297       291,904,408       291,904,408  
Stock options and RSUs granted in connection with the stock option plan
          836,184       836,184  
                         
Weighted-average number of share outstanding — diluted
    269,395,297       292,740,592       292,740,592  
                         
Basic net income (loss) per share
    (RMB0.58 )     RMB1.32     US$ 0.20  
                         
Diluted net income (loss) per share
    (RMB0.58 )     RMB1.32     US$ 0.20  
                         
 
During the nine months ended September 30, 2009 and 2010, the Company issued 2,200,000 and 1,500,000 ordinary shares, respectively, 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 these issuances 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 net income (loss) per share.
 
For the nine months ended September 30, 2009, the potential dilutive effect in relation to the stock options and unvested RSUs was excluded as it had an anti-dilutive effect. For the nine months ended September 30, 2009 and 2010, the potential dilutive effect in relation to the convertible bonds was excluded as it had 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.
 
16.   FAIR VALUE MEASUREMENTS
 
The Company applies ASC topic 820, “Fair Value Measurements and Disclosures” (“ASC 820”). ASC 820 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. ASC 820 requires disclosures to be provided on fair value measurements.
 
ASC 820 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.


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Table of Contents

SOLARFUN POWER HOLDINGS CO., LTD.
 
NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
 
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 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.
 
Assets and liabilities measured at fair value on a recurring basis as of December 31, 2009 and September 30, 2010 are summarized below:
 
                                 
    Fair Value Measurement Using:        
          Significant
             
    Quoted Prices in
    Other
    Significant
       
    Active Markets for
    Observable
    Unobservable
       
    Identical Assets
    Inputs
    Inputs
    Total Fair
 
    (Level 1)     (Level 2)     (Level 3)     Value  
    (RMB’000)     (RMB’000)     (RMB’000)     (RMB’000)  
 
As of December 31, 2009
                               
Cash and cash equivalents
                               
— Time deposits
    645,720                   645,720  
Foreign currency derivatives
                               
— Financial assets
          7,360             7,360  
— Financial liabilities
          1,148             1,148  
Conversion option of convertible bonds
                309,189       309,189  
 
                                         
    Fair Value Measurement Using:              
    Quoted Prices in
    Significant
             
    Active Markets
    Other
    Significant
       
    for Identical
    Observable
    Unobservable
       
    Assets
    Inputs
    Inputs
       
    (Level 1)     (Level 2)     (Level 3)     Total Fair Value  
    (RMB’000)
    (RMB’000)
    (RMB’000)
    (RMB’000)
    (US$’000)
 
    (Unaudited)     (Unaudited)     (Unaudited)     (Unaudited)     (Unaudited)  
 
As of September 30, 2010
                                       
Cash and cash equivalents
                                       
—Time deposit
    1,296,734                   1,296,734       193,817  
Foreign currency derivatives
                                       
— Financial assets
          1,910             1,910       285  
— Financial liabilities
          70,605             70,605       10,553  
Conversion option of convertible bonds
                533,157       533,157       79,689  


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Table of Contents

SOLARFUN POWER HOLDINGS CO., LTD.